OceanFirst Financial Corp (OCFC) 2010 Q1 法說會逐字稿

Good morning and welcome to the OceanFirst Financial Corp. earnings conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Jill Hewitt. Please go ahead, ma'am.

Thank you, Andrea, and I would offer my good morning to everyone as well and thank you for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial. 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 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 interest rate; general economic condition; legislative and regulatory changes; monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board; the quality or composition of the loan or demand for -- 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 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, 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 in our first-quarter 2010 earnings conference call today.

While we are indeed pleased to have posted a 26% increase in quarterly net income available to common shareholders from the prior-year quarter, and continued our quarterly cash dividend, there is no doubt that the capital reorganization we engaged in late in 2009 has had a significant effect on these quarterly results. The substitution of our newly-issued common equity for the retired treasury capital purchase program preferred increased the net income available to common shareholders and diluted reported earnings per share. As we'll discuss shortly, there were several of these unusual adjustments to consider in making quarter-over-quarter comparisons.

We appreciate your interest in our performance this morning and are pleased to be able to review these latest operating results with you. You've 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, visit our plans to grow the balance sheet in both the immediate and longer term, and comment on our credit metrics in what many see as an economic environment in the midst of a turnaround.

Diluted EPS for the quarter was, of course, $0.24 versus $0.12 in the linked quarter, and $0.06 below the prior-year's quarter's $0.30, diluted, as I said, by our Q4 2009 capital raise. The Company's 53rd quarterly cash common dividend was declared and maintained at $0.12 per share, representing a continuing attractive 3.8% yield on our shares.

While there were no unusual extraordinary individual items for the current quarter, as I noted earlier it is difficult to do an apples-to-apples comparison involving quarters wherein a secondary common offering is executed and U.S. Treasury capital purchase program preferred shares are retired. Elimination of the preferred dividend and unaccreted discount on the preferred improved the net income available to the common by $1.6 million over the linked quarter and $458,000 over the same quarter last year. Combined with the absence of merger-related expenses in the current quarter, the earnings per share benefited $0.10.

On the other side of the comparison, there was $0.04 of EPS dilution in the current quarter, due to the higher average common share count from the prior to the current quarter. Moreover, the year-over-year EPS comparison also suffers from similar burdens. I will not spend any more time with my comments on the quarter-to-quarter analysis, as I think the release itself does a much better job of setting forth the details and necessary adjustments for comparative purposes. I only call attention to the need to allow for the events.

What I would like to spend a few minutes talking about, however, are the plans we have put in place to grow our balance sheet and leverage the new capital added in Q4 2009. Ultimately, our balance sheet will be expanded primarily with commercial credits on the asset side and by a combination of core deposits and borrowings on the funding site. Of course, generating this organic growth will take some time, and during the quarter we have implemented an interim wholesale balance sheet expansion with agency mortgage-backed securities and Federal Home Loan Bank borrowings.

We have developed a conservative credit and interest rate risk-managed position, while providing the additional earning power to mitigate earnings dilution from the increased common equity. Certainly, I cannot stress importantly enough that our plans to manage the credit risk and, just as important in the current environment, the interest rate risk associated with this strategy are carefully monitored and controlled.

The initial assets in the balance sheet expansion are all residential agency MBS, and the gradual substitution of incremental, internally-generated residential and commercial credits will be accomplished without any relaxation of our strict credit underwriting standards. Likewise, the eventual funding mix of core deposits and term borrowings will be modeled to tight interest-rate risk tolerances, consistent with only a nominal effect on our interest-rate risk profile.

Our current tangible common equity ratio is 8.5% following this Phase 1 of the process and can be expected to remain well above 8% as the additional balance sheet growth is achieved throughout 2010.

A closer look at the first quarter reveals a $169 million increase in assets, primarily from the mortgage-backed securities purchase, with only a modest contribution from our commercial loan portfolio. On the liability side, wholesale borrowings grew by $188 million as core deposit growth of $25.2 million was partially offset by an $8.3 million decline in timed deposits. Subsequent quarterly analyses will reveal the desired transition from these wholesale assets and fundings to the targeted eventual mix.

Looking quickly at financial comparisons to the linked quarter, the net interest margin was stable and non-interest income was lower, primarily from reduced gain on sale of loans as our residential loan volume eased. Operating expenses decreased by $465,000, affected by a mix of factors in the current quarter, including the absence of merger-related expenses, lower marketing, and higher snow removal, payroll tax, and compensation expenses. Yes, for those of you that are local, you know that it was a memorable winter in New Jersey for snow removal.

There is some additional background details on our credit quality, however, that you may have questions on and I'd like our COO, Vito Nardelli, to preview them with you. Vito?

Thank you, John. Good morning, everyone. John mentioned in his comments that the additional commercial and residential credits that we will generate as part of our strategy to expand the balance sheet would be underwritten to our same strict standards.

These conservative standards are and have been reviewed on an ongoing basis to detect any potential weakness in our credit discipline. Looking at the current quarter's performance, while there were increases in both non-performing loans and net charge-offs, we believe that the circumstances surrounding the items are specific and do not reflect a weakness in the ongoing underwriting discipline. The economic stresses of unemployment and underemployment, as well as suppressed property values, took a toll on the customers of OceanFirst, as they did throughout all of New Jersey and the nation as a whole.

Quarter over quarter, we saw a slowing of the rise in nonperforming loans from the 20% increase last quarter to 14% this quarter. While 14% is still significant, the increase for the quarter occurred solely in residential and consumer portfolios. Nonperforming commercial and commercial real estate loans decreased since last quarter by almost $0.5 million. Currently, nonperforming loans stand at 195 basis points of total loans receivable, or 160 basis points of total assets.

While these levels are high for OceanFirst, they remain favorable to the most recently-available industry measures. The largest non-performing loan remains a residential mortgage loan in the amount of $3.5 million that is secured by property recently valued at $4.1 million. As to nonperforming commercial credits, the largest is a $2 million relationship that is secured by real estate recently appraised at $2.7 million.

During the quarter, we realized net loan charge-offs of $1.3 million. The majority of the charge-offs were related to loans originated by our now shuttered mortgage banking subsidiary, Columbia Home Loans. Following the normal thorough review of the bank's current loan portfolio, and understanding the current economic environment, including continued stresses on homeowners and small businesses, we have maintained a provision for loan losses this quarter at $2.2 million.

I would also like to take a moment to briefly update you on the reserve for repurchase loans, which remains unchanged at $819,000. There is one outstanding repurchase request for $236,000, which the bank is actively contesting.

Additionally in the quarter, the bank received claims totaling $2.2 million on loans that are covered under a settlement agreement executed in August of 2007 by Columbia Home Loans, a nonoperating subsidiary of the bank. The bank is of the opinion that these claims are not valid and the matter will be contested vigorously.

In closing, I want to recognize that the continued economic challenges facing our customers and all consumers and businesses across the state and the nation have stressed the credit quality of many financial institutions. Given our strong credit culture and capital position, I believe we have positioned OceanFirst to effectively handle that stress.

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. Recapping the quarter, then, we feel we have made a solid start to what we see as a brighter 2010 ahead.

We remain encouraged by economic reports, which seem to indicate an emergence from the recession that has gripped our nation for the past two years. Our local morning paper reports that Rutgers University researchers have declared the recession over in New Jersey. As noted several times, although we see encouraging signs locally, much of our area has been spared the deep suffering experienced by other parts of the country. We remain cautious in forecasting a robust recovery just yet.

We are pleased that we have fortified our Company's capital position, strengthened our balance sheet, and provided the appropriate reserves for our loan portfolio, while delivering a solid stream of quality core earnings for our shareholders.

With that, misters Nardelli, Fitzpatrick, and I would be pleased to take any questions you have this morning. Andrea?

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

Just a few quick questions. I wondered if you could talk a little bit about the MBS put out in the quarter in terms of overall duration?

(Multiple speakers). They're 15-year MBS, Frank. They were all 15-year. Agency MBS.

Okay, and they're funded by basically very short-term, like, Overnight FHLB or --

Well, our intention is to fund those with up to five-year borrowings. The borrowings are being layered in. So, they are not only always in the first quarter. Some are as of now. So initially it's relatively short funding, which we'd planned to extend over the next few months.

But the strategy calls for funding anywhere from Overnight up to five years.

And it's a mix, Frank, in terms of the types of modeling that we've done on it. The MBS is a stopgap measure, but again, during the course of the year we'll be filling that in with some of our incremental organic production.

The important thing to note is is that it's not going to be any relaxation of credit that generates that incremental production. We think we might be a little more aggressive on the price side and we can do that knowing that we're replacing the MBS.

And you'd said, John, that you expect TCE, I think you said through 2010, to stay well above 8%, so it probably is just -- you built the MBS and now, like you said, you'll run that off and (multiple speakers)

As it runs off, it will be replaced by incremental production. We have growth goals through 2010, but we see that tangible common equity remaining well above 8%.

And then just finally, on the MBS, just wondering what's -- if you can give sort of the incremental spread that you got from the wholesale program in the quarter.

It varies -- it's going to vary as times change. But I think initially we were in the 165 range.

Yes, once this strategy is fully implemented, it would be about 165. It's a little higher than that now because it's due to shorter-term funding, but when all the borrowings are layered in, it'd be about 165.

And of course, we're blessed with the ability to do this now in a very attractive yield curve environment. But, you know, we're very sensitive to that interest rate risk issue and we haven't taken any undue position that we don't think can be efficiently managed.

Okay, and then just on the nonperformers. In terms of the 1- to 4-family increase quarter over quarter, can you give any color on if that is focused on a specific subsector, the 1- to 4-family? In other words, is it like interest-only stuff that's coming on?

No, Frank, it's just a mix, the common mix. There's no real pattern here. If there's anything that we looked at in terms of a positive nature is that we watch closely our 30 days plus, and that has shown somewhat of a decline. So nothing specific, no one category. It's just that creep that's been there for a while with us.

Okay, and sorry, last question. Just wondered in terms of the foreclosures -- or not foreclosures -- I'm sorry, in terms of the charge-offs that we saw, specifically the 800,000-plus from Columbia. Is that as these things are foreclosed or is that just as new appraisals come in?

It's a combination of both, Frank. We go through a pretty stringent analysis of what we carry, especially some of these Columbia loans that have filtered through to our portfolio, and we're pretty aggressive with the charge-off.

This was not -- we've talked in prior quarters about maybe there's one particular item that was the proverbial 800-pound gorilla. This was not the case here. There was a wide range of $8,000 and $10,000 and $20,000 charge-offs that were processed during the quarter. And it's largely a result of an ongoing portfolio review, and in some cases it's a question of what might happen upon an eventual foreclosure and sale of the REO. (multiple speakers) It's nothing that you can point your finger at and say it's one as opposed to the other. It's really an overall mix.

Yes, Frank, if it's 1- to 4- -- it's first family loan with collateral is typically a charge-off once we go through the foreclosure process, but it's reserved for ahead of that if the collateral is inadequate. In this case, there were also some second mortgages which we didn't think there was enough collateral so it got charged off right away.

Laurie Hunsicker, Stifel Nicolaus.

Just to follow up on some of Frank's questions, the resi jumped from the $19 million to the $23 million in nonperformers. I know that last quarter, just looking September to December, most of that was a smaller loans. Is that still the case?

Yes, that's still the case. We still have that one super jumbo that we've talked about for a number of quarters, but that's really the exception.

That's the $3.5 million or whatever?

That's the $3.5 million. Vito referred to it in his comments, but that's the exception. Most of these are conforming loan amounts. We don't see any significant jumbos associated with them.

Okay, so all smaller. And then, do you have a number for the substandard? That corresponds with at December, it was $71.4 million?

Our total substandard assets as of 3/31?

And maybe while you're looking for that, there is another number. Troubled debt restructurings, how much do you have included in nonperforming, and then, do you have TDRs that are still accruing and how much of those?

Yes, the troubled debt restructurings, it's $506,000 of TDRs that are included in delinquent loans -- in nonperforming loans. And overall, there's -- it's -- there was only two added for the quarter, so I think it's a (multiple speakers)

Laurie, while Mike is looking for that, I don't have the substandard as of 3/31 because we haven't filed the regulatory report yet. I can tell you as of 2/28 it was just under $51 million.

Okay, so down substantially. Okay.

Yes, we do an analysis in February, and then we update it for the regulatory purposes at the end of March, and those numbers haven't been run through yet.

That's great. And so, I think that wraps my questions on credit, outside of TDR, and then I wanted to go back to something that I think Frank was also touching on a bit, or maybe it's just a little bit more with respect to the funding. I know you all had $85 million in borrowings repricing. You also had some CDs coming down. And I was thinking that maybe your margin would be a little bit higher and then flattening out. Are we going to maybe still see a little bit of benefit roll in the second quarter (multiple speakers) from the repricing and then flatten from there, or (multiple speakers)

I think you can assume that, but this leverage strategy is clearly also having its effect on the margin and how (technical difficulty) we're able to work that transition from the wholesale to the organic side is going to have maybe a bigger effect on our margin as opposed to any particular repricing that we're going to be engaging in.

It's difficult for me to actually quantify exactly what we see happening with our margin, but I think the days of us reporting huge increases in margin are largely past us at this point. We've taken about the maximum advantage we can, and I think it's going to be much more dependent on how quickly the Fed decides to turn rates around and what effect that might have on the pricing of our core deposits. Where we are obviously considering the ratio of core deposits we have, we might be vulnerable.

Mike has got that TDR (multiple speakers)

(Multiple speakers) TDR, from what I have, are $7.6 million at March 31, and then, the 500 -- two or 500,000 are not -- are back into nonperforming.

500,000. Okay, and the $7.6 million, that includes the $506 million or it was $7.6 million accruing?

That includes -- yes, that includes the 500,000.

The 500, okay. So basically that -- what's still accruing was $7.1 million. And then, do you have a corresponding number for last quarter?

For last quarter, I know there was only two added. So let's see, the two that were added was about 350,000 for this quarter, so if you take 350,000, then that would be the last-quarter number. In total. There was only -- they're both pro forma. So we only added two loans for $350,000 into the TDR total in the first quarter.

Got it, okay, perfect. Then last question for you, John, obviously the Central Jersey acquisition, not going through at the end of last year. Probably a good thing. But I guess, more importantly, can you weigh in on your acquisition outlook? What are you all seeing? Are you actively looking? If you're actively looking, what are the things that you're looking for and what geographies would you be focused on?

Yes, everyone always talks to us about are you willing to do assisted acquisitions, Laurie, and as you know in our market, we just don't see a lot of opportunity for that, so.

We do see an opportunity that we've talked about many times where there might be some smaller institutions that had been startups, as was Central Jersey, in the last 10 or 15 years that might be available, but we're always walking -- looking within our existing footprint. We're not looking at anything in Cape May or in Sussex County or anything in well up in Bergen County, and the opportunities are quite limited.

The Central Jersey issue was something that regulatorily just -- we almost came to an impasse at, and we are still speaking to them and we're speaking to a whole host of other people, but I don't think we have anything that we can comment on in terms of specifics.

Okay. Do you have any other different thoughts given the appreciation in your stock price, i.e., your acquisition currency, how things have changed just in the last quarter? I mean, would you be more apt to be an acquirer now that your stock currency is higher?

No, because I think the number of opportunities that we have are strictly limited by the market that we're in and I don't think that the value of our stock price has got any real bearing on that.

I think our currency -- the value that our currency has hopefully is recognized by anyone that we might be talking to, and how it trades today or yesterday or tomorrow I don't think is going to have a dramatic effect on that. I think that if we feel that our currency has value, it's the value in our ability to generate core earnings, and we're not being rewarded for that in the near term. So we still think that most of that value lies ahead of us.

(Operator Instructions). Matthew Kelley, Sterne, Agee, and Leach, Inc..

Any impact for you on the Reg E overdraft NSF changes that go into effect the second half of the year?

Well, we think there will be an impact. We don't think it's going to have a dramatic impact on our service fee income, but time will tell. We are making plans to try and accommodate that right now, and I don't think we see any dramatic impact upon our service fee income.

How much of the $10 million of fees and service charges is overdrafts, NSF?

About $1 million.

And then on the expense side, anything that will be coming out as we look into the second quarter? How much was the stock-based compensation expense during the quarter?

That's recurring. That doesn't come out. And that builds as you -- every year as you award stock grants and options. So that doesn't change. Our options are granted typically in the first quarter.

What does come out is the snow removal costs are about $150,000 in the first quarter, so that should come out in the second quarter, barring any unforeseen events.

Frank Schiraldi, Sandler O'Neill & Partners.

I thought I'd just follow up with one, just on the deposit side, in terms of continuing to run down the CD book, and it looked like you had pretty good growth in demand deposits this quarter. Is there, I guess, anything bulky in there? Do you expect that sort of growth to be able to continue here in the short term?

What we do see is on the government side, Frank, as we see that with the budget crisis that New Jersey is experiencing, we see and we hear from our local municipalities and Boards of Ed and so forth that they'll generally be running lower balances with us, and we're seeing a little bit of a runoff in those balances, not that we've lost any relationships but just that the balances, the individual balances themselves, tend to be lower as their budget strings get tightened up.

Beyond that, on the other hand, we'd like to think that we have a pretty strong [calling] program out there and that we're looking to generate some incremental organic growth on the deposit side. So, I think while we don't have a lot of optimism with regard to the governmental deposits, we've had some pretty good success at dealing with some of our competitors that have had some difficulty.

We still see some TD Commerce rollover. TD is not nearly the competitive force that Commerce was when they had their culture really geared up, so we see some opportunities there. And we're pretty sanguine about what our chances might be for the next three quarters through the end of the year to generate that type of incremental growth that we're looking for.

And just, if you can remind us, what's the size of the government/municipal deposits?

Of course it varies seasonally. If you're talking about the end of the quarter, let me take a peek. Now we're talking just core deposits here, so this is not involved with any short-term CDs or anything. These are just transaction accounts. And as of the end of the quarter, just under $271 million.

(Operator Instructions). At this time, we show no further questions. Do you have any closing remarks for today?

No, Angie, just to thank our participants this morning, as we always do, and we'll certainly look forward to our annual shareholder meeting, which is going to be coming up on May 6, and also speaking to the participants at the end of the second quarter for another earnings conference call, which we hope is just as pleasant. Thank you all.

Thank you. The conference has now concluded. Thank you for attending. You may now disconnect.