OceanFirst Financial Corp (OCFC) 2009 Q3 法說會逐字稿

Good morning and welcome to the OceanFirst Financial Corp. earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. Please note that today's event is being recorded.

At this time I would like to turn the conference call over to Ms. Jill Hewitt. Ms. Hewitt, please go ahead.

Good morning and thank you all for joining us. I am Jill Hewitt, Senior Vice President and Investor Relations Officer, and I 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 its subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative regulatory changes, monetary and fiscal policies of the US government including policies of the US 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 areas, and accounting principles and guidelines.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims any obligation to publicly release the results of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Thank you. Now I will turn the call over to our hosts for the 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 that have been able to join in on our third-quarter 2009 earnings conference call today. We have completed a very strong, satisfying quarter with earnings significantly higher than both the linked and prior-year quarters.

Just as importantly, our stabilizing asset quality metrics are generating a cautious optimism over our ability to perhaps see the beginning of the end to the current cycle and help us sustain future performance. Nevertheless, our outlook remains somewhat guarded and we are far from ready to declare an end to the stresses in the market.

During the second quarter we announced the intent to complete a strategic combination with Central Jersey Bancorp, a local community institution, and we also filed a mixed shelf registration for up to an $80 million securities offering. On October 1 both Central Jersey and OceanFirst received approval from our respective shareholders for our strategic combination and we are awaiting regulatory approval for our transaction from the OTS.

With the aforementioned shelf registration we look opportunistically at the capital markets in the fourth quarter of 2009 and weigh the merits of retiring our TARP preferred stock and warrant with the US Treasury. We appreciate your interest in our performance and pending transaction with Central Jersey and are pleased to be able to review these latest issues with you this morning.

You have all had the opportunity to review our release from Thursday afternoon, 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 add some color to our performance for the quarter.

Our diluted earnings per share for the quarter were, of course, $0.34, $0.02 above the prior year and $0.08 ahead of the linked quarter. The Company's 51st quarterly cash dividend was declared and maintained at $0.20 per share, unchanged for the 27th consecutive quarter. Even as we acknowledge the non-recurring expenses incurred in the second quarter, including the FDIC special assessment, the quality and strength of our earnings in the current quarter is gratifying.

Quarter-over-quarter our net interest margin continued its expansion to 3.73% and significant revenue growth has helped our efficiency ratio move below the 60% level coming in at 58.2% for the quarter, the lowest it has been in many years. Our favorable margin continued to be derived primarily from lower liability costs. And although retail certificates of deposit remain difficult to attract, given our disciplined pricing in our highly competitive retail market, our core deposits again grew $17.3 million to now comprise 75.6% of our average deposits.

Expenses continue to be well controlled even in the face of a $244,000 quarter-over-quarter increase in non-tax-deductible merger-related fees. In addition to continued margin expansion, the other key driver on the revenue side is the increase in non-interest income largely the result of a non-recurring $367,000 recovery of residential borrower escrow funds during the past three months.

Contrary to our action taken in prior quarterly periods, there was no additional benefit for this quarter from any recapture of the reserve or repurchased loans, which remained intact although no additional repurchased requests were received.

As noted earlier, our Board has declared our customary cash dividend unchanged given our current strong core quarterly earnings. Having fortified our capital position over the last nine months and looking at the possibility of an additional capital raise to retire the Treasury preferred, 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 will ask Vito Nardelli, our COO, to bring you up to date on our credit quality and increased loan loss provision for the quarter.

Thank you, John. Good morning, everyone. I am pleased to update you this morning on asset quality here at OceanFirst Bank. While non-performing loans increased $2.6 million from last quarter, we remain confident that our credit quality is quite good. The entire increase is attributable to one residential mortgage loan in the amount of $3.5 million that is well secured.

Non-performing commercial and commercial real estate loans actually decreased quarter-to-quarter by over $800,000 and non-performing consumer loans also decreased by $100,000. The level of non-performing residential loans is high for OceanFirst historically, but is substantially less than the industry and peer measures and is clearly a result of the current economic condition. We are encouraged by the stabilizing trend.

The largest non-performing commercial credit at this time is a $1.9 million commercial relationship that is well secured by real estate recently appraised at $3 million. I have discussed on the past several calls that the Bank had one remaining loan, to investor Solomon Dwek, secured by real estate. Helping improve our position, that loan was satisfied in the quarter with no loss to the Bank as a result of the sale of the property.

During the quarter we realized net loan charge-offs of $578,000, a substantial portion of which was related to loans originated by our shuttered mortgage bank subsidiary. While the level of charge-offs increased nominally and the level of non-performing loans grew a scant 18 basis points quarter-over-quarter, we have increased the provision this quarter by 25% to $1.5 million. We took this action to bolster our reserve position after considering the delinquency profile and in recognition of the current economic environment and the likely timeframe before a meaningful recovery may become apparent to homeowners.

As I have said many times before, our commitment to both credit quality and our strong credit culture remain unwavering. 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 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. Earlier this morning I uttered the phrase 'cautious optimism' when referring to our stabilizing credit metrics and outlook for the future. Given where the financial markets have been over the last 12 or 13 months, I certainly don't want to convey any misimpressions of what we see at OceanFirst, but it does seem that the tide may be turning.

Realistically, our commercial loan portfolio delinquencies have been stable through the year. We have bolstered our capital position, substantially increased our loan loss reserves, and as you have heard the only increase for the period in our non-performing loans relates to a $3.5 million single-family first mortgage that is extremely well-secured.

So with another successful quarter behind us we have a strong and growing earnings stream, stable asset quality, and a much strengthened capital position despite the turmoil of the past year. Combined with our excitement over the Central Jersey Bank acquisition I think you can see why we may be cautiously optimistic about the prospects for our future performance.

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

(Operator Instructions) Sandra Osborne, KBW.

Good morning, guys. Maybe just first do you have the dollar balance of 30- to 89-day delinquencies for the quarter?

That is an excellent question and while we are efforting the actual dollar balance I will tell you this -- and we should have made mention of it in the color that we added. We are also gratified, Sandy, that the actual amount of our 30-day delinquencies quarter-over-quarter has decreased and markedly so as of the month of September. So we view that also as significant. That is a point really that we should have made upfront on the residential side.

So the decline was driven by residential mostly?

Yes, when I talk about the 30-day delinquencies I am talking about the residential mortgage delinquencies. So our 30-days were down dramatically and we are still looking to get you the actual numbers.

All right. While you search for that also do you have the level of restructured loans? It looks like in last quarter's TFR they came in at about $5.8 million. Just curious where that stands now and what types of credits would be included.

It's residential loans. It's all residential loans whether we have granted rate concessions.

Or forbearances in terms.

Forbearances or something like that. Typically it's rate concessions and they are well secured and they are performing as intended.

But I don't believe that that includes any of our commercial portfolio, Sandy. If that was your question.

Okay, that is helpful. Thanks.

We have that -- your question was specifically the 30 to 89 days?

Yes.

It's $3.2 million.

Great. Thank you.

And the total restructured now is $8.6 million.

$8.6 million, okay. Maybe just switching to the margin, how much more room do you have to bring down the average cost of time deposits?

That is an excellent question also and as you know there is not a lot of room. We continue to change the mix, clearly, and that is helpful also as we have some of the former high rate CDs run off. But there is really not a lot of room to take rates much lower and we have talked about that repeatedly over the last year or so. Our cost of funds is down now to -- our cost of deposits --

1.19%, but the --

Yes, our cost of deposits is 1.19% all-in and we still act relatively conservatively with our Home Loan Bank advances and not just accepting overnight advances, because we don't want to assume that interest rate risk. So we are laddering our advances out on a gradual basis and there is not a lot of movement there.

And, Sandy, on the -- we do have in this next six months we have $185 million maturing at 1.71% so that will still price down. We have our special rate now; our so-called special is at 75 basis points for short-term CDs. So there is still some repricing down on that and we have some advances, our advances are going to be repricing down as well. So we still have some repricing down on the liability side of the balance sheet.

All right, that is very helpful. I guess I will stop there.

(Operator Instructions) John Shibles, Regal Securities.

Just a couple quick questions. Besides the rent obligations from Columbia, are there any other foreseen expenses due to Columbia?

No, in fact if you recall, last quarter we eliminated that entirely. That was also one of those extraordinary non-recurring items from last quarter that we wrote off entirely.

So no legal or anything like that?

Well, there still may be some residual legal but the big monster there for the last couple of quarters was that overriding lease obligation on properties that we were looking to sublet. We wrote that off in its entirely last quarter and we reported that if we were successful in subletting any of those properties we would be listing it as a recovery.

Obviously, we are not talking about it and there is still a lot of vacant land up there in Westchester County. If you have anybody that is interested, we would be interested in talking to them. But the nominal overrun from quarter to quarter would be just some professional fees and that would really be relatively nominal at this point.

Okay. So no major legal --?

No, no. In fact, that is part of the reason for the improvement in our operating expenses that I tried to allude to is that as the farther we distance ourself from that the more that that -- the less important that becomes in our expense base.

Of the delinquencies have you seen a large number of increases in prime loans? Or what is the -- I guess what is the percentage difference between subprime and prime? I guess that is what I am trying to say here.

Well, the delinquencies that -- in our core bank portfolio have been extraordinarily stable. There hasn't been any even gradual uptick in them over the past quarter.

Again, as I alluded to earlier, the one exception to that was this huge loan and that creates an unusual look to the portfolio. But that is all related to one -- I think the overall increase was $2.6 million, and $3.5 million was one loan.

Which was a prime loan, John.

And that was a prime loan and it is a prime loan.

You are referring to the $3 million loan you were talking --?

Right, that $3.5 million loan. As far as the subprime portfolio, we don't even report that because that is in our loans serviced for others category. And there is a continual gradual increase but that doesn't affect our portfolio. When we are reporting delinquency metrics it's strictly for our portfolio for what we own.

We also service a significant portfolio for others for loans that have been sold and some of that includes subprime. There is a gradual increase in that, as the industry is seeing, but in terms of our portfolio it is absolutely dead stable.

Just out of curiosity, you don't have to answer. Where is the $3 million loan located?

Franklin Lakes.

Franklin Lakes.

It gives you an indication. If you are familiar with that area of New Jersey, it's an indication of the types of homes that are up there. And it was made a number of years ago and it's a loan that we feel is extremely well secured. We are not at all concerned about it and we think that will be money good at the end.

Okay. All right, thanks, guys.

(Operator Instructions) Ladies and gentlemen, at this time I am showing no additional questions and I would like to turn it back over for any closing remarks.

Thank you, Jamie. I appreciate that and I thank everyone for calling in this morning. We, again, are pleased at what we see is in a very positive vein. We look forward to the fourth quarter, getting our regulatory approval, getting together with Central Jersey, and speaking to you sometime after the end of the current year.

Thanks again for your interest.

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