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OceanFirst Financial Corp. (NASDAQ:OCFC)

Q4 2008 Earnings Call

January 23, 2009; 11:00 am ET

Executives

John Garbarino - President and Chief Executive Officer

Vito Nardelli - Chief Operating Officer

Michael Fitzpatrick - Chief Financial Officer

Jill Hewitt - Senior Vice President and Investor Relations Officer

Analysts

Robert Currish - Private Investor

Frank Schiraldi - Sandler O’Neill

Ron Reba - Private Investor

Ross Haberman - Haberman Funds

John Shibles - Regal Securities

Operator

Hello and welcome to the OceanFirst Financial Corp earnings conference call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions)

Now, I would like to turn the conference over to Ms. Jill Hewitt. Miss. Hewitt you may begin.

Jill Hewitt

Thank you, Camille. Good morning and thank you all for joining us. I’m Jill Hewitt, Senior Vice President and Investor Relations Officer and we’ll 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 could have a material adverse effect on the operations of the company and its 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, competitions, 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 result of any revisions which may 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.

Now I will turn the call over the our host this morning, President and Chief Executive Officer John Garbarino; Chief Financial Officer, Michael Fitzpatrick; and Chief Operating Officer, Vito Nardelli.

John Garbarino

Thank you, Jill and good morning to all who have been able to join in on our fourth quarter and year end 2008 earnings conference call today. OceanFirst has just concluded its 106th year of continuous operations and our 13th as a publicly traded company. This has been an extremely difficult year for the entire industry and OceanFirst has not been immune. Nevertheless, we have posted solid consistent earnings for the quarter and entire year.

We demonstrated the ability to face the challenges posed by the economic climate and generally succeeded in avoiding the credit issues and many of the investment security impairment charges incurred by others. We appreciate your interest in our performance and are pleased to be able to review our latest operating results with you this morning.

You’ve all had the opportunity to review our release from Thursday and following our usual practice, I will not be disrespectful of your time reciting a host of actual numbers from the release. My introductory comments will merely help frame our opportunity to add some color to the earnings posted for the quarter and year, as we continue to attempt to fortify our balance sheet, navigate the risks imposed by market value accounting and generate value for our shareholders.

Diluted earnings per share for the quarter were at $0.30, a 15.4% increase from the corresponding prior year period, yet off $0.02 from the linked quarter. Excluding extraordinary items, our core earnings remained $0.32 matching the prior quarter. The company’s 48th quarterly cash dividend declared was $0.20 per share unchanged with the 24th consecutive quarter.

There were two extraordinary items in the fourth quarter, which worked across purposes and net reduced earnings by $0.02. The quarter benefited from $524,000 in state tax refunds for the years 2002 through 2006 and was offset by an impairment mark of $568,000 on our BOLI portfolio. The company’s investment securities portfolio has managed to perform well and not suffer the severe impairment marks reported by many other financial institutions throughout the year.

This write down of our BOLI investment is the first such expense recorded by OceanFirst in what seems to be an increasingly irrational application of mark-to-market accounting to financial institutions. In our case, the primary manifestation of mark-to-market, especially evident in this quarter, is the mark taken against securities in the other comprehensive income calculation.

For the quarter, low evaluations of our securities resulted in a substantial hit to our book value. While I’ll leave it others to rail against the wisdom of mark-to-market accounting, we remain hopeful that some commonsense can still be brought to bear on the concept to avoid the disasters often unwarranted effects on the industry.

The quarter’s earnings have again benefited from an expanding net interest margin, which increased five basis points from the previous quarter, reflective primarily of liability cost decreases in the lower rate environment. Average interest earning assets increased only slightly for the quarter and deposits remained difficult to attract, given our disciplined pricing on certificates of deposit, in an over heated, highly competitive retail market.

Uncharacteristically, core deposits also contracted slightly for the quarter, driven primarily by a decrease in our government deposits. Any of the normal professional fees and other administrative charges prevailed during the quarter. This was largely attributable to the shutdown of our former subsidiary Columbia, again artificially inflating operating expenses.

Our efforts to sublet office space previously occupied by Columbia continue to fall short of expectations in a worsening commercial rental market. We have continued to temper these expectations, substantially increasing our provisions for the inability to sublet this vacant space, assuming an additional six month period of vacancy now through the third quarter of 2009 and then a sublet at a more severely discounted lease rate.

In this market we remain heavily focused on the strength of our balance sheet, as opposed to being preoccupied with growth. With this strategy and our consistent earnings in 2008, we continue to bolster our core capital ratio, which grew to 8.1% during the quarter, prior to any assistance from the treasury capital purchase program, which we recently closed in the New Year. Well capitalized by all standards prior to the treasury investment, our pro forma core and risk-based capital ratios were increased to 9.93% and 15.47% respectively, assuming all treasury funds are available to the bank.

Our board has voluntarily agreed to participate in the capital purchase program, to prudently fortify our balance sheet and capital position in these uncertain times. Overtime, we expect to leverage these funds many times over to bolster lending, as encouraged by treasury and take full advantage of opportunities within our market.

As noted earlier, our cash dividend has been continued, unaffected by economic conditions for now. Our board remains committed to a strong cash dividend policy, benefiting our shareholders with an aggressive dividend payout ratio of current earnings.

I’ll ask Vito Nardelli, our Chief Operating Officer to once again bring you up to date on the good news surrounding the Columbia loan repurchase reserve performance, as well as comment briefly on our core bank credit quality, increased loan loss provisions and BOLI impairment. Vito.

Vito Nardelli

Thank you, John. I’m pleased to announce that there have been no purchase requests received in the quarter, nor has there been any loan repurchase activity. For the year, total charges to the reserve for repurchased loans were $1 million, which was used to be purchase three loans and fund two negotiated settlements.

At December 31, the reserve for repurchased loan stands at $1.1 million, reflecting a quarterly recapture of $37,000. The total recapture from the reserve for repurchased loans for the year amounted to $248,000. There remains one outstanding repurchase request from Fannie Mae, which we are contesting.

Looking at asset quality, non-performing loans increased $3.5 million for the quarter to $16 million or 97 basis points of total loans receivable. In the core bank portfolio, which excludes the $4.6 million of residual Columbia loans, which have already been aggressively written down to market, non-performing loans total $11.4 million or 69 basis points of loans receivable.

The two largest non-performing credits are commercial relationships of $2.1 million, which was added this quarter, and $1.9 million which we’ve reported last quarter. Each is well secured by recently reappraised commercial real estate. I have reported to you in the last two quarters of one remaining loan to noted investor Solomon Dwek, in the amount of $480,000 secured by real estate occupied by a branch of Banc of America. This loan has not yet been resolve, but there remains the contract for sale in the amount of $985,000 which is under the control of the bankruptcy trustee.

While we are not pleased by the 22 basis point increase in non-performing loans for the quarter, neither are we alarmed. We diligently monitor and manage the delinquency metrics of our entire portfolio and all remains favorable to the overall market statistics, reflective of our strong credit culture.

During the quarter, we realized net loan charge offs of $153,000, bringing the year-to-date total to $578,000. We are keenly aware of the economic environment and the condition of the real estate market, and considering these factors as well as the current level of non-performing loans, we have increased the provision for loan losses for the quarter to $600,000. The total provided for the year was $1,775,000.

I would now turn our attention to the reported impairment in our Bank Owned Life Insurance of $568,000. The BOLI is invested in a separate account insurance product, which is then invested in a fixed income portfolio, which was designed considering the Lehman Brothers Aggregate Bond Index as the benchmark, included within that portfolio of bond instruments from major top tier corporations as well as mortgage-backed securities in government bonds.

In the fourth quarter, the impairment was related to the default of certain corporate bonds. We are carefully reevaluating the portfolio mix to asses risk and determine whether to continue with the current portfolio or to alter the risk profile of the expense of the expected return.

With that I will return the discussion back to CEO Garbarino, for some concluding comments, prior to engaging in a question-and-answer session this morning.

John Garbarino

Thank you, Vito. In closing, I’d like to reflect on the extraordinary events our financial system has endured over the past four months. Throughout this turbulent period, we have been continually challenged by the markets and unprecedented governmental interventions proffered to address the rapidly evolving issues.

In many cases government’s response has been at best inconsistent and often subject to criticism. The Congress and media have misinterpreted and mischaracterized the efforts of treasury at nearly every turn. As a result the expectations of the year ahead are indeed unclear. Our outlook continues to be cautious and restrained.

While OceanFirst has maintained a strong lending presence in our market, there is no denying that underwriting conditions have been tightened. To fail to do so would indeed be fool hearted. As I noted earlier with the fortified balance sheet and a strong belief in the credit quality of our portfolio, management feels well positioned to weather the continuing storm and persevere.

Many forecast that the worst for our market may lie ahead and we find it difficult to disagree. In many ways much of our area has been spared the deep suffering experienced by other parts of the country, although local trends in rising unemployment, increasing delinquency and softness in real estate values are impossible to ignore.

We recognize that these conditions do not present an attractive platform for heroic performance by a financial institution. Nevertheless, our shareholder should be assured that we believe we have taken every action we possibly can, to take advantage of market opportunities, that will inevitably reveal themselves in our quest to generate value for our shareholders investment.

With that, Nardelli, Fitzpatrick and I would be pleased to take your questions this morning.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Robert Currish – Private Investor.

Robert Currish – Private Investor

Yes. In regard to the continuing risks from the Columbia venture, you mentioned the lease hold obligations. Could you tell us, what the annual costs are relating to that lease and also the number of years for which that commitment will continue, irrespective of whether there can be a…

John Garbarino

Sure Robert, I’ll give you a rough idea of the numbers. Unfortunately, there are several properties involved. All the leases as you can imagine are different and they all expire at different times also. There’s properties in Westchester County and also out on Long Island and also in New Jersey that are involved, so there’s three separate locations; but in general terms, some of the smaller leases expired later this year, but the main lease which is on the major piece of property in Westchester County expires in 2012.

The annual lease experience for that property is $155,000 in round numbers. Right now we’re incurring annual lease expense in 2010 or anticipating in the event of no sublet of just under $300,000. So, that gives you an indication of some value. Hopefully that’s responsive enough for you.

Robert Currish – Private Investor

Okay, I have another question, but I don’t want to take another turn.

John Garbarino

No, feel free. We always allow two Robert.

Robert Currish – Private Investor

My next question has to do with the treasury of preferred stock that’s being issued? My assumption as to that is that its basically a line of credits that you’re not committing to taking all of that money at this point, but you have access to it, is that correct?

John Garbarino

No, it’s not entirely accurate. It is a preferred stock investment. We closed it on January 16. The treasury is now in possession of a stock certificate that says that they own 38,263 shares at a value of $1,000 a share in OceanFirst Financial Corp. Their preferred shares cumulative preferred and they pay a fixed dividend of 5%. So, the dividend obligation began on the date of closing, which was January 16.

What they additionally receive and this is their program, in terms of their program, is a warrant to purchase an additional 380,000 shares of our common at a price that was determined by a calculation for the 20 days prior to the approval of our participation in the program and that exercise strike prices, $15.07.

Robert Currish – Private Investor

Okay and how do you anticipate that the obligation on the preferred dividends will impact the common share dividend that you’ve traditionally been able to --?

John Garbarino

We feel it will have no initial impact. We have taken steps to immediately invest that in short-term investments. We have levered the treasuries investments 1.4 times and we feel that in sort-term investments we’ll be able to cover the cost of the preferred dividend as well as the common stock dilution.

Again as I mentioned in my comments, on the longer-term basis, we intend to deploy that many times over in our lending operations and I believe that with the additional leverage and in an ideal situation, we feel we can lever that seven to eight times. We’ll actually have that accretive to our common share dividend. So, we are very concerned that we’re not affecting our common shareholders by taking the stock and we’ve takening steps and executing a plan to see that that is in fact the case.

Robert Currish – Private Investor

Okay, thank you.

John Garbarino

Alright Robert.

Operator

Your next question comes from Frank Schiraldi - Sandler O’Neill.

Frank Schiraldi - Sandler O’Neill

Good morning guys.

John Garbarino

Good morning Frank.

Frank Schiraldi - Sandler O’Neill

How are you doing?

John Garbarino

We’re well; and you?

Frank Schiraldi - Sandler O’Neill

Good thanks. Just a couple of questions here; first, I was wondering if you would be able to give any further specifics that would be helpful that you could give on the two largest non-performers in terms of LTV on the new appraisals, specific type and maybe specific reserves against them and any sort of specifics you could give?

John Garbarino

Yes, Vito gave you some flavor for that direct loan certainly, but you’re talking about the two new loans that we talked about being recently reappraised.

Frank Schiraldi - Sandler O’Neill

Right, the two you mentioned in the release, the 2.1 and…

John Garbarino

Right and we talked about them both having been recently reappraised. Again, based upon latest appraisal which occurred really in the last three to four months, we’re concerned obviously about believing in an appraisal that may date back to 2005 or 2006. The LTV’s I believe, Vito do you have the actual number?

Vito Nardelli

Well, I have the reappraisal numbers John. On the one property the reappraisal came in at $3 million, on the second property the reappraisals came in at $2.2 million.

John Garbarino

Okay, so on the $2.1 million there’s an appraisal of $3 million and on the $1.9 million there is an appraisal of two and a quarter. We also have personal guarantees in both circumstances and in both circumstances we feel that the personal guarantees are quite strong. So, we have no specific reveres allocated to these properties, nor do we feel that it would be prudent to do so. They’re well secured by every measure right now.

Frank Schiraldi - Sandler O’Neill

Okay and these are commercial real estate properties?

John Garbarino

The commercial real estate properties, exactly; local in Ocean County; and they’ve been somewhat troubled for sometime. They’ve only become non-performing in the last quarter.

Frank Schiraldi - Sandler O’Neill

Okay, and as far as one-to-four family loans, what were the charge-off in the quarter and has there been an influx in the quarter of one-to-four family into non-performing?

John Garbarino

No, not really. Actually, the increase in non-performing on the residential side was not severe. The charge-offs under residential I think are pretty mundane. I believe in all cases they were loans that had migrated from the Columbia portfolio that had been heavily written down and the charge-offs are relatively nominal. Mike is searching for it.

Michael Fitzpatrick

It was $153,000 for the quarter, the charge-offs, but they were all related to Columbia Frank. They were all related to some of the Columbia loan.

Frank Schiraldi - Sandler O’Neill

Okay, and is OREO, is that the Columbia loans? Is that basically what makes up OREO?

Michael Fitzpatrick

Yes, the main one?

Frank Schiraldi - Sandler O’Neill

Yes.

Michael Fitzpatrick

Some of the Columbia loans went into OREO, and the one-to-four family part to the non-performing is up $600,000 from September to December. That’s mostly bank loans, but that portion is up $600,000; no sorry, I misspoke; $300,000.

Frank Schiraldi - Sandler O’Neill

Okay and then I think you may have given it to us before John, but is there any specifics you can give on the trust preferred the single issuer portfolio? Is the unrealized loss that’s hitting OCI, is that basically one of those securities?

John Garbarino

That’s really what’s coming through there. Again, as you know Frank, our portfolio was $55 million. It was 11 original issues at $5 million each. They were all investment grade, they are all investment grade, but during this past quarter we saw a write-downs in companies such as BofA and Chase, that hadn’t previously been affected terribly, but in this market obviously they are now and so the write-down through OCI was substantial and had a really debilitating effect on our book values as you know, but it’s all related to that trust preferred portfolio.

They were all investment grade, and again I believe Mike, we’ve actually got a total of eight or nine issues now, through consolidation. So, Banc of America has taken now I think a total of $15 million and that was really written-down very substantially in the last quarter by virtue of the market quotes, the illusory market quotes if you will, in this mark-to-market world, but I mean they’re all investment in State Street, companies that you would have thought you were safe with.

Frank Schiraldi - Sandler O’Neill

Okay and then just finally, I just want to make sure I understand the comments you made about the lease. The largest lease you’d said runs you guys $300,000 a year and is this right that in 2010 you basically…

John Garbarino

No, I think all the leases were $300,000. The largest leases I believe was one – I’m sorry yes, you’re right. The Valhalla lease in Westchester is $300,000 for 2010. I was looking at a partial year for ’09.

Frank Schiraldi - Sandler O’Neill

So, you’re basic assumptions right now are that you’ll be able to recoup about half of that in 2010 through a sublet?

John Garbarino

Do we have to tell the world how much we’re willing to discount it on the sublet? I don’t know anyone from Valhalla that can offer this. Actually, we wish they would make us an offer this afternoon. Maybe I could treat this is an advertisement, Frank.

We have assumed that there will be no income from the sublet through the third quarter and we’ve taken a very substantial discount as far as our assumption from that point on through 2012. So, I mean we’re discounting it on a regular basis, trying to get some activity in it, but you can imagine, the commercial real estate market as I mentioned is worsening and certainly not getting any more attractive so.

Frank Schiraldi - Sandler O’Neill

Fair enough. Okay, thank you.

John Garbarino

Thanks Frank.

Operator

Your next question comes from Ron Reba - Private Investor

Ron Reba - Private Investor

Hello.

John Garbarino

Good morning.

Ron Reba - Private Investor

Good morning. How are you?

John Garbarino

We’re well and thank you.

Ron Reba - Private Investor

Okay. I was just looking at the valued stock and then Columbia was down to 12.3, which is probably the lowest in the year. What measures are you trying to implement in order to raise these prices this time?

John Garbarino

I can appreciate your concern because we share your concern with the market performance of the common. I don’t think though that anyone thinks that they’re in a position to raise the price of that. I think that all we can do, frankly Mr. Reba is perform as expected, generate the earnings and hopefully the market will reward that performance. There is very little we can do manipulate the price of that stock. We’re very distressed that the market is trading off across the board and is somewhat indiscriminate in how it treats companies.

In our cases for example, we went through a very rocky patch in 2006, 2007 and our stock price was pummeled for that. Last year, we had the good fortune to perform quite well versus the rest of our peers, but the recent sell-off certainly in the New Year, I don’t think is it all reflective of the type of quarter or year end that we have just reported to you this morning. Unfortunately, that’s not something that we can affect directly, it’s only through our financial performance.

Ron Reba - Private Investor

I know that in institutions the CEO’s and Directors are foregoing performance and issuance of stock. I noticed that the Directors, amongst your selves are publicly getting thousands of shares of stock by the time we get to next year. Is there any plans of foregoing bonuses or any other gifts of stock?

John Garbarino

Yes, we’ve already implemented plans in our new budget year that there will be no review of Officers salaries, including Executive salaries until mid-year of 2009. We want to see how the year begins to unfold with all the uncertainty I spoke to.

Our bonuses are incentive based. They will not be paying across the board and this refers to our entire office of staff not just executive management. They will not be paying anywhere near target levels, but they will be paying at something less than target even given I think the very credible years performance that we turned in. Our bonuses were forgone entirely, the two prior years at the executive level and right now there is no discussion about forgoing bonuses because I think that we’ve turned in a very credible year of financial performance.

All boards and all executive management teams, have the dual issue of trying to retain executive talent. I think that when you have a management team that’s able to perform as well as we did in 2008 there is some reward that is necessary to keep those people engaged.

I realize this is the fine line that has to be walked and I appreciate your concern, but I don’t think that we have been accused to being at all frivolous with our compensation and believe me we are taking the steps that we think we need to send the message and I think our executive team understands that.

Ron Reba - Private Investor

How about the shares, like gifts of stock for 2009?

John Garbarino

You say gifts of stock. I’m not familiar with that.

Ron Reba - Private Investor

Well, I’ve saw somewhere in the internet, inside information, where you and other Directors are due to receive 1000’s of shares of stock, am I wrong?

John Garbarino

Yes, what you are referring to perhaps is the fact that as part of overall compensation when it comes to our officer team, our compensation is not only in the form of cash, but under best practices purposes, it also includes equity based compensation. So, there have been annual equity grants of auctions and in some cases restricted stock awards. That is part of the overall compensation plan and it’s duly reported every year in the proxy statement.

So, if you are looking at in internet insider issue, it would disclose that is having an occurred last year. That subject has not been taken under consideration yet for this coming year. It will be under consideration in February, when our HR Compensation Committee meets and it would be duly reported in our proxy statement for the annual meeting.

Ron Reba - Private Investor

Okay. So, I know that you’re getting close to 60,000 this year as a gift stock?

John Garbarino

No, that’s not. First of all it’s not 60,000 shares of gift stock. It would be option awards, which would be issued at the current strike price and would only have value if in fact the stock price accelerated over a period of time. That is a practice that we think aligns management and the boards interest with that of our shareholders because it only has value if the company performs well.

Ron Reba - Private Investor

Alright, so if you have plans not to take owner for the (inaudible) and maybe a freeze of salary this year.

Michael Fitzpatrick

As I said, our HR Compensation Committee of the board will be meeting in the month of February and they will be addressing it at that time. So I wouldn’t want to comment on anything they may choose or not choose to do.

Ron Reba - Private Investor

Okay, thanks very much. Bye.

Michael Fitzpatrick

Okay.

Operator

Your next question comes from Ross Haberman – Haberman Funds.

Ross Haberman – Haberman Funds

Good morning guys. They were close. How are you?

John Garbarino

Good morning Ross. You are very accommodative of Camille today.

Ross Haberman – Haberman Funds

I just wanted a clarification going back. The $55 million which you hold, that was the safe amount on the trust preferred? What are you carrying it? Is it in terms of the current dollar?

Michael Fitzpatrick

It’s about $34 million; from the balance sheet, that’s $34 million.

John Garbarino

So, it’s been written-down $21 million through OCI right now and of course again that’s been drag on our book value.

Ross Haberman – Haberman Funds

So you counted it back to $0.61?

John Garbarino

Yes, and again there is no pool trust preferred; that’s all issuers and it was all -- they were all investment grade companies, but again everything as I just reported or as I just mentioned to the other caller, everything is being treated somewhat equally here.

Ross Haberman – Haberman Funds

And again that marks to an actual period or price or that’s marked to a cash flow, I just kind of….?

John Garbarino

That’s a level two pricing and it’s based upon broker quotes that are obtained at the end of the quarter, which we know can be somewhat illusory too. It’s the whole mark-to-market issue that we could talk about forever and whether or not we feel there is any -- certainly, we feel there is no permanent impairment to these securities and they are temporarily impaired by market conditions and so far the accounting profession has seemed to agree with that. We hope they continued to look at it that way.

Ross Haberman – Haberman Funds

Have you actually tried to sell any of those over the previous year?

John Garbarino

No, because I think that would be giving it away frankly, Ross and I know it’s for sale at that price.

Ross Haberman – Haberman Funds

Okay, alright I’m just asking (Multiple Speakers) I just asked the questions to see if you have ever tested the market?

John Garbarino

No, we always obtain three brokers quotes on it and then try and use that as our evaluation and of course that’s carefully reviewed by KPMG.

Ross Haberman – Haberman Funds

Okay and I just wanted to go back, what was the actual lease cost to you in either this quarter, the fourth quarter of ’08 or for calendar ’08, what was the net cost?

Michael Fitzpatrick

For Columbia?

Ross Haberman – Haberman Funds

Yes please.

Michael Fitzpatrick

We took an additional $244,000 in our leasehold reserve during the fourth quarter.

Ross Haberman – Haberman Funds

So, that was your actual dollar cost or again that was to cover some sort of future…

John Garbarino

No, we had written that down, if you recall in prior quarters. Going all the way back through the last year that was the additional assumptions that we have imposed upon the additional expense that would be taken based upon further discounted rents; in other words without going into actual account calculation.

When we first started the discount what we thought we could sublet this property at, it may have been at $0.60 to $0.70 on the dollar; we’ve have now taken that assumptions down below those numbers. So, that the incremental additional write down, it would have already been written down say $0.30 on the dollar, we’re taking it below that as far as the assumed ability to sublet it.

Ross Haberman – Haberman Funds

So, going forward though you’re just going to hit your reserve as opposed to taking a quarterly expense, is that correct?

John Garbarino

Well, again we extend the assumption that the property will be dark, will be completely vacant. So, right now our assumption is that the property would be vacant through September of this year and then it assumes that we would only obtain a very heavily discounted sublet of our cost through the maturity of the leases in 2012.

Vito Nardelli

So, you’re right Ross. If that happens, if that assumption holds, then any loss could be charged against the reserve and it wouldn’t flow through the income statement as long as those assumptions hold up.

John Garbarino

And conversely, if we were able to sublet it earlier or obtain a more attractive sublet, we might have a recovery.

Ross Haberman – Haberman Funds

Got it and just one final question; are you seeing a lot of refincance now and what you’re doing? Are you modifying them or will that further hurt the margin or the spread as I guess you resize and sell them?

John Garbarino

It’s an excellent question Ross and yes. Contrary to popular reports we’ve said the refi activity is dropped-off in the last week or two. Our refi activity has never been stronger. We were discussing this the other day; our residential pipeline is at unprecedented levels both in terms of dollars and in units. We are absolutely inundated with refi’s.

We have always maintained a modification program, which we try and offer to our existing refi customers as an alternative to refi’ing and we try and encourage that in terms of we think a win-win situation for both the bank and the customer. We do it at a slight premium to current market, but we do it on an expedited basis with much reduced costs to the borrower.

Fortunately, I can report that the vast majority of the refi business we are seeing is not our portfolio. It’s about one-third our portfolio and two-thirds other institutions. So, that we are more than happy to do that, because that’s new business to us and the answer to your question with regard to the margins is we don’t see a dramatic affect to our margin, because we frankly see customers reifying for 50-75 basis points in some cases. They are not the types of heavy refi discounts that you had seen in previous refi markets, where people may have been taking 7.5% or 8% loans in reifying them down to 5% or 6%.

So, we are not too concerned about the effect on the margin. Although, you are absolutely right, there will be some effect, but the fact that our current pipeline is two-thirds other people’s business is a great source of comfort to us.

Ross Haberman – Haberman Funds

Just a last question, are you keeping any of those or are you selling them all; the ones which are not yours?

John Garbarino

Right now they are all being sold.

Ross Haberman – Haberman Funds

Alright. Thanks again guys.

John Garbarino

Okay Ross.

Operator

Your next question comes from John Cybal Regal Securities; please go ahead.

John Shibles - Regal Securities

Hi guys, how are you?

John Garbarino

Good morning. We’re well and you John?

John Shibles - Regal Securities

I’m doing well. Two quick questions; one is, you mentioned a repurchase request from Fannie Mae. How much is that loan for?

John Garbarino

That loan is in the amount of $270 and we have $81,000 reserve against it and that’s goes back to August of last year. That’s the last repurchase request that hasn’t been adjudicated and we are currently contesting it. I believe it’s in an arbitration proceeding right now.

John Shibles - Regal Securities

Okay and the second one. I’m sorry to do this you, but I just want a clarification so that I’m on the same page. I thought when the first caller called, regarding the vacant Colombia space, you said the total of your lease expenses in 2010 is going to be $300,000 and Westchester is $155 per year to 2012.

John Garbarino

Yes, I may have misspoken that. The Westchester expense was $300,000. The total expenses which cover some of the New Jersey and Long Island property; I’m adding here as we go along. There is an additional $58,000 in New Jersey. There is only a partial year for -- no, that’s it. The Long Island property, the leases all run out in ’09. So it’ll be an additional $58,000 for New Jersey property.

John Shibles - Regal Securities

When does the New Jersey property run out?

John Garbarino

That runs to November 2011. As I say, it’s a little confusion because there’s several properties and they all have different expiration dates.

John Shibles - Regal Securities

Okay, so the total lease expense for 2010 is $358?

John Garbarino

For 2010 it would be in round numbers; 356, yes.

John Shibles - Regal Securities

Okay. Thank guys. Have a good day.

John Garbarino

Bye John.

Operator

(Operator Instructions) We show no further questions at this time. I would like to turn the conference back over to Mr. Garbarino for any closing remarks.

John Garbarino

Thank you Camilla, I appreciated it. I would just like to again thank everyone for their interest and joining us this morning. We have been able to report four decent quarters to you in 2008 and despite the current uncertain times that we live in, we hope that we have the same luxury to continue in 2009. We’ll look forward to speaking to you at the end of the first quarter. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Source: OceanFirst Financial Corp Q4 2008 Earnings Call Transcript
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