OceanFirst Financial Corp (OCFC) 2010 Q4 法說會逐字稿

Good morning and welcome to the OceanFirst Financial earnings conference call. All participants will be in a listen-only mode. (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, Amy. Good morning and thank you all for joining us. I am Jill Hewitt, Senior Vice President and Investor Relations Officer, and we will begin this morning's call with our forward-looking statements 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.

OceanFirst undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. 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 titled Risk Factors and Management 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 hosts 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 fourth-quarter and year-end 2010 earnings conference call today.

OceanFirst has just concluded its 108th year of continuous operations and our 15th as a publicly traded company, the most profitable year in our long history. We have posted record earnings of $20.4 million for the year. We have grown our balance sheet prudently and solidified our capital position, serving the interests of our shareholders well in the face of market turmoil and uncertainty. We appreciate your interest in our performance and are pleased to be able to review our latest operating results with you this morning.

You have all had the opportunity to review our release from Thursday and, following our usual practice, I will not be disrespectful of your time reciting a host of actual numbers from the release. My introductory comments will merely help frame our opportunity to help add some color to the financial results posted for the quarter and year.

Diluted earnings per share for the quarter were, of course, $0.32 reflective of a $0.05 from a nonrecurring tax benefit relating to a reduction in the New Jersey state tax valuation allowance. The Company's 56th consecutive quarterly cash dividend was declared and maintained at $0.12 per share, representing a 44% payout ratio on our quarterly core earnings per share of $0.27 and an attractive 3.7% current yield on our shares.

We continue to be pleased with our consistent earnings per share increases quarter over quarter throughout the entire year, along with our growth in topline revenue and 10.9% balance sheet expansion. Core deposits now represent 82.9% of total deposits with an enviable cost of deposits of 75 basis points at year-end as our reliance on CD funding and government bid deposits abates.

Despite the fourth-quarter decrease of 21 basis points in our net interest margin, a strategic adjustment in our deposit mix has had a bounceback effect on our margin early in the first quarter of 2011. The departure of higher priced government bid deposits at year-end, which had been contracted for two years earlier, had the immediate beneficial effect of reducing our cost of deposits 15 basis points when these accounts closed. We do expect the margin to be under increasing pressure during 2011, however, as our overall funding costs have nowhere to go but up at this point.

Asset yields continue to be adversely affected by significant loan pre-payments, and commercial loan growth continues to suffer from slack demand. Most residential mortgage production at historically low fixed rates continues to reflect refinance activity and is sold into the secondary market rather than booked in portfolio producing robust gains on sale.

Non-interest income for the year increased smartly driven largely by these gains on sale and higher fees and service charges from multiple areas of the bank.

On the expense side, increases were mostly due to higher incentive compensation expense, directly reflective of the strong operating performance of the Company during 2010. We are extremely pleased to note that our efficiency ratio for the year was reduced 4.32% to 58.04%, which itself is a key component of our bank-wide incentive plan goals.

As to capital, our balance sheet growth coupled with record 2010 earnings and prudent cash dividend payout practices resulted in the Company maintaining the strong capital position achieved following our late 2009 secondary common stock offering. Importantly, with financial stocks continuing to trade largely on book value, our tangible book value increased 9.6% to $10.69 per common share. With our stock closing at $12.96 last evening, we think our trading multiples of 1.2 times tangible book and 11.6 times trailing fourth-quarter earnings, represent exceptional value for our shares in this market.

Before asking President Nardelli for his review of our credit quality, I will note that for the year the increase in our nonperforming loans was generally the result of higher residential and home equity delinquencies. We review this as a gradual increase in our local market and a manageable portfolio characteristics. We have prudently adjusted our loan loss provisions accordingly, including the most recent quarter-over-quarter increase at year-end.

We remain pleased that our commercial portfolio delinquency metrics remained generally unchanged for the year and today actually constitute a smaller percentage of delinquent commercial credits than recorded early in 2008. In fact, we are extremely proud to note that in our $500-plus million commercial portfolio, there are currently only four loans greater than 90 days delinquent.

President Nardelli will now offer some added color on our loan portfolio's performance and general assessment of conditions in our local market. Vito?

Thank you, John. Good morning, everyone. You may recall that last quarter when I spoke about the sound process for foreclosures here at OceanFirst, I indicated that the issues that were facing other services would serve to elongation the process for all financial institutions.

We have seen a lengthening of the average foreclosure timeline as borrowers are well-versed in delay tactics available to them. The ability to capitalize on these delay tactics can cause borrowers to allow a loan to strategically default and deal with the inevitable reality many months later.

Of course, whenever possible we continue to work with borrowers who have been impacted by the economic climate to find an appropriate solution to allow them to remain in their homes. With that, I will now turn to a more specific discussion of the bank's current asset quality.

I would like to highlight that it is the Company's practice to include troubled debt restructured loans that were modified in the past six months but that are now current as to payments in the reported nonperforming loans. Given the environment, it is of little wonder that the bank's growth in nonperforming loans quarter to quarter is driven by residential mortgages and home equity loans.

This quarter's increase in nonperforming loans to 223 basis points of total loans receivable again reflects an increase in residential and consumer loans, along with a decrease in commercial loan delinquencies. Of course, we are not pleased by the increase. However we are not alarmed by the level given its makeup.

While high for OceanFirst, this level of nonperforming loans remains favorable to the most recent industry measures available. We are pleased with the stability currently shown in the commercial portfolio and encouraged by the decrease in the 30- to 89-day delinquent accounts for the quarter and the year.

During the quarter, we realized net loan charge-offs of $893,000, an increase from the linked quarter, but lower than the same quarter last year. For the quarter, we set the provision for loan losses at $2 million, up from prior quarter. When evaluating the provision, consideration was given to the current quarter's charge-offs, the level and composition of nonperforming loans over the course of the year, along with our perception of the continued relative stability of the local real estate market.

To briefly update you on the reserve for repurchase loans, there were no charges or recoveries to the reserves indicated from the repurchase activity during the quarter. So the reserve balance remains at $809,000. There is one outstanding repurchase request for $122,000, which the bank is contesting.

Notwithstanding the increase in nonperforming loans, given the composition and vintage of the problem loans, we remain confident in our belief that OceanFirst underwriting standards are strong and conservative. And that over time, these standards will result in continued, favorable credit performance when measured against our peers.

Amid some indications, both real and perceived, of an economic recovery, there are as many indications that the road to recovery remains long. With our conservative credit culture and strong capital position, OceanFirst is well positioned to weather the long road while being always prepared to service the needs of our customers in a recovering economy.

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. It has been a long time since our quarterly press releases and earnings conference calls have included the word record when referring to our earnings and revenue growth. We are pleased indeed to be able to share that news with you once again, as we begin the 16th year of OceanFirst Financial's life as a publicly traded company.

While we hope this will be the first of many future pleasing releases and conference calls, we continue to approach the immediate future with guarded optimism. We remain concerned with the regulatory uncertainty relative to the pending rule writing under Dodd-Frank and are not yet completely convinced that the worst of the economic turmoil plaguing our nation is truly behind us.

Nevertheless, we reiterate our belief that our community bank business plan of serving our attractive Central Jersey shore market continues to have us well positioned to pursue our mission of developing incremental value for our shareholders' investment.

With that, Misters Nardelli, Fitzpatrick and I will be pleased to take your questions this morning. Amy.

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

Good morning.

Good morning, Frank.

Just a few quick questions, if I could. I wanted to ask John about your comments on the margin. I think you had said that some higher cost deposits had repriced and had given you a 15 basis points better.

Immediate reaction right at year-end that wouldn't be reflected in these numbers but it was an immediate bounceback as I referred to it for the first quarter.

So is that when you say that 15 basis points, are you talking about just the cost of a certain balance of deposits?

No. No. That is our overall -- on our overall cost of deposits.

[As] balance. Okay -- so -- .

It had been running 90 basis points. On 1/1/11 it was 75 basis points.

It's just deposits, Frank, we are not addressing the margins.

It's not the margins (multiple speakers).

We're just addressing the fact that deposits we set down 15 basis points as of the last day of the year because there was substantial repricing down of government deposits.

Okay. Got you. So they were running at 90 and now -- and then, subsequent to that, running at 75.

Yes. Normally we don't -- you don't see our cost of deposits reported as a separate number. And I am just saying that as a separate number, not including our other funding costs borrowings and so forth, it's just the cost of deposits immediately went from 90 to 75.

But do you feel that is something that -- that's certainly something that is going to help the margin in the first quarter?

Absolutely. It gives it a nice boost. And I think it helps mitigate that 21 basis point contraction in the fourth quarter.

Just looking forward, do you think it sort of offsets, as you said it, as we go through 2011 should see some margin pressure, but do you feel like it might be sort of flattish as we go into the first quarter here or --?

Well, Frank, we try and avoid giving guidance on the margins so I had rather not answer that directly. But I think we can point out that I don't think 21 basis points is necessarily a good run rate as we start the new year.

Okay. Got you. And then on provisioning, I don't know, how much you can say about it, but just given the trend we've seen in the reserve to loan ratio, is that something that we should expect to continue to trend higher here?

No. We don't want to shortchange that. Clearly, I mean we have great confidence in the quality of our portfolio especially, as I pointed out and Vito pointed out, the commercial portfolio. You know, most of our nonperforming loans are really on the residential side and we don't see huge losses there.

It was reported this week in our market -- actually I think the entire state of New Jersey -- that real estate prices have only retreated 16% since 2006. Okay? So we feel very comfortable with our sound credit underwriting on the residential side and while delinquencies are in fact gradually creeping up during the course of the year, we don't see huge losses.

Having said that, we are not going to shortchange that loan loss provision. And although our experience on the commercial side has been good, we count our blessings. We point to our strong credit culture that we've established in here. And we hope that continues.

And correct me if I'm wrong, but the average loan to value in the residential is somewhere in the low 60s or am I wrong about that?

It's about 60%, yes. (multiple speakers) 59%. Yes.

Okay and then just finally I guess and then I know you guys don't give guidance so I don't know how much you can say about it, but just in terms of if we look at -- you know, is there anything you can say about year-over-year provisioning if we compare what we can see in 2011 and maybe it's a tough question to answer, but compared to 2010? Is there any sort --?

Well, we are not going to the magnitude of it. I mean, I think our budget forecasts that it won't be as robust as it was in 2010.

Perfect. Thank you very much.

(Operator Instructions). Matthew Clark at KBW.

Good morning. On the -- in terms of the excess deposits -- I mean, not excess deposits, but the good deposit growth that you had that you obviously had to reinvest and basically earn nothing on, from what it looks like from the average balance sheet. Any sense for how quickly you might be able to redeploy that into loans? Or whether or not your -- you know, assuming you can see some net growth, if that is going to -- just trying to get a sense, I guess, for the timing of when we might be able to see that redeployed, whether or not you have a desire to slow the deposit growth because of that phenomenon or not?

I don't think we have a desire to slow the deposit growth. Again, we strategically avoided rebidding on that one block of government deposits that we let go right at year-end. So I mean we can do that in select cases. They were core deposits, but they were bid core deposits and they were two-year-old bids. So that was very high-priced money that was rolling off.

So I think we opportunistically see situations where that will prove to be a good strategy.

As far as the loan demand is concerned, we're really not interested at these rates in growing our residential portfolio, and we like the margins that we get on sale. So obviously we are still taking that in the non-interest income vein to avoid putting these extremely low rates in the vault on the residential side.

On the commercial side, we see a lot of slack demand. We only grew the portfolio $44 million in 2010. We have a target above that for 2011 and we'd like to think we can get it, but we are not going to go out there and make loans recklessly. We don't do any brokered loans. Everything we do is on a relationship basis in our own market. And we would like to see demand pick up a little bit.

Our pipeline is not extremely robust that we can point to at the beginning of the year, but we are hopeful that there will be some demand that will develop. I mean if you know any good borrowers in the Monmouth and Ocean County markets, Matt, send them over. Please. We would love to talk to them.

Of course, of course. And then on the loan side, in terms of the -- what you are booking new assets at, I mean on a blended basis, we can see that you are around 5.20% -- yes, about 5.20%. I mean, I guess, can you give us a sense for what you're booking new mortgages at, for example? And what you are booking new commercials funds at, just to get a sense for how much that might [drift slower]?

Again, the mortgages on the fixed rate side are commoditized. So that all of the fixed rate loans are being sold. We have a trickle of ARM product that gets in the portfolio and most of that is in Hybrid ARMs, three- , five- or seven-year product. That range is anywhere from the mid 3s up into the low 4s, low to mid 4s. The fixed rate product is all being sold. So on the residential side, that will give you an idea.

On the commercial side, most of our commercial loans are treasury indexed and they are subject to floors at this point. So we're generally targeting treasury spreads of 2.25% over the corresponding treasury. And we are succeeding in booking loans on that basis. We haven't seen a lot of price competition, although there's indications that there's a lot of people chasing very few loans and that could heat up at any moment. So while spreads continue to be reasonably good on the commercial side, again the slack demand is the major problem there.

Is it fair to use the five-year treasury there? (multiple speakers).

Most of the commercial deals would be off the five-year treasury and we are always targeting about 2.25% over the five-year treasury.

And I see you're in the 4.5 -- ?

Mike, do you have a comment?

Yes, but this floor is on that too typically, Matt, so we don't usually go below 5 on that. We just did -- for the commercial loan we just did -- we had a big loan in December that was in the low 5s that was [15] credit quality. That is about as low as it gets. And then more normally more credits might be in the mid- to high 5s.

So those floors are there. Okay. And in terms of the quarter, can you give us a breakdown of the originations, the payoffs, and what you sold just to get to the net growth number?

We --.

Unless it's -- I don't think I saw it.

Yes, we sold -- well, we sold $64 million, it's in the press release. We originated $156 million for the quarter, we sold $64 million.

And payoffs obviously would be the --?

Well, the payoffs would have been very strong, obviously, because the refight market is there's people refi'ing our loans, too. You know, we monitor how much of the refi business we get of our own and we try and avoid that, but there's other people out there refi'ing loans. The payoffs have been very strong.

And then just lastly, could you give us any color on the kind of second home market? Are you seeing any changes there? I know as a portfolio, it is held up very well for you guys and I know it's not that big, but just curious what you might be seeing there.

The qualifying borrowers are getting fewer. You know, we have stringent underwriting there as well. I think that that sponge has been wrung out pretty well. We'll have to wait for the next kick up in values, I believe, at this stage for that to show any significant growth. I think at best it will be flat and may trail off a little bit.

What are the overall qualities of it?

Yes, if your question is with regard to the country coming out of a recession, how many people are going to make an investment in a second home, I -- you know, the second home market is always -- the sales in that market are always very seasonal. All the sellers want to sell in September and all the buyers want to buy in May and June. So it's a very seasonal market. Nobody wants to buy a second home, a vacation home in the fall and nobody wants to sell one coming into the rental season. Or coming into their vacation season.

So it's difficult for us to use that as a barometer when we are sitting here in the middle of January with a lot of snow on the ground.

Right, but from a quality perspective, I guess I was more curious about --?

No, the quality, I think, is there. I think the values again have held up real well and it's just that there's not a lot of activity.

Okay. Is that portfolio still -- what, $70 million or a little bit less maybe?

The -- yes, about $100 million.

Okay. Thanks.

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

Just a few questions here, one for clarification. The $1.4 million in gain on sale loans and securities. I'm to believe that's entirely gain on sale loans?

Yes.

Okay and then what was the gain on sale margins this quarter?

It was in the high 1s. 1.80%, 1.90%. 2% -- up to 2%. High 1 -- 1%.

And then how does that compare to last quarter?

It's been running high all year, I mean, but traditionally I think we have been willing to engage in those types of sales for something less than 100 basis points. Traditionally, we would be targeting or budgeting something in the 75 to 80 basis point range as a good margin, but the margins have been running higher for the entire year 2010.

We've been getting good execution. Very good execution.

But there was some contraction. If you look, as the quarter went on there was some contraction later in the quarter as compared to the third quarter or early in the fourth quarter. Because rates -- you know, rate -- we had that big run-up in rates in December.

Right and so it was above 200 basis points and it contracted back down to 180?

Yes. But it was still very healthy.

And then what was in the pipeline at quarter end?

Pipeline for loans sold? Or --?

Yes, exactly.

Okay. Well, there was only -- okay, well, all right, the -- okay the loan -- the loan pipeline was 80 -- it's hard to say. I mean, there's only $5 million that's closed and available for sale. Our total pipeline is $84 million, but not all of that is being sold. That includes commercial and consumer loans not being sold. So I would expect we sold $64 million in Dec -- for the fourth quarter, I would expect that to decline in the first quarter. Because refinance buying is slowing now.

And you expect it to decline next quarter. And one quick question on the tax rate. You guys expect it to bounce back to around 37.5%? Is that accurate for next quarter?

Yes.

And next year as well?

For the whole year, yes.

That's it for me. Thank you very much.

(Operator Instructions). Showing no further questions, I would like to turn the conference back over to management for any closing remarks.

Thank you, Amy. Thanks for a nice job this morning. And thanks, everybody, for your interest again. We hope, as I said in my closing comments prior to the Q&A, that we have a number of more pleasant press releases and earnings conference calls as we go through 2011. And we'll look forward to speaking with you again in April. Thanks again.

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