OceanFirst Financial Corp (OCFC) 2009 Q2 法說會逐字稿

Hello, and welcome to the OceanFirst Financial Corp. conference call. All participants will be in 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 will return the conference over to Jill Hewitt.

Thank you, Ryan. Good morning all, and thank you for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations officer. And, of course, 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 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 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 loans 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 results of any revisions, which may be made to any forward-looking statements to reflect events or circumstances after the date of this statement, 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, 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 second quarter 2009 earnings conference call today. Our quarterly earnings compare favorably to both the linked and prior year quarters, when we adjust for this quarter's nonrecurring items.

During the past three months, we have announced the intent to complete a strategic combination of Central Jersey Bancorp, a local community institution, and also filed a mixed shelf registration for up to an $80 million offering. We appreciate your interest in our performance and pending transactions, and are pleased to be able to review these issues 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 identify the aforementioned noise in the release, add some color to the earnings posted for the quarter, as well as briefly review the announced plans for our pending transactions.

Diluted EPS for the quarter was $0.26, $0.04 below the prior year and linked quarter. The Company's 50th quarterly cash dividend was declared, and maintained at $0.20 per share, unchanged for the 26th consecutive quarter. As observed earlier, however, although our announced earnings fell short of the benchmark quarters, let's take a closer look at the unusual, nonrecurring items from the past three months.

On the plus side, there was only one item, a recovery of $211,000 in the reserve for repurchased loans. This reserve was established in 2007 against potential exposure surviving our subsidiary mortgage banking shutdown. As our experience there continued to be favorable, we have taken a more substantial portion of this reserve into income for the quarter. The reserve stands at $835,000 as of June 30. Our recovery for the first quarter was only $34,000, and there was no recovery in the year-earlier period.

On the expense side, however, there were three significant items I call to your attention which, on a tax-affected basis, stripped $0.09 from our reported earnings. The most visible, of course, was the industry-wide FDIC special assessment -- $869,000, in our case. Additionally however, we have incurred $169,000 in specific merger-related expenses, and chosen to completely expense the remaining rent, $556,000, on the now-vacant former mortgage bank subsidiary office space in New York.

You may recall that, although we had previously taken this expense ratably, based upon assumptions relative to the potential sublet of the office space, it has become apparent that this is a low likelihood in the current market. The current charge is for our full obligation through the lease termination of all vacant space previously occupied by our now-shuttered subsidiary.

Adjusting for these nonrecurring items creates a much more favorable comparison to earnings from the prior periods. Driving this quarter's earnings was a benefit from increased net interest income, as the net interest margin continued to expand, growing to 3.56% from 3.47% in the previous quarter. This increase was derived primarily from lower liability costs in the current rate environment.

Although retail certificates of deposit remained difficult to attract, given our disciplined pricing and our highly competitive retail market, our core deposits again grew $59.5 million to now comprise 73.8% of average deposits, as compared to 72.5% in the prior quarter. Additionally, average interest earning assets increased $12.5 million, reflecting completion of our investment of the Treasury Capital Purchase Program Preferred Stock, taken during the first quarter.

The other key driver on the revenue side is the $961,000 quarter-over-quarter increase in non-interest income -- partly from fees and service charges, but to a greater extent, gain on sale of loans in the heavy residential refinance market. Residential loan origination volume for the quarter was extremely strong, reaching record levels for the core bank.

As noted earlier, our cash dividend has been continued unchanged, given our strong core earnings. Having fortified our capital position in the first half of this year, our Board has continued to embrace a strong cash dividend policy, paid from current earnings, for the benefit of our shareholders. As always, future dividend declarations, however, will be evaluated by the Board, based upon our operating performance and capital needs as they emerge.

I'll now ask Vito Nardelli, our Chief Operating Officer, to bring you up-to-date on our credit quality and increased loan loss provision for the quarter. Vito?

Thank you, John. Good morning, everyone. I'm sure that many of you are looking at all the earnings releases for banks, and asking the same first question each time -- how is asset quality holding up?

I would like to report to you that, while OceanFirst is not immune to the economic climate and its impacts on both business and real estate market, credit quality remains quite good for the quarter. As indicated in the press release, nonperforming loans increased in the quarter by $1.2 million to $20.9 million, or 126 basis points of total loans receivable.

The increase occurred in the residential and consumer portfolios, while nonperforming commercial loans decreased by $1.6 million. The increase in nonperforming residential loans is clearly a result of the current economic condition, and consists of several loans -- none posing significant individual risk of loss to the Bank.

Our largest nonperforming credit from the prior quarter was resolved with no loss to the Bank. The largest nonperforming credit at this time is a $1.9 million commercial relationship that is well-secured by real estate, recently upraised at $3 million.

Since I have discussed, on the past several calls, the one remaining loan to investor Solomon Dwek in the amount of $480,000 secured by real estate, I will update you that the contract for sale under the control of the bankruptcy trustee remains in force, and will provide for full repayment of outstanding principal upon closing.

During the quarter, we realized net charge-offs of $461,000 -- relatively flat as compared to last quarter. The bulk of the charge-offs were related to subprime loans originated by our shuttered mortgage bank subsidiary. While the level of charge-offs remained relatively flat, and the level of nonperforming loans grew a modest 6% quarter-over-quarter, we have increased the provision this quarter by 50% to $1.2 million.

We took this action in consideration of the delinquency profile, including some deterioration in the less-than 90-day categories, and in recognition of the current economic environment and the likely timeframe before a meaningful recovery may become apparent.

As I have said many times before, our commitment to both credit quality and our strong credit culture remain unwavering. As you would expect, and as we have done so for some time, we continue to closely monitor the delinquency metrics of our entire portfolio. And they remain favorable to the overall market statistics on both a state and national level.

With that, I'll 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. Earlier, I mentioned the Central Jersey Bancorp's strategic combination announcement, a mixed shelf registration statement we filed during the quarter. As to Central Jersey, we expect to file the S-4 in the coming week, and proceed as originally announced on May 27.

The mixed shelf was filed to afford us the flexibility to access the capital markets efficiently and opportunistically, when and if we find it prudent to raise additional capital in the course of retiring the Treasury preferred shares issued under the capital purchase program. This action will only be pursued after careful deliberation and conclusion that the CPP, Capital Purchase Program, no longer serves the needs and interests of our shareholders.

As we move through the middle of 2009, we feel encouraged by the quality of our earnings, the strength of our balance sheet, and credit quality. While still concerned by the unsettled state of local market conditions, we are also pleased to see some encouraging signs of improvement on the horizon.

Through the first half of the year, we have been continually challenged by the markets and unprecedented governmental interventions targeted to address the rapidly evolving, socioeconomic issues faced by our country. We have not been happy with the stigma attached to the Capital Purchase Program participants or with the onerous conditions and restrictions associated with the program.

Nevertheless, with our planned acquisition, and because of the actions we have taken to continue to evaluate our participation in the Treasury TARP, we feel better positioned today if there should be another round of crises ahead.

We renew our commitment to prudently evaluate every market opportunity that may 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 this morning. Ryan, are you there?

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

Just a few quick questions, if I could. Was wondering, in terms of -- specifically in terms of commercial real estate, what are you seeing -- what are total -- if you have this -- what are total delinquency rates right now? And what have you seen quarter-over-quarter in terms of growth?

Well, actually, Frank, if you see it in the release, I think we had some reasonably good commercial loan growth for the quarter. And our delinquencies actually are down quarter-over-quarter on the commercial side. The increase in delinquencies over all that we reported was really restricted to the residential portfolio.

So, I think -- we're taking a look to see if we can give you the actual number that we have.

These numbers are in the press release, Frank, but it's [about] -- commercial estate is down quarter-to-quarter. The nonperformings are down $1.4 million, and the C&I is down 200; but down $1.6 million overall quarter-to-quarter.

Okay. But do you have the total delinquency rates, is that in the press release as well or --? In terms of the 30 to 89-day bucket as well?

Oh, any 30-day also?

Yes. Yes, that's what I was -- sorry, that's what I was looking for, the 30 to 89-day in terms of quarter-over-quarter in commercial real estate specifically.

If we have it, I don't think we have that for the previous quarter handy here, but again, we saw no alarming trend there, Frank. I mean it -- as we said, the overall nonperforming is down. We haven't seen any alarming trend in the commercial.

The increase provision that we put up, I think, was to get a little ahead of ourselves and to bolster those reserves, which we felt all along have been a little thin. And we feel as strong as our earnings are, we should be increasing that provision; but it's not reflective of any real concern that occurred during the quarter.

Okay. And then should we sort of continue, do you think, to see an abundance of caution? Should we continue to see reserve builds provisioning well above charge-offs in the coming quarters, would you expect?

As we've talked about in the past, I mean, we don't think this area that we operate in has suffered nearly as bad as other areas of the country. And we continue to say that this quarter. Nevertheless, I think that we're concerned about what might lie around the horizon.

But I can tell you, Frank, and you know, we're in a resort area here -- the beaches are full; the boardwalk is full; there's plenty of traffic in the area. We don't see any lack of the tourism trade. The restaurants are full. We don't see commercial real estate vacancies in our market.

I mean, as I said earlier, there's some promising signs on the horizon. I think that we see this situation as not deteriorating, quite frankly. And so we feel encouraged by that.

Now that's not saying that that's going to continue, but I think there's a lot of optimism around the country. And I think that we're starting to share that and we see evidence of it, especially in the mid-summer tourist trade that's occurring here.

Okay, great.

So I think the answer -- I mean, that's a long answer to your question, but the answer is, is that if we do see any weakness, we want to make sure that our reserves are adequately provided for. We've had a history of doing that. We've had some large charge-offs, as far as our record is concerned, because our charge-offs over the years have been extremely small -- low. And we'll be providing for it as we see fit in any given quarter; we take a fresh look at it every three months.

Okay. And then, finally, in terms of capital, in terms of the net gains, I guess you call it, in the OCI balance's linked quarter, is that a mark back up of the trust preferred single issuer? Is that mortgage-backed securities or a combination of both?

No, it's the trust preferred securities got marked back up, Frank. They're valued about $0.57 on a dollar this quarter; they were about $0.50 last quarter. So we saw an increase in the value of those securities quarter-over-quarter.

With all the capital raises that went on over the last quarter, obviously, and you know the names that we're holding -- I mean, they're very large bank's names and there was several capital raises. And there was actually recovery in that price.

Okay, great. And you haven't gotten involved in any of the -- some of the -- I know some of the single issuer stuff has been repurchased by the (multiple speakers) --?

No, we haven't exercised any of those tender offers at all. We're content to sit with what we have.

Great. And it sounds like now that capital position looks a little better, you're comfortable with the earnings stream that, even with the shelf out there, that we shouldn't expect to see a capital raise until -- or unless you're ready to pay back TARP, which sounds like you want to keep as an insurance policy.

That's the intent. Yes, the intent was to -- as I say, to be in an opportunistic mode as far as the capital markets are concerned, because Lord knows how long they might remain open. And -- but we don't see the need to go and access the capital markets until we're in a position where we want to pay back the TARP. And even then, the size of the offering that we might make is still open to debate internally here, as to how we would repay that TARP money.

But as I said, we're not pleased with the way the TARP participants have been treated, but I'm not ready in a knee-jerk fashion to just say, here, take it back; we don't want to be bothered any more. Because we feel that what we did was prudent at the time and it remains prudent today.

So, we're a conservatively-managed institution, and we're going to continue to be that way into the second half of this year.

Great, okay. Thank you very much.

Sandra Osborne, KBW.

Just a question on the margin first. How much flexibility do you guys have in paying down some of the higher cost of borrowings? How much additional flexibility, I guess, in the next couple of quarters?

In terms of paying it down?

Yes, it looks like you [were] down a little bit this quarter, average borrowings, at least.

Well, we have $45 million maturing in the next six months that's eligible for repayment or reset. That's at [5.07]; that's going to reset down. But $45 million in the next six months.

All right. And what about on the CD side? Any big buckets at a certain rate that you could quantify that might be coming up over the next couple of quarters?

Well, the same thing for the CDs -- there's $178 million coming due in the next six months, and that's at 2.29%.

All right. What about longer-term? I guess eventually we're going to see interest rates rising, so I guess, how are you thinking about managing the balance sheet for that kind of environment?

Well, certainly with our core deposit run-up, we haven't done that really with any kind of aggressive pricing. And the industry, historically, when you see interest rates rise, legs, any increasing, especially in core deposits. That's been a historical way to manage that situation.

But our net interest rate risk position is relatively neutral at this point, so we don't think we're at all poorly positioned for an increase in interest rates. And our simulation analysis, in fact, tells us that we'll be in pretty good shape if rates do turn around.

I mean, certainly we're enjoying some significant margin expansion right now. Whether or not that will continue in an increasing rate environment remains to be seen, although we're not terribly troubled by the models that we run.

We do sell our 30-year loans, as you know, you can see the significant buy in any 30-year loans we sell. And when those -- the home loan bank borrowings that do mature, we tend to put them back out at a longer-term at a lower rate. So they'd don't only go short-term; we reset them three to five years.

Sandy, everybody talks about sticky deposits, as core deposits are concerned; but we think, in our case, they really are. I don't think that we've bid for any kind of hot money deposits. I mean, you don't see us offering any 5% money market rates out there, the way some other institutions have.

And so I think there's a good stick factor to those core deposits that we've been able to generate over the last two years.

All right, thanks. That's helpful. And just back to credit quickly. Do you guys have any TDRs in your restructured loans?

No.

All right. Okay, thanks.

Matt Kelley, Sterne, Agee.

I was wondering if you can just kind of break down the gain on sale of loans. Let us know what the dollar amount sold was, the actual gain on that sale versus the securities gains.

There were no security gains. It was all loan-related. And the gain on sale line, that's -- [will be a] $211,000 that we took out as a repurchased reserve. So that's in that line. So if you take that $211,000 out, then all the rest is from loan sales.

And the actual gain, I think in my notes, increased $679,000 from the prior quarter.

Got it, okay. And then down in the expense line, the occupancy was $1.8 million. I guess the $556,000 charge was in there for the quarter for these cancellations?

Correct. Yes.

Okay. So $1.3 million going forward then on the run rate for occupancy.

Correct.

That would be fine. Yes, those -- some of those leases ran out to 2011; but in this market, it's been impossible to get them sublet. So if we do do any subletting before 2011, that would, of course, come back to us in the form of a recovery.

Okay. And then just getting back to the prior question there in the margin, I mean, it looks like you're reaching kind of peak margins here at 350, 360. Obviously, earning asset yields are going to continue to shift down a little bit. And it's not a huge discrepancy on the CD repricing to 2.29% -- that's maturing. Would that be accurate?

Well, at 2.29%, our special rate now is -- a short-term rate is 1.0%. So that 2.29% is definitely going to reset down, and it's pretty sizable -- $178 million.

We did have a reduction in core deposit rates in June, which only marginally affected the second quarter. The full effect will be in the third quarter. So we think there's some -- still some -- a little bit of margin expansion left. And then you're right, it will probably level out.

Okay. All right, got you. And then just getting back to the $80 million on the capital potential raise there. It sounds like it's strictly related to TARP. You don't feel like you need to raise capital for the Central Jersey deal. I know that some of the risk-weighted capital ratios have come down a little bit, just because of the composition of their balance sheet. But the $80 million is strictly related to TARP repayment, not related to needs created by the transaction?

That's right. It's not -- because in Central Jersey, it's all stock deal. There will be no -- there's no need to issue stock related to that Central Jersey; it's just related to the TARP.

Okay, all right. And what about the tax rate going forward?

The tax rate going forward would be about -- I mean, the -- about 35%. I see no change from what it is now.

Okay. I mean, this quarter it worked out to 38.7%, right?

Thirty-eight point -- oh, yes, 38.7% -- yes. And 37% last quarter. Probably 37% is the right way -- it's a little bit higher this quarter because those merger-related expenses are not tax-deductible. So, that affected it a little bit.

And to the extent going forward, we have merger-related expenses, that's going to increase the effective tax rate, because they're not tax-deductible. That's probably why it ticked up a little bit.

Okay, so 37%.

37%, yes.

Okay, great. All right, thank you very much.

[John Schibels, Rival Securities].

The first question is just a clarification. Are you saying without the FDIC insurance expense, you would have earned $0.35?

No, there's three items. The FDIC insurance expense was a one-time assessment for this quarter. Then we had the loan -- the lease write-off of $550,000, and then the merger-related expenses. We're saying those three items (multiple speakers) -- about $0.09.

I got you. All three items equal (multiple speakers).

All three taken together. So that if you look at a core earnings rate, it would have been closer to the mid-30s.

Okay. How many leases are you taking over with the Central Jersey acquisition?

Well, most of their property is leased. Very few of it is earned. And we're -- it's tough to comment beyond that, because obviously, until we issue the S-4, it's difficult to talk too much about that acquisition. But we've taken a look at their properties. We've run the pro forma analysis of it, and most of the property is leased.

Okay. Kind of going back to what Frank from Sandler was talking about -- are you seeing any difference in the commercial real estate market between Monmouth and Ocean County?

Not really, I don't think. We -- you know, again, our exposure is small. Our average commercial real estate loan is only in the $0.5 million range. So -- and I don't think it's that different between Monmouth and Ocean. We have some large -- larger credits. Some of them are in Monmouth; some are in Ocean. But our average loan throughout the entire region is only running about $0.5 million. And we're pretty much encouraged by what we see in terms of the delinquency metrics.

How many office buildings are on the portfolio?

I don't know specifically how many buildings. I can tell you what our exposure to commercial office space is.

That would be great.

I have that. You can ask another question, because that's actually online. I've got to pull that up on computer, so. Or maybe I can get back to you with it, John, all right?

You can get back to me. And then the follow-up question to that would be, what percentage of that commercial office space is in Ocean County?

And then I definitely have to get back to you. Split it between Ocean and Monmouth.

Yes, that's fine.

Are you saying that you see a difference between the condition in Ocean and Monmouth? Does that concern you?

Yes.

Okay. All right. Well, I'll get you the data and we'll get back to you with it.

All right and -- that's it. Thanks, guys.

Ross Haberman, Haberman Fund.

I just had one quick, quick question. Could you go over the information you did discuss about the merger, how accretive, how quickly? And will you consolidate any or many of their branches? -- which you might have already discussed.

Yes, well, all I can do, Ross, as you know, at this point, is basically tell you what was in the release. And the release says, yes, it will be accretive in 2010. We think it will close in the fourth quarter of this year. It will be accretive in 2010. I don't know if the release actually stipulated an amount that would be just mildly, modestly accretive, but it will be accretive next year.

And I don't think we indicated what offices would be closed. There's very little overlap. We're taking a look at it. I don't think there's been any firm decision reached on that. I don't think the release identified any in particular.

And any other plans for any other new branches for the next calendar year?

No, we're off the de novo bandwagon right now. We still have several that are in process, but the land use regulations make this an extremely tedious and laborious process. And there's nothing that's going to come online certainly in the immediate future.

We're not pushing anything. As you can imagine, some of these developers that are looking to develop this property are not rushing headlong in this market. And so we're not pushing as hard as we can. We'd like to get the Central Jersey deal closed and integrated as efficiently as possible, before we go back into that de novo market.

And just one final question. Any large developers in and around your market, like what you see is sort of teetering at the moment, which you might have any above average exposure to?

Ross, I can give you this, and I'm pleased to tell you -- the only reason I can tell you this is anecdotally, because we don't have any large exposure. So, anything that I hear -- I hear rumors or I hear -- or I read about in the paper after the fact.

I mean, there's certainly been a lot of adverse publicity with Amboy, and they had every developer they could possibly get their hands on. We didn't have that problem. So, what we hear, we hear about second or third-hand. And absent what you read about with Amboy, I haven't heard anything recently. A lot of that was news a year or so ago. You know, with [Cara] --

Right. Okay. All right, guys. The best of luck. Thank you.

Michael Zanoni, ValCur International.

It's actually Kevin Curry. I just wanted to say congratulations on a very good acquisition of Central Jersey. We have a lot of faith in the management in the way that institution's been run. And I think that you'll be a great fit going forward. I just wanted to say that. And we're also very pleased that both institutions have a nice number of insiders, that our owners, that feel all the pain and glorification that we do.

The other questions I had, I think were answered; I've kind of been on and off the call. But as far as the deal being closed, can we be confident that it will be the fourth quarter, nothing more?

Well, we'll get a much better idea -- well, the definitive agreement requires the deal to close in the fourth quarter, so if there was anything that was going to delay it beyond that, we'd have to go back and talk to Central Jersey about it.

But we feel confident we can get it done in the fourth quarter. We'll know more, of course, as we get the S-4 filed and see what the SEC comments are, if any, with regard to that; whether or not there's a full review; when we can schedule our shareholder meetings.

But right now, we're on a timeline where we're right on the timeline that we set. We think it will close in the fourth quarter.

Okay. And the S-4 should be in the next week or so?

The S-4, we think should be filed middle of next week.

Perfect. Okay. Gentlemen, thank you, and keep up the good work.

(Operator Instructions).

Ryan, just one update. In response to John's question earlier, our commercial real estate portfolio -- 33% of that portfolio is real estate rental. And out of that 33%, 21% is office space. I think John was interested in how much was office space. So it's 21% of 33%, so it's really only about 7% of the total commercial real estate portfolio is office space.

Is John still on? John, you've got the answer, but we'll still get back to you with the Ocean/Monmouth breakdown.

At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. John Garbarino for any closing remarks.

Thank you, Ryan, I appreciate it. Thank you, folks. I appreciate your questions this morning. We're happy we were able to bring you some solid news in this certainly unsettled environment, and we'll look forward to speaking to you following the third quarter results. Thanks again for your interest.