OceanFirst Financial Corp (OCFC) 2010 Q3 法說會逐字稿

Good morning, and welcome to the OceanFirst Financial Corporation earnings conference call. All participants will be in 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 Jill Hewitt. Please go ahead.

Thank you Laura. Good morning and thank you all for joining us this morning. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst.

We'll begin this morning's call with our forward-looking statement disclosure.

On this call, representatives of OceanFirst may make forward-looking statements with respect to its financial condition, results of operations, business and prospects. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond OceanFirst's control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

The OceanFirst undertakes no obligation to update or revise any forward-looking statements, whether as the result of new information, future events or likewise.

In our earnings release we have included our Safe Harbor statement disclaimer. We refer you to the statement in the earnings release, and the statement is incorporated into this presentation.

For a more complete discussion of certain risks and uncertainties affecting OceanFirst, please see the section entitled Risk Factors and management's discussion and analysis of financial conditions and results of operations set forth in OceanFirst's filings with the SEC.

Thank you. 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 Michael Fitzpatrick.

Thank you Jill, and good morning to all who have been able to join in on our third-quarter 2010 earnings conference call today.

We've completed another strong, satisfying quarter, with net income increased over the both linked and prior-year quarters.

As we review our financial performance over this year and the immediate past quarter, we can point with pride to several significant, positive factors helping us build value for our shareholders.

We appreciate your interest in our performance and are pleased to be able to review these results with you this morning.

You've 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.

Our diluted earnings per share for the quarter were $0.29, $0.02 ahead of the linked quarter, and although our bottom line rose 15.5% from the 2009 third quarter, even after adjusting for the repayment of TARP preferred dividends, the increased share count from our fourth-quarter 29 follow-on common stock offering effectively precludes a favorable EPS comparison over the prior-year period.

The company's 55th consecutive quarterly cash dividend was declared and maintained at $0.12 per share, representing a comfortable and sensible 41% payout ratio, as well as an attractive 3.9% current yield on our shares.

We continue to be pleased with across-the-board growth in revenue, as well as net income available for common shareholders, and core deposits for both the linked and prior-year quarterly periods.

A closer look at this across-the-board growth reveals additional satisfying trends.

Average core deposits now represent 81.6% of our total, with an enviable cost of deposits of 90 basis points, as our reliance on hot money CD funding continues to abate.

Topline revenue again increased from both the prior-year and linked quarter, and helped drive our stronger bottom line.

Although our net interest margin contracted modestly, 5 basis points, over the linked quarter, and asset growth was curtailed, our noninterest income increased $621,000, primarily due to strong margins on sales of residential mortgage loans. The noninterest income comparison to the same period in 2009, however, suffers from the one-time 2009 recovery of borrower escrow funds at the company's now shuttered mortgage bank subsidiary, which inflated last year's numbers.

Importantly, we have not seen a large decrease in our service charges resulting from the opt-in program for debit card overdraft protection. Measures we have taken have prevented any catastrophic reductions associated with customers not desiring continuation of this service.

Asset growth for the quarter was slowed by the absence of strong demand in the commercial lending sector. As discussed last quarter, the strong growth experienced in the spring was largely a result of timing of loan and line of credit funding, not likely to be completed in the second half of the year.

Total loans receivable increased only $2.3 million for the quarter, as commercial lending balances were flat and most residential mortgage production continued to be sold into the secondary market.

Nevertheless, our annualized year-to-date asset growth remains a robust 12.8%.

Our strong earnings over the first three quarters of 2010 and sensible dividend earnings payout ratio have driven our tangible common equity ratio up to just under 9%.

While there can be no question that our bottom line has benefited handsomely from the extended period of low interest rates this year, dictated by Federal Reserve policy makers, we remain mindful that the rates will eventually increase as the Fed changes direction with a turn in the economy. As such, we remain vigilant in modeling and managing our exposure interest rate risk.

To be cautious, in past quarters we've taken steps to extend our wholesale borrowings and shorten our asset durations where possible to maintain our flexibility for the inevitable change. I strongly believe that our interest rate risk position is well managed.

I will now ask President and COO Nardelli to give you some details on the review we have undertaken of our loan servicing operations in the face of the growing adverse publicity over several high visibility and volume services residential foreclosure procedures, as well as to discuss some encouraging signs of stabilization in our credit quality.

Thank you John. Good morning everyone.

Before I begin to discuss the bank's credit metrics for the quarter, I wanted to take a moment to speak about a topic that is regularly in the media today, namely, the issues facing many mortgage servicers with foreclosure proceedings and any impact that may have on OceanFirst.

First, I can tell you that our management team has reviewed our policies, procedures and practices and find them to be safe, sound and in compliance with all applicable laws.

We take the action of initiating foreclosure as the very serious act that it is, and we proceed with appropriate respect for the process and the borrower.

As these matters facing other servicers continue to unfold, I am sure that the already elongated foreclosure process will stretch even longer. As we have throughout this economic cycle, in order to mitigate foreclosuring, unless it is the only practical choice, we will continue to work with struggling borrowers who can remain in their homes with some level of assistance, such as a modification. These workouts, along with the extended time frames to foreclose, have increased the cost of servicing delinquent loans.

As I turn now to the bank's current assets quality, I think it is a good transition to highlight that it is the company's practice to include troubled debt restructured loans that were modified within the past six months but are current as to payments in the reported nonperforming loans.

This quarter's increase in nonperforming loans to 200 basis points of total loans receivable returns the measure to a level similar to the first quarter.

While we of course are not pleased by the increase, we're not necessarily surprised by it. This level remains favorable to the most recent industry measures available.

During the quarter we realized net charge-offs of $153,000, down from $686,000 in the linked quarter, and lower than the past several quarters.

For the quarter we set the provision for loan losses at $1.6 million. When evaluating the provision, consideration was given to the modest level of charge-offs, the level of nonperforming loans over the course of the year, and the relative stability of the local real estate market as a compared to the nation.

I would also note that $2.6 million of the increase in nonperforming loans is one commercial real estate loan that was performing at the end of the prior quarter but was considered in evaluating the provision last quarter.

To briefly update you on the reserve for repurchased loans, there were no charges or recoveries to the reserve in the quarter, so the reserve balance remains at $809,000.

There is one outstanding repurchase request for $122,000, which the bank is contesting.

While the quarter showed an increase in nonperforming loans, we remain confident that our strong and conservative underwriting standards will in the long term benefit us in the form of favorable credit performance.

There continue to be economic challenges facing consumers and businesses in New Jersey and across the nation. This economic stress will likely continue to cause the asset quality of all financial institutions to fluctuate before finally returning to normal levels.

Recognizing our strong capital position and commitment to a conservative credit culture, I believe OceanFirst is in a position to handle that stress.

With that, I 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 continue to be encouraged by this year's financial performance, although we remain cautiously optimistic with regard to risk management going forward, particularly relative to the stability of our credit quality, local real estate market, and interest rate risk position.

Moreover, there remains substantial regulatory uncertainty ahead relative to the heightened oversight from Dodd-Frank, as a host of rules emanating from the legislation are promulgated over the coming months.

As we observed at the end of the second quarter, however, we believe that the winners in the financial industry in the years ahead are the companies who adapt while remaining focused on their objectives and conducting their operations in the long-term interest of their shareholders under any regulatory environment.

I believe our community bank business plan, serving the attractive Central Jersey Shore market, continues to have us well-positioned to pursue those objectives as we strive to build value for our shareholders' investments.

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

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

Just a couple of questions. On the deposit growth in the quarter -- and I apologize if I missed any of this -- but the deposit growth in the quarter, is that similar to what we saw in 2Q with the new muni deposit relationships?

The deposit growth continues to be across the board. A larger proportion, based on the balances, is obviously government, but we still see a nice uptick in consumer and business.

The interesting thing that we noted -- and we commented on this last quarter -- was that we're going after the operating accounts with the municipalities in the local market. There's been some fallout with some of the competitors on not wanting to continue doing business with these municipalities for one reason or another.

We've deepened the relationship. We believe we're embedding ourselves with these municipalities in that we have their operating accounts. And indeed most of the growth is coming into those existing operating accounts that we've already opened.

So we're pleased by the growth, and we believe the way to hold onto these balances as the economic conditions turn is to embed ourselves with these municipalities as being their primary bank for their operating servicing needs.

And you're paying what? I mean on those deposits.

The deposits, the pricing there is between maybe 25 and 50 basis points at the most.

And then --

And it's bid.

It's bid. It's competitively bid. And it's a question of the level of service that you're able to provide to the local municipalities.

Okay. And then on credit, the increase in NPAs linked quarter, part of that was the commercial real estate loan you talked about in your Q, in part?

Yes.

And the rest is one-to-four family?

Yes.

Do you see anything bulky that is in the 30-day, 90-day category that might fall in in Q4 at this point?

No, Frank. Nothing, not --

No.

Mike? No. No.

Actually our delinquency metrics have been remarkably -- when you take a look back and you avoid the quarter to quarter comparison, delinquency metrics for the entire year have been relatively stable, especially on the commercial side.

We've seen some gradual uptick on the residential side, but our commercial numbers have really been remarkably stable. I'll go beyond the beginning of this year. Right back into 2009 we haven't seen any deterioration on that commercial side.

You get the odd loan that might run into some difficulty because of operating problems in the current environment, but on a wholesale basis I think the portfolio has held up real well.

Great. And then finally, on the mortgage banking business, just in terms of maybe what we can expect going forward in terms of a tail, it is sort of peaked here and we're going to see revenues come down, likely fourth quarter? Or is it still going to hold up? Just sort of your thoughts there, Mike?

Yes. We're still -- the pipeline is still $129 million, Frank, going into the quarter, so it is a pretty decent size. I just -- at the beginning of -- at the end of last quarter, it was actually $116 million. So it's actually a little bit higher than it was last quarter.

So I think the quarter will start off pretty strong, but yes, we do expect that to tail off, probably I guess towards the end of the quarter. So it might not be as robust, the mortgage banking gains, as we saw in the third quarter, and then certainly in the first quarter it would tail down.

We're seeing more recently our application volume has tailed off.

Okay, great. Thank you.

(Operator Instructions) Matthew Breese; Sterne, Agee & Leach.

I was hoping you could talk about the margin a little bit more and what you guys see going on over the next couple of quarters in the -- given the low-rate environment we are in?

Yes, the -- well, we saw some compression in the margin quarter-over-quarter from 3.78% to 3.73%. As John mentioned, we're down 5 basis points for the quarter. I think we've said on the first couple of -- the first two quarters this year that we thought it was at a peak and might see some contraction, and we did in the third quarter.

Our deposits are overall 90 basis points, so we can't see a lot of more repricing down there.

We still have some Home Loan Bank advances that can reprice down, but I think the trend is that we're going to see some slightly more compression going forward.

As we said, Matt, too, in terms of managing rate risk, we are extending those wholesale borrowings, so we don't see the Home Loan Bank advances pricing down all that much.

I don't think we're crazy enough to leave it all in overnight at this point, so we are gradually extending the maturities on those wholesale borrowings.

And the margin is pretty robust right now. It has been very steady over the last year. It is exactly where was this time last year, and we felt good about that, but we think it is not likely to do anything but contract, and we hope the level of contraction is just commensurate with the turnaround in the economy.

Okay. And then maybe you guys could talk about the growth outlook a little bit more?

About the growth --?

Outlook.

Outlook. You mean in terms of balance sheet growth?

Yes, loan growth.

Yes. Well, loan growth -- it's really going to be a function of when we see companies start coming back to the market.

As I pointed out in the opening comments, we had kind of an usual circumstance where we just had a tremendous amount of fundings in the second quarter that we knew was not going to continue. We could see the pipeline.

The pipeline has built a little bit, but we had very modest growth I think at just over $2 million in this past quarter, and right now the pipeline still looks pretty anemic as far as any substantial growth through the end of the year.

It's not a function of not being able to take market share. It is a function of people just not borrowing on the commercial side.

We're calling on customers. We're calling on non-customers. And people say, I just don't want to add any debt to my company right now.

So I think that has been the story, from what I read, pretty much nationwide, and it's certainly the story in our market.

Okay, thanks guys.

(Operator Instructions) Laurie Hunsicker, Stifel Nicolaus.

Two questions here, one quick one -- linked quarter your G&A went from -- within the other-other category of noninterest expense -- went from $1.5 million to $1.8 million. Was there anything nonrecurring in that?

$1.5 million to $1.8 million?

Yes. It went from $1.547 million in 2Q to $1.773 million in 3Q. This is sort of that other-other within noninterest [expense] (multiple speakers)

Oh, other-other. It is probably loan related expenses, Laurie. Not only origination expenses but also servicing related expenses for loan collection costs and whatnot. We've seen loan related expenses increase.

Okay. Is there any thought about breaking out that line item so that --?

Well, it doesn't -- well, it's not that big an item that it would rate to the level of another line. We show three, four, five -- we already show 10 lines in operating expenses, so we've got it broken down into a lot of detail.

If it keeps going up, yes, we will give some consideration to breaking it down, but we already have 10 lines in operating expenses, so we give you (multiple speakers)

No, I hear you. I hear you. Okay.

And then just sort of more macro, we're obviously coming up on your one-year anniversary when you terminated your deal. Can you just remind us now in terms of outlook, in terms of what you're seeing in terms of how you perceive the M&A world and what you would love to do.

We see the M&A world as moving to our corner, because we still see a lot of these smaller companies that we've talked about now for the last year are going to become -- and the phrase we use is -- regulatory fatigued. That fatigue is growing heavier. It's not certainly lightening.

And as I pointed out in my comments, as the rules start to get promulgated by the regulatory authorities, I think the fatigue is going to increase.

So we see there will be opportunities.

But again, Laurie, in our case we're not looking to expand our franchise footprint, so the opportunities that we have are always opportunities that we look at in market.

Likewise, we've demonstrated ourselves to be a fairly disciplined purchaser in terms of the price that's willing to pay.

So we're not acquisition junkies. We don't need the acquisitions I think to develop the value that we think is available in our market, and we will try to act opportunistically, and we think those opportunities will be many going forward.

But it's still going to be limited to in-market, and it is going to be only opportunities that present themselves.

Okay. And to the extent that we see you all do a deal, what is the most amount of dilution you would take to tangible book? That becomes sort of an increasing focus. Or is that not how you (multiple speakers)

We don't have hard and fast rules on that. It would depend upon the individual company that we were looking at.

Clearly that number is willing to jump around, depending upon the size of the company and depending upon the value of the franchise that we might be acquiring.

It's not something that we have hard and fast rules on. Every potential opportunity would be evaluated on its own individual merits.

Okay. And how small a deal would you look to do or then it's just not worth your while?

I don't know that there's a deal that would be too small if it represented an opportunity for us. I really don't.

In market I can conceive of deals that might be in the $10 million to $20 million range in terms of overall cost. I don't think that is unreasonable.

And maybe the bigger question is, how large a deal? I don't see any opportunity for MOEs -- thank God -- in the market, but we just don't (multiple speakers)

Okay. Yes, I was just about to ask about that. But I mean to the extent -- say you did an MOE -- it put you with a franchise in a contiguous market, would that be something you would entertain?

Well, that would be something -- again, to move outside of our market and to acknowledge to our shareholders that we don't think we can develop the value that we have right here in the market that we operate would be a departure from our current strategic plan.

And then to what extent would you all consider becoming part of a larger entity? Just a full-out sale?

Again, only if we were absolutely unable to deliver on the pack that we've made with our shareholders. I think as long as we're able to deliver value to them in terms of growing earnings and in terms of growing the company and developing value for them, we'd prefer to do that.

We don't think anybody else offers them a better value proposition than we can right now.

Great. And then just one sort of last question just touching on capital management. Obviously saw you kept your dividend the same. Your payout rate is now --

41%.

I mean, this is -- to my estimate it is now about 43%. So you have room in terms of going up. Can you just remind us in terms of generally how you all -- how the Board --?

Yes. Laurie, as you know, when we had a much higher dividend in the past, we [did] take a cut on it in the fourth quarter of last year, and at that point we indicated that we would like to stay under 50%. We think in this environment we're still interested in preserving and building our capital base, and so to let the payout ratio gravitate north of 50% it is not in the cards.

So we think in the low 40s, where we are right now, is a very sensible rate for us. And as we're able to grow our earnings, I think you might see us take a little closer look at the dividend, but right now that low 40s looks like a good, sensible payout ratio.

Perfect. Thanks for the color.

(Operator Instructions) This concludes our question and answer session. I would like to turn the conference back over to John Garbarino for any closing remarks.

Thanks Laura. I will just again thank everyone for their interest in being with us this morning and look forward to talking to them again as we enter 2011. We hope that our fourth-quarter results are as good as we've been able to put up for the last three quarters. We will speak to you then. Thank you.

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