OceanFirst Financial Corp (OCFC) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the OceanFirst Financial Corporation earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Miss Jill Hewitt, Investor Relations Officer for OceanFirst Financial. Thank you, Miss Hewitt; you may begin.

Thank you, Diego. Good morning and thank you all for joining us today. I am Jill Hewitt, OceanFirst Financial Corp. 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 regulatory changes; monetary and fiscal policies of the U.S. 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 results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

Having said all of that, thank you, and now I will turn the call over to our host this morning, OceanFirst President and Chief Executive Officer John Garbarino and Chief Financial Officer Michael Fitzpatrick.

Thank you, Jill, and good morning to all who have been able to join in on our second-quarter 2005 earnings conference call today. We certainly appreciate your interest in our Company's performance and are pleased to be able to discuss the continuing progress we have made this quarter in restoring growth both to our balance sheet and revenue streams, as evidenced by our third consecutive quarter of strong earnings and operating results.

We've all had the opportunity to review our earnings release from yesterday afternoon, and following our usual practice, I will not be disrespectful of your time this morning reciting the actual numbers from the release. My introductory comments will merely help frame our opportunity to add some color to the earnings posted for the quarter, as well as where we are in our plans to rejuvenate the deposit and revenue growth which has been translated into our improved bottom line.

Before I get into that, however, let me just take a minute to comment briefly on the earnings release disclosure of the resignation of a newly elected member of the OceanFirst Financial Corp. Board, Jim Kiley. Unfortunately, Jim recently received unsettling medical news which has subsequently caused him to submit his resignation from our Board. During his brief tenure, Jim's fellow Board members quickly gained admiration for his financial acumen, and we all looked forward to his advice and counsel as a member of the OceanFirst Board.

Regrettably, as he has determined that his current medical condition precludes his continuing service on our Board, we can now only extend our heartfelt best wishes and prayers for Jim and his family.

Moving back to the second-quarter operating results, however, we did see diluted earnings per share for the quarter at $0.40, up 25% from the prior-year quarter and generally consistent with the linked first quarter's results. Additionally, our cash dividend remained at $0.20 per share for the quarter.

Although we note that current EPS is generally consistent with the first quarter, a closer look at the quality of the earnings reveals otherwise. Discounting the effect of the non-recurring investment income from the first quarter, second-quarter earnings are up substantially, and the apparent 11 basis point contraction of our net interest margin quarter over quarter recalculates to a mere 1 basis point.

Moreover, counter to the current trend of releasing loan loss reserves to support earnings, due to a modest loan charge-off, our second-quarter allowance was actually increased by $150,000 over the prior quarter. Likewise, our second-quarter earnings did not benefit from any restructuring or harvested profits from our investment portfolio.

Over the prior-year quarter, both EPS and the margin demonstrated significant gains. We are gratified by the substantial EPS increase posted over the prior year and the continuing earnings momentum we see building. As has been the case in recent quarters, this performance was driven largely by growth in deposits, loans and noninterest income, even in the face of the flattening yield curve and the challenging environment. Nevertheless, we remain as comfortable as we can with our current interest rate risk exposure.

Noninterest income benefited from a hefty quarter-over-quarter increase in fee income mitigated somewhat, however, by a reduced gain on sale of loans as lower sale margins offset increased loan sales volume for the quarter. The additional loan production capacity we have added during the past year, however, has generated a 58% increase, $1.2 million, in gain on sale over the prior-year quarter.

The financial turnaround we have been pursuing throughout 2004 has gained considerable traction in the past three solid quarters. Core deposits grew 27 million for the quarter, a 13% annualized rate, and represented the fifth consecutive quarter of significant core deposit gains. Overall, total deposits grew even faster at an 18.2% annualized rate.

On the other side of the balance sheet, commercial loans increased at an annualized rate of 25.2% for the quarter. In each case, this improving mix of assets and liabilities has buttressed our net interest margin. We are continuing with our 11th share repurchase program and actually repurchased 201,300 shares in the second quarter with 246,042 shares remaining to be purchased under the current authorization.

In news from our Wednesday Board meeting, I'm also pleased to note that we will be implementing our initial plans to raise $10 million in Tier 2 capital during the second half of this year to further facilitate our ongoing share repurchase plan.

With that recap of the quarter as a backdrop, Mike Fitzpatrick and I would be pleased to take any questions you may have for us this morning.

(Operator Instructions). Frank Schiraldi, Sandler O'Neill & Partners.

I just had a few questions for you guys, if I could. I was wondering if the resurgence in deposit fees that we saw in the second quarter, do you know how much would be -- could you consider seasonal? I mean, we've heard from a lot of people in this space that there might also be a factor of better enforcement in fee collection.

We talked about this last quarter, too, Frank. First off, year-to-date, I think we're well below budget in terms of the types of fees that we are seeing and I think that was born out industry-wide through the first quarter. I haven't seen all the second-quarter numbers yet. But we did see a resurgence in the second quarter. The shortfall that was seen has been a kind of a mysterious move throughout the entire nation, really, a reduction in NSF fees. We saw no change in our collection patterns whatsoever. We monitor that carefully and we're always north of 90% in terms of the fees that are collected. We have drilled down a little bit this quarter on it, however, and we have come up with some seasonal explanations, and Mike I know has got some numbers there that he can share with you.

Frank, this line is fees and service charges, and of course, the NOW and customers' deposit fees is the biggest portion of that. But there are a lot of other things in there that we've talked about before that we focused on. Most of the 206,000 increase, 57,000 of that was PMI reinsurance fees. That's a relatively new line of business for us that we got into last year that's growing now with the loan origination volume, so that's up significantly over the first quarter.

Also, our merchant services fees, which is also business that's growing for us as we build our commercial loan portfolio and our retail deposit base -- so that's up 66,000. That was up 15%. So it goes a little bit farther than NOW deposit fees. The growth is actually in other areas. And going forward, I think we've spoken about the fact that we are now getting -- we now have established a joint venture title agency. There's no revenue from that in the first half of the year, but that's going to start in the second half of the year and really kick in next year. So, we've talked a lot about growing fees -- that the fees generally with different lines of business and we're doing that. You see the results of it.

And also, on expense lines, you guys did a really good job in the quarter obviously of keeping expenses down. Going forward, do you see more contraction there, or what sort of run rate would you expect for expenses going forward, I guess?

I guess the first quarter was unusually high holding company expenses related to the Annual Report and some accounting fees -- high accounting fees related to finishing up the Sarbanes work from last year. So that was kind of some non-recurring first-quarter expenses or some seasonality in the first-quarter expenses. We also got a little bit of a benefit from our ESOP expense because the stock price was lower than it had been in the first quarter. So, we had some benefit from that, so that explains the decrease. It appears to be a pretty good run rate where we are now. The decrease in the first quarter to the second quarter was, again, some seasonality in the first-quarter results.

And just a last question on -- are you guys still targeting capital ratios of about 675, 650? Has anything changed there?

Nothing has changed there. We're pretty comfortable with where our capital is now. And again, as I mentioned in the opening statement, we will be raising some Tier 2 capital here in the second half of the year now that we've brought our capital down into a range that we're comfortable with to continue with that share repurchase program. So we think we're pretty comfortable where we are right now, and we certainly are not interested in taking our capital any lower than it is -- our equity capital any lower than it is.

And just one final question. On the gain on sale of loans in the security line item, is there any way to break that down between the mortgage loans and then the securities?

There's no security, Frank. If there's a security gain, we always say it in the press release. We identify it, and it's not hidden. Anytime we ever had a security gain, we've identified it in the press release. So, that's all -- if there's no mention of that, then it's all loan gain.

(Operator Instructions). Al Savastano, Janney Montgomery Scott.

Just a couple of questions, in no particular order. Can you give us a little flavor of what's in the loan pipeline, kind of the mix between commercial real estate and residential?

Residential is extremely strong. You know, end of June is always a strong closing period, as school years end and so forth and so on, but despite that, the pipeline is extremely strong, and the normal July summer swoon that you see in the residential mortgage business has not been as pronounced maybe as it has been in the past.

So we are seeing refi volume pick up, as it has nationwide, a little bit over the last month or two and the residential pipeline right now is extremely strong.

On the commercial side, likewise, I think we had kind of a slow start the year. We were off our targeted budgeted numbers for the first quarter. We're back on stride now during the second quarter, and the pipeline looks pretty robust heading into the third quarter. So, although we were a little short in our first-quarter numbers, second and third quarter look pretty full for us and we're on our current run rate for budgeted targets for the year.

Commercial activity has picked up, and we also, I think I mentioned last quarter, had some staffing issues that I think we've successfully addressed here in the second quarter, and so I think we've got the number of loan officers that we think is appropriate for what we're trying to get done in the market now.

Excellent. Does the loan pipeline include the mortgage banking pipeline?

Yes. I'm referring to both. Actually, Columbia Home Loans, the mortgage banking sub, is actually extremely strong right now. They added, if you recall, we've talked over the last year about the production capacity that we added. We added some of that capacity at the mortgage banking sub and we added some of that capacity -- what we refer to as the core bank operation -- the actual capacity that we -- the production capacity that we added at Columbia is outperforming what we added at the core bank. And so the Columbia pipeline is extremely robust at this point. And as I said in the opening comment, with the rate situation, the margin on individual sales is down a little bit, but the actual loan sales volume has more than made up for that.

Got you. And how about the charge-off -- it wasn't a big amount, but (multiple speakers)

Nominal. A nominal amount. Again, our charge-offs -- I mean, our asset quality is still pristine, but we did have a commercial credit that we charged off for the quarter. And reflective of that, we felt that we obviously had to increase the allowance. So, again, we're not into releasing reserves to support earnings if it's not justified by the portfolio. So, we don't see any pattern of deterioration in our credit quality, but from time to time you're going to have a charge-off, and the law of small numbers says if you have a small charge-off, all of a sudden, it's a shock to the system.

Yes. Just wanted to make sure it's not a start of a trend.

No, no -- well, we hope not. I can't speak for the rest of the year, but we certainly don't -- there's nothing that's being a trend in the portfolio.

It was only one loan. So the whole charge-off was one loan, Al.

Okay.

One commercial loan.

Thank you. And then, just two more stupid questions -- your yield on the Federal Home Loan Bank stock, it really looks like it increased a lot. Is that sustainable?

You'd have to ask Al DelliBovi. I think it is. I think the New York bank obviously year-over-year went through some difficult -- the whole bank system, obviously, we know went through some difficult times over the last year or two, and the New York bank did that early on. I think the New York bank has done a commendable job in terms of management and the dividend yield that they have been paying has been -- has risen substantially over the last year. And all indications that we have based upon our communications with DelliBovi is that that is sustainable and the bank is looking at sustaining that yield into the near future.

And then last one is deposit yields. What's kind of your expectations for the pace of increase going forward?

Of course we think we have to exercise an extreme amount of discipline in terms of pricing deposits. There's a lot of what we prefer to call maverick deposit pricing in the market. I mean, you see checking accounts and core accounts being priced at 3.5 and 4% in this market. We think that's kind of difficult. We have successfully held the line on that and still been able to generate some growth.

The growth that we have had has been at generally 50 to 75 basis points over the top rate in the market. But, with the yield curve flattening, the battleground for retail deposits has not been really in CDs. It's been in core deposits. And the types of rates that we are seeing generated there are really a little out of hand, in some cases. We've tried to avoid that competition. We've seen an increase in our cost of funds quarter over quarter, but we think that that's in line, really, with the types of increases we've seen out of the Fed. And you've constantly obviously got CDs repricing. The idea of holding the core deposits repricing is where we feel we can exercise the most amount of discipline and gain the maximum effect in terms of our liability pricing.

David Darst, FTN Midwest Research.

Can you give us a little bit of information? You don't have very much more to go on the current repurchase program -- if you will be reloading that, and then what are some of the primary uses that you think you will use with the additional $10 million?

Well, we haven't made a decision as to whether or not we will reload. It's -- obviously the repurchase programs that we've been engaged in over the last year, 18 months, almost two years, I guess now, have been a little slower than they had been early on. We've done it pretty much to support the liquidity in the trading of the shares.

The indication that we're going out and getting the $10 million -- you're absolutely right. I mean, just the remaining program is a little over $5 million in terms of we've finished that program up. So we would anticipate that we might consider a repurchase program, but we'd cross that bridge when we come to it.

We've been repurchasing shares at a fairly steady pace, and I think that we've got what, 246,000 left to repurchase under the existing program. We don't see that occurring -- we don't see that being wiped out, barring some major shock in there much before the end of the year. So, the plans that we're making for that Tier 2 capital is going to be gradual over the course of the next six months. And we'll be evaluating the best use of that capital as it becomes available to us.

So do you have any acquisitions that you would be interested in?

Of course, we never comment whether there's anything that's ongoing, but we've always said in our discussions with people that if there is an acquisition that we could take a look at which is in-market for us, we're certainly willing to look at that. We've looked at a couple over the last two or three years, and if there is another one that makes sense for us, we're certainly amenable to it. But, the first criteria is that it's got to be an in-market acquisition. Again, we're not interested in expanding our footprint. We're interested in being a community bank for the market we serve today, and we think that that's the best way to enhance our franchise value.

Okay, and then, any opportunities for you to pick up the pace of the loan yield improvement? It's about 72; I guess the mortgage and residential side is probably starting to break even, and what do you see on loan yields on the commercial side?

Well, of course, we're held hostage here to the flatness of the yield curve, obviously. The increase in short-term rates is great for anything that we have tied to prime, or anything that we have repricing on a short-term basis. But, in terms of our current originations, residential mortgage yields have been flat, obviously, for the last year, and on the commercial side, really, we're talking about five- and 10-year term loans -- that's also pretty flat. So, that's very difficult. Clearly, the entire industry is laboring under this yield curve that we have, and there's no indication I guess that there's going to be any slope in it in the near-term. But that would certainly go a long way toward helping us pick up that yield. Right now, it's very difficult to make any headway there.

What is your new loan yield that's coming on the books for a five- to 10-year CNL loan, or CRE loan?

Most of our five-year commercial loans are priced off treasuries and most of them are north of 225 basis points to treasuries. It's always based upon the quality of the credit that you're looking at. So, on the commercial side, you're talking about -- if you tie it to a five-year treasury, you're talking about a spread of somewhere just north of 200, 225 basis points. That brings it into, what, 6 3/8 range, somewhere in that neighborhood. That's for a typical, say, five-year loan.

(Operator Instructions). Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to your hosts to conclude.

Thank you, Diego, and again, I thank you all for your interest this morning. We've been pleased that we've been able to discuss what we think has been a very strong quarter for us again, and we hope to speak to you again three months down the road. Thanks again.

Thank you. This concludes today's teleconference. Thank you all for your participation.