OceanFirst Financial Corp.

Thank you for attending the Ocean First Financial Court third quarter 2025 earnings call. My name is Brika and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Alfred Goon, Investor Relations. Thank you. You may proceed, Alfred. Thank you all for attending the Ocean First Financial Corp third quarter 2025 earnings call. My name is Brika and I will be your operator for today. Please stand by whilst we try and reconnect today's speakers. We now have the speaker line reconnected, and I would like to thank you all for attending the Ocean First Financial Court third quarter 2025 earnings call. My name is Breaker 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. So thank you. You may proceed, Alfred.

Thank you, Brika. Good morning and welcome to the Ocean First Third Quarter 2025 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 that differ from those statements. Thank you, and now I will turn the call over to Christopher Marr, Chairman and CEO.

Christopher Marr Thank you, Alfred. Good morning and thank you to all who have been able to join our third quarter 2025 earnings conference call. This morning I'm joined by our President, Joe Lavelle, 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 third quarter, which included earnings per share of 30 cents on a fully diluted gap basis and 36 cents on a core basis. In terms of performance indicators, we were pleased to report a fourth consecutive quarter of growth of net interest income, which increased by $3 million as compared to the prior quarter. It was fueled by an increase in average net loans of $242 million. Net interest margin of 2.91% remained stable compared to the second quarter. Total loans for the quarter increased $373 million, representing a 14 percent annualized growth rate, driven by strong originations of $1 billion. Joe will have more to add regarding our growth strategy in a few minutes. Asset quality remained very strong, as total loans classified as special mention and substandard decreased 15 percent to just $124 million, or 1.2 percent of total loans. This places us among the top decile of our peer group. The quarterly provision was primarily driven by net loan growth and an increase in unfunded loan balances and commitments. Operating expenses for the quarter were $76 million, which includes $4 million of restructuring charges related to our strategic decision to outsource residential loan originations and underwriting functions. This initiative is expected to meaningfully improve operating leverage and earnings in 2026. Pat will provide a detailed update on our financial outlook in a moment. Lastly, capital levels remain robust with an estimated common equity tier one capital ratio of 10.6% and tangible book value per share of $19.52. We did not repurchase any shares this quarter under the existing plan as our capital was deployed for loan growth. This week our board also approved the quarterly cash dividend of 20 cents per common share. This is the company's 115th consecutive quarterly At this point, I'll turn the call over to Joe for additional color on these businesses.

Thanks, Chris. I'll start with loan originations for the quarter, which totaled $1 billion and resulted in loan growth of $373 million. The value of our continued recruitment of talent, coupled with favorable conditions for many of our borrowers, has resulted in momentum in commercial and industrial, which increased 12% for the quarter. Despite the large origination and loan growth for the quarter, the commercial pipeline continues to be strong at over $700 million, only 10% below the high from the linked quarter. Turning to our residential business, during the quarter we made the decision to outsource this business line. As we wind down the existing pipeline, we expect to see some modest growth in the fourth quarter before the portfolio begins to run off. Total deposits in the third quarter increased 203 million, although organic growth was higher at 321 million before decreases in brokered CDs, which declined by 118 million. Growth was primarily driven by government banking and premier banking. Premier bankers contributed 128 million of new deposits for the quarter. The premier banking teams, all of which we onboarded in April, remain on track to achieve our 2025 target of $500 million by the end of the year. Deposit balances as of September 30th total $242 million across more than 1,100 accounts, representing nearly 300 new customer relationships to date. Approximately 20% of those balances are in non-interest-bearing DDA, and the overall weighted average cost of those deposits was 2.6%. The percentage of DDA is increasing as these accounts become fully operational, which should continue to offset new customer acquisition costs. We remain pleased with their results this far. Also of note is the Premier Bank's contribution to commercial lending. Premier clients represent 85 million of commercial originations this year, and the Premier commercial pipeline totals 50 million. Lastly, non-interest income increased 5% to $12.3 million during the quarter, primarily driven by strong swap demand linked to our commercial growth. With the outsourcing of our residential and title platforms, we anticipate a reduction in fee and service income of approximately $2 million in the fourth quarter and a modest gain on sale of loans in the fourth quarter as we close out the remaining pipeline. With that, I'll turn the call over to Pat to review the remaining areas for the quarter.

Thanks, Joe. And we've got a lot of good stuff going on, but a little noisy. So apologies in advance for taking a little bit longer with my prepared remarks. So as Chris noted, net interest income grew and margin remained stable this quarter. Furthermore, pre-tax pre-provision core earnings grew 15% or $4 million linked quarter. the addition of earning assets at the end of the second quarter and through the third quarter, improving earnings power. On the rates side, loan yields increased eight basis points, while total deposit costs remained flat. While our core NIM remained flat, it was negatively impacted by lower loan fees and a full quarter of higher interest costs on our subordinated debt. Absent these two factors, our overall NIM would have improved to 2.95%. Borrowing costs increased 12 basis points, primarily due to the second quarter repricing of our subordinated debt. Average interest earning assets increased during the quarter, reflecting increases in both the securities and loan portfolios. Chris and Joe have already spoken about the loan growth, but I'll add that we took advantage of market conditions to essentially pre-fund next year's anticipated growth in the securities book with highly liquid, very low credit risk, and capital efficient securities that will be accretive to our ROA, all without meaningfully affecting our neutral interest rate positioning. Looking ahead, we expect positive expansion in net interest income in line with or higher than loan growth, but modest short-term compression on margin in the fourth quarter due to seasonality and some residual repricing of a handful of large legacy deposit relationships. Asset quality remained strong, with non-performing loans to total loans at 0.39%, and NPAs to total assets at 0.34%. Delinquency levels continued to remain at the low end of historical levels, while criticized and classified loans declined noticeably. Risk ratings across our commercial portfolio were stable, while net charge-offs of $617,000 were benign and represented only two basis points Total loans bring our year-to-date net charge off run rate to only five basis points. Overall credit quality continued to perform in line with our company's strong historical experience that remains among one of the best in our peer group. Our provision for credit losses in the quarter was driven by both on and off balance sheet loan growth, partly offset by overall improvements in asset quality levels. Core non-interest expenses increased from 71.5 million to 72.4 million, driven by increased occupancy expenses. This excludes the impact of non-core restructuring charges, totaling 4.1 million in the third quarter. The increase in comp expenses and occupancy expenses were driven by recent commercial banking hires, combined with modest increased variable spend during the quarter. Looking ahead, we expect our fourth quarter core operating expense run rate to move downward slightly to the 70 to $71 million range. Turning to the non-core charges, we do anticipate a final $8 million in non-recurring restructuring charges in the fourth quarter related to our outsourcing initiatives. Note that the reduction in headcount associated with the residential outsourcing will not be completed until late in the year pushing the operating expense benefit from that initiative into the beginning of 2026. To be clear, we expect the pre-tax improvement in annual operating results to be approximately $10 million. Capital levels remain robust with our CET1 ratio moving down to 10.6% driven by loan growth during the quarter. While the CET1 ratio remains strong, we continue to evaluate opportunities to further optimize our capital in the near term as we wait for the earnings from newly added earning assets to increase internal capital generation rates. We continue to focus capital priorities on supporting loan growth in the near term and do not expect prioritized share repurchases. Finally, we've resumed our annual guidance, as you can see in our supplemental earnings materials. At this time, for the full year 2026, We expect 7% to 9% annualized loan growth for the year, predominantly driven by growth in C&I, which will be partly offset by runoff in our residential portfolio. We expect deposits to grow in line with loans as we continue to maintain a loan-to-deposit ratio of approximately 100%. The continued growth in earning assets should drive steady net interest income growth in line with or exceeding high single-digit growth rate While our Model 3 rate cuts of 25 basis points each throughout the year could drive a NIM trajectory well above 3% by mid-2026. Other income is expected to be $25 to $35 million, reflecting reduced gain on sale and title revenues resulting from our outsourcing initiatives. 2026 operating expenses should range between $275 to $285 million. reflecting the impact of our focus on expense discipline to offset any inflationary pressures. Capital should remain strong, with our CET1 ratio at or above 10.5% for the year. These firm-wide targets should result in an annualized return on average assets of 90-plus basis points by the fourth quarter of 2026, with a glide path to achieving a 1% return on assets early 2027, continuing to improve thereafter. At this point, we'll begin the question and answer portion of the call.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press a star followed by the number one on your telephone keypad. If for any reason you would like to remove yourself from the queue, please press star followed by the number two. And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. The first question we have comes from Daniel Tamayo with Raymond James. Please go ahead.

Hey, good morning, everybody. Thanks for taking the questions. Yeah, maybe we could just start on the net interest income guidance, just to clarify, because there's a few things happening. I think in the slide deck, there was a comment about reaching 3 percent by the end of, or maybe it was a terminal 3 percent rate in 2026. And then, Pat, you just mentioned potentially reaching 3 percent by mid-2026. The 8 percent-ish guidance for NII growth in 2026 pretty much implies that that would be more of an end-of-the-year story. And then that also implies kind of a reduction in the balance sheet from the end of the year. So sorry to pile all that into one question, but maybe you can just unpack the NII guidance from a balance sheet compared to a margin story for next year. That would be helpful. Thank you.

So I'll do my best. So hang with me on this. But the 3% terminal rate was referring to our assumption around Fed rate cuts. Not our. And then margin, so that's assuming two more rate cuts. This year and three next year. So just kind of take that off the table. We do expect that we will. We will broach or breach a 3% NIM sometime in the first second quarter of next year. So in the near very near term and continue to expand. with a pretty modest but steady expansion as we move forward. We expect the balance sheet to continue to grow in the high single digit levels, almost entirely from loan growth. And that should result in a, now look, this is all things being equal. So deposit costs, big question mark. Competition, yields and spreads, a big question mark. But our best estimate right now is that that should result in steady revenue growth, at least commensurate with the loan growth, high single-digit. So by revenue, I'm really talking about net interest income. But we see that growing at or better than the pace of loan growth, which is high single-digit.

OK. I appreciate what you said on the thermal rate, first of all. That was obviously a mistake on my side. So that, I guess if the margin is up at that level, that would imply the balance sheet is going to come down, not down in the fourth quarter, but down relative. There was some pretty significant growth on overall balances in assets in the third quarter. It sounds like you You pre-funded some growth with securities for next year. So there's some dynamic with the average earning assets coming down relative to the size of the overall balance sheet in the fourth quarter. Is that the way to think about it?

Maybe it's Chris. Maybe I'll just kind of try and draw a clear path. So to take the noise out of the third quarter, we did buy some securities, and we don't anticipate doing that again. It was a pretty unique opportunity to pre-fund 2026. So the securities portfolio you should consider being relatively stable as we go into 26 and throughout 26. On the loan side, though, we expect to continue to see growth. So a very good quarter this quarter, you know, $373 million. That was a particularly strong quarter. You know, maybe I would think closer to $250 million, you know, plus or minus. Some quarters better, some quarters worse. But as Joe mentioned, his pipeline is very strong. We've got a lot of momentum. the new bankers are producing. So if you were to just use kind of back of the envelope and assume that over the course of 26, we're growing plus or minus a billion dollars in the balance sheet, driven by loan growth coupled with deposit growth. So that's the part of the balance sheet that would move. And then as we pointed out earlier, NIM crossing over that 3% in the first half of the year, you put those two things together, and that's how you kind of get the glide path to the 90 basis point or better ROA by Q4.

That's helpful. OK. And thanks for the clarification on the securities. But ultimately, the NII numbers that you guys are talking about, just putting the guidance together, is my math correct here? It gets me kind of the 380s range for 2026 for net interest income. Is that what we should be looking at?

Or better. Maybe a little bit higher. Okay.

Okay. So this 7 to 9 percent NII off of 2025 is kind of a floor? Is that the way? That or better?

Yeah. Look, we haven't had annual guidance. in a while, quite frankly, the uncertainty in the funding environment and the growth environment being a big part of that. So this is our best estimate now, and we're trying to probably err on the conservative side, and I know it's frustrating for us to give ranges of things, but we know we'll probably be wrong in our estimates, but this is our best estimate today. and so we're trying to be a bit on the conservative side from a growth perspective, given that this is our first quarter of really meaningful growth in two to three years.

Understood. Yeah, sorry for all the confusion on my end. I appreciate all the color guys. I'll step back at this point. Thank you.

Thanks very much.

Thank you. Your next question comes from Tim Switzer with KBW. You may proceed with your question.

Good morning. Thank you for taking my question. Good morning. So the first question I have is around the Premier Bank. Sorry if you guys touched on this in the call, but you doubled deposits this quarter. It looks like you've got to double it again. from a larger space for q4 what's driving the acceleration there and i'm sure you already have a good amount of pipeline kind of embedded for you but just curious what's driving that and um you know is there any color you can write on this trajectory as you try to get that two to three billion by the end of 27. so tim it's joe i'll i'll answer the the first part of the question relative to what's driving deposit growth it's the

It's the, you know, the teams we've hired and their acclimation, not only to the bank, but their customers' acclimation to the bank. I think we referenced the 1,100-plus new accounts that have been opened. You know, a lot of those operational accounts are in the process of being converted to funding. So what we've seen early on is the excess cash come across, paying a little bit higher rate for those dollars. And as the actual operational balances start to come up, We'll start to see more of that transactional opportunity come across at lower dollar cost. So that's really the value short term. And then, of course, long term, you know, clients come in pieces, right? They don't come all together and they don't come all at once. So as these teams mature, they'll generate more and more activity from their former book. Hence the value of those deposits over the last couple of years, over the next couple of years, getting to that, you know, one and a half, two, two and a half, $3 billion number.

Tim, you still there?

I'm sorry, I was on mute. Thank you. It was also great to see the $85 million of loan originations related to Premier Bank. That seems like that's a bit above kind of what you guys are expecting, at least in terms of like an LDR. But certainly, so now we can move around, but can you maybe provide an update on your expectations there?

Yeah, actually, we've been really pleased with the activity of the premier bankers so far. And Tim, I expect that we'll see more of that. I think it's a little too early to try to forecast what the percentage of loans versus their deposits will be. Obviously, historically, it's been a pretty low number. But, you know, we have some seasoned folks who've been around a long period of time. And I think we're going to do pretty well in that space. And that sort of goes across some of the Cree space, some of the CNI space. So I think we'll be pleased with the outcomes as we go forward.

Okay, great. And then I want to make sure I heard this correctly. I think you guys said the restructuring at the residential mortgage business will provide about a $10 million pre-tax benefit. So if that's a $14 million expense savings, it implies about a $4 million headwind of revenue. Are there other headwinds?

um expected in non-interest income that gets you that 25 to 35 million dollar guide because that's obviously a bit below um where you guys are trending for this year yeah let me just uh tim i'll mention a couple things on residential and then pat i'll get to the non-interest income just on residential um you know this is a business that we were in since 1902 so restructuring it is a something we're doing very carefully we're making sure that we meet and support all of our customers in the transition We've made sure that we have an ability to produce residential loans for those customers going forward. And then because of the size of the reduction in force, which is about 10% of our headcount, we have certification requirements at the state level. So that all kind of combines for a transition period that's going Q3 and Q4. So you saw some of those one-time expenses for everything from severance to contract terminations and all that. That will all be wrapped up by December. So the benefit will really show beginning in January. We'll get that full benefit. And you're right about the $4 million headwind in residential. So all your numbers are right with that. And, Pat, maybe you could talk about the non-interesting.

Yeah. So the piece that's missing from what Chris just said, which is really focused on our operating residential origination and underwriting platform, the people, the severance associated with it, the cost paying the people, et cetera, is what generates the 10 million net, 14 million of expense reduction, 4 million of kind of our current run rate of gain on sale per quarter, a million times four quarters. So that's your 10 million. The piece that's missing from this that maybe hangs in your models a little bit awkwardly is our majority ownership in the title company that we had acquired about three years ago. That hasn't been material from a bottom line perspective, but it did contribute somewhere in the neighborhood of $10 million of consolidated expenses and about $10 million of consolidated title fee revenues annually in our run rates. It just didn't pop up from a discussion standpoint because it was essentially a conduit to facilitate origination business more than it was a profit earner. So that will bring down Those are headwinds in the revenue side, but also positive benefit in the expense side that will come out of it.

Okay. Okay, very helpful. Appreciate all the color.

Thank you, Tim.

The next question comes from David Bishop of DeGroote. Please go ahead.

Hey, good morning, gentlemen. Morning, Dave. Chris, Joe, appreciate the color on the NDFI exposure there. Obviously, that's been in the headlines a bit. Any color you can provide there in terms of the nature of that lending, how it sort of bifurcates with sort of the regulatory guidelines? And then secondly, on the loan side, any update on, you know, GovCon exposure, you know, with the shutdown, how that portfolio might be holding up on a credit perspective?

Sure, Dave. Just on the NDFI, probably the most important distinction I'd make, other than it's a very small piece of what we do, is that we really aren't engaged in NDFIs that lend to the consumer. So these are more NDFIs that do commercial lending. So if you think about our auxiliary capital, for example, which is an equipment finance business that we have an equity ownership in, but we also use within the company and we provide some credit facilities too. Stuff that is very closely followed and where we've got our hands on things. So we're not concerned about any of those. And those exposures, I think, are all in pretty good shape. Obviously, given the other experience this quarter, we went out and just brushed up and made sure there's nothing there to be concerned about. So does that answer that part of the question?

Yes, thank you.

All right. I'm sorry. The second ad was...

On the GovCon exposure.

Not a big exposure for us today. Today is about $100 million worth of exposure, and that is squarely focused on mission critical contractors and decisions we've made over the course of the last year. So we were really thoughtful about entering those kind of relationships with folks that understand government shutdowns. They've been through this before. They got plenty of liquidity. So we feel pretty comfortable about that. But we stay in close touch with that. Joe, anything you've heard from clients who might pass along?

No, I think you summarized it well, Chris. I'd just add the comment that we've been pretty close to it. We didn't have historical exposure and presence there. So a lot of our stuff, as Chris mentioned, has been in the last, you know, 12 to 14 months. So that's been a benefit to us because we don't have any legacy risk.

Got it. And maybe, Pat, an update in terms of thoughts on the sub-debt and that sort of reset. Any thoughts on sort of refining or paying off things?

Yeah, we're not going to really go into the details of that on the call today, but those details are available to anybody that's interested elsewhere. Got it. Thanks.

Thank you. Your next question comes from Tyler Casaiatori with Stevens, Inc. You may proceed when you're ready.

Good morning. This is Tyler on from . Good morning. The cost of deposits were stable again quarter over quarter despite strong deposit growth including demand deposits. And I know you talked about competition a little bit, but when do you think we start seeing some of the benefits from the team in terms of lower all-in costs there?

The premier side, you'll see that kind of go down gradually, as Joe said, as those non-interest accounts become activated and balances come in. The mix will shift a little bit, but I would think a pretty gradual change there. And then in terms of the rest of the base, you know, deposit betas and the Fed rate cut, You know, there's a lag in our kind of roll-through of deposit rates because we have some contractual agreements with, you know, various commercial accounts and things like that. So if you think about what happened last year, rates came down towards the end of the year. We didn't really see the benefit until the first quarter of 25. So sometimes there's about a 90-day lag, and that contributes to Pat's guidance that NIM would be flattish, maybe even down a little bit in Q4. And we did have some contractual repricings of accounts that were pretty much at or near zero. So, that kind of counterbalanced some of the positive movement elsewhere. So, I think Flattish may be down a little bit for NIM in Q4, but then returning to expansion in Q1 and kind of sequentially thereafter.

Yeah, that's a little, this is Pat, this is Tyler. That's a little bit of the other side of the double-edged sword of growth, which we're very happy to deal with, is that we need to raise deposit funding to fund loan growth. And so we're kind of a little bit bound by whatever the competition and the markets are today. We're seeing the same kind of lag, though, on deposit cost declines that we saw with increases when we were in the upgrade cycle. It was slow to get going. And then it kind of picked up pace as the Fed continued to raise interest rates. We're expecting to see the same kind of behavior. Slow, unfortunately, slower to come down initially. And then picking up pace as we kind of move into the down rate cycle into next year.

Also, the CD book is pretty short duration. So it's under six months. So we'll see a lot of that repricing roll through the CD book in the coming months.

Great, thank you. And then my next question is about the ROA. When do you guys think you can hit a 1% ROA here?

So I think to kind of knit together our comments earlier, we think we're better than a 0.9 by the end of next year, fourth quarter of 26, crossing over above 1% in the first quarter of 27, and then for the full year, continuing to grow throughout that year. So it's going to be at or around fourth quarter next year, first quarter 27. And, you know, as Pat said, there's a lot of unknowns out there about Fed policy and rates and all that, but that's our best guess today.

Great. And then just my last question here. I think you said it in the prepared remarks, sorry if I missed it, about the deposit composition of the deposits the Premier team is bringing on and if the expectations of that 30% DDA target has changed at all.

There are about 20% today, and the expectations haven't changed.

Great. Thank you. That'll be it for me. Thanks, Tyler.

Thank you. Just as a quick reminder, to ask any further questions, you can do so by pressing star followed by the number one on your telephone keypads. And we now have a question from Christopher Marinac with Janine Montgomery-Scott. Your line is open.

James Rattling Leafs- hey good morning, thank you for taking all of our questions just a quick one on on the allowance, if you were to see an increase in criticized loans. James Rattling Leafs- still not big in the scheme of things with that drive to change in the reserve or is that sort of have tolerance and he's been low on criticized for several quarters and just curious if I were to go back up a little bit that would be anything material to how you provision.

Yeah, Chris, you're right. The model is sensitive to the levels of criticized and classified. So if we saw a material movement in those numbers, we'd have a little bit of pressure on the ACL. In fact, if we had just taken the mechanics this past quarter, the decrease in criticized and classified would have caused a reserve release. We didn't think that was the right decision given the external environment and our shift over to CNI. So the model may say that, on the way down or on the way up, but we try and use our qualitative assessment and the exterior, the indications of the economy that we get from, say, Moody's and others to drive our final decisions. So there's a little bit of sensitivity there, but we've been trying to be thoughtful about the provisions in reserve using our qualitative factors.

Perfect. No, that's great, Chris. Thanks. A separate follow-up question just is, if we see more changes among some of the regional bank competitors in your footprint, would that change the hiring? And I'm thinking above and beyond the premier initiatives, or would you just want to go after more business with the existing team?

It's always a balance. Look, whenever we find great talent, we don't want to pass it up because that's what drives our business. On the other hand, we're very much focused on hitting the return hurdles that we've outlined today. So it's a trade-off. If you find very good people, you don't want to pass them up. But we're very mindful that we need to get our return on tangible common equity into the double digits. We see doing that next year, and we want to stay on course to do that. So we'll be balancing out the quality of opportunities to bring on bankers. We love the bankers we've brought on. We will probably always add bankers from time to time. But the number of bankers will be determined by us continuing our steady march in improvements to profitability.

Great, Chris. Thank you very much for all the information this morning. All right. Thank you.

Thank you. One final reminder, if you would like to ask any questions, please press star 1 on your telephone keypad now. I can confirm that does conclude the question and answer session here, and I would like to hand it back to Chris Mayer for some final closing comments.

Thank you. We appreciate your time today and your continued support of Ocean First Financial Corp. We look forward to speaking with you in January, and as we kind of head off into the holiday season, we wish you and your families all the best.

Thank you. Thank you. That does conclude the Ocean First Financial Corp third quarter 2025 earnings call. Thank you all for your participation. You may now disconnect and please enjoy the rest of your day.