OceanFirst Financial Corp. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Financial Results: Reported earnings per share of $0.30 GAAP and $0.36 core. Fourth consecutive quarter of net interest income growth. Asset quality remained very strong.
• Loan Originations: Commercial and industrial loans grew 12% quarter-over-quarter, with a strong commercial pipeline. Premier banking contributed $128 million in new deposits, with over 1,100 new accounts opened, and $85 million in commercial originations.
• Expenses and Restructuring: $4 million in restructuring charges related to outsourcing residential loan functions, with an anticipated $8 million in additional nonrecurring restructuring charges in the fourth quarter. Anticipate a $10 million pretax annual operating benefit from the outsourcing initiative.
• Capital and Dividends: Robust capital levels, with a quarterly cash dividend declared for the 115th consecutive quarter.

Segment Performance

• Net Interest Income: Grew by $3 million compared to prior quarter, fueled by a $242 million increase in average net loans. Net interest margin was 2.91%, stable compared to the second quarter.
• Loans: Total loans for the quarter increased to $373 million, with a 14% annualized growth rate driven by $1 billion in originations. Commercial and industrial loans grew 12% quarter-over-quarter, with a commercial pipeline over $700 million. Residential loan originations and underwriting were outsourced, with expected runoff in the portfolio.
• Asset Quality: Special mention and substandard loans decreased 15% to $124 million (1.2% of total loans). Nonperforming loans to total loans were at 0.39%, and net charge-offs were $617,000 (2 basis points of total loans).
• Expenses: Operating expenses were $76 million, including $4 million in restructuring charges related to outsourcing residential loan functions. Core noninterest expenses increased, but the fourth quarter core operating expense run rate is expected to be in the $70-71 million range.
• Capital: Common equity Tier 1 capital ratio was 10.6%, with tangible book value per share at $19.52. A quarterly cash dividend of $0.20 per common share was declared.

Guidance

• 2026 Outlook: Expect 7%-9% annualized loan growth, predominantly in C&I, offset by runoff in the residential portfolio. Deposits to grow in line with loans, maintaining a loan-to-deposit ratio of approximately 100%. Net interest income expected to grow steadily, with NIM crossing above 3% by mid-2026. Noninterest income projected to be $25-35 million. Operating expenses expected to be between $275 million and $285 million. CET1 ratio to remain at or above 10.5%, with ROA expected to reach 1% by early 2027.

Risks

• Deposit Costs and Competition: Uncertainty in deposit costs and competitive dynamics could impact net interest margin.
• Economic and Regulatory: Potential effects of economic conditions and regulatory changes on loan quality and provisioning.
• Residential Transition: Challenges in transitioning the residential mortgage business, including state modification requirements and timing of headcount reduction for outsourcing.

Question and Answer

• Q: Net interest income guidance and balance sheet dynamics A: Pat Barrett discussed NIM expected to cross above 3% mid-2026, with the balance sheet expected to grow in the high single digits from loan growth, and net interest income to grow commensurate with loan growth.
• Q: Premier Bank deposit growth A: Joe Lebel mentioned deposit growth driven by hired teams and customer acclimation, with operational accounts converting to funding, and expecting more activity as teams mature.
• Q: Restructuring impact on noninterest income A: Christopher Maher and Patrick Barrett discussed a $10 million pretax benefit from residential restructuring, with a $4 million headwind from residential, and noninterest income guidance of $25-35 million due to outsourcing.
• Q: Credit exposure and allowance A: Christopher Maher noted sensitivity of the allowance to criticized loans, using qualitative factors and economic indications for provision decisions.
• Q: ROA and hiring A: Christopher Maher expected ROA above 1% by early 2027, balancing hiring great talent with maintaining return hurdles.