Prepared remarks
Thank you for joining us. I would like to welcome everyone to the OceanFirst Financial Corp. Q2 '25 Earnings Call. My name is Breeka, and I will be your moderator today. I will now hand the conference over to your host, Alfred Goon, from Investor Relations at OceanFirst. Thank you. You may proceed.
Thank you, Breeka. Good morning, and welcome to the OceanFirst second quarter 2025 earnings call. 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 can 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 have been able to join our second 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'll 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 second quarter, which included earnings per share of $0.28 on a fully diluted GAAP basis and $0.31 on a core basis. Before I walk through a few items, a summary of how we see the quarter may be helpful. This was an investment quarter as we added C&I bankers, launched the Premier Bank, opened a commercial banking office in Melville, New York and opened a new full-service branch in Perth Amboy, New Jersey, all of which increased expenses as we expected and as we had guided last quarter.
Revenue growth has been on a strongly positive track, and we expect that to continue, while absolute expenses remain flat with some potential to decrease over time. As a result, we view the quarter as a trough in EPS that we will build from this point as the organic growth momentum continues. We expect this progress to continue while credit performance remains among the best in our peer group. In terms of performance indicators, we were pleased to report a third consecutive quarter of growth in net interest income, which grew by $1 million and continued stability in our net interest margin, which expanded by 1 basis point. Importantly, the loan growth in the quarter came late in June. So the quarterly results don't fully reflect the earnings power of the balance sheet, which is better positioned for additional improvements to net interest income in the third quarter. Total loans for the quarter increased $60 million, representing a 2% annualized growth rate, driven by strong originations of $716 million.
The quarter also included strong growth in commercial and industrial loans, which increased 8% for the quarter, reflecting our focus in this segment. Operating expenses for the quarter were $71 million, in line with our expectations and previous guidance. Operating expenses included nearly a full quarter of the run rate from our recent commercial banking hiring efforts and the launch of the Premier Bank Group. These additional bankers have been immediately productive. Joe will provide a detailed update on these initiatives in a moment. Asset quality remained very strong as total loans classified as special mention and substandard decreased 3% to $145 million or just 1.4% of the total loans. Classified loan levels remain well below our long-term average and are substantially lower than our peer group. The quarterly provision was primarily driven by net charge-offs of $2.2 million and by a mix-shift as commercial and industrial loans increased while commercial real estate loans decreased slightly.
Capital levels remain robust with an estimated common equity Tier 1 capital ratio of 11% and tangible book value per share of $19.34. The quarter included $17 million of share repurchases or 1 million shares at a weighted average cost of $17.17 and the redemption of $57 million of preferred stock. With the existing share repurchase authorization nearly completed, on July 15, the company authorized an additional 3 million shares available to be repurchased. This will allow us to remain flexible with our capital deployment. This week also, the Board approved a quarterly cash dividend of $0.20 per common share. This is the company's 114th consecutive quarterly cash dividend. Finally, we're very pleased with our progress growing the commercial bank, which is on track for a strong third quarter. The commercial pipeline of $791 million is a record high, and we're seeing meaningful lending opportunities and early success gathering deposits.
We expect an increase in net interest income in the third quarter and continued improvement to margins in the second half of the year. At this point, I'll turn the call over to Joe for additional color on the business.
Thanks, Chris. I'll start with loan originations for the quarter, which totaled $716 million, including $426 million from the commercial bank inclusive of $232 million of C&I originations. For the second consecutive quarter, the commercial pipeline has doubled. And as Chris noted, it is a record high for the company. This momentum is directly attributed to our investment and talented commercial banking hires who continue to add diversity and size and geography to the pipeline. At this point, we've completed the majority of our commercial banking hires for the year with 13 C&I bankers and 36 premier bankers hired in 2025. Turning to our residential business. Activities increased on a linked quarter basis, but our markets continue to remain impacted by uneven loan demand, volatility in rates, and limited inventory. The second quarter is typically our low point in deposit balances for the year as government balances decline and seasonal shore businesses consume cash in preparation for the summer.
Deposit balances, excluding brokered CDs, decreased approximately 1% compared to the linked quarter but increased by $117 million compared to the same period in 2024. The addition of our new premier banking teams, all of which we onboarded in April, have contributed to the bank in short order. As of June 30, these teams brought in $115 million in deposits across more than 670 accounts, representing nearly 200 new customer relationships. Approximately 20% of those balances are in noninterest-bearing DDA, and the overall weighted average cost of those deposits was 2.7%. As these relationships begin to transition to OceanFirst, we expect a percentage of DDA to increase as many of these accounts are not yet fully operational as of quarter-end. These bankers are on pace to achieve our 2025 target of nearly $500 million in deposits by year-end, while also contributing to the commercial loan pipeline.
We are very pleased with their results thus far. Lastly, noninterest income increased 5% to $11.8 million during the quarter. After excluding noncore and nonrecurring items, noninterest income was down 1% compared to the prior quarter due to lower swap activity, largely offset by gains on sales. With that, I'll turn over the call to Pat to review the remaining areas for the quarter.
Thanks, Joe. Good morning to everyone on the call. As Chris noted, both net interest income and margin grew in the quarter with loan yields increasing 4 basis points and total deposit costs remaining flat. Average interest-earning assets declined during the quarter, reflecting modest declines in the securities portfolio, while average loan balances only increased slightly due to larger payoffs early in the quarter and higher originations late in the quarter. We expect positive expansion in both net interest income and margin in the back half of the year based on period-end balances and pipelines. Asset quality remained very strong with nonperforming loans to total loans at 33 basis points and nonperforming assets to total assets at 31 basis points. Delinquency levels continue to remain at the low end of historical levels, criticized and classified loans declined. Net charge-offs for the quarter were largely driven by two commercial credits, totaling $1.6 million and just over $400,000 from a small sale of nonperforming residential loans.
Overall, credit quality continued to perform in line with our strong historical experience and remains among the best in our peer group. Credit reserves were stable, with provision expense only addressing charge-offs, growth, and a mix shift in loans. Turning to noninterest expenses. They increased about $7 million to $71.5 million, driven by increased compensation expenses, professional fees, and other operating expenses. The increase in compensation expense was driven by the recent commercial banking hires while professional fees included $1.6 million of nonrecurring recruiting fees related to these hires. Other operating expenses reflected some volatility across a number of minor categories and are expected to revert back to historical levels. Looking ahead, we expect our quarterly operating expense run rate to remain stable in the $71 million to $72 million per quarter range with normalizing professional fees being offset by a full quarterly run rate of compensation and occupancy for the recent addition of the banking teams.
And as Chris noted, capital levels remained robust and included 1 million shares repurchased at a weighted average cost of $17.16 per share. While we reloaded our repurchase plan by 3 million shares, we expect capital priorities will focus on supporting expected loan growth in the near term, and we will reserve any share repurchases for periods of market volatility. Finally, a word on taxes. We expect our effective tax rate, which was 24% in the second quarter to remain in the 23% to 25% range, absent any changes in policy. At this point, we'll begin the question-and-answer portion of the call.
Questions and answers
The first question we have from the phone lines comes from Daniel Tamayo with Raymond James.
To start on the deposit side, you have a lot happening. You've made new hires and added $115 million, including some DDA. Meanwhile, the overall funding costs are beginning to stabilize. As deposits from the new hires increase, do you think it's possible to reduce funding costs going forward, excluding any rate cuts? How much of that reduction might happen further out, like next year or the year after, and how much is more immediate?
There is certainly opportunity to mix shift, to reduce it a little bit. I think absent a rate cut, I wouldn't see a lot of movement in the near term. The CDs we have rolling over in Q3, I think, have a blended average rate of about 3.8%. So there's a little bit of opportunity there, not a lot, and it's not a lot of maturities, so it's not going to drive a big change in the mix. But as the Premier Banking teams come on, Joe noted they're going to have slightly higher levels of DDA, but also outside the Premier Bank, the C&I growth has been very strong, and the accounts that they bring along are going to tend to be far better priced than kind of market rate accounts that you've raised. And anything you want to add?
I think the only thing I'd add is, historically, the second quarter is the weakest quarter for us. Government seasonality, tax payments, all those kinds of things are on the come, and we have a lot of the operational businesses utilizing cash. So 3Q, 4Q should be better.
Okay. And I guess, bigger picture, kind of same theme, but on the margin, stable to slightly up in the third quarter, maybe if there was a rate cut, it would have been stable or slightly down. But I'm just trying to think about the trajectory of the margin longer term, obviously up, but your thoughts on kind of how quickly that translates into margin expansion as we get into the out quarters here.
We are in a slow and steady process, where it's going to just come up maybe a few basis points a quarter. We think we're within striking distance of that 3%, which is important to us. Unclear whether we would get there by year-end. But we're on the path to get there and cross over that. So I think it's been a little bit on mix shifts, and how many dollars people have in different account types, but it's certainly improving. And on the loan side, as we grow loans, the mix of the loans we grow will also be important and the weighted average coupon. You saw so the weighted average coupon in the pipeline came down a little bit quarter-over-quarter. That just reflects more C&I deals, which tend to be priced in the short end of the curve. So they tend to have lower nominal rates, but they're adjustable loans, which is good.
Okay. Helpful. And lastly, just to clarify, probably not that different from last quarter, but just if you could kind of indicate what the impact from rate cuts at this point would be? And how much of that would be initially after the first rate cut versus the lag effect.
Operator, move to the next question, please.
We have another question from Tim Switzer with KBW.
The first one I have is just a quick clarification on the outlook for stable noninterest income. What's the base for that? Is that the adjusted number or reported?
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Hi, Tim, I'm not trying to dodge your question.
It's a pretty simple one. I was just wondering what is the base we should be using for the guidance for stable noninterest income? Is that the adjusted number or the reported GAAP?
Sorry, I didn't catch that. Could you repeat the first part of your question?
Yes. What is the base we should be using for the guidance for stable noninterest income?
GAAP is the best base to use. They're almost the same at this point for this quarter. So if you're looking at margin 2.91% versus 2.90%.
Even the noninterest income...
Well, I am sorry, it will be noninterest income.
Okay. So like that $12 million number?
Yes.
Could you provide more details on the expense increase from the new hires at Premier Bank and how that affected earnings this quarter? I believe we are now at a more stable run rate going forward. Are there any plans for additional new hires for the rest of the year?
No plans for new hires. If you think about it in EPS terms, the additional expenses in Q2 probably hit us about $0.06 in EPS. And then that will now reverse, and we'll start pulling out of that.
And just to kind of simplify from a geography perspective, as we get the full quarter impact as a lot of these hires didn't start until late in April, expect our comp expense will drift up a bit higher, so call it, go from $40 million run rate to $42 million run rate, but professional fees will come down by $2 million because we won't have all the hiring costs. So net, we should be flat on OpEx. Although I would add, we're not relaxing on expenses. We have a number of things that we're looking at, and we actually do think there are opportunities for us in absolute terms to gain some additional expense efficiencies. We're just not guiding to that right now.
Okay. And then the last question I have is you guys have been pretty decent capital levels here. Can you update us on your thoughts about your approach to M&A, how much of a priority that is relative to dividends and share repurchases?
Our primary focus is on the organic growth plan and producing the earnings momentum we think that we need to show. And I think we're also very mindful of where our shares trade relative to book value. So there are not very many opportunities that would make sense for our shareholders with the valuation of our shares today. So that's kind of how we think about things.
Your next question comes from Dave Bishop from Hovde Group.
Good to catch up. I think you said in the preamble, the deposits thus far from the Premier team, maybe 20% DDAs, seeing that ramping up. Do you see the weighted average rate going below the average for the entire bank over time and pushing that appreciably lower as you onboard more of these accounts?
Currently, our deposits are around $260 million and have shown growth since the end of the quarter. The overall cost of deposits for the bank is about 2%. We expect to align our rates closely with the bank's, possibly even slightly better. We anticipate that around 30% of our deposits will be noninterest-bearing, while the remainder will be in various market rates, though not necessarily the highest ones. We believe this will lead to efficient funding, but we do not expect it to be free. Our funding costs will gravitate toward the bank's overall deposit costs, but we aim to achieve growth at a much more rapid pace. Although we have a strong deposit cost, our growth has not kept pace, and we need to match the growth rates necessary to support our balance sheet.
Got it. And any insight on potential loans coming from that segment?
Actually, Dave, we're pretty bullish on the opportunity there. Obviously, with the Premier Bank, the expectation is deposit focused, but we've already driven some significant activity that you're seeing in the pipe already, and I expect that to continue to grow over time. So we're very pleased with the activity on that end of the spectrum as well.
Got it. And Joe was sticking maybe with loans on the commercial side. Just curious where you're seeing sort of the best opportunity either geographically or within that C&I segment, any specific verticals that are driving the majority of growth your way when it's pretty tough environment to grow C&I in this market?
Yes, Dave, we are being very mindful of the market trends. The positive aspect is that we're experiencing growth across our entire geographic footprint, not just in one specific area. Our Northern Virginia market and government contracting continue to show strong momentum, and we are also seeing encouraging activity in our home markets that had previously been quieter. Additionally, we have observed some progress in equipment finance. While I wouldn’t say there’s a significant concentration in any particular sector, the new hires we’ve made are bringing valuable relationships they have developed over the last 15 to 20 years. Despite the challenging environment, we are managing to capture market share from competitors.
Got it. Then maybe a housekeeping item on the sub debt, just any update there in terms of the thinking of redemption or retirement?
We're watching that market carefully. It gets more efficient teams every quarter. So we don't feel a burning need to have to address that immediately. We have the option to address it in either pieces or potentially do a new issuance. The recent issuances in the last few weeks have looked pretty promising. So we think about it often. And when we think that opportunity is right, we might refinance it or we might look to kind of pay it down a little bit with earnings over time, so we like having the optionality. We're watching the markets and we could go in either direction over the next quarter.
The next question comes from Manuel Navas with D.A. Davidson.
Is the 3Q loan growth guide, how sustainable is that? And how much is that based on what you've seen so far this quarter and what's expected by the year-end? How much is there in that projection?
I think we feel pretty confident given the pipeline that we have, and I think the continued pipeline growth. I think, Manuel, the real challenge for anybody else is what are you going to see at the other end. We've seen payoffs abate since early in the quarter and especially in Q1, which is a positive. I can't predict what could occur in the future. But in terms of what we're originating, who's originating it, where it's in our footprint, we're pretty confident we're going to continue to drive that momentum forward. So on that end of it, I think you can be as confident as you can be. So I think that's probably a fair assessment.
In our discussions with clients, they have been telling us that business conditions are favorable for them. They have strong backlogs and ample work opportunities. We are observing an increasing willingness to invest. While there are broader economic concerns, we have not witnessed these reflected in our customers’ feedback so far, although this could change given the unpredictable nature of the current environment. For now, our clients maintain a positive outlook and continue to undertake projects. We have clear visibility into future work, and many of our recent hires are expected to create long-term opportunities. Typically, a commercial banker takes between 18 months and 3 years to fully reach their potential, which supports our belief in a sustainable growth rate.
I appreciate that. It seems that when you consider what you're generating from the commercial deposit teams and what you have in the loan pipeline, there's a marginal net interest margin close to 4% or more. What prevents you from increasing the net interest margin or expanding it even more quickly?
I think it's just the speed at which there are net additions to the balance sheet. There is a possibility, Manuel, where if we continue to grow and this growth compounds along with rate cuts, we could see a quicker expansion in our net interest margin. However, we want to be cautious and not get ahead of ourselves until we've observed that trend for a few quarters.
Shifting topics a little bit. It seems like the team is largely in place at the moment, maybe for this year. Is there any shift in the hiring focus? Any expansion in geographies at the moment across the Premier Bank or even in C&I?
No new geographies. We're very happy with our current distribution, which provides the right balance since we prefer not to be overly concentrated in any single market. We believe we've managed that effectively, and our markets are very strong. We think our hiring for this year is mostly complete. However, if an exceptional banker becomes available next month, we would hire them as it would benefit the company. Therefore, I believe our hiring is effectively done for this year. As we approach year-end and review our performance in Q3 and Q4 while looking ahead to Q1, we will evaluate the appropriate growth rate for '26 based on how we are performing with our current team. That's why I think Pat indicated a stable to potentially reduced operating expense level over time. We'll keep you updated on our plans regarding this.
We now have Christopher Marinac with JMS.
Chris and Joe and team, I wanted to ask a little bit about the kind of big picture on deposits on the Premier Bank. I mean given the strong quarter you just had, I mean, is there the potential to kind of rethink that upper number over time, not thinking in the next quarter, of course, but just curious if the $500 million can be bigger as next year in the future come into focus?
We are pleased with the relationships we are building and the trust customers are showing by coming to us and joining the bank. Joe highlighted that there are hundreds of accounts and a couple of hundred relationships, which align with our expectations. This is just the first eight weeks since they've come on board, and it takes some time to get acclimated to a new environment, including familiarizing oneself with policies and procedures. We are very satisfied with the quality of the conversations we're having. I believe it would be premature to adjust our guidance at this point; let's see how things progress through the end of the year. Joe, do you have anything to add about the conversations you've had? Both Joe and I have met with many of these new customers, and I truly appreciate the caliber of the individuals we are bringing on board.
I think the only thing I'd add for Chris is that we have provided some guidance toward multiple years out. And we fully expect, obviously, that we'll continue to grow these balances into bigger dollars in '26 and '27.
And that was a pretty wide guidance, I think. So we could outperform on the top end. But early days, we are only in this a couple of months. So I want to kind of build some momentum and have a track record before we adjust anything.
No, understood. And I see the multiyear aspirational goals, I just was curious how we go from this $500 million to even the $2 billion in the '27, but we'll continue to let that play out. So thank you for the color, both of you. Any comments on just sort of overall credit quality as it pertains to the, I guess, longer-term interest of trying to grow the reserve just in general? Is that still a possibility for you as these scenarios have played out?
I think that's going to depend on the mix shift over time. As the portfolio shifts to include a larger share of commercial and industrial loans and a smaller share of commercial real estate loans, we expect to maintain slightly higher reserves. This quarter showed very minimal growth, so there wasn't an opportunity for reserve building. However, I wouldn't be surprised if we see reserves continue to increase over the next several quarters as the mix shifts. We believe it's moving in that direction, but this quarter's numbers didn't reflect that.
Great. And then just last question. The small improvement we saw in the criticized ratio, are there upgrades driving that? Are there other upgrades that are possible in the future? Just sort of curious on any background?
We expect several factors may contribute positively in the second half of the year, but we remain cautious for a couple of reasons. Firstly, we are uncertain about the upcoming environment, and our current levels are relatively low. While we anticipate some favorable outcomes, there could also be instances where a credit or two may falter. However, we aren't observing any concerning trends in our portfolio, risk ratings, or delinquencies, indicating no signs of significant deterioration. Moreover, the makeup of our loans is crucial. We've steered clear of higher-risk segments. Our multifamily portfolio is relatively small, and we don't engage much in unstable areas. Additionally, our central business district office portfolio is minor. Therefore, I believe our portfolio is well-positioned to avoid major issues. Our performance indicators are strong and may improve slightly, but significant enhancements are unlikely, considering we are starting from low levels overall.
We now have a question from Matthew Breese with Stephens.
First, I just wanted to circle back. I think Mr. Tamayo asked about the NIM impact from each 25-basis point cut both initially and over time, we cut out there due to the connection. I just want to make sure that was answered.
Okay. Yes. Thank you for that, Matt, because we didn't catch that part of the question. Pat?
Yes. We are not significantly impacted by volatility whether or not there are cuts to the Fed rates. The main effect for us is seen in the middle of the curve, particularly with the 2-year, 5-year, and 10-year rates. The dollar amount involved is not substantial, amounting to less than $0.01 per share annually for every 25 basis point reduction by the Fed. Our guidance does not anticipate significant changes from this; we expect to align with prevailing consensus on any shifts in the curve. I foresee a rate cut in the third quarter and another by the end of the year, which aligns with what many expect. However, if a 25 basis point cut occurs next week, there could be a slight delay before we see the negative effects on our floating-rate assets, while the benefits from lower deposit costs might take about a quarter to materialize.
I think as Pat point...
Longer end of that is probably more. If there's a Fed cut and then the long end comes up, that might be more beneficial than just a cut.
I want to revisit the topic of deposits. The incremental Premier deposits are approximately $270 million, while the total for the bank stands at $206 million. The figures suggest that the incremental growth should result in higher deposit costs, but you are implying that there may be some potential to lower those costs. I'm interested in learning about the blended new rate of deposits across other parts of the bank and whether there are agreements regarding Premier banking deposits that may impact their rates in the short term. Can you provide some clarification on that?
The funding process for accounts is essential, Matt. The bankers arrived in mid-April and started opening accounts likely by early to mid-May. For commercial accounts, there's a requirement to complete all the beneficial ownership documentation and file the necessary paperwork. Then, they must transition their banking operations, which includes moving their cash management, checks, and payment methods. Consequently, the initial deposits tend to be driven by interest rates. Although operating accounts start with no balances, they gradually increase over time. Joe indicated that we might reach around 30% noninterest-bearing deposits in the long run, which would reduce the current figure of $260 million to about $206 million. If we exceed expectations, we might perform even better. However, we believe this won't lead to increased deposit costs for the bank. Over time, we anticipate that we can attract deposits at current pricing levels.
Okay. That makes much more sense. I did want to touch on securities yields, down pretty sizably the last 3 quarters. What's going on there? And where do we start to hit stability in securities yield because that seems to be a headwind to the margin.
Yes, the decline has a few contributing factors. One-third of our securities portfolio consists of floating rates, so any changes there create some directional movement. However, the duration is relatively short. We are seeing reinvestment occurring for instruments that we entered into during a higher interest rate period, which are now repricing based on medium to longer-term rates. Those are the primary factors at play. There hasn't been a significant shift in the mix; we remain heavily invested in treasury securities, treasury CMOs, and agency paper. The rates on those instruments will reflect current market conditions, but it's primarily our floating rate CLO investments that fluctuate with the short end of rates.
Okay. The loan yield expansion this quarter was around 4 basis points. In the absence of rate cuts, is that a reasonable rate of expansion from this point onward?
I think that's a good proxy.
And then last one for me is just as you think about loan growth and the guidance, to what extent are you baking in commercial real estate payoffs, seems to be a common theme this quarter. There's a lot of competition for paper, a commercial real estate. That's all I have.
Yes, Matt, regarding commercial real estate, we believe we manage that area effectively. While we are concentrating on growing the commercial and industrial book, we are not abandoning our commercial real estate portfolio. We have seen solid performance and have excellent clients in that sector. Payment fluctuations can occur, as is typical in this field, where a single large loan can have a significant impact. However, we anticipate that commercial real estate will hold steady, and we may see some growth depending on available opportunities. We also have a strong pipeline in this area. Joe, you...
Yes, we've seen a resurgence in CRE transactions. A great example, Matt, is that the largest payoff we got this quarter was a $55 million transaction at 3.5%. So as long as I can put that money back out and I'll put it out this quarter, I'll take that trade even though I'm not theoretically growing the balance sheet on the CRE side. I do believe I'll be able to replace those payoffs in the second half of the year.
If you're considering how to model this, keeping the CRE balances stable is a reasonable assumption. They may fluctuate slightly, but I don't anticipate that portfolio will be decreasing.
I can confirm that does conclude the question and answer session. And I would like to hand it back to Chris for some final closing comments, please.
Thank you very much. We appreciate your time today. I apologize for the technical glitch in the call that kind of got us disconnected for a little bit. But we do appreciate your time and your support of OceanFirst Financial Corp. We hope you have a great summer. Your plans bring you to the Jersey Shore, come visit us, and we'll talk to you in October. Thanks very much.
Thank you. I can confirm that does conclude today's conference call with OceanFirst Financial Corp. You all may now disconnect. Thank you all for your participation, and please enjoy the rest of your day.