SEC Company Response from OCEANFIRST FINANCIAL CORP (OCFC) (CIK 0001004702) (OCFC) — Oct 2, 2009
OCEANFIRST FINANCIAL CORP (OCFC) (CIK 0001004702)
Date: Oct. 2, 2009 · CIK: 0001004702 · Accession: 0001193125-09-202605
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-11713
Letter
VIA EDGAR Office of Financial Services United States Securities and Exchange Commission Division of Corporation Finance Washington, DC 20549 Re: OceanFirst Financial Corp. Form 10-K for Fiscal Year Ended December 31, 2008 Form 10-Q for the Period Ended June 30, 2009 File Number 001-11713
Dear Mr. Windsor:
Please accept this letter as our response to your comments of August 31, 2009 relating to your review of the above referenced filings.
Form 10-K for the Fiscal Year Ended December 31, 2008
General
1. In the future, please include all sections incorporated into your 10-K from your annual report as part of your Exhibit 13. In particular, we note that the Shareholder Information section used to incorporate your response to Item 5 of Form 10-K does not appear to be part of your Exhibit 13.
In the future, we will include all sections incorporated into our 10-K from our annual report as part of our Exhibit 13, including the Shareholder Information section used to incorporate our response to Item 5 of form 10-K.
Origination, Sale, Servicing and Purchase of Loans, page 5
2. Noting your liability for the repurchase of loans, please tell us and revise future filings to disclose the following:
A. Please disclose updated information of your remaining total potential repurchase liability at each balance sheet date.
B. Please disclose the amount of loans repurchased in each period, including the resulting loss.
C. Please disclose the material assumptions relied on in determining the reserve for potential losses on loans that may have to be repurchased, including a comparison of your assumptions to actual repurchases, clarifying and supporting why your assumptions are reasonable.
A. Most of the Company’s potential repurchase liability relates to loans originated or sold by Columbia Home Loans (“Columbia”), the Bank’s mortgage banking subsidiary. In September 2007, the Bank discontinued all loan origination activity at Columbia and their offices were subsequently closed. Columbia entered into loan sale agreements with investors in the normal course of business. The loan sale agreements typically required Columbia to repurchase certain loans previously sold in the event of an early payment default, generally defined as the failure by the borrower to make a payment within a designated period early in the loan term (usually during the first 30 to 90 days). Columbia may also have been required to repurchase loans in the event of a breach of a representation or warranty or a misrepresentation during the loan origination process.
At December 31, 2008, Columbia had not originated or sold a loan in over one year and, therefore, the potential repurchase liability relating to the early payment default period (the first 30 to 90 days) was zero. The liability for the repurchase of loans currently relates to loans which may be repurchased in the event of a breach of a representation or warranty or misrepresentation during the loan origination process. These representations and warranties remain outstanding over the life of the loan, although the likelihood that a loan may be repurchased diminishes over time. Most of the higher risk loans (e.g., subprime loans) sold by Columbia were sold servicing released, therefore, the Company is unable to determine the loan’s current outstanding balance. The Company also entered into negotiated settlements with most of Columbia’s loan investors which reduced the Company’s repurchase liability in exchange for a cash settlement. Due to the open-ended nature of the representations and warranties and the absence of loan level data, the Company believes that the remaining total potential repurchase liability cannot be determined in a meaningful manner. As noted in response (C), however, the Company has established a reserve for potential losses based on the assumptions noted in the response. Please note that on Page 5 of the 10-K under Origination, Sale, Servicing and Purchase of Loans, the Company discloses the following loan data for Columbia for the years ended December 2007 and 2006 – total loans originated; subprime loans originated; and subprime loan originations with 100% financing relative to the value of the underlying property.
A portion of the potential repurchase liability relates to prime loans sold by OceanFirst Bank, exclusive of Columbia. Based upon the Company’s experience, however, the likelihood that one of these loans is repurchased was considered remote. The Company did consider these loans in the evaluation of the Reserve for Repurchased Loans due to the recent repurchase experience of prime loans at Columbia and the change in the economic climate.
B. The amount of loans repurchased in each period is disclosed in the statement of cash flows and was $968,000, $15,495,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Losses on loans repurchased are disclosed in the analysis of the reserve for repurchased loans (Note 13) and were $1,007,000, $10,662,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Included in the losses on loans repurchased are negotiated settlements with loan investors. These settlements are in lieu of a possible loan repurchase. Included in the losses on loans repurchased are payments for negotiated settlements of $785,000, $6,268,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006.
C. The material assumptions relied on to determine the reserve for potential losses at December 31, 2008 include the following:
•
Specific Reserves
A specific reserve was established for projected losses on outstanding repurchase requests. The specific reserve was based on the estimated fair market value of the underlying collateral.
•
General Reserves
In addition to the specific reserve, the Company established general reserves for various pools of loans considered likely to generate loan repurchase requests. These pools included: subprime loans subject to negotiated settlements; subprime loans sold in a bulk “scratch and dent” sale (loans with a delinquent history or flaws in the loan documentation); and the sale of prime loans. A projected rate of return and a projected loss on return was applied to each loan pool to arrive at a loss estimate. The assumption for each pool are as follows:
o Reserve for Subprime Loans Subject to Negotiated Settlements
The Company entered into negotiated settlements with many loan investors which mitigated the Company’s overall exposure to various representations and warranties. The Company estimated a limited rate of return on these loans, projected at 0.50%. The projected loss on return was 50% due to the subprime nature of the loan, high loan-to-value financing, scheduled rate resets and declining home values. These loans
were considered a higher risk level pool. As loan interest rates reset higher in 2009 from initial teaser levels, defaults were projected to increase significantly. Investors in the loans may seek to put delinquent loans back to the Company as violations of representations and warranties may be uncovered.
During 2008 there were no repurchase requests from investors who were a party to a negotiated settlement.
o Reserve for Subprime Loans Sold in a Bulk Scratch and Dent Sale
The bulk scratch and dent sale in June 2007 also required the Company to provide various representations and warranties. The projected rate of return was set at 0.50% which was consistent with the rate used for negotiated settlements. The projected loss on return was 100% which was set higher than the 50% loss rate on negotiated settlements since the scratch and dent sale pool primarily consisted of second mortgages on loans with 100% financing. Due to declining real estate values, there is likely to be little or no available collateral coverage.
The Company had one repurchase request relating to this pool of loans during 2008. The $500,000 loan represented 1.4% of the total scratch and dent loan pool and the loss on repurchase of $98,000 was 19.6% of the loan amount. In this instance, the loss related to a first mortgage loan.
o Reserve for the Sales of Prime Loans
A reserve for prime loan repurchases was established based on the amount of loans sold during 2007 and 2008. A projected rate of return of 0.50% was applied, consistent with the rate used for subprime loans. A projected loss on return of 30% was assessed; a reduction of 20% from the 50% rate used on subprime loans. Subprime loans typically included no or nominal down payments while prime loans (primarily those sold to a government agency) often required a 20% down payment. As a result the loss experience on prime loans was projected to be less than that for subprime loans.
During 2008 the Company received five repurchase requests on prime loans sold by Columbia. Two of the repurchase requests were settled without a loss. The third repurchase request on a $230,000 loan resulted in a realized loss of $115,000. The fourth repurchase request on a $279,000 loan resulted in a realized loss of $9,000. The fifth repurchase request was on a $270,000 loan and the Company established a specific loss reserve of $81,000 on this loan. The three repurchase requests reflecting losses totaled $779,000 and represented a rate of return of 0.17%. The $205,000 total loss represented a loss on return of 26.3%.
o The general reserves which were established were generally higher than actual loss experience, however, in establishing the Reserve for Repurchased Loans the Company also considered several economic factors which were likely to adversely impact the Company’s loss experience. These factors included continuing weakness in the housing market and price declines in the local market; a nationwide recession with significant decline in employment; and increasing delinquency and foreclosure rates on single family mortgage loans. Additionally, both FNMA and FHLMC have publicly stated their desire to carefully examine loan documentation with a goal of putting an increasing amount of delinquent loans back to the originator.
Proposed Disclosure
The Company proposes to revise the disclosure in future filings to include the amount of loans repurchased in each period including the resulting loss, the material assumptions relied on to determine the reserve for potential losses on loans, including a comparison of our assumptions to actual repurchases, clarifying and supporting why our assumptions are reasonable. We have underlined the proposed Form 10-K disclosure to reflect the changes that would be made in future filings. The Company confirms that it will make such disclosure in future filings.
FORM OF 10-K DISCLOSURE:
At December 31, 2008 the Bank maintained a reserve for repurchased loans of $1.1 million related to potential losses on loans sold which may have to be repurchased due to an early payment default or a violation of a representation or warranty. Provisions for losses are charged to gain on sale of loans and credited to the reserve while actual losses are charged to the reserve. The amount of loans repurchased was $968,000, $15,495,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Losses on loans repurchased were $1,007,000, $10,662,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Included in the losses on loans repurchased are negotiated settlements with loan investors. These settlements are in lieu of a possible loan repurchase. Included in the losses on loans repurchased are payments for negotiated settlements of $785,000, $6,268,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006.
In order to estimate an appropriate reserve for repurchased loans, the Bank considers recent and historical experience, product type and volume of recent whole loan sales and the general economic environment.
The material assumptions relied on to determine the reserve for potential losses at December 31, 2008 include the following:
•
Specific Reserves
A specific reserve was established for projected losses on outstanding repurchase requests. The specific reserve was based on the estimated fair market value of the underlying collateral.
•
General Reserves
In addition to the specific reserve, the Company established general reserves for various pools of loans considered likely to generate loan repurchase requests. These pools included: subprime loans subject to negotiated settlements; subprime loans sold in a bulk “scratch and dent” sale (loans with a delinquent history or flaws in the loan documentation); and the sale of prime loans. A projected rate of return and a projected loss on return was applied to each loan pool to arrive at a loss estimate.
o Reserve for Subprime Loans Subject to Negotiated Settlements
The Company entered into various negotiated settlements with many loan investors which mitigated the Company’s overall exposure to various representations and warranties. The Company estimated a limited rate of return on these loans and a projected loss on return. The rate of return and loss on return were applied to a subset of the total loans subject to negotiated settlement – the adjustable-rate loans with rate resets through December 31, 2009. These loans were considered a higher risk level pool. As loan interest rates reset higher in 2009 from initial teaser levels, defaults were projected to increase significantly. Investors in the loans may seek to put delinquent loans back to the Company as violations of representations and warranties may be uncovered.
During 2008 there were no repurchase requests from investors who were a party to negotiated settlements.
o Reserve for Subprime Loans Sold in a Bulk Scratch and Dent Sale
The bulk scratch and dent sale in June 2007 also required the Company to provide various representations and warranties. The projected rate of return was consistent with the rate used for negotiated settlements. The projected loss on return was set higher than the loss rate on negotiated settlements since the scratch and dent sale pool primarily consisted of second mortgages on loans with 100% financing. Due to declining real estate values, there is likely to be little or no available collateral coverage.
The Company had one repurchase request relating to this pool of loans during 2008. The $500,000 loan represented 1.4% of the total scratch and dent loan pool and the loss on repurchase of $98,000 was 19.6% of the loan amount. In this instance, the loss related to a first mortgage loan.
o Reserve for the Sales of Prime Loans
A reserve for prime loan repurchases was established based on the amount of loans sold during 2007 and 2008. A projected rate of return was applied, consistent with the rate used for subprime loans. A projected loss on return was assessed at a level less than the rate used on subprime loans. Subprime loans typically included no or nominal down payments while prime loans (primarily those sold to a government agency) often required a 20% down payment. As a result the loss experience on prime loans was projected to be less than that for subprime loans.
During 2008 the Company received five repurchase requests on prime loans sold by Columbia. Two of the repurchase requests were settled without a loss. The third repurchase request on a $230,000 loan resulted in a realized loss of $115,000. The fourth repurchase request on a $279,000 loan resulted in a realized loss of $9,000. The fifth repurchase request was on a $270,000 loan and the Company established a specific loss reserve of $81,000 on this loan. The three repurchase requests reflecting losses totaled $779,000 and represented a rate of return of 0.17%. The $205,000 total loss represented a loss on return of 26.3%.
o The general res
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CORRESP 1 filename1.htm SEC RESPONSE LETTER VIA EDGAR October 2, 2009 Christian Windsor Special Counsel Office of Financial Services United States Securities and Exchange Commission Division of Corporation Finance Washington, DC 20549 Re: OceanFirst Financial Corp. Form 10-K for Fiscal Year Ended December 31, 2008 Form 10-Q for the Period Ended June 30, 2009 File Number 001-11713 Dear Mr. Windsor: Please accept this letter as our response to your comments of August 31, 2009 relating to your review of the above referenced filings. Form 10-K for the Fiscal Year Ended December 31, 2008 General 1. In the future, please include all sections incorporated into your 10-K from your annual report as part of your Exhibit 13. In particular, we note that the Shareholder Information section used to incorporate your response to Item 5 of Form 10-K does not appear to be part of your Exhibit 13. In the future, we will include all sections incorporated into our 10-K from our annual report as part of our Exhibit 13, including the Shareholder Information section used to incorporate our response to Item 5 of form 10-K. Origination, Sale, Servicing and Purchase of Loans, page 5 2. Noting your liability for the repurchase of loans, please tell us and revise future filings to disclose the following: A. Please disclose updated information of your remaining total potential repurchase liability at each balance sheet date. B. Please disclose the amount of loans repurchased in each period, including the resulting loss. C. Please disclose the material assumptions relied on in determining the reserve for potential losses on loans that may have to be repurchased, including a comparison of your assumptions to actual repurchases, clarifying and supporting why your assumptions are reasonable. A. Most of the Company’s potential repurchase liability relates to loans originated or sold by Columbia Home Loans (“Columbia”), the Bank’s mortgage banking subsidiary. In September 2007, the Bank discontinued all loan origination activity at Columbia and their offices were subsequently closed. Columbia entered into loan sale agreements with investors in the normal course of business. The loan sale agreements typically required Columbia to repurchase certain loans previously sold in the event of an early payment default, generally defined as the failure by the borrower to make a payment within a designated period early in the loan term (usually during the first 30 to 90 days). Columbia may also have been required to repurchase loans in the event of a breach of a representation or warranty or a misrepresentation during the loan origination process. At December 31, 2008, Columbia had not originated or sold a loan in over one year and, therefore, the potential repurchase liability relating to the early payment default period (the first 30 to 90 days) was zero. The liability for the repurchase of loans currently relates to loans which may be repurchased in the event of a breach of a representation or warranty or misrepresentation during the loan origination process. These representations and warranties remain outstanding over the life of the loan, although the likelihood that a loan may be repurchased diminishes over time. Most of the higher risk loans (e.g., subprime loans) sold by Columbia were sold servicing released, therefore, the Company is unable to determine the loan’s current outstanding balance. The Company also entered into negotiated settlements with most of Columbia’s loan investors which reduced the Company’s repurchase liability in exchange for a cash settlement. Due to the open-ended nature of the representations and warranties and the absence of loan level data, the Company believes that the remaining total potential repurchase liability cannot be determined in a meaningful manner. As noted in response (C), however, the Company has established a reserve for potential losses based on the assumptions noted in the response. Please note that on Page 5 of the 10-K under Origination, Sale, Servicing and Purchase of Loans, the Company discloses the following loan data for Columbia for the years ended December 2007 and 2006 – total loans originated; subprime loans originated; and subprime loan originations with 100% financing relative to the value of the underlying property. 2 A portion of the potential repurchase liability relates to prime loans sold by OceanFirst Bank, exclusive of Columbia. Based upon the Company’s experience, however, the likelihood that one of these loans is repurchased was considered remote. The Company did consider these loans in the evaluation of the Reserve for Repurchased Loans due to the recent repurchase experience of prime loans at Columbia and the change in the economic climate. B. The amount of loans repurchased in each period is disclosed in the statement of cash flows and was $968,000, $15,495,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Losses on loans repurchased are disclosed in the analysis of the reserve for repurchased loans (Note 13) and were $1,007,000, $10,662,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Included in the losses on loans repurchased are negotiated settlements with loan investors. These settlements are in lieu of a possible loan repurchase. Included in the losses on loans repurchased are payments for negotiated settlements of $785,000, $6,268,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. C. The material assumptions relied on to determine the reserve for potential losses at December 31, 2008 include the following: • Specific Reserves A specific reserve was established for projected losses on outstanding repurchase requests. The specific reserve was based on the estimated fair market value of the underlying collateral. • General Reserves In addition to the specific reserve, the Company established general reserves for various pools of loans considered likely to generate loan repurchase requests. These pools included: subprime loans subject to negotiated settlements; subprime loans sold in a bulk “scratch and dent” sale (loans with a delinquent history or flaws in the loan documentation); and the sale of prime loans. A projected rate of return and a projected loss on return was applied to each loan pool to arrive at a loss estimate. The assumption for each pool are as follows: o Reserve for Subprime Loans Subject to Negotiated Settlements The Company entered into negotiated settlements with many loan investors which mitigated the Company’s overall exposure to various representations and warranties. The Company estimated a limited rate of return on these loans, projected at 0.50%. The projected loss on return was 50% due to the subprime nature of the loan, high loan-to-value financing, scheduled rate resets and declining home values. These loans 3 were considered a higher risk level pool. As loan interest rates reset higher in 2009 from initial teaser levels, defaults were projected to increase significantly. Investors in the loans may seek to put delinquent loans back to the Company as violations of representations and warranties may be uncovered. During 2008 there were no repurchase requests from investors who were a party to a negotiated settlement. o Reserve for Subprime Loans Sold in a Bulk Scratch and Dent Sale The bulk scratch and dent sale in June 2007 also required the Company to provide various representations and warranties. The projected rate of return was set at 0.50% which was consistent with the rate used for negotiated settlements. The projected loss on return was 100% which was set higher than the 50% loss rate on negotiated settlements since the scratch and dent sale pool primarily consisted of second mortgages on loans with 100% financing. Due to declining real estate values, there is likely to be little or no available collateral coverage. The Company had one repurchase request relating to this pool of loans during 2008. The $500,000 loan represented 1.4% of the total scratch and dent loan pool and the loss on repurchase of $98,000 was 19.6% of the loan amount. In this instance, the loss related to a first mortgage loan. o Reserve for the Sales of Prime Loans A reserve for prime loan repurchases was established based on the amount of loans sold during 2007 and 2008. A projected rate of return of 0.50% was applied, consistent with the rate used for subprime loans. A projected loss on return of 30% was assessed; a reduction of 20% from the 50% rate used on subprime loans. Subprime loans typically included no or nominal down payments while prime loans (primarily those sold to a government agency) often required a 20% down payment. As a result the loss experience on prime loans was projected to be less than that for subprime loans. During 2008 the Company received five repurchase requests on prime loans sold by Columbia. Two of the repurchase requests were settled without a loss. The third repurchase request on a $230,000 loan resulted in a realized loss of $115,000. The fourth repurchase request on a $279,000 loan resulted in a realized loss of $9,000. The fifth repurchase request was on a $270,000 loan and the Company established a specific loss reserve of $81,000 on this loan. The three repurchase requests reflecting losses totaled $779,000 and represented a rate of return of 0.17%. The $205,000 total loss represented a loss on return of 26.3%. 4 o The general reserves which were established were generally higher than actual loss experience, however, in establishing the Reserve for Repurchased Loans the Company also considered several economic factors which were likely to adversely impact the Company’s loss experience. These factors included continuing weakness in the housing market and price declines in the local market; a nationwide recession with significant decline in employment; and increasing delinquency and foreclosure rates on single family mortgage loans. Additionally, both FNMA and FHLMC have publicly stated their desire to carefully examine loan documentation with a goal of putting an increasing amount of delinquent loans back to the originator. Proposed Disclosure The Company proposes to revise the disclosure in future filings to include the amount of loans repurchased in each period including the resulting loss, the material assumptions relied on to determine the reserve for potential losses on loans, including a comparison of our assumptions to actual repurchases, clarifying and supporting why our assumptions are reasonable. We have underlined the proposed Form 10-K disclosure to reflect the changes that would be made in future filings. The Company confirms that it will make such disclosure in future filings. FORM OF 10-K DISCLOSURE: At December 31, 2008 the Bank maintained a reserve for repurchased loans of $1.1 million related to potential losses on loans sold which may have to be repurchased due to an early payment default or a violation of a representation or warranty. Provisions for losses are charged to gain on sale of loans and credited to the reserve while actual losses are charged to the reserve. The amount of loans repurchased was $968,000, $15,495,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Losses on loans repurchased were $1,007,000, $10,662,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. Included in the losses on loans repurchased are negotiated settlements with loan investors. These settlements are in lieu of a possible loan repurchase. Included in the losses on loans repurchased are payments for negotiated settlements of $785,000, $6,268,000 and $0, respectively, for the years ended December 31, 2008, 2007 and 2006. In order to estimate an appropriate reserve for repurchased loans, the Bank considers recent and historical experience, product type and volume of recent whole loan sales and the general economic environment. The material assumptions relied on to determine the reserve for potential losses at December 31, 2008 include the following: 5 • Specific Reserves A specific reserve was established for projected losses on outstanding repurchase requests. The specific reserve was based on the estimated fair market value of the underlying collateral. • General Reserves In addition to the specific reserve, the Company established general reserves for various pools of loans considered likely to generate loan repurchase requests. These pools included: subprime loans subject to negotiated settlements; subprime loans sold in a bulk “scratch and dent” sale (loans with a delinquent history or flaws in the loan documentation); and the sale of prime loans. A projected rate of return and a projected loss on return was applied to each loan pool to arrive at a loss estimate. o Reserve for Subprime Loans Subject to Negotiated Settlements The Company entered into various negotiated settlements with many loan investors which mitigated the Company’s overall exposure to various representations and warranties. The Company estimated a limited rate of return on these loans and a projected loss on return. The rate of return and loss on return were applied to a subset of the total loans subject to negotiated settlement – the adjustable-rate loans with rate resets through December 31, 2009. These loans were considered a higher risk level pool. As loan interest rates reset higher in 2009 from initial teaser levels, defaults were projected to increase significantly. Investors in the loans may seek to put delinquent loans back to the Company as violations of representations and warranties may be uncovered. During 2008 there were no repurchase requests from investors who were a party to negotiated settlements. o Reserve for Subprime Loans Sold in a Bulk Scratch and Dent Sale The bulk scratch and dent sale in June 2007 also required the Company to provide various representations and warranties. The projected rate of return was consistent with the rate used for negotiated settlements. The projected loss on return was set higher than the loss rate on negotiated settlements since the scratch and dent sale pool primarily consisted of second mortgages on loans with 100% financing. Due to declining real estate values, there is likely to be little or no available collateral coverage. 6 The Company had one repurchase request relating to this pool of loans during 2008. The $500,000 loan represented 1.4% of the total scratch and dent loan pool and the loss on repurchase of $98,000 was 19.6% of the loan amount. In this instance, the loss related to a first mortgage loan. o Reserve for the Sales of Prime Loans A reserve for prime loan repurchases was established based on the amount of loans sold during 2007 and 2008. A projected rate of return was applied, consistent with the rate used for subprime loans. A projected loss on return was assessed at a level less than the rate used on subprime loans. Subprime loans typically included no or nominal down payments while prime loans (primarily those sold to a government agency) often required a 20% down payment. As a result the loss experience on prime loans was projected to be less than that for subprime loans. During 2008 the Company received five repurchase requests on prime loans sold by Columbia. Two of the repurchase requests were settled without a loss. The third repurchase request on a $230,000 loan resulted in a realized loss of $115,000. The fourth repurchase request on a $279,000 loan resulted in a realized loss of $9,000. The fifth repurchase request was on a $270,000 loan and the Company established a specific loss reserve of $81,000 on this loan. The three repurchase requests reflecting losses totaled $779,000 and represented a rate of return of 0.17%. The $205,000 total loss represented a loss on return of 26.3%. o The general res