OceanFirst Financial Corp (OCFC) 2011 Q3 法說會逐字稿

Welcome to the OceanFirst Financial Corp. earnings conference call and webcast. 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, Senior Vice President and Investor Relations Officer. Ms. Hewitt, please go ahead.

Thank you, Amy. Good morning and thank you all for joining us. I'm Jill Hewitt and we will 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 conditions, 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 statement 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 entitled Risk Factors and Management Discussion & Analysis of Financial Condition 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 Nardellil; and Chief Financial Officer, Michael Fitzpatrick.

Thank you, Jill and good morning to all who have been able to join us for our third-quarter 2011 earnings conference call today. We appreciate your interest in our performance and are pleased to be able to review these results, as well as the important factors behind them, with you this morning.

During the third quarter we've continued to post solid consistent core operating earnings while prudently provisioning for the uncertainty which may lie ahead in these unsettled times. You've all had the opportunity to review the earnings release from last evening 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. As in earlier calls this year, we will also spend some time analyzing the reported credit data, talking about the regulatory restructuring which took place in July, and giving some comfort on the underlying strength of our credit portfolio and reserve position.

Diluted EPS for the quarter of course was $0.28, unchanged from the linked-quarter. The Company's 59th consecutive quarterly cash dividend was declared and maintained at $0.12 a share representing a comfortable and sensible 43% payout ratio as well as an attractive 3.9% current yield on our shares.

Although our net interest margin contracted 12 basis points for the quarter, primarily due to a change in the mix of assets and liabilities, our income statement remains strong as our average interest earning assets grew modestly.

With continued lackluster demand on the commercial lending side and the struggling economy, asset growth continues to be controlled. Our deposit mix remains favorably weighted toward core deposits which are continuing to be priced conservatively, although our growth for the quarter has generated a level of excess liquidity which has put pressure on our margin.

Of course our earnings benefited from a reduced provision in the quarter. In his review of our credit quality metrics, President Nardelli will shortly discuss the lower provision. Our operating earnings also benefited from the new FDIC insurance premium assessment methodology which resulted in a $160,000 reduction from the linked-quarter. The overall decrease in expenses for the quarter was also reflective of a successful real estate tax appeal.

Adding to the negative earnings effect of our net interest margin contraction, our non-interest income decreased primarily due to a $148,000 loss on the impairment of equity securities in our portfolio as the market continued to test new lows during the quarter.

The Bank regulatory restructuring, which transpired in July, resulted in our initial examination conducted by the office of the controller of the currency. Our exam was successfully concluded early in September and at this point we are awaiting the final report of examination.

After reviewing this report our Board intends to undertake a fresh look at our capital management planning with an eye toward deploying some of the capital we have been building over the past three years on the heels of our national financial crisis.

I'll now ask President Nardelli to give you that more detailed look at our credit situation before taking any questions you may have this morning. Vito?

Thank you, John. In the quarter virtually the entire growth in non-performing loans was in residential one-to-four family category. Recognizing the sale of some REO, total non-performing assets were flat quarter to quarter.

It is striking to note in the quarter not a single property was acquired as REO as no foreclosure actions were completed, indicative of the continuing situation in New Jersey of mounting foreclosure delays. In fact, a recent report indicates that New Jersey foreclosures are averaging 974 days, up again this quarter from the 908 days that I last reported to you and the 849 days at the beginning of this year.

Until this backlog begins to clear improvement in non-performing loans cannot be foreseen and will likely remain elevated. That said we do note that short-term delinquencies have exhibited some modest improvement for the second quarter in a row.

Recall that we had origination channels for prime portfolio residential loans at Columbia Home Loans and in the loan production office in Kenilworth. In looking at the portfolio breakdown by originating office, we note that the commercial and residential portfolios originated at core bank remained favorable with non-performing loans of approximately 1.5%.

In contrast, the portfolio of residential loans originated at the shuttered Columbia and Kenilworth offices show non-performing loans at 8.3% and 5.7% respectively. These shuttered channels account for 71% of the non-performers, but only 33% of the total residential portfolio. This is mainly attributable to the predominance of ARM and interest only loans and to a lesser extent to the location of the properties.

For the quarter we realized net charge-offs of $399,000, down markedly from prior quarter. We set the provision for loan losses at $1.85 million, well in excess of net charge-offs and down from the prior quarter's levels of $2.2 million. In addition to the charge-offs, we considered the level of the composition of our non-performing loans, the historical loss levels of residential loans, and our overall assessment of a local real estate market in establishing the provision.

Our coverage ratio on non-performing loans has increased by 140 basis points and we are confident in our rigorous quarterly analysis of the loan loss reserve and believe that our reserve level is strong.

Finally as noted by Chairman Garbarino, I am pleased that as one of the first thrifts to be examined by the OCC I can characterize our experience as thorough, professional and efficient. We've been encouraged by our dialogue with the OCC and look forward to reviewing the final report of examination in the days ahead.

With that, I'll 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. In summary then, we have another satisfying quarter to share with you this morning. The consistency of our core operating earnings and strength in capital position over the past three years has helped us emerge as a stronger company. We are pleased to have successfully concluded our first round of examinations under our new federal regulator and look forward to initiating a dialogue on the matter of capital planning.

While we realize that growth is difficult to attain and perhaps altogether unwise in this market, nevertheless we also recognize our responsibility to generate a satisfactory return on capital for our shareholders. I assure you that our Board remains committed to address these issues in the weeks ahead. With that, Mr.'s Nardelli, Fitzpatrick and I will be pleased to take any questions you have this morning. Amy?

(Operator Instructions). Matthew Clark, KBW.

Maybe first on the potential share repurchase activity, can you give out --?

Well, capital management activity, let's call it that. I don't think we are necessarily locked into the share repurchases. But -- I understand where you're going.

Fair enough. Yes, I was just thinking about the dividend payout already at 43%. Can you just remind us what your share authorization is and I guess what your -- maybe update us on your comfort around capital ratios. I mean your Tier 1 is well over 13%, it looks like 13.2% approximately. I'm just trying to get a sense for what your (multiple speakers) might be?

As you know, we've talked over the past couple of quarters actually about getting ourselves comfortable with our new regulator. And so we were quite happy that we were among the first thrifts to have gone through an examination by OCC.

Our existing authorization is just under 490,000 shares, but that's quite aged at this point. That goes back I believe five years or so that the Board had authorized that. So we don't consider that to be active at this point and we're waiting on the final examination report and seeing exactly how the OCC feels and opening a dialogue as to where we think we can go with capital management planning.

Because again, we've been quite successful over the last three years in building that capital back up, now our tangible equity is at 9.46%. We clearly think that's a little excess and it's very difficult for us to create any value for our shareholders. We haven't repurchased a share in over four years. So certainly that's going to be at the top of the list of discussions that we're going to have and we'll undertake those discussions in due course.

Okay. And then in terms of the FDIC deal that happened in and around you guys in Cranford recently, did you guys have any interest in that?

No, Cranford really is not in the sweet spot in our market. I was unfamiliar with the bank actually, it was a relatively new de novo and I knew they had had quite a bit of difficulty. But we didn't take any serious look at it at all.

Okay. And in terms of the originations, pay offs and loans sold this quarter, could you just maybe update us on those numbers?

Yes, Mike has got some --.

It's actually in the press release, Matt, it's in the -- loans sold for the quarter was $28 million. That's just a couple million dollars more than last quarter. Loan origination was $61 million.

Okay, thanks. And then I guess just maybe the other piece, just honing in on the margin a little bit. Trying to quantify I guess the impact from premium amortization and just the reinvestment of cash flows at lower rates. Can you give us a sense for that? It looks like the yield on securities around 3.04%, down 13 bps, just want to get a better sense for how you think about that going forward.

I mean there's no question the margin is going to come under some pressure. I mean the cash flows are being reinvested. For the quarter we were -- it was 15-year MBS, about 2.3% or agency securities about 1%. So any cash flow would be reinvested at pretty modest rates or short-term cash at 25 basis points.

So that's going to -- so we had some cash flow from deposits and then we had some cash flow from loan and mortgage backed securities repayments. So the reinvestment in that is relatively modest at this point.

In terms of the amortization, we've got a -- I don't know, I mean we don't purchase loans, so we don't have a big -- we don't have any amortization there. We have our MBS' at a premium. But from last quarter to this quarter it only went up $60,000, the premium on mortgage-backed securities. So it didn't have a big impact from one quarter to the next.

We've also seen some pretty heavy prepayments, Matt, on the commercial side throughout the year. We find that our market businesses that we're dealing with are generally debts averse. And it's not a question of losing customers as much as it just paying down lines and reducing debt in the businesses. So there's been a definite trend on that side also. Actually our commercial originations have been fairly robust, but the prepayments have also been quite heavy.

Okay. In terms of that excess deposit growth though, are you just going to stay short with that for now?

Yes, I mean we've actually purchased some mortgage backs and some agencies and during the quarter, a nominal amount. But there's clearly -- just holding a ton of excess liquidity at this point, as I mentioned, is taking a little bit of a toll on the margin. So I think as we successfully deploy that we anticipate some heavier commercial closings coming up here in the fourth quarter. And I think the effect on the margin will be mitigated somewhat by that as some of that excess liquidity becomes invested.

Thanks.

Laurie Hunsicker, Stifel Nicolaus.

I just wanted to follow up on what Matt started with, capital management. And I just wonder if you could take us through how you would prioritize with your stock at current levels sitting here in the low 12's. Would you be more inclined to be aggressive on a buyback or dividend or how would you rate it?

Well, we've run the analysis, Laurie. But obviously, as we noted, our cash dividend I think is appropriately structured right now at about a 43% payout. We've traditionally said that we really would like to be south of 40%. So we're right about where we'd like to be on that.

We've looked and analyzed at the idea of the potential for a special dividend, we know that that's become in some goal in the industry as we look around. We've taken a look at that. And of course, as you know, over the 15 years as a public company we've always been pretty aggressive with the buyback of our shares.

We haven't purchased a share in four years and we understand the mathematics associated with that. And with us trading just slightly above tangible book at this point, that analysis frankly looks very attractive to us. We think we look inexpensive, we tell that to the investment community and perhaps the best way to utilize that capital is to consider a buy back.

Right. Well, I would certainly agree. So that kind of brings me to my next question. Your SIP plan of 2.4 million shares, so my understanding, you're issuing that on top of your existing shares?

No, the registration and stock option plan (multiple speakers)?

Yes, yes.

We registered the shares, that was a stock option plan that was approved by shareholders in May. So we have to register the shares, as they get used they would come out of treasury if they're exercised.

If they're exercised. But for the SIP plan, I thought that was an open market purchase? So what you're saying is you're going to be issuing it on top of (multiple speakers)?

No -- you say it's an SIP plan, I'm sorry, you (multiple speakers).

I thought it was an -- did I read this right? Maybe I misread it.

Well, the shares were -- in May -- at the May shareholder meeting our shareholders approved a new stock option plan for up to 2.4 million shares. So what happened two weeks ago was we had to register those shares with the SEC filing.

So all we've done is register the shares that were for stock options that were approved by shareholders in May. When the shares could actually exercise, which may be 10 years from now or eight -- it's up to 10 years, you have 10 years to exercise -- then the shares would come out of treasury, they wouldn't be new issue shares.

I'm with you, okay. I'm with you. Okay, great, thanks for the clarification.

(Operator Instructions). Matthew Kelley, Sterne, Agee.

I was just hoping you guys could expand upon your commentary regarding the provision and that above charge-offs and kind of the outlook on that and why are you -- why do you sound a little more cautious than you did at the beginning of the year in terms of that strategy?

Matt, it's all about the foreclosures. If you can't clear out these foreclosures, if you can't create the reality of making them owned by us so that we can dispose of it you just have this build up of a toxin in the system. And I don't care who you are, what bank you are, if that back door is closed in terms of being able to purge out these loans you're going to have a problem.

And we have to -- and I think it's prudent to recognize that. And until we get relief, until we get some movement, some real serious movement in the process of the foreclosure, I think we have an obligation to look at that as a potential for concern.

As these residential properties, and that's really the increase in our non-performing throughout the year has been almost exclusively in residential. As these residential properties build up and they sit there in some cases dormant with deferred maintenance, you don't really know what the effect on the real estate market is going to be and we don't think this is any time for us to be heroic in terms of not provisioning for these on the conservative side.

And so, it's kind of an unusual backlog that we're faced. And again, I don't think it's anytime for us to be heroic when it comes to not trying to take full cognizance of what the effect might be on the market going forward.

I guess with a three-year foreclosure closing time, I mean, is it something we can expect for the foreseeable future? Or is there more of a limit you guys have in mind as far as the reserve level goes?

I think you're absolutely right. I mean as Vito talked about in his commentary, it's almost inconceivable that we did not take back one piece of REO for the quarter. I mean there's properties that are out there in excess of three years and there's just not one successful foreclosure sale for the quarter. That's absolutely inconceivable.

I mean even the last real estate recession -- residential real estate recession that we went through, you never saw anything like this and that was much more volume than we see today. But if it just keeps backing up like that we're going to start to approach those volumes pretty soon.

There was a moratorium in the state that was lifted earlier this year, but as we've said often times, the courts and the County sheriff's offices and the County Clerk's offices are still processing that paperwork at the same level as though there's no crisis. And there's certainly no public policy initiative to increase over time or to increase wages to remove this backlog. So this thing is dying of benign neglect.

There is no political desire on the part of any legislature to step in and to assist banks in this scenario.

And it's just the convoluted judicial foreclosure process that we have in New York and New Jersey is just really gumming up the works.

It's amazing.

It's frustrating. I mean you say amazing, to us hopefully you can hear the frustration.

Yes, absolutely. Maybe switching gears a bit, you guys commented on heavier commercial volumes this quarter. Is there anything that we can expect next quarter and if you'd quantify that that would be great.

Well, I just happen to know that we have some larger credits that are scheduled to close that we've already issued commitment letters on that we expect to be closing in the fourth quarter. As we've said all year long, the pipeline has been relatively full; the question is to get the properties closed and to get a bit them on the books and to, in some cases, stem the tide of prepayments.

So I don't -- we don't see any great increase in the pipeline in the current environment. As I say, most of our existing clients are debt averse. We do see some ability to win some client business as Wells and BofA go through some rightsizing and some [rips] in market and there's some market dislocation there. But I just think in the immediate future we expect to close some credits in the fourth quarter that we've been working on during the course of the year.

Do you think looking over the next six months we can keep the loan portfolio flat or potentially grow it?

We would look to think we'd keep it flat. We're running just a little behind in our budget projections for the year. But again, the wild card there is what we can get actually closed and on the books and how the prepayments are going to be affected. And at year end of course you know too companies tend to pay down more debt.

Matt, our focus is to grow -- is growing the commercial loan book, that's always been our focus as we shift the mix from one-to-four families to commercial. So our plan is to grow commercial. It would be difficult to maintain the one-to-four family balances because of prepayments, refinance activity and the loans that we do -- the 30-year loans that we do originate are sold in the secondary markets for interest rate risk purposes.

So it would be more difficult to maintain balances and probably unlikely to maintain one-to-four family balances, but we will be hopeful of growing commercial balances.

Yes, I'm sorry to focus on that, Matt; I didn't realize you were talking about the residential side. Because the residential side in this market with the gains on sales that are generated and the portfolio yield on the new originations, clearly the move is for us to jettison those properties into the secondary market.

Right, right. And last question, in terms of geography where are you guys seeing the most improvement and then perhaps the most deterioration?

Actually our market geographically is pretty concentrated. And all along I think we've been pretty confident that our market has escaped the real wrath of the economic downturn. So I don't think that we see any great recovery, but I think it ever really bounced along the bottom either. I think the market appears to be relatively healthy.

Real estate values have held in there real well, although the wild card we're talking about with this extended foreclosure process is -- as these properties eventually come to market they may have a detrimental effect on the current valuation on residential real estate. And that may yet to be seen, that's maybe one of the worst fears that we have. But overall real estate prices have hung in there pretty well, commercial real estate prices have backed up, but we still think it's a viable market that we operate in.

Okay, thanks, guys.

Frank Schiraldi, Sandler O'Neill.

Just a few quick questions. I wondered maybe if I could just revisit credit for a second, the provision. Given the increase in the coverage ratio and the increase in the reserve to loan ratio quarter over quarter, what are your thoughts -- I mean what is sort of your best guess in terms of continued growth in those ratios going forward? Have we sort of reached maybe where you want to be? Or you need to be?

Frank, the analysis gets done each quarter and each quarter there's a whole host of variables and assumptions that get weighed into that. I don't think we manage the coverage ratio to a particular number. I think optically people have always thought that the coverage ratio looked a little thin. And we've always said compared to our level of charge-offs we don't think so, we feel very confident in the level that we have.

But the wild card that we talk about is the potential effect yet to be seen in the residential market certainly. And so as I said earlier today, we don't feel it's any time to be heroic when it comes to that and if we're going to err, we're going to err on the side of keeping that provision healthy going forward.

I think the worst thing that can happen is we get surprised someplace in 2012 or 2013 by the fact that we weren't aggressive or as conservative enough with our provision in the third and fourth quarter of 2011.

And then just looking at the margin and quarterly growth in deposits. Given the excess liquidity, I mean do you think that could be a scenario that plays out again in the fourth quarter? Or given the lack of good loan growth are you expecting that maybe you slow down that spigot on the deposit side?

It's a conundrum, Frank. As a banker, how do you sit here and say I want to turn back customers' deposits. Here's the conundrum for us, there's a little dislocation going on here with some of the major banks and a lot of the satisfaction in terms of the service level. So we have customers defecting from some of the major players and coming over to us. We welcome this. Obviously they're coming with deposits.

We're very disciplined in terms of how we price our deposits and we do know in the long term these retail depositors, these retail customers are going to bring other business with them. At the same time we have to manage our entire balance sheet, if you will, to ensure that we maintain our profitability and we don't want to be in a situation where we're paying slightly more than we can generate with any excess deposits that we sell back.

So as a matter of fact, we just had discussions -- this very discussion with our officers. So the conundrum is we must continue to have our open arms to receive new retail customers into the bank, we have to be very disciplined in terms of how we price our entire depository portfolio, and we have to look to seek ways of increasing and improving our ability to generate more loans so we get out of this scenario.

There's no easy answer to this question, it's a balancing act, it's a tight wire and we need to manage it. And it is something that we need to spend time on. And I think you point out an excellent observation here, and that's something I think a lot of banks are going to face. I hope that answers the question, Frank.

Put the cost of holding that excess liquidity now is clearly reflected in the margin. I don't think it indicates that the margin is going to continue to plunge here in subsequent quarters; I think that when we look at this past quarter we were just a little more successful than we would have otherwise thought in terms of our deposit build.

Okay. And then just on modeling, just a couple of quick ones. On the expense base, I know you guys have been focused on expenses and I'm wondering if 3Q is a pretty good run rate for from a non-interest expense standpoint.

The $13.1 million, yes, that's -- well yes, it's $600,000 down from last year. So we've certainly shown some success in controlling our operating expenses. But I think that appears to -- now it's got the FDIC insurance in there of course for this quarter. I'd say that's a pretty good run rate.

But let me help Mike out here, Frank. The wild card, recall only 7% of what's to be written in terms of Dodd-Frank legislation regulations with another 93% to go. And as that gets written we may have to expend more dollars to meet the requirements of those regulations. So that's the wild card. So with that as the caveat, that's the total answer.

Okay, and then just finally, just tax rate -- wondering if we should be targeting -- I think I was targeting 37% for next year if that's still viable or given where it's gone to we should be targeting something a little lower?

Yes, we usually target that too -- it's a little less than that for the quarter and year to date. I guess you can -- our estate tax has been a little bit less than what we've anticipated. You could probably take the 37% down to 36%.

Got you. Okay, thank you, guys.

(Operator Instructions). Matthew Clark, KBW.

Just a couple more. Back to the capital, your comfort level on capital. Can you give us a sense for what kind of TCE ratio you'd be willing to run with or work yourself down to? If you just assume 8% of say a minimum with -- which would obviously include still some cushion, you could argue that you could easily buy back 14% of your shares or 2.7 million shares and your Tier 1 common would still be 10.9. I mean do you have any -- I guess first on your comfort level around TCE and, secondly, would you consider buying back maybe 10% to 15% of your shares?

Well, yes, we've run all those numbers, Matt. Clearly the question is how the numbers sort out. But the big wild card is the OCC's posture here. So we need to establish that dialogue. We think we have some excess capital; we'd like to review the examination report. We know how the exit interview went, we know how the dialogue has gone with the OCC subsequent to the exam, we'd just like to review the report. Once we have that in hand then I think our Board can sit down and actually set some definite targets and parameters. But to do that right now would still be premature.

Okay. And then just finally on the pipeline. Can you just quantify the pipeline for us?

Okay, the type of loan -- the loans in there? Sure.

Or the overall size of it unless you -- I'm not sure if you already mentioned it.

Yes, it's $87 million at September, $32 million is commercial.

Okay, thanks.

Laurie Hunsicker, Stifel Nicolaus.

I just had a quick follow-on. TDRs, do you have a number for that?

Good question, Laurie.

TDRs? Well, TDRs in total are $20.2 million.

And how much of that is accruing still?

Well, yes -- out of that $20.2 million, $6.4 million are included in the non-accrual number. So the incremental number would be $13.8 million if TDRs are not included in non-performing loans, $6.4 million are included in non-performing loans.

Okay. And then what is the bulk of the $13.8 million, is that resi?

It's almost all resi. Actually, yes -- actually up until this quarter it was almost 100% resi. With this quarter we did a 2.5 million TDR for a commercial -- on a commercial loan. But other than that we've only got two or three other commercial loans. So I would say 90 -- let's see -- it's 80% residential.

Okay, perfect. Thanks.

(Operator Instructions). And seeing no further questions I would like to turn the conference back over to Mr. Garbarino for any closing remarks.

Thanks again, Amy, sure. I would just again thank everyone for their interest in the Company. We're pleased that we're still reporting generally good results with you and we look forward to speaking to you again three months down the road.

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