OceanFirst Financial Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2025

Key Takeaways

  • Positive Sentiment: Net interest income rose by $1 million and net interest margin expanded 1 bp, marking a third consecutive quarter of revenue growth and setting up improved earnings in Q3.
  • Positive Sentiment: Record-high commercial pipeline of $791 million and $716 million in loan originations (including $232 million in C&I) reflect the immediate productivity of recent commercial banking hires.
  • Positive Sentiment: Asset quality strengthened further with classified loans down 3% to 1.4% of total loans and nonperforming assets among the lowest in the peer group, driving minimal provision expense.
  • Positive Sentiment: Premier Bank launch onboarded 36 bankers who have already generated $115 million in deposits (20% non-interest-bearing) at a 2.7% cost, on track for the $500 million year-end target.
  • Positive Sentiment: Robust capital deployment with $17 million in share repurchases, $57 million preferred redemption, authorization for 3 million more repurchases, and the 113th consecutive $0.20 quarterly dividend.
AI Generated. May Contain Errors.
Earnings Conference Call
OceanFirst Financial Q2 2025
00:00 / 00:00

There are 8 speakers on the call.

Speaker 1

Thank you all for attending. I'd like to welcome you all to the OceanFirst Financial Corp. Q2 2025 earnings call. My name is Rebecca, 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, Senior Vice President of Corporate Development and Investor Relations at OceanFirst Financial Corp. Thank you. You may proceed.

Speaker 7

Thank you, Breca. Good morning and welcome to the OceanFirst Financial Corp. second quarter 2025 earnings call. I am Alfred Goon, Senior Vice President 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 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.

Speaker 4

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, Joseph Lebel III, and our Chief Financial Officer, Patrick 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.

Speaker 4

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 commercial and industrial bankers, launched the Premier Bank Group, 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 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.

Speaker 4

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 one 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.

Speaker 4

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 total loans. Classified loan levels remained well below our long-term average and are substantially lower than our peer group. The quarterly provision was primarily driven by net charge loss of $2.2 million and by a mixed shift as commercial and industrial loans increased while commercial real estate loans decreased slightly. Capital levels remained robust, with an estimated common equity tier one capital ratio of 11% and a tangible book value per share of $19.34.

Speaker 4

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, the board also approved the quarterly cash dividend of $0.20 per common share. This is the company's 113th 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.

Speaker 4

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.

Operator

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, is a record high for the company. This momentum is directly attributed to our investment in talented commercial banking hires, who continue to add diversity in 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 the linked quarter basis, but our markets continue to remain impacted by uneven loan demand, volatility in rates, and limited inventory.

Operator

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 non-interest-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.

Operator

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, non-interest income increased 5% to $11.8 million during the quarter. After excluding non-core and non-recurring items, non-interest income was down 1% compared to the prior quarter due to lower swap activity, largely offset by gain on sale. With that, I'll turn over the call to Pat to review the remaining areas for the quarter.

Speaker 5

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 four 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 non-performing loans to total loans at 33 basis points and non-performing assets to total assets at 31 basis points. Delinquency levels continued to remain at the low end of historical levels, and classified loans declined.

Speaker 5

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 non-performing 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 mixed shift in loans. Turning to non-interest 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 non-recurring 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.

Speaker 5

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. 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 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.

Speaker 3

Thank you. Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, you can do so by pressing star followed by two. To ask a question, please press star one. 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 from the phone lines comes from Daniel Griggs with Raymond James. Please go ahead.

Speaker 3

Thank you. Good morning, guys. Maybe to start, just on the deposit side, you know, curious, you got a lot going on, right? You've got the new hires. You added $115 million, I think you said, Joe, including some DDA there. At the same time, the overall funding costs are starting to stabilize. As this shift continues to happen with the deposits coming on from the new hires, if we could pull rate cuts out of this for a second, do you think you can reduce funding costs going forward? How much of that is like further out, like next year or the year after type of thought? How much is more near term?

Speaker 4

Certainly, the opportunity through a mixed shift to reduce it a little bit. I think absent 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%. There's a little bit of opportunity there, not a lot, and it's not a lot of maturity, so it's not going to drive a big change in the mix. As the Premier Bankers teams come on, Joe noted, they're going to have slightly higher levels of DDA. Also, outside the Premier Bank Group, the commercial and industrial 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'd raise. Anything you'd add?

Speaker 4

Yeah, I think the only thing I'd add is, you know, 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. 3Q, 4Q should be better.

Speaker 4

Okay. I guess bigger picture, kind of same theme, but on the margin, you know, stable to slightly up in the third quarter. Maybe if there was a rate cut, it would have been stable or slightly down. I'm just trying to think about the trajectory of the margin longer term. You know, obviously up, but your thoughts on kind of how quickly that translates into margin expansion as we get into the out quarters here?

Speaker 4

It'll be 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. It's unclear whether we would get there by year-end, but we're on the path to get there and cross over that. I think it's going to depend a little bit on mixed shifts and how many dollars people have in different account types, but it's certainly improving. On the loan side, you know, as we grow loans, the mix of the loans we grow will also be important. The weighted average coupon, you saw the weighted average coupon in the pipeline came down a little bit quarter over quarter.

Speaker 4

That just reflects more commercial and industrial (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.

Speaker 4

Okay, helpful. 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.

Speaker 3

Thank you.

Speaker 4

Operator, please move to the next question.

Speaker 3

We have another question from Tim Switzer with KBW.

Speaker 3

Hey, good morning. Thanks for taking my questions. The first one I have is just a quick clarification on the outlook for stable non-interest income. What's the base for that? Is that the adjusted number or reported?

Speaker 4

Here with us is we seem to have a little technical difficulty with the operator today.

Speaker 4

I can hear you. Can you guys hear me?

Speaker 3

Please go and follow us. Try and establish the connection issue. Please stand by while we try and correct the connection issue with the speakers today. You will now hear holding music until we reestablish the issue with the speakers' connection. I can confirm we have the speakers back, and Tim, you may resume with your question.

Speaker 4

Hi, Tim. It's Chris. I'm not trying to dodge your question.

Speaker 4

It's a pretty simple one. I was just wondering, what is the base we should be using for the relatively stable non-interest income guidance? Is that the adjusted number or the reported GAAP?

Speaker 4

Sorry, I didn't. It's Pat. Could you say the first part of that question one more time?

Speaker 4

Yeah, what is the base we should be using for the guidance for stable non-interest income?

Speaker 4

GAAP is the best base to use. They're almost the same at this point for this quarter. If you're looking at margin 291 versus 290, or even the non-interest income. Oh, I'm sorry, for the non-interest income.

Speaker 4

Fee income.

Speaker 4

Do not use the GAAP.

Speaker 4

Yeah, GAAP and stable. Okay, like that $12 million number?

Speaker 4

Yes.

Speaker 4

Okay. Can you guys, you guys talked about it a little bit last quarter, provide a little bit more details on kind of what was the expense lift from the new hires you made in Premier Bank and how did that impact the earnings this quarter? I think we're now a more stable run rate going forward, right? You know, any plans for new hires over the rest of the year?

Speaker 4

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. That will now reverse and we'll start kind of pulling out of that.

Speaker 4

To simplify from a geography perspective, as we get the full quarter impact, because a lot of these hires didn't start until late in April, we expect our comp expense will drift up a bit higher. Call it go from $40 million run rate to $42 million run rate. Professional fees will come down by $2 million because we won't have all of the hiring costs. 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. The last question I have is you guys are seeing pretty decent capital levels here.

Speaker 4

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?

Speaker 4

Our primary focus is on the organic growth plan and producing the earnings momentum we think that we need to show. We are also very mindful of where our shares trade relative to book value. There are not very many opportunities that would make sense for our shareholders with the valuation of our shares today. That is kind of how we think about things.

Speaker 4

Great. Thank you, guys.

Speaker 3

Thank you. Your next question comes from David Bishop from Hovde Group.

Speaker 3

Hey, good morning, gentlemen. Hey, question. 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 rates going below the average for the entire bank over time and pushing that appreciably lower as you onboard more of these accounts?

Speaker 4

Right now it's in the 260 range. It's been holding, and we've seen additional growth since the end of the quarter. The bank-wide cost of deposit is closer to 2%. I think we'll get down to kind of match the bank, maybe a little bit better than the bank, but our expectation is that 30% or so will be non-interest bearing. The rest is going to be some version of market, maybe not the highest rate you have to pay, but something. I think it's going to be very efficient funding, but we don't expect it to be free funding. I think of it kind of gravitating towards the cost of deposits for the rest of the bank, but being able to grow at a much faster clip. We've got a great deposit cost, but we haven't been growing as quickly.

Speaker 4

We want to match the growth rates we need to fund the balance sheet.

Speaker 4

Got it. I know it's still early in the lifecycle here, but any new line of sight on potential loans emanating from that segment?

Operator

Actually, they were pretty bullish on the opportunity there. Obviously, with the Premier Bank Group, the expectation is deposit focus, but we've already driven some significant activity that you're seeing in the pipeline already, and I expect that to continue to grow over time. We're very pleased with the activity on that end of the spectrum as well.

Operator

Joe, sticking maybe with loans on the commercial side, just curious where you're seeing sort of the best opportunity, either geographically or within that commercial and industrial segment, any specific verticals that are driving the majority of growth your way when it's a pretty tough environment to grow commercial and industrial in this market?

Operator

Yeah, and they were pretty thoughtful about, obviously, what we're seeing in markets. The good news is, from a geographic perspective, we're seeing it all over the footprint, which I truly appreciate. It's not being driven by one area, but we've seen good continued momentum in our Northern Virginia market and government contracting. I've also seen some really good activity in our home markets, which have been a little quiet. That's good to see as well. We've seen some equipment finance. I wouldn't go as far as to say there's any real concentration in any vertical. When you hire the people we've hired, some of that is the fact that they're bringing relationships that they've built over 15, 20 years to us. Even though the environment's difficult, we're taking market share from others.

Operator

Got it. Maybe a housekeeping item on the sub debt. Is there any update there in terms of the thinking of redemption or retirement? Thanks.

Speaker 4

We're watching that market carefully. It gets more efficient, it seems, every quarter. 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. 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. We like having the optionality. We're watching the markets and going either direction over the next quarter.

Speaker 4

Great. Thanks.

Speaker 3

Your next question comes from Manuela Davis with D.A. Davidson. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 4

Morning.

Speaker 4

Is the 3Q loan growth guide, how sustainable is that? How much is that based on what you've seen so far this quarter and what's expected by the year-end? How much give is there in that projection?

Operator

I think we feel pretty confident given the pipeline that we have, and I think the continued pipeline growth. I think, Manny, 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. 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. On that end of it, I think you can be as confident as you can be. I think that's probably a fair assessment.

Speaker 4

I would add, in our conversations with our clients, they're reporting to us that business conditions are good for them. They've got building backlogs, they've got plenty of work, plenty of opportunity. We're seeing them increasingly lean in and make investments. I know those macro headlines are concern over the economy. We have not seen that reflected in the comments from our customers to date, that could change. We live in a volatile world. For now, our clients are thinking pretty positively to doing projects. We've got good visibility, and a lot of these hires we made are going to produce opportunities for us for years to come. Typically, a commercial banker takes anywhere between 18 months and three years to reach their full potential. I think this is a sustainable growth rate.

Speaker 4

I appreciate that. It looks like if you look at what you're bringing in from the commercial deposit teams, what you have in the loan pipeline, there's like a marginal NIM close to 4% plus. What keeps you from growing the NIM or expanding the NIM even faster?

Speaker 4

I think it's just the pace at which there's net additions to the balance sheet. There is a scenario, Manny, under which if we're growing and compounding this growth and there are rate cuts, you could see a faster expansion. We just don't want to, until we've seen that for a few quarters, we don't want to get ahead of ourselves.

Speaker 4

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 Group or even in C&I?

Speaker 4

No new geographies. We're very happy. We have enough geography that gives us the appropriate concentration balance because we don't want to have too much of anything in any one market. We think we've got that covered, and our markets are exceptionally deep. We operate in the strongest banking markets in the country. We essentially think that the hiring is done for this year. If a great banker comes available to us next month, we're going to hire the great banker because that's good for the company. I would assume that the hiring is done for this year. As we get through year-end, look through our performance in Q3, Q4, heading into Q1, we will consider what the appropriate growth rate is for 2026 based on how we're performing with the teams we've hired thus far.

Speaker 4

For now, that's why I think Pat guided to a flat to possibly even reduced operating expense level over time. We'll keep you guys updated on our plans in that regard.

Speaker 4

I appreciate the commentary. Thank you. I'll step back into the queue.

Speaker 4

Thank you.

Speaker 3

Thank you. We now have Christopher Marinac with Janney Montgomery Scott. Your line is open, Christopher.

Speaker 3

Hey, good morning. Chris and Joe and team, I wanted to ask a little bit about the kind of big picture on deposits on the Premier Bank. Given the strong quarter you just had, 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.

Speaker 4

I'll just make a qualitative comment, not a quantitative comment. We're really pleased with the relationships we're being introduced to, with their customers' trust in coming over to us, joining the bank. You know, Joe mentioned hundreds of accounts, a couple hundred relationships. They've really done what we would have expected to do. This is only the first eight weeks or so that they were on board. It does take a little while to get oriented in any new place. You have to kind of find the restroom and work through policies and all that kind of stuff. Very pleased with the quality of the conversations we're having. I think it'd be premature to reset a different guidance level. Let's see how we go through the end of the year. Gentlemen, you tell where you're at on the conversations you've had.

Speaker 4

Both Joe and I have been out and met a lot of these new customers and really appreciate the quality of the folks we're bringing over.

Operator

I think the only thing I'd add for Chris is that we have provided some guidance toward multiple years out. We fully expect, obviously, that we'll continue to grow these balances into bigger dollars, 2026 and 2027.

Speaker 4

Yeah, that was a pretty wide guidance, I think. You know, we could outperform on the top end, but it's growing in this in a couple of months. I want to kind of build some momentum and have a track record before we adjust anything.

Speaker 4

Understood. I see the multi-year aspirational goals. I was curious how we go from this $500 million to even the $2 billion in 2027. We'll continue to let that play out. Thank you for the call, both of you. Any comments on just overall credit quality as it pertains to the longer-term interest of trying to grow the reserve in general? Is that still a possibility for you as these scenarios have played out?

Speaker 4

I think that's going to be determined by the mix shift, Chris, over time. As the portfolio becomes, has a larger composition of commercial and industrial loans and a smaller composition of CRE loans relative to each other, we would expect to carry slightly higher reserves. It didn't turn out that it was a very small growth this quarter, so that wasn't an opportunity. The mix shift didn't provide enough to see a reserve build. I would not be surprised if you see the reserve continue to build for the next several quarters as the mix shift changes. We think it's heading in that direction. This was just a quarter where the numbers didn't turn out that way.

Speaker 4

Great. The small improvement we saw on 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.

Speaker 4

We have a number of things that we think may resolve in the second half of the year as we provide some upside to that. We always get cautious for two reasons. First, we don't know the environment we're going into, and we're at an absolute, you know, fairly low level. As much as we might have positive resolutions, there's always situations where you may have a creditor or two that would slip, you know, into that. Nothing, we're not seeing anything in portfolio trends, risk ratings, delinquencies. There's no sign of a wider deterioration. The composition of the loans is really important. We've stayed out of some of the segments that have higher levels of concern. We have a relatively small multifamily book. We don't really operate in the rent-stabilized world. Our central business district office portfolio is very small.

Speaker 4

I think the portfolio was structured well and not have an outsized issue. Performance indicators are good. Might get a little bit better, but probably won't get a lot better because these are pretty low levels.

Speaker 4

Great, Chris. Thank you all for the call today.

Speaker 4

Thanks, Chris.

Speaker 3

Just as a reminder, to ask any further questions, you need to press star followed by one on your telephone keypad. We now have a question from Matthew Breese with Stephens Inc. Please go ahead.

Speaker 3

Hey, good morning, everyone. 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.

Speaker 4

Okay. Thank you for that, Matt, because we didn't hear that part of the question.

Speaker 4

Yeah, Pat.

Speaker 4

Yeah, we're not wildly exposed to much volatility with or without Fed rate cuts. The impact for us is really more kind of in the belly of the curve. See what the two and the five-year and the 10-year do. There's not a dramatic dollar amount. It rounds to less than a penny a share on an annualized basis per 25 basis point cut from the Fed. Anything that we're talking about from a guidance perspective doesn't really contemplate anything meaningful from that, any big change in the curve. We kind of go with consensus. I think we have a third-quarter rate cut and a year-end rate cut in right now, which I think is what most people think would happen.

Speaker 4

If we got one next week, a 25 basis point cut, there might be a little timing lag, but you'd see the negative on the floating rate book coming through, and then the positive would come through in lower deposit costs with maybe a one-quarter lag.

Speaker 4

I think as Patrick Barrett points out, I appreciate that.

Speaker 4

Longer end, there might probably be more. If there's a Fed cut and then the long end comes up, that might be more beneficial than just a cut. If there's a cut where the long end stays where it is, probably not that much.

Speaker 4

Cheaper is always better.

Speaker 4

We're still pretty neutral right now.

Speaker 4

Okay. I wanted to go back to deposits. The incremental Premier deposits came in at, I think, right around $270 million. The bank as a whole is at $206 million. It feels like, by the numbers, the incremental growth should take deposit costs higher, but you're suggesting maybe there's actually some room to reduce costs. I'm curious, the other parts in the bank, what is kind of the blended new rate of deposits, and/or are there agreements with your banking deposits that, whatever rate they're getting is more or less, there's some short-term elements to it. Maybe help me out there.

Speaker 4

It's just the operational way that accounts get funded, Matt. The banker showed up in mid-April. They begin to open accounts probably by early or mid-May. There is a process on a commercial account. You have to go do all the beneficial ownership stuff, paperwork filed. They have to go out and operationally kind of wind down wherever they're banking today and move over their cash management to checks and payment methods and all that. As a result, the early deposits you get in tend to be rate-driven deposits. You've got the operating accounts, but they've got nothing in them. They build in their balances over time. I think Joe had guided to maybe closer to 30% non-interest bearing over time. That would pull that $260, $270 down closer to the $206. If we can do better than that, you might even outperform it.

Speaker 4

We don't think it's going to drag the deposit costs up at the bank. We think over time we can kind of gather deposits about where we're priced today.

Speaker 4

Okay, that makes much more sense. I did want to touch on securities yields, you know, down, you know, pretty sizably the last three quarters. What's going on there? Where do we start to hit, you know, stability in securities yields because that seems to be a headwind to the margin?

Speaker 4

Yeah, the decline, there's a couple of things that are at work there. A third of our securities book is floating rate. As you see any movements there, you get a little bit of directional push. The duration is pretty slow, pretty short as well. We've got reinvestment that's occurring of instruments that we entered into in a higher rate environment that are repricing out already based on the kind of belly of the curve, a little bit longer end. Those are the main drivers. There wasn't a huge mix shift in those, and they still remain, you know, largely Treasury, Treasury CMOs, agency paper. Whatever the rates are on those types of instruments is what you'll see. It's really only the floating rate piece, which is our CLO book, that kind of moves around with the short end of rates.

Speaker 4

Okay. Loan yield expansion this quarter was, I want to say, maybe 4-ish basis points. In the absence of rate cuts, is that a decent rate of expansion from here?

Speaker 4

I think that's a good proxy.

Speaker 4

The last one for me is just, you know, as you think about loan growth and the guidance, to what extent are you baking in commercial real estate payoffs? It seems to be a common theme this quarter. There's a lot of competition for paper in commercial real estate. That's all I had. Thank you.

Speaker 4

Yeah, Matt. In terms of commercial real estate, we think we do that well. While we are focused on adding to the C&I book, we're not exiting or leaving the CRE book. We've done it well. It's performed well. We have great clients there. It can be episodic on pay down. That's the way that world works. If you had one big loan, it can make a difference. We would hope that the CRE would remain flat. Maybe even we could grow it a little bit depending on opportunities. We do have a strong pipeline in CRE.

Operator

Yeah, we've seen a resurgence in CRE transactions. A great example, Matt, is the largest payoff we got this quarter was a $55 million transaction, $52 million at 3.5%. 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.

Speaker 4

If you're thinking about modeling that, keeping CRE balances steady is probably a decent bet. It might go up a little bit, it might go down a little bit, but I would not expect that portfolio to be in runoff.

Speaker 4

All right. I appreciate all that. That's all I had. Thank you.

Speaker 4

Thanks, Matt.

Speaker 3

Thank you. I can confirm that does conclude the question and answer session. I would like to hand it back to Chris for some final closing comments, please.

Speaker 4

Thank you very much. We appreciate your time today. I apologize for the technical glitch in the call that got us disconnected for a little bit. We do appreciate your time and your support of OceanFirst Financial Corp. We hope you have a great summer. If your plans bring you to the Jersey Shore, come visit us, and we'll talk to you in October. Thank you very much.

Speaker 3

Thank you. I can also 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.

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