OceanFirst Financial Corp. Stock

Thank you. Welcome to the OceanFirst second quarter of 2026 earnings call. I am [ Alfred Goon ], SVP 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. Participants should refer to our SEC filings for a complete discussion of forward-looking statements and associated risk factors. Thank you, and now I will turn the call over to Christopher Maher, Chief Executive Officer of OceanFirst.

Thank you, Alfred. Good morning. Thank you to all who have been able to join our second quarter of 2026 earnings conference call. This morning I'm joined by our President, Joseph Lebel, 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 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 1.

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 in 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. As mentioned previously, we complete our acquisition of Flushing Financial Corporation on June 1 concurrent with the $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. Integration planning is well underway, and 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, and we are already seeing competitive wins in both talent and customer acquisition. We are on track to achieve the cost savings and returns outlined at the transaction announcement.

A significant portion of our cost savings is expected shortly following systems conversion. 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.

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, the 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 [ iBankers ] 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. 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 arrangements 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 2 new premier teams in Manhattan and Long Island. 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, 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.

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 $2.5 million, primarily driven by higher net gains on other real estate activity and [ commercial-owned 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.

Thanks, Joe. Good morning, everyone. We delivered our 8th 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. 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.

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 remained 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 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 1 reserve established for the Flushing portfolio. 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 1 month of Flushing operations. Excluding Flushing, our core expense base of $72 million continued to reflect disciplined expense management across the company. Capital levels remain 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. Book value per share was $18.19, reflecting the impact of purchase accounting and the very substantial increase in our allowance for credit losses. 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, 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're updating our guidance on the pro forma combined company for the remainder of 2026. For loans and deposits, we expect 1% to 2% growth from our June 30 levels by year-end. That interest margin should continue to expand to a range of 3.07% to 3.12% in Q3, 3.09% to 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 to $16 million per quarter. We expect operating expenses for the third quarter to decline to the $120 million to $125 million range, declining further in the fourth quarter to $110 million to $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, but I just wanted to highlight that our 2027 profitability targets remain essentially unchanged from when we announced the Flushing deal. 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.

[Operator Instructions] Our first question comes from Peter Winter from DA Davidson. Peter, your line is open.

Thanks. Good morning. I wanted to start on the margin. The outlook for the second half of the year assumes no rate changes, but can you talk about how you're positioned if we do get 1 or 2 rate hikes? And then second, on page 9 of the presentation, you mentioned that, you know, due to competitive pressures, it could pressure the margin. And then if you could just elaborate on that, and is that contemplated in the margin guidance for the second half of this year?

Sure, maybe I'll take a quick, a quick shot. This is Pat. Impact of rate hikes, so when we combine the organization, we absorbed Flushing's liability sensitivity with our relative neutrality on interest rates. It was just shape of where the balance sheets were in respect. We added hedges to that that kind of brought us back into a more neutral rate position. So 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. Conversely, if we got a rate cut, which nobody's modeling, but if we did because of our modest liability sensitivity, that would be about a $4 million a year run rate. So we remain relatively neutral. I think the as important, if not more so, is what happens in the belly of the curve and what happens with 5-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, so if there's a parallel increase in the curve, we're kind of indifferent to rate hikes or cuts. And then you'd 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, so the, both bank and non-bank pressures are keeping spreads on new loans at pretty historically tight levels. Joe, do you wanna add to that?

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. So 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 in C&I versus...

You know, permanent CRE loans. Got it. If I could ask on credit, you know, any guidance maybe you can provide with regards to net charge-offs or provision expense in the back half of this year and then also in the press release, mentioned a $21 million commercial relationship that went non-performing, and then 2 commercial relationships for $56 million that went to criticize. Just any details on those loans?

So I guess I'll give you just some sense on net charge-offs. I think as the company gets...

Thank you. We are experiencing I can hear you. Apologies for the brief technical delay.

I am. You started with the charge-off and then I lost you.

Sorry about that. So if you think about net charge-offs, I mean, historically, both OceanFirst and Flushing had, you know, close to, I mean, 5 basis points and 0 in charge-offs in any given quarter. Things are 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, but I don't think they're going to be a material impact on profitability. So, slightly higher than our historical performance, but nothing that would stand out or be unusual, and probably still well at or below the 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. Peter, I'm sorry.

In 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.

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

One moment for technical difficulties, please. Your line is now live.

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

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

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.

Right. So he has started with a $21 million commercial.

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. And then 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. Okay. And then just one quick housekeeping. Just 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?

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

Got it. Okay. Thanks for taking the questions.

I just want to demonstrate that we're continuing funding our ongoing platform investments core run rate, which still is hovering kind of at the $70-ish million a quarter range.

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

Yes, thank you. Good morning, gentlemen. Hey, quick follow-up on the net interest margin in terms of the guidance. Do you think that's going to be mostly driven by the 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?

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 and redeploy some of them. So 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. So 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, has super tight spreads and is probably the most competitive space right now.

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

That's a great question, Dave. 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. And those customers typically had pretty strong cash flows. So that's one of the ways we kind of split out what we wanted to keep and what we wanted to move away from. So we don't think that'll have any impact on the other areas of the bank. But for the most part, the loans that we sold were lending only relationships.

Got it. Appreciate the color. Thanks, Dave.

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

Thank you. Good morning, guys. So, yes, I guess maybe just to go back to the margin, I apologize for being a dead horse here. So you reiterated the guidance for the 3.20% margin in 2027 post-merger there. And I guess, you know, can you give us your deposit cost assumptions underlying that margin in '27. You know, it just seems like most banks are talking about and you guys mentioned as well, like competition being pretty stiff right now on the funding side and I think a lot of banks are talking about the pot, you know, funding costs, bottoming. I get, you guys have, uh, the Flushing funding base to integrate but just curious how that plays out maybe there's some color on on the Flushing some of the components that how you can lower that, but just trying to get, you know, fill in the gap between maybe funding costs going down where others are saying they're bottoming or maybe even moving up.

I think it's on both sides. Danny, it's Chris Maher. Both sides you're going to see a little bit more of a mix shift than you are kind of 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. So the pressure you see out in the markets and others have talked about is out there.

You know, CDs cost a fair amount, but we're talking about bringing down the level of brokered. We're talking about optimizing pricing in the government deposit base, particularly in New York. The New York government deposit base is – cost a fair amount more than the New Jersey government deposit base. So we see some tactical opportunities there, but think mixed shift in product. As you saw, you know, 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. So kind of leaning into that new branch network and doing a little bit of a mix shift.

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

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 in the fourth quarter because of our system conversions that won't be fully completed until the end of the quarter. So there's some cost saves that occur, but 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. 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.

That we start out the year. A good way to think about the expense momentum is in Q3, we had some employee separations related to the initial in the merger but 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 you know within the bank for at least 1 month afterwards to make sure that the customer experience is exactly what we want it to be. So 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 '27.

Okay. So, I mean, how should we think about the amount of cost saves left in the first quarter? And is the first quarter then the kind of the first clean quarter that we should build on? Or is even '27, you're hoping to take it down from that first quarter number?

The first '27 will be the first clean quarter, but we think there are opportunities to improve operating leverage throughout the year. So 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 quarter is going to go through merit increases and that kind of stuff. So and then you'll see, you know, we're planning for more significant growth in loans and deposits in '27. So if you're holding expenses flat or coming down a little bit, the operating leverage...

Build up by the end of '27. Okay, great. Thanks for all the color, Chris. Appreciate it.

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

Hey, thanks. Good morning. Chris and Pat and team. You've wanted to have a large reserve for a long time, so you're finally here. I guess my question is should we think of this as a permanent change, number 1, and number 2, is the extra tangible book dilution something that we can kind of make up for relatively quickly?

Yes, I think the, you know, we see a lot of earnings momentum going into '27, so I think you'll be building back tangible book value as you go throughout the year. And then one thing I just want to point out, and Pat mentioned this in his comments, if you think about the source of the tangible book value dilution, the source of the tangible the most significant individual line item was the build in the ACL. So 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, but it's not like that money was, you know, left the company in any way. It's just a stronger ACL. 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. So that was the most significant line item. And we certainly don't expect that that's loss content. And the second biggest item is the purchase accounting marks, which will come back to us and accrete into income over the next couple of years.

So because of the sources of the dilution, we were a little less concerned about that. But we do expect earnings to pick up nicely in '27 and start to build that tangible book back.

Great, Chris. Thank you for that background and thanks for hosting us this morning.

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

Hey everyone, this Emily stepping in for Tim Switzer. Thanks for taking my question. So, 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?

I guess one thing I would say, Emily, is that if you think about the company as we go into the – the recruiting season is typically heaviest in Q1, because you're going to your best commercial bankers have, you know, typically they're having a good year and they like to collect their bonuses from where they are and then move on. So, we expect that 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. So 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. And then there's just the dynamics of having a larger balance sheet, bigger capital base. So players from larger banks, which is typically our recruiting base, would feel more comfortable coming to a firm of the size we are now. So I think we've got, we will be a more attractive destination for talent in the future, 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 kind of the rotation of how we spend our money instead of spending a net extra. But, you know, 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.

That's really helpful. Thank you. And then 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? And do you have any appetite for further bank M&A, maybe in 2027 or beyond?

So we take the the priorities are pretty straightforward. I mean, 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. So if we don't find the right quality of growth and we wind up with an excess capital position, our number 1 priority would be buybacks. And that's it. We're heads down focused on the franchise right now. We're not talking about M&A.

Great. Well, thanks for taking my questions. Congrats on the quarter.

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

Hey, good morning. Good morning, Matt. I was hoping we could start with maybe overall balance sheet size kind of thoughts and guidance. And I guess I'm most curious about the interplay between loan growth and securities from here. You know, should we be thinking there's, you know, like a 1-for-1 offset, you know, securities into loans, basically maintaining a flat balance sheet? And if that is the case, how long do you anticipate that dynamic going on for?

Oh, that's a good question, Matt. So 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. So 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. But 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 that.

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.

I guess my follow up there is, does that balance sheet outlook, that what's giving you the flexibility and the opportunity the kind of test run higher cost community deposits, maybe work offs from brokered deposits and lower deposit costs. I think the spot costs at the end of the quarter is 2.26%, right? About 20 basis points higher. Is that what's providing you the room to kind lower that from current levels and see where it goes?

Absolutely. That's the chief advantage of having that excess liquidity in 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. But I will say that to give you longer term guidance, we think being more liquid, all things equal, makes us a more valuable franchise. So you might see loan to deposit pick up a little bit, but you still think of it as staying below 95%, as opposed to in the past, we would have been closer to 100%. But we will use that advantage in the way we think about pricing.

I will add, Matt, this is Pat. 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. We'll look to recycle those and maybe some cash flows into better yielding opportunities as they come up. Most of that will probably, hopefully be done this quarter, in the third quarter, but we didn't have much time and we wanted to put all the cash to work as fast as we could. So there'll be some churn there, but it shouldn't affect the overall magnitude of the portfolio or the mix of loans versus securities.

Okay. I do want to come back to that, but just one more on kind of balance sheet mix. What is the strategy with the remaining stub amount 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? 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, you know, getting rid of on an expedited basis.

So 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. We had loans to deposit customers. We had loans there that might have had an interest rate swap or a participant position. It just made them less liquid. You really couldn't sell them into a capital markets execution. You know, but 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, you know, we recognize that there's a public policy risk to the asset class. So we've got a 14.5% credit reserve against them. So we've marked them pretty aggressively. But it's small. It's going to run off. And, you know, we'll just kind of see that happening slowly over probably 2 to 3 years. And I would say these aren't bad assets tonight.

So these are 50% LTVs, 1.40x debt service coverage, 5% LTVs, and 1.5% average yield of what we're left with. They were just not as easily securitizable, so 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. 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, you know, July 1 balance sheet to then move off of, and we're focused on, you know, organically growing that, as we outlined earlier.

Okay, and then my last one going back to the NIM, you know, let's just assume that the down a little bit. Still implies that there's quite a bit of moving pieces on the earning assets side to get to that third quarter range. Can you just help me out with your expectations for kind of loan yield, and obviously there's accretion that impacts that. And Pat, you'd mentioned, you know, 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. And that's all I have. Thank you.

One thing I'd point out is that, you know, just like the deposit spot costs, on the loan side, we only had 1 month worth of purchase accounting accretion on the loan side. So 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. So that'll be helpful in terms of bringing the loan yields up. Yes. Probably the biggest driver of that is the full quarter's worth of accretion moving. So we had about $8 million of accretion in second quarter, net interest income, and we'll have $16 million, $17 million, $18 million as we move into the next quarter on a run rate basis.

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

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

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

I'll let Pat walk you through the duration and all that. But you think about philosophically, we want to run a reasonably balanced shop. We were pretty neutral prior to the acquisition, as Pat mentioned, made us liability sensitive. So what we were focused on with the hedges is the more of the tail risk, like outside the normal operating environment, because the normal, you know, plus or minus 100 basis points really doesn't move the number much for us. But what you would have seen if you looked at our interest rate risk models without the hedges, you would have seen more risk going in the kind of plus 200, plus 300, plus 400, and minus 200, 300, and 400. So 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.

Sure. So yes, and the hedges that we did put on were essentially caps and collars, as Chris mentioned, just to hedge against spikes, larger increases about $1.3 billion that ranged out over 3-, 4-, 5-, 6-year kind of period. And what we're left with is some modest liability sensitivity that is largely driven by the fixed rates on the deposit side inherited. So as we roll out of deposits, more fixed rate deposits and into non-maturity will continue to help that. And our goal would be to have to have a relatively neutral balance sheet because predicting short-term rates is pretty to be very difficult. Predicting long term rates is proven to be very difficult, so we feel like staying 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 to 5 range on the asset side years duration, and the securities duration is ticked up along with the loans. Are both in that range on the liability side, for the most part, we remain quite short.

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

I'll make a couple comments, I'm sure Joe will add in as well. So 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. So 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. And I think that that could be a meaningful driver over the next several quarters. But Joe, anything you'd add?

I think the – I'd add 2 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. But 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. I think is really going to make a difference. And remember, the vast majority of the Flushing book was smaller CRE transactions. They had a fledgling C&I business. So the opportunity to do things at a larger scale with a little bit more, 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. And individual portfolios, you have...

Some expected runoff in residential. We talked about the rent regulated is going to run off slowly. Where are some of the headwinds?

Those are certainly headwinds, but I think the guidance we gave you around growth in '27 would be net of those headwinds. So that's kind of where we would be. I'd also note that we think our wind percentage in New York is going to go up. So as you recall, we entered New York in 2019 with 5 branches at $2 billion franchise. We were doing well and winning clients, but 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 1.

And 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 will, we hope, provide a little more visibility and credibility. So the wind percentage in New York, we think, is going to be better in '27 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.

Okay. 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 '27 with the trajectory to a better ROA and the best ways to accomplish that.

So, I mean, I think long-term ROA targets, the minimum floor for us would be more like a 1.20%. If you don't get to that level, our capital levels are going to remain reasonably range bound. So you're not going to get to your cost of capital unless you're somewhere up in that area or better. So I think in '27, it's to not just get to a 1%, but get above a 1%, exit the year strong, and then look towards that target in '28.

Executing on cost saves, more substantial loan growth, getting the 3.20% NIM, any other pieces to that?

Better trajectory? I think I think if we do those things, it all holds together. You know, you've got you know, we think that over time is the balance sheet grows, we would get non-interest expenses closer to a range of like 175 basis points, 1.75%. You couple that with a 3.20% margin, and you're doing pretty well.

Thank you for the commentary.

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

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. 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.

You're absolutely right. It was about $1 million in June, 1 month. That will be about $5 million in the third quarter. And it's driven off 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. So 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 year for at least the next 2 to 3 years.

OK, that's it. I'll leave it there. Thank you.

Thank you. Sorry for the misspoke.

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

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.

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

Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the OceanFirst Financial Corp. First Quarter 2026 Earnings Call. [Operator Instructions].

I will now turn the call over to Alfred Goon. Please go ahead.

Thanks, John. Good morning, and welcome to the OceanFirst First Quarter 2026 Earnings Call. I'm Alfred Goon, SVP 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 for a complete discussion of forward-looking statements and associated risk factors. Thank you. And now I'll turn the call over to Christopher Maher, Chairman and Chief Executive Officer.

Thank you, Alfred. Good morning, and thank you to all who have been able to join our first quarter 2026 earnings conference call. This morning, I'm joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett.

We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we 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 solid first quarter results, which included earnings per share of $0.36 on a fully diluted GAAP basis and $0.43 on a core basis. GAAP earnings per share increased $0.01 and core earnings per share increased $0.08 or 23% as compared to the prior year's quarter.

In terms of performance indicators, we delivered our fifth consecutive quarter of net interest income growth, which increased by $1 million or 1% as compared to the linked quarter and was up $10 million or 11% as compared to the prior year's quarter. This performance is driven by an increase in average net loans of $268 million and net interest margin expansion to 2.93%, supported by lower cost of funds and earning asset growth.

Total loans for the quarter increased by $92 million, representing a 3% annualized growth rate, driven by $429 million in originations. Joe will have more to add regarding our growth strategy in a few minutes, but we are encouraged by the continued organic growth momentum from the second half of last year.

Asset quality remained exceptional as total loans classified as special mention and substandard were 1.5% of total loans below our 10-year average of 1.8% and within the top decile of our peer group. The quarterly provision was primarily driven by loan growth and an increase in criticized and classified loans, partly offset by lower unfunded commitments.

GAAP operating expenses for the quarter were $73 million, which includes $4 million of merger-related expenses. On a core basis, operating expenses of $69 million declined by $2.1 million or 3% from the linked quarter, primarily driven by the impact of our strategic initiative to outsource the residential lending platform and disciplined expense management across the company.

Looking forward, we've worked diligently to restructure our core IT infrastructure and position the bank to benefit from the deployment of artificial intelligence across all departments. We've invested in AI through existing vendor relationships and have started to see the efficiency benefits in legacy bank processes while looking to further enhance our capabilities.

We see significant opportunities to date and these efforts will enable our ability to improve operating leverage, building further scalability as the bank grows. Pat will provide additional commentary on our financial outlook in a moment. Capital levels remain strong with an estimated common equity Tier 1 capital ratio of 10.7% and tangible book value per share increasing to $19.86.

During the quarter, we also repurchased a modest number of shares, solely related to the vesting of employee equity awards. We did not repurchase any shares under the Board-approved authorization. As previously announced, the quarterly cash dividend of $0.20 per common share was declared, marking the company's 117th consecutive quarterly cash dividend.

Finally, on December 29, 2025, we announced our merger agreement with Flushing Financial Corporation and an investment agreement with Warburg Pincus. To date, both companies have received shareholder approval. In addition, we have received regulatory approvals from the state of New York Department of Financial Services and from the OCC. Approval from the Federal Reserve remains the final outstanding regulatory requirement to complete the merger. We continue to work towards an expected closing in the second quarter of 2026 and a full systems integration and rebranding in the third quarter of 2026.

Importantly, we have made arrangements to accommodate branch transactions for all customers in all branches effective in our first day of operation. We've undertaken that work as we believe that the additional Flushing branches will provide an immediate and meaningful competitive advantage. We plan to provide a detailed financial update on the Flushing merger in connection with our second quarter earnings, which will include a discussion on the pro forma balance sheet and other projections from our latest view of the merger model. In the meantime, we remain focused on executing our organic growth strategy, which is clearly reflected in our results of this quarter.

At this point, I'll turn the call over to Joe for additional color on these businesses.

Thanks, Chris. I'll start with loan originations for the quarter, which totaled $429 million and resulted in quarterly loan growth of $92 million, which was in line with our expectations given typical first quarter seasonality and a handful of customer accelerated closings at the end of Q4. Our C&I business grew 19% on an annualized basis from the linked quarter with closed loan volume in C&I and commercial real estate up 81% year-over-year, reflecting continued momentum from our recruitment of talent added in 2024 and 2025. We added another 3 C&I bankers in Q1 2026 with plans for more in the coming quarters.

Total deposits grew by $192 million or 2% in the quarter. Excluding brokered deposits, deposits increased $314 million, driven by broad-based organic growth across our core business lines and institutional deposits. The Premier Bank deposits grew $9 million or 3% from the linked quarter. The team has brought in over 1,500 new accounts across 400 relationships since the May 2025 inception, with approximately 20% representing noninterest-bearing accounts.

As an added benefit, the teams contributed $21 million in loan originations for the quarter, and the loan pipeline in Premier stands at $40 million. Customer engagement and calling activity has been significant and the addition of the Flushing branch footprint will provide a meaningful tailwind moving forward. We remain confident in our 2026 Premier deposit targets and have recently added 2 new Premier teams located in Manhattan and Long Island with a few more on the horizon.

Lastly, noninterest income decreased by $2.7 million to $7 million during the quarter, primarily driven by a lower gain on sale of loans of $779,000 relating to the Q4 2025 outsourcing of our residential platform. Additionally, we saw some reductions in commercial loan swap income due to lower swap origination volume for the quarter. That should improve through the year as seasonal origination volumes increase. Overall, noninterest income levels were in line with our expectations and as guided in the previous quarter.

With that, I'll turn the call over to Pat to review the remaining areas.

Thanks, Joe. As Chris noted, net interest income increased and margin expanded in line with our previous guidance.

Compared to the previous year's quarter, net interest income grew $10 million or 11% attributed to the tremendous loan growth in the latter half of 2025. Pretax pre-provision core earnings grew 4% or $1.2 million from the prior quarter, driven by earning asset growth during the quarter and in the second half of 2025.

Loan yields decreased modestly, reflecting both lower rates and continued mix shift within the portfolio. Total deposit costs decreased 16 basis points, driven by disciplined pricing across our relationship base and reflecting the positive impact of the Fed's rate cuts in late 2025.

Looking ahead, we expect positive expansion in net interest income in line with our loan growth and a stable to modest increase in margin over the next quarters. As Chris mentioned, asset quality remained very strong with nonperforming loans to total loans and nonperforming assets to total assets, both at 0.31%. Criticized and classified loans increased during the quarter, driven by one large commercial relationship that remains current and well collateralized. Even including this increase, asset quality continues to remain at the low end of historical levels for criticized and classified loans. And lastly, net charge-offs were de minimis, representing only 3 basis points of average total loans on an annualized basis.

Turning to expenses. Core noninterest expense decreased from $71 million to $69 million, driven by our initiative to outsource the residential business. Noncore items in the first quarter were almost entirely Flushing merger-related costs. Looking ahead, we expect our second quarter core operating expense run rate to remain in the range of $70 million to $71 million.

Capital levels remain strong with our estimated CET1 ratio of 10.7%. A word on taxes. We expect our effective tax rate, which was 24% in the first quarter to remain in the 23% to 25% range, absent any tax policy changes. This will change with the impact of the Flushing acquisition, and we'll update you accordingly once the transaction closes. There are no changes to our full year guidance as stated in the previous quarter, although we have removed the modest impact of further Fed rate cuts from our outlook.

To recap, our guidance is for mid- to high single-digit loan and deposit growth, NIM growing past 3% in the back half of the year, other income ranging from $7 million to $9 million per quarter and expenses stable at $70 million to $71 million per quarter. Note that these are stand-alone expectations and do not reflect the impact of the Flushing acquisition. We've also added our second quarter outlook for your convenience.

At this point, we'll begin the question-and-answer portion of the call.

[Operator Instructions] Our first question comes from the line of Daniel Tamayo with Raymond James.

Maybe starting first on the deposit side, nice quarter of growth for you guys, had some positive mix shift. It sounds like the Premier folks are making an impact there. Maybe just some detail on -- you touched on in the prepared remarks a little bit, but how sustainable you think this is if there's any seasonality in the first quarter numbers? If you're able to maintain the mix shift that you've had? Any color on the deposit side would be great.

Dan, I think you see some seasonality. It's not uncommon for us in our space to see some given where our geography is. And quite frankly, I think that Premier guys' momentum, we're going to see more in Q2 and Q3. We're still pretty bullish there. It's a little bit slow start to the year for them, but it was more than made up for in other areas of the company. So we're pretty happy with the trajectory, more work to do, but overall, I think we're generally optimistic.

Okay. And the reiteration of the net interest income guide, despite pulling the cuts out, is that -- and correct me if I'm wrong, but I guess the read there that competition is increasing and impacting loan spreads? Or is it something else?

Yes. I would say, yes, competition is pretty intense. You see that in our loan yields stable versus expanding. So any benefit from maturities and rollovers is being competed away for new originations and of course, the yield curve is playing a little bit of havoc with repricing, but we've been positioned relatively neutral for several quarters on interest rates and the impact of the Fed cuts is less of a thing that rolls through our balance sheet than it is a reason that gives us the ability to cut or reduce deposit costs. So -- and it's about a quarter lag on seeing the benefit of that when we do it.

So we saw a nice benefit from the Fed's rate cuts in September, November, December, rolling through this quarter. We had only modeled, I think, a September rate cut and a December rate cut previously. So when we take that out, because we tend to track with consensus where the market views and predicts rates to be. It was less than $0.5 million of impact on the year. It's a little bit more on an annualized basis for next year, but pretty much de minimis for this year.

Got it. Okay. And then maybe one for you, Chris. Just on the portfolio sale for Flushing. Any update there on potential size, timing, anything you can give us in terms of where you stand with that now.

Yes. So the only thing I can tell you is that when we kind of work through legal day 1 and have all those answers, we'll promptly share them out with folks. There's nothing that's changed our outlook since either the last time that we spoke. The merger model is holding up. So there's really no deviation in terms of March earnbacks, anything like that. So I think we're pretty much on track to where we thought we would be. But I leave the details around the balance sheet restructure for legal day 1, and we'll talk to you then. And I would note that certainly, there are some loan segments we're looking at, but it even goes deeper than that. We're looking at hedges and liability structures and securities portfolio.

So it's [ kind of ] an all-encompassing review to make sure we have the right balance sheet coming together as a combined company. So there's a lot of kind of different things we would tick and tie, but we will report them out to you guys promptly. Our views haven't changed and the merger model is on track, no reason to have any concern about either marks or earnback periods at this point.

Our next question comes from the line of Tim Switzer with KBW.

So you guys mentioned you hired a few C&I bankers already, 2 other Premier Bank teams and looking to maybe do a little bit more hiring, like any goals in terms of how many bankers you'd like to add? And how should we think about this impacting the expense outlook?

Tim, listen, the way I think about it is we're really bullish on the opportunity to be building out our franchise in New York. We think there's so much opportunity there that the more qualified bankers we can bring on the better. So I think that as we see that opportunity, it's getting us interested in adding a few more bankers. But Joe, you might talk a little bit about the work you're doing now, and this is kind of key hiring season. So why don't you take it from there?

Yes, Tim, there's a lot of irons in the fire. I'm a big believer that you hire talent when talent is available to you. So we were fortunate to get a couple of folks just ahead of the hiring season. We're in the thick of it today. I think you'll see more from us in the coming quarters, but we're pretty bullish. A lot of that talent is going to come in the C&I section of the bank, which I think is where you're going to see the vast majority of the loan growth as we diversify the mix over time. But there's good talent to be held or had across the geographies that we're in.

I'd also note, and we mentioned this in the prepared remarks, that we've made a lot of progress on a few things that relate to the infrastructure costs around the company. So we did guide on stand-alone expenses, and those reflect us being able to add a significant amount of talent, but not have expenses go up. So we're seeing material decreases in some of the operations areas, which is helping us fund the new folks that we're bringing on board.

So I think we're going to have a brisk hiring season and we're going to be able to comply with the expense guidance that we put out earlier. So don't look for expenses to move up if we are able to hire several more high-quality bankers, but we've got room to do that.

But don't be surprised if you see comp expenses go up and data processing expenses go down and the net would be a push.

Got it. Good to hear. And you touched on this in your comments earlier, but there was some slight credit migration across some of those more forward-looking metrics, nothing crazy and all from like low levels, but just to check the box, is there anything systemic in there or concentrations in certain sectors?

No, it's really just it was a single customer who had a weak year last year. So you kind of -- you look at your risk ratings on that basis. At this point, it looks like that they've got runway to recover and migrate back out of that over a foreseeable time period. But we're watching closely, but it was only one credit, and it was not something that had a pattern or anything that we would be concerned about bleeding from there.

Okay. Great. And one last quick one for me. Like the timing of close for the merger, should we be thinking like end of Q2?

So we're going to close pretty promptly after we receive the final regulatory approval, but we've got to kind of respect their process and understand where they are. There is a -- typically, you're not really able to close for about 15 days after you receive the final Fed approval. So we would be hopeful that we're doing it earlier in the quarter, but who knows? And we've got to just kind of respect that process and let's see how things fall out.

Our next question comes from the line of David Bishop with Hovde Group.

Chris, Joe, I'm just curious, as you sort of get to know the legacy Flushing franchise and their customer and deposit base. Any sort of update on your assumptions in terms of your ability to sort of go in there and maybe reprice and resystemize, remap some of their deposit products and realize some of the maybe deposit cost saves you guys may have contemplated on [ first pass ].

I think there's opportunity, Dave, in a lot of different ways. First, we've been very pleased as we've -- you can do all your work in diligence, but as you start working kind of face-to-face with people in broad numbers and get to know them better, we've got hundreds of people with OceanFirst and Flushing working together and preparing for not just the closing, but the integration and how we're going to run the business together and really enjoyed that opportunity, a lot of good talent there. In a particular call out, we think the branch folks are fantastic. We're working through a process of kind of integrating the commercial bankers as well.

I think in terms of deposit pricing, I think that some of that will be a little bit market-driven. We've got to just understand where the market comes. The yield curve kind of bouncing around the last few weeks is at least raised the question in our mind about how much you could reprice. But the model was not especially dependent upon that. So I think we have an opportunity.

And look, we're looking at the whole balance sheet because if we have an opportunity to restructure the balance sheet, we may be able to be less dependent on certain sources of funding, that could give us some options as well. So we still feel good about it, but we're also watching the broader world and where short-term rates are and what that policy becomes because that will probably make a little bit of a difference over the next couple of quarters. So as Pat pointed out, it's not going to make a big difference in our full year earnings or the NIM, but around the margins, it could better...

Got it. And then maybe one follow-up question. Obviously, the focus of the merger, obviously, in the New York Metro area, but a lot of disruption from integration from M&A down in the greater Baltimore, D.C. region. Still looking to potentially add talent down in this metro area as well as Boston.

Absolutely. I was just down with that team a couple of weeks ago, and we think there's a great opportunity there. But Joe, maybe you can walk through that a little more.

Yes, Dave, we have almost a dozen folks down there now. We've continued to build that team out in the last 18 months and remain out there looking for more. I think we're still just scratching the surface of our opportunities down there.

I think one of the things we're seeing, Dave, is kind of the advent of technology. There are a lot of smaller technology players that are working in the mission-critical government space, everything from defense to cybersecurity and all that. And because they're smaller companies, they have -- it really particularly suits our banking model where the relationship matters a great deal, where they're looking to align themselves with the bank over the long term and a bank that can grow with them because they may be small today, but have aspirations to grow very quickly. So really enjoyed meeting and working with a lot of those clients, and we think we can grow that pretty nicely in the coming years.

Our next question comes from the line of Christopher Marinac with Brean Capital Research.

I wanted to ask a little bit about the kind of non-New York geography and sort of new C&I business that you're doing in Philadelphia and Boston and the D.C. corridor and kind of how that -- those markets can complement what you're building out with Flushing and the combined OceanFirst footprint?

Chris, I'll start with Boston, just to give you a little bit of flavor. The 3 C&I hires this year were in the Boston footprint. We're pretty happy with that addition, that team is now 8 folks or so. I mentioned earlier, we're almost a dozen down in the D.C.-Baltimore metro, Philly has always been a constant performer, it's a book that's north of $2 billion today. So we really bullish on all 3 markets, continuing to add people in those segments.

The C&I business is growing in all 3 segments. If you recall, initially, the CRE business was very strong in Philly and Boston. But the focus for us has been to diversify the books, and I think we've done a really good job there. But as I mentioned earlier, we're just touching the surface. I think there's a wealth of opportunity going forward.

Great. Joe. And Chris or Joe, if you go back to when Signature failed a couple of years ago, how much business is still out there to move if you had to ballpark it in terms of today, do you think?

Look, there's always some opportunity there, but what we're really focused on is winning share across kind of a wider group of a lot of different competitors. And in fact, the hires we made, including the number of the hires we made into the Premier group this year, came from other banks and have other targets.

So I think what we tried to build when we brought our teams over was to build out the folks that had a history of working in this model and hiring bankers from a variety of different institutions and kind of bringing them into the Premier model and making it work. So I think we're less dependent upon any particular competitor, but there is still opportunity out there.

So if we go back pre pandemic and the hires you were doing in those years, Chris, it's going to look more like that, a real diverse set of institutions that bring their customers up.

That's exactly. Although I will say that we continue to focus the Premier group, although it's recruiting from a variety of sources, is still a deposit-heavy deposit-centric hire. So the bankers we're looking at there are bankers that have -- can bring cash management portfolios with them, which is a slightly different focus.

The C&I folks bring cash management with them as well. And in fact, we're really happy. Our C&I bankers are funding almost 50% of their asset growth with their own deposits, which is -- exceeds our expectations in that segment. But in the Premier segment, we expect it to be more -- they would be funding -- contribute excess funding. So it's a slightly different candidate but would look very similar to what we've done over the years.

And at this time, we have no further questions. I will now turn the call back over to Chris Maher for closing remarks.

All right. Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in July at our second quarter results and hope we'll have the opportunity to go a little deeper in the Flushing merger model at that time as well. So thanks, everyone.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines at this time. Thank you for your participation, and have a pleasant day.

Hello, everyone, and welcome to the OceanFirst Financial Corp. Q4 '25 Earnings Release. My name is James, and I will be your operator for today. [Operator Instructions]

The conference call will now start. And I'll hand it over to our host, Alfred Goon. Please go ahead.

Thank you, James. Good morning, and welcome. I am Alfred Goon, SVP 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 a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements.

Thank you. And now I will turn the call over to Christopher Maher, Chairman and CEO.

Thank you, Alfred. Good morning, and thank you to all been able to join our fourth quarter 2025 earnings conference call. This morning, I'm joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we 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 our financial results for the fourth quarter which included earnings per share of $0.23 on a fully diluted GAAP basis and $0.41 on a core basis. In terms of performance indicators, we're pleased to report a fifth consecutive quarter of net interest income growth, which increased by $5 million or 5% as compared to the prior quarter and up 14% as compared to the prior-year quarter. The current quarter results were fueled by an increase in average net loans of $446 million. Our net interest margin of 2.87% declined modestly compared to the third quarter.

Total loans for the quarter increased $474 million, representing an 18% annualized growth rate, driven by $1 billion in originations. Joe will have more to add regarding our growth strategy in a few minutes, but we're very pleased to see the organic growth momentum that is a direct result of the investments we made in the first half of 2025.

Asset quality remained exceptional as total loans classified as special mention and substandard decreased 10% to $112 million or just 1% of total loans. This continues to place us among the top decile of our peer group. The quarterly provision was primarily driven by improvements in asset quality and the decrease in unfunded commitments, offset by loan growth.

GAAP operating expenses for the quarter were $84 million and included $13 million of expenses related to our residential outsourcing initiative, merger costs and execution costs for our credit risk transfer. On a core basis, operating expenses of $71 million were down $1 million or 2% from the linked quarter primarily driven by the impact of our strategic initiative to outsource our residential lending platform. Pat will provide additional commentary on the credit risk transfer and a detailed update on our financial outlook in a moment.

Capital levels remain robust, and estimated common equity Tier 1 capital ratio of 10.7% and tangible book value per share increased to $19.79. We did not repurchase any shares this quarter under the existing plan as our capital is utilized to support loan growth. This week, our Board also approved a quarterly cash dividend of $0.20 per common share. This is the company's 116th consecutive quarterly cash dividend.

Finally, on December 29, we announced a merger agreement with Flushing Financial Corporation and an investment agreement with Warburg Pincus. The acquisition of Flushing will directly support our organic growth initiatives in New York, positioning OceanFirst as a scale competitor in the deepest banking markets in the country. The resulting company is expected to demonstrate improved profitability and increased operating scale, which should deliver meaningful upside to our shareholders. We continue to work towards an expected close in the second quarter of 2026, and we'll provide more updates as regulatory approval progresses. In the meantime, we remain focused on OceanFirst continued organic growth efforts, which are proving successful as shown in the results of this quarter.

At this point, I'll turn the call over to Joe for additional color on the businesses.

Thanks, Chris. I'll start with loan originations for the quarter, which totaled just north of $1 billion for the second consecutive quarter and resulted in record quarterly loan growth of $474 million. Our C&I business grew 42% for the year as we have reaped the benefit of our continued recruitment of talent, coupled with favorable conditions for many of our borrowers. Much of that was in the second half of the year, which bodes well for interest income growth early in 2026.

As discussed in the previous quarter, we made the decision to outsource the residential and title businesses, and we have worked through the remainder of the existing pipeline and expect to see measured runoff in the portfolio going forward.

The loan pipeline of $474 million, while lower quarter-over-quarter, is due to the outsourcing of residential and is still markedly higher than this time last year, reflecting the robust growth in the Commercial Bank.

Total deposits in the fourth quarter increased $528 million, with $323 million driven by organic growth across varied business lines. Among those lines, the Premier Bank team grew deposits $90 million or 37% from the linked quarter with the weighted average cost of their deposit portfolio declining 36 basis points to 2.28% as of December 31. To date, the Premier Banking teams have brought in a $332 million in deposits across more than 1,300 accounts and representing more than 350 new customer relationships. Approximately 21% of those balances are in noninterest-bearing DDA.

Lastly, noninterest income decreased by $3.3 million to $9 million during the quarter primarily driven by lower title fees and a reduction in the gain on sale of loans related to the outsourcing of our residential and title platforms. We continue to see strong swap demand linked to our commercial growth and look for that to continue in the coming quarters. Overall, noninterest income levels were in line with our expectations as guided in the previous quarter.

With that, I'll turn the call over to Pat to review the remaining areas for the quarter.

Thanks, Joe. As Chris noted, net interest income grew while margin declined modestly, as we had previously guided. Pretax pre-provision core earnings grew 9% or $3 million from the prior quarter, driven by earning asset growth over the second half of the year. Loan yields decreased modestly, reflecting the impact of floating rate resets and a continued mix shift in our portfolio. Total deposit costs increased modestly, reflecting very isolated upward repricing for certain interest-bearing accounts combined with continued competitive deposit pricing. Borrowing costs also contributed a modest 1 basis point of pressure on our margin, reflecting the net impact of our subordinated debt issuance and retirement during the fourth quarter.

Average interest-earning assets increased meaningfully compared to the prior quarter, reflecting increases in both the securities and loan portfolios. Growth in securities was from our late third quarter opportunistic purchases which also had a modestly compressing impact on our margin. Looking ahead, we expect positive expansion in both NII and margin.

As Chris mentioned, asset quality remained very strong with nonperforming loans to total loans at 0.2% and nonperforming assets to total assets at 0.22%. Asset quality continues to remain at the low end of historical levels for criticized and classified loans as risk ratings across our commercial portfolio remains stable. Net charge-offs ticked up slightly, the full year net charge-offs as a percentage of total loans remained extremely low at 5 basis points.

Turning to expenses. Core noninterest expenses decreased from $72.4 million to $71.2 million, driven by the sale of our title business, noncore items include restructuring charges of $7 million related to our residential outsourcing initiative, $4 million of merger-related costs and $1 million of professional fees related to the credit risk transfer transaction we executed during the quarter.

Looking ahead, we expect our first quarter core operating expense run rate to remain in the range of $70 million to $71 million, with seasonal compensation increases offset by a full quarter's benefit of our residential outsourcing initiatives.

Capital levels remained strong, with our CET1 ratio increasing to 10.7%, reflecting strong loan growth during the quarter combined with the benefits of the credit risk transfer transaction. This trade provided approximately 50 basis points of CET1 ratio benefit at an annual pretax cost of less than $4 million.

A word on taxes, we expect our effective tax rate, which was 22% in Q4, to remain in the 23% to 25% range quarterly absent any changes in tax policy. There are no changes to our full year guidance, as stated in the third quarter's earnings release, mid- to high single-digit loan and deposit growth, NII and NIM growing with NIM growing past 3% during the year and NII ramping in the second half of the year. Other income, $7 million to $9 million per quarter and expenses relatively flat to current run rates.

Note that these are stand-alone expectations that do not reflect the impact of the Flushing acquisition. We've also added our first quarter outlook for convenience. But again, remember that the first quarter always reflects the impact of 2% fewer days and the impact that has on a lot of our P&L items and NII.

At this point, we'll begin the question-and-answer portion of the call.

[Operator Instructions] We have one from Daniel Tamayo from Raymond James.

Maybe just a clarity on your net interest income guidance, Pat. The growth in dollars matching the growth in loans that's to be read as back of the envelope math is just under $90 million, I guess, in loan growth. So that's the way to think of that, that number is the net interest income growth? Or...

It actually will probably grow at a bit higher clip than whatever our loan balances grow just because of the compounding effect of how big the balance sheet is today. So I was just reminding that Q1, it always looks disappointing because you have to shave 2% off for fewer days in the quarter with the drop from fourth quarter to first quarter and then it will begin to ramp back up. I think you'll see high single-digit growth in NII for the year. .

Great. Okay. That's perfect. And then let's see here, the -- I guess as it relates to the deal, any kind of updated commentary around what loan sales might end up looking like after the close.

It's a little bit too early to give you any precise figures on that. We're undergoing a process right now to review the portfolios. A lot of the work we could not really kind of get deep into when we were still in the confidential mode of negotiating with Flushing. So now we've got a little better ability to do that. So we'll update you as our thoughts evolve, but we do expect to be able to do some work on the balance sheet in a way that improves our margins and ROA outlook over time while also reducing credit risk.

Understood. And then maybe just a clarification question for you, Pat, on the expense line. Where is the recurring CRT premium expense in that line?

Comes through other -- just like insurance premium expense essentially.

So expense, it's not in the yield. It won't be in the NIM or in the -- will look like OpEx...

Moving on, we have Tim Switzer from KBW.

I got a few on balance sheet growth here. So first up on commercial balances, C&I on a dollar basis, it looks like it's accelerated for 4 straight quarters, basically every quarter this year with a pretty meaningful pickup in Q4. What kind of pace should we expect for 2026?

Tim, it's Joe. Look, I think we probably snuck in a couple of Q1 stuff into Q4, but that's what the borrower wants, that's what we're going to do. But the seasonality aside, which tends to be a little slower in Q1 as everybody is waiting for year-end financial statements. I would tend to think that you're going to see very similar growth rates. I think we've got it in the 7% to 9% range, which I think is fair. Look, we put a ton of dollars into talent in that space, and I think that space is now just starting to deliver what we expected. So more to come.

Okay. Okay. That's helpful. And I think you guys disclosed this last quarter, wondering if you can talk about how much of the growth this quarter in C&I was driven from the Premier Bank in cross sales?

Yes. So I don't have the quarterly number in front of me, but I do have the half year numbers. So they generated just shy of $200 million in gross closed loans and the outstandings at the end of the year about $64 million, which is pretty much what we figured, right? They're going to be more deposit-heavy, loan-to-deposit number is going to be really good. But they do have a solid C&I clientele, which is [indiscernible]. And I think we'll see more of that to come in '26 as well.

Tim, it's Chris. One other thing I'd mention is that we're really pleased that the level of self-funding in the C&I customers was pretty strong this year. So we're seeing pretty strong deposits come in. The C&I teams have done a nice job with that. So we had just shy of like a 40% coverage of outstanding self-funding. So as that book rotates, we do more C&I and on a relative basis, less CRE, the deposit portfolio is going to strengthen as well. .

Got you. Yes. Yes, that's great. And then on the Premier Bank specifically, it looks like the deposit growth maybe slowed down a little bit. I know it's just 1 quarter, there's probably some volatility, maybe some seasonality in there. But can you add some color on that? And then reconfirm if you still feel good about the target for $2 billion to $3 billion of deposits by the end of '27?

Yes. So Tim, I think you hit on the head. We had higher balances up until really the last week of the year. We had some seasonality, some distribution, some bonus payments, I think that's part for us to learn about the clientele as well. You onboard 350 new clients, you're trying to solve for what works. So we saw nothing but a ramp up until the last week. So I think you're going to see recoveries as the year goes on, we're going to see continued growth. I don't see any reason why we would back off the 2027 targets. .

Moving on, we now have Christopher Marinac from Janney Montgomery Scott.

Chris and Pat and Joe, I wanted to ask about the Premier Banking new money rate that came in. You may have mentioned it and I just missed it. Then I had a follow-up.

Yes. I don't know that we have the new money rate, handy. We did -- the overall portfolio was down nicely to just like a [ 225 ] cost. We're seeing noninterest-bearing is coming in faster now. And although the balances were seasonally weak, as Joe mentioned, we continue to open new accounts and establish new relationships at a good clip. So I think you're going to see that trend with more noninterest over time, better -- lower yields on those deposits and a faster pace of growth in Q1.

Okay. So [ 225 ] is the overall rate, and that works with what I was asking. Chris, as you move forward with Flushing, can you just go back through the opportunity to kind of reset deposit rates? And is there anything instructive from what you're doing now with Premier banking and those new customers with what you can do with Flushing. And I guess part of my question is also how much of that is sort of additional potential earnings beyond what you underwrote going in?

Yes. So well, I think there's a tremendous opportunity there, Chris. So let me just kind of walk through mechanically what we think it is. And I hope you understand also going to shy away from any numbers around that opportunity. But the premise is -- well, first, I should say, if you look at Flushing's numbers, they've done a nice job of building noninterest-bearing accounts at a pretty good clip. They've built nicely over the course of the year and have had some momentum on their side.

I think our Premier folks who operate in the markets with Flushing branches are today, will find a higher rate of success because they have the opportunity to offer that kind of branch distribution network over time. And then I think the real important part of this is that for both us and for Flushing being a stronger, larger regional bank is going to help us in recruiting top-tier talent. So I think we are a more attractive destination for career commercial bankers who are looking for a platform to continue to build their brand and build their teams and build their legacy.

So I should kind of see it in a few ways. Flushing was doing a great job on its own. We can probably do a little better with our Premier teams giving them a branch distribution network. And then we're going to be a much more competitive place to land. I think as we go through the first few quarters as a combined company, hopefully later this year, we'll be able to put a finer point on what we think that growth rate will look like. But those deposit markets are absolutely massive.

So although you do -- in the Northeast, you're always picking up share from someone else. That's kind of the name of the game. There's a lot of share out there in the markets. We're picking and we really like the branch distribution network where it is, the neighborhoods they're in, the streets they're on. And I think that's going to help both of us grow faster than either one of us would have grown stand-alone.

Great. That's helpful, Chris. And I guess, without getting too deep in the weeds, I mean, in general, it doesn't seem like what you had told us in late December really is dependent on adjusting these rates that, as you can have success later on that and that creates future opportunities for earnings?

Yes. So with the one caveat, we are thinking through the balance sheet and in every bank, you have a variety of different funding sources and a variety of different assets. And this is an opportunity for us to be very thoughtful about thinking through the higher cost deposits and the lower-yielding loans and securities, and kind of saying, looking at that mix and say the marginally highest cost funding and the lowest yielding assets present an opportunity to be much more efficient together. And that's really what the balance sheet process is about. And that's something that we may not be able to solve exactly at closing, but we would hope that within 30 days of closing, we would be able to provide some really good data on that. .

We now have David Bishop from Hovde Group.

A quick question on the -- back to the C&I growth here and maybe for Joe. Just curious geographically, maybe where you're seeing the best strength there? And is any of this growth also driven by maybe expiration of [indiscernible] or handcuffs that or maybe [indiscernible] get some of these lenders you had hired over the past year?

So the good news is it's pretty geographically dispersed, David, which I appreciate because we've hired lenders in all markets. Yes, we are -- some of the handcuff stuff that comes off, even if it's really like what I consider to be not not really true handcuffs, people do feel that obligation, and that's a fair assessment.

So I anticipate that we'll see more and more out of those folks as they get a little deeper into their OceanFirst tenure. But I don't -- I wouldn't say that there's anywhere where we're not performing up to standard. And then I think I've mentioned earlier that we've even got some of that activity from the Premier Bank, which is really valuable in terms of some of their clientele in New York City centric.

And there's like a positive flywheel as these new bankers come on their first few clients take a little bit of time. And then those clients have a good experience. They tell not just their friends but the accountants, the attorneys and get better known and then it becomes incrementally better to pick up kind of the second round declines and the third round of the -- we see a lot of opportunity going forward.

Got it. And I thought the earnings narrative on the deposit funding side. It sounded like 1 large deposit client reset in terms of deposit rates from 0 upwards. I don't know, Pat or Joe, if you have that number in terms of maybe what the NIM headwind and is that sort of just a a onetime [indiscernible] impact.

Yes, it's a onetime. It happens all the time where customers don't know where they want their money and they keep it out of higher earning promotional type of things if they think they need it. So it was just -- it was noteworthy because of its size, and it's very infrequent and we expect nonrecurring.

And it was fully reflected in Q4. It actually it was kind of like a late Q3 thing. So you're not going to see that drag or provide a headwind going into Q1. So...

I could have just said that NIM hardly moved at all just due to a lot of little things and noise, but that didn't feel like it was a good enough explanation for 3 basis points of contraction. So is was that kind of quarter...

And I know this number of bumps around, especially at the end of the year, but a noticeable pickup at the early-stage delinquencies and the [indiscernible] bucket. Any commentary there that could be driving that?

Yes. It was just 1 loan, Dave, that has a federal government lease where the lease payment is a little bit late. So we don't have any concern in the long term, but it was already a loan that we had in the substandard bucket. We've been watching it because of that tenancy. So we'll give you an update as time goes on, but they have a good lease in place. It looks like it was just a payment issue, meaning their collection of their rent was delayed administratively. .

Got it. Got it. And then maybe a holistic question for you, Chris. Looks like the Netflix studio is entering into sort of the final stages, the building the studios, [indiscernible] stages and such. Any thoughts about maybe is there a potential to sort of set up branches within that footprint or any sort of branding within that community or within that development to sort of take advantages of branding the company there and backing the caterers, the builders, et cetera. Do you see any sort of longer-term opportunities as that builds out?

That's going to be a tremendous thing for the [ Monmouth ] County, which is our second strongest county after Ocean County. So I think we've got a few branches that provide some good coverage for that market already. I don't know that we'll need to open other branches. But I'll make a broader comment. That's a great kind of boom to the Monmouth County market. But we continue to see over the course of our core, call it, the Jersey Shore market, that the post-pandemic period has been a seismic shift, more people were down at the shore, more parts of the year. There's been a significant demand for the infrastructure you need, everything from hospital systems having to expand to hospitality and office and all sorts of stuff.

So our core, our strongest market in kind of the Central New Jersey Shore is doing pretty well. And I think that's going to be a pretty sticky thing. We see that happening probably for several more quarters.

Next up, we have Matthew Breese from Stephens Inc.

On Premier Banking, I guess I was a little bit surprised by the loan and deposit growth guide and outlook, maintaining 100% loan-to-deposit ratio. I was thinking once the [indiscernible] making effort got up and running, there would be a reduction to that ratio. I was hoping you could maybe talk a little bit to that. And then the other one is I know it's still early days with these teams, but on the DDA side, is 30% DDAs from Premier Banking, that's still the right long-term number?

I'll take the first side and then Joe can take the question about the noninterest bearing. In terms of the loan-to-deposit ratio, we'd like to see that down under 100%. On any particular quarter, it's a little bit of wait until the last few days as you see deposits come in or go out. I don't expect us to be a bank that's going to wind up at a 90% loan-to-deposit ratio, but I'd like to be substantially lower than 100%. I think we're going to see how things play out. We're opportunistic too, about earnings and making sure that we've got the right earnings power.

And I would note that we've got a very robust set of deposit verticals. So we have our consumer deposit vertical. We have a government banking vertical, we have our corporate cash management and C&I vertical, and we have the Premier vertical, which overlaps a lot with the C&I vertical. So we have a lot of different sources of deposits and feel comfortable running at the higher end, which is not unusual for banks in the Northeast. But to your point, we'd like to be further under 100%. I think you may see that over the next several quarters, but not dramatically under 100%.

I think on the second half, Matt, I'd tell you that between 25% and 30% is actually, in my mind, still the right number. What we're hearing a lot from clients and clients that I've met personally is that there anticipation in midyear '25 or late-year '25 was a transition into full operating businesses coming across to OceanFirst in '26. So we still have a significant number of unfunded operating accounts that we've opened, getting ready for people to migrate. So I anticipate you're going to see a higher percentage of DDA as time goes on during the 2026 fiscal year.

Got it. Okay. And then, Chris, going back to Flushing, you had mentioned that there was some higher cost components, of the $7.3 billion of Flushing deposits, could you just describe some of the business lines tied to the higher cost components? And then oppositely, what are the highest-quality parts that you're more likely to kind of keep and grow? What's on the whiteboard there?

So if you think about -- everyone has kind of pockets of deposits. And everyone has more kind of promotionally-priced deposits. You think about their national deposit vertical, the IGO banking, for example, or [indiscernible], which is not a lot of dollars. It's a good capability for us to have and preserve going forward but those are higher-cost deposits. Not surprising, some of the government deposits are higher cost because they wind up being excess fund accounts and you've got to be competitive on that. .

And then there are some money market accounts across the base that have been kind of priced more to acquire deposits. But there's still a pretty big slug of long-term high-quality deposits that either historically have been at Flushing for a long time. I remember the bank was chartered in 1929. So they've got a really long history. Very strong in Queens, very strong in the Asian communities, significant number of the branches they've opened in the last several years have been to serve the Asian communities around the city, which are not just in Flushing but places like Bay Ridge, and Lower Manhattan, Sunset Park, kind of those areas.

So I think the real opportunity here is those long-term consumer accounts that go back in a lot of the franchise, the Asian markets and a lot of their commercial clients keep operating accounts with them. So that's all high-quality stuff. Around the edges, we might decrease the amount of dollars that are out in IGO banking, maybe some of the higher yield money market, maybe some of the higher-cost government. That's kind of the high-quality, lower quality. And I think every bank has some of that. We're looking at our own stuff, too, in the way we price it.

Understood. Very helpful. And Pat, just looking at deposit costs up this quarter, and I know you'd mentioned there was an [indiscernible] incident. Obviously, Premier Banking as a blend is higher than the average cost, could you help us out with the deposit cost outlook for the year? Where do we peak and without any rate cuts or using your rate cuts to kind of forecast, where do you expect deposit cost to be at the end of the year?

Yes. I am not going to give you a guess of where deposit costs are going to be at the end of the year, but I do think that they're going to keep coming down. They are coming down. They're lagging a little bit from a speed of repricing relative to rate cuts, which is exactly what happened when we were in an uprate environment, we lagged before they started going up.

So I think we -- we're seeing the same kind of things. So starting off slowly repricing and then picking up. I'm encouraged by the fact that all of our spot rates across all of our deposit types are noticeably lower than the averages for the quarter. So they are steadily coming down already. Rate cuts help because there's a lot of promotionally-priced stuff. It's not contractually indexed, but a lot of the larger promotional balances definitely are linked there.

And frankly, the pace of loan growth and the opportunity for loan growth is going to drive a lot of how that ends up occurring similar to the loan-to-deposit ratio. It's less something that we drive the business towards rather than an outcome. And if there's high-quality loan growth that is a little bit higher than our deposit growth outlook, then we'll probably fill the buckets with some higher cost deposits just to secure the longer-term lending relationships.

So I think you'll probably see deposit costs and loan yields roughly moving in line with each other with a slight edge on the loan yields due to growth, and that's going to drive our margin, I think, steadily improving as we move through the year, a handful of basis points every quarter. That's a backhanded way of not answering your question exactly. So...

All very helpful. And maybe just to drill in on 1 category that looks like it has the most room, your time deposit costs, the spot cost at the end of the quarter was [ 364. ] What is kind of the blended all-in cost of CDs as they -- I know there's going to be some promotional stuff in there, but the all-in blend of [indiscernible] resets.

Yes. Well, one thing, Matt, I'd note that when we think about the balance sheet restructure to your prior question, that's the first dollars we're going to give up. We don't have a lot of brokered, but we do have some, and we've kept those durations really short. So as we kind of zero in on the combined balance sheet with Flushing, the very first thing we will do is let those brokered runoff, and those are in the high 3s, but coming down. So even if we kept them, they would be coming down. So I think there's a strong opportunity there. And all of that is probably -- the weighted average duration on that is under 6 months, Pat?

Yes. It's about 4 months. So we can pretty rapidly change prices, and we actually do. We don't wait for a rate cut and mess around with kind of daily changes and we see are we able to keep rollover balances or not? Are we attracting any new balances or not? With, again, that being just 1 of the components of funding base that we need to maintain to support whatever the loan growth rate is.

And that is it for all the questions. Thank you, everyone, for participating on that. And the Q&A is now clear, and I'll hand it back to Chris Maher for some final remarks. .

All right. Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in April about our first quarter results. Thanks very much. Bye.

And this concludes today's call. Thank you all for joining. You may now disconnect your lines. Have a great one.

Hello, everyone, and thank you for joining us today for the OceanFirst Financial Corp. Investor Call. My name is Sami, and I'll be coordinating your call today. [Operator Instructions]

I'll now hand over to your host, Alfred Goon, to begin. Please go ahead, Alfred.

Thank you. Good morning, and happy holidays. I am Alfred Goon, SVP of Corporate Development and Investor Relations. We appreciate you joining us for today's call to discuss the merger of Flushing Financial Corp. and OceanFirst Financial Corp., which was announced yesterday evening.

The call will be led by OceanFirst Chairman and CEO, Chris Maher. Chris is also joined by Joe Lebel, President and COO of OceanFirst; and Pat Barrett, CFO of OceanFirst.

Before we get started, a couple of housekeeping items. We will be referencing a slide presentation during management's comments today, which can be found on the Investor Relations page at oceanfirst.com and flushing.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 for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements.

I will now turn the call over to Chris Maher. Chris, please go ahead.

Thank you, Alfred. Good morning, and thank you for joining us. I'm Chris Maher, Chairman and CEO of OceanFirst Financial Corp.

Today, we're excited to announce that OceanFirst Financial Corp. and Flushing Financial Corp. have entered into a definitive agreement to combine in an all-stock merger. Upon completion of the transaction, Flushing Bank will merge into OceanFirst Bank with OceanFirst Bank as the surviving entity. The transaction is valued at approximately $579 million and will create a high-performing regional bank with a meaningful footprint across some of the most dynamic markets in the Northeast.

Before we get to some of the materials in the presentation, I want to take a minute to walk through why we see this as an important opportunity for our franchise. For those that may not follow OceanFirst closely, we entered New York City organically in 2019 and have been steadily building our business there over the past 5 years. Just a month ago, we opened our fifth branch in Melville, New York. And earlier this year, we recruited 9 commercial banking teams with 36 bankers to help us lean into the opportunity in New York City and Long Island. These efforts have enabled us to build a strong customer following in the New York market, which now comprises $2.2 billion in loans and over $800 million in deposits. Broadly, we view this merger as an opportunity to support our growing New York franchise and to make OceanFirst much more attractive to both clients and to banking professionals.

Importantly, it provides the distribution network and branding presence that it would have taken many years and significant investments to achieve otherwise. This strategic opportunity accelerates our New York growth strategy by expanding our presence in the deposit-rich markets of Long Island, Queens, Brooklyn and Manhattan, ranking us #2 in the Long Island deposit market as compared to banks with less than $50 billion in assets.

The combination also complements our existing footprint across New York, Philadelphia, Boston, Baltimore and Washington, D.C. metro areas, all markets with strong long-term demographics and a vibrant commercial activity. At closing, the combined company is expected to have approximately $23 billion in assets, $17 billion in total loans, $18 billion in total deposits and about 70 branches across our combined footprint. We are bringing together 2 organizations with shared values, a relationship-driven culture, a disciplined credit philosophy and a commitment to the communities we serve.

We're also pleased to announce a $225 million strategic capital investment from affiliates of Warburg Pincus, subject to the closing of the merger. The investment will further strengthen capital levels and support future growth.

Upon closing, I will continue as CEO of the combined holding company. John Buran, current CEO of Flushing, will join us as Non-Executive Chairman of the Board for 2 years post-closing. Following that transition, I will resume the role of Board Chair. The company's combined Board will include 17 directors, 10 from OceanFirst, 6 from Flushing and 1 representative from Warburg Pincus. Upon completion, OceanFirst shareholders will own approximately 58%, Flushing shareholders, 30% and Warburg Pincus 12% of the combined company.

Flushing Financial Corp. has built a highly respected commercially oriented franchise with deep client relationships, a conservative credit culture and a strong reputation for local decision-making. Their operating philosophy, client focus and approach to risk management align closely with our own.

Most of my career has been spent as a banker in New York City and Long Island. I've known the Flushing team for years and have a great deal of respect for them. We're excited to have an opportunity to combine the teams.

Slide 4 of our investor presentation covers some of the highlights and expands our view of the strategic rationale for the transaction. The combined company will be able to use scale as a competitive advantage. Delivering OceanFirst's product and technology through Flushing's deep distribution network should help us win market share. The combined company's financial performance should improve materially from either company stand-alone, including a meaningful increase in capital generation. Both companies have a pristine record of credit quality, purchase marks are conservative, and they were informed by deep diligence.

We will welcome a highly sophisticated equity partner, Warburg Pincus, who is investing $225 million after conducting their own independent deep diligence. Our team has demonstrated a great track record of M&A integration. Note that we've completed 8 core conversions in my time at the bank.

This last point is particularly important. The financial modeling we will discuss later is supported only through cost synergies and assumes a static combined balance sheet. We structured the purchase marks and capital to allow for a balance sheet optimization, and we fully expect some level of revenue synergies as we compete more effectively in these markets.

Digging a little into the details, if you turn to Slide 5. The transaction will create meaningful profitability enhancements with a pro forma return on average assets of approximately 1% in 2027, return on tangible common equity of approximately 13% in 2027 and a noninterest expense to asset ratios of 1.7%. This places us in the mid-quartile of regional bank peers based on 2027 consensus estimates.

Capital remains strong with a CET1 ratio of 10.8% at announcement, supported by the $225 million capital raise from Warburg Pincus. We expect EPS accretion of approximately 16% in 2027, with tangible book value dilution of just 6.4% and a tangible book value earn-back of just over 3 years.

On Slide 6, we've summarized Flushing's key financial and business metrics today. Flushing has a strong and established presence across Long Island, Queens and Brooklyn, areas with attractive demographics and strong deposit bases. Their credit performance has been exceptional with only 7 basis points average net charge-offs over the past 10 years.

On Slide 7, we included some of our analysis on how we evaluated their branch network, which competes in micro markets with approximately $153 billion in FDIC insured deposits. The top 15 of these high-density markets are individual ZIP codes that report between $3.8 billion and $31.7 billion in deposits. In several of these neighborhoods, billions of deposit dollars are clustered in only a small several block radius.

Furthermore, 27 of their branches operate in ZIP codes dominated by G-SIB institutions. That presents an ideal opportunity for OceanFirst. Our relationship-focused model has proven successful when we compete with larger banks. Clients choose OceanFirst because we provide a comprehensive suite of robust products delivered with the speed and attentiveness of a nimble regional bank. The entrance into these exceptional deposit markets creates a compelling opportunity for us.

Independent of this transaction, Flushing's branches are situated in highly attractive markets that we would have expected to organically enter over time. Building de novo branches would have taken significant investment and time to reach the deposit levels that these Flushing branches already have today. This acquisition helps to expedite our presence into these markets and accelerates an already contemplated organic strategy, while also improving our profitability.

Turning to Slide 8. On the commercial side, Flushing's distribution channels provide a deep relationship base that can be further expanded through OceanFirst's broader commercial product set. Our commercial treasury management products are highly competitive and strongly profitable, but are just one example of the product opportunities. We will also bring new products like escrow services, Trust Powers, equipment finance and our Nest Egg investment platform to the combined company. As you can see, both organizations have made progress, shifting the loan mix towards C&I and reducing CRE concentrations. We see significant opportunities in continuing this momentum through Flushing's retail, commercial and Asian Affinity segments.

Turning to Slide 9. We've discussed some of the financial impacts of this transaction earlier in the call, but noting some key benefits around credit and capital. Capital ratios resulting from the transaction are strong with a CET1 ratio of 10.8% at closing and a leverage ratio of 8.3%. The pro forma ACL coverage ratio of approximately 1.5% provides a conservative level of reserves and significant loss absorption capacity.

Bank level CRE concentration will increase modestly from 417% for OceanFirst stand-alone at September 30 to a max of about 461%. We will actively manage the portfolio and see this concentration decreasing over the first several quarters. That decrease will be managed through runoff and may include loan sales and participations.

We plan to engage in a process between now and closing on the combined commercial real estate portfolio to determine how to optimize the portfolio. We're optimistic that we'll have select opportunities to reduce portfolio concentrations in the near term. Our due diligence included a review of liquidation values on select portfolios, and those values partially informed our purchase accounting estimates. We have already held preliminary discussions on the potential sale of certain commercial real estate loans. Early interest from buyers has been strong, given the record of credit performance and the underlying borrowing base, which is dominated by multigenerational families with a long history of performance.

Turning to Slide 10. We want to touch on the opportunity and our ability to diversify and derisk the pro forma balance sheet. To provide capital to support OceanFirst's organic growth, we recently completed a credit risk transfer on a $1.5 billion residential loan pool, which increased CET1 by approximately 50 basis points. That capital strategy reflects the strong levels of organic growth we expect from the OceanFirst franchise in Q4 of this year and into Q1 of 2026.

We also performed an extensive review of Flushing's loan portfolio, covering more than 70% of total loans and 100% of criticized, classified and rent-regulated multifamily loans. Our analysis resulted in an overall mark of about 4.5% of gross loans with the credit mark equal to about 4x Flushing's current reserves or 2.6%, including a 10% mark inclusive of both credit and interest rates on the rent-regulated multifamily loans.

We leveraged support from strategic risk associates, while our capital partner conducted independent diligence work with the support of Maverick Real Estate Partners and [ JLL ]. Their analysis helped confirm our view of the portfolio risk and supported our credit marks.

Said a different way, the total mark on the loan portfolio equals approximately $303 million, while still producing an estimated volume purchase gain of about $9 million. Additionally, with the $225 million capital raise from Warburg Pincus, we built sufficient capital on day 1 to support continued organic growth to provide us with optionality to immediately execute on any balance sheet optimization opportunities and, of course, to protect against downside risk. These opportunities should help to provide meaningful uplift to our disclosed pro forma profitability metrics, and we're excited about our prospects.

Going forward, our focus remains on the continual growth in C&I, expansion of treasury management capabilities and enhancing branch performance across Long Island, Queens, Brooklyn and Manhattan.

I'll now turn to Pat Barrett to provide some additional details on the transaction.

Thank you, Chris. Before we discuss any further details on the financial assumptions, I wanted to briefly provide an update for OceanFirst's fourth quarter performance to date.

Our performance is tracking well. It's roughly in line with our guidance that we issued in October as well as current consensus. As Chris mentioned, we closed on a credit risk transfer during the quarter, providing first loss coverage for the first 5% of losses relating to a $1.5 billion pool of legacy OceanFirst residential mortgages. This transaction provides approximately 50 basis points of CET1 ratio benefit, which we'll recognize this quarter and will cost us less than $4 million pretax annually going forward. We remain excited about our stand-alone performance and look forward to speaking in more detail during our fourth quarter earnings call in January.

Turning to the financial assumptions on Slide 11. The transaction is structured as an all-stock transaction with a fixed exchange ratio of 0.85, resulting in a total transaction value of approximately $579 million. The price to fully synergized 2026 estimated earnings is 5x, and we expect cost savings of 35% of Flushing's noninterest expense, 50% phased in for 2026, 100% thereafter. Additionally, we did not incorporate any meaningful savings on real estate, such as branch closures or material operating locations. These could present opportunities over time.

Pretax restructuring charges are expected to total $106 million or about 18% of total deal value, in line with other precedent transactions. This also includes $5 million of charitable contributions, which cover approximately 6 years of Flushing's typical CRA spend. This was important to our organization as we look to continue to serve Flushing's communities post-deal close.

We're thrilled to welcome Warburg Pincus as a new shareholder. Warburg is committed to a $225 million equity raise at $19.76 per share, comprising 9.7 million shares of common stock and 1.7 million shares of a new class of nonvoting common equivalent stock. This is combined with warrants that carry a term of 7 years and may be exercised after year 3. The warrants have a mandatory exercise should OCFC market price reach $30 per share.

With respect to purchase accounting, we expect to record an interest rate mark and credit mark on the acquired loan portfolio consistent with current market conditions and the extensive credit due diligence work we completed. The interest rate mark reflects the difference between contractual coupons and current market rates, while the credit mark approximates lifetime expected losses under CECL. These marks are fully incorporated into our accretion and earn-back analysis and do not signal deterioration in underlying credit quality. This transaction will not create goodwill, and we currently expect to record a $9 million bargain purchase gain. Lastly, we expect regulatory approval in the first half of 2026 with an anticipated close during the second quarter.

Before we open the lines for Q&A, I want to touch briefly again on our due diligence process on Slide 13. We've had 12 advisers reviewing this transaction from all angles, covering work streams that included credit, accounting, valuation, human resources, compliance and tax, just to name a few, reflecting the depth of our diligence. The third-party credit advisers included deep experience in loan valuation broadly and more specifically focused on the rent-regulated multifamily market. Their conclusions were consistent with our own reviews and the conservative marks we took on the loan portfolio.

Moving to Slide 14. And as Chris mentioned earlier, we wanted to briefly touch on OceanFirst's strong history of M&A execution and integration, having completed 8 whole bank acquisitions and 8 core conversions over the past decade. Our team is experienced, integration-focused and execution-driven. And I'd also reiterate what Chris said that we plan to retain key Flushing management personnel, such as Maria, Frank, Mike and Tom, who among a great management team have been important contributors to both Flushing's success and our expected combined success going forward.

In closing, the transaction creates a scaled, high-performing franchise primed for sustained growth with strong capital, enhanced profitability and a powerful expanded presence across the Northeast.

We'll now open the call for questions.

[Operator Instructions] Our first question comes from Daniel Tamayo from Raymond James.

Yes. Maybe first, just on the balance sheet. So I think you made a comment on balance sheet size being lower priority in the slide deck and one of the -- I think it was Slide 10. And then, Chris, you just talked about potentially selling some loans after close as a way that to manage the CRE concentration.

Maybe you can kind of talk us through like how big do you think -- what's the size of the loan portfolio you're maybe targeting or think that this thing shakes out at once the dust settles post-close? And maybe how you're thinking about CRE concentration after some of these balance sheet actions that may happen?

Sure. Maybe I'll just kind of start with an important principle that I know has been kind of central to our culture at OceanFirst and at Flushing. And that is we view these as customers and not individual kind of transactions or loans. And we've been able to decrease our CRE concentration over time as has Flushing by focusing on the strongest relationships that we have.

So the customers we want to retain are the customers who have a fuller relationship with us that bring not just loans, but also deposits where we kind of see ourselves as their primary partner. So over time, as our portfolio has come to maturity and renewed, we have deepened relationships and retain those relationships or if we were not able to deepen them and they remain more transactional, we've decided to let those kinds of customers fall away. We would look at this opportunity the same way.

And by the way, it's not just about, say, a Flushing portfolio. It's about the whole balance sheet. As we see loans mature in the coming quarters, we're going to be increasingly focused on our relationship clients, making sure we serve them, making sure they've got a full relationship with us and that they bring other products, things like deposits. That's allowed us to just kind of quietly and thoughtfully reduce our CRE concentration. I think Flushing has taken the same approach.

I think there is an opportunity to look at both balance sheets at this kind of point in time and look for the same things and say, what are the relationships we want to protect and keep in the market, in which case, that's great, we'll hold on to those. Or if we have a segment of clients that we were maybe aspirational about that we thought would develop into fuller relationships but haven't, we're going to look on both of the balance sheets, and we're going to look at what is the contribution from those individual loans. What is the potential with the client.

And there is -- every bank has a segment of funding that's higher cost. There are some opportunities here to kind of pair off lower-yielding transactionally focused loans with higher cost funding that will have very little impact to our net interest income, but shrink the balance sheet. I'd hesitate to put too fine a point on the amount, but I would not be surprised if that's something that could approach $1 billion, maybe it's a little more than that. So we're not talking about a little opportunity. We think there's a meaningful opportunity.

But that's something that we didn't want to do in a knee-jerk and do it while we were trying to pull the deal together and add the complexity of needing to have these kind of client relationships, kind of talk one by one, understand what's best for the long-term franchise value of the company. But that's the work that will begin next week as we work together as a team and look at the portfolios, look at the opportunity long-term, look at what they're contributing to us from a profitability standpoint.

But I expect you're probably going to see by the end of 2026, a somewhat smaller balance sheet that will have better return dynamics than the ones we had in the presentation. We just -- that work has to be done thoughtfully. It has to be done as a team, and it has to be well informed by -- you want to use a scalpel, right, and make sure that you're doing the right thing there.

And I'd just add to that, that as part of the credit due diligence that we went through, we did get indicative bids from multiple parties. And so the marks that we have on the portfolio and not just on one specific aspect, we did on both balance sheets. So the marks that we have put on the transaction would contemplate that sort of a potential outcome. So we feel like the valuation that we have on this balance sheet lends itself to optimizing without, as Chris said, without significant P&L impact.

Okay. That's helpful, Chris and Pat. And then maybe the other side of that, maybe, Pat, if you could help us think about the core margin here going forward, the number that you guys put out there. I'm trying to think through how that is impacted. Obviously, there's a meaningful purchase accounting number in there in the '27. But you've got the CRE -- the CRT, excuse me, that you just did in the fourth quarter. So maybe if you could just kind of walk through the puts and takes, including the CRT impact on the margin and how you're thinking about where that could shake out on a core basis going forward?

Sure. So I guess I'll take that in reverse order. So starting with the CRT. That doesn't really impact our margin. That's more of a risk-weighted asset optimization exercise. So the costs to us are essentially the cost of one kind of portfolio level credit default swap that has the $1.5 billion of mortgages that remain on our balance sheet as the reference pool. So the cost of that really roll through expense just like an insurance premium would. The benefit that we get from that is the ability to change our risk weighting for that reference pool of mortgages from 50% down to 20% risk weight. And so that's where the 50 basis points of CET1 ratio benefit comes in.

From a NIM and margin perspective going forward, it's really kind of just basic math of taking our consensus and outlook, which is pretty much in line with the guidance that we've given, plus the consensus for Flushing and adding them together and then adjusting for impacts of the transaction and primarily, that's going to be the accretion from the interest rate mark. And Chris mentioned the interest rate mark briefly on the loan portfolio. So that's about $140 million. But then we have other interest rate marks, some are puts and some are takes on the rest of the balance sheet.

So the net impact of all of those it results in about $25 million pretax of NII on an annualized basis that's going to roll through the P&L. So it's a pretty small impact from that perspective, but it does help to offset the impact of the lower yield and margin of Flushing when you match the 2 companies together. Does that help? So I think a 320 is just a mathematical outcome of all of those at this point.

Got it. I appreciate it, and thanks for the clarification on the CRT. I mean my only follow-up on that quickly here is just on the number that Chris talked about on the loan sales, how that would potentially factor in if you have like an initial thought.

Sure. Well, hopefully, it would improve things. So -- but again, as Chris said, we're looking at lowest yielding loans, highest costing deposits and try to come up with a balance that is essentially P&L neutral. If you think about some relationships that we might have, that could change the dynamics of that. So you are going to be able to perfectly take your lowest yielding and highest cost and match them together. But that would be our intent is to do that in a way that's P&L and NII neutral.

Okay. Great.

Thank you.

Our next question comes from Tim Switzer from KBW.

Congratulations on the deal.

Thank you.

You mentioned the attractive deposit markets Flushing is in. And if we look at their deposit costs compared to legacy OceanFirst, it's a bit higher. Can you talk about where you see the opportunity to bring down Flushing's deposit costs closer to OceanFirst? And what's going to be the go-to-market strategy in New York? And is it any different than your other markets?

So the first thing I'd start with is I would recognize that Flushing has done a great job on their own building and improving their mix of noninterest-bearing demand. So one of the things we were really pleased with as we did our kind of deposit work and deposit study is that the momentum Flushing has had is very positive. We think it's really just kind of doubling down on that trend. We have some products that I think will help our treasury clients and help us do significantly better in terms of wallet share.

Both Flushing and OceanFirst have been focusing on building C&I. We expect that to continue. If anything, there's an opportunity, I think, to accelerate in that world. And then there are some of the more competitive kind of deposit segments like government deposits, and we might reduce our reliance on those a little bit. So I think if you see a mix shift really towards transactional kind of treasury management, continuing to build on the good work Flushing has done.

And one of the unique things, Flushing has done a great job of picking the neighborhoods and the locations for these branches to be in. They've been in a methodical de novo expansion for several years. That's wonderful because that provides a great opportunity for us together. But that's some of what's been weighing down their profitability as they built out their branch network and had to fill those branches up. So it's an opportunity for both of us, but we couldn't be more pleased with the markets they're in.

The last thing I would say is that I mentioned in our prepared remarks, we've kind of organized our bank to be very competitive when competing with the biggest banks around. So the way we kind of view things are -- is that clients who come to OceanFirst have essentially kind of on par products and benefits and services they would have with the biggest banks, but they have the responsiveness they find at more like a community bank. And that's kind of our niche. That's where we do well. We always focus on markets that have a high share of market from the G-SIBs because that's the client we're looking after. And so I think we're optimistic on that.

Okay. Got it. Very helpful. And then can you talk about how -- does this change your internal investments or initiatives in any way in terms of your C&I lending push or the Premier Bank at all? Are there any impacts to that?

I think this is really additive to our organic strategy. So this isn't like instead of this actually levers and makes us, I think, a much more desirable bank, both for clients and bankers. But Joe, maybe you could talk a little bit about kind of how you see the development, the additional bankers you'll be adding and things like that.

I think you hit it on the head. The advantage we get is the branch locations, which is always a valuable thing even in this world of technology, clients do appreciate the flexibility as to our bankers because having more location for bankers builds brand reputation, but it also gives us additional flexibility in markets.

So the C&I initiative, the Premier Bank initiative and even at the other end of the market, our Spring Garden lending teams that are active in New York, again, gives them more footprint, more name notoriety and it also gives us the ability to continue recruiting in those markets with an expanded brand and branch presence.

We're building our brand in New York already. We've been doing that for 5 years. It's a big market. It's a crowded market. And I often think about brand scale as something we don't discuss in the industry. But brand scale is important. People kind of know the brand, feel like they feel comfortable with the brand, it's going to be easier for you to compete. So having this opportunity to be kind of like deeply embedded in the core markets is going to provide, I think, it's really going to accelerate our credibility when we're securing those larger commercial relationships and trying to attract talent.

Got it. Make sense.

Thanks, Tim.

Our next question comes from David Bishop from Hovde Group.

Chris, you touched upon maybe some of the due diligence you did from a financial perspective to get comfort with the rent-regulated multifamily side. Just curious how you consider maybe some of the noise coming out of the political backdrop there on the rent control issue, how you got sort of comfort level heading into the transaction?

That's a great question, Dave. Thank you. So if you turn to Slide 20 in the presentation, we've got a couple of stats here that I think are critically important.

First, like OceanFirst, Flushing has got this exceptional track record of credit quality, and that matters a great deal. If you think about the credit performance of our book and Flushing's book for decades, it's been pristine and among the best in the peer group. Part of the reason for that is that the portfolio is very granular. So the average rent-stabilized multifamily loan is just $1.3 million. Interestingly, over 60% of the multifamily rent stabilized loans at Flushing have balances less than $1 million. So we're talking lots of small buildings, none of the kind of giant buildings that might have, I think, a little more difficulty kind of matching the environment.

The second thing is that Flushing's customers are very long-term relationships. These are folks that they bank for ages. The average loan duration is about 8 years, but the relationships are far deeper than that. And many of these buildings are held by generational owners. Those generational owners have a very low tax basis. So interestingly, it is better for them when needed to pay a loan down or restructure something than to take a tax event or a loss on the building because their embedded capital gains would be so significant, the taxes would outweigh any investment they need to keep the current property current. They have a lot of equity in there. The historical performance has been great.

And the last thing is when we went through, we did a sample of the book, we found that 38% of the loans in the book have the financial ratios that would qualify them for a GSE takeout. So there's a migration path for a lot of these loans, a lot of deep relationships, clients who have multiple loans. So we feel pretty good about it. You can never know what's coming in the political environment. We were certainly pretty happy to see that Mayor Adams made some appointments to the rent stabilization Board that we think kind of reduce the risk somewhat.

But we took a view on this that there is additional credit risk, and that's what informed our mark. It wasn't as much a computational mark on the assets as a reflection of the potential risk that you mentioned that some unknown things could happen in the future. Portfolio is great, no delinquencies, great borrowers, low LTVs, very granular size, but we wanted to be careful. You don't want to get that wrong.

Got it. No, I appreciate that color. And then maybe just one follow-up for Pat housekeeping. Just curious in terms of the base operating expense you're using for Flushing, is that based on the consensus out there to drive those cost saves? And did I hear there could be potential branch closures?

Yes, it is based on consensus, and there are not any potential branch closures. I did say that real estate at large remains kind of a long-term opportunity for us as we continue to develop. I mean we have plans to build potentially build out multiple locations. We have our own branches that overlap a little bit, but none of that is in the calculus for the deal or for the near-term projections of the pro forma company.

One example of that, that is not in the base rate is that Flushing has a location in Midtown Manhattan, an office location, back office. And we have 2 locations. All 3 of those locations are within like 3 blocks. So -- and they're on short-term leases. So we got to think about optimizing that kind of stuff. But that's not in the base case.

Our next question comes from Christopher Marinac from Janney Montgomery Scott.

I wanted to go back to deposit growth and kind of what is realistic for the combined franchise in the longer term. Chris and Joe, if you look back the last 4 years, your deposit growth has been sort of mid-single digits. And I'm just curious if you aspire to be faster than that. And I know there's the combination of the Premier Bank initiative already underway, but does Flushing give you the ability to grow deposits better as the next sort of 5 years come into focus?

Absolutely. But I think more of it, Chris, like a mix shift. So we note if you've got the presentation on Slide 8, Flushing has done a great job. Their noninterest-bearing deposits have increased 12% in the last year. Ours are up 6%. I don't know that you're going to see total growth. And if we kind of think about the balance sheet restructure opportunity, that would reduce funding pressure as well. So that would allow us to optimize.

And what you'll see is we'll be pulling back from higher cost funding sources and just leaning into checking both interest and noninterest-bearing. So I think you're going to see a mix shift. And I think we can kind of generally over time, we'll get to a deposit portfolio that looks more like OceanFirst cost of deposits.

Maybe I'd say -- I'd mentioned that the organic stuff that we're doing in Premier comes in at a materially lower net cost than the Flushing deposits today. So every Premier dollar we add reduces the cost of deposits if we're exchanging that out for a -- kind of a Flushing dollar.

Chris, I had that same question in mind. So just one more point in the big picture. Does this transaction allow you to win more business on the Premier side, whether it be existing customers you're bringing over or perhaps new hires? Does the pipeline of hires perhaps get a little bit of a bump as a result of today's transaction?

Yes, Chris, it's Joe. I agree on both points. It does give us the ability to win more clients that may have wanted the optionality of branch presence rather than building our own that gives us a franchise now that has established branches in good locations. And then it also makes it a little bit more attractive for those bankers that we have on our recruitment list to join us because of the fact that we've now built out or attained a branch presence for them.

And Chris, I would note that the 35% cost save is net of some investments we intend to make in the franchise. So we've got some kind of movement around behind the scenes that will net 35%, but we expect to be adding more commercial bankers and maybe having a few more cost saves, but that's all in the baseline, and we would not be looking at a spend in addition to what you got laid out in front of you.

Great. Thank you very much for hosting us today.

Thanks, Chris.

Thanks, Chris.

[Operator Instructions] Our next question comes from Matthew Breese from Stephens.

Chris and Pat, one thing I'm struggling with a bit here is just balance sheet size dynamics pro forma, and I get it, there's some optimization consideration going on. Maybe you could just as best you can help us out with the loan and deposit growth outlook and maybe give us some sense, even if it's a range of expected balance sheet size as we get into mid- to late 2027, assuming some of this optimization has taken place.

Sure. So as with NIM, when we look at the pro formas, the consensus for each of the banks has kind of the underpinning legacy organic growth rates built into it. So we expect those to continue kind of in the mid-single digit to high single digit for us, respectively, Flushing and us, respectively, going forward.

So the real 2 offsets would be any accelerated runoff that is above what we're contemplating or what's in consensus or anything that we might deliberately trigger. So the accelerated runoff really would be like our residential mortgage back book, the $3 billion, which is showing some signs of a little bit faster prepayments than what we had modeled, but that largely is in consensus. And if we start to see an acceleration of that elsewhere, which we're not, and I don't believe the Flushing is either, then that could trigger that.

Notwithstanding that, I think that kind of a mid- to high single-digit organic growth rate is reasonable. The offset would be is if we decide to do some optimization work that's P&L -- largely P&L neutral, ROA and profitability accretive, but it would involve shrinking the balance sheet. And I couldn't envision that being more than something in the $1 billion to $1.5 billion range without us starting to have to take haircuts outside of the marks that we feel like we could cover.

And I don't want to put a probability on that because we really are going to weigh kind of the costs and lost NII that have to be replaced versus the risk of carrying the earning assets that potentially have a credit risk associated with them, none of which is obvious to us today.

And Matt, I'd just add to that, that -- and we understand the complexity here because without that target, it's kind of hard to build out a model. I think if you think about the net interest income line being largely stable and growing over time, what you'll see shift is the total footings. You'll see hopefully a little better ROA, a little better margin than we think. But the contribution back to EPS accretion is, we think, pretty firm. So you'll see different profitability ratios. You won't see a much different level of profit than we would have gotten otherwise.

So I think if you were to kind of look at our loan book, look at our deposit book, look at them growing over time, if we do an optimization, that would just kind of reset at one point, but it's not going to change the earnings outlook for the company in a significant way.

Great. I appreciate that. And then maybe tying into it a bit. As I consider these 2 balance sheets, the one thing that becomes a little bit of a glaring kind of mismatch is the $1.4 billion of rent-regulated multifamily. You all have just -- you haven't done that business, not to that size.

Yes.

And so I guess, first of all, how did you arrive at that mark? I'd be curious if you have any sort of anecdotes around cap rates, potential cap rate changes considering [ Mondani ] or implied kind of valuation change considering the LTV is 55% here.

And then, Chris, you had mentioned 38% of these loans, I think you said something like they have GSE characteristics. Is that to imply you could securitize them through a Freddie Q program or something like that?

You might be able to do that. I was more referring to the fact that if they at maturity, would need to refinance, they could refinance through a GSE program, and we wouldn't have that risk. It was great questions, Matt. Let me just walk you through.

First, just for those who have not spent as much time with us, Dan Harris, who's our Chief CRE, Credit Risk Officer, has some of the best experience in these markets, particularly around rent-stabilized multifamily. He was historically the Chief Lending Officer over at Dime Community and has done several billion dollars' worth of this asset class. So we had the internal expertise to be able to look at it from our own perspective. We then looked at it through SRA, who we contracted to take a look at it. We did review not just of the debt coverage, we looked at NOI shortfalls, how much that would impact the portfolio over time. We looked at debt yield. We looked at cap rates. We stressed on each of these aspects to understand -- there's really 2 factors here, the probability of default and then the loss given default.

So 86% of that Flushing book carries a debt service, a current debt service over a 1.2, very strong debt service. So the probability of default for a loan that's debt serving over 1.2 is very low, maybe 0. So that leaves just a small piece that we would have to go out and kind of think about the risk on.

Secondly, we did find interesting the work that was done by our capital partner for their own use, but they brought Maverick in. Maverick is probably the best in this asset class in understanding that. We went out, obviously, given the importance to keep confidentiality. We only went out to a limited number of partners, but we did get 2 indicative bids on segments of the portfolio that helped inform our marks as well.

And then I mentioned it earlier, but I want to just double down on the small size of the loans and the relative modesty of the buildings. We're able to go through -- we're able to look at things like none of the New York City kind of bad landlords are in the list. We went through to make sure all the borrowers are kind of clean borrowers. We looked at building violations. This is a really, really clean portfolio, well underwritten. We stressed -- we had SRA look at it. Our partners did their research and -- is this kind of like a mosaic. You look at all these different inputs and you come up with a mark. And we think that mark is, if anything, probably in the conservative side.

Understood. And then just kind of on the first part of the question, this is the one piece of the 2 banks that doesn't seem to fit quite well? Is it higher likelihood that this portfolio or at least a good chunk of it gets sold off?

Yes. It's not an area for growth for us for sure. It's not strategic. And I just want to have that small caveat. They're super high-quality individual customers in this. And I don't want the message to be anything other than where we have strong relationships. We're going to support those strong relationships. But this is where there's a significant opportunity, I think, to look at what is that portfolio producing for the combined companies? And is that really the best use of our balance sheet and all that.

And I think we do have the -- we have the financial marks to deal with it. I'd also kind of doubled down on the comment that Pat made earlier. We intend to retain a number of folks from Flushing that also bring exceptional kind of detailed market knowledge of this. Frank Korzekwinski is going to be working with us on this. We're also retaining Maria Grasso, Mike Bingold, Tom Buonaiuto.

We're going to have folks helping us through the integration here because it is a significant operation, they know it best. Frank has kind of crafted that portfolio himself over the last 25, 30 years. We want to make sure that we have all the right expertise on the street. So I think we've got it covered a variety of ways. And now that we've been able to announce the opportunity, this allows us to have conversations we couldn't have in the last 3 or 4 weeks with a variety of partners to really kind of get the work done around that portfolio. And we're going to be working hard so that at or around closing, we can give you a significant update on this.

Understood. Okay. Last one for me is more of a culture question. You have 2 relatively heavy CRE institutions. You're putting them together. You want to keep the employees happy. Can you just talk a little bit about how you navigate that while also trying to shrink one of the primary asset classes and reduce the CRE concentration, working with the model, should we be expecting owner-occupied CRE growth, but -- or yes, owner-occupied CRE growth, but not multifamily and nonowner-occupied CRE growth? Is that the way to think about it? And how do you kind of navigate that culturally? That's all I had.

Yes. I'd make 2 comments on that, Matt, and then I'll ask Joe to chime in as well. You think about really -- you're going to think about that CRE book, owner-occupied, we love. And then we love CRE clients that have their full relationship with us and bring deposits. So we're going to protect those. We've done CRE really well. Flushing has done CRE really well.

We comply with all the regulatory requirements around concentration management and all that. So we're not worried about it as a concentration. But we also know that for our -- for us to maximize our valuation, it needs to be a smaller part of the overall business. So this is something that happens gradually and over time, and I think in a very thoughtful way. But Joe, maybe talk about the investments you've already made in C&I and how you're going to lean into this with even more investment?

Well, I think it's piggybacking your comment about CRE, Chris. I think that the other thing to remember is the [indiscernible] our own, but the combined portfolios have significant amortization, weighted average duration is typically less than 5 years. So you need to put new assets on to sort of keep and bolster the book even if your goal is to diversify asset classes over time. So I anticipate we're going to continue to originate CRE at a fairly significant level.

And then on the C&I side, look, we've talked a lot about the bankers we've added over the last couple of years, exclusive of the premier bankers as well and the momentum we haven't seen. I can see that continuing. We're going to add more bankers in the New York metro markets. So I fully anticipate that, that growth will be outsized compared to the net growth of the mid- to high single digits.

We currently have no further questions. So I'd like to hand back to Chris for some closing remarks.

All right. Thank you. In closing, we thank you all for joining the call today. This transaction is consistent with everything we've done historically, disciplined growth, focused market expansion and prudent risk management. We believe it positions the company for strong, sustainable performance over the long-term. We look forward to sharing more with you as the approval process takes shape. Wish everyone a Happy New Year, and we'll speak to you again during the fourth quarter earnings season. Take care.

This concludes today's call. We thank everyone for joining. You may now disconnect your lines.

Thank you for attending the OceanFirst Financial Corp. Third Quarter 202 Earnings Call. My name is Brika and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to your host, Alfred Goon, Investor Relations. Thank you. You may proceed, Alfred.

Thank you all for attending the OceanFirst Financial Corp. Third Quarter 2025 Earnings Call. My name is Brika and I will be your operator for today. [Operator Instructions]

[Technical Difficulty]

We now have the speaker line reconnected. And I would like to thank you all for attending the OceanFirst Financial Corp. Third Quarter 2025 Earnings Call. My name is Brika and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to your host, Alfred Goon, Investor Relations. So thank you. You may proceed, Alfred.

Thank you, Brika. Good morning and welcome to the OceanFirst Third Quarter 2025 Earnings Call. I am Alfred Goon, SVP 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 a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements.

Thank you. And now I will turn the call over to Christopher Maher, Chairman and CEO.

Thank you, Alfred. Good morning and thank you to all who've been able to join our third quarter 2025 earnings conference call. This morning, I'm joined by our President, Joe Lebel; and our Chief Financial Officer, Pat Barrett. We appreciate your interest in our performance and this opportunity to discuss our results with you. This morning, we 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 our financial results for the third quarter, which included earnings per share of $0.30 on a fully diluted GAAP basis and $0.36 on a core basis. In terms of performance indicators, we are pleased to report a fourth consecutive quarter of growth of net interest income, which increased by $3 million as compared to the prior quarter and was fueled by an increase in average net loans of $242 million. Net interest margin of 2.91% remained stable compared to the second quarter. Total loans for the quarter increased to $373 million, representing a 14% annualized growth rate, driven by strong originations of $1 billion. Joe will have more to add regarding our growth strategy in a few minutes. Asset quality remained very strong as total loans classified as special mention and substandard decreased 15% to just $124 million or 1.2% of total loans. This places us among the top decile of our peer group.

The quarterly provision was primarily driven by net loan growth and an increase in unfunded loan balances and commitments. Operating expenses for the quarter were $76 million, which includes $4 million of restructuring charges related to our strategic decision to outsource residential loan originations and underwriting functions. This initiative is expected to meaningfully improve operating leverage and earnings in 2026. Pat will provide a detailed update on our financial outlook in a moment. Lastly, capital levels remain robust with an estimated common equity Tier 1 capital ratio of 10.6% and tangible book value per share of $19.52. We did not repurchase any shares this quarter under the existing plan as our capital was deployed for loan growth. This week, our Board also approved the quarterly cash dividend of $0.20 per common share. This is the company's 115th consecutive quarterly cash dividend.

At this point, I'll turn the call over to Joe for additional color on these businesses.

Thanks, Chris. I'll start with loan originations for the quarter, which totaled $1 billion and resulted in loan growth of $373 million. The value of our continued recruitment of talent, coupled with favorable conditions for many of our borrowers has resulted in momentum in commercial and industrial, which increased 12% for the quarter. Despite the large origination and loan growth for the quarter, the commercial pipeline continues to be strong at over $700 million, only 10% below the high from the linked quarter.

Turning to our residential business. During the quarter, we made the decision to outsource this business line. As we wind down the existing pipeline, we expect to see some modest growth in the fourth quarter before the portfolio begins to run off. Total deposits in the third quarter increased $203 million, although organic growth was higher at $321 million before decreases in brokered CDs, which declined by $118 million. Growth was primarily driven by government banking and Premier banking. Premier bankers contributed $128 million of new deposits for the quarter. The Premier banking teams, all of which we onboarded in April, remain on track to achieve our 2025 target of $500 million by the end of the year. Deposit balances as of September 30 totaled $242 million across more than 1,100 accounts, representing nearly 300 new customer relationships to date.

Approximately 20% of those balances are in noninterest-bearing DDA and the overall weighted average costs of those deposits was 2.6%. The percentage of DDA is increasing as these accounts become fully operational, which should continue to offset new customer acquisition costs. We remain pleased with their results thus far. Also of note is the Premier Bank's contribution to commercial lending. Premier clients represent $85 million of commercial originations this year and the Premier commercial pipeline totals $50 million. Lastly, noninterest income increased 5% to $12.3 million during the quarter, primarily driven by strong swap demand linked to our commercial growth. With the outsourcing of our residential and title platforms, we anticipate a reduction in fee and service income of approximately $2 million in the fourth quarter and a modest gain on sale of loans in the fourth quarter as we close out the remaining pipeline.

With that, I'll turn the call over to Pat to review the remaining areas for the quarter.

Thanks, Joe. And we've got a lot of good stuff going on but a little noisy. So apologies in advance for taking a little bit longer with my prepared remarks. So as Chris noted, net interest income grew and margin remained stable this quarter. Furthermore, pretax pre-provision core earnings grew 15% or $4 million linked quarter with the addition of earning assets at the end of the second quarter and through the third quarter, improving earnings power. On the rate side, loan yields increased 8 basis points, while total deposit costs remained flat. While our core NIM remained flat, it was negatively impacted by lower loan fees and a full quarter of higher interest costs on our subordinated debt. Absent these 2 factors, our overall NIM would have improved to 2.95%. Borrowing costs increased 12 basis points, primarily due to the second quarter repricing of our subordinated debt. Average interest-earning assets increased during the quarter, reflecting increases in both the securities and loan portfolios.

Chris and Joe have already spoken about the loan growth but I'll add that we took advantage of market conditions to essentially prefund next year's anticipated growth in the securities book with highly liquid, very low credit risk and capital-efficient securities that will be accretive to our ROA, all without meaningfully affecting our neutral interest rate positioning. Looking ahead, we expect positive expansion in net interest income in line with or higher than loan growth but modest short-term compression on margin in the fourth quarter due to seasonality and some residual repricing of a handful of large legacy deposit relationships. Asset quality remained strong with nonperforming loans to total loans at 0.39% and NPAs to total assets at 0.34%. Delinquency levels continued to remain at the low end of historical levels, while criticized and classified loans declined noticeably.

Risk ratings across our commercial portfolio were stable, while net charge-offs of $617,000 were benign and represented only 2 basis points of total loans, bringing our year-to-date net charge-off run rate to only 5 basis points. Overall, credit quality continued to perform in line with our company's strong historical experience and remains among one of the best in our peer group. Our provision for credit losses in the quarter was driven by both on and off-balance sheet loan growth, partly offset by overall improvements in asset quality levels. Core noninterest expenses increased from $71.5 million to $72.4 million, driven by increased comp and occupancy expenses. This excludes the impact of noncore restructuring charges totaling $4.1 million in the third quarter. The increase in comp expenses and occupancy expenses were driven by recent commercial banking hires, combined with modest increased variable spend during the quarter. Looking ahead, we expect our fourth quarter core operating expense run rate to move downward slightly to the $70 million to $71 million range.

Turning to the noncore charges. We do anticipate a final $8 million in nonrecurring restructuring charges in the fourth quarter related to our outsourcing initiatives. Note that the reduction in headcount associated with the residential outsourcing will not be completed until late in the year, pushing the operating expense benefit from that initiative into the beginning of 2026. To be clear, we expect the pretax improvement in annual operating results to be approximately $10 million. Capital levels remain robust with our CET1 ratio moving down to 10.6%, driven by loan growth during the quarter. While the CET1 ratio remains strong, we continue to evaluate opportunities to further optimize our capital in the near term as we wait for the earnings from newly added earning assets to increase internal capital generation rates. We continue to focus capital priorities on supporting loan growth in the near term and do not expect to prioritize share repurchases.

Finally, we've resumed our annual guidance, as you can see in our supplemental earnings materials. At this time, for the full year 2026, we expect 7% to 9% annualized loan growth for the year, predominantly driven by growth in C&I, which will be partly offset by runoff in our residential portfolio. We expect deposits to grow in line with loans as we continue to maintain a loan-to-deposit ratio of approximately 100%. The continued growth in earning assets should drive steady net interest income growth in line with or exceeding high single-digit growth rate, while our modeled 3 rate cuts of 25 basis points each throughout the year could drive a NIM trajectory well above 3% by mid-2026.

Other income is expected to be $25 million to $35 million, reflecting reduced gain on sale and title revenues resulting from our outsourcing initiatives. 2026 operating expenses should range between $275 million to $285 million, reflecting the impact of our focus on expense discipline to offset any inflationary pressures. Capital should remain strong with our CET1 ratio at or above 10.5% for the year. These firm-wide targets should result in an annualized return on average assets of 90-plus basis points by the fourth quarter of 2026, with a glide path to achieving a 1% return on assets in early 2027, continuing to improve thereafter.

At this point, we'll begin the question-and-answer portion of the call.

[Operator Instructions] The first question we have comes from Daniel Tamayo with Raymond James.

Yes. Maybe we could just start on the net interest income guidance. Just to clarify because there's a few things happening. I think in the slide deck, there was a comment about reaching 3% by the end of -- or maybe it was a terminal 3% rate in 2026. And then, Pat, you just mentioned potentially reaching 3% by mid-2026. The 8%-ish guidance for NII growth in 2026 pretty much implies that, that would be more of an end of the year story. And then that also implies kind of a reduction in the balance sheet from the end of the year. So sorry to pile all that into one question but maybe you can just unpack the NII guidance from a balance sheet compared to a margin story for next year, would be helpful.

Sure. So I'll do my best. So hang with me on this. But the 3% terminal rate was referring to our assumption around Fed rate cuts, not our NIM margin. So that's assuming 2 more rate cuts during the rest of this year and 3 next year. So just to kind of take that off the table. We do expect that we will approach or breach a 3% NIM sometime in the first, second quarter of next year, so in the near -- very near term and continue to expand with a pretty modest but steady expansion as we move forward. We expect the balance sheet to continue to grow in the high single-digit levels, almost entirely from loan growth. And that should result -- look, this is all things being equal, so deposit costs, a big question mark, competition, yields and spreads, a big question mark. But our best estimate right now is that, that should result in steady revenue growth, at least commensurate with the loan growth, high single digits. So by revenue, I'm really talking about net interest income. So we see that growing at or better than the pace of loan growth, which is high single digit.

Okay. I appreciate what you said on the terminal rate. First of all, that was obviously a mistake on my side. But -- so that -- I guess if the margin is up at that level, that would imply the balance sheet is going to come down, not down in the fourth quarter but down relative. There were some pretty significant growth on overall balances in assets in the third quarter. It sounds like you prefunded some growth with securities for next year. So there's some dynamic with the average earning assets coming down relative to the size of the overall balance sheet in the fourth quarter. Is that the way to think about it?

Maybe. It's Chris. Maybe I'll just kind of try and draw a clear path. So to take the noise out of the third quarter, we did buy some securities and we don't anticipate doing that again. It was a pretty unique opportunity to prefund 2026. So the securities portfolio, you should consider being relatively stable as we go into '26 and throughout '26. On the loan side, though, we expect to continue to see growth. So very good quarter this quarter, $373 million. That was a particularly strong quarter. Maybe I would think closer to $250 million, plus or minus. Some quarters better, some quarters worse. But as Joe mentioned, his pipeline is very strong. We've got a lot of momentum. The new bankers are producing.

So if you were to just use kind of back of the envelope and assume that over the course of '26, we're growing plus or minus $1 billion on the balance sheet, driven by loan growth, coupled with deposit growth. So that's the part of the balance sheet that would move. And then as we pointed out earlier, NIM crossing over that 3% in the first half of the year and you put those 2 things together and that's how you kind of get the glide path to the 90 basis point or better ROA by Q4.

That's helpful. Okay. But ultimately, the NII numbers that you guys are talking about, just putting the guidance together, is my math correct here, it gets me to kind of the [ 3 80s ] range for 2026 for net interest income. Is that what we should be looking at?

Or better, maybe a little bit higher.

Okay. Okay. So that -- the -- this 7% to 9% NII off of 2025 is kind of a floor. Is that the way, that or better?

Yes. Look, we haven't had annual guidance in a while, quite frankly, the uncertainty in the environment, the funding environment and the growth environment being a big part of that. So this is our best estimate now and we're trying to probably err on the conservative side. And I know it's frustrating for us to give ranges of things. But we know we'll probably be wrong in our estimates but this is our best estimate today. And so we're trying to be a bit on the conservative side from a growth perspective, given that this is our first quarter of really meaningful growth in 2 to 3 years.

Your next question comes from Tim Switzer with KBW.

So the first question I have is around the Premier Bank. And sorry if you guys touched on this on the call but you doubled deposits this quarter. It looks like you got to double it again from a larger base for Q4. What's driving the acceleration there? And I'm sure you already have a good amount in the pipeline kind of embedded for you but just curious what's driving that? And is there any color you can provide on this trajectory as you try to get that $2 billion to $3 billion by the end of [ '27 ]?

So Tim, it's Joe. I'll answer the first part of the question relative to what's driving deposit growth. It's the teams we've hired and their acclimation not only to the bank but their customers' acclimation to the bank. I think we referenced the 1,100-plus new accounts that have been opened. A lot of those operational accounts are in the process of being converted to funding. So what we've seen early on is the excess cash come across paying a little bit higher rate for those dollars. And as the actual operational balances start to come, we'll start to see more of that transactional opportunity come across at lower dollar cost. So that's really the value short term. And then, of course, long term, clients come in pieces, right? They don't come altogether and they don't come all at once. So as these teams mature, they'll generate more and more activity from their former book, hence, the value of those deposits over the last couple of years -- over the next couple of years, getting to that $1.5 billion, $2 billion, $2.5 billion, $3 billion number.

I'm sorry, I was on mute. It was also great to see the $85 million of loan originations related to Premier Bank. That seems like that's a bit above kind of what you guys are expecting, at least in terms of like an LDR. But it's early -- it certainly can move around but can you maybe provide an update on your expectations there?

Yes. Actually, we've been really pleased with the activity of the Premier bankers so far. And Tim, I expect that we'll see more of that. I think it's a little too early to try to forecast what the percentage of loans versus their deposits will be. Obviously, historically, it's been a pretty low number. But we have some seasoned folks that have been around a long period of time and I think we're going to do pretty well in that space. And that sort of goes across some of the CRE space, some of the C&I space. So I think we'll be pleased with the outcomes as we go forward.

Okay. Great. And then I want to make sure I heard this correctly. I think you guys said the restructuring of the residential mortgage business will provide about a $10 million pretax benefit. So if that's a $14 million expense savings, that implies about a $4 million headwind to revenue. Are there other headwinds expected in noninterest income that gets you that $25 million to $35 million guide because that's obviously a bit below where you guys are trending for this year.

Yes. Let me just -- Tim, I'll mention a couple of things on residential and then Pat will get to the noninterest income. Just on residential, this is a business that we were in since 1902. So restructuring it is something we're doing very carefully. We're making sure that we meet and support all of our customers in the transition. We've made sure that we have an ability to produce residential loans for those customers going forward. And then because of the size of the reduction in force, which is about 10% of our headcount, we have modification requirements at the state level. So that all kind of combines for a transition period that's going between [Technical Difficulty]. So you saw some of those onetime expenses for everything from severance to contract terminations and all that. That will all be wrapped up by December. So the benefit will really show beginning in January. We'll get that full benefit. And you're right about the $4 million headwind in residential. So all your numbers are right with that. And Pat, maybe you could talk about the noninterest income.

Yes. So the piece that's missing from what Chris just said, which is really focused on our operating residential origination and underwriting platform, the people, the severance associated with it, the costs of paying the people, et cetera, is what generates the $10 million net, $14 million of expense reduction, $4 million of kind of our current run rate of gain on sale per quarter of $1 million, times 4 quarters. So that's your $10 million. The piece that's missing from this that maybe hangs in your models a little bit awkwardly is our majority ownership in the title company that we had acquired about 3 years ago.

That hasn't been material from a bottom line perspective. But it did contribute somewhere in the neighborhood of $10 million of consolidated expenses and about $10 million of consolidated title fee revenues annually in our run rates. It just didn't pop up from a discussion standpoint because it was essentially a conduit to facilitate origination business more than it was a profit earner. So that will bring down -- those are headwinds in the revenue side but also positive benefit in the expense side that will come out of it.

Your next question comes from David Bishop with Hovde Group.

Chris, Joe, appreciate the color on the NDFI exposure there. Obviously, that's been in the headlines a bit. Any color you can provide there in terms of the nature of that lending, how it sort of bifurcates with the sort of the regulatory guidelines? And then secondly, on the loan side, any update on [ gov con ] exposure with the shutdown, how that portfolio might be holding up on the -- on a credit perspective?

Sure, Dave. Just on the NDFI, probably the most important distinction I'd make other than it's a very small piece of what we do is that we really aren't engaged in NDFIs that lend to the consumer. So we're -- these are more NDFIs that do commercial lending. So if you think about our Auxilior Capital, for example, which is an equipment finance business that we have an equity ownership in but we also use within the company and we provide some credit facilities to. So stuff that is very closely followed and where we've got our hands on things. So we're not concerned about any of those and those exposures, I think, are all in pretty good shape. Obviously, given the other experience this quarter, we went out and just brushed up and made sure there's nothing there to be concerned about. So does that answer that part of the question?

Yes.

All right.

I'm sorry, the second -- that was.

On the [ gov con ] exposure.

[ Gov con ], not a big exposure for us today. Today, it's about $100 million worth of exposure and that is squarely focused on mission-critical contractors and decisions we've made over the course of the last year. So we were really thoughtful about entering those kind of relationships with folks that understand government shutdowns. They've been through this before. They've got plenty of liquidity. So we feel pretty comfortable about that. But we stay in close touch with that and Joe, anything you've heard from clients you might pass along?

No, I think you summarized it well, Chris. I'd just add the comment that we've been pretty close to it. We didn't have historical exposure and presence there. So a lot of our stuff, as Chris mentioned, has been in the last 12 to 14 months. So that's been a benefit to us because we don't have any legacy risk.

Got it. And maybe, Pat, an update in terms of thoughts on the sub debt and that sort of reset. Any thoughts on sort of refi-ing or paying off?

Yes. We're not going to really go into the details of that on the call today but those details are available to anybody that's interested elsewhere.

Your next question comes from Tyler Cacciatori with Stephens Inc.

This is Tyler on for Matt Breese. The cost of deposits were stable again quarter-over-quarter despite strong deposit growth, including demand deposits. And I know you talked about competition a little bit but when do you think we start seeing some of the benefits from the team in terms of lower all-in costs there?

On the Premier side, you'll see that kind of go down gradually, as Joe said, as those noninterest accounts become activated and balances come in, the mix will shift a little bit but I would think a pretty gradual change there. And then in terms of the rest of the base, deposit betas and the Fed rate cut, there's a lag in the -- or kind of roll-through of deposit rates because we have some contractual agreements with various commercial accounts and things like that. So if you think about what happened last year, rates came down towards the end of the year. We didn't really see the benefit until the first quarter of '25. So sometimes there's about a 90-day lag and that contributes to Pat's guidance that NIM would be flattish, maybe even down a little bit in Q4. And we did have some contractual repricings of accounts that were pretty much at or near 0. So that kind of counterbalanced some of the positive movement elsewhere. So I think flattish, maybe down a little bit in -- for NIM in Q4 but then returning to expansion in Q1 and kind of sequentially thereafter.

Yes, that's a little -- this is Pat, Tyler. This is -- that's a little bit of the other side of the double-edged sword of growth, which we're very happy to deal with is that we need to raise deposit funding to fund loan growth. And so we're kind of a little bit bound by whatever the competition in the markets are today. We're seeing the same kind of lag though on deposit cost declines that we saw with increases when we were in the upgrade cycle. It was slow to get going and then it kind of picked up pace as the Fed continued to raise interest rates. We're expecting to see the same kind of behavior, slow, unfortunately, slower to come down initially and then picking up pace as we kind of move into the down rate cycle into next year.

Also the CD book is pretty short duration. So it's under 6 months. So we'll see a lot of that repricing roll through the CD book in the coming months.

Great. And then my next question is about the ROA. When do you guys think you can hit a 1% ROA here?

So I think to kind of knit together our comments earlier, we think we're better than 0.9% by the end of next year, fourth quarter '26, crossing over above 1% in the first quarter of '27 and then for the full year, continuing to grow throughout that year. So it's going to be at or around fourth quarter next year, first quarter '27. And as Pat said, there's a lot of unknowns out there about Fed policy and rates and all that but that's our best guess today.

Great. And then just my last question here. I think you said it in the prepared remarks, sorry if I missed it, about the deposit composition of the deposits the Premier team is bringing on and if the expectations of that 30% DDA target has changed at all?

They're about 20% today and the expectations haven't changed.

[Operator Instructions] And we now have a question from Christopher Marinac with Janney Montgomery Scott.

Just a quick one on the allowance. If you were to see an increase in criticized loans still not big in the scheme of things, would that drive a change in the reserve? Or does that sort of have tolerance? I mean it's been low on criticized for several quarters. I'm just curious if that were to go back up a little bit, that would be anything material to how you provision?

Chris, you're right. The model is sensitive to the levels of criticized and classified. So if we saw a material movement in those numbers. We have a little bit of pressure on the ACL. In fact, if we had just taken the mechanics this past quarter, the decrease in criticized and classified would have caused a reserve release. We didn't think that was the right decision given the external environment and our shift over to C&I. So the model may say that on the way down or on the way up but we try and use our qualitative assessment and the exterior -- the indications of the economy that we get from, say, Moody's and others to drive our final decisions. So there's a little bit of sensitivity there but we've been trying to be thoughtful about the provision to reserve using our qualitative factors.

Perfect. No, that's great, Chris. And a separate follow-up question just is, if we see more changes among some of the regional bank competitors in your footprint, would that change the hiring? And I'm thinking above and beyond the Premier initiative. Or could -- would you just want to go after more business with the existing team?

It's always a balance. We -- look, whenever we find great talent, we don't want to pass it up because that's what drives our business. On the other hand, we're very much focused on hitting the return hurdles that we've outlined today. So it's a trade-off. You've got to have -- if you find very good people, you don't want to pass them up. But we're very mindful that we need to get our return on tangible common equity into the double digits. We see doing that next year and we want to stay on course to do that. So we'll be balancing out the quality of opportunities to bring on bank [Technical Difficulty]. We love the bankers we brought on. We will probably always add bankers from time to time but the number of bankers will be determined by us continuing our steady march in improvements to profitability.

[Operator Instructions] I can confirm that does conclude the question-and-answer session here. And I would like to hand it back to Chris Maher for some final closing comments.

Thank you. We appreciate your time today and your continued support of OceanFirst Financial Corp. We look forward to speaking with you in January. And as we kind of head off into the holiday season, we wish you and your families all the best. Thank you.

Thank you. That does conclude the OceanFirst Financial Corp.'s Third Quarter 2025 Earnings Call. Thank you all for your participation. You may now disconnect and please enjoy the rest of your day.