OceanFirst Financial Q2 2026 Earnings Report

OceanFirst Financial EPS Results

• Actual EPS: $0.43
• Consensus EPS: $0.43
• Beat/Miss: Beat by +$0.00
• One Year Ago EPS: N/A

OceanFirst Financial Revenue Results

• Actual Revenue: $131.33 million
• Expected Revenue: $135.63 million
• Beat/Miss: Missed by -$4.29 million
• YoY Revenue Growth: N/A

OceanFirst Financial Announcement Details

• Quarter: Q2 2026
• Date: 7/30/2026
• Time: After Market Closes
• Conference Call Date: Friday, July 31, 2026
• Conference Call Time: 11:00AM ET

OceanFirst Financial (NASDAQ:OCFC) Corporation (NASDAQ: OCFC) is a bank holding company headquartered in Toms River, New Jersey, that provides a full range of community banking and financial services through its principal subsidiary, OceanFirst Bank. Established in the early 20th century, the company has built its business around serving the deposit, lending and wealth management needs of individuals, small businesses, municipalities and nonprofit organizations across New Jersey and portions of New York.

The company’s core activities include accepting consumer and business deposits, making commercial, municipal and consumer loans, and offering residential mortgage financing. OceanFirst Financial also provides specialized treasury management solutions, cash management services, and a suite of online and mobile banking products designed to support the day-to-day operations and long-term goals of its clients. In addition, the firm operates a trust and investment management division that delivers personal and institutional investment advisory services.

Over the years, OceanFirst Financial has pursued both organic growth and strategic acquisitions to broaden its geographic footprint and enhance its service capabilities. The company has steadily expanded its branch network throughout the Jersey Shore region and into key suburban markets, while integrating complementary businesses to deepen its product offerings. This measured growth strategy has enabled OceanFirst to maintain a community bank culture even as it has scaled.

Governed by an experienced board of directors and led by a senior management team with deep expertise in banking and finance, OceanFirst Financial remains focused on balancing community engagement with disciplined risk management. By aligning its services to local market needs and leveraging digital platforms, the company aims to deliver consistent value to its customers and shareholders over the long term.

OceanFirst Financial Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Core EPS was $0.43, up 39% year over year, while pre-tax, pre-provision core earnings rose 29% sequentially to $44.5 million. Management also approved its 118th consecutive quarterly dividend of $0.20 per share.
• Positive Sentiment: The Flushing Financial acquisition added approximately $8.7 billion in assets, $5 billion in loans, $7.4 billion in deposits, and 30 branches, expanding OceanFirst to roughly $23 billion in assets. Management expects full systems integration by the end of the third quarter and remains confident in achieving announced cost savings and profitability targets.
• Positive Sentiment: Net interest income increased 25% sequentially and net interest margin expanded 12 basis points to 3.05%; management expects the margin to reach 3.07%–3.12% in the third quarter and 3.09%–3.14% in the fourth quarter. A full quarter of acquisition-related loan accretion and funding optimization are expected to support the improvement.
• Neutral Sentiment: Underlying asset quality remained strong, with non-performing loans at 0.33% excluding acquired credit-deteriorated loans and annualized net charge-offs of just five basis points. Reported criticized loans and reserves increased mainly because of acquisition accounting and the application of OceanFirst’s credit methodology, rather than identified deterioration.
• Positive Sentiment: Operating expenses are projected to decline from $120 million–$125 million in the third quarter to $110 million–$115 million in the fourth quarter as merger savings begin, with management targeting a run rate closer to $100 million entering 2027. The company expects improving operating leverage and profitability above a 1% return on assets during 2027.

Presentation

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Good morning. Thank you to all who've been able to join our second quarter 2026 earnings conference call. This morning, I'm joined by our President, Joseph Lebel, and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we will provide brief remarks about the financial and operating performance for the quarter and some color regarding the outlook for our business. We may refer to the slides filed in connection with the earnings release throughout the call. After our discussion, we look forward to taking your questions. We reported second quarter results that reflect the closing of our transformational acquisition of Flushing Financial Corporation on June 1st.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

On a GAAP basis, we reported a net loss of $0.04 per fully diluted share, which was driven by $0.47 per share or $33.6 million of non-recurring merger-related expenses, net of taxes. On a core basis, which excludes non-recurring items, earnings per share was $0.43 or $30.5 million, unchanged from the prior quarter and up 39% from the prior year. Pre-tax, pre-provision core earnings grew by 29% from the prior quarter to $44.5 million. We've seen quarterly improvement in the company's performance from the second quarter of 2025 in net interest income, net interest margin, and return on average assets. This highlights our multi-quarter journey from our revenue-generating investments as we continue to improve towards peer profitability levels. This week, our board also approved the quarterly cash dividend of $0.20 per common share, marking the company's 118th consecutive quarterly cash dividend.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

As mentioned previously, we completed our acquisition of Flushing Financial Corporation on June 1st, concurrent with a $225 million strategic investment from Warburg Pincus, which was priced at $19.76 per share. Flushing added approximately $8.7 billion in total assets, $5 billion in loans, and $7.4 billion in deposits, along with 30 retail branches across New York City and Long Island, bringing our combined franchise to approximately $23 billion in assets. We're thrilled to welcome the Flushing team and their customers to the OceanFirst family. We also repositioned our balance sheet by selling $1.3 billion of multifamily loans acquired from Flushing, which eliminated the majority of our exposure to New York City rent-regulated properties and reduced the bank's commercial real estate concentration by approximately 50 percentage points to 381%. The proceeds were reinvested into highly liquid investment-grade securities.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Integration planning is well underway. We anticipate full integration of Flushing's operations and systems, including the systems conversion and rebranding, by the end of the third quarter of 2026. We're confident in the strategic and financial rationale of this combination. We are already seeing competitive wins in both talent and customer acquisition. We remain on track to achieve the cost savings and returns outlined at the transaction announcement. A significant portion of our cost saves is expected shortly following systems conversion.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Pat will provide additional details on the financial impact of the transaction in his remarks. We remain focused on executing our organic growth strategy, which continues to be reflected in our underlying results this quarter, while also approaching the integration of Flushing with a sense of urgency. I'm proud of the pace at which our staff is moving related to both organic initiatives and the Flushing integration. At this point, I'll turn the call over to Joe for additional color on these businesses.

[Joseph Lebel, President and COO at OceanFirst Financial]

Thanks, Chris. I'll start with loan originations for the quarter, which totaled $642 million, an increase of 50% from the prior quarter. Excluding the impact of the Flushing acquisition and the multifamily loan sale, underlying commercial organic loan growth was approximately $154 million or 2% from the prior quarter, reflecting the company's focus on core relationships. These results underscore the continued strength of the core growth initiatives, which the Flushing franchise will further bolster. The C&I business grew 8% on an annualized basis, reflecting the continued momentum from our recruitment efforts in 2024 and 2025. We've recruited another 17 C&I bankers so far in 2026 and will continue to be opportunistic with hiring efforts throughout the remainder of the year. Total deposits grew by $6.6 billion during the quarter to $17.8 billion, driven by the $7.4 billion of deposits acquired from Flushing.

[Joseph Lebel, President and COO at OceanFirst Financial]

Excluding Flushing, deposits declined modestly, primarily due to seasonal outflows in government deposits and a reduction in brokered deposits. Positively, we did see a 6% increase in non-interest-bearing deposits. The Premier Bank deposits grew by $150 million, while the cost of deposits dropped by 17 basis points. Non-interest-bearing deposits crossed the $100 million mark during the quarter. The group now manages 426 clients and 1,879 accounts and continues to build this momentum. As an added benefit, the Premier teams contributed $45 million in loan originations for the quarter. Customer engagement and calling activity has been significant, and the addition of Flushing's branch footprint throughout New York City and Long Island now provides tailwind moving forward. We remain confident in our 2026 deposit targets and have recently added two new Premier teams in Manhattan and Long Island.

[Joseph Lebel, President and COO at OceanFirst Financial]

I wanted to add a brief summary of our calling efforts to date with the Flushing teams in the commercial and retail segments of their market. Clients and notable centers of influence in all segments of the business have been welcoming. They are optimistic that we can continue to support their needs while using the scale of the combined company to grow with them, and in some cases, in the commercial bank specifically, grow exponentially. Recent visits in the Asian community specifically have surfaced several significant loan and deposit opportunities in both C&I and CRE.

[Joseph Lebel, President and COO at OceanFirst Financial]

Lastly, non-interest income was $10.6 million during the quarter, up from $6.7 million in the prior quarter. Excluding non-core items and Flushing's contribution of $1.4 million, other income increased to $2.5 million, primarily driven by higher net gains on other real estate activity and commercial loan swap income. Overall, non-interest income levels were in line with our expectations. With that, I'll turn the call over to Pat to review the remaining areas of the quarter.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Thanks, Joe. Good morning, everyone. We delivered our eighth consecutive quarter of net interest income growth, which increased $24 million or 25% from the prior quarter, $33 million or 38% from the prior year. This performance was driven by the addition of Flushing, which contributed $19 million of net interest income, with the remaining increase largely reflective of earning asset growth. Net interest margin expanded 12 basis points to 3.05%. Loan yields increased, reflecting new originations and the net impact of adding the Flushing portfolio. Total deposit costs were 2.06%, reflecting the addition of Flushing's deposit base. Looking ahead, we expect net interest income to benefit further from a full quarter of the combined franchise. Our underlying asset quality remains strong.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Reported ratios this quarter reflect the fair value marks on Flushing's acquired loans, including purchased credit-deteriorated loans, which elevated our reported non-performing and criticized loan levels but are not indicative of underlying credit deterioration. Excluding acquired credit-deteriorated loans, non-performing loans to total loans were 0.33%, and non-performing assets to total assets were 0.38%, both consistent with our historically low levels. Criticized and classified loans did increase to 3.12% of total loans impacted by the Flushing acquisition but still remain below peer averages. The increase in criticized and classified loans was driven by the application of OceanFirst credit rating methodology to the Flushing portfolio, which it bears repeating, does not reflect a deterioration in credit performance. We have no inherent concerns in the pro forma customer base. Our allowance for credit losses increased to 1.29% of total loans, primarily reflecting the day-one reserve established for the Flushing portfolio.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Net charge-offs were de minimis, representing only 5 basis points of average total loans on an annualized basis. Turning to expenses, GAAP operating expenses for the quarter were $130 million, including $43 million of merger-related expenses. On a core basis, operating expense of $87 million included approximately $15 million of one month of Flushing operations. Excluding Flushing, our core expense base of $72 million continued to reflect disciplined expense management across the company. Capital levels remained strong following the acquisition, with an estimated Common Equity Tier 1 ratio of 10.7%, flat to the previous quarter. That capital position was supported by the $225 million strategic investment from Warburg Pincus that funded concurrently with the closing of the Flushing transaction. Tangible book value per share was $18.19, reflecting the impact of purchase accounting and the very substantial increase in our allowance for credit losses.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Quick word on taxes, our reported effective tax rate this quarter was impacted by non-deductible merger expenses and a one-time deferred tax revaluation related to the acquisition. On a normalized basis, our ETR was approximately 28%. Given our new profile taxability, we expect our go-forward rate to remain around that level, absent any tax policy changes for the near term. With the Flushing acquisition now closed, we are updating our guidance on the pro forma combined company for the remainder of 2026. For loans and deposits, we expect 1%-2% growth from our June 30th levels by year-end. Net interest margin should continue to expand to a range of 3.07%-3.12% in Q3 and 3.09%-3.14% in Q4, subject to average balance, seasonal volatility, and with no rate changes modeled through the second half of the year. We expect other income of $12 million-$16 million per quarter.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

We expect operating expenses for the third quarter to decline to the $120 million-$125 million range, declining further in the fourth quarter to $110 million-$115 million as cost savings begin to be realized. As we complete the integration of Flushing and mature our efforts to apply AI-driven automation, we expect that operating leverage will continue to improve throughout 2027. Finally, capital is expected to remain strong and grow with earnings from the current level. We plan to provide detailed guidance for 2027 in the fourth quarter. I just wanted to highlight that our 2027 profitability targets remain essentially unchanged from when we announced the Flushing deal.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

One last point, just to talk about consensus estimates. While there's a fair amount of variability among individual analysts and line items within our financials, on average, the earnings estimates look reasonable and should be generally aligned with our outlook for the second half of the year and for next year, both of which, again, remain consistent with our initial estimates at the time we announced the transaction. At this point, begin the question-and-answer portion of the call.

[Operator]

We will now begin the question-and-answer portion of the call. Our first question comes from Peter Winter from D.A. Davidson. Peter, your line is open.

[Peter Winter, Analyst at D.A. Davidson]

Thanks. Good morning.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Good morning, Peter.

[Peter Winter, Analyst at D.A. Davidson]

Good morning. I wanted to start on the margin. The outlook for the second half of the year assumes no rate changes, can you talk about how you're positioned if we do get one or two rate hikes? Second, on page nine of the presentation, you mentioned that due to competitive pressures, it could pressure the margin. If you could just elaborate on that, is that contemplated in the margin guidance for the second half of this year?

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Sure. Maybe I'll take a quick shot. This is Pat. It's the impact of rate hikes. When we combined the organization, we absorbed Flushing's liability sensitivity with our relative neutrality on interest rates. It was just kind of the shape of where the balance sheets were in respect. We added hedges to that kind of brought us back into a more neutral rate position. We're modeling something that's modestly liability sensitive. A rate hike would be very modestly dilutive, if you will, to revenue. I'd say that from a 25-basis-point rate hike on an annual basis would be about a $5 million pre-tax impact to revenues. Conversely, if we got a rate cut, which nobody's modeling, if we did, because of our modest liability sensitivity, that would be about a $4 million a year run rate.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

We remain relatively neutral. I think as important, if not more so, is what happens in the belly of the curve and what happens with five-year and 10-year rates for new originations and renewals, because I think most people would agree that we're at fairly elevated levels for those. We like the shape of the curve, if there's a parallel increase in the curve, we're kind of indifferent to rate hikes or cuts. Second part of your question was competitive pressure. I think that's just a continuous pressure on pricing for new loans, particularly the kind of loans that we're considering. Both bank and non-bank pressures are keeping spreads on new loans at pretty historically tight levels. Joe, do you want to add to that?

[Joseph Lebel, President and COO at OceanFirst Financial]

I think it's a fair statement. We've seen an increase and a focus on our construction business, which tends to have better margins. I think as you've seen in the latest quarter, the average yield is pushing 6.70%, 6.72%, which I think is indicative of us focusing on construction and C&I versus permanent CRE loans.

[Peter Winter, Analyst at D.A. Davidson]

Got it. If I could ask on credit any guidance maybe you can provide with regards to net charge-offs or provision expense in the back half of this year? Also in the press release it mentioned a $21 million commercial relationship that went non-performing and then two commercial relationships for $56 million that went to criticized. Just any details on those loans?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I guess I'll give you just some sense on net charge-offs. I think as the company [audio distortion] Can everyone hear?

[Operator]

I can hear you. Apologies for the brief technical delay.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Peter, are you still there?

[Peter Winter, Analyst at D.A. Davidson]

I am. You started with net charge-offs, then I lost you.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Sorry about that. If you think about net charge-offs, historically both OceanFirst and Flushing had close to between 5 basis points and zero in charge-offs in any given quarter. I think as our business shifts to more C&I lending, you're going to see that it won't be unusual to have charge-offs from quarter-to-quarter. I don't think they're going to be a material impact on profitability. Slightly higher than our historical performance, but nothing that would stand out or be unusual, and probably still well at or below the kind of peer group levels of net charge-offs. I'm sorry, Peter, your second question was on the criticized loan. Let me just ask Joe to cover that for you.

[Joseph Lebel, President and COO at OceanFirst Financial]

Yeah. Peter, on the $21 million loan, the bank and the borrower have a plan in place. We believe we're well secure. We have updated appraisals, and I expect that that'll resolve itself before the end of the year, either through an upgrade or a refinance. We're well-informed on our large borrowers.

[Peter Winter, Analyst at D.A. Davidson]

Okay. It broke up, Joe, on your end, I think.

[Operator]

One moment for technical difficulties, please.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Operator, we're just checking to make sure the backup line is working.

[Operator]

Yes, the backup line has been staged. Please ensure to mute all other lines and microphones in the room and proceed.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Okay. Sorry for that interruption again, Peter. I think we were on the classified loan. I just want Joe to take that from the top again and walk through that.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Right. Peter started with the $21 million commercial-

[Joseph Lebel, President and COO at OceanFirst Financial]

Yeah. The $21 million [crosstalk] CRE loan, we have a plan in place, the borrower and the bank. We expect that that will be resolved before the end of the year, either through an upgrade or a refinance. On the other assets you referenced and criticized. Downgrades come and go quarter-over-quarter. We're well aware of what we need to do on both sides of the house, and we remain pretty confident. I'll leave it at that.

[Peter Winter, Analyst at D.A. Davidson]

Okay, just one quick housekeeping. You mentioned with the expense guidance for the third quarter, there's the one-time expense associated with the new digital banking platform. How much is that?

[Pat Barrett, SVP and CFO at OceanFirst Financial]

It's not significant. It's probably $2 million.

[Peter Winter, Analyst at D.A. Davidson]

Got it. Okay. Thanks for taking the question.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

It's not a huge number. We just want to demonstrate that we're continuing funding our ongoing platform investments out of our kind of core run rate, which still is hovering kind of at the $70-ish million a quarter range.

[Peter Winter, Analyst at D.A. Davidson]

Got it. Thanks, Pat.

[Operator]

Our next question comes from the line of David Bishop with Hovde Group. David, your line is open.

[David Bishop, Analyst at Hovde Group]

Yeah, thank you. Good morning, gentlemen. Hey, a quick follow-up on the net interest margin in terms of the guidance. Do you think that's going to be mostly driven from earning asset yield improvement? Or still room to move on the deposit side or maybe a combination of both? Just curious how you see that rise sort of occurring.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

It's definitely both. We've got opportunities to improve our funding base and even bigger opportunities with Flushing's funding base as we move forward and kind of redeploy some of the extra liquidity that we have today. There's really good opportunity on the funding side. On the yield side, I think it kind of depends on the mix and competitive pressures. The more construction and small business that we do, the better. From a straight yield perspective, C&I, which carries with it a lot of other opportunities and self-funding, obviously has super tight spreads and is probably the most competitive space right now.

[David Bishop, Analyst at Hovde Group]

Got it. In terms of the multifamily loans sold there, just curious, is there still sort of a banking relationship with those customers or has that been completely divested?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

That's a great question, Dave. No, we actually sorted out the primary relationships in that and retained loans for that exact reason. We retained loans where we had primary relationships and strong deposit profiles. Those customers typically had pretty strong cash flows. That's one of the ways we kind of split out what we wanted to keep and what we wanted to move away from. We don't think that'll have any impact on the other areas of the bank. For the most part, the loans that we sold were lending-only relationships.

[David Bishop, Analyst at Hovde Group]

Got it. Appreciate the color.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

All right. Thanks, Dave.

[Operator]

Our next question comes from the line of Daniel Tamayo with Raymond James. Daniel, your line is open.

[Daniel Tamayo, Analyst at Raymond James]

Thank you. Good morning, guys. Yeah, I guess maybe just to go back to the margin. I apologize for beating a dead horse here, you reiterated the guidance for the 320 margin in 2027 post-merger there. I guess, can you give us your deposit cost assumptions underlying that margin in 2027? It just seems like most banks are talking about, and you guys mentioned as well, competition being pretty stiff right now on the funding side. I think a lot of banks are talking about funding cost bottoming. I get you guys have the Flushing Financial funding base to integrate. Just curious how that plays out. Maybe there's some color on the Flushing Financial, some of the components that how you can lower that. Just trying to fill in the gap between maybe funding costs going down where others are saying they're bottoming or maybe even moving up.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I think it's on both sides. Daniel, it's Chris Maher. Both sides, you're going to see a little bit more of a mix shift than you are environmental trends. Both on the loan side, as Joe mentioned, beefing up. Historically, OceanFirst has done a nice job around construction. We have an opportunity to do a little more of that moving with the extra balance sheet from Flushing. On the deposit side, a mix shift around products. The pressure you see out of the markets and others have talked about is out there. CDs cost a fair amount, but we're talking about bringing down the level of brokered, and we're talking about optimizing pricing in the government deposit base, particularly in New York. The New York government deposit base costs a fair amount more than the New Jersey government deposit base.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

We see some tactical opportunities there, but think mix shift in product. As you saw, we had a nice increase in non-interest bearing this quarter. Flushing's done a nice job historically over the last several quarters around non-interest. Kind of leaning into that new branch network, and doing a little bit of a mix shift.

[Daniel Tamayo, Analyst at Raymond James]

All right. Thanks for that, Chris. I guess next, just on the expenses, want to make sure I understand the guidance. I think you said it was $2 million for the digital banking, the one-timers within the guide that you put out there, Pat. As we think about kind of back half of the year, is the way to think about that just taking $2 million off of the $110 million-$115 million? Or just from a kind of run rate end-of-the-year number, is it $108 million-$113 million in the fourth quarter and then that's a good number to grow off of?

[Pat Barrett, SVP and CFO at OceanFirst Financial]

I'd rather think of expenses as a good number to shrink off of as we exit this year, because just remember that the majority of our cost saves are only just kicking in the fourth quarter because of our system conversions that won't be fully completed until the end of the quarter. There's some cost saves that occur. The biggest chunk of those will start in the fourth quarter, and then there's continued opportunities to further rationalize vendors as we move into next year. I would hope that we're on a glide path to continue to bring it down a little bit, even in the face of inflationary pressures, and see us with a run rate that's closer to $100 million than $110 million as we start out the year.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

A good way to think about the expense momentum is in Q3, we had some employee separations related to the initial consolidation in the merger. As we get into Q4, the systems conversion is likely to happen in September. It's been our practice to keep most of the staff within the bank for at least a month afterwards to make sure that the customer experience is exactly what we want it to be. You'll see staff departures in earnest at the end of October, which will benefit the fourth quarter a bit, but that will help even more in the first quarter of 2027.

[Daniel Tamayo, Analyst at Raymond James]

Okay. How should we think about the amount of cost saves left in the first quarter? Is the first quarter then the kind of the first clean quarter that we should build on? Or is even 2027, you're hoping to take it down from that first quarter number?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

2027 will be the first clean quarter, we think there are opportunities to improve operating leverage throughout the year. Even if that means just kind of holding expenses flat or down a little bit quarter-to-quarter and avoiding what would be typically the inflationary increase in first quarter as you go through merit increases and that kind of stuff. Then you'll see we're planning for more significant growth in loans and deposits in 2027. If you're holding expenses flat or coming down a little bit, the operating leverage could really build up by the end of 2027.

[Daniel Tamayo, Analyst at Raymond James]

Okay, great. Thanks for all the color, Chris. Appreciate it.

[Operator]

Our next question comes from the line of Christopher Marinac with Brean Capital. Christopher, your line is open.

[Christopher Marinac, Analyst at Brean Capital]

Hey, thanks. Good morning, Chris and Pat and team. You've wanted to have a large reserve for a long time. You're finally here. I guess my question is, should we think of this as a permanent change, number one? Number two, is the extra tangible book dilution something that you can kind of make up for relatively quickly?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Yes, I think we see a lot of earnings momentum going into 2027. I think you'll be building back tangible book value as you go throughout the year. One thing I just want to point out, Pat mentioned this in his comments, if you think about the source of the tangible book value dilution, the most significant individual line item was the build in the ACL. We moved what was in the equity account over into the ACL account, which provides for a much stronger balance sheet and more consistent ACL coverage with our peer group. It's not like that money left the company in any way. It's just a stronger ACL.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

That was about, if you think about it in dollar terms, that was about $80 million of net reserve build on top of the reserves that both Flushing and OceanFirst had coming into the quarter. That was the most significant line item, and we certainly don't expect that that's loss content. The second biggest item is the purchase accounting marks, which will come back to us in accreted to income over the next couple years. Because of the sources of the dilution, we were a little less concerned about that. We do expect earnings to pick up nicely in 2027 and start to build that tangible book back.

[Christopher Marinac, Analyst at Brean Capital]

Great. Well, thank you for that background and thanks for hosting us this morning.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

All right. Thank you.

[Operator]

Our next question comes from the line of Emily Lee with KBW. Emily, your line is open.

[Emily Lee, Analyst at KBW]

Hey, everyone. This is Emily stepping in for Tim Switzer. Thanks for taking my questions.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Sure.

[Emily Lee, Analyst at KBW]

Given the progress made in commercial banking initiatives and the recruitment of some revenue-producing talent over the last few years and your commentary on remaining opportunistic on the hiring front, can you maybe dive deeper into any incremental investments you plan to make in that area?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I guess one thing I would say, Emily, is that if you think about the company as we go into the recruiting season is typically heaviest in Q1 because your best commercial bankers, typically they're having a good year, and they like to collect their bonuses from wherever they are and then move on. We expect the hiring season really to be in Q1. We have already seen an uptick in interest from qualified commercial bankers who really like, first, the coverage in New York that we got from Flushing. We're talking to commercial bankers in New York that wouldn't, I think, have considered us as strong an opportunity as they did in the past. There's just the dynamics of having a larger balance sheet, bigger capital base.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Players from larger banks, which is typically our recruiting base, would feel more comfortable coming to a firm of the size we are now. I think we will be a more attractive destination for talent in the first quarter. At this point, we don't expect any significant increase in expenses because we think that we can self-fund a lot of this through technology initiatives and through the rotation of how we spend our money instead of spending net extra. We'll keep everybody posted, and if we have good news in the first half of next year, we're able to hire more bankers than we thought, we'll certainly give you updated guidance.

[Emily Lee, Analyst at KBW]

That's really helpful, thank you. Just on capital, following the completion of the Flushing acquisition, can you discuss your capital priorities going forward? What level of repurchases should we anticipate going forward? Do you have any appetite for further bank M&A, maybe in 2027 or beyond?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Let me take it. The priorities are pretty straightforward. I mean, our best priority is always organic growth. We hope to be able to use the capital we expect to accrete in organic growth next year. That's the biggest priority. We're always very discriminating about the credits we put on and the spreads and managing our margin. If we don't find the right quality of growth and we wind up with an excess capital position, our number one priority would be buybacks. That's it. We're heads down focused on the franchise right now. We're not talking about M&A.

[Emily Lee, Analyst at KBW]

Great. Well, thank you for taking my questions, and congrats on the quarter.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Thank you.

[Operator]

Our next question comes from the line of Matthew Breese with Stephens Inc. Matthew, your line is open.

[Matthew Breese, Analyst at Stephens]

Hey, good morning.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Good morning, Matt.

[Matthew Breese, Analyst at Stephens]

I was hoping we could start with maybe overall balance sheet size kind of thoughts and guidance. I guess I'm most curious about the interplay between loan growth and securities from here. Should we be thinking there's like a one-for-one offset, securities into loans, basically maintaining a flat balance sheet? If that is the case, how long do you anticipate that dynamic going on for?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

That's a good question, Matt. If you were to kind of go back a step, we did inflate to a degree the amount of securities in the balance sheet when we did the loan sale. Curiously, we were able to buy securities at a lower risk weight that had a higher yield than the loans that we sold. It wound up being a very good trade. As we go forward, we're probably a little heavy in securities, so we'd pull that down a little bit. We do want to maintain a pretty good liquidity position. We think that's one of the most important things we achieved this quarter in terms of making sure we had on-hand liquidity, a lower loan-to-deposit ratio and all of that. The first place we would go is pulling down securities a little bit.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I think you'll see a flattish balance sheet this year. To the extent you'll see any growth, it would probably be coming in 2027. After we've kind of massaged the securities number a little bit.

[Matthew Breese, Analyst at Stephens]

I guess my follow-up there is, does that balance sheet outlook, is that what's giving you the flexibility and the opportunity to kind of test run higher cost-of-community deposits, maybe work off some brokered deposits and lower deposit costs? I think the spot cost at the end of the quarter is 226, right?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Yep.

[Matthew Breese, Analyst at Stephens]

About 20 basis points higher. Is that what's providing you the room to kind of lower that from current levels and see where it goes?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Absolutely. That's the chief advantage of having that excess liquidity and the lower loan-to-deposit ratio. We don't have to be as kind of careful. We don't have to match the market every day. I will say that to give you longer term guidance, we think being more liquid all things equal makes us a more valuable franchise. You might see loan-to-deposit tick up a little bit, but you still think of it as staying below 95%. As opposed to in the past, we would've been closer to 100%. We will use that advantage in the way we think about pricing.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

I will add, Matt, this is Pat, that there's probably $300 million or $400 million of securities where we parked them just because the yields were better than leaving them in cash, that we'll look to recycle those and maybe some cash flows into better-yielding opportunities as they come up. Most of that'll probably, hopefully, be done this quarter, in the third quarter. We didn't have much time, and we wanted to put all the cash to work as fast as we could. There'll be some churn there, but it shouldn't affect the overall magnitude of the portfolio or the mix of loans versus securities.

[Matthew Breese, Analyst at Stephens]

Okay. I do want to come back to that, just one more on kind of balance sheet mix. What is the strategy with the remaining sub-amounts of rent-regulated multifamily? Is that saleable at similar marks? Is that something you intend to do or is that more of a work down over time through maturities and payoffs? I'm also curious, same question line, if there's anything else within the Flushing kind of loan portfolio that we should think of as running off or getting rid of on an expedited basis.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I would consider that asset class to be in a runoff posture. We expect that it's going to decline slowly over the next probably 8-12 quarters. I will make the point that those were pretty good loans. We had loans to deposit customers. We had loans there that might have had an interest rate swap or a participant position that just made them less liquid. You really couldn't sell them into a capital markets execution.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Strong debt service, very low LTVs, delinquencies de minimis. We're happy to have those clients and just let that kind of resolve itself over time. That said, we recognize that there's a public policy risk to the asset class. We've got a 14.5% credit reserve against them, so we've marked them pretty aggressively. It's small, it's going to run off and we'll just kind of see that happening slowly over probably two to three years.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

I would say these aren't bad assets to hang on to. These are 50% LTVs, 140 debt service coverage, 5.5% average yield of what we're left with. They were just not as easily securitizable, they weren't as fast to sell at as high a price because of that feature, which is why they didn't go into an even larger pool of sale that we did in June.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I think your second question, Matt, about other assets, I think we're done with the balance sheet restructure. This is kind of where we are. It's kind of a clean July 1st balance sheet to then move off of, we're focused on organically growing that as we outlined earlier.

[Matthew Breese, Analyst at Stephens]

Okay. My last one, going back to the NIM. Let's just assume that the 226 deposit costs might be down a little bit. It still implies that there's quite a bit of moving pieces on the earning asset side to get to that third quarter range. Can you just help me out with your expectations for kind of loan yields? Obviously there's accretion that impacts that. Pat, you had mentioned some movement of securities portfolio. Could you just give us some idea of where yields on those two components will shake out that's kind of supporting the NIM range for the third quarter? That's all I have, thank you.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Matt, one thing I'd point out is that just like the deposit spot costs, on the loan side, we only had one month worth of purchase accounting accretion on the loan side. You're going to see a little bit of an offset there as we experience a full quarter's worth of kind of mark on that loan portfolio. That'll be helpful in terms of bringing the loan yields up. Pat?

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Probably the biggest driver of that is the full quarter's worth of accretion moving it up. We had about $8 million of accretion in second quarter net interest income, and we'll have $16 million, $17 million as we move into the next quarter on a run rate basis.

[Matthew Breese, Analyst at Stephens]

Okay. I'll leave it there. Thank you very much, I know I asked a lot. Thank you.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Thanks, Matt.

[Operator]

Our next question comes from the line of Manuel Navas with Piper Sandler. Manuel, your line is open.

[Manuel Navas, Analyst at Piper Sandler]

Staying on the balance sheet for a moment, can you talk about the hedging strategy a bit? Flushing with liability sensitives. What are you putting on, and how long is it termed out for? Does it contemplate you shifting your own funding base to eventually not need that in the future? Just kind of talk through that a bit, please.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I'll let Pat walk you through the duration and all that. If you think about it philosophically, we want to run a reasonably balanced shop. We were pretty neutral prior to the acquisition, as Pat mentioned. It made us liability sensitive. What we were focused on with the hedges is more of the tail risk, like outside the normal operating environment. The normal ±100 basis points really doesn't move the number much for us. What you would have seen if you looked at our interest rate risk models without the hedges, you would've seen more risk going in the kind of +200, +300, +400, and -200, -300 and -400. It was really an exercise around limiting our longer-term risk. You might talk about the duration and our return to the more neutral position over time.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Sure. Yeah, the hedges that we did put on were essentially caps and collars, as Chris mentioned, just to hedge against spikes, larger increases in rates, about $1.3 billion. That range out over three, four, five, six-year kind of period. What we're left with is some modest liability sensitivity that is largely driven by the fixed rates on the deposit side that we've inherited. As we roll out of deposits and more fixed rate deposits and into non-maturity deposits, that'll continue to help that.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Our goal would be to continue to have a relatively neutral balance sheet predicting short-term rates has proven to be very difficult. Predicting long-term rates has proven to be very difficult. We feel like staying short is the way to go. From a duration perspective, we've ticked up our duration modestly with the acquisition. We're probably in the 4%-5% range on the asset side, years duration. And the securities duration has ticked up along with the loans, so they're both in that range on the liability side. For the most part, we remain quite short.

[Manuel Navas, Analyst at Piper Sandler]

That's helpful. Can I shift to kind of loan growth drivers? Just kind of walk through the loan portfolio places where you might see continued run-off. There's a comment of resis running off. Also you have a lot of legacy momentum in the commercial side. If you could just talk about go-forward loan growth mix a bit, and when does the Flushing team kind of add even more to it?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

I'll make a couple comments. I'm sure Joe will add in as well. Some of the momentum is just by adding the commercial bankers, as Joe talked about, new bankers, new relationships. As we've seen in other times when we've made acquisitions, we think hopefully a meaningful opportunity in the Flushing base to become a bigger part of many of these clients' kind of wallet share. Just by nature of the size of the balance sheet and loan limits and things like that, we've already met just a wonderful group of long-term Flushing clients who can do more with us than they could with Flushing. I think that could be a meaningful driver over the next several quarters. Joe, anything to add?

[Joseph Lebel, President and COO at OceanFirst Financial]

I'd add two things. One, typically when you do these, there's a little bit of a lull just because clients are trying to assess the combined entity, and quite frankly, some of your salespeople are as well. As Chris mentioned, we've got a pretty good positive outcome pretty early on. We've done a variety of customer events and days in market, which I think have been really valuable for us and the client base. The combined scale I think is really going to make a difference. Remember, the vast majority of the Flushing book was smaller CRE transactions. They had a fledgling C&I business. The opportunity to do things at a larger scale with a little bit more boots on the ground and some sophistication I think is going to really benefit. It's one of the densest markets in the country.

[Manuel Navas, Analyst at Piper Sandler]

Individual portfolios. You have some expected runoff in residential. You talked about the rent-regulated is going to run off slowly. Where are some of the headwinds?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Those are certainly headwinds, but I think the guidance we gave you around growth in 2027 would be net of those headwinds. That's kind of where we would be. I'd also note that we think our win percentage in New York is going to go up. As you recall, we entered New York in 2019 with five branches, a $2 billion franchise. We were doing well in winning clients. Adding the 30 branches and the visibility of that we think is going to be very helpful. I mentioned in my comments that we will rebrand the Flushing branches. That'll be done by October 1st. One of the reasons you see a slight elevation in expenses in Q4 is we expect to do a significant kind of brand launch in New York that we hope provide a little more visibility and credibility.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

The win percentage in New York we think is going to be better in 2027 than it was in 2026 because people will just know us better, feel more comfortable. It's hard to pin down, but there's a comfort level people get when they drive by your branches, even if they never walk through them.

[Manuel Navas, Analyst at Piper Sandler]

That makes sense. My final one is obviously 1% ROA next year isn't the final target. With things closed now, what are kind of your thoughts on how you can exit 2027 with a trajectory to a better ROA and the best ways to accomplish that?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Manuel, I think if you think long-term ROA targets, the minimum floor for us would be more like a 120 because if you don't get to that level, our capital levels are going to remain reasonably range bound. You're not going to get to your cost of capital unless you're somewhere up in that area or better. I think in 2027 it's to not just get to a one, but get above a one, exit the year strong, and then look towards that target in 2028.

[Manuel Navas, Analyst at Piper Sandler]

Executing on cost saves, more substantial loan growth, hitting the 320 NIM. Any other pieces to that better trajectory?

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

No, I think if we do those things, it all holds together. We think that over time as the balance sheet grows We would get non-interest expenses closer to a range of 175 basis points, 1.75%. You couple that with a 320 margin, and you're doing pretty well.

[Manuel Navas, Analyst at Piper Sandler]

Thank you for the commentary.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Thank you.

[Operator]

Our next question comes from the line of Matthew Breese with Stephens Inc. Matthew, your line is open.

[Matthew Breese, Analyst at Stephens]

Just a quick follow-up point of clarification. Pat, I think you had said 8 million in accretable yield this quarter. The press release says net accretion was closer to, I don't know, $1.1 million, $1.2 million.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Yeah. I misspoke on that.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

I was modeling like $4.5 million, $5 million next quarter. I think you were referring just to the loan side. Maybe you could clarify.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Yeah, you're absolutely right. It was about $1 million in June, one month. That will be about $5 million in the third quarter. It's driven in part off of loan maturities. It'll drop down a little bit, $3 million-ish, maybe a little under that in the fourth quarter. The full-year impact for this year is a little over $8 million. That will double and will be $16 million, $17 million, $18 million per year for at least the next two to three years. That's what we're expecting.

[Matthew Breese, Analyst at Stephens]

Okay. That's it. I'll leave it there. Thank you.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Yeah. Thanks, Matthew.

[Pat Barrett, SVP and CFO at OceanFirst Financial]

Sorry for the misspeaking.

[Matthew Breese, Analyst at Stephens]

No, that's all right. Appreciate it.

[Operator]

We have reached the end of our Q&A session. I will now turn the call back to Christopher for closing remarks.

[Christopher Maher, Chairman and CEO at OceanFirst Financial]

Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in October about our third quarter results, and we'll provide an update in our merger integration at that point, too. Thanks very much. Enjoy the rest of your summer.

[Operator]

This concludes today's call. Thank you for attending. You may now disconnect.

Participants

Executives

• Christopher Maher, Chairman and CEO
• Joseph Lebel, President and COO
• Pat Barrett, SVP and CFO

Analysts

• Peter Winter, Analyst at D.A. Davidson
• David Bishop, Analyst at Hovde Group
• Daniel Tamayo, Analyst at Raymond James
• Christopher Marinac, Analyst at Brean Capital
• Emily Lee, Analyst at KBW
• Matthew Breese, Analyst at Stephens
• Manuel Navas, Analyst at Piper Sandler