OceanFirst Financial Corp (OCFC) 2010 Q2 法說會逐字稿

Good morning and welcome, everyone, 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. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Ms. Jill Hewitt. Ma'am, please go ahead.

Thank you, Vijay. Good morning and thank you all for joining us. I am Jill Hewitt, Senior Vice President and Investor Relations Officer. 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 and regulatory changes; monetary and fiscal policies of the United States government, including policies of the United States 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 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 unanticipated or unanticipated events. Thank you all.

And now I will turn the call over to our host this morning, Chief Executive Officer John Garbarino; President Vito Nardelli; and Chief Financial Officer Mike Fitzpatrick. Mr. Garbarino?

Thank you, Jill, and good morning to all who have been able to join in on our second-quarter 2010 earnings conference call today. Before I begin to discuss what we view as outstanding quarterly results from our earnings release, permit me to take a moment to call attention to our press release of this past Wednesday afternoon, announcing the next step in our management succession plan, the appointment of Chief Operating Officer Nardelli as President of the Company and the Bank.

I would like to publicly congratulate Vito, who is succeeding me after my 25 years serving as President of the Bank. It has become apparent in recent years that a segregation of responsibilities in our executive management structure was desirable, and I am confident that Vito, who has served as Chief Operating Officer since September of 2005, will now capably assume the entire responsibility for day-to-day operations of the Company, permitting me to focus my attention more intently on Board matters and investor issues as Chairman and CEO of the Company and Bank. The time is right to make the change now and takes maximum advantage of our extensive experience in managing the Company forward.

Getting back to the earnings conference call, however, we are gratified to be able to report a very strong quarter, with across-the-board increases in several key operating metrics including earnings over the linked and prior-year quarters. We appreciate your interest in our performance and are pleased to be able to review these results with you this morning.

You have all had the opportunity to review the earnings 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 results posted for the quarter.

Diluted EPS for the quarter, of course, were $0.27 -- $0.03 and $0.01, respectively, ahead on the linked and prior-year quarters. The Company's 54th consecutive quarterly cash dividend was declared, maintained at $0.12 per share, representing an attractive 4% current yield on our shares off yesterday's close.

The more exciting news from our release, however, is the across-the-board growth in deposits, loans, revenue, and earnings per share for both the linked and prior-year quarterly periods. It has been a long time since we have been able to achieve increases in all of these key metrics; and shortly Vito will also highlight some encouraging news on our asset quality.

A closer look at this across-the-board growth reveals additional satisfying trends. The robust deposit growth was driven by core deposits, which now represent 80% of our total. Our loan growth was primarily realized in the commercial portfolio, as the extraordinarily low fixed-rate residential mortgage rates and high margins on sales of the product helped dictate our decision to continue the sale of virtually all our longer term fixed-rate residential production.

Even looking at the revenue increases, we can point to additional expansion in our net interest margin, certainly year-over-year, but also from the linked quarter, which helped drive the growth in net interest income.

Non-interest income increased by $630,000 over the linked quarter, benefiting from improved REO operations and higher fees and service charges from merchant services, checking fees, and trust operations. The modest decrease from the year-ago quarter is readily explained by the extraordinary gain on sale of residential loans realized following the Spring 2009 refinance blitz.

Despite the 18.7% annualized growth in our balance sheet year to date, our tangible common equity ratio increased to 8.78% as a result of our strong earnings. On the expense side, our efficiency ratio also benefited from the strong earnings and dropped below 57% for the first time since 2003.

As promised earlier, I will now ask President Nardelli to give you some additional encouraging details on our credit quality.

Thank you, John. Good morning, everyone. During the past quarter, as we grew loan portfolio by $27.3 million, primarily in commercial and commercial real estate, we maintained our conservative and disciplined underwriting standards.

Looking at the Bank's delinquency metrics, we have seen an improvement with nonperforming loans, recovering virtually all of the deterioration suffered in the prior quarter. This level of 173 basis points of total loans receivable remains favorable to the most recent comparable industry measures available. We are encouraged by the improvement, but are not yet ready to call it a trend.

The largest nonperforming loan continues to be a jumbo residential mortgage rather than a commercial relationship. During the quarter, we processed net loan chargeoffs of $686,000, down from $1.3 million in the linked quarter.

Following the normal, thorough review of the Bank's current loan portfolio and understanding the current economic environment, including current levels of property values, and recognizing the continued stresses on homeowners and small businesses, we have maintained the provision for loan losses this quarter at $2.2 million.

I would also like to briefly update you on the reserve for repurchased loans. There was one charge to the reserve in order for $10,000, representing a negotiated settlement on a claim made in the quarter. As there was no provision taken in the quarter, the reserve balance of $809,000. There is one outstanding repurchase request for $250,000, which the bank is contesting.

The quarter showed many positive signs that the value of our strong and conservative underwriting standards continue to pay dividends in the form of favorable credit performance. That said, we certainly acknowledge the continued economic challenges facing consumers and businesses in our market and across the nation.

We are aware that these stresses may continue to cause the asset quality of financial institutions to fluctuate before finally settling into normal levels. Recognizing our conservative credit culture and strong capital position, I believe OceanFirst is in a position to handle that stress better than most institutions.

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. We have really been encouraged by the second quarter's results. We find ourselves energized at midyear despite some of the ominous signs on the horizon relative to the expected heightened regulatory oversight from the Dodd-Frank Wall Street Reform and Consumer Protection Act. Despite the fact that there is little in the legislation that may help the community bank industry, I would like to share a portion of what I communicated to my officers and directors over this past weekend.

Now is the time for us to move forward as a community bank. Faithful to our vision and no matter the external circumstances, we must strive to be the best community bank in our market.

We sincerely believe that to be the case, knowing that whatever rules and regulations may emerge from this groundbreaking legislation over the coming years, we view ourselves as well positioned to attain that objective. With that thought, Messers. Nardelli, Fitzpatrick, and I would be pleased to take your questions this morning. Vijay?

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

Good morning, gentlemen. Just a couple of quick questions here. I just wondered about asset quality. I wanted to ask about the 30- to 89-day bucket. I believe that it -- though NPAs came down linked quarter, I believe that was up linked quarter.

Is there anything in there that concerns you in terms of migrating over -- perhaps going over 90 days and going into NPA?

No, I don't think so, Frank. It's mostly residential, and that fluctuates quite a bit. I think we hit kind of a low point there at year-end, so comparing it to year-end is difficult. But that can move around quite a bit.

We have one nonperforming classified asset that is new, right at the end of the quarter; that is a bankruptcy filing, and that is on the commercial side. But we think that that has been well provided for at this point, and we see nothing that really alarms us in terms of trends.

Okay, fair enough. Then that one, the new classified asset, that is a commercial real estate? That is --?

It's a commercial real estate. It was an aborted project with a dispute between the contractor and the developer. It is currently being litigated, and it is in bankruptcy. So it is a partially completed real estate -- commercial real estate project.

Okay.

It is in-market; it is just -- that just came up in the month of June. That is why I am calling attention to it.

But other than that I think most of that bucket was in residential. That was a little larger loan, so that just jumped in right at the end of the quarter.

Okay. And what was the size of that?

$2 million.

$2 million, okay. Then just wanted to ask if you'd go into deposit growth, sequential deposit growth, a little more. I guess I don't know, maybe it is too early; but have you seen a continuation of some of that? Or do you expect to see a continuation -- not to that degree, but a continuation of that in the third quarter?

Well, you know, starting a couple years ago we talked about the fact that when TD Bank acquired Commerce's franchise in our market, Commerce had always been our toughest competitor for deposits, whether they be retail or wholesale government deposits. We felt that we would be able to be much more successful in that area, and we kind of doubled our efforts in looking at those deposits.

And I think it is starting to yield some dividends. Sometimes it takes some time; it is not like throwing the light switch in the room.

But I think that we have been a lot more successful in the government area as TD has withdrawn and hasn't been as effective as Commerce was clearly, and that has helped drive it.

We've also had some good success with our retail money market, premium money market account, with BlueChip account that we call it. That has been -- proven very successful for us in terms of offering a little teaser rate upfront and then dropping the rate down to more normal levels.

I think the significant thing is that when you look at our overall cost of funds, it's extremely low by any standards, even considering that we are 80% core deposit funded at this point.

Okay, so there is nothing necessarily that came in, in the quarter, that you might expect to flow out?

No, there's a couple of new government relationships. And again we had a particularly successful BlueChip promotion during the quarter. But it's nothing that you can point to that said that it was the whale that was in there.

Right. Okay. Then I guess maybe a question for Mike, just if you could remind us. How much in terms of total deposits, if you have it, how much is governmental?

How much is government?

Yes.

$348 million.

Okay. Okay, great. That's all I had. Thank you very much.

And that is almost all core. There is very little CD in that $348 million. That is the key to the cost factor.

So that $348 million is very low. It's a big number, so obviously very low cost overall.

Yes, right.

I don't think you would have that available, though.

The cost to that? Actually that $348 million is all core. That 1.2% is the overall, all-in cost, 1.2%.

1.2%.

The reason it is a little higher than our other core is obviously that is all bid.

Right. Okay, thank you very much.

Matthew Kelley, Sterne, Agee.

Yes, hi, guys. I was wondering if you can just talk about your core single-family lending business. We've heard from a lot of other thrifts in the region that -- just electing to not grow, given where spreads are in that business and given the influence of the government and pricing and yields.

I would like to get your thoughts on the opportunity for growing or electing to not grow as a result of some of those factors going forward.

I couldn't agree with the general trend that you referenced. I mentioned it in my opening comments, in that we are not thrilled about putting these loans in the vault at this point, so we are selling virtually all of that longer term fixed-rate production.

We find that our pipeline is rather robust. The residential pipeline is strong. The refinance activity is very strong, obviously, at these rates.

But we're originating loans right now at a 4% 30-year fixed rate, and I don't really want that in our portfolio. Plus the fact that even originating it at 4% we have got good execution in the secondary market, and we are currently looking at gains of approximately 120 to 150 basis points at, say, 4% execution in the secondary market.

So I don't think we are comfortable at all with putting those loans in portfolio, and that is the reason you don't see our residential portfolio growing. We're selling the vast majority of that production.

Okay. No, I noticed it did go up this quarter for the first time in five or six quarters sequentially. So that should not be a trend, then? We should expect flat to down balances there going forward in the next couple of quarters?

Yes, the residential production is always our plug. We're really trying to focus on growing the commercial side of our business prudently.

You know, the asset growth that we seek on the residential side is a plug. When we think we like the yields that we're originating at, we will put it in the portfolio. When not, we are just as content to buy mortgage backs.

Okay. Can you give us a little bit more color on the commercial growth? The nature of the growth, the size of the credits, the yields on the C&I versus commercial real estate or multifamily -- where is it coming from?

Also your commercial lending team, where does that stand today? Have there key hires and people starting to transfer their books of business that are generating those types of gross numbers?

That has occurred over the last three or four years, but we haven't had any key hires in the last two years or so.

The majority of the commercial business that we're getting, of course it is all local, it is all originated. It is not brokered at all, which we always stress.

It has been a little larger recently only because we find overall loan demand is really quite slack. We have succeeded at picking up a couple of larger relationships, some of which were serviced by people that are on our team, that were serviced at their prior place of business, and the prior lender may no longer wish to service that credit because of its size.

When you are dealing with BofA and Wells and so forth, it is very easy for them to walk away from a $5 million or $6 million or $7 million relationship. That really doesn't have much interest in there any longer.

So we've had a couple of relationships in that range come in, in the last say two quarters. But nothing that I could point to with any extreme size that would really skew the numbers at all.

Our largest relationship we are always saying is through a local university building a dormitory; it is a construction loan. And we're going to be bidding aggressively because we think they are going to put some permanent financing on it. But that is our largest outstanding commercial real estate relationship right now.

Okay. In the commercial real estate growth over the last couple of quarters, it looks like over the last year it is up about 20%. Is it multifamily? Is it retail? Industrial? Or what types of collateral?

No, it is mostly owner-occupied commercial real estate. There is some C&I lending sprinkled in. But there is no multifamily to speak of at all.

In fact, we wouldn't even consider that as commercial. We generally consider that residential because multifamily here are duplexes and quadriplexes, so it's not like you're talking about a city arrangement when you are talking about an apartment building. So really it's all for the most part owner-occupied commercial real estate.

Okay. Then last question, on the consumer financial protection agency, have you started to actually go through and have an ability to quantify the impact on your P&L as a result of that legislation? I know it's going to really come down hard, presumably on credit administration and those types of costs for single-family lenders such as yourselves.

But have you started to put pen to paper to think about what that could cost you guys?

Now, we haven't, Matt, because I think the devil is going to be in the details. To start trying to estimate that now before they start writing the rules and regulations -- which as we know are going to take somewhere, probably two years or so -- it's going to be very difficult to do.

We have done estimates as to what Reg. E is costing us effective July 1 and that type of thing. But there is so much in this legislation, and it is so vague, and the Congress has given the regulators so much latitude in terms of interpreting what they intend that I don't think we'd want to be doing that analysis right now.

Okay. A reminder of the Reg. E analysis? How much is that going to hit you for?

We thought that the impact was going to be relatively nominal on our case. I think we're talking a couple hundred thousand dollars.

(multiple speakers) $150,000 (multiple speakers).

Yes, less than $200,000.

Okay.

Is what our estimate is, and we will be able to evaluate that better certainly has we get through the quarter.

Okay. Actually, one more. What is the composition of the period in pipeline? The $116 million, is it mostly commercial or residential?

That's mostly residential because the refis -- it's definitely mostly residential because of the refi [put] that is going on right now. One-to-four family mortgage rates are at historical lows, as you know. So it is mostly -- it is almost all -- it is a lot of single-family.

And that will be sold, so we shouldn't expect to see the type of loan growth in the next couple of quarters that we saw this quarter.

Not unless we see it on the commercial side. Again, we won't anticipate the residential loan growth would be -- I would anticipate the residential portfolio to probably shrink over the coming quarters.

Okay. Got it. Thank you.

Russell Gunther, KBW.

Hi, guys. Good morning.

Good morning, Russell. Good to talk to you.

Nice to talk to you. Most of my questions have been asked and answered but let me just ask a housekeeping question.

Okay.

On the TDRs for the quarter, could you update us on that number if you have it?

Most of our TDRs are not nonperformings. Is that what you are looking for?

Yes. Yes, I think it was $9.4 million last quarter?

Okay, $10.0 million.

Okay, that's great.

Total TDRs.

All right. Thank you. That is helpful. Then I guess just following up on Matt's question with Reg. E, how has the opt-in process gone for you? Could you give us a little color there?

Well, we've been very, very aggressive in reaching out to our customer base and doing our best to give the customer the option of choice. And to that extent it is an ongoing process.

We believe it is a successful process, and we will continue to employ that right through when some of the customers who don't opt in have negative experiences, when they are trying to transact a gasoline bill or restaurant bill and deal with that embarrassment. We believe it's a service. It is a good service that banks have been providing, and we will continue to provide that option to our customers.

I think for us it has gone well. We have tackled it head-on. We have been aggressive about reaching out to our customers and doing the necessary explanation to them.

Operationally I don't think we've had any horror stories from branches yet or customer outrage or anything. But there is a real potential I guess for that down the road, but it's still relatively young.

All right. That's helpful. Then lastly, could you update us on your thoughts with regard to the OTS ultimately getting absorbed by the OCC, and how that might impact you guys?

No, that's going to be down the road.

Basically, if it happens it happens. But I think the OTS folks have been told that they will have their positions for the next three years, so we don't see any instability in terms of that transition relative to personnel and those who are conducting examinations.

I think it is probably going to be much to do about nothing in terms of the actual supervisory roles that the regulator -- by whatever name they are called -- will be.

I think there is a lot more trepidation, Russell, among mutual institution, mutual holding companies. I think that there might be a culture shock there when they get over to the Comptroller's Office.

But I know we feel very comfortable as a public company that we have the proper constituency. We have OTS regulatory examination going underway right now; they will be finishing up over the next couple of weeks.

And I think the morale of the staff is good. I think that they are finally trying to see it come to some conclusion.

But we are looking -- I can't say we are looking forward to the regulatory regime, because change on the regulatory side can always be fraught with some danger. But I don't think that we fear it as much as you might otherwise think.

I think that again most of that fear is being expressed in the industry on the mutual holding company side. And certainly if I was mutual, I think I would be a little fearful of how I might be treated.

Sure. All right, guys. Well, look, thanks very much. It's very helpful.

(Operator Instructions) John Shibles, Regal Securities.

Hey, guys. How are you?

Good morning, John. We are well, and you?

I'm doing just fine. Two quick questions. Going down to the asset quality, it says nonperforming loans increased $900,000 at June 30 from December 31, and that is predominantly on the consumer side.

What percent is that of your overall business? Like the whole consumer loan versus commercial?

Mike is looking.

Okay. Consumers versus commercial? Yes, one second, Russell -- I mean John. It's $215 million, 13% of total loans.

Then is this a trend you see in the footprint continuing?

No, I don't think that that is of any real concern. Most of that consumer portfolio is home equity, either loans or lines. I think there is a little stress on it. But I don't think those numbers are alarming at all.

You know, we always talk about the fact that as long as real estate values tend to stabilize -- and I think that we are starting to see that right now -- that that portfolio looks pretty solid. I think if we saw a significant further deterioration in local residential real estate values, that portfolio might receive a little more stress.

But you know, we are not too concerned about that. We think those numbers are very manageable.

Okay. On the commercial side, who are you taking market share from? Are you taking it from the larger banks or more --?

Yes, I think so.

Yes, I think so. I think that, as I mentioned to one of the earlier questions, that we see the Bank of America, the Wachovias -- I'm sorry, Wells, they are going to be rebranded shortly -- even TD in some cases, walking away from credits. And they are good credits. They are credits maybe that someone that joined us over the last two or three years has been servicing.

So we have actually seen as I mentioned, slack demand. And what demand we are getting is we are taking relationships from some of the larger banks in general.

I don't think we see sovereign really in the market at all. I think most of our competition comes from BofA and Wachovia-Wells at this point.

Disenfranchised customers, John, who are not getting the service or attention that they need from these larger institutions, either because it is a concentration for the institution or it is a lack of appetite or lack of desire to deal with that type of customer. So that is creating opportunities; then we're seizing upon those opportunities as they occur in the marketplace.

Okay, cool. Thanks, guys. Have a great day and a good weekend.

Thanks, John. You too.

Frank Schiraldi, Sandler O'Neill.

Hi, I just had a couple of follow-ups. On TDRs, Mike, you said were $10 million I think at the end of the quarter. How much of that was non-accrual and how much was accrual?

Well, it was just two, about $500,000 was included in nonperforming; so the other $9.5 million was performing.

Okay. Then I guess for Vito, I heard you speaking about the Reg. E stuff. I am just wondering, just curious what you have seen in terms of so far in contacting customers.

Has it been a majority of those contacted have opted in or --?

Yes.

Okay.

Frank, the majority have opted in, and it is a matter of making contact with the customer. Once we make contact with that customer, 9 out of 10 times they will opt in.

So we are stressing the customer contact and having that conversation with the customer. That is why we are continuing it on an ongoing basis.

And the contact can come over the phone or in the branch? Is that how it is being done?

Yes, that's correct. You need an affirmative response from the customer to want to opt into the program, and they are in.

We have taken great pains I think too to keep our branch people fully informed and trained on this. I think that is the reason that we see the actual effect on our fees and service charges being relatively nominal.

Okay. Then leading into that, you had said I think less than $200,000. Was that something you expect the hit to be? Or was that the revenue that could come under pressure?

Currently based on where we see ourselves right now, that is like a worst-case scenario. Obviously the more people that opt in, the lighter that number becomes.

Okay, great. Thank you.

(Operator Instructions) Matthew Kelley, Sterne, Agee.

Yes, hi, guys. Just thinking about the margin, if growth starts to slow, particularly on the origination of higher yielding commercial product, and we know where residential is going directionally, and liquidity builds, in a static rate environment it seems like we are going to have some margin compression here over the next couple of quarters.

Can you just talk about that and help us maybe quantify?

Yes, we would agree with you wholeheartedly, Matt. In fact, we were a little surprised that we were able to avoid that kind of compression in this quarter. I think the reason was because borrowing costs stayed as low as they did.

We are still in the process of extending our borrowings, and we expect that there would be some compression. But we managed to eke out a couple of bps actually expansion in the current quarter.

Going forward, you're right, there is not a lot of place for it to go. Clearly the fundings -- all rates on the funding side are going to be higher down the road. And we think that there will be some pressure.

Okay. If the balance sheet growth is constrained and you are going to start to build capital, would you consider buying back stock?

Boy, that is a tough question to ask at this point in terms of hypothetical. But we always point out that we still have some unused authority from the Board in terms of a buyback that we never really finished. But that really has not come under active consideration.

If the market conditions warranted, trading at the current levels, it is something that we would have to take a look at as the best use of the capital. But right now we are in a capital preservation and growth mode.

Okay, all right. Thank you.

It appears we have no further questions. This concludes our question-and-answer session for today. I would like to turn the conference back over to Mr. John Garbarino for any closing remarks.

Thank you, Vijay; appreciate it. I would just like to thank everyone again for joining us on this nice warm Friday morning. I wish everyone a good weekend and we will look forward to speaking to you at the end of the third quarter. Thanks again for your interest.

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