OceanFirst Financial Corp (OCFC) 2009 Q1 法說會逐字稿

Hello and welcome to the OceanFirst Financial Corp. earnings conference call and webcast. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please note this conference is being recorded.

Now I would like to turn the conference over to Jill Hewitt. Ma'am, please began.

Thank you. Good morning and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer. I'll 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 word believe, expect, intend, anticipate, estimate, project, or similar expressions. The Company's ability to predict the 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 the interest rates; general economic conditions; legislative regulatory changes; monetary and fiscal policies of the US government, including 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; 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 revision 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. Now I will turn the call over to our hosts this morning, President and Chief Executive Officer John Garbarino; Chief Financial Officer Mike 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 2009 earnings conference call today. We are indeed pleased to have posted solid, consistent earnings for the period when compared to both the linked and prior year quarters.

During the past three months, we have continued to demonstrate the ability to face the challenges posed by the economic climate and have fortified our balance sheet and capital positions in several ways. Not the least of these is our previously reported voluntary acceptance of $38.3 million in preferred stock, under the US Treasury Capital Purchase Program.

We appreciate your interest in our 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 Thursday. 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 and comment briefly on the strength of our balance sheet and the continuing challenging economic environment.

Diluted EPS for the quarter was $0.30, matching the linked quarter and was $0.04 below the prior year quarter.

The Company's 49th quarterly cash dividend was declared and maintained at $0.20 per share, unchanged for the 25th consecutive quarter.

There were two unusual items in the quarter. There again was a small recovery of $34,000 in the reserve for repurchased loans established against potential continuing exposure from our 2007 mortgage banking shutdown, as our experience there continued to be favorable. This was offset by a loan servicing asset impairment of $263,000 resulting from heavy prepayments in the current mortgage refinance market.

The quarter's earnings have again benefited from increased net interest income, as the net interest margin grew to 3.47% as compared to 3.35% in the previous quarter, reflective primarily of liability cost decreases and the lower rate environment.

Additionally, average interest earning assets increased $25.4 million, reflecting our investment of the Treasury Capital Purchase Program stock.

Although retail certificates of deposit remain difficult to attract, given our disciplined pricing and our highly competitive retail market, our core deposits increased $51.6 million, driven primarily by government deposits. Our core deposits currently comprise a growing 72.5% of average deposits.

Our efforts to sublet office space previously occupied by Columbia continue to fall short of expectations in a worsening commercial office market. We have again supplemented the reserves associated with these vacant properties through the end of 2009.

Otherwise, operating expenses were closely controlled and, on the whole, decreased $161,000 even as our FDIC insurance expense increased $350,000 and our effective tax rate rose to 37%.

In this market, we remain heavily focused on the strength of our balance sheet as opposed to being preoccupied with growth. Well capitalized by all standards prior to the Treasury Capital Purchase Program investment which we accepted in January, our tangible and core capital ratios grew to 8.27%, and the Bank's total risk-based capital ratio was 14.25% at the end of the quarter.

A more common measure of capital adequacy cited these days, especially for institutions in the Capital Purchase Program, our tangible common equity capital ratio is a strong 6.39%.

Our Board voluntarily agreed to participate in the Capital Purchase Program to prudently fortify our balance sheet and capital position in these uncertain times as well as support our lending initiatives. Both of these objectives have been accomplished, as overall our lending has increased 43% over the first quarter of 2008.

While we are not pleased by the stigma which has attached to healthy institutions that participate in the Treasury program, neither do we feel it prudent to return these funds to Treasury until we have satisfied ourselves as to the ability of our Company to withstand an even more hostile economic environment than currently exists. That stress assessment continues.

As noted earlier, our cash dividend has been continued, unaffected by economic conditions for now. As we have fortified our capital position, our Board remains committed to a strong cash dividend policy paid from current earnings for the benefit of our shareholders.

I will ask Vito Nardelli, our Chief Operating Officer, to bring you up-to-date on our credit quality and increased loan-loss provision.

Thank you, John. I'm sure you're all interested in hearing my perspective on our credit quality. As indicated in the press release, nonperforming loans increased in the quarter by $3.7 million to $19.7 million or 118 basis points of total loans receivable.

The increase is clearly a result of the deteriorated economic condition that was spread among all categories of loans, commercial, residential, and consumer. There were no specific patterns which would indicate a systemic issue with any particular product line or underwriting characteristic.

The two largest nonperforming credits are unchanged from prior quarter. The largest is a commercial relationship of $2.1 million, secured by real estate which is now under a contract for sale, that will yield repayment virtually all the outstanding principal. The second is a $1.9 million commercial relationship that is well secured by real estate recently appraised at $3 million.

Since I have reported to you in the last two quarters regarding the one remaining loan to investor Solomon Dwek in the amount of $480,000 secured by real estate, I will update you once again. The contract for sale that remains in force and under the control of the bankruptcy trustee will provide for full repayment of outstanding principal upon closing.

Of course, we are concerned by the increase of our nonperforming loans, but we are not surprised. Our commitment to credit quality and our strong credit culture remains unwavering. As has been our long-standing practice, we continue to closely manage the delinquency metrics of our entire portfolio, and they remain favorable to the overall market statistics on a state as well as national level.

We are fortunate that the real estate values in our primary market area promotion of Ocean and Monmouth Counties, have held up comparatively well to both state and national trends. As recently as yesterday, a front-page article in the regional daily newspaper reported a relatively modest decline of 7% in the average sale price of homes since 2007.

Likewise, while we are not immune to the rises in unemployment and underemployment being experienced throughout the nation, our customer base has held up better than most.

Given all that we know regarding the current economic environment, including the condition of the real estate market, and recognizing the current level of nonperforming loans, we have increased the provision for loan losses for the quarter to $800,000. That's up $200,000 from last quarter's decision provision of $600,000.

During the quarter, we realized net charge-offs of $446,000, of which $366,000 were related to subprime loans originated by the shuttered Columbia Home Loans. All were specifically reserved for in the allowance for loan losses.

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

Thank you, Vito. As I've noted in the past, with a fortified balance sheet and a strong belief in the credit quality of our portfolio, management feels well positioned to weather the continuing storm. Pundits continue to forecast that the worst for our market may lie ahead; and given what we have experienced, candidly we find it difficult to disagree.

Much of our area has been spared the deep suffering experienced by other parts of the country, although local trends in rising unemployment, increasing delinquency, and softness in real estate values are impossible to ignore.

In closing, I would like to again reflect on the extraordinary events our financial system has endured in recent months. Throughout this turbulent period, we have been continually challenged by the markets and unprecedented governmental interventions proffered to address the rapidly evolving issues faced by our country.

During this time, we have maintained solid, consistent earnings and have used every means possible to strengthen our Company while preserving value for our shareholders. In many cases, government's response has been inconsistent, lacking in details, and subject to criticism from many circles.

The expectations of the year ahead remain clouded and our outlook continues to necessarily be cautious and restrained. Nevertheless, because of the actions we have taken, we feel better positioned today for the next round of crises which may lie ahead. We remain committed to evaluate every market opportunity as they emerge in our quest to generate value for our shareholders' investment.

With that Messrs. Nardelli, Fitzpatrick, and I would be pleased to take your questions.

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

Morning, guys. A couple of questions here. I wanted to start with just a question about the new FASB B position and how it relates to the balance sheet, particularly the question of whether or a market is inactive or active. Has that new guidance -- do you think that affects Ocean in any way, or not?

I'll let Mike answer it, but I will give you my impression off the top, and then he can give you the technical answer to it, Frank.

Of course, we don't have an OTTI impairment. I think we feel that any benefit of that new guidance might be in helping clarify how you can measure the impairment and how you can allocate it between OCI and the income statement. But I will let Mike give you a technical answer response.

Yes, Frank, we have not adopted -- we didn't adopt that as of the first quarter. We looked at it and it didn't affect us. For our trust-deferreds, we use Level 2 pricing. We were able to get some -- there was some activity in those, some sale activity, purchase of sale activity in those bonds.

The primarily big issue with it, as you know, is Chase, Bank of America, etc. So there is some ability to get pricing on that or to get similar quotes and adjust them. So we use Level 2 pricing and it didn't affect us.

So it didn't affect us at all in the first quarter. We don't expect it to have an effect in the second quarter when we adopt it either.

Okay, thanks. Then just trying to get a sense for our modeling going forward. In terms of expenses, the salary or the comp line was down pretty significantly from 4Q. Could you just talk a little bit about it?

I guess it's a question for Mike as well. Talk a little bit about the quarter-over-quarter drop in the comp line and what we can expect as a decent run rate going forward.

There was two items in that, Frank. It was down a little over $500,000. There was a decline in incentive plan expenses; that was about $200,000 from quarter to quarter. Then there was a decline of about $300,000 in capitalized costs related to loan originations.

Typically when we have a very heavy loan origination period, as we did in the first quarter due to refinancing, the accounting is you capitalize costs that are related to the origination of those loans.

So what happened in the first quarter was that a lot of the costs, the salary expense that's related to loan origination was capitalized, more so than in the fourth quarter because the volume increased substantially. So it was loan origination costs, compensation related, that are capitalized.

Now what happens is it gets capitalized into the loan. Then when we sell a loan, it reduces the gain on sale a little bit, although as you can see our gain on sale was still pretty healthy for the quarter. But it gets capitalized into the loan and you sell the loan and it lowers your gain on sale.

Frank, I'll just add the reduction in the incentive plan expense is directly related to the Capital Purchase Program and the bullet that our top five senior executive officers took with regard to their potential bonus payments for the year.

Okay. All right, thanks. Also for modeling -- and this is probably a tougher question. But is there -- when you're looking at the reserves, John, you said that certainly for New Jersey and for your footprint the worst could be in front of you.

Is there a number that you think of when you are looking at the reserve to loan ratio, that you think it will migrate forward?

You know, there is not an absolute number, Frank, and in some cases we been criticized because some people would argue that our loan reserve looks a little thin.

I think we spend a lot more time looking at the underlying quality of the credits and what they are already carried on, on the balance sheet.

So most of our nonperforming really are our residential mortgage loans. The real estate market is holding up extremely well locally. And we honestly feel that the provision that we make is directly related to what we feel we're going to need.

So I don't think we're chasing a mythical number. I think we beefed the provision up certainly in the fourth quarter of '08; and certainly we beefed it up again in the first quarter of this year. And we feel very comfortable with that provision.

Now when you talk about stress testing the balance sheet, as the market conditions change we'll obviously evaluate the provision as we go along. But I don't think we have a mythical number.

If you assume the worst, I think it can get a lot worse than it is now. But so far we've been pleased with the way -- with the resiliency of the local economy.

Okay. I guess just finally a follow-up to that. When you say real estate prices have held in very well, what about commercial real estate in the footprint? Is that the case as well?

Yes, it really is. Again, you see some signs of it. But you don't see the real heavy vacancies that you see; you don't see the restaurant closings that you see elsewhere.

Frank, as you know, I spend some time out of state in the wintertime and the areas that I go to are very, very heavily affected by what's going on. It always strikes me, the distinction strikes me when I get back home.

Okay. Fair. Thank you very much.

Ross Haberman, Haberman Fund.

I was wondering. You touched upon some writedowns on mortgage servicing. How big is your mortgage servicing asset?

If we continue to see these low rates through the end of the year, will we continue to see that level or more writedowns?

Ross, the servicing asset was $6.7 million at March 31. That writedown was based on a point in time; so at March 31, for example, the 30-year mortgage rate was 5%. We were at 5%.

So it was based on that rate and the prepayment speeds that are associated with that. We took a $263,000 writedown.

Then since that time, actually our rates are up a little, are up an ace from that time. But if rates go below 5% during the next quarter or two, then it's likely that there might be another impairment.

Okay. I just had one other general question. How big is your TARP participation exposure with other banks?

How large is our TARP participation exposure?

Participation (multiple speakers) on the commercial or the (multiple speakers).

TARP on the brain these days, Ross, I'm sorry. We have very little. I don't believe we have any participation where we are not the lead lender.

Okay.

We have participated some of credits out that we felt a little uncomfortable holding the majority of; and they are all mostly local institutions. We have no Shared National Credits, and I don't believe we're along for the ride on anything where we are not the lead. So really in essence we have zero.

Okay. Sorry, just one final question. Did you have any trust-preferred holdings on the asset side or pooled trust-preferreds?

Yes. No pooled trust-preferred, but we have a total of $55 million and that covered originally 11 issues. All major banks. For example, Mike alluded to it earlier. We've got $15 million with Bank of America, I think $5 million with Chase. (multiple speakers) $10 million with Chase. So half of it is between BofA and Chase.

They are all single issues. They are all subject to writedowns through our other comprehensive income.

But there are no pooled trust-preferred securities and we don't feel that there's any permanent impairment or other than temporary impairment in the portfolio.

Okay. Your carryings are generally what kind of level?

$0.52. I mean $0.52 on the dollar at March 31; and that is in other comprehensive income.

Got it. Okay. Thank you, guys.

(Operator Instructions) Julienne Cassarino, Prospector Partners.

Good morning and thank you for such a nice strong quarter. It's great. I was wondering if the AOCI, the other comprehensive income in additional $1.5 million lost or so, is that from the trust-preferred marks or was it other marks?

Yes, it declined a little bit during the quarter.

It was just because of the trust-preferred securities? There were no other --?

No, actually we had some MBS purchases during the quarter; but actually those actually gained ground by the quarter end. So the decline was just related to the trust-preferreds.

Okay. That are now carried at $0.52.

Right.

I was wondering what the 30-to-89 past dues were at the end of the quarter.

We have that information, Julienne; we just have to dig it out of the pile here. I will comment on it just generically. There's been a gradual uptick, but I don't think there's anything that's causing any severe alarm.

It's something that we monitor. In fact we get even a little more granular than that; we monitor the late charge income in terms of the intramonth delinquency. And we have stepped up servicing even so far as that's concerned.

But our 30-to-89 was what you were looking for?

Yes.

We're struggling with that. We may have to get back to you with that, Julienne.

Not a problem.

Trying to get you an absolute personage. We'll give you a call.

Okay. Then just from -- just curious about the dividend discussion. You mention you think candidly that things might get worse before they get better. But your underwriting is down, you've got capital.

I guess I'm just wondering what kind of -- is the dividend -- can you talk about the dividend policy in light of --?

No, I'll be happy to address it because it's something -- we spend quite a bit of time discussing that with our Board. The Board met Wednesday; made the dividend declaration on Wednesday; and there was quite a bit of discussion on the dividend.

It's our feeling that as a retail bank, especially in this market, that is one way that we can provide value for our shareholders. So we've always had a reasonably aggressive cash payout ratio for our dividend, and we're willing to continue that.

So as long as our earnings holed up, I would say the dividend is relatively safe. But it will be evaluated each quarter on an ongoing basis.

The payout ratio for this quarter was in the mid-60s; but we're a pretty good earner by those standards these days. If we see that suffer then I think the dividend will come under more pressure.

That's why in my comments I say we're willing to pay it out of current earnings. I don't think we're willing to take it out of retained earnings. We recognize that building capital in this environment is also important. I think we've done a good job of that.

But I think that as a retail community bank the dividend is important to our retail shareholders, and so we recognize that responsibility.

Thank you.

Matthew Breese, Sterne, Agee.

I had a quick question. I noticed your tax rate went up somewhat and was just wondering if could you talk about that and if that that's something we can expect going forward.

Yes, that can be expected. The state tax expense increased that, so that is the effect. The federal is about the same, but the state tax expense increased; and that's going to be the same going forward.

Okay, so the federal is the same and the state has increased.

So all-in, the effective tax rate will increase, and that is a good effective rate going forward.

Okay. Thank you very much, guys.

[John Shibleys], Regal Securities.

A couple quick questions. Any additional expenses expected from the leftover from Columbia?

Oh, yes, they are still on the expense side of the ledger. We still have some legal expenses associated with actions that we are pursuing.

We have still, as I mentioned in my comments, got reserves set up for the vacant office space that we're stuck with our in Long Island and up in Westchester.

While we provided for through year-end, some of those leases go beyond that; and there could be additional expenses if they are not in fact sublet. The problem as you know is trying to sublet commercial office space today is a difficult proposition.

But our professional fees are still higher than we would like to see. We actually had a little break in the first quarter. We were a little under budget as far as that was concerned. We're expecting that to return in the second quarter just because of timing differences.

Can you elaborate on the legal expense side?

Well, there's a number of different actions that we have pending against brokers that dealt with Columbia. And there's a number of different initiatives that we have there. At some point, there may be some recoveries that are generated, but it's too early to speculate on that.

Okay, and as of last quarter you had written off the office space through the third quarter. So you're just adding one quarter?

Yes. Yes, so we are through the end of the year at this point.

If I recollect, the space in Long Island comes off lease this year; correct?

Yes, that is one of the smaller pieces. That comes off lease at the end of the year. But the big piece up in Westchester continues, I believe --

2011.

2011.

Okay.

But there is still a bleed through there with those expenses. It's not -- because it's pretty consistent now from quarter-to-quarter you don't see it, but we feel it. You know?

Right, right. Any plans on expansion? New branches?

We have no -- well, I shouldn't say we have no; we always have some branches in the pipeline. But as you know in New Jersey it is very difficult to get approvals. Right now I guess we've got three or four that we are pursuing approvals on, and they will come on line at some point. But I don't think we have anything that we feel is going to come on line this year.

Okay. Are those in Monmouth?

Yes, they are all within pretty much the existing footprint. We have got a couple in Monmouth, we've got another one in Ocean.

The $2.1 million nonperforming loan, when do you expect closing on that? The one that's tied up in (multiple speakers) bankruptcy.

That's not in bankruptcy. The direct loan is going into bankruptcy. It's the $2.1 million was a different loan, and Vito has got that.

We're anticipating coming to closure within this next quarter.

Okay.

But you know, New Jersey, it is real estate, you never know. But we're very optimistic that this will close.

Okay. Then just going back to the trust-preferred, if I have this correct, the $55 million, you marked it down to $28.6 million; and last quarter it was maybe $30.5 million.

Yes, $28.6 million is right; $0.52. Last quarter was -- the $55 million was $31.7 million.

Okay.

During this past quarter, BofA actually fell out of the investment-grade. So the $15 million of BofA actually wound up to be rated down to double-B. So that technically is a classified asset on our balance sheet.

Okay. Can I call Mike Fitzpatrick and go through that portfolio at another time?

Sure, by all means.

All right.

Give Mike a call anytime.

Thanks, guys, for your help. Have a good day.

Frank Schiraldi, Sandler O'Neill.

I just had one follow-up if I could. Just wanted to ask, I was trying to get a sense of the margin in the near term here going forward.

I wondered if you had the margin for just March and if it was markedly different than the margin (multiple speakers)?

You mean the current run rate in March?

Right.

Slightly higher, Frank, but not substantially so. Of course the concern about the margin is with the expected prepayment of the mortgages going forward. So that's not likely to adversely affect it a little bit.

We still have some CDs and borrowings repricing down; but we are going to have substantial prepayments of mortgages during the second quarter which will knock that yield down.

Right, okay. Thank you.

(Operator Instructions) We show no further questions at this time. I would like to turn the conference back over to John Garbarino for any closing remarks.

Thank you. We appreciate your questions this morning. We appreciate the fact that we think we have delivered a solid quarter under some very difficult circumstances; and we hope to do the same thing when we speak to you next in July. Thank you for your interest and have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.