Good morning and welcome to the OceanFirst Financial Corp. Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jill Hewitt, Investor Relations Officer. Please go ahead.

Thank you, Austin. Good morning and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning’s call with our forward-looking statements disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, including the Risk Factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you. And now, I will turn the call over to our host, Chairman, President, and Chief Executive Officer, Christopher Maher.

Thank you, Jill, and good morning to all who have been able to join our first quarter 2017 earnings conference call today. This morning, I'm joined by our Chief Financial Officer, Mike Fitzpatrick; Chief Administrative Officer, Joe Iantosca; and Chief Banking Officer, Joe Lebel. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. As has been our practice, we will highlight a few key items and add some color to the results posted for the quarter and then we look forward to taking your questions. In terms of financial results for the first quarter, diluted earnings per share were $0.36. Quarterly reported earnings were impacted by merger-related expenses and the acceleration of certain director stock awards of $0.04 or $1.1 million after-tax, resulting in core earnings per share of $0.40. Core earnings per share included a $1.4 billion tax benefit associated with the adoption of ASU 2016-09 related to stock compensation. This tax benefit will vary in the future and depends upon option exercises and equity investing in future periods, much of which is outside the company's control. Excluding the impact of these items, the company's base tax rates for the first quarter would have been 32.7%. Regarding capital management for the quarter, the Board declared a cash dividend of $0.15, the company's first 81st consecutive quarterly cash dividend. In addition the Board has proved a new -- approved a new share repurchase program which authorizes the company to repurchase an additional 1.6 million shares or 5% of the company's stock. This program augments 154,804 shares that remain available under the 2014 repurchase program. The authorization provides the flexibility to repurchase shares which we believe is an important capital management tool. However, given economic conditions, growth prospects,…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Frank Schiraldi with Sandler O’Neill. Please go ahead.

Good morning.

Good morning Frank.

Just a couple of -- first I wanted to ask on -- Chris your comments on the pipeline, sort of refilling here. You talked about elevated payoffs in the first quarter, which held down net growth. So, is the elevated payoff -- is that story just sort of volatility and when these things payoff or is it still attributable maybe to some runoff in the in the Cape deal that could continue. Can you just give us a little more detail on how you're thinking about those elevated payoffs maybe leading into 2Q and beyond?

Frank, its Joe Lebel. How are you?

Hey Joe.

The payouts that we've seen last year from Cape have dwindled. Some of that elevation is the result of a couple participation loans that Cape had done. We expect that we'll see a little bit of that bleed into the second quarter, nothing substantial. I think our originations will be more than sufficient to support it.

Okay. So, is the message then that -- and I think the message is just loan growth -- net loan growth should pick up as the elevated payoffs in the first quarter -- you wouldn't necessarily expect to be repeated in 2Q?

Yes.

Okay. And then anything new to how you guys are thinking about cost saves that you'll capture from the branch rationalization. In the past, you've talked about reinvesting that. I think even in the release kind of talked a little bit about that helping -- investing that money into commercial to help grow that business. But if you could just remind us if you're thinking on what if any of that $6 million falls to the bottom-line?

So, there's two parts of the $6 million. The first is the 10 branches that are in the southern market and the majority of those savings are part of that merger integration modeling that we did. So, those were kind of previously accounted for in our view. The additional five branches, the philosophy we're following is this isn't ironclad rule, but a rough rule that we want to take about half of the expenses down to the bottom-line and the other half would be available for investing in both technologies is needed and also our commercial bankers. Joe continues to hire and add good commercial talent to his team. I think the best guidance I can give you which is, going back to my comments earlier, is that we're very comfortable that when the dust settles in the fourth quarter, you're going to have an ongoing quarterly expense rate that's under $28 million a quarter. So, I think that kind of tell you where everything's going to wind up settling. So, that would account for taking some of those sales, but also making a couple of more commercial hires.

Got you. Okay. And then just finally on the tax rate. I mean I'm assuming the benefit was outside this quarter, but if you assume the stock price kind of is around near current levels at the end of next quarter, I mean is there any way to get a sense of how much benefit was just sort of a one-time this quarter versus just your regular options exercises throughout the year.

Sure. It's hard to get a great handle on it. I can talk -- make a couple of comments about it. The first is we have a significant amount of additional options that are in the money, some of which will be coming to the end of their exercise period next year. So, at current prices, I would expect that we would see some auction activity over the coming quarters. But as you know that's individuals making their own decisions, not the company, so whether they decide to do that this quarter or next quarter, it's very hard to tell. Our guess is that you're going to see benefits now. And again $0.04 is probably a pretty big number, but there may be quarters like the first quarter of next year when you've got some of this -- the options expiring that you'd expect to see a few cents of that. I wouldn't be surprised if it bounces around between $0.01 or $0.02 for the next few quarters, and then maybe at some point [Indiscernible] every quarter when you've got expirations of options coming. So, people are going to take them at that point. So, I don't think it will be zero, but it it's unlikely to be $0.04. Mike you may add.

Frank I got a little bit of -- some more color on that in terms of number. So, with the tranche from 10 years ago that's expiring on March 1st of 2018 and the remaining options in that tranche are 136,000 at 16.81, so they'd be about $12 in May, that's about $1.5 million of option value between now and next March 1st. So, most of that probably be in the fourth quarter and the first quarter next year. So, $1.5 million option value, the tax expense would be about 500, probably between now and next -- beginning next year. Now, there's obviously options that expire well after that and those -- if those exercises are fairly random, they're hard to predict, but we know that this 136000 shares will surely be exercised within the next eight or nine months.

Okay. Great. You don't have the -- well, I guess you don't have the fair value of those handy like when you granted them, do you?

Well, they were valued 10 years -- well 10 years ago they were probably like between $2 and $3 with probably the fair value at that time.

Okay. Okay, I appreciate. Thank you.

Thanks Frank.

[Operator Instructions] Our next question is from David Bishop with Fig Partners. Please go ahead.

Hey, good morning gentlemen.

Good morning David.

Hey, Chris excess liquidity, just curious how you view it now versus the end of last quarter, obviously it's come down. Just curious you think how much in your view is left to sort of be redeployed at this point?

Yes, so I can make a few comments about that. I think we said last quarter the dollar averaging it made sense, so we did move a little bit, saw an opportunity in the bond book to move that a little quicker, so we took that opportunity and invested more there. One of the reasons that we don't feel a ton of pressure around the loan book is that making those commitments could wind up tying up the balance sheet for, in some cases, a number of years. So, we like the dollar averaging on that side. So, I think Joe's comments earlier, $30 million worth of the growth in commercials would have [Indiscernible] and would like to see, we think we can do a little better than that. But we're also not looking to deploy all rapidly. We focused in my comments about the $175 million in cash. Loan-to-deposit ratio is 90%, so 91%. So, I think after we go through kind of some of that excess cash position, we in the pads have taken the loan-to-deposit ratio up to 100% or 101%, which I don't think would be an issue. So, if the loans are out there in addition to the cash we have on hand, we do have the ability to access. We've got a bunch of wholesale funding availability through the federal loan bank. So, if the deals are the right deals and they're hitting the right price points, we can go a little faster than that. We're also notwithstanding the comments about the share repurchase program. If economic conditions are good and Joe can find the loans, we're reserving capital so that we can grow the total footings as well. So, I think we're still in a mix shift kind of phase right now, but a couple of quarters, we -- if things continue to be good, we could just look at growing the balance sheet.

Got it. And then as it pertains to sort of the risk appetite, any improvement I guess in the commercial real estate segments that maybe -- change your view of that asset class?

David I think that the -- I think the mantra for us has been that consistent methodical growth. We do see some improvements in pricing, we saw in the first quarter. We continue to think we're going to continue to see it, hence Chris' comments about not rushing out in the market. We continue to have a pricing discipline with the pricing model we have. And the good thing that we're still doing is we're attracting talent. So, we've recently hired two additional lenders from BB&T. Last quarter we hired one from MNC, so we're getting good solid regional bank talent to come here. So, I think more of the same.

Yes, I would classify the CRE specifically. As we said I think last quarter, it's about status quo, so structures have gotten a little bit more rational, pricing is still reasonably competitive, but with more rational structures, we're seeing more deals we're comfortable doing.

Got it. And maybe just to follow-up on the non-performing inflows, were those not a legacy OceanFirst markets or are these the Cape Ocean Shore franchise?

So, on the commercial side that was -- there was on loan, it was a legacy OceanFirst loan in Middlesex County. In the residential side, it was kind of kind of Shore properties coming out of the acquired portfolios predominantly. But the well-secured and it's one of those -- kind of odd things about the Shore community. I mentioned the one loan, this is -- house is under contract, the sale -- the guy just wants to use the house for the summer to be on the beach and not pay his mortgage. So, we're not going to accelerate that or foreclose or go sell it. So, that's one of those idiosyncrasies. But at the end of the day that portfolio -- the residential portfolio, particularly at Ocean Shore, was a really strong portfolio with no concerns there. The FICO drift [ph] analysis that we've done shows that borrowers are very strong and the 10-year chargeback history -- charge-off history for the Ocean City portfolio was phenomenal. So, these things will happen from time-to-time for the blip coming up, but we're not concerned about that.

Got it. Thank you.

Thanks David.

Our next question is from Matthew Breese with Piper Jaffray. Please go ahead.

Good morning guys.

Good morning Matt.

Just tying two questions together. You made some remarks on the loan pipeline and you made some remarks on the reinvestment of saves in two commercial lenders. So, I guess I wanted to get a sense of what you think the loan growth outlook for 2017, what that loan growth outlook is?

So, I think -- we think we can in 2017 grow a little faster than we did in the first quarter. So, we think -- and most of the focus is on commercial, although residential should be flat, so they contribute a little bit as well. So, but on the commercial side, I'd say the $30 million or so in outstandings, remember I did comment that we had about $29 million worth of undrawn mines that we booked as well, which are a great, those will draw from time-to-time. So, I would think that the $30 million we might be able to do a little better than that, but you're talking mid-single-digit high single-digit in commercial and probably mid to low single-digit overall with residential provide a little bit of width. So, I think we should be able to do better than we did in the first quarter, but we're not trying to hit $100 million a quarter in loan growth.

Got it.

Because we think that we punch out the growth too quickly and we don't know where interest rates are going, we don't know what the slope of the yield curve is, so dollar averaging is kind of our mantra.

Understood, okay. And then going back to your NIM commentary, I was hoping I could poke a little bit more into that one, you said stable to slightly improving. Could you maybe color that comment a little bit and give us the potential upside to the margin and what the interest rate environment would have to look like for you to get there?

So, let me take it in discrete pieces. So, the first piece just talked about funding costs. So, we're not seeing any pressure to-date on funding costs on the deposit side. So, good new is you know at some point, I'm sure we'll see that pressure. But based on our mix of deposits, we're seeing virtually zero pressure on cost deposits. Now, my sense is at some point that comes from, so that looks at this point to be probably still a couple quarters out. So, funding looks like a very comfortable position for us. On the yield side I think the progress we made in the bond portfolio is pretty strong and probably not going to be repeated as strongly in the future. So, I think the bond portfolio, we captured a lot of our delta there. On the loan book, it’s a little bit about the mix of loans we wind up being put on and some of that impacts the yield curve. One thing you will notice is that we've favored putting more of the residential loans on our balance sheet as pricing has gotten better. So, you saw two things happening. We do a little more residential originations, a stronger residential pipeline, and virtually no gain on sale. So, the lack of gain on sale is because we're biasing towards putting that in the balance sheet as those yields improve. So, I think they should think about margin. We hope that it's going to be expanding. I'd be cautious about giving you a specific number range on that. But I think we're pretty comfortable to be expanding, probably not as quickly as it did in the last quarter, but we've got very little concern over compression.

Got it. Okay. And then Chris you've always had kind of a longer term vision on things and I think you've -- since you've been at the banking position did well on a couple different fronts including the commercial real estate concentration issue and the loan-to-deposit ratio. I was hoping to get some insight as to -- as you look down the field now, what are some looming issues, somethings you're position in the bank on to get ahead of the curve once again?

What I would point to and we've talked about a little bit of this is the branch consolidations can't be viewed in a vacuum. So, it's one thing to close branches. I don't think it's a terribly complicated thing for folks to do. But closing branches means you have to have your act together on alternative delivery channels and you have to make sure that you're positioned around mobile banking, mobile -- remote deposit, all those things are -- they are actually very closely tied to the branch closing world. Second thing about the branch closing world is as you consolidate branches, we've got some cases where we were remaining in the property and we may remain in the property with a smart ATM or a video teller machine. So, you may be losing a fully staffed branch, but you're leaving a point of presence. That changing nature of the branch I think is a really important topic for all of us in the sector and that implies not just the changing nature of the branch, but the changing nature of branch employee and what you're looking to have them do. And one of the reasons that we're not just capturing the branch closing expenses and throwing them straight to the bottom-line is that we feel we've got to continue to make an investment in the people and the processes and the technology. And they're all combined, the technology -- look anyone can go out and buy a fancy piece of technology to have a good app on a phone. If your employees in the branches don't know how to help your customer use them, don't get people enrolled when they open the account, they don't work through that process, you're not getting full value. So, I would say as we're working through this year, we're both funding and spending a lot of time working through the opportunities to make sure that our folks out in front the customer are changing with the technology. So, for us it's not -- I got to go pay somebody to put an app in. It's a whole change in the branch footprint, the branch design, the staffing, and making sure, for example, a lot of our investments will be to make sure that our call center staff have absolutely all the tools they need to be able to handle customers. So, as I look out and see beyond the commercial lending piece, we're spending a fairly significant amount of time and energy on that. We're able to self-fund it. We don't think it presents a whole lot of pressure on the income statement, but it goes part and parcel with your ability to do the branch rationalization that I think makes sense.

Understood. Okay. And then could you just remind us of your longer term profitability targets with the two acquisitions under your belt and how soon you think you can achieve those goals?

So, we're still looking at -- and look we know we got a bit of a tax benefit in the first quarter which we're happy to have. But I would still say for the full year, we expect to be able to get the ROA and our target is to get above 105 and we're looking to get return on tangible common equity in the 13 range. And I think those are achievable in 2017. I think depending on now the progress we make in digital banking initiative, the progress we make in commercial lending hires. As we go through our planning process for 2018, it's kind of stride in August, we'll be thinking through what's the right number of commercial lenders, how much commercial and residential loan growth should we see next year, how much investment do we need in these alternative channels. And that will determine the 2018 if we chose to might have a little bit faster organic growth as we feel we've got the foundation together and as people kind of get comfortable having integrated into the OceanFirst family.

Got it, very good. That's all the questions I had. Thank you.

Thanks Matt.

[Operator Instructions] At this time, I'm showing no further questions. I would like to turn the conference back over to Christopher Maher with -- for any closing remarks.

All right thank you. Once again thanks for all that were able to join us this morning for the call. We look forward to presenting additional updates as the year progresses. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.