OceanFirst Financial Corp. (OCFC) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the OceanFirst Financial Corp. 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 Jill Hewitt. Please go ahead.

Thanks, Emily. Good morning and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer and 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’ll find factors that could cause actual results to differ materially from these forward-looking statements. Thank you. And now I will turn the call over to our host, Chief Executive Officer, Christopher Maher.

Thank you, Jill, and good morning to all who've 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 $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 and 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. Those shares were repurchased during the fourth quarter as the Company elected to remain out of the market due to the pending announcement of the 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 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 in the resolution of a large non-performing 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 non-performing loan transferred to OREO totaled $7 million. The commercial loan pipeline remained strong at year end at $53.8 million $7 million higher than yearend 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 Toms 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 above loans and deposits produced a healthy net interest margin to 3.37% and 11 basis point improvement in prior quarter. Prepayment 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 full data conversion and customer integration to be completed in the fall of 2016. With that Mike, Joe and I would be pleased to take your questions this morning.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Frank Schiraldi of Sandler O'Neill. Please go ahead.

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

Sure. Obviously there's a lot of moving pieces and parts in the margin both on the funding end 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 - couple of basis point in any given quarter but we see kind of the stable outlook. Based on the decrease in the velocity of prepayments in our normal business and notwithstanding the prepayments we had because of couple of properties got sold. We think the prepays are coming in a slower and slower range and the new credits we are putting on are almost exactly matched so 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 mid-320s and 330 - mid 330s is probably a good range for us in the long-term.

Okay, so may be in the short-term the best way to think about is maybe pull out the additional prepayment fee income and then sort of think about stable from 4Q levels give or take?

Yes, that’s a great way to think about it, Frank.

Yes, Frank some of the increase was the Colonial assets coming over, they had a fairly higher margin that we did so we emerge those in and increase the margin and also we did have a little bit of rotation shift in the quarter-over-quarter out of securities again into loan, so that was part of it.

Okay. What 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 there asset yield was 3.90% and ours is - well combined it's 3.77%. So there was a little bit there I mean probably a couple of basis point and probably one or two basis points, but that was part of the increase. We did have a - we’ve 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. 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. And then just on commercial loan growth I mean I think this is what is it the tenth quarter in a row of double-digit growth. Just wondering your thoughts on and if you can keep that pace in the short to medium-term and if you just remind us what the primary drivers have been and are at this point going forward?

Frank, its 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 and it spread between the C&I and CRE growth, which is good and we anticipate that's not going to change. I do expect competitively that we are not telling anything new versus last quarter. We see thinner pricing, we continue to see that we see longer durations, we see weak in credit standards, but that's not new and we’ve been able to navigate through that and as I said we are pretty happy with where we stand on the pipe.

Okay, thank you.

Okay. Thanks Frank.

Our next question is from Travis Lan of KBW. Please go ahead.

Yes, thanks. Good morning, everyone.

Good morning Travis.

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 kind of local economies are feeling today versus maybe a year ago?

I guess so we characterize them as stable. So I think in the local economy 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, the inventory 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 that they do and work through them. And we are pretty pleased the net charge-offs for the year were essentially at four basis point. So at the end of the day we do have to work through some of these resolutions both 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 market, the brokerage stuff whether that’s there is the credits that wind up either having a credit national tenant in there or a multifamily product. So we see those deals kind of come through, we tend to choose not to compete with them or we just know we are 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 it, so we are seeing some discipline by the few players.

Got it. Okay. And on the expense side, putting Cape aside, you look at the OceanFirst the $15.5 million quarterly run rate that you referenced I mean obviously you add the purchase branch kind of late in the first quarter. Is there anything else that jumps out at you is kind of a specific need for investment either on the compliance or risk side or anything else that would kind of meaningfully impact that $15.5 million run rate?

So we think expenses are kind of fully loaded at this point we feel very comfortable with the IT infrastructure. We feel very comfortable with compliance investments we’ve made and we have made significant investments over the last two years in both areas. But we’re not steering at any medium we’ve refreshed all of our customer facing ATM technology in the last 24 months. So we don't plan anything that I think would change that. I think we’re steering at probably on a trajectory of inflationary level increases just as salaries comes under a little bit of pressure, benefits comes under a little bit of pressure but nothing that’s going to change that in a significant way.

Got it. And then last one for me. It looks like there was a pretty big jump in assets under administration in the quarter. Is there anything specific there is that you know new initiatives or hires or just kind of how do you feel about that business going forward?

We like the business, but it's a relatively small business for us and it can have lumpy results. So sometimes if you wind up signing on an estate to manage you’ll get big jump in one direction. If an estate rolls off you'll have - 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 and we feel comfortable with it, but we anticipate that’s a slow growth business. That is a business we think could have tremendous potentials we expand those products into the Cape market, because we think we can play that niche provider role of handling smaller dollar trusts and estates that are typically less competitive and they bring higher fees. One thing is we’ve always watch with that business is our fee ratio and we’ve been able to keep our fee ratio over 100 basis points. So the business that we are doing is pretty quality business. But I expect it’s going to be kind of the slow growth.

Our next question is from David Bishop of FIG Partners. Please go ahead.

Yes, thank you. Hey good morning gentlemen.

Good morning David.

A question noticed in the release also sort of time 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. Is that reflect market conditions Colonial maybe just internal pricing changes just curious what sort of driving the uptick in both originations in the pipeline yields?

David, its 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 season 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 are going to be proactive in picking and choosing the right transactions that meets our relationship banking product. The other thing we do internally for Community Bank of our size we have pricing model that we utilize to a full extent that has target returns that are important to the bank and 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 we’re seeing on that just goes back to the 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 in 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 it’s 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. And then as it pertains to deposits you noticed the outflow there you talked about some of the seasonality. Just curious about sort of the prospects of the rebuild there especially as it pertains to some of the DDAs and other core deposit accounts there. Do you expecting us to sort of rebuild as you move into the first half of the year?

Yes, we would expect them to kind of seasonally swing so there is a rebuild some of the institutional depositors have kind of natural cash flow patterns towards the course of the year so we expect some of that will comeback. And frankly as we become more commercial, we had series of customers appropriately tax planning and doing distributions and things like that at the end of the year. So I think you can see the trend now and just kind of swing back in the other direction that just part of the business. So that’s why we try to look at it both over quarter-to-quarter and year-over-year, but certainly the third quarter I think we mentioned in the third quarter call that was an unusually high level growth for us, it was about $80 million organic growth.

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

So there is kind of two components of our wholesale borrowings. So 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. And that’s we matched that against our projected cash flows out of the depositors we know swinging balances back and forth. Then we have the portfolio, we maintain. I’ve classified more for investment purposes that’s a majority of our advances. And by pushing the maturities out, we're probably somewhere in excess of 3.5 years or so in average maturity on the chunk of advances. So we’re laddered as far as we want to be there. I don’t think we won’t be taking - we won’t be pushing that ladder out any farther. And in 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 and 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, Dave.

[Operator Instructions] And our next question is from Matthew Breese of Piper Jaffray. Please go ahead.

Good morning everybody.

Good morning Matt.

Chris, just following up on the deposit question. Just kind of thinking about it in 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 thresholds of comfort at 104 here.

As always I guess you have to apply two things against one and other. The first is by kind of optimizing your mix of funding, you are 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 maybe more efficient than affecting the pricing across a wider deposit base. So I would tell you that knowing that we are 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 at the higher end of the range. I would continue to 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 going to be up at 120% to 150% loan to deposits, but the difference between the 99% and 102% if we can make little more money one or two we are going to optimize to that. So I don’t have the next couple of months or quarters you can play out, but certainly having both the branch acquisition wind 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.

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. And then going to margin expectations, obviously there's been some flattening of the yield curve, two to 10-year spread is now close to 120, it’s been as low as 115, 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 what, but I think that even in the current environment and even with probably a little bit more flattening we are pretty much okay. We've never played the spread game going long, so we are not writing the seven and 10-year deals. So the margin expectations we have most of our papers written in five years and under in fact the commercial book has the duration of I think 2.7 years. So with that part of the curve, it’s kind of almost now we call the belly of the curve, but you're not getting the advantage of - that’s 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 are still in early stages, 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 it impact on that, but when you have competitors of that size stakeout positions around deposit pricing are more concerned about the deposit pricing then I am loan yields. And the deposit pricing aspect of it I think is less likely to kind of neatly follow of 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. And I think it’s going to be haphazard. I think in some markets you may see competitors move more quickly and some more slow.

Got it, okay. And then what’s a good tax rate to use for the year?

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

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

Thanks Matt.

[Operator Instructions] 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 update as the year progresses. Thank you.

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