OceanFirst Financial Corp (OCFC) 2015 Q1 法說會逐字稿

Good morning, and welcome to the OceanFirst Financial Corp. earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to Jill Hewitt, Investor Relations Officer. Please go ahead.

Thank you, Kate. Good morning, and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer, and we will begin today'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 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 the certain risks and uncertainties affecting OceanFirst, please see the sections entitled Risk Factors and Management Discussion Analysis of Financial Conditions and Results of Operations, set forth in OceanFirst's filings with the SEC. Thank you, and now I will turn the call over to our host, Chief Executive Officer, Christopher Maher.

Thank you, Jill. Good morning to all who have been able to join in our First Quarter 2015 earnings conference call today. This morning, I'm joined by our Chief Financial Officer, Michael FItzpatrick; Chief Lending Officer, Joe Lebel; and Chief Administrative Officer, Joe Iantosca. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you this morning. As has been our practice, we will highlight a few key items and add some color to the results posted for the quarter, then look forward to taking your questions.

In terms of financial results for the first quarter, diluted EPS was $0.32 per share, which represents progress as compared to $0.30 per share in the fourth quarter of 2014, and $0.28 per share in the first quarter of last year. Regarding capital management for the quarter, the Board declared the company's 73rd consecutive quarterly cash dividend of $0.13 per share. In addition to the quarterly dividend, during the first quarter the Company repurchased 110,143 shares of common stock, at an average cost of $17.08.

Stock repurchases were lower than the linked quarter, primarily due to a restricted trading window in the time period leading up to the announcement of our agreement to acquire Colonial American Bank. During the quarter, the Company announced the appointment of Jack Farris to the Board of Directors. Jack is Vice President and Deputy General Counsel, Information Technology, Information Security, Global Clearance and Compliance for Verizon Communications. His background and experience in information security will add a valuable skill set to the boardroom.

The bank also announced the establishment of an additional branch to serve the Jackson, New Jersey, market, which we expect will open during the second quarter. Quarterly trends included strong loan growth, core deposit growth and expense discipline. Net charge-offs were the lowest in three quarters, and a provision for credit losses was slightly higher than charge-offs, as loan portfolio growth drove the need for modest addition to reserves.

The new loan production office in Mercer County and the addition of a retail branch will place some pressure on expenses in second quarter. These investments, as well as the announced agreement to acquire Colonial American Bank, are being made to provide growth opportunities and build franchise value in the quarters to come.

One important milestone achieved this quarter is that interest income, derived from the commercial business, which totaled $8.3 million, comfortably exceeded the $7.6 million in interest income derived from the residential mortgage portfolio. This trend illustrates the progress being made towards changing the nature of the balance sheet, to migrate towards a more valuable business model. For the remainder of the call, I'm going to ask Joe Lebel to comment on trends in the commercial business, and Joe Iantosca to comment regarding both the Colonial American Bank transaction and the decision to open an additional branch in Jackson.

With that, I'll now turn the call over to Joe Lebel.

Thank you, Chris. Commercial loan originations for the quarter were $69.4 million, which compares to $52.5 million in the prior-year quarter and the record level of $77.7 million in the linked quarter. Net growth in commercial loans was $41.3 million, the seventh consecutive quarter of double-digit growth. As we have seen in prior periods, much of the growth occurred late in the quarter, which will benefit us in the coming quarter. The cumulative growth in commercial loans over the past seven quarters totals $231 million, and the pipeline indicates continued methodical growth trends should continue.

As Chris noted, we formally opened our Western Jersey loan production office in Mercer County in February. In advance of the opening, we began building the sales team by hiring the team leader in December 2014 and a senior level banker in January. We have recently hired another seasoned lender and administrative staffer, and are fully operational in the marketplace. The team has been successful from the onset, accounting for $14 million of new loans in the first quarter. As we have in past quarters, we continue to bolster the buildout of our sales staff, with increased credit risk team members. In that regard, I would like to mention a notable addition to the bank.

We recently hired Margaret Lanning as Chief Credit Officer, a newly established position that supports our strategic growth initiatives and reinforces our conservative credit culture. Marge is a 35-year banker, most recently serving as Senior Vice President and Senior Regional Credit Officer for the business banking activities in the five-state northeast region of Wells Fargo.

As I have mentioned in previous calls, the commercial lending market remains very competitive. Much has been written about the multiple banks bidding quality credits and continuing pressure on interest rates, reduced financial covenants and extended loan durations. While these challenges are significant, we are pleased with the performance of our commercial lenders and credit risk team members, and remain optimistic moving forward.

With that, I'll turn it over to Joe Iantosca.

Thank you, Joe. As our lending engine continues to perform, funding incremental loan growth becomes an additional strategic requirement. While wholesale funding may be efficient in today's interest rate environment, deposit funding will likely become increasingly important, especially if the predictions of a rising rate environment come to pass. The bank is historically managed a favorable loan-to-deposit ratio and will continue to favor a conservative funding position.

The acquisition of Colonial American Bank affords OceanFirst the opportunity to quickly enter two very desirable deposit markets with an established presence and existing deposit base. Shrewsbury and Middletown were ranked first and third on our strategic plan's list of target towns to establish a branch presence. Colonial American has established a reputation of providing high-quality service in those markets, so the acquisition of its branches and talented branch personnel fits extremely well with OceanFirst's strategic plan. Just as importantly, the deal makes sense financially.

We expect the all-stock transaction, valued at approximately $11.3 million, to be accretive to OceanFirst's EPS in 2016, with negligible tangible book value dilution. Colonial has developed quality relationships with local businesses, as reflected by their fourth quarter 2014 balance sheet of $127 million in loans and $129 million in deposits. We look forward to providing Colonial customers with the enhanced array of products and services OceanFirst has to offer, especially in the areas of wealth management and trust, and investment services.

Additionally, OceanFirst can more fully accommodate the needs of Colonial's corporate borrowers with a wider array of product and a significantly higher lending limit. We submitted the necessary regulatory applications for the merger. Subject to receipt of regulatory approval and the approval of Colonial American shareholders, we hope to close the transaction during the second half of the year. Certainly all of us at OceanFirst look forward to welcoming the customers, employees and shareholders of Colonial American to the OceanFirst family.

Also, I'd like to update you on branching activity. As part of managing the bank's loan-to-deposit ratio within our comfort zone, we plan to open branches as a strategy to attract core deposits. As such, we anticipate opening a second branch in Jackson over the next few months. Noteworthy is that this branch, while occupying a traditionally sized footprint, will employ two models we have deployed separately but not combined before: universal bankers and interactive telemachines, or ITMs. The ITM allows us to personally handle customer transactions with a teller who is in a remote location. You can think of it as a long- distance drive-up.

By combining this technology and universal bankers, who consult with customers and sell the bank's products and also perform routine teletransactions as needed, we will service this community with the extraordinary care our customers have come to expect, yet in a more cost-efficient manner. I'll now turn the call back to Chris.

Thank you, Joe. With that, we are prepared to take your questions this morning.

(Operator Instructions)

Frank Schiraldi, Sandler O'Neill.

Good morning.

Good morning, Frank.

Just a few questions, if I could. First on the strong commercial growth. So you guys obviously touched on the contribution from the new Mercer office. But it seems like even ex that, growth was still very strong obviously. Wonder if you could talk maybe a little about the main drivers of growth outside of the new LPO?

Well, we continued to get -- Frank, it is Joe Lebel. We continued to get solid performance from the existing team that we've built prior to the LPO, both in the investments CRE and CNI. And the CNI growth has really helped us drive some deposit growth as well.

Guess what I'm getting at, is there an uptick in the economy? Or is it really more of taking from others and building out the new team's production?

It's still largely billing out production and taking from others, Frank. We still see a fairly inorganic growth economy.

Okay. Obviously I look at the average yields in the pipeline versus the originations. I can see some contraction, and I think Joe touched on it a bit already, in terms of the funding side. But taking into account funding plans for this strong growth, what do you think this means for margin expectations, going forward?

We see that probably stay around similar levels, Frank. I think we are going to be expanding the balance sheet, so any pickup in net interest income will be from expansion of the balance sheet and earning assets, not from expansion of the margin.

Okay. So this is probably a decent run rate as you see it, given where the pipeline yields are?

Yes.

Frank, it's Chris. I think in the first quarter, it is a seasonal anomaly, the way we report our margins. So with a couple fewer days in the quarter, it looked like the margin fell back a couple of basis points, but it was essentially flat, if you looked at it quarter-to-quarter.

Right. Okay. That's the day count on the first quarter, and then that anomaly goes away in the next three quarters.

Right. But we'll have an extra quarter [to report]. When we look from last quarter to fourth quarter, the first, we lost two days. So that really accounts for the whole decrease in margin of three basis points. Otherwise, it would have been exactly the same, quarter-to-quarter. Now we pick up an extra quarter in the second quarter, so that's worth about $100,000, just that one day.

I got you. And then just finally on provisioning. You've talked about in the past obviously the reserve-to-loan ratio continues to tick down. So wondering if we should expect some stabilization at these levels? Or is there still some room to reduce that ratio, going forward?

Frank, it's Chris. It is always a hard one to figure out, because it is very dependent upon conditions in the quarter. We see how the portfolio moves and what a variety of different markers point towards. I would say though, you saw in the first quarter that while it wasn't a big number, our provisions exceeded charge-offs by about $100,000 to cover loan growth. It didn't fully cover, but that was a part of the equation.

I do think that we'll have a little more pressure to cover the net loan growth, to maintain somewhat stable coverage of the portfolio. But conditions will have to -- have to look at them each quarter as we move along. Look at how the portfolio is performing and then react accordingly.

Between the fourth quarter and the first quarter, one metric we look at is our unallocated amount and it was relatively stable. So we want to make sure that we continue to have roughly the same coverage levels we are at, but it is going to be conditions related.

Great. Okay, thank you.

Thank you, Frank.

(Operator Instructions)

Travis Lan, KBW.

Yes, thanks. Good morning, everyone. How do we think about -- Chris, I know you mentioned this a little bit -- but how would you think about the standalone OceanFirst expense trajectory from what was $13.7 million on a core basis in the first quarter?

Yes. I think when we had the end-of-year conference call, we had said that we expected kind of inflationary pressure to the expense line. We did better than that in the first quarter. You actually saw expenses come down a bit from Q4 to Q1.

In the second quarter, we'll have a full quarter of the loan production office. We will have some of the impact of the Jackson branch. But that's offset against some of the expensing we took into the first quarter for handling the loans that were sold late last year, as well as the servicing expenses.

So all in all, ex Colonial, I think we see -- if you took the fourth quarter of last year, you looked at, it is probably where we think expenses will get to, over time. The other impact is that in the second quarter, it is our season for equity awards. So there is a little bit of uptick in compensation expenses, related to that.

Got you. Okay. Then on the fee side, it looks like all bank card, wealth and deposit fees fell for the second straight quarter. And I can see there was some seasonality in there, but how does the outlook feel for those lines, versus where we were a year ago?

Think of this. The banking fees and the cards, core deposit fees and card interchange revenue, it was a little bit of weak during the quarter, due to seasonality. The weather wasn't great and all that. The first quarter isn't the biggest quarter for that stuff anyway. So I think on that segment of fee income, some of it was seasonality.

On the wealth side, we do both advisory work, but we also do work for estate resolution. So we function as a fiduciary in that regard, and that business can be a little bit more lumpy. We had one large estate come to conclusion. That kind of came off of earnings during the quarter. So that may bounce around a little bit. That is more susceptible. It is a smaller number, and there is some lumpiness in the way we recognize income there, so that may bounce around a little.

Okay. I think I missed it in Joe's comments, but do you have an updated expected close date for the merger? And how do you feel also about the previously announced expectations for minimal tangible book impact and the 2.5% earnings accretion for 2016?

I'll take the easier question first, which is how do we feel about the original assumption? Very much on track. Really nothing of consequence has changed in our view of what the expected book values should be or the accretion in 2016. We are just always very cautious about the process in closing, so we don't want to get ahead of ourselves. The regulators have their work to do. We filed everything we need to file. That we would be hopeful to be closing in the second half, but we have to let that wind up first.

Got it. All right. Thank you, guys, very much.

Thank you, Travis.

(Operator Instructions)

There are no additional questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Chris Maher for any closing remarks.

All right. Thank you. Once again, thank you to everyone for joining us this morning for the call. We look forward to presenting additional updates as the year progresses. Thank you.

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