OceanFirst Financial Corp (OCFC) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the OceanFirst Financial earnings conference call. At this time, all participants are in a listen-only mode and a brief question-and-answer session will follow the formal presentation. (OPERATOR GIVES CALLER INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your initial host, Ms. Sally Dennis. Sally, you may begin.

Good morning. Thank you for joining us this morning. As I was introduced, I'm Sally Dennis, Investor Relations officer, and we will begin this morning's call with our forward-looking statement disclosure. This call, as well as our recent news release, may contain certain forward-looking statements which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words believe, expect, intend, anticipate, estimate, project, or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and the subsidiaries include but are not limited to changes in interest rates, general economic conditions, legislative or regulatory changes, monetary and fiscal policies of the United States government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements, or to (indiscernible) the occurrence of anticipated or unanticipated events. Thank you. Now, I'd like to turn our call over to our host of the morning, our President and Chief Executive Officer, John Garbarino, as well as our Chief Financial Officer, Mike Fitzpatrick.

Good morning to all of you who have been able to join in on our second-quarter 2003 earnings conference call today. We certainly appreciate your interest in our company's performance and despite the fact that our quarterly earnings may not have fully met analysts estimates, we appreciate this opportunity to discuss our operating results is this most challenging economic environment.

As you have all had ample time to review our release issued prior to yesterday's market opening and as is our custom on these calls, I will not be disrespectful of your time this morning reviewing the actual numbers from the release in great detail. My introductory comments will only briefly recap the results and help frame our opportunity to add some color and background to the numbers in taking any questions you may have.

Diluted earnings per share for the quarter were, of course, 38 cents and that's up 2.7 percent over the prior year quarter. However, it's off two cents from the first quarter of 2003. Our cash dividend was maintained by the Board at 20 cents for the quarter. With interest rates throughout the quarter continuing down to new lows, the residential mortgage refinance market remained very active and prepayment expectations have again caused us to realize a significant impairment to our loan servicing asset. The $1.5 million loan servicing loss for this quarter includes this extraordinary $1.2 million impairment for the servicing asset and an total impairment total impairment for the first half of 2003 has been 2.2 million. Mortgage interest rates have recently rebounded over these historical lows, however, as the yield curves steepens, and we continue to view additional, significant future impairment of the asset as unlikely.

On the positive side of the second-quarter results, the continued heavy mortgage origination activity drove higher than anticipated the profits from sale of loans (sic), the obvious natural hedge to the loan servicing impairment issue. the gain on sale of loans increased by an additional 716,000 from the previous quarter, excluding the first-quarter gain reported from the sale of an equity security. No securities whatsoever were sold from the portfolio during the second quarter of the year.

Our net interest margin has held up remarkably well, decreasing only two basis point for the first six months of this year and falling only a total of three basis points from the second quarter of last year. Discounting the first-quarter increase in net interest income from a K-1 (ph ) reported equity investment, the margin shrunk only four basis points for this current quarter. We remain proud of the stability of our margin in this environment, largely due to the strategic restructuring of the Company's balance sheet without resorting to security sales.

We continue to make substantial progress in repositioning our mix of assets and liabilities away from the CD-funded residential mortgage focus to a more effective mix of now 64.6 percent core deposits funding a growing and more diversified loan portfolio. While overall deposits have decreased due to diminished consumer interests in the lower-yielding CDs during the period, our core deposits continue to benefit from new business, governmental and retail relationships, increasing 44.5 million over the quarter. Commercial loans also grew at a 26.1 percent rate for the quarter. Our asset quality remains excellent with a net recovery of $58,000 in reserves for the quarter and no REO (ph) at all on the ledger during the first half of the year. Nonperforming loans fell again for the quarter from the small increase reported three months earlier.

We are continuing our tenth share repurchase program, helping to manage our capital, and have repurchased over 510,000 shares in the first half of this year with approximately 439,000 shares remaining to be purchased under the current announced plan.

As referenced earlier, during this difficult economic period, we have taken the long-term view of support for our margin with a disciplined approach of avoiding excess leverage and restraint in harvesting short-term securities gains. Managing our balance sheet into a positive GAAP in an asset-sensitive interest rate risk position, we feel prepared for the eventual economic turn-about. With that said, Mike Fitzpatrick and I would be pleased to take any questions you may have for us this morning.

Certainly. At this time, the lines will be open for a question-and-answer session. (OPERATOR GIVES CALLER INSTRUCTIONS). Rick Kramer (ph) of Sandler O'Neill.

Good morning, gentlemen. I just had a quick question regarding some of the funding costs. I see, on the core deposits, the funding level is fairly low right now at the end of last quarter, but how much more opportunity do you see to lower your funding costs over the next two quarters?

Since the end of last quarter, we already had an additional reduction in some of our core rate. You're absolutely right; there is a limit below which you cannot go. In our market, we are probably in the bottom third as far as our pricing is concerned, and that's in terms our competition. And that's been the case really for the last two years. We're not at all price-competitive as far as deposit growth. You can see that in terms of our overall growth because there's still some reasonably high pricing alternatives, even on CDs and core deposits in our market. But we've already made one additional cut since the beginning of this quarter and there's still room, certainly. Most of our growth -- if you look at our core deposit growth -- has been in non-interest-bearing accounts. This is really as a result of new relationships that have been garnered over the last 12 months in our market. But clearly, on a retail side, given our pricing levels, it's extremely difficult to generate any type of deposit growth. We've (indiscernible) very conservative prices for some years now.

One other question -- if you can just kind of quantify the extent of the slowdown you've seen in prepayments in the last, say, three weeks?

I don't know if the last three weeks have made any difference but certainly, we've seen a bump up in interest rates. I mean, we are on the Street right now at a six percent rate for a 30-year fixed-rate product, and that's up substantially from the lows that we saw during the second quarter. The prepayment experience -- of course, there's always a tail (ph) on something like this -- (indiscernible) this is a tale on the originations. In terms of our own prepayment experience, I don't know that we've seen a significant slowdown, but we're encouraged by the fact that we may have finally seen a turnaround in terms of the extremely low rates, as there's been some slow (indiscernible) back into the yield curve.

Thank you.

Bill McCrystal (ph) of (indiscernible) Romano.

Good morning. As you've talked in the past and continue to talk about changing the mix on the loan side, can you give us a sense of what your goal would be in terms of (inaudible ) individual loan categories are, and how long long you would expect to take to get to those levels?

Yes, Bill -- because we've been pretty careful about growing this portfolio too quickly. When the talk about goals like this, we prefer to talk about them more in terms of years than we talk about in individual years. Generally, we're talking, by the end of 2004, about a 70 percent residential bend to our portfolio and roughly 30 percent divided between consumer and commercial. We would expect the lion's share of that to be in the commercial area. So, you know, it's not something that when we started this initiative some time ago, we were very concerned about maintaining a strong credit culture as far as taking on these commercial credits. We recognized pitfalls that have been experienced elsewhere, so we've been very conservative about that. So on an individual basis, were pleased that we're still able to generate the growth, but as I'm fond of telling people all the time, we're still turning down two or three credits for every credit we approve on a daily basis.

Particularly in the commercial end of it, is it just organic growth, or are you taking from competition?

Of course, you take some from competition, but we have the good fortune to be in a very attractive and high growth-oriented market area. The Jersey shore (indiscernible) County in general is still a growth area even in this difficult economic environment. So, we see both new clients and customers come in, as well as people that we may have called on in the past that have become disenchanted with their relationship with their existing lender. So we see it come both ways.

Then just finally, branch (indiscernible) or expansion opportunities?

We've, again, been relatively careful. We've had (indiscernible) noble branching policy but it's been well over years since we opened our last office and there's nothing on the immediate horizon. We are currently looking at a number of sites; we've been very careful about that. We think that you can overdo Day Noble (ph) branching and since all of it is in market, we're very careful about putting sites up that we feel are going to be beneficial to us. So, our last office was opened well over a year ago, and that's also, I think, retarded some of the deposit growth that we might ordinarily see. We're currently looking at two to three sites right now, but we don't see anything being opened certainly before the first half next year.

Thank you.

Christopher Marinack (ph) of FIG Partners.

Good morning. I wanted to ask you about the securities portfolio and what your philosophy would be on managing that with incremental flows in the future. Also, kind of what some statistics are on the average duration of what you'd like to manage that to in the future?

Chris, the securities portfolio is -- basically balances itself; we haven't added leverage to our balance sheet for quite some time now -- or any significant leverage. We added about 20 million in the first quarter. We didn't add in the second quarter. In the second quarter, we really actually deleveraged, going back into last year. So, as loans are expected to grow, we expect our securities portfolio to continue to decline as we see that continued shift in mix of from securities into higher yielding loans, and then the loan side from mortgage loans into commercial loans, so that's how we benefit -- our margin is able to benefit from that. Duration of the portfolio now is, of course, relatively short with the prepayment activity, but we have also about $875 million in securities; those securities are floating rate, so they will reprice as rates go back up. So, we don't have -- there's no significant interest rate risk in our securities portfolio.

So that would also apply to extension risk if we saw more substantial change (indiscernible)?

That's true. Some of that are well-designed CMOs, so that's true. We are not worried about extension risks.

Very well. That's helpful. As a separate question, what is your thinking about the allowance for loan losses in the future as a percentage of loans? Would you like to see that change much in the future?

Let me address that and then I'll let Mike, the accountant, address it from the standpoint of what's going on right now. Of course, we're very concerned with what's happening and Mike, I'm sure will address that, but we've continued to make reasonably substantial provision, even this year. I notice a number of companies have really cut back (indiscernible) corporate (indiscernible) provision entirely as earnings may have come under pressure. But we feel it important to maintain a strong reserve position, more so as we transform the balance sheet. As we've said on numerous occasions, we're looking at continually increasing that commercial loan portfolio, and we fully recognize that that portfolio has really not been stressed tested until just recently. It's hardly a seasoned portfolio, so we're not going to sacrifice adequate provisioning of the portfolio, even though it looks like we are extremely well provisioned now. Having said that, I think we're all quite anxious as to what the eventual outcome is going to be as the current discussions with regard to the provision issue (sic) -- because we realize that as financial institutions, we are all probably overprovided with the way the current discussions is evolving. Mike, I don't know if you want to comment on that.

Obviously, as we've had loan growth and the loan growth being in the commercial loan area, we've continued to provide -- to reflect that. On the other side of the coin, we've obviously had excellent experience in terms of low levels of nonperforming assets. If you look at our charge-off history, certainly this year -- for the year, it's $60,000 net recovery, so there's no charge to us of all. Looking back five, even ten years, it's been very -- our charge-offs have been a couple of basis points. So, on that basis, there's certainly no need for high provisions or increasing them (indiscernible) going forward.

Thank you.

(CALLER INSTRUCTIONS). Gentlemen, there appear to be no further questions. Do you have any closing comments?

I would just like to thank everyone again for joining us this morning. We appreciate this opportunity to get together in a formal setting, at least on a quarterly basis, and we will look forward to a good quarter coming up. Thank you.

Thank you very much, ladies and gentlemen. That does conclude this morning's teleconference. You may all disconnect your lines at this time, and have a wonderful afternoon. (CONFERENCE CALL CONCLUDED)