OceanFirst Financial Corp (OCFC) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the OceanFirst Financial Corp. earnings conference call. (Operator Instructions). Please also note that today's event is being recorded. At this time I would like to turn the conference call over to Ms. Jill Hewitt. Ma'am, please go ahead.

Thank you, Jamie. 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 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 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 sections entitled 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.

And now I will turn the call over to our hosts, Chief Executive Officer, John Garbarino; Chief Operating Officer, Christopher Maher; and Chief Financial Officer, Michael Fitzpatrick.

Thank you, Jill, and good morning to all who have been able to join in on our second-quarter 2014 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.

You have all had to the opportunity to review the earnings release from last evening and, following our usual practice, we will not be disrespectful of your time reciting a host of actual numbers from the release. Our introductory comments will merely help frame our opportunity to add some color to the results posted for the quarter before we take your questions.

Following my brief comments I will turn the call over to President, COO Chris Maher who will review the highlights from the quarter and give you the additional detail beyond what is printed in the release.

Of course, diluted earnings per share for the quarter were $0.30, up $0.02 from the linked quarter and a penny ahead of the prior year quarter. As there were two relatively minor extraordinary items that Chris will reference, which realistically offset, the quarter reflects $0.30 of solid core earnings.

The Company's 70th consecutive quarterly cash dividend was declared and maintained at $0.12 per share representing a comfortable and sensible 40% payout ratio within the parameters of our capital management planning.

As a further note on capital management, I will make the point upfront that although we have announced Board authorization for a new share repurchase program after completing the previous program during the second quarter, we do not see share repurchases as a key core strategy in future periods and will generally be opportunistic purchasers of our shares in the current market, responding to any market imbalance in the supply and demand for our stock.

We continue to take into careful consideration the incremental book value dilution associated with the retirement of shares, how it weighs against the accretive effect of our earnings per share, and also factor in the expected earn-back period on the book dilution.

Our primary capital management objective remains balance sheet and revenue growth over time to better deploy the excess capital that we have built in recent years. I will now ask Chris to provide additional background to our quarterly operating results and general outlook for the remainder of the year.

Thank you, John. My comments this morning will add some color to the quarterly results. While loan portfolio growth continues to be a highlight, I will leave commentary regarding loan originations and net portfolio growth to our Chief Lending Officer, Joe Lebel.

Second-quarter results marked the fourth consecutive quarter of double-digit commercial loan growth and I thought it important to have Joe available to comment on our progress.

In terms of operating results, I should start by noting there was a little noise in the quarter in terms of a one-time gain on security sales and one-time expenses related to a reduction in staff in our residential lending group. These items largely offset each other making core earnings essentially equivalent to reported earnings.

Net interest margin remained stable as commercial loan growth offset continuing margin pressure. Importantly, much of the reported loan growth occurred in late June and is not reflected in the second-quarter income statement.

The provision for loan losses, which was marginally higher than charge-offs, continues to reflect improving credit conditions as evidenced by a 10% decrease in nonperforming loans and a substantial reduction in quarterly charge-offs. Noninterest income improved sharply as a result of a wholesale migration of retail checking accounts to a new fee structure.

During the course of the second quarter all retail checking accounts were migrated to the new structure resulting in an increase to annualized bank fee income of $1.2 million and the migration of $64 million from formerly interest-bearing checking accounts to non-interest-bearing checking accounts.

This effort addresses the rising cost of electronic delivery channels, allows our customers to make product and usage choices and results in an improved interest rate risk position. In other areas of noninterest income residential mortgage gain on sale, while slightly better than the prior quarter, continues to be weak. Wealth Management and bankcard both improved versus the linked quarter.

Regarding operating expenses, the reduction in residential lending origination staff resulted in a one-time severance expense of $196,000 for the quarter but will provide benefit in future periods.

Additionally, marketing expenses have increased this year, with emphasis on checking account marketing to support the account restructure previously mentioned and to promote increased bankcard activity. Marketing expenses are expected to moderate from the elevated levels in the first half of 2014.

Deposit trends included a migration from government deposits to retail and business checking accounts. While government deposits are an efficient funding source in the current low rate environment, reducing reliance on this source of funding is an important aspect of interest-rate risk management.

In summary, we are pleased with the progress this quarter as the investment in growth initiatives has begun to demonstrate an ability to positively impact earnings. The most important pillar of our growth strategy is our commercial business.

With that I will hand it over to Joe Lebel to provide some color regarding loan activity during the quarter and progress against our strategic objectives in this area. Joe?

Thank you, Chris. Loan originations increased 4% for the quarter as we continue to experience strong commercial activity in residential construction lending. Overall the loan portfolio grew $60.9 million or 3.9% for the quarter driven primarily by commercial loans which increased $35.3 million as well as a $20.4 million purchase of in-market Jumbo residential mortgages.

As previously noted, almost half of the growth was booked late in the quarter, but we will see the full benefit in our interest income beginning in the third quarter. The residential purchase, opportunistic in nature, allowed us to acquire seasoned jumbo loans in our market at a net yield of 4%.

As Chris mentioned, the pillar of our growth continues to be the commercial lending division. Commercial loans grew 5.7% from last quarter and represent a substantial increase from the 1.9% growth we experienced in the second quarter of 2013. Year over year the commercial growth was $108 million or 19% -- 19.8% annualized. This increase is attributed to our continued expansion of the commercial team which began in mid-2013.

While much of our growth is classified as commercial real estate activity, we have seen noticeable gains in commercial construction lending and C&I relationships. Further, loans classified as commercial real estate include owner-occupied properties. Owner occupied commercial real estate loans comprise 46% of our commercial real estate exposure.

These relationships are underwritten on the financial standing of the business owner rather than the underlying leases in an investment real estate loan, and carry a different risk profile. They are generally more profitable as they represent a relationship based client with a multitude of product needs, including deposits, cash management services and wealth.

In effect we believe they generally involve the security of a CRE loan and frequently carry the benefits of a C&I credit. As of quarter end our investment CRE to risk-based capital ratio was 153%, still a modest exposure relative to capital.

The commercial lending market remains very competitive. We've seen multiple banks bidding on few quality credits and find continued pressure on interest rates, loan structure and extended loan durations as our main challenges.

While these challenges are significant, we are pleased with the performance of our seasoned commercial vendors and are optimistic moving forward. At this point I will turn it back over to John for the Q&A portion of the call.

Thank you Joe and Chris. And, Jamie, you can set up a Q&A queue if you would like.

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

Just a few questions on -- first, just on the loan pipeline. Clearly you just look at the commercial loan pipeline you guys gave in the release and it is up significantly off of the last quarter, I think about 50% higher. So obviously that would imply that commercial loan growth could be stronger here than even it was in 2Q. Could you just maybe comment on that and does that make sense implicitly?

Well, Frank, we remain optimistic given the size of the pipeline and the activities we are seeing from our lending staff and the feedback that we get that we are headed in the direction that we anticipated.

I mean there is no reason to assume that less will be closed from this pipeline than it was three months ago, right? I mean there is nothing sort of odd or different or bulky about that?

Nothing to assume from that. No, not at all.

Okay. Okay, and then just one -- I had a question -- just thinking about loan growth versus deposit growth. Obviously loan growth has been strong. It sounds like maybe deposit growth has been impacted at bit by a mix shift there.

As that loan to deposit ratio has grown, what are the thoughts on the margin here? May it be that given the strong loan growth you have to get a bit more aggressive on bringing deposits in the door and that may be a bit more impactful to the NIM than we have seen?

Yes, Frank, it is Chris. Thank you for the question. We certainly have our eye on that loan to deposit ratio. And I would leave you with these thoughts.

The first is that we've built a very strong core deposit franchise. And we have -- it has been our posture not to compete very much on rates in market. But the markets that we have branches in today are very deep markets. And if we had the desire to price a little more competitively I think we could quickly raise a reasonable amount of deposits out of our existing branches.

And that is probably the primary place that we would look. And I don't think there would be too much margin pressure on that because we really are priced rock-bottom now. So I think we could incrementally improve some of those deposit statistics without a whole lot of pricing.

The second thing is we still have a tremendous amount of opportunity both in Ocean County, but particularly in Monmouth County, where I would not be surprised as we continue to mature the loan growth process we might look now to potentially opening additional facilities over time either in Ocean or Monmouth County.

So I think our first move would be to use the rich deposit base that we already have branches in. But then -- we have our eye towards maybe some incremental expansion down [the road].

Okay. Then just finally in the same vein on the margin. It would seem like there is still some pretty good room to -- for a mix shift from securities into the loan book which will help support the NIM. Is that still the case going forward?

Yes, Frank, it is Chris again. I would say absolutely. I think we have still got the opportunity to pare back the securities portfolio. So in the near term I think it is still going to be a mix shift. Although I wouldn't be surprised if down the road we are starting to get to the point where we might allow total assets to come up a little bit.

So I think we still have a little ways to go in the mix shift, but we are starting to see that on the horizon there is that point where you might see total asset growth.

And what might that point be in terms of would it be sort of a bogey in terms of hitting a securities to asset level? Or is it not totally clear at this point given what interest rates could be and then what the environment could be?

I think it is not all that clear. I think it is interest rates, I think it is the environment. I think there is also -- we are looking closely at the new liquidity rules that don't apply to us directly based on our size. Nevertheless, they always give you some kind of benchmark to take a look at and say what would it take to conform to the liquidity rules required of the larger institution.

So we are looking through all that now. I don't think that moment is on us today. But we've got our eye open to it and we will make that decision as time goes on. But you certainly won't see it in the next couple quarters. We still have a bunch of securities to chew through.

Okay. All right, great, thank you.

Matthew Breese, Sterne Agee.

Just staying on the margin, given your ability to continue the mix shift do you feel like where we are at 3.35% for the margin, is that sustainable over the next few quarters?

Yes we think so, Matt. We continue to shift, you have seen it every quarter now for the last past several, a shift from investments which are yielding as about [1.7%] into loans which are 4 plus. So that is beneficial. And we've been able to maintain deposit cost at fairly low levels. And the only item that might offset that is we are extending home loan bank advances so that is going to put a little bit of pressure the other way. But we think we can overcome that with the loan growth.

Okay. And then again on some of the deposit account changes you have made, the help fee and service charge income this quarter -- I guess my question is twofold. One, with those changes do you feel like there is the potential for some degradation of your core deposit franchise, meaning folks change? And two, is there any sort of learning curve with the account changes so we will see some reduction in the level of surcharges from this quarter?

I think those are great questions. I mean to your first question about kind of customer reaction and what risk does this post to franchise, we went about this in a fairly conservative way. And the first step was we actually started marketing tail end of the first quarter, beginning of the second quarter the new account structures.

And I think in our previous release we noted we opened about 1,100 new accounts of the new design structure. And that was our test to make sure that the markets were comfortable with that and that consumers felt good about going into those account structures.

Following that we did the notifications and transitioned throughout the second quarter. At this point all of our customers, they received notices predominantly in April, they had the changes affected in May, they have lived through them, they have called us, we have adjusted their product types and got through the entire process during the quarter.

Interestingly, while we did have some accounts close as a result of the process, we continue to offer a free checking account, that free checking account goes squarely against some of the senior segments in our market where they want to write checks, they want to get their statement, they are not interested in online bill pay and they are not interested in doing things like that. So we are able to get them into the right product.

Then finally I would add that we saw a balance shift where folks were happy to continue to bank with us and just brought in a few extra dollars to raise their average account balance to meet the new balance requirement.

So I think we are very comfortable that the adoption rate by the customers is complete, that it has been accepted by them. There was certainly a lot of conversations that had to happen, probably thousands of them with customers. And there were -- put a handful of a few dozen accounts that are no longer with us. But net at the end of the process our retail checking balances were larger than they were at the beginning of the process.

Second thing I would say is that while retail is stable our growth in commercial checking has been substantial as we added these C&I relationships and/or occupied CRE. So I think the core deposit franchise you are not going to see any change other than maybe some improvement over time.

And Matt, let me just add one other thing too. Strategically with regard to these retail checking accounts, I think the industry knows deep in their heart, and some people may still be in denial, that the idea of packaging free checking with every conceivable service under the stars is one that has got a very short life ahead.

And there is a lot of companies that are going to take the strategic moves that we did. And we are happy to have executed them I think with a high degree of efficiency and have them behind us at this point.

Okay. And then in regards to the overall level of service charging from this quarter, that pumped up quite a bit. As folks get used to the new account structures do you think that number will diminish over time?

Matt, it is Chris. There is always a risk there will be some diminishment, but I will tell you that we are very sensitive to our reputation of the brand in the market. So we were very accommodating with customers, if people wound up in an account type they were not happy with we had refunded the fees in the second quarter. We have made sure they match the account that they feel comfortable in long-term.

So there is some risk, but I wouldn't consider that to be a material risk. I think that within the normal fluctuation that happens from quarter to quarter that the fee income number you saw in the second quarter is sustainable.

Okay. And then my last question, kind of a bigger picture one. In the wake of Superstorm Sandy, you all have boots right on the ground there. How is the local community doing? A lot of changes, a lot of insurance premium changes coming. How do you feel like your customer base is prepared for some of those changes?

Matt, it is Joe Lebel; I will answer that for you. Quite frankly I think we see that the vast majority of the customer base is optimistic, especially in the last six months. They have been able to get their insurance proceeds and they have been able to get their rebuilding approvals. In many instances many of the municipalities have been quite accommodating in fast tracking some of these things. We've seen a significant increase in the residential and the commercial construction lending pipeline, which has been a positive.

That is all I had, thank you very much.

(Operator Instructions). Travis Lan, KBW.

Most of my questions have been answered. But just on core operating expenses, which if you back out the severance was about $14.6 million in the quarter. That still seems a bit higher than what I think was expected. I know you get some benefit from the efficiencies in the mortgage business, but is that kind of $14.5 million, $14.6 million a good run rate going forward or a good starting point for us?

Travis, it is Chris. I think that is a good starting point. To give you a little bit more color on that -- during the quarter we did add three back office hires to commercial lending to help support the improved volume. So that is not unexpected. And then we had the one-time event.

But we also had some increases in equity expense for equity grants related to the hires we've made over the last year or so. So those equity grants were made in the second quarter so they began to impact the run rate then. But in summary I would say that if you used the second-quarter number that is a reasonably good number to use going forward.

Okay. And then just on the staffing issue. What is the outlook for more commercial hires maybe on the loan production side? Are you guys fairly fully staffed or do you think -- are you willing to add more here?

Travis, Joe Lebel. We are always looking in the marketplace for qualified staff. We have set ourselves with fairly high standards and we are very happy with the group that we have. But if qualified folks come along we would always consider adding.

Got you. And then last -- go ahead.

I was going to say, Travis, it's Chris. The main point is that if we find the right people we are going to bring them on, but we are not going to chase an arbitrary number and say we've got to make three hires by October 31. So the quality guys come whether it is one or a team, we are going to look closely at doing that. But we feel comfortable we have got a good team and they can continue to produce at this level.

Got it, all right. And then just the last one is just how you are thinking about the reserve going forward. Obviously there was a nice improvement in NPAs this quarter. Is the reserve sufficient where you guys can continue to grow into it a little bit or do you think you are going to need to kind of begin providing more in excess of charge-offs there to kind of stabilize the reserve as a percentage of loans?

Travis, it is Chris. I would tell you it is a very dangerous place to start talking about future reserves. So I would just say this, I think that we are encouraged by the improving credit quality, but we always look at that -- the nonperforming group, the vast majority of which date back to residential issues that came out of the crisis and are still around.

I mean it's just taken years and years for that stuff too clear. So I would tell you that in the nonperforming group it is related, the vast majority to the crisis, there are not new credits coming into that. We look at resolutions and we are looking at different ways to resolve that. But I don't feel there is a whole lot of pressure on the allowance at this point. I think the allowances we feel very comfortable with.

Great, thanks, guys.

Larry Seaman, Seaman & Associates.

A few people asked about the securities portfolio and I just want to know what comprises your OCI? Because it seems to be rather high for a securities portfolio of $32 million. What else is in that OCI?

Well, the securities portfolio is $500 million. It is held to maturity. If you consider that you have to look down, it is $478 million in held to maturity and that was reclassified from available for sale about a year ago. And a year ago there was an OCI that was a comprehensive loss in that portfolio that got carried over to held to maturity.

So you have to look at that bucket. And most of the decline in value is from corporate securities, there is $55 million of corporate securities floating rate which are about $8 million below book value. So that is most of the decline.

Okay, thank you.

(Operator Instructions). At this time and showing no additional questions I would like to turn the conference call back over to Mr. Garbarino for any closing remarks.

Thanks, Jamie. I will just close by saying that we'd like to thank everyone once again for joining us this morning and we certainly look forward to the opportunity of speaking with you again in the months ahead.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your telephone lines.