OceanFirst Financial Corp (OCFC) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the OceanFirst Financial Corp. 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, Ms. Jill Hewitt, Senior Vice President of OceanFirst Financial. Thank you, Ms. Hewitt, you may begin.

Good morning, all, and thank you for joining us this morning. I am Jill Hewitt, Senior Vice President and Investor Relations Officer, and we will begin this morning's conference 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 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 its 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; demands 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 statements to reflect events or circumstances after the date of such statements or to reflect the recurrence of anticipated or unanticipated events.

Thank you, and now, I will turn the call over to our hosts for the morning, our President and Chief Executive Officer, John Garbarino, and our Chief Financial Officer, Michael Fitzpatrick.

Thank you, Jill. And good morning to all who have been able to join in on our third quarter 2006 conference call today. We appreciate your interest in our Company's performance. We are pleased to be able to take this opportunity to discuss our improved (technical difficulty) operating results with you this morning.

You have all had the opportunity to review our release issued following yesterday's market close 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 only briefly recap the numbers and help frame our opportunity to add some color to the increased earnings posted for the quarter in spite of the unrelenting pressure on the margin in this challenging interest rate environment.

Our diluted EPS for the quarter, of course, were $0.42, up 5% over the prior year and 2.4% over the linked quarter. For the last 12 months, that translates to $1.58.

Our cash dividend, again, remained $0.20 per share for the quarter.

While it is always a pleasure to report earnings increases, however modest, from previous periods, we obviously remain concerned with the tremendous pressure on our margin in the current environment. Weaker fundamentals, relative to a less advantageous mix of deposits and loans, remain a concern. With our average core deposit ratio falling below 60% for the first time since 2002, our commercial to residential lending mix is similarly suffering.

Although disciplined attention to pricing held the margin contraction to seven basis points for the third (technical difficulty), the cumulative margin contraction has now increased to 39 basis points year-over-year. We continue to successfully work through this period of challenging net interest income growth.

Average interest-earning assets have continued to expand, increasing $49 million from the linked quarter, and 100 (technical difficulty) year-over-year. Non-interest income surpassed the previous exceptionally strong quarter, driven by an $81.6 million increase in loan sales, nearly a 50% gain. Our mortgage banking subsidiary, Columbia Home Loans, contributed handsomely to our profitability for the quarter, responding quickly to the cost savings, consolidation, delivery channel adjustment, and revenue restoration initiatives undertaken over the past year.

While mortgage application activity at the core bank is off substantially during the quarter, the current residential loan pipeline at Columbia remains (technical difficulty), and we optimistically look to sustain this positive performance for the immediate future.

We understand that mortgage banking (technical difficulty) line of business, and we will be vigilant in managing Columbia aggressively to minimize this volatility to the greatest extent possible.

Fees and service charges also grew 12.6% over the prior year period, primarily the result of continued satisfying (technical difficulty) mortgage activity. This new business line has quickly developed into a meaningful contributor to our revenue growth, and I am pleased to report that OceanFirst has recently received approval as one of a handful of select nationwide Fannie Mae seller services of reverse mortgages - the number one originator of reverse mortgages headquartered in the state of New Jersey.

Our focus on diversifying and strengthening non-interest revenue streams is continuing to pay off and mitigate the stress on our core spread business. Other than non-interest income, the other major contributor to our earnings growth was related to compensation expense reductions, primarily driven by a decreased incentive plan accrual of $0.25 million for the quarter and our strong pay for performance culture. The challenges posed by the flat to inverted yield curve will likely cause our management incentive plan to fund at a level somewhat below target for the year.

The aforementioned pricing discipline of the bank also extends to our commercial lending, where insistence on our (technical difficulty) principles has made it difficult to grow the portfolio in the face of more aggressive lenders in our market. We definitely do not feel that the pursuit of loan growth should justify relaxation of underwriting standards. We have all seen the result of that tragic mistake in previous business cycles.

Core deposits expanded very modestly for the quarter as the competition for deposits grows ever more fierce. The price-sensitive consumer, in many instances, is driving prices on retail deposits, particularly CDs, above alternative wholesale funding costs. Deposit pricing in this market obviously involves walking a very fine line between margin support and deposit growth.

Fortunately, despite the local real estate market being rocked by news of the Solomon Dwek and Kara Homes difficulties, asset quality essentially remains a nonissue for OceanFirst, as we have been able to extract full value for the one Dwek credit we had previously classified. Our remaining Dwek credit of $1.5 million is a performing loan collateralized by two operating Bank of America branches. We have no exposure whatsoever to Kara Homes' bankruptcy.

We did restore a modest loan loss provision for the quarter, as our nonperforming assets nudge off the floor, increasing very modestly to 19 basis points of total assets. Overall, our loan loss reserves remain a healthy 281% of nonperforming loans.

Share repurchase activity for the quarter was more subdued from earlier in the year, with 114,356 shares repurchased, although average diluted shares outstanding were down in excess of this, affected by the heavy repurchase activity of the prior quarter. We currently have outstanding authority to purchase an additional 641,963 shares under existing programs.

With that as a backdrop, Mike Fitzpatrick and I would be pleased to take your questions.

(OPERATOR INSTRUCTIONS) Frank Schiraldi, Sandler O'Neill.

I was wondering if you could talk a little bit, John, about loan demand in general. Is it just, on the commercial side, a choice not to compete on price? Is there anything you have seen differently in demand in this quarter?

Well, I would go beyond price, Frank. I think price is one thing, but it is also terms. And as we talked about in previous conference calls, we have actually exited a couple of credits that we had owned for a number of years, the relationship, primarily because of underwriting terms that were offered that we think are insane, in terms of waiving personal guarantees and recourse agreements, and undercollateralizing the borrowing. So I think that the competition on the commercial side has definitely heated up, but it is not just a question of price. And maybe I should even correct that and say it's less a question of price than it is underwriting.

And we feel that is obviously the wrong path to go down. So as much as it hurts you to exit an existing relationship, there are times, obviously, when that has to be done. And we think that in this current market that's the appropriate action to be taken.

On the residential mortgage originations, our originations at the mortgage bank, as you can see from this quarter's activity, were extremely strong. They have been very consistent for the last two quarters. The core bank originations in the Monmouth and Ocean County market have really fallen to a low point. They are as low as they have been in traditional months. We always see a seasonal drop off in December, and they are running about what they would normally run in prior years in December. So they have fallen off substantially.

That is the reason why our pipeline looks somewhat diminished from previous quarters. In reality, the pipeline at Columbia, as I mentioned in my comments, is extremely robust.

So demand on the residential side has fallen off locally, but as far the Columbia demand is concerned, it is quite strong. And of course, some of that is fueled by the alternative credit lending that they do.

Okay. And then I just want to make sure that I understand the expense line. The compensation this quarter, the reduced incentive plan accruals. So do you think in the fourth quarter -- you are saying there could be a continuation of that, and maybe you could see net net continued flat expense growth?

Yes, I mean, you know, we obviously take a look at that accrual each quarter. And the way our targets were running, we were running a little bit below target for the quarter in terms of our incentive plan. The current run rate could see a similar adjustment to fourth quarter, although from our standpoint, management's standpoint, we hope that doesn't happen.

Okay, and then finally, just on the buybacks, I know you mentioned that you got plenty out there on the current program, and you are continuing the buybacks. Is there any change at all to levels of that? Is there any thoughts as far as internal rate of return? Has that changed at all, that thinking -- ?

No. Our analysis there that we routinely do still shows it to be a good use of capital for us, given the way we are funding it with debt at this point. And we are responding to demand in the market.

As we said, I think on earlier calls, we anticipated seeing a little less demand. Earlier in the year, we had one particular institutional investor that was liquidating a rather large position they had with us and some other financial services companies. And so we were responding to that demand -- or that supply, actually, in the market. But we would anticipate that it would tend to fall off, since that institutional investor, I believe, has accomplished most of their objectives at this point.

Michael Litman, FTN Financial.

I have a quick question on the credit side for you. There was a slight jump, obviously, relatively speaking, so the credit story remains really excellent. But what exactly made up that jump? And I guess in just the credit market in general, are you seeing any deteriorating trends in New Jersey, or can you provide any color on that front?

Yes, Mike. On the credit quality side, it picked up. There was a $1.2 million increase in nonperforming commercial loans. And $1 million of that was one loan. It was a commercial real estate loan. It was well secured. Our average commercial real estate loan is about $600,000, so this was a little bit bigger than that. But it is basically one loan that makes up most of the increase, and it is not a credit that we are concerned about at all.

Yes, Michael, and I think the other part of your question is do we see anything in the market that concerns us? Absent the Dwek situation in the state of New Jersey, and Kara Homes, we really don't -- with our other credits we have a fairly rigorous loan review process. And we don't see any deterioration. But obviously, when something is -- you are dealing with the law of small numbers here -- when you have a $1 million loan go bad, it looks like it doubles the previous exposure.

But I don't think that that is any kind of precursor to anything else that is occurring. And we are real pleased with our credit quality and the way it is holding up. Certainly on the residential side, it is as good as it has ever been, still.

All right, well, the first caller asked my other question. So thank you very much.

(OPERATOR INSTRUCTIONS) Mike Shafir, Sterne Agee & Leach.

I was just wondering, there was an uptick, I guess, in the net charge-offs. And I was wondering if maybe you could give me that exact number, and maybe the methodology or the reasoning as to why the provision did not cover the charge-offs this quarter.

We don't look at it, Mike -- I mean, quarter to quarter, it is kind of a short-term look at it. We kind of look at it over a period of time. I mean, the first six months of the year, we had a net recovery, and we didn't unwind the reserve. So when we are looking at it over the course of the year, the charge-offs -- the net charge-offs have been 150, and our provision has been 100. So if you look at it over nine months, it is pretty close. I would not just look at it as one quarter's worth of charge-offs.

We had one commercial loan where we had a charge-off of about $200,000, and then we had some recoveries against that. But it was really one bad loan this quarter that resulted in charge-off. But we don't think that is anything close to a trend.

And again, Mike, I think we are talking about the law of small numbers here, also. And so when we look at the current environment, we are pretty critical about it. I think we are pretty quick to charge off some of this also. And in the past, we have seen some reasonably substantial recoveries, as Mike pointed out. I am not projecting that we will see that in this current case. But I can tell you we are pretty aggressive with the charge-off policy in this environment. You don't want to be caught, obviously, with anything that is lurking there.

There are no further questions at this time.

Thank you, Diego. And again, thank you all, for your interest in OceanFirst Financial. I think we have come off a reasonably good third quarter. We still have the problems that the current interest rate environment is creating for us, but we are dealing with them - as everyone else is - as best we can. So we appreciate your interest, and we will talk to you again at the end of the year.

This concludes today's conference. Thank you all for your participation. All parties may disconnect now.