OceanFirst Financial Corp (OCFC) 2015 Q4 法說會逐字稿

Welcome to the OceanFirst Financial Corp earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to the conference over to Jill Hewitt. Please, go ahead.

Thanks, Emily.

Good morning. Thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer. We will begin this morning's call with our forward-looking statement disclosure. Before we begin, I want to remind you that many of our remarks today contain forward-looking statements based on current expectations. Please refer to our press release and other public filings, including the risk factors in our 10-K, where you will find factors that could cause actual results to differ materially from these forward-looking statements. Thank you.

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 our fourth-quarter 2015 earnings conference call today. This morning, I'm joined by our Chief Financial Officer, Michael Fitzpatrick and Chief Lending Officer, Joe Lebel. 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 and then we look forward to taking your questions. In terms of financial results for the fourth quarter, diluted earnings per share increased to $0.31. Reported earnings were impacted by merger-related expenses of $0.02 or $441,000 after tax, resulting in core earnings per share of $0.33.

We are pleased to report fourth-quarter core earnings per share was $0.03, or 10% higher than the prior-year period. Full-year core earnings per share was $0.10, or 8.4% higher than the prior year. This progress demonstrates the value of our focus on organic growth driven by relationship commercial lending.

Regarding capital management for the quarter, the Board declared the Company's 76th consecutive quarterly cash dividend of $0.13 per share. No shares were repurchased during the fourth quarter as the Company elected to remain out of the market due to the pending announcement of a definitive agreement to acquire Cape Bancorp. As a result, tangible book value per share increased nicely ending the year at $13.67, a $0.76 or 5.9% increase over prior year, despite a $0.52 dividend payout, 373,594 shares having been repurchased throughout the year, and the issuance of 660,998 new shares related to the acquisition of Colonial American Bank in July 2015.

As of December 31, the Company had 244,804 shares available for repurchase. The repurchase program remains active, but as discussed in the January 6 conference call regarding the agreement to acquire Cape Bancorp, the Company is prioritizing dividends and building tangible book value to increase capital ratios in advance of the Cape Bancorp transaction.

Operating results included strong organic loan production of $126.5 million for the quarter and $485.8 million for the year. This level of production was in line with prior periods although net loan growth was muted, as a few payoffs and the resolution of a large nonperforming credit partially offset the production gains. These factors offset approximately $17 million of production, as prepayments driven by the sale of underlying real estate collateral totaled in excess of $10 million and the nonperforming loan transferred to OREO totaled $7 million.

The commercial loan pipeline remained strong at year end at $53.8 million, $7 million higher than year-end 2014. Joe Lebel will be available during the Q&A session to discuss local credit markets, competitive conditions and his expectations for 2016.

Year-end deposits decreased $51 million as compared to the prior quarter, largely due to seasonal deposit flows. As compared to the prior year, deposits increased $196.5 million, $73.2 million of which was driven by organic growth, with an additional $123.3 million of deposits acquired in connection with the Colonial American Bank acquisition. The loan to deposit ratio increased to 102.8%, which is in the high rent, high end of our target range but underscores the strategic thought process behind our decision to acquire a retail branch in Tom's River, which is expected to close in the first quarter of 2016 and our decision to pursue the opportunity with Cape Bancorp.

The full-quarter benefit of the Colonial American acquisition and the maintenance of price discipline on both loans and deposits produced a healthy net interest margin of 3.37%, an 11-basis point improvement from the prior quarter. Pre-payment income had a modest impact of 3 basis points on the quarterly net interest margin.

Operating expenses of $16.5 million for the quarter were elevated as a result of $786,000 of expenses related to Colonial American, of which $614,000 is classified as merger-related expenses and $172,000 related to the operation of duplicate banking systems during the quarter. The remaining $596,000 expense increase as compared to the prior linked-quarter was driven by the full-quarter impact of operating the new Colonial American branches, the new branch in Jackson, New Jersey and growth in data processing costs and professional fees partly related to nonrecurring items.

Given the amount of noise in the expense line this quarter, I would characterize normalized and recurring operating expenses for the fourth quarter to be in the range of $15.5 million. In terms of nonperforming loans, on November 16, the Bank took possession of the golf course, hotel, winery and vineyard complex previously discussed in last quarter's earnings call.

The Bank has executed a contract to sell the operation to an entity with the wherewithal to not only complete the transaction, but also make additional capital improvements and ensure the continued operation of the facility, which is an important local employer. The Bank is not providing financing for the transaction. Providing customary due diligence and closing requirements are satisfied, closing is anticipated in the second quarter.

Finally, as previously announced, the Bank is working diligently towards satisfying the requirements to close the previously announced agreement to acquire Cape Bancorp. As indicated in our conference call on January 6, we are targeting at closing sometime this summer and a full data conversion and customer integration to be completed in the fall of 2016.

With that, Mike, Joe and I will be pleased to take your questions this morning.

(Operator Instructions)

Frank Schiraldi, Sandler O'Neill.

Just wanted to start with the margin -- it looks like you got -- so, Chris, you mentioned 3 basis points from the higher prepayment fees quarter over quarter. Then, I think you are looking for basically another 1 basis point from the first full quarter of accretable yield from Colonial. Can you just talk about that, and the other 6 or 7 basis points in expansion and your outlook from here?

Sure. Obviously, there's a lot of moving pieces and parts in the margin, both on the funding and on the lending side. I would tell you, we continue to think that our margin will be stable going forward. So that may be up or down a couple basis points in any given quarter. But we see kind of a stable outlook.

Based on the decrease in the velocity of prepayments in our normal business, and notwithstanding the prepayments we had because a couple properties got sold, we think the prepays are coming in a slower and slower range. The new credits we are putting on are almost exactly matched to the credits rolling off.

So, there's very little pressure on margin, but there's also very little upside. So I think it's anywhere between the [mid-3.20s basis points] and [3.30 basis points] -- [mid-3.30s basis points] is probably a good range for us in the long term.

Okay. So maybe in the short term, the best way to think about it is maybe pull out the additional prepayment and fee income, and then think about stable from 4Q levels, give or take?

Yes. That's a great way to think about it, Frank.

Frank, some of the increase was the Colonial assets coming over. They had a slightly higher margin than we did. So, when we merged those in, that increased the margin. Also, we did have a little bit of rotation shift in the quarter -- quarter over quarter -- out of securities again and into loans, so that was part of it.

Okay. What would -- would you have, Mike, just setting aside the accretable yield, just in terms of the sequential growth in the margin quarter over quarter, what Colonial's higher-yielding book equated to, in terms of basis-point expansion?

I know their asset yield was 3.90% and ours is -- well, combined it's 3.77%. So there was a little bit there. It was probably a couple basis points -- probably only 1 or 2 basis points but that was part of the increase.

We said in the back of the press release, we had $177,000 in accretable yield in the fourth quarter. So, that was part of it, too. The third quarter was about $140,000. So, there's a little bit of accretable yield that's in the fourth-quarter number.

Right. Okay. Then, just on commercial loan growth, I think this is, what is it, the 10th quarter in a row of double-digit growth? Just wondering your thoughts on if you can keep that pace in the short to medium term. If you could just remind us what the primary drivers have been, and are at this point going forward?

Frank, it's Joe. In terms of keeping the pace, we remain pretty pleased to see the continued pipeline activity. It's been fairly consistent, really, over the last eight quarters or so. It's spread between C&I and CRE growth, which is good. We anticipate that's not going to change.

I do expect, competitively, that -- we're not telling anything new versus last quarter. We see thinner pricing; we continue to see that. We see longer durations. We see weakened credit standards. But that's not new. We've been able to navigate through that. As I said, we're pretty happy with where we stand on the pipe.

Thank you.

Okay. Thanks, Frank.

Travis Lan, KBW.

Chris, can you just talk a little bit about the credit environment more broadly? Obviously, you had the move from NPL to OREO in the quarter -- but just how the local economies are feeling today versus maybe a year ago?

Yes. I guess I would characterize them as stable. So, I think in the local economies -- so, for us, that's kind of Monmouth, Middlesex, Ocean -- we do not tend to see the same level of real estate price appreciation that you would find in the northern parts of New Jersey, New York City, or the Philadelphia Metro itself. So, it's kind of a second-tier impact on home prices.

But that said, they are stable. They are not getting worse. In fact, inventories seem relatively stable. Prices are stable. So, I would say that we don't see any deterioration, but we expect to continue to have things come up, as they do, and work through them.

We are pretty pleased -- the net charge-offs for the year were essentially like 4 basis points. So, at the end of the day, we do have to work through some of these resolutions, but the impact to us is not -- hasn't been big. I don't think we're going to see that change.

In terms of overall credit conditions, Joe talked a little bit about the competing for credits. We've never been a big player in what I would call the highly active investor CRE markets, the brokerages and stuff, whether that's credits that wind up either having a credit national tenant in there or a multi-family product. So, we see those deals kind of come through. We tend to choose not to compete with them, or we just know we're not going to win them.

So, I think that's becoming even -- if it could be -- even more competitive than it has been. Although, we are seeing selected players stepping back out of that. So we are seeing some discipline by a few players.

Got it. Okay. On the expense side, putting Cape aside, you look at the OceanFirst, the $15.5 million quarterly run rate that you referenced. Obviously, you add the purchased branch late in the first quarter.

Is there anything else that jumps out at you as kind of a specific need for investment, either on the compliance or risk side? Or anything else that would meaningfully impact that $15.5 million run rate?

No. We think expenses are fully loaded at this point. We feel very comfortable with the IT infrastructure. We feel very comfortable with the compliance investments we've made. We have made significant investments over the last two years in both areas.

But we're not staring at any need. We've refreshed all of our customer-facing ATM technology in the last 24 months. So, there's really -- we don't plan anything that I think would change that.

I think we're staring at probably on a trajectory of inflationary level increases just as salaries come under a little bit of pressure, benefits come under a little bit of pressure. But nothing that's going to change that in a significant way.

Got it. Then the last one for me is: It looks like there was a pretty big jump in assets under administration in the quarter. Was there anything specific there? Or is that new initiatives or hires, just, how do you feel about that business going forward?

We like the business, but it's a relatively small business for us. It can have lumpy results. So, sometimes if you wind up signing on an estate to manage, you'll get a big jump in one direction. If an estate rolls off, you'll have it roll off in the other direction. So, we -- although we look at assets under administration, we look more closely at fees.

I would tell you that the ratio of recurring fees is quite high. We feel comfortable with it, but we anticipate that's a slow growth business. That is a business we think could have tremendous potential as we expand those products into the Cape markets, because we think we can play that niche provider role of handling smaller dollar trusts and estates that are typically less competitive and bring higher fees.

One of the things we've always watched with that business is our fee ratio. We've been able to keep our fee ratio over 100 basis points. So the business that we're doing is pretty quality business. But I expect it's going to be kind of a slow growth.

David Bishop, FIG Partners.

Question: Noticed in the release also sort of tying back to the growth in commercial loans or just loans in general, a nice step-up in terms of loan yields, both in the pipeline and origination. Does that reflect market conditions -- Colonial -- maybe just internal pricing changes? Just curious what's driving the uptick in both originations and the pipeline yields?

David, it's Joe Lebel. It's interesting, we just talked about the competitive pressures in the marketplace in terms of durations and pricing and credit structure, but I would tell you that we have a seasoned lending staff. They have an understanding of what we're trying to accomplish as a Company, largely measured consistent growth on a quarter-over-quarter basis. So we're going to be proactive in picking and choosing the right transactions that meet our relationship banking product.

The other thing we do internally for a community bank of our size, we have a pricing model that we utilize to a full extent that has target returns that are important to the Bank. The lenders understand the need to meet those targets. So we're fortunate, as I said, to have that kind of discipline in place.

Got it. Were you able to pass on any of the most recent Fed rate hike, in terms of loan pricing?

Floating-rate borrowers all saw the immediate increase in rates; it hasn't really translated in the durational market because, quite frankly, the long-term rates have gone down the first few weeks of the year with the volatility.

I think what we're seeing on that just goes back to Frank's margin question from earlier -- a lot of the floating-rate instruments we have tend to have floors in them. For example, our home equity lines of credit tend to be at a floor. So, the first rate hike or two don't provide all that much.

On the other side, they don't provide all that much pressure on deposit pricing either. So I think over time, it may have a bigger impact. But this first hike, I think is going to be relatively neutral to our balance sheet, because we're not going to get a whole lot of advantage on the floating-rate stuff, but we're not getting a whole lot of pressure on deposit pricing.

Got it. Then as it pertains to deposits, I noticed the outflow there. You talked about some is the seasonality. Just curious about the prospects of the rebuild there, especially as it pertains to some of the DDAs and other core deposit accounts there. Do you expect those to rebuild as you move into the first half of the year?

We would expect them to kind of seasonally swing. So there's rebuild -- some of the institutional depositors have kind of natural cash flow patterns during the course of their year. So we expect some of that will come back. Frankly, as we've become more commercial, we had a series of customers appropriately tax planning, and doing distributions and things like that at the end of the year.

So I think you're going to see the trend now just kind of swing back in the other direction. That's just part of the business. So, that's why we try and look at it both over quarter to quarter and year over year. But certainly the third quarter -- I think we mentioned on the third-quarter call -- that was an unusually high level of growth for us. It was about an $80 million organic growth.

Got it. Then just one final one: The release talks about extending some of the durations on the borrowing side. Just curious what the term structure and cost looks like, in terms of your borrowings? Maybe just what matures and reprices over the next year, and how that's changed quarter over quarter?

So there's kind of two components of our wholesale borrowings. Depending on deposit flows, we will match the seasonality of deposit flows by going in and out of overnights or short duration, 30 day or less. We match that against our projected cash flows out of the depositors we know swing balances back and forth.

Then we have the portfolio we maintain -- I would classify more for investment purposes -- that's the majority of our advances. By pushing the maturities out, we are probably somewhere in excess of 3.5 years or so in average maturity on that chunk of advances. So we're laddered as far as we want to be there. I don't think we will be taking -- we won't be pushing that ladder out any farther.

Then the short end of our advances that we go in and out of -- those are really just to affect the seasonality on the commercial deposits. So, I guess the way I would say it, we don't expect any more margin compression from laddering. We're comfortable that the interest rate risk position is relatively balanced.

Okay. Got it. So a lot of that was just the plug from the commercial side. Okay. Appreciate the color.

Thank you, David.

(Operator Instructions)

Matthew Breese, Piper Jaffray.

Chris, just following up on the deposit question -- just kind of thinking about it a different way. Ideally, where would you like the loan-to-deposit ratio to be right before the deal closes? It seems like it's at the upper threshold of comfort at 104% here.

There is always -- I guess you have to play two things against one another. The first is by optimizing your mix of funding. You're going to get the best margin you can get out of it, right? So, in certain cases -- and now is one of those times, if you got to dip into a little bit of overnight funding, that may be more efficient than affecting the pricing across a wider deposit base.

So, I would tell you that knowing that we're on this path, both to close the branch acquisition in the first quarter, and we have the opportunity with Cape Bancorp, that we feel comfortable running on the higher end of our range. So saying it otherwise, we are kind of optimizing income in the near term by running it in the higher end of the range.

I would continue though to -- or I would reiterate our prior guidance around this, which is we think that the best community bank franchises are balanced between loans and deposits. So, over a longer period of time, we're going to work very hard to keep this within a reasonably tight range around 100% loan to deposits. So, we do not intend to run the Franchise where it's going to be up at 120% to 150% loan to deposits. But the difference between a 99% and a 102% -- if we can make a little more money at 102%, we're going to optimize to that.

So, I don't know how the next couple months and quarters are going to play out, but certainly having both the branch acquisition lined up to close in March, and the Cape transaction hopefully by the summer, we feel comfortable we could run a little bit on the higher end and optimize income in the short term.

Got it. Okay.

If we did not have both of those things ahead of us, I think we might be trying to get that number down a little bit more right now.

Understood. Then going to margin expectations, obviously there's been some flattening of the yield curve, the 2- to 10-year spread is now closer to 1.20%. It's been as low as 1.15%. Where would that have to be to maybe make you rethink your margin expectations, and we could see some more compression?

It's hard to say exactly when, but I think that even in the current environment, and even with probably a little bit more flattening, we're pretty much okay. We've never played the spread game going long, so we're not writing the 7- and 10-year deals. So, the margin expectations we have -- most of our paper is written in 5 years and under. In fact, the commercial book has a duration of, I think, 2.7 years.

So, at that part of the curve, it's kind of almost -- we call it the belly of the curve -- but you're not getting the advantage of the long-term rates anyway. So, I don't feel under a tremendous amount of pressure on the lending side.

On the deposit side, I think we're still in early stages, right? So, you have Chase that announced, right after the rate increase, that they intended to raise deposit rates for some customers. We haven't seen that. We haven't seen an impact on that. But when you have competitors of that size stake out positions around deposit pricing, I'm more concerned about deposit pricing than I am loan yields.

The deposit pricing aspect of it, I think, is less likely to kind of neatly follow the yield curve. I think it's going to be more a function of which competitors in which markets decide they are going to move rates. I think it's going to be haphazard. I think in some markets you may see competitors move more quickly, and some more slowly. So --

Got it. Okay. Then what's a good tax rate to use for the year?

35% is what we would -- it was a little different in the fourth quarter because merger-related expenses are not all tax deductible, but 35%.

Okay. That's all I had. Thank you very much.

Thanks, Matt.

(Operator Instructions)

I'm showing no further questions. This will conclude the question-and-answer session. I would like to turn the conference back over to Christopher Maher for any closing remarks.

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

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