OceanFirst (OCFC) Q2 FY26 earnings call: guidance and Q&A

How is the company positioned for rate hikes, and how does competitive pressure impact the margin guidance?

The company is modestly liability sensitive, so a 25bps rate hike would have a small dilutive impact ($5M pre-tax annually). They remain relatively neutral to parallel shifts in the curve. Competitive pressure on new loan pricing, especially C&I, is keeping spreads tight, but construction loans offer better margins.

“We're modeling something that's modestly liability sensitive, so 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.”

asked by Peter Winter · answered by Patrick Barrett

Can you provide guidance on net charge-offs or provision expense, and details on the $21 million non-performing and $56 million criticized commercial relationships?

Net charge-offs are expected to be slightly higher than historical levels but not material, remaining at or below peer averages. For the $21 million non-performing loan, a plan is in place with the borrower, and resolution (upgrade or refinance) is expected by year-end. Criticized loan downgrades are normal fluctuations, and the bank is confident in its actions.

“So the $21 million 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.”

asked by Peter Winter · answered by Joseph Lebel

Will NIM expansion be driven by earning asset yield improvement, deposit costs, or both? And is there a banking relationship with customers whose multifamily loans were sold?

NIM expansion will be driven by both improved funding base (especially Flushing's deposits) and asset yields, depending on mix. The company retained banking relationships and loans where primary relationships and strong deposit profiles existed, selling only lending-only relationships to avoid impact on other bank areas.

“No, we actually sorted out the primary relationships in that and retained loans for that exact reason. So we retained loans where we had primary relationships and strong deposit profiles.”

asked by David Bishop · answered by Christopher Maher

Given the reiterated 3.20% margin guidance for 2027, what are the underlying deposit cost assumptions, especially with stiff competition and other banks seeing funding costs bottoming?

The 2027 margin will benefit from a mix shift on both the loan and deposit sides. Opportunities include increasing construction and small business lending, optimizing pricing in government deposits (especially New York), and reducing brokered deposits. The focus is on mixed shift and product optimization rather than relying on environmental trends.

“So both on the loan side, as Joe mentioned, you know, kind of beefing up. Historically, OceanFirst has done a nice job around construction. So we have an opportunity to do a little more of that moving with the extra balance sheet from Flushing. And then on the deposit side, a mixed shift around products.”

asked by Daniel Tamayo · answered by Christopher Maher

How should we think about the expense guidance, particularly the impact of cost saves and the run rate for 2027?

The majority of cost saves will kick in during Q4 2026, following system conversions. Q1 2027 will be the first 'clean' quarter, but management expects continued operating leverage improvement throughout 2027, aiming for a run rate closer to $100 million than $110 million, even with inflationary pressures.

“So 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. See us with a run rate that's closer to $100 million than $110 million.”

asked by Daniel Tamayo · answered by Patrick Barrett

Is the large reserve a permanent change, and can the extra tangible book dilution be made up for quickly?

The tangible book value dilution is expected to be built back quickly due to strong earnings momentum in 2027. The most significant source of dilution was an $80 million net reserve build in the Allowance for Credit Losses (ACL), which strengthens the balance sheet and is not a loss of funds. Purchase accounting marks will also accrete into income over the next couple of years.

“So that was about, if you think about it in dollar terms, that was about $80 million of net reserve billed top of the reserves that both Flushing and OceanFirst had coming into the quarter.”

asked by Christopher Marinac · answered by Christopher Maher

Can you elaborate on planned incremental investments in commercial banking and talent recruitment?

The company expects the heaviest recruiting season in Q1, as commercial bankers typically move after collecting bonuses. The expanded New York coverage from Flushing and a larger capital base make OceanFirst a more attractive destination for talent. They don't anticipate significant expense increases, aiming to self-fund through technology initiatives and rotation of spending.

“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 kind of the rotation of how we spend our money instead of spending a net extra.”

asked by Emily Lee · answered by Christopher Maher

What are the capital priorities going forward, what level of repurchases should be anticipated, and is there appetite for further M&A?

The top capital priority is organic growth. If excess capital remains due to insufficient quality growth, buybacks are the next priority. The company is currently heads down focused on integrating the franchise and is not discussing M&A.

“Our best priority is always organic growth, and so we hope to be able to use the capital we expect to accrete in organic growth next year. So that's the biggest priority. But we're always very discriminating about the credits we put on and the spreads and managing our margin.”

asked by Emily Lee · answered by Christopher Maher

What is the overall balance sheet size guidance, and is there an interplay between loan growth and securities, implying a flat balance sheet?

The company inflated securities after the multifamily loan sale, buying higher-yielding, lower-risk-weight securities. They are currently a little heavy in securities and will pull that down. A flattish balance sheet is expected this year, with growth potentially in 2027 after adjusting the securities portfolio. The goal is to maintain a strong liquidity position and a loan-to-deposit ratio below 95%.

“So the first place we would go is pulling down securities a little bit. So I think you'll see a flattish balance sheet this year, and then to the extent you'll see any growth, it would probably be coming in '27, but after we've kind of massaged the securities number a little bit.”

asked by Matthew Breese · answered by Christopher Maher

What is the strategy for the remaining rent-regulated multifamily portfolio, and are there other assets from Flushing that will be run off?

The remaining rent-regulated multifamily portfolio is in a runoff posture, expected to decline slowly over 8-12 quarters. These are considered good loans with strong debt service and low LTVs, but were less liquid for sale. They carry a 14.5% credit reserve. The company is done with balance sheet restructuring and is not planning to get rid of other assets from Flushing on an expedited basis.

“I would consider that asset class to be in a runoff posture, so we expect that it's going to decline slowly over the next probably 8 to 12 quarters. I will make the point that those were pretty good loans.”

asked by Matthew Breese · answered by Patrick Barrett