Executive Summary / Key Takeaways

• OceanFirst Financial is executing a strategic pivot, shifting its focus from Commercial Real Estate (CRE) towards Commercial & Industrial (C&I) lending and attracting lower-cost, relationship-based deposits, notably through the new Premier Banking initiative.
• Recent financial results show positive momentum, with net interest margin expanding to 2.90% and net interest income increasing in Q1 2025, driven by declining funding costs.
• Asset quality remains strong, with low non-performing and criticized loan levels, although the allowance for credit losses has been prudently increased due to macroeconomic uncertainty and portfolio mix shifts.
• Capital levels are robust, exceeding regulatory requirements, providing flexibility for organic growth investments, preferred stock redemption, and potential future share repurchases or sub-debt management.
• Management anticipates continued margin expansion and steady net interest income growth in the latter half of 2025 and into 2026 as strategic initiatives ramp up and funding costs continue to improve, targeting a return to ROA levels exceeding 1%.

Setting the Scene: A Regional Bank's Strategic Evolution

OceanFirst Financial Corp., the holding company for OceanFirst Bank N.A., operates as a regional community bank serving a dense corridor spanning New Jersey and extending into major metropolitan areas between Massachusetts and Virginia. Historically, the company's results have been primarily driven by net interest income generated from its lending and deposit-taking activities. Over the years, OceanFirst has grown and expanded its footprint and capabilities, partly through strategic acquisitions, while navigating various economic cycles and competitive pressures inherent in the banking sector.

The current landscape for regional banks is marked by intense competition from peers like WSFS Financial (WSFS), Fulton Financial (FULT), Peoples Financial Services (PFIS), and Berkshire Hills Bancorp (BHLB), as well as disruptive forces from fintech firms offering streamlined digital services. In this environment, differentiation is key. While OceanFirst may not lead the pack in cutting-edge digital innovation compared to some larger or more tech-focused rivals like WSFS, it is strategically leveraging and investing in its operational technology and infrastructure. Management commentary highlights that new hires, particularly from larger institutions, are often surprised by the quality of OceanFirst's IT systems, treasury sweeps, and back-office capabilities. This operational backbone is crucial for supporting the company's strategic pivot and enabling new, potentially higher-yielding business lines. For instance, the acquired Spring Garden Capital business, focused on specialty real estate renovation finance, benefits from an avenue and speed to market for smaller construction loans that the bank's traditional processes might not match, demonstrating how targeted technological and operational capabilities can provide a competitive edge in specific niches.

Recognizing the need to adapt and enhance its long-term value proposition, OceanFirst has embarked on a deliberate strategic pivot. This involves shifting its origination focus from a historical emphasis on investor Commercial Real Estate (CRE) towards expanding Commercial & Industrial (C&I) lending relationships and, critically, deepening its channels for gathering lower-cost, more stable deposits. This strategic evolution is not about abandoning existing successful businesses but rather rebalancing the portfolio for greater diversification and enhanced profitability in the prevailing interest rate and competitive environment.

Executing the Pivot: Building C&I and Attracting Core Deposits

The strategic shift is actively underway, marked by tangible investments in talent and new initiatives. OceanFirst has been steadily adding C&I-focused commercial bankers, hiring 10 in 2024 and an additional six year-to-date in 2025. These bankers are expected to drive growth in the C&I loan portfolio and bring valuable commercial deposit relationships. The impact of these hires is already becoming visible, with C&I loans increasing by $95.1 million, or 6% (24% annualized), in Q1 2025 compared to the linked quarter. The commercial loan pipeline also saw a significant jump, increasing 90% to $375.6 million in Q1 2025, signaling potential for continued loan growth in the near term. Management notes that this growth is broad-based but includes concentrated activity in areas like government contracting in the Virginia/Maryland/DC metro area, a segment where the company can be selective about credit risk.

Complementing the C&I push is the significant Premier Banking initiative, launched with the onboarding of nine teams in April 2025. This initiative specifically targets deposit-rich commercial customer relationships. These teams, primarily located in the New York metro area (Manhattan and Long Island), are expected to bring in substantial net new customers and a significant share of their customers' wallets over time. Management views this as a long-term investment in building durable, low-cost deposits, which is crucial for enhancing franchise value. While it may take two to three years for these teams to reach their full run rate potential, their portfolios are expected to include a substantial portion of non-interest-bearing deposits (potentially 20%+), resulting in an attractive overall cost of funds. This influx of lower-cost deposits is anticipated to provide a significant tailwind for future margin expansion and profitability.

The focus on attracting core deposits is already yielding positive results. In Q1 2025, total deposits increased by $110.7 million, driven by growth in non-interest-bearing, money market, and time deposits. This deposit growth, coupled with a decrease in higher-cost FHLB advances, contributed to a notable reduction in funding costs. The total cost of deposits decreased to 2.06% in Q1 2025 from 2.32% in the prior quarter. This improvement in funding costs was a primary driver behind the 21-basis-point expansion in the net interest margin to 2.90% and the $3.3 million increase in net interest income in Q1 2025.

While the company is prioritizing C&I and deposit growth, its existing CRE portfolio remains a significant component of the balance sheet, totaling $5.20 billion at March 31, 2025. Management emphasizes that this portfolio is performing well, is prudently managed with diversification across property types and geographies (including limited exposure to rent-stabilized multifamily and Central Business District office), and is not subject to a "mad dash" to reduce concentration. The CRE concentration at the bank level is 416%, and 393% at the holding company level. The company is comfortable with its CRE exposure and will continue to originate high-quality, well-structured CRE loans when opportunities arise, but expects the proportion of CRE on the balance sheet to gradually decrease over time as C&I grows. The rolling CRE back book, with over $1 billion maturing in 2025 and 2026 at a blended rate of 4.31%, presents an opportunity for margin improvement as these loans reprice, and stress testing indicates borrowers can service debt at higher rates.

Financial Performance and Risk Profile

OceanFirst's recent financial performance reflects the impact of the strategic pivot and the prevailing interest rate environment. Net income available to common stockholders in Q1 2025 was $20.5 million, or $0.35 per diluted share, a decrease from $27.7 million, or $0.47 per diluted share, in the prior year period, which included certain non-recurring benefits. However, sequentially, Q1 2025 showed improvement in net interest income and margin, building on the momentum from Q4 2024. The increase in net interest income to $86.7 million in Q1 2025 was primarily driven by the decrease in funding costs outpacing a modest decrease in asset yields.

Asset quality remains a key strength. Non-performing loans stood at 0.37% of total loans at March 31, 2025, and criticized and classified loans decreased by 5% to $149.3 million. These metrics are well below the company's long-term averages and significantly lower than peer group averages. The allowance for loan credit losses as a percentage of total loans increased to 0.78% in Q1 2025, reflecting a net loan reserve build of $5.2 million. Management attributes this build primarily to elevated uncertainty around macroeconomic conditions and a modest shift in portfolio mix towards higher C&I exposures, rather than specific deterioration in the existing loan book. Net loan charge-offs were minimal at $0.6 million in Q1 2025, including charge-offs related to the sale of non-performing residential and consumer loans. The allowance coverage ratio relative to non-performing loans was robust at 213.14% at quarter-end.

Operating expenses increased to $64.3 million in Q1 2025 compared to $58.7 million in Q1 2024, primarily due to higher compensation and benefits related to acquisitions and annual merit increases, as well as increased data processing and other operating expenses. This reflects the investment in talent and infrastructure to support future growth.

Liquidity and capital resources are strong. Total assets were $13.31 billion at March 31, 2025. The loan-to-deposit ratio was 99.5%, down from 100.5% in the prior quarter, reflecting the increase in deposits and decrease in FHLB advances. Total on-balance sheet liquidity and funding capacity were $3.4 billion, representing a healthy 191% coverage of estimated adjusted uninsured deposits ($1.75 billion).

Capital levels exceed well-capitalized regulatory requirements, with the common equity Tier 1 capital ratio increasing to 11.24% at March 31, 2025. Total stockholders' equity increased to $1.71 billion, supported by net income. The company repurchased 398,395 shares totaling $6.9 million in Q1 2025 and intends to redeem its Series A Preferred Stock in full on May 15, 2025, a move that will reduce higher-cost capital.

Outlook and Investor Implications

Management's outlook is centered on the expectation that the strategic pivot towards C&I and core deposit growth, coupled with improving funding costs, will drive enhanced profitability. They anticipate additional net interest margin expansion in the second half of 2025 and see a "glide path" to return the NIM above 3% in the latter half of 2025 and into 2026. This is the level at which management believes earnings per share will begin to build nicely. Net interest income dollars are also expected to see steady growth moving forward.

The quarterly operating expense run rate is projected to increase by approximately 10% from the Q1 2025 level, largely attributable to the Premier Banking hires, settling into a range around $70-71 million after Q2 2025, assuming no further significant hiring. The effective tax rate is expected to remain in the 23-25% range.

For investors, the "so what" of this narrative is clear: OceanFirst is actively repositioning its balance sheet and business mix to improve profitability and long-term value in a challenging environment. The investment in C&I bankers and the Premier Banking teams represents a calculated upfront cost aimed at generating higher-quality assets and lower-cost funding, which should drive future earnings growth. The strong capital position provides the necessary flexibility to fund this organic growth and manage the capital structure, including the upcoming preferred stock redemption and potential future sub-debt decisions.

While macroeconomic uncertainty persists, as reflected in the reserve build, the company's consistently strong asset quality metrics and prudent risk management approach provide a degree of confidence in its ability to navigate potential headwinds. The competitive landscape remains challenging, but OceanFirst is leveraging its regional presence, relationships, and operational capabilities to differentiate itself and capture market share in targeted areas.

Conclusion

OceanFirst Financial is in a period of strategic transition, actively reshaping its business to enhance profitability and build long-term franchise value. The pivot towards C&I lending and deposit-rich commercial relationships, supported by investments in talent and operational capabilities, is beginning to yield tangible results in the form of expanding margins and growing pipelines. While the upfront costs of these initiatives will impact near-term expenses, management has articulated a clear path for these investments to drive future revenue and improve the funding mix.

With a robust capital position and a track record of strong asset quality, OceanFirst appears well-positioned to execute its strategy. The outlook points to continued margin expansion and net interest income growth, offering a potential path back to historical profitability levels. Investors should monitor the successful integration and ramp-up of the new banking teams, the continued trajectory of funding costs, and the company's ability to maintain credit discipline in a competitive lending environment as key indicators of the investment thesis playing out.