OceanFirst Financial Corp (OCFC) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the OceanFirst Financial Corp. quarterly earnings conference call. At this time, all participants are in 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, Jill Hewitt of OceanFirst Financial Corp. Thank you, you may begin.

Thank you, Ryan. Good morning and thank you all for joining us. I am Jill Hewitt, Investor Relations Officer and we 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 its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative, regulatory changes, monetary and fiscal policies of the US government, including the policies of the US 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 occurrence of anticipated or unanticipated events. Thank you and now I will turn the call over to our host of the morning, Chief Executive Officer John Garbarino; Chief Financial Officer, Michael Fitzpatrick and Chief Operating Officer, Vito Nardelli.

Thank you, Jill and good morning to all who have been able to join in on our fourth-quarter and year-end 2007 earnings conference call today. OceanFirst has just concluded its 105th year of continuous operations and our 12th as a publicly traded company. This has been an extremely difficult year for OceanFirst, as well as for the entire industry coping with the challenges posed by the subprime market meltdown, credit market turmoil and general economic weakness. We appreciate your interest in our improving performance and are pleased to be able to review our latest operating results with you this morning.

You have all had the opportunity to review our release from this morning and following our usual practice, I will not be disrespectful of your time reciting a host of 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 we continue to emerge from the troubles at our former mortgage banking subsidiary, Columbia Home Loans. I'll also briefly address two other issues seemingly on everyone's mind -- credit quality and capital adequacy.

Our diluted earnings per share for the quarter were $0.26, off a penny from the linked quarter, although representing a turnaround from the $0.13 loss for the corresponding prior year period. Excluding hold-over expenses associated with Columbia of $0.06, bank-only earnings were effectively $0.32 for the quarter. Despite the heavy Columbia-related losses posted earlier in the year, the last two solid quarters have pulled our earnings into positive territory for the year at $0.09 per diluted share. The quarterly cash dividend declared was $0.20 per share as our Board remains committed to maintaining the dividend through our earnings improvement.

Fourth-quarter earnings have benefited from an expanding net interest margin, which increased seven basis points from the previous quarter, primarily the result of disciplined deposit pricing. Earnings were impeded by a $22.6 million decline in average interest earning assets for the period, as well as the continuation of professional fees and other administrative charges lingering from the shutdown of Columbia.

Deposits decreased $27.2 million over the quarter and loan portfolio contracted $3 million, although commercial loans grew $17.4 million in the quarter and $25 million for the year. We continue to view our disciplined deposit pricing as managing effectively to support the margin suffering with the CD run-off in the ultracompetitive market in which we operate. While CDs decreased $88.5 million for the year, core deposits remained essentially unchanged and represented an improved 64.5% of average deposits.

The contraction in our balance sheet also benefits our capital ratios as the earlier Columbia losses took their toll. With the strengthening of our earnings stream, we expect to continue to support the bank's cash dividend, but forgo any significant share repurchases in the near term to help rebuild our capital and liquidity at the holding company. Of course, we remain well-capitalized by all regulatory standards.

The major issue in the industry today, however, undoubtedly revolves around an institutions credit quality. I am pleased to again report that the reserves we had established and actions we have taken with regard to Columbia subprime loans have generally performed as expected, confirming our initial assumptions. In fact, the current quarter's provisions have also benefited from a release of our earlier provision for Columbia repurchased loans. $300,000 this quarter on the heels of a $200,000 recapture in the prior quarter.

Should repurchase activity continue to stabilize as we have projected, there may be additional opportunity to take down more of that reserve in future quarterly periods during the coming year. The reserve is $2.4 million at year-end and there have been only a total of two valid loan repurchase requests received since August 1. Moreover, as previously discussed, we feel fortunate that we have succeeded in negotiating numerous comprehensive settlements with investors wherever we could to effectively insulate us from any additional repurchase claims other than the early payment defaults, which may be triggered as a result of teaser rate resets in the months ahead on the now seasoned adjustable loans sold by Columbia.

Although nonperforming loans can still appear to be somewhat inflated at $8.7 million, 52 basis points of total loans receivable, those numbers do include $4 million of residual Columbia loans either repurchased earlier in the year or previously held for sale in Columbia's inventory. In either case, this portion of the portfolio has already been aggressively written down to market. This effectively reduces the amount of nonperforming loans in the core portfolio to $4.7 million, only modestly higher than the $4.5 million reported one year ago before the effects of Columbia were included. Excluding these loans, I can report no adverse delinquency trends in our residential, consumer or commercial portfolio observed in recent quarters as we continue to outperform peer indices in all these areas.

Charge-offs for the quarter totaled $394,000, largely the result of a single formerly nonperforming commercial credit and totaled only $470,000 for the entire year. As a result of this charge-off, however, we did increase our quarterly provision modestly to $175,000. We continue to feel confident that our reserve levels adequately address the strong quality inherent throughout our loan portfolio.

With the recent extraordinary and widely expected additional Fed reductions in short-term rates affording us some immediate relief as a result of our liability sensitive balance sheet, we are prepared to endure what increasingly looks like a prolonged hostile economic environment in 2008. Under these circumstances, we expect the return of modest linked quarter-to-quarter EPS growth and significant increases in earnings over the troubled quarters from 2007.

We will continue to be paying close attention to both our operating expenses, which are exiting with the shuttering of Columbia's operations, as well as our margins, while protecting profitable deposit and loan relationships where we can. We will be further developing our noninterest income initiatives, which have continued to serve us well and above all else maintaining our commitment to strong asset quality.

With that, Mike Fitzpatrick, Vito Nardelli and I would be pleased to take your questions this morning.

(OPERATOR INSTRUCTIONS). Ross Haberman, Haberman Funds.

Good morning, gentlemen, how are you?

Hey, Ross, we are well and you?

Nice relative quarter. Could you tell us -- I guess a question for Mike -- exactly how -- what's your interest rate, your sensitivity assuming again rates will drop maybe once or twice more from here, how will that scenario affect the margin or spread?

Well, as you can see from our last quarter's results, we were slightly liability-sensitive. So you can see that the effect of that in the fourth quarter, previous three cuts of 25 each, we had some expansion to our net interest margin in the fourth quarter from the third quarter and from a year ago, so you can see that that had a positive effect. The 75 should have some positive effect as well going forward. Once you get further rate cuts passed that, once the cuts get too aggressive then you get some flooring on the deposit rate and it doesn't have a beneficial -- after a while, it ceases to have a beneficial effect, but for the instant case, there will be some modest expansion.

Ross, as always, the most important thing is to get some slope in the curve. I mean for the last couple of weeks and months, we have been operating with a U-shaped curve and that is not beneficial. But if we see some normal slope return to the curve, that would be much more beneficial for us.

And could you tell us how you are seeing loan demand today and what category is the strongest, as well as the weakest and include -- touch upon the refi as well, please.

Well, yes, and I think the latest actions here may have a big effect on that. I think you are very perceptive in talking about the refis because our loan demand has oddly been tracking very closely to what we read in the national media with regard to loan demand. Now percentage of refis have been running just slightly north of 50%. Residential mortgage demand is very uncharacteristically volatile. I mean, for example, it was very strong around the holiday season where normally it is a very, very, slow period. Our demand picked up dramatically in November, slowed down a little bit in December except for the holiday period and it has been relatively strong here early on in January on the residential side.

Consumer loan demand has been fairly consistent throughout and commercial loan demand, we are still making some significant inroads in the market. While we try and feature that as the major portfolio that we would like to grow, we are still very selective in terms of the types of credits we are putting on and we still continue to look as we have talked about in the past with the TD Banknorth acquisition of Commerce is perhaps giving us a little help there because Commerce has been a lot more aggressive in their commercial lending in our particular market over the last two years or so. So we think that there will be some disenfranchisement of commercial customers there with the TD Banknorth acquisition. That will open up that demand for us even a little greater and allow us to continue to be selective while growing the portfolio.

Just one follow-up regarding the refis. Will refis of your portfolio, assuming we continue to see that, will that put further pressure on the margin because you are seeing higher rate mortgages refi down?

That is again a good question. Of course, I don't know that we are ever going to see the refi blitz that we had two years ago because I think a lot of that has already taken effect. And we have been proactive in offering our depositors modifications when it suits our mutual needs rather than refi-ing, but we have also monitored our refis and our refi business of other people's loans always, always has outdistanced our refi of our individual portfolio of products. Our loan officers that are out on the street are carefully monitored if they are not churning the portfolio. We are very sensitive to that. And I think that we have, in essence, done a good job over the years when refi activity has been heavy in helping us insulate from any real heavy effect on the margin.

Thanks. The best of luck, guys.

Matt Kelley, Sterne Agee.

Hi, guys. Wonder if we can just kind of go through the expense items just to clarify exactly where the Columbia expenses were during the quarter and then just a little bit of help on what to expect going forward from the $12.4 million run rate we had this quarter.

I'm all ears.

Go ahead. What is the specific question?

What was the dollar amount of Columbia expenses this quarter?

Okay, $1.250 million.

And where did that fall?

Where did that fall, what line item?

Occupants?

Oh, the occupancy was 385,000 -- I mean compensation was 385,000 and then occupancy was 480,000. Those were the two biggest.

Okay. And were there any bank expenses that were one-time in nature that we need to be aware of or is that a pretty good run rate?

No, I mean our -- we had some increased -- well, we had some increased professional fees for the quarter that are not likely to continue.

Well, there will be some bleedthrough into the first quarter, but it won't be on the magnitude that we experienced in the fourth quarter, but there is still some ongoing audit fees and so forth that are going to be above original budget, attorneys' fees that will be above original budget that will bleed through into the first quarter, but they were much heavier in the fourth quarter of last year. It is just one of those things you just can't shake. We had an officers meeting this morning, Matt, and I told our staff you can't just put the key in the door and close it.

Right. But I mean the [1.25] in Colombia will not appear in the first quarter, is that correct?

That's correct. Those are direct expenses for Columbia. Those are all gone. There is no --

So that is over now? I can put a bow on that.

Yes, the occupancy is eliminated. The only thing that might be left is some indirect costs related to professional fees and things of that nature.

Okay.

So direct costs.

And then just getting back to the margin, you guys have $500 million worth of borrowings with a [486] cost. How much of that will roll over the next 12 months and at what rate?

How much of that -- the borrowing?

Yes.

How much is maturing?

That's right.

We have got -- including overnights, we have got $81 million in the first quarter of '08, $38 million in the second, $30 million in the third and $25 million in the fourth. So if we are talking about the year, that is $55 million and $119 million -- $174 million for the year and overnights are currently running at about $58 million. So roughly $115 million plus overnights. The rate breakdown I don't have for that, Matt, but the average rate breakdown has got to be somewhere on the high 4%s, 5% range.

The whole portfolio is about 5%. I don't know what that -- those specifically roll at. They clearly roll down.

Right. I mean if you guys just go to straight bullets, it is almost 200 basis points of pickup or improvement.

Right.

Clearly, clearly there is a big advantage there.

Okay. What is the average life of your CD portfolio, the $460 million of CDs at [439]?

It is short. It is heavily weighted in a year or less.

Okay. And what is the CD product that you guys are pushing right now or promotional product that you're highlighting?

A two-month CD, Matt.

With what kind of rate?

Well, it is going to be subject to re-pricing at noon today, but as of last week, it was priced at [450] for a whole 60 days.

Any sense of the magnitude of how much you are going to be able to bring that down? I know that in talking to some of the other banks in the region, it seems like just the last couple of days here there have been some pretty significant moves.

I hope -- I hope to have. I haven't looked at the survey that we take locally. That was put on my desk this morning. But I am hopeful we can move it down as much as we possibly can. I mean we are looking at ratepayers in our market. I am looking at the survey as we speak. We have got Hudson City at [485] as of this morning. I mean we have got Wachovia at [480] as of this morning. We are going to come off [450], but I don't know how far off we are going to come off it.

All right. Thank you very much.

We don't see a lot of movement in this market. That is why I say it is an ultracompetitive market and as I have said on other calls, it is not the sleepy mutuals here that normally people point fingers at in terms of being asleep. We see a lot of heavy competition in our market from Wachovia, obviously from Hudson City who makes no bones about competing on price and also from B of A. B of A has been very aggressive in our market.

I mean why not just let some of that CD money go and finance yourself at 3% from the FHLB?

Matt, we do. $88 million last year, but how many checks can you write? When it starts to reach relationships, it really gets our attention, but we wrote checks for CDs for $88.5 million last year and frankly, I question why Wachovia and B of A are so aggressive in the CD market. It is really uncharacteristic.

Right. Okay. All right, thanks, guys.

Frank Schiraldi, Sandler O'Neill.

Good morning, guys.

Good morning, Frank.

Most of my questions have been asked, but I just was wondering following up on the margin on the asset side, how much reprice is off of -- how much does variable rate repricing off of prime? Is that a real small number?

A real small number? No, it is not a real small number. No, it is home equity lines, it is commercial lines and there is -- and then we have some corporate securities. They are not prime, but they are three-month LIBOR, so in essence, they are short-term repricing. That is probably about, maybe about $200 million.

$200 million, okay. Thanks. And just one other question on -- wondering -- as far as the Columbia loans that have been I guess subprime or non-prime that you have originated going back to the beginning of '06, is there -- I think you might have given this before, John, but is there a number of sort of what percentage you have reached agreements not to come back based on stated income or stated occupancy?

Yes, as we speak, if we count individual settlements that may not be comprehensive settlements, it is at 94%.

So those are agreements not to come back over stated income or --

No, because individual settlement would not necessarily imply that. I don't know if we have the number for just our comprehensive settlements. Let me -- I may not have that number on the tip of my tongue, but let me just do a quick addition here because -- the individual settlements would not necessarily imply that it would be all the business for all future possibilities.

Okay. So those are just -- what they are, they are individual -- those are --

Yes, but I mean that's -- including that -- and that is the -- there are many more comprehensive settlements than individual settlements. The number would -- do you have a rough estimate? It's probably in the 70% range I would think. We are trying to run just a number here as you --

Sure. I guess I'll just ask one more question. It just came to me while you look at that. I am just wondering -- just for modeling purposes, is there anything different in the tax rate that we should see going forward? I mean is 34.5% sort of a good tax rate going forward without Columbia?

I think it is probably a little bit less than that, slightly less than that, probably low 30%s I would say because our ESOP expenses is going down and that is an adverse -- that is nondeductible. So that actually -- I'd probably say lower 30%s, take a couple percent off the 34.5%.

Okay, thanks.

Frank, we have come to the conclusion that in round numbers here, it is about 70% of the originations were covered by what we will call comprehensive settlements. So that our exposure would have only been 30% and then an additional 24% of that was taken care of by individual settlements as opposed to repurchases. So we actually only one wind up repurchasing about 6% of the production and most of that was in fact result. There is only again a $4 million residual really that is hanging on.

Okay so then it sounds like you are pretty secured against future [misreps] as well coming back, right?

As long as those -- as I said in the opening comments, as long as those comprehensive settlements hold up, so far so good. I mean we feel confident, we have counsel look at them every day, take it out, put it on the desk and ask counsel to take a look at it. It is holding up real well.

Okay. So just to double check here, so of all the originations since the beginning of '06 when you did that new product, 94% are -- you have individual or comprehensive settlements. The other 6% --

I believe are subject to repurchase or they wound up in portfolio because they were inventory, on a scratch and dent inventory or whatever.

Got it. And since -- for the quarter, you have only had I guess one repurchase request come back, right?

As I said earlier, since August 1, two. I think there was one in the third quarter, one in the fourth quarter. Those are repurchase requests that we consider to be valid. We have had several others that we said, hey, guys, we have got a comprehensive settlement here and they said, oh yes, we forgot. That's what I mean. So it is tested periodically and it is holding up.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Dan Quirk, Seacliff Capital.

Good morning, guys. I apologize if I missed it earlier, but can you quantify exactly what you think your NIM will do if we assume 100 basis points of Fed rate cuts for the month of January?

Well, I mean we have got some modeling on that, Dan, but I don't know that it is an exact science. The model that we run is more regulatory in nature than it is of actual use to us and the NIM -- the actual performance I think would be difficult to quantify. That would also border on us giving guidance, which we try and avoid. The modeling that we do internally is more for regulatory purposes than it is for actual projections as to what is going to happen with the NIM by the end of the year.

Well, do you think the seven basis points --

Assign a number to it, say it is 10, 15, 20 basis points would be a real guess and kind of a fool's errand on our part given the level of modeling that we do.

Okay. I mean do you think there is anything that would change substantially from what we saw Q3 to Q4 in terms of the magnitude based on what the Fed had already done and if we just --

As Mike pointed out earlier, there comes a time depending upon how deep the Fed cuts where it ceases to be a benefit as certain rates hit floors and so forth. I mean you are dealing with rates that are tied to treasuries and at some point -- and advances and at some point, they are going to hit floors if the Fed cuts deep enough.

And as long as the Fed is above --

We're not there yet certainly, but I mean we were there several years ago. When funds were at 1%, that was of no benefit to our liability pricing at that point.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS). I am showing no further questions at this time. Do you have any concluding remarks?

Yes, thank you very much, Ryan. I would just like to thank everyone again for their interest this morning. We are happy to be able to report better times in an area of great financial uncertainty and we look forward to speaking with you next quarter. Thanks again.

Ladies and gentlemen, this concludes today's teleconference. Thank you all for your participation.