OceanFirst Financial Corp (OCFC) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the OceanFirst Investor Conference Call. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Jill Hewitt, Senior Vice President of Investor Relations.

Thank you, you may now begin.

Thanks, Jackie. Good morning. I'm Jill Hewitt, Senior Vice President, and we will begin this morning's call with our forward-looking statements disclosure.

This call, as well as our recent news release, may contain certain forward-looking statements which are based on certain assumptions and describe future plans, strategies, and expectations of the Company.

These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain.

Factors which would -- could have a material adverse effect on the operations of the Company and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, and accounting principles and guidelines.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

The Company does not undertake, and specifically disclaims any obligation to publicly release the results of any revisions which may be made to any forward-looking statements, or to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

Thank you.

And now I will turn the call over to our hosts of the morning, our President and Chief Executive Officer, John Garbarino, our Chief Financial Officer, Michael Fitzpatrick, and our Chief Operating Officer, Vito Nardelli.

Thank you, Jill. And good morning, again, to all who have been able to join in in our call this morning to discuss the revision to our previous earnings release in January to reported earnings for the fourth quarter and year end 2006.

On March 12th, we disclosed the then unquantified need for this revision to our earnings and briefly reviewed the circumstances which required us to revisit the unaudited financial information we had originally released in January.

We also advised of a delay in the filing of our Annual Report on Form 10-K for up to 15 days.

Over the past two weeks we have been actively involved in assessing the additional information we initially discovered relative to the incidence of early payment defaults on sub-prime mortgage loans sold by our subsidiary, Columbia Home Loans, LLC.

Unfortunately the untimely communication of this information by certain officers at Columbia has additionally resulted in our assessment that our internal control over financial reporting was not effective as of December 31st.

We have reinforced and enhanced our policies and procedures for communicating this information in a timely manner and have suspended the origination of sub-prime loans and have taken disciplinary action against the officers of Columbia responsible for the communication breakdowns.

Just as importantly, having completed an assessment of the lending operations at Columbia, we have found no unlawful conduct as a factor in this breakdown of controls.

We continue to believe that, absent this management communication failure, underwriting policies and procedures at Columbia were and are sound and rigorously enforced.

In retrospect, we have discovered that as a result of the industry-wide meltdown in the sub-prime market, our sub-prime lending activities were too aggressive, given the market conditions which ensued.

The steps we had taken last summer to toughen underwriting standards were insufficient to protect Columbia from the onslaught of early payment defaults, which only began in the fourth quarter of 2006.

Despite the earnings revision we are announcing today, I stress that this does not represent a critical threat to OceanFirst Financial and is not expected to have any deleterious effect on our operations.

We believe that over the past two weeks we have identified the problems, instituted corrective actions, and adequately recognized the financial effect on the Company through year end for loans originated and sold during the first quarter of this year, prior to our announced cessation of sub-prime originations we will assess and provide for a suitable reserve for the projected continuation of early payment default loan repurchase demands. We do not anticipate any longer-term effect.

With that, I'm sure that you have some questions that Mike Fitzpatrick, Vito Nardelli, and I can address for you this morning. And, Jackie, I'd be happy to open it to questions at this time.

Ladies and gentlemen, at this time we will be conducting a question and answer session. [OPERATOR INSTRUCTIONS].

One moment, please, while we hold for questions.

Our first question is coming from Matthew Kelley with Sterne Agee. Please proceed with your question.

Yes, hi, guys. I was wondering, first of all, if you could just quantify the dollar amount of loans you anticipate actually having to -- to repurchase due to the early payment defaults? Essentially, what is the denominator on the $9.6 million kind of provision you've set aside?

Oh, yeah, we went through this, Matt, really on a pretty much a loan-by-loan basis. Now this $9.6 million, as I tried to allude to in the opening statement really only covers the fourth quarter of '06. There will be some additional tail and there will have to be an additional provision in the first quarter's numbers that will be released.

But on a fourth quarter basis, for October, November, December, when these repayment demands began, we quantify and have segregated on a loan-by-loan basis several different likelihoods of repurchase, depending upon the type of product that was underwritten, how long it had been since it was underwritten and closed, and we're looking at a total, absolute exposure, we think, for the fourth quarter somewhere in the neighborhood of $46, $47 million dollars.

There would be an additional tail that -- that we're calling a tail -- for a loan that closed, say in October, November, December, that might not have been sold until January or February of this year, and the repurchase demand may yet be pending. We'll also make some provision for that and some of that will, in fact, filter over into the first quarter. But as of -- as of year end we're talking about $46, $47 million.

Okay, so 20% haircut then, essentially, is what you're looking at then?

In round numbers, on average, yeah.

Okay.

But that's -- but that's not -- that's not how the calculation was done.

Okay. But help us understand how, if your early payment default window was limited to 30 days, the dollar amounts can get so big if the total pool of nonconforming is $300 million.

That's an excellent -- and it's one that it's difficult to get your arms around. But let me go through a typical time line here.

When these loans are sold -- well, actually, when any mortgage loan is originated, as you may realize, the first payment is not generally due for, on average, 45 days. There's a period when the loan is closed and the first payment is not due.

Likewise, these loans are not sold immediately on the date of closing. For example, for the entire production in 2006 -- I'll give you a breakdown of how quickly the loan sale ensued following the closing on the sub-prime production.

Only 22% of the loans that were sold, were sold within the first 30 days following closing, 59% were sold in the 30 to 60 days following closing, and 19% were sold somewhere two months and seven months following closing. So there is a lag here, and it's an administrative lag that occurs from the time the loans are actually closed until they are actually sold.

Moreover, the vast majority of these loans, in fact I think, Mike, 100%, were sold servicing release so that there's also a transfer of servicing. And, in line with that transfer of servicing, the first payment may in fact have been collected by Columbia and then the second payment, or third or fourth payment, which may, in fact be the measurement of whether or not there is an early payment default was collected by the new servicer. So that you can have a pretty significant lag here.

And, on average, I mean we're seeing requests for early payment default repurchases that can very easily run 90 to 120 or 150 days following the original closing of the loan. There's a significant tail here.

Okay.

Okay, does that -- does that give you some idea of how the time line would--?

Yeah, no that helps quantify it, but I mean of the $300 million in nonconforming -- you did quantify that 148 of that was the 100% financing product. How much of the 46 to 47 that you quantified for fourth quarter total repurchases came in that product, 100% financing product?

Almost all of it.

Okay, so that's what this is--?

Yeah, that's what this is--

All of it?

The -- the -- and that product only began to be offered somewhere around the middle or late in the second quarter of '06. So there were no -- again, the repurchase -- request for repurchases were absolutely -- well, materially nonexistent, there may have been one or two in the first six to eight months of the year even of offering this product. But then in October, November, December is when these repurchase requests started to show up. And that's where the control broke down, where it wasn't being reported.

So -- I mean the percentage of loans being put back to you is 30% of this product. I mean 46--

If you do that -- yeah, if you do that arithmetic, yeah, it'd be about--

And how do you feel confident in the underwriting of that product?

Well, the only thing that we can tell you is that the vast majority of these loans were -- were underwritten to investor specifications, according to commitments that were made to investors, they were underwritten by Columbia's people. They were underwritten by a independent third party that we had retained to do quality control loan review. So they were underwritten by a completely independent third party, and then, of course, they were also subject to investor due diligence.

Now, as I said in the comments, given the conditions that ensued, it was probably too aggressive a product for us to issue. It's very easy in the mortgage banking arena to say we originate these products, the products are sold, but when you see default rates get as high as they did, as quickly as they did, it's almost impossible to react quickly enough to stem the tide of it.

Okay.

I mean the controls that were there, and we've taken great pains over this relatively brief three-week period that we had to make sure that these controls were, in fact, rigorously followed.

I -- the first that comes to mind is that there might be some sort of fraud involved here. And, at this point in our investigation, there's absolutely no indication that there was any unlawful conduct or fraud involved. So I think that's a very big positive. Now, that's not saying that our investigation is complete here because, again, it's been a relatively short period that we've had to run through this, trying to get our arms around this problem.

Okay. Just one last one, I'll hop off, let somebody else come in here. But have you considered just selling Columbia, in its entirety, the whole thing, and what is the book value of that institution or that subsidiary now, on your books.

Clearly -- clearly we have. We went through that consideration last year, as you may recall. We discussed--

What became of that, last year?

--previous conference calls because of the volatility that we had experienced with Columbia's operations. And this is one more example of that kind of unwelcome volatility that this brings on the entire Company. So that will be under consideration, there'll be a whole host of things under consideration. With -- we have the analysis as to where we were last year and what the -- the net plusses and minuses were for Columbia at that time. That's obviously changed a little bit in the last couple of months, but it -- it would be premature to openly discuss that now.

As an example, our Board hasn't even met formally since this was uncovered. This was only uncovered right at the end of February and our March Board meeting is scheduled for this week. So, to begin a discussion about that today would clearly be beyond the scope of where we're prepared to go. But clearly it will be under consideration.

Well, what became of the -- the potential of selling it last year?

We determined at that time that on the -- on the net plusses and minuses that it was more accretive to us than it was having been spun off. Whether or not that's the right decision, Monday morning always tells the answer to that, but if you ask me if I had wished we had taken more aggressive action last year, I probably would have said, at this point in time, yeah.

Right. Okay, thank you very much.

Thanks, Matt.

Our next question is coming from Ross Haberman with Haberman Funds. Please proceed with your question.

Good morning, gentlemen, how are you. Could you tell us what the level of Alt-A origination was as a percentage of, I guess, the total which Columbia did? And is that -- are you concerned that that's an issue or have you seen any [callbacks] on that category?

Ross, it's Vito here. It was about 25% and--

25 -- I'm sorry, 25% of the 728?

Yes.

Okay.

And, as it stands now, we've had little to none of that come back or appear in the mix.

That's a real concern, Ross. And your concern is, I think, well founded. It's been -- It's been bandied about in the media and it's something that we've spend quite a bit of time looking at, because you wonder if this is the tip of an emerging iceberg, clearly. And there's been a lot of speculation that that might be the case and that it might affect Alt-A and it might affect mortgage lending, in general.

We see absolutely no indication of that yet. Our Alt-A product has been sound. It's been sold, and it's obviously not as aggressive a product. And the repurchase -- the incidence of repurchase demands has been virtually nonexistent. I mean certainly nothing that we'd be concerned about establishing any reserve for, which has been the case with Columbia's operations up until the fourth quarter. The fourth quarter is when this problem really emerged.

And a question for Mike. Of the $300 million you said are sub-prime mortgages which were originated what was sort of, I guess, the average gain on sale on those $300 million of sub-primes? Do you have a range?

Well, we have primarily brokered loans, Ross. So they're not -- the gain on sales, Columbia, last year, was about a point and a half. And that's probably consistent with that.

Oh, so those weren't -- those didn't have bigger -- bigger margins, you might say?

Well, they're brokered, so you've got to pay -- I mean the broker -- they're not originated by us. They're brokered, so--

Right, so a point and a half would be -- is a good guess?

Right.

Okay. Okay. And just one final question. Did you -- did you suspend your buyback with all this news and what are your thoughts about it now that it's all out and disclosed.

Yeah, well, clearly we had to suspend any buyback activity and we went into a dark period, as far as that's concerned. That would normally be suspended anyway pending the first quarter earnings release. So I think it's going to be difficult to resume that at any point in time.

We've only just revised the earnings release that we had out there for the market in January. And until that revision was going to be effective, obviously, there's no way we could be in the market, buying back our own shares.

Not to say that that wouldn't have been attractive from our standpoint, given the way the share price has suffered with -- with this, but there's obviously been no support whatsoever.

And we'll be in a dark period now, really, right through the first quarter earnings release.

And that's going to be -- you're saying that's coming up, what, mid-April?

Right now I guess we would be scheduled to release earnings, and that's still on schedule, as far as we're concerned, on April 19th.

Okay. Thanks, guys. The best of luck.

Okay, Ross.

Our next question is coming from Frank Schiraldi with Sandler O'Neill. Please proceed with your question.

Good morning, guys.

Hi, Frank.

Hey, I'm just wondering on the 100% LTV product, so you talk about in the release what was originated in 2006, was any of that originated in 2007, or it was stopped by then.

Yeah, no, we didn't stop the origination of that product until we were well into this in March, so that -- yeah, there will be, as I said earlier, there will be a tail here of originations in '07 that repurchase demands could be presented on that product, if it continues, probably -- well, well into the second quarter, perhaps into the third quarter given the delay that I was explaining to Matt's question, earlier.

So that, for example, if a loan closed say during the month of February, prior to any of this being discovered, by the time that gets sold, it could've not been sold maybe until today or into the first week of April, May, and then there could be an administrative delay where a repurchase demand isn't even presented until well into the second quarter.

So we'll -- but this provision applies only to the fourth quarter of '06. There is a provision in there for a tail of production that was originated in '06, but the -- any provision for the first quarter's activities will be a first quarter event and that would be disclosed in our April earnings release.

Okay. So, in April, when you take a reserve there that'll -- since you stopped in March, that should -- there shouldn't be any further reserve in the second quarter that'll handle any tail--?

Shouldn't be the second quarter, unless we see an unkindly issue in terms of how these repurchase demands are presented. I wouldn't want to speak to the second quarter until we actually get there. If we were discussing this into the second quarter I'd be able to give you a little better idea, but obviously we'd like to get this behind us as thoroughly as possible and as quickly as possible, but I think that the time lines that, again I was discussing earlier with Matt may make that completely untenable. So I wouldn't rule out the possibility of an additional reserve in the second quarter.

Okay, and you don't have any expectations yet of what the reserve will be in the first quarter?

No, because -- I mean we have an idea of what our production is, but we have to see what the incidence of repurchase requests has been, vis-à-vis what it was in the fourth quarter.

I mean, again, the fourth quarter was infinitely larger than the third quarter, when they were -- I mean they were absolutely negligible, I think there was one loan presented in the entire third quarter of the year.

The fourth quarter clearly spiked. If the first quarter comes down off those levels, the reserve will calculated differently. This -- setting reserves for these repurchases or setting reserves, as you know, for A-triple L is a very subjective call and it's based upon what's currently happening in the market.

So we'll have to wait until we get through the quarter, assess what's occurred in terms of what types of repurchase demands were presented in the first quarter on the production and then establish the reserve accordingly. It's going to be very difficult to get our arms around at this point.

Okay, and have you seen anything come back for--

Mike just wanted add something to that.

Just to clarify, on the -- when we established the reserve at year end it's based upon all [reserves] originated through December 31st. So we estimated a reserve for loans October, November, December. So it's really when the loan is originated, not when the loan is put -- the repurchase request is made. So we made an estimate for put-back for the fourth quarter. So the first quarter -- these loans that John said originated, we'll take -- at March 31st we'll take an estimate of the reserve that needs to be allocated for the [reserves] originated in the first quarter.

And then in the second quarter the only thing that would change is, since we're not making these loans anymore, would be if our estimates were more -- were too conservative or not conservative enough, so you might have to true up your reserves in the second quarter, but you wouldn't expect to have -- you wouldn't have a reserve for loans originated in the second quarter, you'd just have kind of a true up.

All right. Okay. And so now that you've stopped all sub-prime origination and it was the -- really the 100% LTV stuff that was the problem, do you foresee possibly going back to that origination.

Again, I wouldn't foreclose that opportunity -- a bad word, foreclose -- I wouldn't absolutely deny that opportunity, but I don't think that that's under consideration right now. For now that operation is shut down, there's going to have to be a complete reassessment.

Most of this -- this represents wholesale production also. I mean Columbia had been involved in the retail origination of sub-prime credits back into the early '90s and the experience there was quite good. This was the wholesale channel that was opened up in the second quarter of last year.

So the initial reaction by some of our people was well, let's not shut down the whole sub-prime lending activity, because obviously we've successfully -- or Columbia's successfully originated retail sub-prime for some time and this was really limited to the wholesale channel.

We took a little firmer action than that to give the market some consolation that we were shutting this down entirely. That's not to say that it might not be reopened. The options that we're going to have with Columbia are going to be many and varied. And, as I said, that's under the intense study as we speak. But it's -- it would be too early to comment on that one way or the other without precluding us going in a different direction. So I wouldn't want to mislead you.

Okay, I don't know if Mike would be able to speak to just the percentage of earnings, or the percentage of Columbia's income that is tied to the sub-prime origination? Is it 40% or is it much higher because it's a bigger margin.

No, no -- the fact that they're wholesale brokered loans, I wouldn't say that they were -- they were a bigger margin. I mean we have conventional loans that are -- that are originated through our own network of loan officers where we're not paying a broker, so I don't think there's substantial difference between that.

So -- I mean Columbia made $950,000 last year, so it wasn't out of the -- before this adjustment it was 950 out of $18 million, so it wasn't a significant part of the earnings even before this. Clearly it's a loss now, but it's not a significant part of our earnings before this adjustment.

Okay. And sorry to ask so many questions, but just one more, if I could. I don't know--

We suspected that there would be a lot of questions, don't be apologetic, Frank.

Just wondering it -- something I think was asked earlier -- if you were able to give sort of an estimate for what book value is on Columbia? I don't know if that's possible.

Book value is negative now, it's negative about $800, $900,000.

Okay. Okay. Great. Okay. Thank you very much.

Okay, Frank.

The next question is coming from Al Savastano with Janney, Montgomery, Scott. Please proceed with your question.

Good morning, guys.

Hi, Al.

Could you just run through the mechanics of, for these early payment defaults do you actually get the loan back and does that get reported as a non-performing asset?

Yes, that will be the case. As the repurchases are, in fact, executed, the loan will come back onto portfolio and then, of course, we'll have a number of different options with regard to how we either manage or dispose of that asset. But it will be reported as a non-performing, so I think you can expect to see a spike in that in the -- in the first quarter's results.

As of today -- oh, I'm sorry, I can't quote as of today -- as of March 21st there was $11.2 million repurchased through March 21st, 37 loans. So that, again, our estimate of the potential of $46 or $47 million, you can see that not a lot has been executed as far as the repurchase activity is concerned.

How we take this loan back, though, it's written down to fair market value on the day we take back. So if the loan's $100,000 when we take it back we may put it down to $70,000 when we take it back.

So even though the $70,000 is reported as a non-performing loan, but there's no need at that point to take additional loan losses there, it's already written down through this repurchase reserve.

Got you. Got you. Okay. So, I'm assuming then when you looked at -- when you tried to set up the reserve you looked at some kind of base in the secondary market to kind of justify where the fair value was.

Well, yeah, that's one thing that we looked at. And that's one option that we would have is to resell this loan originally. But, again, we went through pretty much on a loan-by-loan basis, looked at the exposure, we verified the quality of the underwriting, we did desk reviews of appraisals, we reordered credit reports, we looked at credit score analyses. And so we went through this on a loan-by-loan basis to make sure that we weren't going to underestimate this reserve.

Clearly we applied about as much rigor as I think we could have in the last two to three week period. So we feel confident that we've got our arms around it, but that's not necessarily the entire case. And we still -- while we say that there is the potential for $46 or $47 million, you can see very little of that has actually been executed yet.

Okay. I just lost my other question. Let me go back to the revenue side for a second. Are you saying that the sub-prime originations in -- in '06 and the sales -- the resulting sales have resulted in about $4.5 million in revenue? Is that what I gathered from the other prior questions?

I don't want to -- I can't be that specific, Al. Columbia had $10.5 million in gain on sale revenue last year, so it's -- at 40% it would be about $4.5 million given all other things being equal.

Okay, so how can you either replace that or cut costs in '07?

That's an excellent question and that's one that's going to have to be determined, Al. Clearly there's going to be -- it's going to be dependent on what we choose to do with Columbia. If Columbia is spun off, closed down, sold, run as it is right now, that question could be answered four or five different ways today. And since that hasn't been determined yet, I think it would be premature for us to take a stab at it. That's something that's going to be determined and it'll be determined relatively quickly, obviously. Because to shut down this sub-prime channel and have Columbia operate with the type of overhead that it presents right now is not a very palatable proposition.

Most of the -- I'm assuming most of the costs then at Columbia are fixed at this point.

No, I wouldn't say most of them. I mean, clearly, there's a lot of variable costs associated with production, but there is a large amount of fixed overhead. Mortgage banking is a very, very expense intensive operation. That's the reason the efficiency ratio suffers dramatically in terms of what we look at. I mean we can operate this community bank a lot more efficiently than we can the mortgage banking operation.

We're -- our analyses have always been -- and I'll throw numbers at you that will drive Mike crazy -- but we're spending probably north of $0.75 to earn $1 at Columbia, and our traditional ratios down at the community bank would be well below $0.60 to earn $1. So, on average, that brings our efficiency ratio where it is, but it's a much more expensive operation with a lot of fixed overhead, also.

Okay, so then -- kind of what I'm hearing is if you decide to keep Columbia, to make up the loss -- to make up the lost earnings, so to speak, probably going to be more a volume than an expense difference. In -- in more loan volume rather than drastically cutting expenses.

Well, if that's a hypothetical question I'll give you a hypothetical answer and say that's probably right, but it's strictly -- it's assuming too much at this point.

Very good. Thank you.

Our next question's coming from [Eric Boughton] with [Deschutes] Investment Advisors. Please proceed with your question.

Hi, Mike. I sent you an e-mail yesterday or Friday about the press release. And so I'm just going to ask some of the questions that I asked then and haven't been answered, I don't think.

First of all, could you comment on your liquidity situation? And, second, I think more importantly, could you comment on -- it seems like you experienced significant fraud from these Columbia -- certain Columbia employees. And since you're not going to be originating this particular sub-prime product any more, it would seem appropriate to immediately fire anyone involved in the sub-prime product, the 100%. And then that way you could figure out what's on their computers and stuff. Because it would seem that they -- they were out of authority there, they went and negotiated with things with buyers, expanded the default period, et cetera. And--

Eric, if I could address that first, then I'll let Mike get back to your liquidity question. Again, this is John Garbarino.

We discovered no fraud, as I said in the opening statement. What we discovered was people that -- that obviously violated the internal controls and did not timely communicate the information that needed to be communicated for us to react as quickly as we would have otherwise against what was happening.

The -- the knee-jerk reaction, is always "off with their heads," especially from the CEO's chair. I mean that's very easy. But as we all know that's the wrong reaction. I have to disagree with you.

I think that we've conducted a very effective investigation, computer technology being what it is, any time, anything you put -- you put anything on that hard drive, it's there forever. We've all seen ample evidence of that, so we're not concerned about records being destroyed, we feel we have our arms around that. We've discovered no unlawful activity, no evidence of fraud to this point.

And we have taken action against certain Columbia officers but the investigation continues and, again, we've been at this now for just, basically, three weeks. I think that if we were sitting here this morning telling you that we had discovered fraud, there were falsified appraisals, there were straw man transfers, any number of things that we've seen in other areas of the country, the nature of this call would take a very different tack, but right now we're convinced that there was no unlawful conduct.

I'll let Mike address the liquidity issue that you had.

Yeah, liquidity is not a concern right now. The Columbia mortgage banking operations are funded by the bank. The bank has adequate -- clearly adequate liquidity. The capital ratios at the bank remain well capitalized after this adjustment, and the bank has lines of credit with the home loan bank. It's got $100 million line of credit plus another -- actually $200 million with the home loan bank and other lines of credit with other banks. It's got significant borrowing capacity based upon the -- the loans held at the bank which are available for pledging. So there's no liquidity issue and there's no capital issues as well.

You're $1.7 billion of loans have not been pledged?

Yes. Not all of them, though, clearly not all of them. They do get pledged to home loan bank for -- to pledge against borrowings. They absolutely, but only a small portion of those loans have been actually pledged.

Because, for example, take New Century or something, they had $2 billion of warehouse lines, and they just were pulled instantly, so my guess is that, if -- when some of your lenders are going to read this press release and realize that you've got wildcat employees, perhaps not fraudulent, but certainly wildcat employees going and renegotiating terms of a loan without -- in a way that's clearly not beneficial to Ocean and beneficial to them personally so they don't have to "fess up," they're going to be pulling the loan. So -- I mean it just -- why -- why would you not have liquidity problems? Do you have cash?

Oh, yeah.

How much cash do you have there? Let me just check this out here; $32 million. I mean, if you're getting say -- you originated $300 million of loans, of sub-prime loans in 2006, right? You're getting repurchase demands that could run at -- did I hear a 30 or 40% number or is that just for the 100% LTV product?

If you -- quick arithmetic, the 30% number for the 100% LTV product was something that was talked about earlier, I think with Matt Kelley's question. Yeah, that could -- could be as high as that. We're not saying that it will be as high as that.

--assume that to be prudent, don't you?

Pardon?

You have to assume that to be prudent. I mean it would seem kind of silly to say, "Well, we've received 30% rates on loans we've originated up 'til the end of '06, but we won't receive those rates in the future, especially in today's climate.

That assumption is exactly what the reserve is based on. But I don't want to confuse the assumption with reality. I'm not -- I'm not telling you I'm 100% certain that we're going get repurchase requests of $46 of $47 million, or 30% of that production. It could be that high, and that assumption is what this reserve is based on.

If you do, you're out of cash, aren't you?

No, no -- well, yes, we're out of cash. I mean you're talking about our year-end cash on hand number?

Yeah, and you've had to pay salaries and bonuses and everything. I mean--

I mean that cash on hand number changes dramatically for a financial institution. What Mike was referring to is what our borrowing capacity is based upon assets that have not been pledged and based upon home loan bank lines, and that liquidity analysis is gone through in great rigor on a monthly basis and we have no problems with our liquidity. It simply is in our best operating interest to run the Company as lean as possible when it comes to cash on hand.

There's -- there's nothing to be had by keeping huge amounts of cash on our balance sheet.

Unless something like this happens.

Well, yeah, but that liquidity is adequately covered by -- by home loan bank advances and other borrowing opportunities that we would have.

It's -- I know the loan sales, I mean there's an ongoing operation here, everything didn't stop as of December 31st. There's cash being generated every day. That's the nature of the financial institution.

All right.

I -- really, I mean I understand that you're somewhat concerned about that and I can appreciate that concern, and I'm trying -- I don't want to belittle it, but I think that what I can tell you is that, based upon our liquidity analysis, there's more than enough cash on hand and easily available with established lines.

New Century is in an entirely different situation. I think that to make the comparison between New Century and Columbia is just not valid. Here you're dealing about an entirely different operation and New Century had, with these tremendous warehouse line that were, in fact, called, and virtually drove them into a bankruptcy filing.

Yeah, I mean, just in the Columbia subsidiary it seems like -- I mean you're talking about having negative book value now. I mean, for example, New Century, if they were to get funding, would have positive book value, as far as I can tell, so it's just an example, but in terms of liquidity, Columbia's liquidity is guaranteed by Ocean's, and Ocean's is the stock.

So -- I mean, it's a question of magnitude, right? If enough of these things -- if you have to buy back enough of these things and you can't sell them for -- for anything but $0.40 or $0.50 on the dollar then, which is possible. But anyway, I -- I will assume that you know what you're doing and that you're dealing with this. I just -- I would like to register my concern.

I realize that may also be a leap of faith, given the way things have unfolded over the last three weeks, but I appreciate your -- your willingness to assume that. And I think that there are a lot of options that are available to us with regard to the disposition of these assets, not the least of which is what you said, it'd be a quick fire sale, but I'm not sure that's the best course of action, and I think that, given the fact that banks manage problem assets for a living, I think that we're obviously going to try to extract as much value as possible out of these assets.

Yep. Thanks.

Okay, Eric.

We have a follow-up question coming from Matthew Kelley from Sterne Agee. Please proceed with your question.

Yeah, if you look at the $148 million in production on the 100% financing product, I mean would it be fair to assume that that same kind of a monthly run rate of $16 to $18 million of that type of production continued, or -- help us quantify what the tail will be is the most important question here.

Yeah, that's a good question, Matt, and I've got the numbers here for you. Just hold here while I shuffle some papers here. Mike, you want to go through it.

Total closings for the first quarter, okay, in this product, were $37.3 million. $27.9 -- or figure $28 million of that was wholesale production. And there is a tail pipeline that has not, in fact, been closed yet as of March 23rd, but that's relatively nominal and we're still -- we're still trying to determine how much of that is committed and how much of that is not committed but just is in the beginning stages of a pipeline.

So the 37.3 is what, again? What is that total number?

Well below -- well below what we had. The fourth quarter production--

No, but what is in that 37.3?

The 37.3 is $27.9 million in wholesale production--

Okay, prime or non-conforming or conforming--

This is all sub-prime.

Okay. All right.

This is only sub-prime that we're talking about. So the sub-prime production is 37.3, $28 million figure -- it's 27.9 -- is wholesale, $3.9 million retail, and there's an additional $5.4 million of loans that were purchased from First Financial, which is a correspondent.

But it was -- the sub-prime closings through March 23rd were 37.3. Conversely, the sub-prime closing for the fourth quarter were over $75 million. So, it's off about 50% in the first quarter of the year. Just to give you some idea of the--

Okay.

All right? So October, November, December was $75.4 million and through March 23rd it's $37.3 million.

And what was Q3, just to help us continue to break this down?

We don't have that number.

I think you may have asked a question we don't have the number for, but it -- my sense is that it would have been approximating Q4, because the production was heavy in the third -- it tailed off, in and of itself, without any action being taken here in the first quarter of the year. And then, of course, having shut it down now, it's -- it'll be stopping absent any commitments that we're already legally obligated to fund.

So, I mean, technically there's still a liability or an exposure to the $75 million that closed in the fourth quarter?

Yes, oh yes. And our reserve includes a tail for that production, because, as we talked about earlier, a loan that closed at Thanksgiving may not be put back to us until April or May.

It's included in the reserve, though.

But it's -- we have made a provision in the reserve.

Okay. All right.

But that's the difficult part of the tails here, and about the timeliness. That's further to your question that you were right on top of earlier when you asked that question as to how the time line works.

So all loans -- all loans originated prior to December 31st, we considered that they got exposure, and that's included in the $9.6 million reserve. For the loans that originated in January, February, we obviously couldn't reserve for those at December 31st, so they'll be -- they'll be -- there's an exposure there to the first quarter.

Okay.

And we -- just to give you some example, again, of tails and so forth and so on. I won't tell you who the investor was, but in terms KPMG looking at our internal control and measuring our effectiveness of internal control and our assessment of it, when through a pretty rigorous independent confirmation process with investors. And one particular investor that we looked at was surveyed and they had 19 loans that were originated during -- that were in the package that they had purchased through the -- through the end of the year. As you would expect, two of those 19 came back to us, but none of those loans were originated prior to October. The two loans that came back were both originated in November. So there were loans that were originated in May, June, July, August, September, none of those loans were defaulted. It was only the loans that were originated in November.

Okay.

And that's pretty consistent with the types of results that we have seen.

Matt, the second quarter was about -- the third quarter was $110 million. That's compared to the $75 million in the fourth quarter, so -- and that's -- that's the seasonality of the -- second and third quarter are your biggest -- typically your biggest production volume, and then your fourth and first quarters are a little down because of seasonality.

But it was $110 million in the third quarter and then down to $75 million in the fourth quarter.

Okay, and then on the 37.3 in the -- through March 23rd there, would it be fair to use the same 30% haircut on that?

I think that would be a little too aggressive, but we're still determining what that -- how close that haircut has to be. But I think that 30%--

30% kind of first payment default, I should say.

I think that -- based upon what we're seeing right now, I think that'd be too aggressive, because, don't forget, we did strengthen the underwriting during the course of the year. I, again, alluded to that in the statement and that's a relatively easy way to look at it, but I think that we want to apply a little more rigor when we actually establish that reserve.

Okay. And, Mike, just to kind of quantify something, I mean $75 million in the fourth quarter and $110 in the third quarter, that's $185 million. So it's -- it's a combination of both the 100% product, because you only did 148 of that during the year, and then some other non-conforming type product as well, I assume.

On the sub-prime [inaudible].

Right. Okay.

Right, I mean the 299 was sub-prime product, the 148 was a component of that.

Right. Okay. John, just a bigger picture question here. You start looking at long-term performance metrics, and over the last five years now the total return on OCFC is 18% and the Russell 3,000 is 43%, the NASDAQ Bank Index is 60%, and this has been a painful experience. Just talk about kind of the longer term strategy here of how you kind of get the ship moving in the right direction and you stay independent versus considering other alternatives.

Yeah, Matthew, you're dead on, obviously. We've had a number of stumbles here in the last couple of years that we -- that were kind of uncharacteristic for us and it's a very grave concern.

We started this year, obviously, optimistic that we began to turn things around, that some of what we had seen was really victimized by the current operating -- economic operating environment, but that we still had initiatives with regard to our non-interest income that were carrying us through. We still have a lot of very positive things happening inside the Company.

Clearly this mortgage banking sub-prime snafu is a step backward, and a step in the wrong direction. But, again, at this point in time our main focus is to make sure that we adequately quantify this, get it behind us, and begin to execute on the business plan that we've set forth going forward.

There's no denying the statistics that you've raised. It's not something that we're particularly proud of, but it's something that I think that we're going to work through the same way as you work through any business circumstance that might arise.

Okay, thanks. And then if just if I can get another clarification on -- on your buyback potential. I know that you're out of the market now, kind of a black-out period, but your appetite and capacity. Do you need to do another trust preferred to have the cash on hand to repurchase the shares and do you view this as a great opportunity in your stock, here at $19.40.

Yeah, we wish -- we wish we could be in the market today, clearly, I think. We -- we have some cash -- to Mr. Boughton's question earlier -- we have some cash available. I know the source of liquidity is some unused trust preferred capacity that we have. As you know, that's something that's relatively easy to draw down, on relatively short notice.

We suspect that we will be -- we certainly have ample authorization from our Board, in terms of executing buyback -- but again, coming into the dark period here, we don't expect to be back in the market until after the first quarter earnings release. But we'll have the wherewithal and we'll see where we're trading and do the analysis following the first quarter earnings release.

Thank you.

Okay, Matt.

Our next question is coming from Frank Schiraldi with Sandler, O'Neill.

Hey, just one more -- or two more questions maybe on -- just wanted to make sure I understood on the production -- well, the production in the first quarter, the wholesale production, you can assume that -- maybe assume about half of that is 100% LTV?

In the first quarter of '07?

Yeah. When you talk about $28 million in wholesale, or the wholesale channel, so that's not all 100% LTV, right? So you could maybe assume half of it is, like half was -- half of sub-prime origination in '06 was--?

Well, I -- the numbers I'm looking at, Frank, I don't know if that's a tough assumption to make, because, as I said, of the $37 million almost 28 was wholesale. And our experience was that this wholesale product was the 80/20 product. So I don't have the actual number for you, sliced and diced that way, but I would expect it would be more than -- more than what you just said. You said half?

Yeah.

I think it would be more than that.

Okay. Okay, and--

I wouldn't want to speculate. If you'd like we can get back to you with that number.

Yeah, that'd be great.

Okay.

And then just -- the last question was about the -- when you talk in the release, Friday's release, about certain Columbia officers renegotiating terms of some of the loans seemingly to open you guys up to longer default periods or longer repurchase periods. So is it really -- I mean is that -- how prevalent was that, I guess? And have you really -- are you really only open to first payment default for most of these?

Yeah, Vito will address that for you, Frank.

Hey, Frank. That bucket was really loans that were cured and put back with the investors. And the investors wanted some assurances that it would stay cured. So the officers negotiated an additional six months, in some cases, relative to what they called -- what they have now called the "watch list." So that's a contained amount, we know what it is, we know that they gave back approximately an additional six months to those loans, which have been cured, and are being watched internally by us, as well, of course, the investors.

Frank, when our release talks about the fact that they exceeded their authority, they did, in the sense that this was not to be done without the knowledge of the most senior officers at Columbia. And they took it upon themselves. But it -- we're not ready to ditch that as a bad decision because a lot of these watch list loans we viewed as administrative defaults, technical defaults. And, again, back to that old time line, when you're transferring servicing, if the coupon book doesn't get delivered in a timely manner, despite the fact that you're dealing with a sub-prime borrower and a payment is missed, if that thing is immediately cured, I think, and you can make the investor comfortable that this is -- this is not a chronic issue, it might be difficult to quarrel with the decision that was made.

When we say it was made outside the delegated authority that they had at the time, that's true and that's accurate and that was a violation of our control. But it's difficult to quarrel with the decision. I think that I can probably safely say that if the powers to be, if it was on their desk, that the same decision might have been made.

However, Frank, it would have alerted senior management here, I hope, a lot shorter time line that there was a problem. We could have brought more resources to bear and be in better control of the situation.

Yeah, that's the whole problem is the timely communication of this information that really kind of caught us by surprise. It wasn't that they were off the reservation, I heard them referred to as "cowboys" earlier. I'm not sure that that was entirely the case, but there was clearly a violation of delegated authority and controls that had been established to alert -- with what we saw happening in the rest of the industry -- I mean, we were aware of what was going on in the sub-prime industry. We were aware we had some sub-prime exposure, and we were not aware that that was causing us any sleepless nights, because there was no indication of that whatsoever.

The sleepless nights began on February 28th.

Okay. All right, thank you.

Okay, Frank.

Our last question's coming from Al Savastano with Janney, Montgomery, Scott. Please proceed with your question.

Hi, guys. Just two follow-up questions. How long do you expect these loans to remain on your books?

I think most of them are 30-year terms, Al.

No, I think, Al what we have -- if I might, John -- what we have is we have an asset resolution committee in formation. Clearly we're going to bring the best resources to bear, both from the bank and Columbia, some top talented people from the bank have been identified and migrated to this project and will remain with this project until completion. So we've got a lot of silver-templed individuals working this problem on a go forward basis.

As well as having a repurchase committee in place working with the CHL people on any repurchases that are going to take place, now going forward. So I think we have put in place ample resources and guidelines to ensure that the communications challenge is as short as possible and that we get the right level of management leadership making the decisions on a go forward basis, to minimize any risk to OceanFirst.

Yeah, but it would be premature, Al, at this point to really decide that all of it or none of it is going be handled in any one given way. As of this point, again, we've only taken back through March 21st, a little over $11 million and we'll assess that on an individual basis to determine how we can extract the maximum amount of value out of this.

I think a knee-jerk reaction in any other direction would be the wrong reaction at this point.

Okay. So basically there's two ways to resolve this, it's either foreclose and try to sell the property, or just the sell the loans outright. Is that correct?

Well, yeah. And they may be curable delinquencies. Again, if you're talking about -- clearly I don't think we're going to be talking about as heavy a default rate. These loans are technically not in default, a lot of them have been cured already.

And, Al, if I might, the way I look at this process is three-fold. First of all you have an adjudication of the claim. Are we being presented with a valid claim? Answer yes or no. If it's a valid claim, okay, then we have to go about repurchasing that. Once we repurchase that then we have to come to a decision as to whether or not we can cure it and, once again, return it to the market or whether or not we have to portfolio it? If we have to portfolio it then there's another set of decision makers that go in place. If it is untimely in terms of payment, how do we collect on that payment? And if we can't collect on that payment then the ultimate decision is made is well, how do we get out of it as quickly as possible?

So there's steps that need to be taken on each and every turn relative to the things that the bank needs to do to get ourselves out of the situation.

I mean the actual delinquency experience, as most of you know, at this point we didn't address it directly, but clearly, for the Mid-Atlantic region in the sub-prime area is in the 15% range for the fourth quarter -- or at year-end. That's MDA data that we're quoting.

Our experience parallels that. And -- but that's not saying there's a 15% default to foreclosure rate on this product, either. The -- sub-prime delinquencies have been higher than that and they've been lower than that. And some of these were remediated and some are not, but I don't think we're going to anticipate that there's going to be 15% of these going to foreclosure.

And, again, absent any indication of fraud or unlawful activity, I think we can make that with a little more confidence than if we were talking about a whole different set of circumstances.

Okay, so I'm still a little bit confused. When the loans come over are they going to be on an accrual or non-accrual status?

Either one. There's actually some loans that are on accrual status. That are -- actually have been restored to -- that are making -- that are current. But, obviously the majority of them -- or the overwhelming majority are non-accrual.

Okay.

Yeah, but they may -- this goes to the earlier question with regard to the -- the officers that, in their wisdom, decided to extend the put-back period to six months to see if an administrative late payment, because you're not talking about a default, you're talking about a late payment, could, in fact, be remediated.

So some of those -- is going to be the case. And that's all a part of that $46 million number we talked to you about.

Okay. And then a nice easy question. When is your 10-K going to be filed?

That's the easy one. Well, it's due on Friday, we hope to do it by -- on Thursday.

Al, the exact answer is our audit committee is meeting following this call. Our Board is meeting tomorrow, and we expect that it will be filed timely, by the end of the week.

Great, thank you very much.

Okay. Jackie, if there are no other questions can you tell us there's nothing else in the queue?

There are no further questions at this time. I'd like to hand it back over to you for any further comments.

Thank you. Thank you again, folks, for your comments. I think they're all on point. We appreciate that. Hopefully we've been able to give you some degree of confidence that, over the last two or three weeks, we've been able to get our -- as I said earlier -- our arms around this problem and begin to move past it.

We appreciate your interest in the shares and we hope to see you at our first quarter earnings conference call, which should occur, I guess, at this point, on April 20th.

Until then, thank you again for your interest.

This concludes today's conference. Thank you for your participation.