Jill Hewitt - SVP and IR Christopher Maher - President and Chief Executive Officer Michael Fitzpatrick - EVP and Chief Financial Officer Joe Iantosca - Chief Administrative Officer.

Frank Schiraldi - Sandler O'Neill Travis Lan - KBW David Bishop - FIG Partners Matthew Breese - Piper Jaffray.

Good day and welcome to the OceanFirst Financial Corp. Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Jill Hewitt. Please go ahead..

Good morning and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer and we will begin this morning's call with our forward-looking statement disclosure.

On this call, representatives of OceanFirst may make forward-looking statements with respect to its financial conditions, results of operations, business and prospects.

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond OceanFirst's control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

OceanFirst undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In our earnings release we have included our Safe Harbor statement disclaimer. We refer you to this statement in the earnings release and the statement is incorporated into this presentation.

For a more complete discussion of certain risks and uncertainties affecting OceanFirst, please see the sections entitled risk factors and management discussion and analysis of financial condition and results of operations set forth in OceanFirst's filings with the SEC.

Thank you, and I will now turn the call over to our host, Chief Executive Officer, Christopher Maher..

Thank you, Jill, and good morning to all who've been able to join our third quarter 2015 earnings conference call today. This morning, I'm joined by our Chief Financial Officer, Michael Fitzpatrick, and Chief Administrative Officer, Joe Iantosca.

As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you this morning. As has been our practice, we will highlight a few key items to add color to the results posted for the quarter and then look forward to taking your questions.

In terms of financial results for the third quarter, diluted earnings per share was $0.28 per share. Reported earnings were impacted by merger related expenses of $0.04 or $714,000 after tax, resulting in core earnings of $0.32 per share.

Regarding capital management for the quarter, the Board declared the company's 75th consecutive quarterly cash dividend of $0.13 per share. In addition to the quarterly dividend, during the third quarter, the company repurchased 113,654 shares of common stock at an average cost of $17.67.

As of September 30, the company had 244,804 shares available for repurchase. For this morning's call, I'll walk you through some highlights for the quarter and then I will ask Joe Iantosca to provide some color on our progress on the deposit side, which will include an update on the integration of Colonial American Bank.

Third quarter results demonstrated strong organic growth in loans and deposits, which with the Colonial acquisition, helped drive meaningful balance sheet growth of $162.8 million.

Commercial loan production of $70.4 million for the quarter, drove organic loan portfolio growth of $41.8 million marking another quarter of double-digit growth in the commercial banking book.

Organic deposit growth was strong at $82.8 million being driven by commercial deposits, but also supported by the addition of two new branches in the past few months. Our relationship banking strategy produced deposit growth, while keeping deposit costs steady, resulting in a stable net interest margin of 3.26%.

Beyond the organic growth for the quarter, the Colonial American Bank acquisition, which closed on July 31, provided additional benefits. Colonial provided $121.2 million in net loans and $123.3 million in deposits with total asset growth of $142.4 million.

While modest in size, the Colonial transaction was neutral to tangible book value during the quarter and is immediately accretive to earnings. The transaction also allowed the bank to demonstrate the capacity to execute on acquisition opportunities.

Every aspect of the transaction proceeded smoothly, including obtaining regulatory approval in 68 days, and completing the systems integration 78 days following the legal closing. Details regarding the fair value marks on the Colonial balance sheet were included in the earnings release.

Expenses were elevated for the quarter as the result of one-time items related to Colonial American. The ongoing support of duplicative data processing systems to operate Colonial and the addition of two new branches.

The increase in branch operating expenses was necessary to support deposit gathering activities, but the Bank has no near-term plans for additional de novo branches. Over the coming quarters, incremental expense reductions in the legacy branch operation will largely offset the increase from the two new branches.

Non-performing loans ticked up during the quarter, as two well-seasoned credits moved into non-performing status. These loans, totaling $3.7 million, were originated in 2003 and 2004, having closely monitored for some time and are both well-secured.

Our approach to non-performing loans has been to maximize recovery amounts which can extend resolution timelines and result in elevated levels of non-performing loans.

On that note, our largest nonperforming loan, which has a principle balance due of $6.2 million, has moved towards resolution with the bankruptcy court recently approving the bank taking possession of all collateral on November 16. We anticipate this loan moving to OREO on that date.

The bankruptcy proceeding has taken a year to resolve but we believe it was the best course of action to protect the bank's recovery. While non-performing loans are elevated from time to time, resolutions have been favorable with the bank's 5 year net charge-off percentage running 44% below peers at 34 basis points.

Portfolio delinquency trends were stable and there is no sign of deterioration of credit quality in the portfolio. At this point, I will ask Joe Iantosca to talk about developments in our deposit funding strategy..

Thanks, Chris. This past quarter, deposit growth was strong at $206 million, which should reduce the bank's loan-to-deposit ratio from 100.6% last quarter to 98.5% as of September 30. $123 million in growth was attributable to the Colonial American acquisition, but organic growth was substantial at $83 million.

This deposit growth did not materially impact the cost of deposit which was at 24 basis points for the quarter.

Over the past several quarters, as the bank invested in prudently growing the commercial lending platform, a watchful eye was cast on monitoring the loan to deposit ratio and planning was undertaken to prepare for the time when growth on the funding side would be needed.

While I won't reiterate all the technology initiatives that I discussed last quarter that enhance the bank's ability to gather deposits I will focus on recent activities that will aid in deposit growth. As you know, the closing for Colonial American occurred on July 31, and this past weekend, we successfully completed the systems conversion.

So these branches now have the full suite of OceanFirst products and services to offer to new and existing customers. In addition, we opened our second branch location in Jackson, bringing the current total to 27 full service branches.

As you may recall from last quarter's call, the new Jackson location is able to operate with a smaller and typical complement of staff since it's manned by universal bankers and routine transactions are conducted through personal teller machines.

The bank will soon be opening its second deposit production office in an age restricted community, where routine transactions will be handled six days per week by our personal teller machines and on-site services for sales and servicing will be available a few hours per week and by appointment.

Also looking forward, the bank has received regulatory approval to proceed with the acquisition of a single branch of a competitor bank located in the Fisher Boulevard section of Toms River. The closing is being planned to occur in the first quarter of 2016 coincident with the account integration.

I'll now turn from deposit gathering to providing some additional color on the Colonial American integration. We successfully completed the technical conversion and account integration 78 days post-closing. The integration included a replacement of all ATMs and systems and the training of the branch staff as universal bankers.

As a result, we are on track to realize the full effect of the plan cost savings in the first quarter of 2016, as all the expenses to operate redundant systems are wound down in the fourth quarter.

These expenses included data processing systems, the staffing to support operating those systems, as well as rent for Colonial's administrative headquarters. Over and above the one-time merger-related costs, these expenses were $200,000 in the third quarter. That amounts for the two months in the quarter post-closing.

These costs with a quarterly run rate of $300,000 will phase out in the fourth quarter and will be fully eliminated by the start of the first quarter 2016. I would also highlight that the bank took a $3.2 million or 2.6% credit mark on Colonial's loan book in the acquisition approximating the original forecast.

Finally, I'll provide some additional color on the non-performing number. Some progress has been made in reducing the non-performing assets early in the fourth quarter.

In addition to the $6.2 million loan that Chris mentioned, the non-performing loan was 700,000 was sold at par and two OREO properties with a carrying value of $1.3 million are under contract and scheduled to close in the fourth quarter. With that, I'll turn the call back to Chris..

Okay. Thank you, Joe. With that, Mike, Joe and I would be pleased to take your questions this morning..

Cathy, we are ready for questions..

[Operator Instructions] The first question comes from Frank Schiraldi of Sandler O'Neill. Please go ahead..

Good morning. Just a couple questions.

First on - with Colonial closed and integrated and I imagine you looked to potentially pursue additional bank M&A, and the question is, you're generating pretty good core deposit growth as well, but as you continue to grow out the commercial book, the commercial loan book will that deposit growth suffice or do you think a focus here could turn to looking to acquire a good core deposit franchise to support that growth?.

That's a great question Frank. I think that – or I'd say a few things about it.

The first is that while we certainly have always had interest in M&A activity that we think adds value to our shareholders, we're also relatively balanced in our approach and we won't to be very prudent about the kinds of deals we would consider, with a focus on generating shareholder value. So I think quality of the deal would be paramount.

That said, if we can find a deal that meets the metrics and are important to us, then also contribute - contributed some core deposit as part of that that would be a very beneficial thing. So we're open to it, having completed Colonial there is nothing preventing us from looking at anything else.

But we're going to be pretty disciplined in that approach..

Okay. And then just in terms of modeling, I guess, if the securities book is more fairly right sized here and at this point loan growth is going to create more overall balance sheet growth, obviously that’s good for NII, it could be punitive to the NIM.

Just want to get your thoughts on potential NIM progression from here?.

I think that overall we expect NIM to remain fairly steady and reasonably close range. When we look at the credits we're putting on and the incremental cost to funding to support those, I don't think you're going to see a big change in our NIM, and we don't think it will be under a lot of pressure.

I would say that as we look at the number of loans repricing on the portfolio, that's gotten to the point where there's less pressure on repricing side. So I think we're comfortable with the NIM about where it is, that may pop-up are down a little bit of couple bps from quarter-to-quarter, but we think it's a good range..

Okay.

And though on the security side, is that a reasonable way to think about things going forward in terms of the size of the book that – any cash flow will be redeployed back into securities?.

Yes, I think that we're at a point where our securities portfolio was always primarily for liquidity. But I think we're at that point where we want to probably keep it about where it is now.

So as incremental loan growth comes in, you probably - it may not be exactly 1 to 1, but you're going to see a much closer one to one relationship between total assets and loan growth..

Great. Okay. Thank you..

Thanks, Frank..

The next question comes from Travis Lan of KBW. Please go ahead..

Thanks. Good morning, guys..

Morning, Travis..

Can you just remind us about how you think about the balance sheet positioning with the potential for short-term rates to increase at some point over the next 6 to 12 months, just kind of philosophically how you think about the balance sheet?.

Sure. Yes, we didn't go into detail in this quarter’s release or in our comments in the call. But if you recall, I believe last quarter we talked a little bit about the lengthening of maturities that we had undertaken in the FHLB advance book.

So we've pushed those maturities out to the point where we're very comfortable that the company is well-positioned in a potentially rising rate scenario. I think the bigger issue we would probably face, it’s not just us, but everyone in the industry, is what is the shape of the curve after that happens.

So we positioned the balance sheet to be we think very prudently - position in case the Fed does decide to move rates. But I think until we know what the shape of that result and curve is, you know, if the short-term goes up, but the long-term doesn't move, I think that will get a lot of people headaches.

So I'm a little cautious about the shape of the curve, but we've done everything we can to our balance sheet. We think we're reasonably neutrally positioned. And we're in a incrementally more conservative position this year than we were this time last year..

Got it. Okay, all right. That's helpful. Obviously the loan pipelines are extremely strong just based on the release, stronger than they've been.

Given kind of the lack of seasoning on the commercial portfolio, should we take that as kind of an indication that loan growth could be a touch above the kind of 10% that you annualize, that you've been able to put on over the last couple of quarters or is there a kind of mitigating factor with that?.

It's always hard to look at beyond say the next 90 days in terms of what you're going to see in loan growth. I would tell you the market remains highly competitive. So there are plenty of deals that are either out of the yield curve that are great credits that from a pricing standpoint kind of don't fit our model.

And we have seen some deals that are price fine and not longer-term risks, but the structure of the deals has been wanting. So I think in balance we're comfortable that we can continue to grow at the rate we've been growing, plus or minus over the last eight or nine quarters, it's been pretty consistent.

So I think we'll be in that range, but market conditions are very hard to understand and they can change pretty quickly.

Where we're seeing stress in the market is either long dated assets, which we feel we can't compete in or very good credits that are not responsibly structured, where there is a lack of covenants, and there is lack of things - structural elements that we believe it’s good – they will be good loan over the long run..

Got it. Okay. All right, that's helpful. And last one from me is just on Colonial expenses.

If you annualize the two month impact this quarter and then remove the redundant systems cost that you mentioned, it would indicate that savings are going to be actually above 40% versus the 35% that were announced, I am thinking about that right?.

Yes, you are. I think we - we are trying to be conservative when we went into the transaction to make sure that we could hit the numbers that we represented out to the market. But at this point it appears pretty clear that we can get a little more cost savings than we originally anticipated. .

All right. Thank you guys very much..

Thanks, Travis..

[Operator Instructions] The next question comes from David Bishop of FIG Partners. Please go ahead..

Good morning, gentlemen..

Good morning, Dave..

Chris, as you sort of look west across the state, heading into Pennsylvania there's obviously been some disruption in the market with some M&A sort of creeping a little bit east.

Any thoughts about opportunities to pick up market share or maybe pick up some lending teams as opposed to just sort of whole bank acquisitions to maybe supplement some of the lending niches you guys might be targeting over the next 12 to 18 months?.

That's a great question. I'd say a few things about it. The first is, our kind of small toe in the water in western migration, the loan production office we opened in Mercer County has worked out really well. So we're very pleased with what we're seeing there. We think that those markets are very similar to our core markets in Monmouth and ocean.

We’re able to put on some tremendous talent and so our early results in those markets appear to be the kinds of markets that OceanFirst can do well in. So I think to the extent we have opportunities on that side we're going to continue to push them.

The second part of your question which is always an interesting trade off, which is when is it best to pay potentially a premium to acquire a bank franchise or is it better to do a lift out of the talent within the bank that you think can help you grow. And I think we're somewhat neutral on those. We look at different things.

So in the case of the Mercer LPO that was a great cost-effective way for us to get a toe in the water in Mercer.

But in the case of the Colonial transaction that was a very well priced, very well structured way for us to pick up a little incremental market share, not just on the commercial side, but also to pick up a couple thousand retail customers which builds our franchise.

So I guess the short answer would be, we would be open to both, and opportunistic about what comes our way. So if we can find the right commercial lenders, we're absolutely going to hire them. If we can find the right transaction that meets our metrics, we're not averse to doing that.

And I guess I mean, there are some situations, and if we’re fortunate enough you could wind up doing both..

Got it.

And then I think on - during the preamble you talked about potentially there were some opportunity on the legacy branch structure, maybe to carve out some operating expenses, are there any details you can share there, maybe order of magnitude of what we're thinking there?.

Sure. I'll give a sense to it and then I'll let maybe Joe follow on. I think the way we're trying to explain this is that, in our existing legacy branch network, we expect due to customer migration and channel preferences that we're going to have less call for the traditional power line. And so that's going to phase out over time.

However, these are long-term legacy customers that we do not want to push out of the comfort zone to the point where it might interfere with what we think is a tremendous franchise value. Our checking base, our cost of funds, our retail clients there.

So at a very high level we're kind of pacing our investment in retail infrastructure, saying occasionally we may open a branch or do a deposit origination platform in an age restricted community. But we also have the opposing trend of being able to take some expenses out as we transition legacy branches into the universal banking model.

Those two things will not always be aligned. So like in this past quarter we went and opened – essentially in the last four months, we opened two branches and put on expense a little faster than we took it out, it maybe quarters where we take out a little more expense than putting on new ones.

So at a high level it's a balancing act and the best guidance I would give is I would say our total amendment to retail operating expenses will probably remain steady and grow at kin of inflationary expense – the comp rises, again healthcare issues and that sort of thing.

So Joe, I don’t maybe you want to add?.

Yes. Over the next in 2016 we anticipate taking maybe four or five of our legacy branches and moving them to one of our new models and it doesn't get you all the saves that you would have on a brand new model branch because you still have a larger footprint.

But it allows you to pick it up in some areas, especially compensation and redeployed those folks. So as Chris said, it's a process, it's not a light switch..

From as sort of FTE perspective, is there - what's the difference between, so traditional legacy branch, maybe the model - you're talking maybe, save one or two bodies….

It's typically 2 may be 2.5 FTE, depending on the branch you were dealing with and its way out, its structured and its traffic patterns. But typically around two..

Got it. Thank you..

Thanks, Dave..

The next question comes from Matthew Breese of Piper Jaffray. Please go ahead..

Good morning, everybody..

Good morning, Matt..

Hey, Matt..

Just going back to the margin, I was hoping to get a little bit more color on the impact on the margin from the Colonial acquisition and whether or not there was - what kind of accretable yield impact was there this quarter?.

Yes, there was some accretable yield impact it was $140,000 in critical yield for the third quarter..

And that's reflective of just the two months, so as we get into the fourth quarter into 2016, do you expect to be above that 140,000 run rate?.

Yes. Of course it’s - as you know it amortized on level yield basis, so it's about straight line. But the fourth quarter number will be 173,000 and all of next year will be 394,000..

Right.

That’s your estimate at this point subject to change on the non-accretable piece correct?.

Yes. I mean, you know with the goodwill they are subject to modest change, as far as a year from now. And also prepayments or non-prepayments may either delay or extend or accelerate that or delay it. So depending on actual cash flow periods..

Right. Okay. And then as we think about the extent you're going to grow loans and it’s much higher today than it was a year or two years ago. I acknowledge that we're in a very strong credit environment.

But when do we start to see the provision pick up to reflect a stronger loan growth of those?.

I think that’s the function of a lot of things. So when we look at the provision, entirely you're looking at the allowance, then kind of backing into the provision from that. We have lengthened our look back period.

We've kind of shifted into commercial look where we have had - we call them kind of statistically irrelevant default loss rates in the commercial book over time.

So the issue with that is, if we go back to look at our home historical losses you're just not going to find a number of losses that would be statistically relevant or predictive in terms of future bosses. So we've done a couple of things. We've lengthen the book back to try and capture some of those.

We have also introduced into the model a pure valuation looking at what the - in terms of kind of guide rails, what our peers are experiencing in the commercial loan charge off world. Because our history is not there, we're looking to the industry to kind of to push that out.

So when we do that, obviously we're very comfortable with where the allowance is. I would point you to one number that’s been shifting and that is our unallocated allowance, which is been coming down and it's now just under 5% or so of the allowance.

Some of the layer provisions have been the result of that excess being drawn down which is really what the accounting industry wants to see. They want to see less and less unallocated allowance there. However it's not going to go zero. So I think we're getting to the point where you might in 2016 see a slightly level of provisions.

But - so I hope that answers your question. It's very hard to predict in the future kind of where those provisions will go. But that's our top process about it. We've lengthen the look back period.

We've increased our reliance on pure charge-offs, as our charge-offs in commercial were statistically irrelevant and then we are also looking at unallocated which has come down over time..

Okay. That makes sense.

And then just a couple real ticky tacky questions, what's remaining in merger-related costs from now through the ended the year?.

Matt's, it’s probably a little weak, the severance and the state bonus they use and pay or accrued for as of quarter end. So that part is primarily completed. But there is still some cost with the IP conversion, systems conversion happened last week. So it has some cost related to that, which maybe couple hundred thousand.

I don’t think it would exceed a couple hundred thousand..

Okay.

And then what's the right average diluted share count you are expecting for fourth quarter?.

Okay. That's a good one Matt, you've got Mike flipping the pages..

Let me hop to my last question then..

Sure. Go ahead..

As the size of the balance sheet is increasing and obviously there's good loan growth, what's the appetite like for buybacks at this point?.

I think the way we look at buybacks is twofold. We look at capital utilization and then we also look at the IRRs that are represented by the buyback in each individual share.

So on the capital side, we've got the tangible common equity over 9% and we think – I would tell you, just from the guidance perspective that unless something changes the economy that makes us more conservative, we think there is some room there, whether that's 25 basis points or 50 basis points is kind of open for discussion.

So the first comment I would make is we think we've got a little more room in the capital ratio. The second point is that, the dividend payout being just about core earnings, it’s just little over 40%, we are still generating earnings beyond the dividend to supplement the growth of the balance sheet.

So I would be surprised if we didn't - and the IRRs the third part, is the IRRs in the buyback are still pretty favorable. So when I look at those three situations where the capital is a little higher that needs. We've got good earnings momentum and the IRRs are strong.

I think you'll still see some repurchase activity, but that's going to be kind of markets based – the prices we are trading at now you might not see as much as you would have a quarter or two ago, but we're still in the range. And it was a little big but that’s just principles on how we think about it..

That's fine. And Michael if you haven't found the number, you want to go back to me….

I've got it, Matt. So, yes. The Colonial share [ph] ratio on July 31, is only the average number for two months rather than the full three months. So outstanding shares as of September 30 are 17,276 million. When we look at, when we take out the - when we do our adjusted ASAP and stock option dilutions that's a net of $150,000 out.

So if you take the outstanding shares now 17,276 and take out 150, that's probably our run rate going into the fourth quarter..

Perfect. I appreciate it. Thank you very much..

Thanks, Matt. [Operator Instructions] As there are no further questions at this time. This concludes our question and answer session. I would now like to turn the conference over back to management for any further remarks..

Once again thank you for joining us this morning on the call. We look forward to presenting additional updates as the year progresses. And I guess we'll talk to you again in January. Thank you..

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