OceanFirst Financial Corp (OCFC) 2008 Q3 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 a listen-only mode. A 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, Senior Vice President for OceanFirst Financial Corp. Thank you Miss Hewitt, you may begin.

Thanks Doug. Good morning and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer and we will begin this morning 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 word believe, expect, intend, anticipate, estimate, project or similar expressions.

The Company's ability to protect results or the actual effect or 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 and regulatory changes, monetary and fiscal policies of the US government including policies of the US Treasury and Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan product, 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 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 third-quarter 2008 earnings conference call today. This morning, we are indeed pleased to be able to report on the continued improvement in our operations for the quarter just past. We appreciate your interest in our 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, 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 wrestle with the challenges of the current operating environment.

It is abundantly clear that the unprecedented events of the past six weeks are having a dramatic effect on all financial institutions. Most importantly, at OceanFirst as a community bank, we have delivered strong financial performance and maintained the confidence of our depositors and local market as we emerge from the events of 2006 and 2007. In the coming days as a healthy well-capitalized institution, we will certainly be further evaluating the options available to us under the Treasury's Troubled Asset Relief Program as additional details become available.

For the quarter, diluted earnings per share were $0.32 representing a 6.7% increase from the link quarter and an 18.5% increase above the corresponding prior year period. The Company's 47th quarterly cash dividend was $0.20 cents per share, unchanged for the 23rd consecutive quarter as our Board remains committed to maintain the dividend in the near-term consistent with our strengthening financial performance.

The quarter's earnings have again benefited from an expanding net interest margin which increased 14 basis points from the previous quarter partly offset by a decline in average interest-earning assets. Earnings also benefited from the sale of a previously impaired available for sale investment security which was in fact sold during the quarter with an accounting recovery book.

Partially offsetting this, the opening of our 23rd branch office and the continuation of heavy professional fees and other administrative charges lingering from the shutdown of Columbia also resulted in higher than anticipated operating expenses. Our efforts to sublet office space previously occupied by Columbia in this market continue to fall short of our expectations.

We have continued to temper these expectations and have increased our provisions for this vacant space through the first quarter of 2009. Core deposits grew $41.4 million for the quarter but were partially offset again by a $24.9 million decline in CD balances as we continue to exercise restraint in our CD pricing.

Core deposits now exceed 71% of our total deposit base, a very satisfying transformation in the composition of our liabilities. We continue to bolster our tangible and core capital ratios which grew to 7.94% during the quarter.

As noted earlier, with the strengthening of our earnings stream, our cash dividend is secure for now as our capital levels help improve our capacity to generate liquidity at the holding company. At this point, however, irrespective of our revolving TARP strategies with continuing plans to preserve capital, we do not anticipate any change in our moratorium on share repurchase activity for the foreseeable future.

I will ask Vito Nardelli, our Chief Operating Officer, to again bring you up-to-date on the Columbia loan repurchase reserve performance as well as comment on our core bank credit quality and loan loss provisions.

Thank you John. Clearly in the current environment, concerns over credit quality demand the attention of our management team and also remains of significant interest to our shareholders. I'm pleased to report that total nonperforming loans declined $2 million for the quarter to $12.5 million or 75 basis points of total loans receivable.

Looking at the core bank portfolio, excluding the $5.2 million of residual Columbia loans which have already been aggressively written down to market, nonperforming loans totaled $7.3 million. Last quarter I spoke of three nonperforming commercial relationships totaling $4.3 million. This represented the area of improvement as only $2.3 million consisting of two relationships remains outstanding at quarter end.

The first relationship is a $9.1 million credit which is well secured by commercial real estate in the process of foreclosure. The second is the remaining balance of a loan to now notorious investor Solomon Dwek which received a significant paydown in the quarter as one of two properties securing the credit was sold out of bankruptcy leaving a $480,000 outstanding balance. The second Dwek property remains under a contract for sale for $950,000 under the control of the bankruptcy trustee.

Despite the quarter-to-quarter improvement of 12 basis points in nonperforming loans, and the fact that our portfolio delinquency metrics remain remarkably stable, easily outperforming peer indices, we remain diligent in our monitoring of emerging trends that might foretell future weakness. Reflective of this as well as the modest increase in our commercial loan production and the net charge-offs of $101,000 in the quarter, we maintain the level of our third-quarter loan loss provision at $400,000.

I would now turn our attention to the reserve for repurchased loans established as a result of the lingering potential from the subprime issues at Columbia. I'm pleased to state once again that performance has been in line with our expectations.

While we receive two repurchase requests in the quarter, they were resolved or repurchased as were three of the four repurchase requests which were outstanding at June 30. There is currently one remaining request and we are vigorously contesting this claim.

In light of the repurchase activity and resolution, our analysis indicates that the current reserve for repurchases was above what is being necessary, prompting a modest recapture of $50,000 of that reserve during the quarter. This reserve is $1.2 million at September 30. With that, I will return the discussion back to CEO Garbarino for some concluding comments prior to engaging in a question-and-answer session this morning.

Thank you Vito. In closing, I would like to reflect on the extraordinary events of the past six weeks and perhaps more importantly the speed with which it has all transpired. Throughout this turbulent period, we have been continually challenged by the markets and unprecedented governmental interventions to address the problems.

In the past, I have often referenced the potential for and caution over major financial systemic shocks which have now obviously come to pass. As I referenced earlier, we're carefully and cautiously following the remaining details of the comprehensive Treasury TARP as they are released. Pending the continued emergence of those details, our Board will be assessing the merits of participation in TARP and remains cognizant of its fiduciary duty to shareholders with regard to exploring all available options.

In the interim, we plan to continue to exercise discipline in the pricing of our deposits and loans particularly CD's to both preserve our margins and protect profitable relationships wherever we can. As I said earlier, the solid relationship we have nurtured with our community is perhaps our most cherished asset in this environment. It remains the principal point of differentiation for OceanFirst in this market.

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

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

Good morning, just a few questions. First on the -- I wonder, John, if you could give us little more detail on the increased occupancy costs. I know you talked about a couple of subleases through Columbia. If you could just talk about the size of those offices and how long sort of the leases run and then maybe what your -- let's say they do stay vacant for an extended period of time, what sort of losses or sort of increase on a quarterly basis (multiple speakers)

I can appreciate that Frank. As I said, we had developed expectations about how long it might take us and at what rate we might be able to sublet most of this space. Needless to say, commercial real estate markets haven't moved in our favor as far as that is concerned.

And the largest office that we have I believe is about 10,000 square feet up in Westchester County in Valhalla and that's the one with the longest lease to run too. I believe the lease still runs for three or four years, 2012 it expires.

So we're looking at that on a quarter-by-quarter basis. There's some other smaller parcels out on Long Island and other areas around. But we've tempered as I said our expectations with regard to that and tried to lower the goals that we would have for subletting it. But clearly we're looking at it on a quarter-by-quarter basis trying to stay six months ahead of it.

The provisions that we've made in this quarter cover us through the end of March 2009. If we're still unable to get any activity after that date, we will have to extend it again and we will take a look at that a little closer at the end of the year.

The other local occupancy expenses we had and maybe more importantly compensation expenses, were related to -- and I said in my opening comments the 23rd branch office -- but in essence it was the 22nd and 23rd. The 22nd office was opened right at the end of the second quarter and so there wasn't a full quarter of expenses associated with it.

We have been gearing up for these for some time and the people have been brought on board so it's really two offices that were opened in essence over the last four months or so. Other than that, it's the operating expenses -- just -- we have some very heavy professional fees, attorneys and still some accounting fees associated with the unwinding of Columbia.

As much as we would like to see it go away, it is still lingering on much longer than we thought originally. We would love to see a real clean quarter here and I know in terms of your modeling you would love to be able to get your arms around it a little better too. But believe me, the attorneys fees are substantial.

Is there any disclosure you can give on just that one that you mentioned about 10,000 square feet up in Westchester? How much is that basically? How much are you paying for that and where are you sort of -- what are your loss expectations?

You want us to open the kimono and tell you what we would like to get for it, is that the deal?

Maybe I could give you an offer.

Yes, I don't know that I have all that information handy but it's just my recollection that we have remaining exposure there of almost $600,000 through 2012. That's if there's no sublet available.

So if you can look at it say over the say next four years, there's about $600,000 so about $150,000 a year of total exposure. I don't know that helps you but (multiple speakers) and that's the most exposure. The other properties have shorter-term leases and significantly less exposure but the the one Valhalla is the largest.

Okay. And then just on -- do you have any thoughts on margin here, on margin expectations? I would think the Fed cuts would help you guys pretty quickly. Is that fair to say? I mean is that fair (multiple speakers)

I think we're probably at the point where the Fed cuts have very little effect because as we've talked about this numerous times, there's only so low that you can take your deposit rates and I think we're probably there. The last 50 basis point rate cut and any subsequent cuts that may be coming along are likely to have much less effect on our margin than they have had to date.

There would still be some benefit in any borrowings that were being rolled. Presumably that's going to be passed along in terms of our home loan bank advance rates. But our ability to exercise any additional discipline with regard to pricing our retail deposit products, our principal source of funding, is pretty much all used up at these levels.

So we see much less margin effect in the quarters going forward as might come from the Fed. We're still anxious obviously in pricing CD's as I said with a strong degree of discipline and you know earning our way with our core deposits as much as we possibly can. We have seen significant improvement in that over the first three quarters of this year. As I say, they're over 71% now of total deposits and that is a significant milestone for us.

Finally, just wondering if you could touch on the balance sheet as far as the loan side, the flattish growth there and what -- is it the fact that what you're seeing coming in the door is basically just not creditworthy? Is it that funding costs are just making it sort of not worth it on the margin side?

Frank, I think it has been a question of funding. I think if you'll look at this quarter, you will see that we had some pretty significant commercial loan growth and that is always our primary focus here in terms of portfolio growth. The funding has been somewhat limited. We haven't been in an expansive stage with regard to our balance sheet as a whole and so any commercial loan growth we're able to generate is generally generated at the expense of our residential mortgage portfolio.

And so what we're trying to do in times like these as I mentioned is to conserve our capital, manage those capital ratios as closely as we can, not pursuing an exceptional amount of growth but where we can pursue growth in the commercial portfolio we take it. We have seen over this last quarter several instances where formerly very difficult and formidable competitors in the commercial loan market principally Wachovia, Bank of America, TD Banknorth have declined to even issue term sheets on credit that we have been competing for and that his kind of amazing.

I think with Wachovia we understand that. And I think they were subject to obviously the funding pressures now, having seen what has occurred with them over the last three months. But we also see that with Bank of America. So the money sent there and [supraegional] banks I think have been more and more absent from our market. We see more and more opportunity.

Having said that, we have certain funding restrictions ourselves and we're not at breakneck speed to try and grow this portfolio. We still exercise an extreme amount of discipline and attention to credit quality and there's no way that we are going to be the repository here for everyone else's bad credit.

So, we had some nice portfolio growth on the commercial side this past quarter. I believe the increase was something of the order just under $20 million for the quarter which is pretty strong for us, takes our commercial portfolio up. And I think if we can see that continue certainly for the subsequent quarters, we will be pleased.

(Operator Instructions) Ross Haberman, Haberman Value Fund.

I'm sorry, did you summarize to say how much in terms of I guess the other expenses, legal and so forth, I guess putting aside the leases for the moment, do you think it will be lead less recurrent or not recurrent after this quarter or two?

I would love to cut the attorneys off, Ross.

I would too.

But they're still pretty significant.

And you see this at least lasting for how many more quarters would you say?

Well as we've said in the past, I think they're beginning to wind down. But there's a lot of actions that are being pursued right now that are still costing us substantial legal fees. That and then the other big item is the compensation and benefits associated with the new offices. Those are the two biggest items really, the occupancy compensation and benefits and legal fees.

How much were the extraordinary legal fees would you say this quarter?

This quarter it was just under $200,000 (multiple speakers) significant. It's not a number to be sneezed at. I'm not talking about some token fees here. With what's going on with TARP and so forth, it's not just the Columbia -- maybe I'm unfairly characterizing it as related to the unwinding of Columbia. But every time we have to evaluate another treasury proposal and take a look at TARP or any other program that comes down the pike, obviously the attorneys are involved and that clock is running.

Unfortunately right. I just have just two balance sheet questions. The $215 million of which you deem consumer loans, are those all home equity and how much of that do you have the first mortgages on?

They're principally home equity loans and lines. There is a very, very minor amount of direct auto loans. We don't do any indirect auto lending and there's some overdraft line of credit loans but the vast majority is home equity loans and lines.

I don't know that we have the exact ratio as to how much represents first lien, but I think it would be fairly significant the way lending went over the last couple of years. The amazing thing is the delinquency metrics with regard to that portfolio is holding up so well and completely uncharacteristic compared to what we see in other areas of the country.

I think that is true of what we see around the state also. I don't think that is singular to OceanFirst. I think the state of New Jersey, the home equity lending delinquency metrics are very, very strong.

So we are even monitoring and we monitor closely thirty-day delinquencies there and there is no uptick in even thirty-day delinquencies. Looking for a dark cloud, our collection people tell us that people that used to pay on the 17th might be paying on the 25th but that's about as dark a cloud as they can find on the horizon.

And finally, with the advent of Sovereign going away, how do you see that? Do you see that affecting business much?

I'm not sure that that is going to be a big effect. We didn't see Sovereign very much even over the last four or five years, quite frankly. I wouldn't classify them in the top three or so of our retail competition. My understanding is that Santander generally does not rebrand when they do this. They didn't do that certainly with First Union and some other occurrences. And so I think Sovereign will continue to exist there.

Whether or not they're going to be a more formidable competitor as a result of Santander's acquisition, I think remains to be seen. But I don't think we ever considered them to be a significant force in our market. They had a reasonably large market share but that was all acquired over the years with acquisitions that they had done. On a continuing basis their market share has been decreasing.

One final thing if I may and then I will step back. Could you describe -- I got on a little late. Did you give us some color on the local, residential and commercial markets today?

Vito spoke to that in terms of our credit metrics and without going into specifics just that the credit metrics were holding up real well.

No, I guess what I'm getting at is at is -- commercial you're saying is holding up. How about residential? Is that down?

You mean lending or delinquencies?

Pricing.

No, pricing has been pretty stable. The pricing on the residential side has been whipsawed obviously with what has gone on in the credit markets. But when I saw whipsawed, you're talking about an eighth to three-eighths here or there, up or down in any given monthly period. But it's holding in there pretty tight.

On the commercial side we haven't seen any opportunity to get more aggressive with pricing but we always had a fairly high pricing threshold. We never dropped our prices as low as some other institutions did and quite frankly as I mentioned a little bit earlier, we haven't seen Wachovia on any deal that we have issued term sheets on in the last month and we have seen Bank of America less and less. They were two very formidable forces in the market and their exit from the commercial lending market has been I think to our benefit.

There are no further questions in the queue at this time.

Doug, I thank you. We did want to correct one piece of -- I think where Vito misspoke and we attacked him as he did this but he transposed a number and that was related to -- Vito, why don't you --

When I characterized the first relationship when we were talking about the difference, the $2.3 million consisting of two relationships, I think I mentioned the first relationship was $9.1 million. No, it's $1.9 million.

And that was in the commercial real estate and it's in the process of foreclosure (multiple speakers) We didn't want to leave the impression there that there was a $9 million relationship in the process of foreclosure. It was a simple transposition of 1.9.

I'm being sent to the eye doctor this afternoon so that will never happen again.

Vito thank you, thank you for your honesty. Again, we thank you all for your attention this morning. We look forward to talking to you toward the end of the year.

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