OceanFirst Financial Corp (OCFC) 2012 Q1 法說會逐字稿

Good morning and welcome to the OceanFirst Financial Corporation 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, Senior Vice President and Investor Relations Officer. Ms. Hewitt, please go ahead.

Thank you, Laura, good morning and thank you all for joining us. I will begin this morning's call with our forward-looking statement and 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 this 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 title risk factors and management discussion and analysis of financial condition and results of operations set forth in OceanFirst's filings with the SEC. Thank you.

Now I will turn the call over to our host for the 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 first quarter 2012 earnings conference call today. We appreciate your interest in our performance and are pleased to be able to review these results with you this morning.

We have completed another strong, satisfying quarter with earnings per share increase over both the linked and prior-year quarters. We can point with pride to several additional positive factors helping us build value for our shareholders. Earnings growth has been achieved even in the current environment, which presents little or no opportunity for loan portfolio growth or balance sheet expansion. Our tangible common equity ratio increased to 9.75% even as we pursue a more aggressive capital management posture this year with our stock repurchase program and attractive cash dividend payout of current income. Although loan demand remains relatively slack in our market, our credit metrics are stabilizing and beginning to show signs of improvement.

You have 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.

Diluted earnings per share for the quarter were $0.31; that's $0.03 ahead of the prior-year quarter and a $0.01 increase over the linked quarter. The Company's 61st quarterly cash dividend was declared and maintained at $0.12 a share, representing a comfortable and sensible 38% payout ratio of current earnings as well as an attractive 3.4% current yield on our shares.

With limited realistic growth opportunities in our market, our balance sheet contracted during the quarter. This resulted primarily from lackluster loan demand, except for residential mortgage refinance. Although the commercial lending pipeline remains relatively robust, commercial credit fundings are slow to develop and loan prepayments along with line of credit pay-downs make portfolio growth difficult to achieve. Local businesses clearly remain debt-averse in this environment. It is certainly no time to become an overly aggressive, pursuing commercial loan growth in the face of observed market softening of underwriting discipline and increasingly competitive loan pricing.

With residential mortgage demand dominated by long-term fixed-rate refinance activity and the very attractive gain on sale margins, the residential portfolio contraction is accepted as a consequence of the sale of most of this loan production and the increase achieved in other income.

We are mildly concerned this quarter that our local residential market is not yet experiencing the resurgence in purchase activity widely reported in other areas of the country. We wonder if the oft-discussed three-year average backlog in New Jersey residential foreclosure resolution is having a detrimental effect on the ability of the local real estate market to self-correct, as they have already in other areas of the country.

Our deposits reflected seasonal governmental unit outflows, and the average core deposit mix again improved, now comprising 84.9% of total average deposits. The net interest margin continues to benefit from disciplined control of our funding costs. Although the margin remained relatively flat from the linked quarter, it is noted that any pressure on the margin was muted by a 5-basis-point benefit derived from a large commercial loan prepayment fee booked during the quarter.

Operating expenses remain well-controlled in the new year, and our efficiency ratio continues to improve, moving sharply downward to 55.3% at the end of the quarter, also benefiting from the reported increase in other income. As a practical matter, however, this could likely represent a low point for the efficiency ratio for this year.

As is our custom, I will now ask President Nardelli to provide some added background to our reported credit metrics and loan loss provisioning.

Thank you, John. During the first quarter, nonperforming loans in the residential portfolio showed a small improvement and commercial and consumer portfolios each showed small increases, leading to a relatively flat overall performance with no significant deterioration in any individual category.

Breaking down the residential portfolio, we continue to be very pleased with the performance of loans originated by the core bank, the only remaining origination channel, with a nonperforming rate of 1.4%. Loans originated by the now shuttered Columbia and Kenilworth channels carry 10.5% and 4.7% delinquency rates, respectively.

Looking for a moment at the foreclosure backlog, while we did take three properties back at share of sale in the quarter, these are loans that were in the process for about three years. Therefore, our view is that the overall foreclosure situation has not significantly improved, nor do we expect to see any dramatic change in the overall time frame in the near future. Our loan loss mitigation actions have been increasing and effective. Of note, delinquencies of less than 90 days showed significant improvement quarter over quarter and as compared to last year's first quarter.

After having completed our rigorous quarterly analysis of the loan loss reserve and recalling the change last year in our charge-off policy whereby we have charge off the portion of a seriously delinquent real estate loan that is deemed to be uncollectible in the quarter they are identified, we set the provision for loan losses at $1.7 million, basically flat to net charge-offs. Included in our analysis is our assessment of the local real estate market, which is still under pressure from excess inventory as well as the commercial real estate market, which is improving slowly.

Turning for a moment to the reserve for repurchase loans, you may recall that we entered the year with four repurchase requests pending. In the quarter, five requests were received for loans originated between 2005 and 2007 by the now shuttered mortgage banking subsidiary, Columbia Home Loans. These requests, we believe, are indicative of loan purchases looking to shift credit risk back to originators whenever there may be an adverse outcome on a loan. As appropriate, on a case-by-case basis, we are negotiating or vigorously contesting these claims. The increase in the motivation of investors to generate these repurchase requests was a factor in our analysis that concluded a $150,000 provision in the quarter would be prudent, bringing the reserve to $855,000.

With that, I will return the discussion back to CEO Garbarino for some concluding comments prior to engaging in a question and answer session this morning.

Thank you, Vito. Recapping the quarter, we feel we have made a solid start to 2012 with a sense of cautious optimism toward the remainder of the year. Despite these strong results, we remain mindful that with inevitable pressure returning to our margins, to build long-term value for our shareholders' investment we will need to restore some growth in our balance sheet and increase both our revenue and earnings. We accept that challenge in what we hope will become an improving economic environment and see ourselves as well positioned to achieve just that.

With that, Mr.'s 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, one on buybacks. Is the thinking changing at all? Do you expect that, given where the loan growth is -- has remained, do you think you might look to get more aggressive on that front at these stock prices?

Well, Frank, it's a good question and it's one that we asked ourselves during the first quarter as prices kind of rebounded. As you recall, when we originally announced the buyback, we said we modeled it up to $14 a share and we were content with the book value dilution that was occurring at that level. Once the stock began to trade above that level, of course, we took another look at it. We have taken another look at the modeling, and it's a question of how comfortable we are becoming with the book value dilution versus the effect on earnings per share.

So I think we can say yes, we are reasonably comfortable where it is today, but I don't want to prejudge that going forward. It's nice to see some market recognition in our shares, but when we announced the buyback, our shares had a lot more value in them than they do today. So it's something that gets evaluated on a continuing basis. And as to your question whether we might be buyback additional shares, I think that's a little premature at this point.

Okay, and then secondly, I just wondered how -- it's always a tough question to answer, but how we can think about or should think about the reserve going forward, if we may be getting to the point, an inflection point where provisioning could begin to trail charge-offs, releasing some reserves. Or is that not a likely scenario in the short-term?

Well, again, we are still somewhat concerned, as I mentioned in my introductory comments, about the state of the real estate market. We haven't seen this pickup in purchase activity that is being widely reported. Until we see that, I don't think we can feel that we are really in a -- what I would characterize as a healthy, thriving market, that you can characterize as occurring in other areas of the country.

So we are still very cautious about our provisioning. As you see, this quarter we just about matched our charge-offs. We see some encouraging signs about delinquencies. Our short-term delinquencies are certainly well down from levels that they had been in prior quarters, and we have seen some relative stability on the mortgage side. But the delay in the pickup of activity in the real estate market still gives us some pause. And so I don't think we are ready to declare victory yet.

Okay, that's all the questions I had. Thank you.

(Operator instructions) Matthew Kelley, Sterne Agee.

I was wondering if you could just talk about the repurchase requests and the real change this quarter with five new ones coming in. How concerned are you on that?

Well, if there's a silver lining, we -- most of that came in early in the quarter. We didn't get anything in the last month in the quarter. It appears to us to be at kind of a shifting of the credit risk, as I mentioned, on some of these very old and dated items. And I think a lot of scrubbing is going on at the various institutions which are holding some of this paper. I think we are very well positioned to defend against some of these requests and have been in a good position defending these requests. We just don't pay out of hand. Indications -- some of these things have been here a while because they still lack full documentation and information for us to properly adjudicate some of these requests.

And it has kind of been kind of spotty. If you recall for a couple of years that we practically had none, and then very recently we started to get a few in. I really can't judge as to how much more is out there, only to say that this bucket of potential repurchase requests is kind of diminishing. It's limited, and it has a lifespan, and that lifespan is aging every day. So --

How big is that bucket? How do you quantify the potential pool of loans that could be attempted to be put back to you?

It's not about a potential pool of loans. It's about a potential defect in something that was originated seven, five, 10 years ago. And that defect is kind of subjective in this day and age by the presenter. It may be valid, it may be invalid. So

(multiple speakers) reserve (multiple speakers).

It's not -- I caution you -- it's not a matter of we had X loans and, therefore, a percentage of them of go sour. Some of these loans might be performing, it's just that they discover a defect and they want to put it back.

No; I think that we've seen that in some of the larger banks that have already reported. My question would be, on the $150,000 reserve that you put aside for the five loans, if you look at the reserve you had at year-end of $700,000 on the four requests outstanding, it's a pretty big dollar amount relative to what you put up this quarter for the five that you received. How do you explain -- or how do you (multiple speakers) think through that relationship?

Why don't you let Mike talk about how the reserve is actually calculated and (multiple speakers) had assigned to it and so forth. That might give you some additional comfort, Matt.

Yes, Matt, we had -- on the four loans at the end of the year, we do an analysis, we look at the loss, we look at the loss that we might experience because they are all real estate collateralized. So we can go out and we can appraise the property and we can get an assessment of what loss might be, number one. And then we assign a probability of loss because we have been very successful, as Vito just said, in disputing a lot of these.

So we have -- so if the loan is $100,000, the actual loss based upon the real estate collateral might be $30,000 and your probability of loss might be 50%, so now you're down to $15,000 for a single loan. But included in the reserve is -- it's not just a specific reserve, a specific loan request, but most of it is related to -- it's like doing the same methodology for reserve for loan losses. We have specific losses that anticipate and then we have what we call general reserves based upon the pool of loans and the probability that something may come back to us and then a loss experience on that. So the $700,000 loss at the end of the year -- it was only a $100,000 loss, I think, that was specifically assigned to those four repurchase requests, and the other $600,000 was kind of general in nature. So now we have nine repurchase requests. You are right, but the specific loss on that I think is about $200,000-$250,000, and the rest is still a general type related to unknown requests that we might receive down the road.

And Matt, recall, we defeased 93% of those Columbia Home Loans years ago, through negotiated settlements and other actions taken by the bank in that time frame. So the population is less than -- it's seven and diminishing every day as they mature out. So it's not a huge population and it's not one where you would gauge based on a loan risk factor. It's more on the potential that there might have been some technical defect in some of the documentation related to that loan packaging when we sold the package seven years ago.

Would that be the same servicer sending stuff back?

Sometimes those servicers change, okay? Sometimes we have noticed there's 1, 2, 3 times change of hands. So that makes some of these things kind of like -- it makes you wonder why they are doing it, what their motivations are. That's what I characterize it as the investor motivation.

Okay, switching gears, on the securities portfolio, up 2% this quarter, where should we expect that to go as a percentage of assets? I have kind of watched it grow over the last year as loan growth has remained challenging, 25% of the portfolio now, 25% of assets. Where is that number going?

I don't think that's something we target, Matt. It's the fallout from liquidity purchases. I mean, our goal, obviously, is to grow our loan portfolio. So -- and to the extent that the loan portfolio doesn't grow and might have deposit liquidity or some sort, we'll invest it in investments. But we don't sit here and say, we want to increase our investment portfolio. Our goal is to grow the loan portfolio.

I think, Matt, you're probably in a better position to know this, but I think on an industry basis, that percentage is probably right in line or maybe somewhat less than the entire industry is. So it's something we are experiencing in this environment. You can't force a loan. We certainly don't want to do that because a year from now we will be having a totally different conversation about why you are writing them off.

Sure. Last question on the margin -- so from kind of the 3.47 core margin ex the prepayment activity, where do you see that heading if we just remain in a static rate environment, if we don't change across the treasury curve, swap curves, LIBOR, prime, whatever? If nothing changes, where do you see the going?

Well, there's some contraction in that because our deposit cost, as we've said before, are starting to floor there at 47 basis points at the end of March. So those are flooring, and there is still considerable cash flow on loans and mortgage-backed securities that are being reinvested at lower yields. So we think there's going to be some more contraction now. What we didn't have in the first quarter that we think we can offset that with is loan growth. So that's down 6 basis points on a core nature in the first quarter was -- without what we would anticipate to be our -- without very good loan growth. So if we can generate some loan growth, then that will mitigate some of that.

Okay, all right, thank you.

Fred Cannon, KBW.

Thanks; I just had a couple of follow-ups on the mortgage business. One, on the put-back loans, are those all Fannie/Freddie loans?

No, some were -- the five taken in first quarter this year are Fannie, and I believe the four last quarter last year were Countrywide.

Oh, okay, they were Countrywide private label?

Countrywide private-label?

Well, they were Countrywide loans that they bought from us. We originated it.

Okay, okay, and not -- and weren't necessarily secured by Fannie/Freddie? Okay. And then, I know you are seeing some pretty good gain on sale spreads in the current market. Can you tell us -- that's kind of HARP-related loans, and if you see it near the end of the month, if that accelerated?

On HARP related.

Oh, modification loans? (multiple speakers) No, these are mostly refinances on performing loans that routinely -- that we routinely originated. It's no special program.

It's a base case product that we sell.

Okay, that's all I had. Great, thanks.

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

Thank you, Laura. Once again, let me thank you for joining us this morning. We hope you may be able to join us also for our annual shareholder meeting in Point Pleasant, New Jersey on May 10, but if not, we will look forward to speaking with you again in July.

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