OceanFirst Financial Corp (OCFC) 2007 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the OceanFirst Financial Corp. second-quarter earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Jill Hewitt. Thank you. Ms. Hewitt, you may begin.

Good morning, Joe. Thank you. Thank you all for joining us this morning. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst and we will begin this morning's call with our forward-looking statement 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 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 and U.S. Treasury and 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 might be made to any forward-looking statements 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 host this morning, our President and Chief Executive Officer, John Garbarino; our Chief Operating Officer, Vito Nardelli; and our Chief Financial Officer, Mike Fitzpatrick. Thank you.

Thank you, Jill, and good morning to all that have been able to join with us this morning on our second-quarter 2007 earnings conference call. We appreciate your interest in our Company's performance and we are looking forward to reviewing the past quarter's operating results with you.

The last two previous conference calls we had conducted this year in March and April have unfortunately been dominated by a review of the operations of our mortgage banking subsidiary, Columbia Home Loans. We have spent a considerable amount of time discussing the events which had unfolded and caused us to devote the majority of our attention to investigating, identifying and providing for the losses associated with Columbia's renegade subprime lending operations.

I am pleased to report this morning that our resilient core banking operations have finally overcome the drag of Columbia and returned the Company to profitability during the past quarter as we successfully moved past the disastrous effect on our operations.

I can reiterate this morning that we have ceased all subprime lending at Columbia and are moving to discontinue all operations at their Valhalla, New York headquarters. The servicing and attendant lending operations from Columbia's two other offices are being incorporated into the core bank. Columbia as a separate subsidiary will cease to exist during the third quarter as the planned shutdown is completed.

All costs associated with this action have been reflected in our past quarter's operations with the exception of any additional expenses that may become associated with the unwinding of our lease on the Valhalla office. These additional potential costs cannot be quantified at this time but are not expected to be material to our operations.

I'm also pleased to report that the disposition of Columbia's subprime inventory and the loss reserve we established for repurchased claims and negotiated settlements with investors have performed as expected and we continue to feel comfortable that all such claims remain properly accounted for.

Recently OceanFirst's Board completed the evaluation of the independent forensic review we commissioned and has become reassured that the bank has taken all appropriate steps in its own investigation into the events at Columbia. The review failed to reveal any specific pattern of misconduct on the part of Columbia or bank employees other than the willful suppression of information and violation of controls at Columbia relative to the EPD repurchase claims we had previously disclosed.

We remain confident as we move beyond this unfortunate period for the Company and are focusing our attention on execution of our business plan in the continued challenging economic environment.

As is our custom on our quarterly earnings calls, I will be respectful of your time and avoiding a recitation of actual numbers from our press release. I will highlight areas that we believe merit your attention and then give you the opportunity to pose your questions to our management team which I'm sure you will have this morning.

Of course as the release notes, we have returned to profitable operations during the second quarter however meager, and recorded net income of $277,000 representing $0.02 per diluted share. I continue to think it might be helpful, however, to strip out the noise associated with Columbia's activities from the income statement and then review the underlying results at the core bank as we move forward without the mortgage bank subsidiary.

When we do this for the current quarter and six-month period, we reveal net operating income of $4.7 million and $8.3 million, that is $0.41 and $0.72 EPS respectively at the core bank. These amounts exclude the nonrecurring costs relating to the write-off of goodwill and employee severance which were recorded on the bank's income statement. There were other sundry professional fees absorbed by the bank but also related to Columbia not likely to recur in future periods.

Admittedly, this adjusted bottom line still represents a shortfall from the prior year periods but the netted out performance remains credible in our view under the circumstances.

Given the effect Columbia has had on the Company's operations in recent quarters, it is difficult to point to bright spots. Despite the margin compression continuing to adversely affect the bottom line, noninterest income grew 11.7% year-over-year. This gain was driven by higher reverse mortgage and checking account fees as well as by the steady growth in our trust and asset management business.

Asset quality at the bank also continued to be generally positive with charge-offs of only $68,000 for the quarter. Nonperforming assets decreased $7.5 million from the linked quarter due primarily to the sale of some of Columbia's nonperforming loans. Despite the effects of subprime repurchase and sale activity, core bank asset quality has held up well as the residential and commercial portfolio remains solid and well collateralized.

Our balance sheet growth has been severely curtailed by the overriding effect of Columbia's repurchases and sales accompanying the challenges imposed by the fierce competition in the current market. In this environment we do not view this lack of growth as necessarily unwelcome and we have utilized the opportunity to pay down our wholesale borrowings and reinforce our pricing discipline on both loans and deposits. We continue to believe strongly that this is not a time to lower standards in the pursuit of growth and promote a relaxation of price and/or loan terms.

We are content to shrink our balance sheet and bolster our capital position given the losses we have booked with Columbia in prior periods. We repurchased no shares during the quarter but still have ample existing Board authority and holding company liquidity available to us as we continue to evaluate the repurchase strategy for future periods.

As I realize we cannot possibly address all issues from our quarter in this brief summation, Mike, Vito and I would be pleased to respond to your questions. Joe?

(OPERATOR INSTRUCTIONS) Frank Schiraldi, Sandler O'Neill.

Good morning, guys. I'm just wondering when you look at nonperformers in the release it says included in nonperformers is $1.2 million in repurchased Columbia loans. But are there any other Columbia loans in there as far as stuff maybe you never sold and so immediate just portfolio?

Yes, there are Columbia -- yes, part of the loans that were inventoried that were never sold are included in that. So out of that we say in the press release we had net $4.9 million of subprime loans that are remaining on our books, many of those not all of them but many of those are nonperforming. So there are Columbia loans in there that haven't been sold.

The footnote applies only to the actual repurchase loans but there was inventory that has yet to be disposed of. We disposed of quite a bit of inventory in the second quarter but there is still some residual, Frank, that is hanging on at this point. But I think the footnote clarification was just related to the repurchased loans.

Right, footnote is just repurchased loans.

Okay, so that the $4.9 million that you are holding out, does that includes the $1.2 million of repurchased loans?

Yes, yes, that is in that number.

So there's an additional 3.7. And there is every indication that we're going to try and dispose of that too. That was the old scratch and dent inventory that you are talking about so it's a little more difficult to sell.

All right. I was just wondering because it looks like if you just look at this quarter's release and last quarter's release and subtract out from nonperformers, the repurchased loans, it looks like a linked quarter increase of $2.8 million in nonperformers but it's fair to say that is basically all Columbia loans, right?

Yes, if you look at commercial, it didn't change at all; really it is consistent. Consumer was consistent. It was really in the mortgage line and most of that was all Columbia.

Yes, again, it would be a 3.7 inventory.

Right. Okay and then the commercial real estate nonperformer, you guys talked about in the 10Q, $2.3 million in construction of townhouses. Is there any update on the status of that loan as far as I'm guessing it still in nonperforming and as far as any idea of what losses you think could be there?

Yes, we think that is extremely well collateralized as I've try to point that out in my might comment without going into a lot of detail. But there is no update except in terms of it being unwound. There's a dispute among partners in that event and so it's taking a little longer than we would otherwise like to see. But we feel very comfortable with the collateral position that we have there. And unfortunately there's no update as far as the resolution is concerned. But I've got to believe it's going to be sooner rather than later.

Okay. And then also in the queue, there's a special mention loan several credit facilities to a large real estate agency. I think it was over $4 million was the balance. Is there any update to the status on that loan or can you talk about that a little bit?

No, again, I think that was a special mention transaction that we had and it was a relationship that we took a look at. Obviously with the slowdown of the real estate market, the financial performance of that agency was not what it had been in prior years and that is still the case. But I think that we feel comfortable with that relationship. It is just a full disclosure that it's receiving attention. And as with any commercial loan if there is performance characteristics that are not up to snuff, there is no indication there is any default or anything associated with that. It is just a question of underperforming previous year's activities and it's a special mention watchlist asset.

Okay and then just one more question on credit quality. Is there any worrisome trends that you see in any other parts of the portfolio namely delinquencies in home equity that you've seen quarter to quarter?

No, in fact our home equity and our residential portfolio, the delinquencies have held up very well. We don't see those disturbing trends. We feel comfortable with the asset quality and in fact, we had a resolution of one of our commercial credits that we were hopeful were going to be resolved in the second quarter. It actually closed on July 2. So we can also say that at this point there's also been a resolution of one of the other commercial credits that is in there of some note. That was just a question of timing.

But there is really no adverse trends that we can report. This bouncing around of nonperforming is really much more associated with -- as I said in the opening statement, the repurchases and sales of Columbia -- and there's big, huge movements there. But other than that, we think that our loan portfolio is performing pretty much as expected and in line with what we're seeing in other areas in the industry.

Okay, so that commercial relationship you just mentioned that cleaned up as of July 2, that was something that was in nonperformers for the quarter?

Oh yes. Yes, yes, that was something that was resolved.

Okay. And then just looking at the average balance sheet, I'm just looking at yields on loans in the quarter. Quarter-over-quarter last quarter it was 6.15%; this quarter 5.98%. What drove that specifically?

I think part of it, Frank, is the non-accrual status of the Columbia portfolio. So we repurchased loans from Columbia in February and March in the first quarter. Those were on nonaccrual and then there were loans that were held in inventory that went on to nonaccrual and then we sold the bulk of those but that was on June 15. So it was at the end of the quarter. So you have a large block of nonaccrual mortgage loans that were held for largely the whole quarter and that drove down that yield. We think that is probably artificially low. I think that will bounce back a little bit now that those loans are sold we think that will bounce back a little bit the next quarter.

Okay, got you. So that's what drove it down in the second quarter was having those repurchased loans on nonaccrual?

Right.

Okay and then just one final question, if I could. As far as just trying to model out forward, is there any sort of guidance you can give or number you can give on a good run rate going forward for expenses? Sort of how much noninterest expense is -- I guess I could back into it but how much noninterest expense is at Columbia? About?

I think Mike has got that detail.

Well, we're trying -- we're unwinding it. We just had a pretty significant headcount reduction on July 3 and we're not taking any more applications and we're unwinding it. So I -- whatever our rate was in the second quarter will be much less in the third quarter. So, it's hard to say what that run rate could be.

While Mike can totally remove Columbia out of the expense side of the income statement, there were certain functions that were being performed at Columbia that are going to have to be incorporated back in our operations again related to some servicing operations, investor reporting. That was all kind of a shared activity that was in Columbia's expense line So that has got to be incorporated back into the core bank.

So while we have a separate cost structure that we could simply say Columbia cost X amount of dollars, part of that would have to be absorbed in the bank. I think that is what we are wrestling with now.

Okay. But did I hear you correctly before, John, when you talked about -- when you guys put out in May, you put out an 8Q with basically a couple of line items of charges, employee severance and lease cancellations. That is basically -- except for the one lease you mentioned in the beginning at this call, those have run through the system?

Yes. The only potential we have is the lease on the Valhalla headquarters which until we vacate obviously, we're talking about a sublet or somehow trying to mitigate the expense associated with that lease.

The severance costs have been recorded in the second quarter so we don't expect any further severance related costs at Columbia.

Okay, so was it just slightly higher than you guys were expecting or am I talking before tax and after-tax numbers?

What, the severance?

Yes.

No, we said in our 8-K, we said it would be 400,000 and that's what it was, 400,000.

Okay, I thought it was 700 in the quarter. Am I wrong about that?

It was 300,000 related to the bank.

Right.

Which was also in an 8-K filing. It was 400,000 at Columbia which we said -- was where we expected. And there was another 374,000 recorded at the bank level for the termination of a contract.

Okay, so that is totally separate from Columbia?

It was recorded on the bank books.

Got you. Okay, thank you.

Julienne Cassarino, Prospector.net.

Hi, or Prospector Partners.

We recognize you, Julienne. Good morning.

As opposed to an online Internet company. I wanted to ask about the nonperformers. Of the $11.9 million, how much is the bank only, non-Columbia?

How much is non-Columbia?

Of the $11.9 -- I believe it would be about -- the Columbia is I believe 4.9 of that. There is 3.7 in inventory and 1.2 in repurchased. So I think it is -- unless I'm wrong, Mike, it would be --

Well, I've got Columbia right here. Let's see, $5.2 million in Columbia, so it is $5.3 million altogether at Columbia.

So $11.9 million minus $5.3 million would be the bank only NPAs?

Right.

-- .6 million. Do you know what that -- the bank only NPAs were in the prior quarter?

The prior quarter? I don't have that detail for the prior quarter. Most of the increase for this quarter was in the one to four family line and it was all related to Columbia. There was virtually no increase in the bank.

The total nonperforming, just look at the last quarter release, was 18.9 and the footnote, the same footnote reflected $10.3 in repurchased. I don't think what we have is how much inventory was nonperforming at that point. But it would have been something along the same lines. There was no -- if you net out core bank to core bank quarter to quarter, the nonperformers were really very stable.

Okay --

Which I think is what you're trying to get to.

Yes. And also what a bank only nonperforming ratio -- sequentially the level of nonperformers didn't change?

Yes.

And the important thing in the higher risk areas, commercial real estate and commercial loans, commercial real estate was virtually identical quarter to quarter and commercial was down about 80,000. So in our commercial portfolio, nonperformers are down 80,000 quarter to quarter.

Okay. And the charge-offs are all related to the bank only?

The charge-offs that I mentioned, 68,000?

Yes.

Yes.

So it's all bank only?

Yes.

Okay. And same with the prior quarter?

That was only 1000 --

$1000 I think.

Oh, that is right and that was just bank only --

Yes.

-- okay. And credit outside of Columbia looks fine, looks --?

Yes, I mean that's what Frank's question was and I think it is on point and it is tough to get through some of the noise here because the numbers jump around so much. But we haven't seen any trends and we feel comfortable with the condition of our credit. Our commercial portfolio is performing. I think it is well collateralized and residential home equity loans are -- have been pretty stable.

Sounds good. Let's see a couple -- a quick question. The reverse mortgages that fee income, which line item is that on your income statement?

Fees and service charges.

On fees and service charges. Okay and about what percent of that is due to reverse mortgages? Is it the whole thing?

No, that includes deposit fees, trust fees. No it's not even close to the whole thing. It is still a small portion.

Okay.

We are looking at a probably 1.1 plus or minus for the full-year as part of that line item.

Okay. And then on the balance sheet I totally understand and I'm with you on the asset growth. But the deposit growth I guess I don't understand why you would be trying to grow deposits? I know the cost -- but -- and along those lines we've been hearing from a lot of other New Jersey banks that deposit pricing may be peaking. I'm just wondering if you could comment on that?

Yes, I think we saw some relaxation in what we -- everyone characterizes as the fierce competition. But we have steadfastly tried to avoid that price competition and the reality is is that it is still out there. We think it's unreasonable in some circumstances and we've tried to spend this period, Julienne, as chewing even that deposit growth and trying to manage that margin as best as possible.

It's a philosophy. I think other companies have said that they are willing to relax on that and we haven't as yet. The deposit growth is also impacted. I think in our case I think we can't delude ourselves but we've had some negative publicity associated with this whole subprime issue in the local press and so forth. And we see some effect on that. So I think that that is something that has hurt us also. And we think the wrong response to that is to start paying up and trying to buy the market with CD or core account deposits. We've steadfastly resisted that temptation. We think it is the wrong business strategy.

Okay. All right. And then I just wanted to ask about the buybacks in the quarter as a lack --

We bought back no stock.

Yes, why on earth not?

Well part of the reason, we were very concerned about the delisting and the rebalancing of the Russell indexes. That June 26 event seemed to be done in a fairly orderly market. We were prepared if we had to, to try and assist there. But frankly we felt that that rebalancing went through in an orderly fashion. And so we didn't take an active role in terms of buying back shares.

We would have been in an awkward position too being in possession of a lot of information that the market wasn't aware of. We tried to release information as we became aware of it to preserve our right to buy back shares. But there was also a lot going on with the resolution of a lot of this Columbia mess that put us in possession of information that we -- counsel may have been a bit uncomfortable with us executing an aggressive buyback program.

So you kind of had a self-imposed --

We were on the sidelines here with a self-imposed blackout unless we felt we had to do something on the 22nd relative to the rebalancing of the Russell.

-- to the Russell. Your sort of self-imposed blackout, about when was that in force?

Pretty much whole quarter.

The entire quarter?

I mean on a realistic basis, we always impose it through the end of the quarter three days following the earnings release to the end of the quarter. But we had the shackles on a little longer than that and we were willing to release them if we absolutely had to with regard to the Russell.

Okay, so is the self-imposed blackout throughout the whole quarter essentially that you were prepared to override if there was a big movement associated with --?

If we absolutely had to on June 22, we actually updated some information a little earlier in the month of June, we felt gave us a little room there in terms of how the reserve was performing and what we had done disposing of some of the inventories. Information like that that we made public just for the Russell was part of the reason we did that was so that we could in fact act if we had to during the Russell rebalancing.

Okay. Is there any reason why you are in a blackout after today?

No. Right now it is just normal. We would not be in the market until three days following our earnings release. So, that being said, the end of this week we would be eligible to be repurchasing shares.

At the end of this week. And there is no reason why you wouldn't be in the market?

We feel comfortable now. I mean, once, you know -- Michael?

Well, I mean clearly, Julienne, we have to manage our capital a little more carefully now than we have in the past where we had some excess capital to utilize the repurchase programs. The bank is still well capitalized at the end of the second quarter but it's restrained from paying dividends at this point back to the holding company. And that is the primary source of liquidity for the holding company is dividends from the bank.

Now we did say in the press release that we issued a trust preferred during the quarter to raise $10 million at the holding company, but I think we're going to be careful as to how we utilize that because clearly we want to protect our dividend. So we're going to be careful as to how we utilize capital in the next couple of quarters.

And, Julienne, that maybe should have been a partial answer too to your question with regard to growth. Again, in this environment we were trying to keep that balance sheet from growing where it was going to stretch that capital position any farther in terms of restricting our ability to get cash back up at the holding company level.

Yes, I understand -- yes but if you're not -- if you are shrinking the balance sheet then presumably you could be -- your excess capital position improves?

Right, exactly. We used it to pay down borrowings and kind of be content with that. Now, am I pleased that we haven't been able to generate the deposit growth that I think we sat out at the beginning of the year? No, by no means. I think that is the case. I think that we could deal with that, but I think the reality is that its Plan B is in effect here. And if the growth isn't there, we are not going to stretch for it.

Okay. Okay, great, thank you.

Matt Kelley, Sterne, Agee.

Yes, hi, guys. I was just wondering -- when you first started the call, you talked about core bank earnings and I think you said $8.3 million for the first six months. And then $4.7 million for the first --

If you strip out Columbia and then make a couple of other adjustments.

Okay.

Those adjustments are the goodwill, the bank severance that Mike was referring to I think on one of the earlier caller's questions. There was 374,000 in bank severance that was reflected in the goodwill write-off. So that's a --

Okay, but you are calling core this quarter $0.31? Is that right? It was $0.72 (multiple speakers).

This quarter actually it would have been $0.41.

$0.41.

$0.41. And the only thing with that, that is the bank's earnings plus adding back the severance the $374,000 severance that was recorded in the second quarter at the bank level which is non-recurring. But the only problem with that is to the effective tax rate for the second quarter was much lower than the first quarter. So on a year-to-date basis, the tax rate is -- you could -- is all in, it's effective. But it was unusually low in the second quarter so that gave us about an extra $0.07 of benefit. So we just caution you on that.

Okay.

It was only 20%, about 20% effective tax rate at the bank for the first quarter -- for the second quarter and that will probably be higher in the third quarter.

So really the $0.34 would be the operating --?

If you adjust for the --

Tax rate.

The unusual tax rate, yes, that is the only thing.

Okay. So this quarter's compensation and employee benefits expense was $7.612 million. I assume that going forward we strip out not only the Columbia severance but also the bank severance for the total of $778,000. So operating based start from would be $6.8 million? Is that right? Before any kind of reduction in the operating expense levels?

Right. Yes.

Okay. I mean will operating expense -- operating compensation, employee benefits going forward drop down below $6 million?

Well, we had -- yes it might, because Columbia had pretty rich -- they had a pretty substantial workforce up in Valhalla with the sales force and then their underwriting and other staff up there. (multiple speakers)

What was the total staff reduction up there on July 3?

Well, it didn't all happen on July 3. It is being phased during this quarter.

Yes. It was a big reduction July 3 and then further reduction going up to the quarter. Though all of the loan representatives were --

50 or 60 but that's not including loan reps. That's not including commissioned sales reps.

Well, they left on July 3 too.

Yes.

So 50 to 60 salaried people? Or hourly?

In total, counting the commissioned loan reps, right?

Yes.

Counting the -- it was 50 or 60 counting the commissioned loan reps.

Okay. I mean we really need some detail here on how to model operating expenses ex-Columbia. I mean is there --?

We realize you are laboring there because it is difficult to carve it out. We've been trying to get that done ourselves, quick frankly, Matt. It something that we would like to try and get you some guidance on. Clearly this is going to be the last quarter where we're running these two sets of books, one for Columbia in terms of those employees and then moving it back down to the bank. It's going to be difficult to get you concrete guidance but I see what you are trying to do in terms of backing into that compensation line.

Columbia expenses for the quarter were just under $3 million. And they will just be a fraction of that for the third quarter, we think. But it's difficult to project at this point.

$3 million total and I assume that is a good slug of the occupancy expense for the location in Valhalla. What else is in there? I mean how does it break down between compensation --?

Compensation was $1.5 million for the quarter and then occupancy was about $300,000, marketing -- and then general administrative is over $1.1 million.

Okay. So I mean by the time we get to Q4, we should be down around $10 million on an operating expense level? Because you have $13.7 million this quarter less the onetime severance cost of about $800,000, and then you are saying that operating Columbia is $3 million? That would get you to $10 million.

Right. Although -- right -- that takes us down to $10 million and the only caveat is there is some recurring expenses at Columbia. We said in the press release that they are going to be carried forward into the bank that relate to the loan servicing portfolio. There's a couple of headcount there related to some expenses related to servicing that portfolio we think about two headcount. And then there is -- we are retaining two loan production offices. So there's expense related to that. So out of that $3 million related to Columbia -- $1.5 million goes away?

2.5?

A little less than that may between $2.5 million.

Okay, all right.

May be 2+ goes away.

The accountants wouldn't let us report this as a discontinued operation because there was some residual expenses that are going to be carried over. It would've been a lot cleaner if the normal accounting would obviously show this as discontinued operation and it would've been easier to segregate out but we weren't permitted to show it that way for this quarter.

Okay, so would it be fair to say that Q4 could be somewhere between $10 million and $11 million of operating expense?

I think it would be kind 10 -- between 10.5 -- no less. I doubt if it would be less than 10.5 -- between 10.5 and 11.

Okay.

As we've said for years, that is where the efficiency ratio had run awry because it was a very expensive operation.

All right, that is good. And then of the $134.6 million of loans that were sold during the quarter, can you break down what was actually sold? Was there any conforming kind of prime type stuff?

Sure.

How does it break down?

How does it --

What was sold?

Oh, gosh. Well we sold -- we had a $42 million bulk sale of subprime loans in June which we previously reported to you.

Okay.

So that was -- so most of the subprime was sold in that but if you take that out, then the rest would be kind of loans sold 134, take out the 40 so you are basically back to about 90 million -- I mean all the subprime was pretty much in the --

It was a little bit --.

Yes, so -- you see it back to about 90 million in non -- in kind of prime business.

Okay.

And, yes, the bank sold about 80 million.

Okay, so where did the other 13 million --?

Well, the Columbia has loans too that are not -- (multiple speakers) at Columbia subprime so they are originating selling loans as well.

All right. So $13 million of prime Columbia and $80 million of bank production? All right. So what was the actual gain on the $93 million? Trying to figure out will the bank continue to sell $50 million to $100 million worth of production going forward and what is the gain we should expect on that?

Yes, the net gain on -- the bank sells depending on the interest rate environment -- right now it's a lot of 30-year fixed-rate mortgages that were signed for interest rate risk. But that could change if the mix gets more weighted to ARMs, then we don't sell. So it is hard to do. I mean the bank business not like Columbia is not (multiple speakers) mortgage banking. It's not originating and selling loans so the volume of that is very much dependant on the mix of the loans. So I wouldn't lock in the $80 million level. But based upon what we are selling, it's about -- it's a little less than 1 point net after costs, about 75 basis points or so.

You mean in terms of the margin on sale at the core bank?

Yes.

Yes, about three-quarters of a percent -- after cost.

Okay. All right, that is good. Thank you very much.

Ross Haberman, Haberman Funds.

Good morning, gentlemen. How are you? The $11 million or 11 or $12 million in nonperformers, what is your guesstimate on how quickly you are going to get -- be able to get rid of those or work them down say over the next year?

Well again, I think what would you say? It was 5.7 --?

5.3.

-- was associated with Columbia.

Are those more markable than the others?

No, no, I don't think they are. Again, most of that came from that scratch and dent sale. It was part of Columbia's inventory so you are still dealing with certain issues there. Those have been written down, however, to roughly $0.70, $0.75 cents on the dollar already. So -- and that is the reason that our loan loss provision might look a little lean because so much of that nonperforming has already been written down on a mark-to-market basis.

So does that make the 5.3 because you marked it down that much more easy to sell -- because again, you've hopefully marked it down to a --

Reasonable level, yes.

-- to a salable level?

Right, right, exactly. I mean that is based -- your best guess is the pricing but getting concrete pricing in this market as of the end of the quarter to mark that down is a daunting task because you are dealing with the subprime market and it's very difficult to get accurate pricing. That is what kind of blind-sided us a little bit from the first to the second quarter with that announced sale of the big chunk of inventory where it was $45 million and there was an additional $2.5 million loss book.

So it is difficult to get pricing on that. You try and get some quotes but -- you satisfy yourself that you got the best pricing available but you don't know how accurate it is until you actually cut the deal. The simple answer to your question I think, Ross, is that we would like to dispose of that ASAP. We don't want any of that tainting through to the bank's portfolio if we can possibly avoid it.

Okay. Once you get rid of that, are you likely to see more loans come into the nonperforming assets from the mortgage company or we've seen what we're going to see (multiple speakers)?

We hope not. The only thing that could occur there is if we received additional repurchase claims on a tail of production, if you will. But our experience there has been very, very positive. I think the release points out that we've had two loans during the -- since May 1. So we've only had requests for repurchase of two loans since May 1 -- that had been valid claims. You may have others that are explained away through a document being provided or whatever the case is.

But we haven't seen any tail that gives us any concern and we had a reserve established for an assumed tail that might occur. This tail we feel should -- would likely disappear during this quarter. We shut down the production of subprime loans during very early on in March. But we were still closing loans in April and May. As those loans were closed and sold, if there's an early payment default that could come back to you during this current quarter.

But so far so good. Our experience as I said earlier in the established reserve is that it has been performing actually -- I hate to say better-than-expected but you might make that argument that it is better-than-expected. We are pleased with it.

What is your guess in terms of trying to get rid I guess you said it wasn't a significant liability. I guess the offices or the related to the mortgage company? What do you have to release that or give it back to the --

It's corporate A space. Vito's got it.

Ross, it's corporate A space when you have a first option to notify the landlord a space is available. He has the option to take it off of our hands. If he declines that, then we are free to sublet it. It's very good space. It's clean space.

Valhalla is a lovely Westchester town, Ross. You should get some space yourself?

Right, I know, I might move. It will be cheaper rent. What is your rent per square foot? I'm sure it is cheaper than here in Manhattan.

A lot cheaper.

And just one other question. In terms of a clean operating quarter, will it be the September quarter or more likely the December quarter?

Well, I think we still have wind-down costs at Columbia and even though we've accounted for the severance, we still have some operating losses that we're going to absorb over the next couple of months at Columbia. There are still some people there winding down the loan pipeline and closing loans. We expect the wind down to be completed by the end of the third quarter at which case there will be some of those -- some activities remerge with the bank. So I would expect that there will be some drag on the bank's earnings in the third quarter still relating to the Columbia wind down and then the fourth quarter, we should see a pretty clean quarter for the bank.

Okay. Just one question -- the total aside. Boardwalk was taken over I guess by a mutual --

Yes, Cape Savings.

Cape. I was wondering one, did you guys see that? Did you have a chance to look at it? What was your opinion? One, of Boardwalk and will they be a more significant competitor to you as a merged entity?

No, because we don't compete with them at all. That is really out of our --

Too far south?

Yes, it's about -- their market is about 60 miles south of us. Maybe 30 miles south of our southernmost reach. So we don't interface at all with either Boardwalk or Cape, that is a real South Jersey event. And again, people, everyone thinks New Jersey is the size of Rhode Island but I mean there's quite a bit of land between here and there. And we don't have any.

Boardwalk was a de novo that was started a number of years ago and I think was at that stage in their life that we have talked about where de novos get whether they can either continue to stay independent or look for a partner. And I think they chose the latter. But it's not something that we ever looked at, it would have been a real extension of our market and we wish them well in their transaction.

Okay. Thanks, guys. Best of luck.

Abbott Keller, Kestrel Investment Management.

Yes, I'd like to ask another question about the share repurchase. I was wondering given your capital constraints, is it unlikely that we're going to see any share repurchases over the next couple of quarters?

Unlikely I think might be a tough word to use. I don't think you'll see very aggressive share repurchases. Our position has always been that that has been a use of excess capital. Coming off the events of the past couple of quarters, that excess capital is pretty much depleted. So I think that we would respond to any market pressures that we felt we had to but I don't think you will see us in there in an aggressive capacity at all.

But you think possibly some modest repurchases?

I think it would depend upon what the market is looking for. Our position has always been as a passive repurchaser even though the repurchases have been fairly substantial. That has always been a response to -- a passive response to market demand.

Okay.

It's not something we've gone out and necessarily budgeted aggressively that says we're going to repurchase X number of shares in any given quarter.

Okay. Thank you.

Frank Schiraldi, Sandler O'Neill.

I just had one follow-up question. I was wondering where the bank's total capital levels are? And I'm just trying to figure out when the bank is going to be able to pay dividends up to the holding company, in the likely scenario?

The bank at -- the risk-based capital at June 30th was 10.4%. And the bank had paid dividends back -- right now, the bank had paid dividends once -- they may pay 10.5% or more. So even the well-capitalized levels for risk-based capital is 10%. So we exceeded that this quarter, last quarter.

The OTS by prior agreement with the bank going back many years has asked the bank to maintain 10.5%. So we are 10.4% at June 30th. Once we go over the 10.5%, which will probably happen next quarter, then we'd be in a position to start considering dividends from the bank to the holding company. But we'd have to maintain above 10.5% ratio after the dividend was paid.

But there's sufficient liquidity at the holding company right now, certainly to protect the cash dividend and to engage in some level of repurchase activity. We've modeled that out, and that was part of that preferred offering that we did during the second quarter. So there is ample liquidity there, Frank.

So do you think it's unlikely then that you have another trust preferred in this quarter, or do you think you will --?

No, that would be unlikely. I think the $10 million, that we expect that to cover our liquidity needs at the holding company for the next few quarters. So no, the cash dividend to the external shareholders is about $2.5 million. There are some other operating costs at the holding company for repayment of debt and some holding company expenses. But that is another $500,000 a quarter. So we need about $3 million a quarter. So that is about 3/4 worth of liquidity with that $10 million.

Okay, thanks a lot.

(OPERATOR INSTRUCTIONS) Scott Carmel with Philadelphia Financial Management.

Good morning, guys. Can I just go back for one second to the margin. You mentioned that some of the repurchased loans depressed the loan yield during the quarter. Could we see that pop back up to the 6.15 level in 3Q? Or is this going to be something slightly lower than that 6.15 level?

Well, we think it will pop back out whether -- well, certainly on the -- well, I'm just thinking where we're making loans. I mean, I think we're making -- our new production is coming on over that around mortgage -- in our mortgage and commercial area. So new production is going to edge that up a little bit. And to the extent that any of that reprices, it's generally going to reprice up.

So we think it will be -- and a lot of these non-accruals are now off our books, book with the bulk sale in mid-June. So, yes, I'd expect it to increase, and whether it gets back to 6.15, it may, but we certainly expect it to increase.

Okay. Have you calculated the bank only loan yields, or is that something you don't have in front of you?

The bank -- the bank only, well, the bank only loan yield. Well, since Columbia was unwinding, most of the loans are kept at the bank anyway. I mean the commercial -- so Columbia's average loans for the quarter were relatively modest.

Okay. But if I was to look at the average subprime loan balance during the quarter, would it be somewhere in the range of $40 million or $50 million?

Yes, it would be -- we had a $42 million bulk sale -- yes, bulk sale in June, so that was Columbia. Actually, we had loans ell for sale at the beginning of the quarter. I think it was $62 million going into the quarter. That was mostly subprime. Let's see, it was -- yes, $60 million going into the quarter. At March 31st we had $60 million that was held for sale. That was mostly all Columbia loans. And then at the end of the quarter, that was down to $14 million.

So on a simple average, that is $37 million just beginning of quarter, end of quarter. Those were -- that loan for sale line is virtually all Columbia.

But that was mostly closed on June 15th.

Right. So it was on our books for most of the quarter, right, because the bulk sale was June 15th.

Okay. And can I assume pretty close to zero interest on that portfolio?

I wouldn't say it was close to zero, but there was a substantial amount of nonaccrual loans.

It wasn't robust.

It wasn't robust, yes.

Okay, great, and then one other question. On the investment securities line, the yield on this portfolio seems to bounce around quite a bit. And I know you have the equity piece in the first quarter that usually bumps things up. If I'm looking to model this out, what kind of yield should I use on this $70 million or so of investment?

Well, I would use the second-quarter yield -- the first quarter was bumped up because of the non-recurring income. It recurs every first quarter of our equity interest. But the second-quarter number I think is pretty solid. The investment securities is 5.68, the mortgage backs is 4.47. Those are pretty good numbers going forward to.

Okay. And the mortgage back, I can assume that goes up slightly over time as you probably reinvest in the higher yields.

Yes, although we haven't done much reinvesting. I mean as that pays off, we either pay down borrowings or reinvest in loans or whatever -- our investment portfolio has shrunk significantly over the last few years.

Understood. Okay, thanks a lot.

Matt Kelley with Sterne, Agee.

Just on the June 15th bulk sale of $42 million, what was the original principal balance of that bulk sale? Trying to figure out the actual write-down or the hit here that you took to get that off your books.

Well, the $42 million was the principal balance, and then we sold it for --.

We're looking at the sale now, Matt.

Principal balance was $42.6 million, and the proceeds was $33.2 million. So about $9.4 million.

Okay, so $0.78 on the dollar.

A lot of that loss was recorded in the first quarter because we had a mark-to-market write-down in the first quarter. So we had already written it down by about $7 million as of March 31st. And then when we went to sell it, there was an additional $2 million or so.

Okay, got you. All right. And then the $15 million of loans held for sale that you have at the end of the period, that is mostly subprime loans as well?

No, actually that is the remaining -- it's not mostly sub -- we have only $4.9 million net of subprime loans on our books as of June 30th, and that it written down to expected market value. So what's in that $14 million is basically the remaining portion of Columbia's inventory pipeline of conforming loans.

Okay, all right. But the 4.9, the gross principal balance is 7.8, right?

Right.

Okay, all right. So that is carried at 63%. So that is a lower carrying value than what you actually sold stuff during the quarter at in the bulk sale.

Right.

Okay. How are you feeling about that today? I know a lot has changed in the mortgage market over the last couple of weeks, even since June 15th. Do you feel like that is an appropriate carrying value at 63%?

Yes, we think so. And quite frankly, at this point, with 4.9, I don't know how many loans that is, but at this point we feel we could probably -- you know, if we just move to collections, regardless of what went on in the external market, at this point that's not a significant burden for us to just move to collection with those loans and satisfy our principal that way, or our accounting value that way if we had to. That's not going to be a drag on our operations.

Okay. All right, thank you.

At this time, there are no further questions in the queue. I'd like to turn the call back over to management.

Thank you, Joe. And again, I'd like to thank everyone that participated in the call and for your questions. It helps us certainly add some clarity to what is an otherwise very confusing couple of quarters that we've had with the Columbia issues. We look forward to that clarity being able to be added a little more forcefully as we know farther past this. And we appreciate your interest and look forward to speaking to you next quarter. Thank you.

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