Q3 2019 Earnings Call
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I don't like to turn the conference over the Ms. Jill Hewitt Senior Vice President Investor Relations. Please go ahead.
Thank you Nick good morning, and thank you all for joining US. This morning, I'm Jill Hewitt Senior Vice President Investor Relations Officer at Oceanfirst Financial Corp. We will begin this morning's call with our forward looking statement disclosure.
Please remember that many of our remarks today contain forward looking statements based on current expectations refer to our press release, another public filings, including the risks factors in our 10-K.
Where are you will find sectors 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 hosts today, Chairman and Chief Executive Officer, Christopher Maher.
Thank you Joe.
Hi, good morning to all who'd been able to join our third quarter 2019 earnings conference call today.
This morning, I'm joined by our Chief operating Officer, Joe with Bell Chief Financial Officer like Fitzpatrick.
Always we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you.
It's been our practice, we will highlight a few items and then add some color to the release to the results posted for the quarter.
And we look forward to taking your questions.
In terms of financial results for the third quarter diluted earnings per share were 49 cents.
Where do we reported earnings were impacted by merger related expenses.
Branch consolidation charges.
Nonrecurring professional fees related to the renegotiation or core systems contract.
He's items totaled $2.6 million net of tax benefit, resulting in core earnings per share with 54 cents, a 5.9% increase over core earnings in the second quarter of this year.
Core operating expenses decreased to $40.1 million as compared to $42 million in the prior quarter.
We realize efficiencies related to the capital Bank acquisition.
During the quarter additional for legacy branches were consolidated which should help us manage expenses in the fourth quarter and into 2020.
But these consolidations or average deposits per branch now exceed $110 million.
Joe will provide more color in the loan growth for the quarter, but we're pleased to see both Philadelphia, New York contributing strongly.
Which positions the company well for the future.
The net interest margin contracted but the impact was primarily due to purchase accounting and prepayment.
<unk> cost appear to have plateaued for this cycle.
Pressure on the net interest margin going forward should moderate.
Regarding capital management for the quarter. The board declared a quarterly cash dividend of 17 cents, the company's 90 onest consecutive quarterly cash dividend.
The 17 cents dividend represents a 31% payout of core earnings.
Given the opportunity to repurchase shares at what we believe it's an advantageous price or capital deployment strategy will continue to favor share repurchases rather than dividend increases in the near term.
On a year to date basis. The company has repurchased 786567 shares at an average cost of $22.95.
Since quarter end, we've been able to repurchase an additional 296200 shares at a weighted average price of $23.43.
Inclusive of those purchases after quarter end.
Repurchased a total of 1 million 82767 shares this year.
As long as we continue to be able to repurchase shares at these terms share repurchases will serve as one of our preferred method so capital deployment.
During the remainder of the fourth quarter, however repurchase volumes, maybe limited due to the rules related to the pending shareholder votes for the country bank into Riverbanc acquisitions.
In addition, as part of our annual strategic planning effort. The board will consider an expansion of the existing authority to repurchase shares the existing plan, maybe exhausted by yearend.
Our performance metrics remain highly competitive with a core return on assets of 1.35%.
A core return on tangible common equity of 14.53% and of course efficiency ratio of 53.56%.
All of which are slightly improved since the second quarter.
The balance sheet remains strong with net credit recoveries and continuing low levels of delinquencies and nonperforming assets. In fact, I, just 22 basis points, our nonperforming asset ratio is where the lowest we have ever recorded.
And what common equity to total assets remained strong at 9.73% well tangible book value per share increased by 29 cents to $14 in 86 cents.
Regulatory applications related to the two river in country Bank acquisitions are in process.
We continue to plan to closing both acquisitions should occur in the first quarter of 2020.
At this point I'll turn the discussion over to Joe will bell to provide more details regarding the development of our business.
Thanks, Chris.
Record loan originations of 482 million drove loan growth of 138 million for the quarter.
Commercial lending closing set an all time quarterly high at 315 million with significant contributions from the Philadelphia, New York regions of 158 million and 100 million respectively. As both geography is continues to gain momentum.
We took the opportunity to add to our participation book.
After several quarters plan run off.
Hi, partnering at 50 million of seasoned New York Metro Co op loans at average loan to values under 15%.
As a result, the commercial portfolio grew 119 million for the quarter.
Residential real estate continues to exceed expectations and delivered 156 million in closings for the quarter and 41 million in portfolio growth.
The total pipeline remains robust despite the record closing quarter.
100, and through our 320 million.
And while much of the pipe was residential at quarter end, we expect to solid fourth quarter and commercial activity.
Our swap product introduced earlier this year had a solid quarter and wall fee income from swaps can be lumpy on a quarterly basis.
Bookings floating rate loans with synthetic fixed rates for borrowers and this rate environment continues to diversify our loan book.
Well average yields a new originations were impacted by fed cuts in competition in new and existing markets.
Net interest margin of 3.55% decreased 11 basis points largely due to decreased purchase accounting.
Down six basis points to 15 basis points.
And lower prepayment fee income.
Off from four basis points to just one basis point this quarter.
Deposit costs are stable and walk competition is fierce pressure on deposit pricing is abating.
Our own cost of deposits was unchanged this quarter at 62 basis points after increasing five basis points in Q2 and nine in Q1.
In the quarters ahead pricing discipline remains paramount given the volatility in the yield curve.
And our fundamental approach to credit remained steadfast in the face of rising uncertainty.
Our use of interest rate swaps in 2019. This helped increase the amount and percentage of floating rate loans as an offset to our fixed rate portfolios.
Well fed cuts impac yields on these floating rate instruments in the short term, we manage interest rate risk long term.
We have built a strong stable of lending teams and remain committed to strategic controlled growth in our markets.
We're still finding good quality loans to strong borrowers as result of our efforts.
Moving to expenses were seeing the expected reduction as a capital bank cost saves take effect.
Core expenses exclusive of merger related costs and noncore items.
Were reduced by 1.9 million in the quarter.
Further improvements in the expense run rate.
Due to the recently restructured core processor contract and the upcoming mobile and retail online vendor contracts.
I will yield additional savings.
We expect a portion of these savings will be reinvested in technology initiatives.
Some of our 2020 branch rationalization savings will fund additional expansion and Treasury services to support our growing customer base.
In New York, Philadelphia, and New Jersey.
One final note on the continued initial success of our hybrid Robo advisor product that's <expletive> .
Since introducing the product in early 2019, we've seen organic growth measured by assets under management.
Double each quarter.
Rising to nearly 24 million at the end of Q3.
Well this represents small dollars to date and has no impact on financial performance in 2019 and likely 2020.
Acceptance from our customers has been notable.
Growth is ahead of plan and momentum is building.
With that I'll turn it back over to Chris for the Q and a part of the coal.
Thanks, Joe at this point, we'd be happy to take your questions.
I'll begin the question answer session to ask a question. We press Star then one on your Touchtone phone.
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This time, we'll pause momentarily to assemble a roster.
Our first question comes from Frank Schiraldi Sandler O'neill go ahead. Please.
Good morning, good morning, Frank.
Just a couple of questions on first on loan growth just given the strength and fill in New York first maybe if you could talk a little bit about your expectation of trend and those two.
Geography is and then just your thoughts overall I think in the past you've talked about 50 to 100 million and then net growth.
Quarter, just you know sort of update us on and you're thinking there.
[noise] Frank I think it's I think the focus on 100 million quarterly growth is a fair number.
And the expectation for Philadelphia, New York are on track, where we expect them to go I think New York will continue to build early returns are good and I think me Philadelphia's hit their stride because of their head start a little earlier, but I think both trends assuming we can still in this marketplace find the kind of credits that we'd like to book.
Should continue to be positive.
Okay, and then just in terms of the margin outlook I know the purchase accounting accretion kind of a complicates things a little bit.
But just.
Thoughts on the NIM from these levels.
Frank I would say that if you if you strip out the purchase accounting and even the prepayments, which are kind of transitory and just look at the coordinating we're pretty pleased that it just went down a couple of basis points in the quarter.
And I think that that's how we're seeing things going forward of course, if there are additional fed cuts that pace, a little bit of a headwind, but I think if even if we have a couple of basis points of core NIM contraction from quarter to quarter, we can probably overcome that with with new volume at this point and keep net interest income study are rising like you have any other comments.
On the margin that.
Yeah, So purchase accounting accretion Ashley through the fourth quarter will actually be slightly ahead of the third quarter third quarter was adversely affected because you had some true ups to a cash <unk> estimate than we trued, though those up to actual so there was that extra three basis points of downward pressure on that so we had the benefit of a slightly more accretion.
In the fourth quarter.
Posit costs seem to have that flattened it might even go down a little bit and then there is a remix and the balance sheet from Atas securities into loans and the low end and even within loans into commercial book. So we think those are those are positive the the yield curve and maybe another another fed.
That would be would be negative, but I don't see much of a change may be stable to slightly down in terms of the margin.
Okay. Thank you.
Thanks Frank.
Thank you.
Our next question comes from Russell Gunther D.A. Davidson go ahead.
Thanks, Good morning, guys. Good morning Russell.
Hey, Mike just a follow up on the margin while we're on the the stable to slightly down.
Guidance. There is is that for the fourth quarter and does that assume an October rate cut.
No without a rate cut stable to slightly down a rate cut we would obviously impact that a little bit probably about we think about two basis points in NIM.
A 25 basis point rate cut and considering our mix of assets and funding sources that are tied to either prime or LIBOR or fed funds.
Got it okay. Thanks for thanks for the clarification and then.
On on the expense side of things, obviously, a better result, this quarter and appreciate the comments you guys gave about some incremental improvement in franchise reinvestment as well but that.
How would you expect that.
40 million this quarter to run rate or there are there some pressures there is that cannot be.
That's the flat for the next couple of quarters, how what are you thinking there.
And Russell's Chris.
Probably stay around flat a there may be an opportunity to get maybe a little bit under 40 million, but what we're doing is really.
Taking advantage of opportunities to reduce expenses in the branch network and even or contracts on I T. In order to fund the initiatives, we have going on in terms of.
The digital build out and all that so I.
I know, we referenced and it's it's in the numbers the.
Renegotiation of our core systems contract. We also referenced in the fourth quarter will be renegotiating, our digital vendor contracts and we expect it to give you get a sense the cost per account will drop somewhere in the range of 50%. So we're trying to make sure we get on top of the unit economics in digital as we move our customer.
There's from brick and mortar to digital it's really important that we keep the unit economies digital working so I think you're gonna see us around that 40 million dollar numbers, some quarters might be a little better.
We'd like to see it dropped but.
You also shouldn't see it under water pressure either.
Okay. No that's very helpful. Chris. Thank you and then just on the balance sheet side. So it sounds like organic growth and commercial growth is is going to continue to be strong.
And then I hear you on re mixing out of securities and into loans. So I'm curious as to when you expect sort of the 10 billion pressure to necessitates sail out of single family residential when we might see that show up in fees on a gain on sale perspective.
Yeah. So.
Fresh everyone that when we announced the country into river acquisitions, Oh, we discussed potentially staying at or below 10 billion throughout 2020, as a strategy to defend NIM and to be able to kind of increase our profitability before crossing over 10.
Maybe as soon as the first quarter 2021.
We will get a lot of things when we think through that we look at economic conditions, we look at our organic loan growth numbers and I.
I would expect that you'll start to see us initiate some loan sales beginning in the fourth quarter. They won't be significant by dollar amount, but just to get us in that that mode.
But then throughout 2020, we're going to look at economic conditions lending conditions and what we think we can do inorganic growth rate and it's possible. We would consider accelerating the point at which we will cross 10 billion. If we felt conditions were favorable enough. We're good we're gonna have to see where the economy is we're going have to see what our organic loan growth is and why.
Way, the obviously the headwinds on the Durbin and things like that.
Got it okay very helpful. Thank you guys.
Thank you.
Our next question comes from Collyn Gilbert of KBW go ahead.
Hi, guys.
Oh, no Chris just to follow up on that comment if it's interesting so what changed from what obviously you have you guys had indicated after that July call and is it.
Yes, just what is it that you're seeing in the market is it is it just <unk> you know that the tenure coming back a little bit or that might make you feel better about adding the growth in 2020 relative to where your position was in July .
Yeah, I think I think you hit the nail and ahead with the 10 year end to end the five year, even beyond the rebound or makes us a little bit more bullish on loan growth.
We're also feeling very comfortable with the New York in Philadelphia teams sourcing really good product at a at yields we think we can live with so.
We're going through various modeling exercise is to understand what the right time is to cross 10, our default is still the first quarter of 2021.
And I don't think will really have the answer to that until we see.
Hopefully in the next few months, maybe some resolution under trade agreements and things like that and where the core economy is going so.
You don't want to push that organic lever to hard if you're if you're thinking there may be a credit cycle.
That said good bankers always lenses, though there's a credit cycle coming so if you. If you think you can you know kinda tailor your credit risk appetite in good times, some bad you're probably going to get get caught so were pretty conservative to begin with so so we're looking at things we're doing multiple projections.
It is still our plan to defer the a 10 billion across until the first quarter 2021.
But we're thinking about different options and how that might play out.
Okay. Okay. That's helpful and then Joe I, just want make sure I heard you correctly. When you were talking about the pipeline did you did you say the majority of the pipeline is in ready.
At this point of what the yen back ended this quarter.
The we had such a strong quarter and a third.
From commercial at the ended the quarter point in time September 30, a the resi pipe is actually a little higher than the.
On the commercial pipe, but the commercial pipe has rebounded robustly since then.
So and we're still going to have a great fourth quarter resi as well.
Okay. Okay. That's helpful. And then just going back to that to just trying to reconcile some of the NIM comment. So is the change that you're anticipating in the fourth quarter. So I guess I kind of look at the core NIM, having fallen for bait I'm, sorry, eight basis points Fuchs glued accretion it looked like the pre pay impact was about the same in each.
The quarters.
So and then you know it sounds like a better NIM outlook I know granted it doesn't assume a rate cut but what what is what's driving that and again it sounds like maybe you won't see a huge drop in deposits, which would then perhaps indicate that loan pricing is there I know just trying to kind of piece that puzzle together.
As to why your NIM outlook will be better in the fourth quarter than what you guys saw the compression happened in the third quarter.
Yes so.
So for the third quarter, the compression was 11, but eight but eight or nine basis points to that was it with purchase accounting accretion was down six and prepayments fees, which are not a big part of our net interest income, but they did go down from four basis points to one.
So nine of the 11 with non core items. It was only two.
Ready to core so and then we see and they were looking for it and they said we have deposit cost of stabilized Tibet <unk>, the earning asset mix out of securities into loans as a benefit within the loan book more more weight on commercial loans is a benefit.
It's just a county accretion in the fourth quarter will actually be 125000 more than it was in the third quarter. So that's not a tailwind as that's a headwind as it usually is so that's why we're thinking.
Flat to slight contraction without regard for a rate cut at the rate cut like I said that it'd be two basis points negative.
I would also just to add to that cone that I'm worried about a 98% loan to deposit ratio, we've always enjoyed being under 100% in that case.
But in a declining rate environment like we're experiencing now wholesale funding can have its advantages. So as we go into the first <unk> fourth quarter. If we have the kind of loan growth, we'd like to see a we don't feel a pressure.
To have to fund all of that with deposit. So we have the alternative got loads of availability on the wholesale side, a pretty attractive prices. So.
We think we've got a couple tools that help us at this point in the in the cycle.
Okay. Okay. That's helpful and then just.
As we think about kind of the efficiency you know there's reinvestments that are happening as you guys had indicated on some of the savings at your that you're going to see on from the two acquisitions and then also what you did this quarter <unk> can you just update us, perhaps and maybe where you see kind of by the end of next year or or it will.
Are you having efficiency target our goal to be.
So I think we've talked about this before especially with the addition of two river and country, which will help us become a at the operating leverage we do both of those.
We think it's possible we could cross under 50% of we're just being a little bit cautious given the NIM outlook over the next four quarters and not knowing exactly how many times the fed might cut that the revenue side may actually impact more that more than the expense side. So we think we've got a good handle we've got levers.
To prevent expenses from kind of creeping up.
But it's going to depend a little more on the revenue side, how low that goes.
Okay. Okay, that's great I'll leave it there thanks guys.
Thanks Count.
Again, if you have a question. Please press Star then one.
Next question comes from Shawn Talbott of Janney go ahead.
Good morning does.
Morning, Sean.
I guess the start out to touch on the buyback you guys bought back a good amount of stock in the quarter and have a nice amount of approval remaining I know what to do some restrictions between albums does closed transactions, but can you give us some color on your appetite for buyback activity and what we can expect assume the near term even us even prior to the deals closing.
Hi.
Just point to a few things.
First just as a technical matter when we issued the S. Four and it's in the mail for the shareholder vote, we will not be repurchasing shares during the pendency the vote.
So that's just a matter of the rules, we have to follow up but outside of that.
Appetite for the shares and we think the earn back level at this price is a is pretty attractive. So we have a strong appetite and then you really start to look at the capital equation and whereas capital today, where do we think it's going to be where we'll be post two important events.
The acquisition of country into river, but also the implementation of Cecil So we're maintaining Tc ratio well in the nines, even after the acquisitions and likely after she so we think will probably remain in the nines and as long as we're at that level. I think you can think about our the earnings pay the dividend.
Ratio the earnings a payout ratio of 31%.
And then look to split what's left after that between organic growth keeping capital for that.
And then using the rest for buybacks if we can.
So we could.
Depending on the circumstances next year, we could have a more active buyback program that we did this year.
Gotcha, that's a that's very helpful. I'm not switching gears to the nice growth you saw in noninterest bearing deposits.
Can you give us a little color on what drove that was that primarily from a CR relationships from a new teams of Philadelphia New York.
Well, we've had a concerted effort on our Treasury services line of business for several years now and I think one of things, it's not a commonly appreciated about our deposit bases that 40% of the total deposits that oceanfirst have at least one treasury products with the bank.
And it's a really important line of business for us. It's one weve invent we've invested in we've added staff to we had a great leadership to that team a year ago.
We're investing in the technology underpinning that team and Weve recently hired folks to support Treasury sales in the Philadelphia in New York markets. So it's a product that we think is probably incredibly important to us in the future. So.
So we were not surprised to see a little uptick in noninterest bearing deposits.
Not always gonna come in that way, but we have a concerted effort against that.
That's helpful. A good stuff and then last fall and on the credit quality front is there anything you want class Pfizer criticized or are those trends going to be similar to what we saw last corner.
No.
Kind of Directionally follow up and saw in the employees at quarter end.
So there I mean, the credit trends are very positive very benign.
We have not detected.
Any trends in delinquencies.
Migration to to classify that would be of any consequence.
That said.
You're not going to have quarters, where you wind up with net recoveries every quarter right. So and given that this is one of the lowest quarters, we've ever seen in nonperforming assets total assets.
I don't expect.
That we're going to be able to stay here forever.
We did have a single credit in the is included in the figures for the quarter end that moved to the special mention it was related to the bankruptcy of a tenant.
Cluster of commercial real estate properties that we went to.
That has resolved favorably so we had strong guarantors a they pay the loan during the period as bankruptcy bankruptcies been resolved there was a buyer has reaffirmed the leases through low LTV. So in fact that will actually take a decrease from our special mention category that was in the range of $16 million.
But as well structured credit so when you have low ltvs fast amortization is a good guarantors, even when you have a surprise you should be able to work it out it.
Okay.
So all positive at this point.
Oh good stuff that's it for me thanks for taking my questions last quarter.
Thanks, Sean.
And if you have a question. Please press Star then one.
This concludes our question and answer session.
I'd like to turn the conference back over to Christopher Maher for any closing remarks.
Thank you, but I'd like to thank everyone for their participation on the call. This morning, we look forward to providing additional updates after yearend. So thank you.
[noise] Conference has now concluded. Thank you for attending today's presentation you may now disconnect.