OceanFirst Financial Corp (OCFC) 2008 Q1 法說會逐字稿

Ladies and gentlemen, and welcome to the OceanFirst Financial Corporation quarterly 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. Thank you Ms. Hewitt. You may begin.

Thank you. Good morning all, and thank you for joining us. I am Jill Hewitt, Senior Vice President and 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 for the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations of the Company and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative and regulatory changes, monetary and fiscal policy of the US Government, including policies of the U.S. Treasury and 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 reflect the occurrence of anticipated or unanticipated events.

Thank you, and now I will turn the call over to our host this morning, President and 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 first quarter 2008 earnings conference call today. Following our tumultuous year of 2007 we are indeed pleased to be able to report on the dramatic turnaround of our operations continuing in the quarter just past. We appreciate your interest in our improving performance and are eager to review our latest operating results with you this morning. You have all had the opportunity to review our release and following our usual practice we will not be disrespectful of your time reciting a host of actual numbers from the release.

Our introductory comments will merely help frame the opportunity to add some color to our earnings posted for the quarter as we continue to distance the Company from the troubles at our former mortgage banking subsidiary, Columbia Home Loans. We will also briefly address two related issues foremost in everyone's mind in this challenging environment, underlying credit quality and capital adequacy.

For the quarter diluted EPS of course were $0.34, a 30.8% increase from the linked quarter and representing a stark turnaround from the $0.47 loss for the corresponding prior year period. The quarterly cash dividend declared was $0.20 per share as our Board remains committed to maintain the dividend in the near-term. Consistent with our plans to strengthen our capital base, through our improved earnings stream. First quarter earnings have benefited from an expanding net interest margin, which increased 31 basis points from the previous quarter aided by a recurring seasonal recognition of income from an equity investment which contributed 14 basis points of the improvement.

Earnings were impeded by a $21.9 million decline in average interest-earning assets for the period, as well as the continuation of higher professional fees and other administrative charges lingering from the shutdown of Colombia's operations. Deposits were essentially flat, decreasing $3 million over the quarter although core deposits did grow by $20.2 million as we continue to exercise restraint in our CD pricing.

Weaker loan demand resulted in a contraction of $19.3 million in loans receivable as all loan portfolio balances declined during the quarter. This slightly smaller balance sheet coupled with our stronger earnings improves our capital ratios following the toll taken by last year's losses from Colombia's operations. As noted earlier, with the strengthening of our earnings stream, our cash dividend is secure for now. We expect to continue to assess our capital levels throughout the year in the context of the changing business environment. We do not anticipate any near-term change in our strategy with regard to share repurchase activity.

As our Chief Operating Officer, Vito Nardelli has been the principal architect of our emergence from the damaging effects of Columbia over the past year. I'll ask Vito to bring you up-to-date on the lingering Columbia operating expense issues as well as briefly comment on our continuing satisfaction with our core bank credit quality.

Thank you, John. There is no doubt that in the current environment credit quality remains foremost in everyone's mind. I am pleased to reiterate that the reserves we had established and the actions we have taken with regard to Columbia's subprime lending activity have generally performed as expected, confirming our initial assumptions. In fact the current quarter's operations have again benefited from a $161,000 release of our earlier provision for Columbia repurchased loans. This comes on the heels of similar recaptures totaling $500,000 in the second half of 2007.

Should Columbia loan 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. The reserve is $1.7 million at March 31, 2008, reduced from $2.4 million at year-end. Following the aforementioned reversal as indicated by our reserve planning model, along with an additional $525,000 of total charge-offs for the quarter relative to a single loan repurchase and an additional negotiated comprehensive settlement in lieu of loan repurchases.

As noted previously, although nonperforming loans ticked up a bit they can still appear to be somewhat inflated at $10.6 million, 63 basis points of total loans receivable. Those numbers include $4.2 million of residual Columbia loans which have already been aggressively written down to market. This reduces the amount of nonperforming loans in the core portfolio to $6.4 million. The small increase in nonperforming loans during the first quarter is primarily the result of a single loan made to noted investor Solomon Dwek, which is now in bankruptcy and became nonperforming during the quarter. This particular loan is well secured by two properties occupied by National Bank branch tenants.

Our review of delinquencies and our remaining loan portfolio does review some minor weakening, generally reflective of the economic turmoil but remaining well below all reported peer indices. Nevertheless, as a result of this nominal increase in nonperforming loans and net charge-offs of $104,000 for the quarter, we did see fit to increase our first quarter provision by $200,000 from the previous quarter.

Despite the great strides we have taken to reduce our operating expenses following Columbia's shutdown, some administrative expenses continue to bleed through to our first quarter operations. The Company recorded additional extraordinary expenses related to Columbia of approximately $500,000 during the quarter. These consisted primarily of additional reserves posted for expected shortfalls on sublets of Columbia's leaseholds and unusually heavy professional fees carried over to the new year.

With that, I will throw the discussion back to CEO Garbarino for some concluding comments prior to engaging in our question-and-answer session this morning.

Thank you, Vito. I would like to of course remind everyone that although our margin has benefited significantly over the past quarter from the extraordinary reductions in short-term rates as a result of our liability sensitive balance sheet, any additional future rate reductions at this point are much less likely to have effects of a similar magnitude. Additionally, the coming quarter will be crucial to continue to build on our earnings momentum established over the past three quarters. We will continue to price our deposits and loans conservatively to both preserve our margins and protect profitable deposit and loan relationships wherever we can. As we have over the past years we will also continue to develop our non-interest income initiatives which have served us well and above all else reaffirm our commitment to strong asset quality at the core bank.

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

(OPERATOR INSTRUCTIONS) Ross Haberman, Haberman Fund.

Nice quarter. Could you talk about -- you talked about an equity investment. Was there a gain from that and where did that show up on the income statement?

Yes, it actually bleeds through into the margin, Ross. This is something that we've had on the books now for I guess close to 10 years and it is always a first quarter; it is the result of a K-1 that we receive during the first quarter.

All those late K-1s, right?

All the ones that you wait the total last minute for, yes.

Right. And how much income or gain was that for, if I may ask?

I believe it was $633,000.

Okay, and was it a partnership or is that interest income basically or capital gains or what?

Included in interest income.

Has that been pretty regular or bouncing around a lot?

No. Last year, for example, it was $681,000 so it has been consistent.

Got it. And could you just go over what's left in terms of -- I missed it; what is left in terms of the Columbia loans and how quickly do you think you are going to get rid of the balance?

You mean the loans that we still have in the bank's portfolio?

Yes.

Again, we've written them down now to a total of 4 points -- it was just in my comments here -- that's right -- I am just looking at the exact number so I don't mislead you. It was actually in Vito's comments, $4.2 million Columbia loans on the books. Most of those are nonperforming, obviously, and most of those are in the process of foreclosure. So it unfortunately the strict foreclosure time periods will lengthen out. But we expect that probably over the period of the next year to a year and a half most of those loans would disappear. The thing that we feel confident is that we carried them at very conservative valuations and so that we think we are less likely to see any additional losses associated with them at this point.

When you say conservative what sense based on the original loan or (multiple speakers) original loan?

Very aggressively.

We have them at $0.50 on the dollar, Ross.

And just one final question in terms of your current -- could you describe sort of current loan demand and what category are you seeing -- are you seeing any weakness particularly in the consumer sector yet?

The three categories of loan demand we experience at OceanFirst are residential mortgage, consumer lending, home equity line and of course the commercial side of the house. It is no surprise that the residential piece has kind of cooled down. The consumer piece, given current values and the fact of diminishing income on the part of many borrowers has caused that to substantially slow down. On the commercial side there are many banks competing against too few customers and we are holding to our credit standards and to our pricing models there. So those three factors kind of contribute to our loan portfolio not growing at the budgeted rate that we anticipated earlier on this year.

Any particular concerns about the home equity and dropping value that you are going to -- you might see some write-downs or delinquencies particularly in that category, based on lower valuations of the underlying homes?

I think there is two parts to that question. First, the affordability model of whether or not the homes in Monmouth and Ocean are retaining their value above the average diminished value of most houses in the country. Our experience here is that the Monmouth sector is pretty much held. Ocean is showing a diminished value in terms of houses to the tune of about 10% to 15%. We are monitoring that carefully. We have put in place and revisited our underwriting criteria for consumer lending. And we've also taken steps in reviewing what we currently have on our books to ensure that we have no risk sitting there that could start a spark here in the next six months.

Thank you, guys.

Julienne Cassarino, Prospector Partners.

Nice quarter. I was just wondering about the accumulated other comprehensive income in the shareholder's equity section of the balance sheet. The loss, or I should say loss that doubled sequentially, I was just wondering what drove that.

Those are invested in corporate securities. They are floating-rate corporate so they are trust preferred securities issued by other banks, major banks. And with that market those credit spreads, those spreads have widened dramatically over the last six months. So those where six to nine months ago those were close to par, they are now at 20% under water. So that's reflected in that fair market value adjustment. The ones that we have are all major banks. They are all -- they all maintain their investment-grade rating. In fact, none of them have been down graded, but their market values have declined.

You don't have a particularly large securities portfolio. This is like a big swing.

That's the majority of it; that is 11 issues at $5 million, it is $55 million of the investment portfolio. And it has been on the books now I think probably 10 years.

We've owned the securities for about 10 years, and they are floating-rate. We bought them for interest rate risk management purposes. They float to LIBOR. So the valuation is not based upon interest rate swings so much as it is the way credit spreads have widened in that market over the last six to nine months. And basically they are 20% -- at 55 [day] in corporate, they are 20% off, that is $10 million and the tax [affected] you get it down to $6 million; the number you are seeing it in our balance sheet.

And so it was $55 million value at year end that has been marked down by the $6 million?

Well, it is a principal balance of $55 million on March 31, and their market value is about $10 million less. And then when you tax effect it, you come up with a total loss of about $6 million.

So $55 million on the balance sheet right now.

In principal, right.

In principal, and do you have any other kind of non-agency backed securities like that? (multiple speakers)

That is virtually all our corporate; we have a small portfolio, a couple of small municipal credits, and the only other securities is a small portion of MBS, and those are all government agency MBS, no CMOs or anything exotic.

No private label stuff, (multiple speakers). Okay. Very good. Thank you.

Private label stuff, no.

(OPERATOR INSTRUCTIONS) Matt Kelley, Sterne, Agee.

Just on the expense front getting back to Vito's comments on the $500,000 is that fair to assume that is not going to be repeated and that there are kind of base rate for expenses going to be down about $11 million level Q2?

I would say they will all be gone, Matt. That might be -- there will still be some bleed over. I mean, the leases we are trying, we're doing our best to try to sublet them, but some of them go out for a couple years. We estimate that they will be dark for the next, that we have a full loss for the next six months and then we can sublet it at a percentage of our base rate. So if that holds true then there will be additional expenses but if we have trouble subleasing it there might be some additional expenses. And there is still some nominal charges that is still going to bleed through. I wouldn't say that all $500,000 is gone next quarter. I would say maybe half of that might be gone.

Professional fees will still continue, too, because obviously we are dealing with a lot of holdover just the foreclosure issues and so forth. It is a costly operation.

And there are maintenance expenses related to managing their book.

Every quarter we look at the next one as hopefully being cleaner than the one before. We are certainly moving in the right direction but the bleed-through we will try and keep you apprised of.

In aggregate what was the total amount that was spent on Columbia? Whether it is the leases, whether it is the professional, whether it is kind of the maintenance of those assets. What is the total amount in the $11.6 million?

That was the $500,000.

That's it. Okay, all right. The second question just on the Solomon Dwek, what is the dollar amount of that again?

1.5.

$1.5 million?

No.

And what is the LTV on that? On the value?

It is extremely well secured, and it is positive cash flow. The reason it is nonperforming is because the loan has matured and the bankruptcy trustee hasn't moved quickly to liquidate it. He is sitting on it, so it is in a default interest rate. It's a typical example of bankruptcy retarding the process. It had been performing right along through the end of the year. The loan came due and the bankruptcy trustee hasn't done anything to liquidate it. So we are sitting with an asset that is matured and has got a positive cash flow and the bankruptcy trustee doesn't appear to be in any hurry.

Okay.

And again it is secured by two National Bank operating branch offices in Brighton Ocean County; not ours.

Just turning to your liabilities for a second, your time deposits, what percentage is scheduled to mature over the next year? Quarter end?

The percentage time deposits are -- it is almost all of them. It is at least 90%. Time deposits typically are fairly short, so I'm looking at 410 out of 454, I am looking at our year end GAAP tables, 90% is within about a year.

A lot of them, Matt, are even shorter yet. In this current environment the special CD pricing that we have been engaging in has been of a two-month variety.

What is the rate on that?

The current rate on the two-month is 240.

Have you guys tried to entice people to go out a little bit further up the curve?

We do, yes, but it is --

What is your 3, 4, 5-year?

Let me give you one now for example in special CD pricing. When you talk about farther out on the curve there is a 6-year account that is out there at 4%, but even in an intermediate account we go 2 months at 240, 10 months at 250.

Okay, all right. And going through the GAAP table on the FHLB advances there's $191 million in the 1 to 3-year bucket. I wonder if you can give us a little bit of guidance on where that falls in the 1 to 3-year. Is it going to be more front end loaded? It is almost half your borrowings, half your FHLB advances in that bucket.

Just looking at the information.

Yes, just trying to figure out kind of the '09 numbers.

It is more '09 than '10. It is $108 million in '09 and $85 million in '10. So it is a little bit sooner.

What was the amount in '10? I'm sorry.

$85 million. That is (multiple speakers)--

What is the average rate on $108 million in '09?

$108 in '09 -- I don't have that, Matt.

I assume it is north of 4 though.

Yes, well, the weighted -- I could just -- it reflects the entire portfolio.

I guess the more important question is as these borrowings start to mature, you are starting to extend a little bit down here on FHLB advances?

Home Loan Bank was about 490 -- it was about 490 was the portfolio, so that clearly has got to reprice down.

Right.

Matt, are you trying to infer that we should being opportunistic relative to the rates and our borrowings to take it --.

I am looking at 4-year advances, just bullets in the high 3's. It seems like now is the time to start extending a little bit on some of the funding if (multiple speakers).

(multiple speakers) we have been borrowing in at the 4-year range in the low 3's. So yes, this is absolutely a good opportunity to extend. We've actually done that for the first quarter; we have done that.

Okay.

Matt, as these come due we take a look at the yield curve and try and place them at a convenient spot. For example last month we had a $5 million roll that we rolled at 330 for a 4-year period; exactly what you're talking about.

Okay, great. Thank you.

There are no further questions in the queue. Would you like to make some closing comments?

Thank you, Doug. I would; I just again, once again thank everyone for their interest this morning. We appreciate the capacity we have to sit here and talk to you about our improving earnings picture and of course we would invite you all to our annual meeting which will be held at the upcoming May 9, locally here in Ocean County. We hope to see you then. Thank you again.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.