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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-27428
OceanFirst Financial Corp.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3412577
- ---------------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
975 Hooper Avenue, Toms River, NJ 08754-2009
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732)240-4500
---------------------------
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___.
---
As of November 6, 2002, there were 13,898,665 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
OceanFirst Financial Corp.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
- ------- ---------------------
PAGE
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of September 30, 2002 and December 31, 2001 ............. 1
Consolidated Statements of Income for the three
and nine months ended September 30, 2002 and 2001 ........... 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 ............... 3
Notes to Unaudited Consolidated Financial Statements ........ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk ... 10
Item 4. Controls and Procedures ..................................... 11
Part II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings ........................................... 12
Item 2. Changes in Securities ....................................... 12
Item 3. Default Upon Senior Securities .............................. 12
Item 4. Submission of Matters to a Vote of Security Holders ......... 12
Item 5. Other Information ........................................... 12
Item 6. Exhibits and Reports on Form 8-K ............................ 12
Signatures ............................................................ 13
Certifications ........................................................ 14
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
September 30, December 31,
2002 2001
------------- ------------
(Unaudited)
ASSETS
- ------
Cash and due from banks $ 34,861 $ 16,876
Investment securities available for sale 79,482 80,017
Federal Home Loan Bank of New York
stock, at cost 18,440 23,560
Mortgage-backed securities available for sale 180,837 233,302
Loans receivable, net 1,302,137 1,300,889
Mortgage loans held for sale 30,121 37,828
Interest and dividends receivable 7,881 7,632
Real estate owned, net 359 133
Premises and equipment, net 17,849 16,730
Servicing asset 6,995 7,628
Other assets 41,784 39,071
----------- -----------
Total assets $ 1,720,746 $ 1,763,666
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 1,170,049 $ 1,109,043
Federal Home Loan Bank advances 199,000 272,000
Securities sold under agreements to repurchase 196,200 212,332
Advances by borrowers for taxes and insurance 2,665 6,371
Other liabilities 14,701 17,191
----------- -----------
Total liabilities 1,582,615 1,616,937
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares issued - -
Common stock, $.01 par value, 55,000,000 shares authorized,
27,177,372 shares issued and 13,924,103 and 14,791,334
shares outstanding at September 30, 2002 and December 31,
2001, respectively 181 181
Additional paid-in capital 183,852 181,780
Retained earnings 139,887 131,746
Accumulated other comprehensive loss (1,897) (824)
Less: Unallocated common stock held by
Employee Stock Ownership Plan (11,601) (12,663)
Unearned Incentive Awards - (161)
Treasury stock, 13,253,269 and 12,386,038 shares
at September 30, 2002 and December 31, 2001,
respectively (172,291) (153,330)
----------- -----------
Total stockholders' equity 138,131 146,729
----------- -----------
Total liabilities and stockholders' equity $ 1,720,746 $ 1,763,666
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
1
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
For the three months For the nine months
ended September 30 ended September 30
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Unaudited) (Unaudited)
Interest income:
Loans $ 23,993 $ 24,300 $ 71,222 $ 70,130
Mortgage-backed securities 2,353 4,316 8,058 13,210
Investment securities and other 925 1,334 3,273 5,338
-------- -------- -------- --------
Total interest income 27,271 29,950 82,553 88,678
-------- -------- -------- --------
Interest expense:
Deposits 6,784 9,978 21,426 32,760
Borrowed funds 4,915 5,722 15,225 15,998
-------- -------- -------- --------
Total interest expense 11,699 15,700 36,651 48,758
-------- -------- -------- --------
Net interest income 15,572 14,250 45,902 39,920
Provision for loan losses 375 265 1,250 780
-------- -------- -------- --------
Net interest income after provision
for loan losses 15,197 13,985 44,652 39,140
-------- -------- -------- --------
Other income:
Loan servicing income (2,047) (614) (2,091) (554)
Fees and service charges 1,676 1,397 4,669 3,962
Net gain on sales of loans 1,258 1,001 2,766 3,505
Net (loss) income from other real estate operations (7) 215 67 270
Other 460 481 1,460 1,388
-------- -------- -------- --------
Total other income 1,340 2,480 6,871 8,571
-------- -------- -------- --------
Operating expenses:
Compensation and employee benefits 5,107 5,100 15,365 15,205
Occupancy 848 792 2,438 2,227
Equipment 561 544 1,679 1,601
Marketing 583 477 1,439 1,271
Federal deposit insurance 113 122 364 368
Data processing 595 521 1,908 1,580
General and administrative 2,092 1,915 6,393 5,390
-------- -------- -------- --------
Total operating expense 9,899 9,471 29,586 27,642
-------- -------- -------- --------
Income before provision for income taxes 6,638 6,994 21,937 20,069
Provision for income taxes 1,848 2,312 6,962 6,873
-------- -------- -------- --------
Net income $ 4,790 $ 4,682 $ 14,975 $ 13,196
======== ======== ======== ========
Basic earnings per share $ .38 $ .34 $ 1.16 $ .93
======== ======== ======== ========
Diluted earnings per share $ .35 $ .32 $ 1.08 $ .88
======== ======== ======== ========
Average basic shares outstanding 12,719 13,785 12,938 14,160
======== ======== ======== ========
Average diluted shares outstanding 13,666 14,616 13,822 14,954
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
2
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the nine months
ended September 30,
----------------------
2002 2001
------- ------
(Unaudited)
Cash flows from operating activities:
Net income $ 14,975 $ 13,196
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises
and equipment 1,501 1,449
Amortization of Incentive Awards 161 1,451
Amortization of ESOP 1,062 1,120
ESOP adjustment 1,514 986
Amortization and impairment of servicing asset 3,715 1,787
Amortization of intangible assets 79 269
Net premium amortization in excess of discount
accretion on securities 948 483
Net accretion of deferred fees and discounts
in excess of premium amortization on loans (330) (208)
Provision for loan losses 1,250 780
Net gain on sales of real estate owned (81) (303)
Net gain on sales of loans (2,766) (3,505)
Proceeds from sales of mortgage loans held for sale 364,647 273,175
Mortgage loans originated for sale (356,324) (274,431)
Increase in value of Bank Owned Life Insurance (1,424) (1,246)
Increase in interest and dividends receivable (249) (180)
Increase in other assets (3,820) (2,586)
(Decrease) increase in other liabilities (1,932) 1,428
--------- ---------
Total adjustments 7,951 469
--------- ---------
Net cash provided by operating activities 22,926 13,665
--------- ---------
Cash flows from investing activities:
Net increase in loans receivable (635) (141,135)
Purchase of mortgage-backed securities available for sale (30,165) (49,006)
Purchase of investment securities available for sale (600) (92)
Proceeds from maturities of investment securities
available for sale -- 23,470
Principal payments on mortgage-backed securities
available for sale 81,114 60,879
Decrease (increase) in Federal Home Loan Bank of New York stock 5,120 (2,800)
Proceeds from sales of real estate owned 472 745
Purchases of premises and equipment (2,620) (3,377)
--------- ---------
Net cash provided by (used in) investing activities 52,686 (111,316)
--------- ---------
Continued
3
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
For the nine months
ended September 30,
----------------------
2002 2001
------- ------
(Unaudited)
Cash flows from financing activities:
Increase in deposits $ 61,006 $ 14,124
(Decrease) increase in short-term borrowings (71,132) 47,634
Proceeds from Federal Home Loan Bank advances 25,000 115,000
Repayments of Federal Home Loan Bank advances (43,000) (20,000)
Proceeds from securities sold under agreements to repurchase -- 10,000
Repayments of securities sold under agreement to repurchase -- (33,000)
(Decrease)/increase in advances by borrowers for taxes and
insurance (3,706) 316
Exercise of stock options 769 993
Dividends paid (6,679) (5,868)
Purchase of treasury stock (19,885) (25,299)
--------- ---------
Net cash (used in) provided by financing activities (57,627) 103,900
--------- ---------
Net increase in cash and due from banks 17,985 6,249
Cash and due from banks at beginning of period 16,876 7,235
--------- ---------
Cash and due from banks at end of period $ 34,861 $ 13,484
========= =========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 37,213 $ 48,533
Income taxes 2,803 5,680
Noncash investing activities:
Transfer of loans receivable to real estate owned 617 340
Mortgage loans securitized into mortgage-backed
securities 96,275 27,321
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
OceanFirst Financial Corp.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of OceanFirst Financial Corp. (the "Company") and its wholly-owned
subsidiary, OceanFirst Bank (the "Bank") and its wholly-owned subsidiaries,
Columbia Equities, Ltd., OceanFirst REIT Holdings, Inc., OceanFirst Realty Corp.
and OceanFirst Services, LLC.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. The results of operations for the three and nine months ended
September 30, 2002 are not necessarily indicative of the results of operations
that may be expected for all of 2002.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report to Stockholders on Form 10-K for the year ended
December 31, 2001.
Note 2. Earnings per Share
The following reconciles shares outstanding for basic and diluted earnings per
share for the three and nine months ended September 30, 2002 and 2001 (in
thousands):
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted average shares issued net of Treasury shares 14,169 15,582 14,451 16,025
Less: Unallocated ESOP shares (1,397) (1,566) (1,438) (1,611)
Unallocated incentive award shares (53) (231) (75) (254)
------ ------ ------ ------
Average basic shares outstanding 12,719 13,785 12,938 14,160
Add: Effect of dilutive securities:
Stock options 905 673 824 621
Incentive awards 42 158 60 173
------ ------ ------ ------
Average diluted shares outstanding 13,666 14,616 13,822 14,954
====== ====== ====== ======
Note 3. Comprehensive Income
For the three month periods ended September 30, 2002 and 2001, total
comprehensive income, representing net income plus or minus items recorded
directly in equity, such as the change in unrealized gains or losses on
securities available for sale amounted to $3,909,000 and $6,415,000,
respectively. For the nine months ended September 30, 2002 and 2001, total
comprehensive income amounted to $13,902,000 and $17,951,000.
Note 4. Impact of Recent Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of
Certain Financial Institutions - an amendment to FASB Statements No. 72 and 144
and FASB Interpretation No. 9." This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." The provisions of SFAS No. 147 that relate to the
application of the purchase method of accounting apply to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises.
5
SFAS No. 147 clarifies that a branch acquisition that meets the definition of a
business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of SFAS No. 147 are
effective October 1, 2002. The Company has previously purchased deposits of
another financial institution and recorded a core deposit intangible. This
Statement will have no effect on the accounting or amortization of the recorded
intangible asset.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
The Statement, among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishments of Debt", as amended. Under SFAS No. 4, as amended,
gains and losses from the extinguishment of debt were required to be classified
as an extraordinary item, if material. Under SFAS No. 145, gains or losses from
the extinguishment of debt are to be classified as a component of operating
income, rather than an extraordinary item. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002, with early adoption of the provisions
related to the rescission of SFAS No. 4 encouraged. Upon adoption, companies
must reclassify prior period amounts previously classified as an extraordinary
item.
The Company elected to adopt the provisions related to the rescission of SFAS
No. 4 effective April 1, 2002. The adoption resulted in a second quarter 2002
debt prepayment penalty of $72,000 being classified in general and
administrative expenses. The Company recognized an extraordinary loss, net of
tax of $1,085,000 in the fourth quarter of 2001 pertaining to debt prepayment
penalties. The gross prepayment penalty of $1,669,000 will be reclassified as a
component of general and administrative expenses in 2001, with the related tax
benefit of $584,000 reported as a component of income tax expense in the
consolidated financial statements for the year ending December 31, 2001.
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed periodically for impairment. SFAS 142 requires that goodwill and any
intangible asset determined to have an indefinite useful life acquired after
June 30, 2001 not be amortized, but continue to be evaluated for impairment in
accordance with the appropriate pre-SFAS 142 accounting literature. The Company
adopted SFAS 142 effective January 1, 2002. As of December 31, 2001, the Company
had $1.0 million in unamortized goodwill with annual amortization of $253,000
which ceased upon the adoption of SFAS 142. The cessation of goodwill
amortization for the three and nine months ended September 30, 2002 did not have
a significant impact on the Company's consolidated financial statements as
compared to the same prior year periods. The Company has determined that there
is no impairment to goodwill based on the criteria of SFAS 142. The adoption of
SFAS 142 did not significantly impact the Company's accounting for currently
recorded intangible assets, primarily core deposit intangibles.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal or Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental
provisions of that Statement. The Statement is effective for fiscal years
beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not
have a significant impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires an enterprise to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets. The Company is required to adopt the provisions of SFAS No. 143 for
fiscal years beginning after June 15, 2002. The Company does not anticipate that
SFAS No. 143 will significantly impact the Company's consolidated financial
statements.
-6-
Note 5. Loans Receivable, Net
Loans receivable, net at September 30, 2002 and December 31, 2001 consisted of
the following (in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Real estate:
One- to four-family $ 1,057,812 $ 1,110,282
Commercial real estate, multi-
family and land 133,849 112,318
Construction 10,493 9,082
Consumer 79,372 67,039
Commercial 61,859 51,756
----------- -----------
Total loans 1,343,385 1,350,477
Loans in process (2,899) (2,458)
Deferred origination costs, net 1,443 1,048
Unearned (discount) premium (6) 1
Allowance for loan losses (9,665) (10,351)
----------- -----------
Total loans, net 1,332,258 1,338,717
Less: mortgage loans held for sale 30,121 37,828
----------- -----------
Loans receivable, net $ 1,302,137 $ 1,300,889
=========== ===========
Note 6. Deposits
The major types of deposits at September 30, 2002 and December 31, 2001 were as
follows (in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Type of Account
- ---------------
Non-interest bearing $ 84,358 $ 73,799
NOW 256,599 212,328
Money market deposit 117,289 78,903
Savings 228,987 196,879
Time deposits 482,816 547,134
----------- -----------
$ 1,170,049 $ 1,109,043
=========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets at September 30, 2002 were $1.721 billion, a decrease of $42.9
million, compared to $1.764 billion at December 31, 2001.
Loans receivable, net and mortgage loans held for sale together decreased by
$6.5 million to a balance of $1.332 billion at September 30, 2002, compared to a
balance of $1.339 billion at December 31, 2001. Commercial and commercial real
estate loans outstanding increased $31.6 million, while one- to four-family
mortgage loans declined, as the Bank actively sold 30-year fixed-rate mortgage
loans during the period.
Proceeds from the loan sales and the cash flow from mortgage-backed securities
were used to reduce total borrowings (Federal Home Loan Bank advances and
securities sold under agreements to repurchase) which declined by $89.1 million,
to $395.2 million at September 30, 2002 from $484.3 million at December 31,
2001. The sale of 30-year fixed-rate mortgage loans and the reduction in the
total borrowings reduces the Company's interest rate risk exposure and better
positions the Bank for the higher rate environment expected in 2003.
Deposit balances increased $61.0 million to $1.170 billion at September 30, 2002
from $1.109 billion at December 31, 2001. Core deposit categories, a key
emphasis for the Company, increased by $125.3 million as time deposits declined.
7
Stockholders' equity at September 30, 2002 decreased to $138.1 million, compared
to $146.7 million at December 31, 2001 due to the completion of the Company's
ninth stock repurchase program and the commencement of the Company's tenth stock
repurchase program. The Company repurchased 940,050 shares of common stock
during the nine months ended September 30, 2002 at a total cost of $19.9
million. Under the 10% repurchase program authorized by the Board of Directors
in August 2002, 1,250,535 shares remain to be purchased as of September 30,
2002.
Results of Operations
General
Net income increased to $4.8 million and $15.0 million for the three and nine
months ended September 30, 2002, respectively, as compared to net income of $4.7
million and $13.2 million for the three and nine months ended September 30,
2001, respectively. Diluted earnings per share increased to $.35 and $1.08 for
the three and nine months ended September 30, 2002, respectively, as compared to
$.32 and $.88, respectively, for the same prior year periods. Earnings per share
was favorably affected by the Company's repurchase program, which reduced the
number of shares outstanding.
Interest Income
Interest income for the three and nine months ended September 30, 2002 was $27.3
million and $82.6 million, respectively, compared to $30.0 million and $88.7
million, respectively, for the three and nine months ended September 30, 2001.
The decrease in interest income was due to a decline in the yield on
interest-earning assets to 6.66% and 6.71%, respectively, for the three and nine
months ended September 30, 2002, as compared to 7.22% and 7.34%, respectively,
for the same prior year periods. Despite the decline, which was reflective of
the general interest rate environment, the asset yield continued to benefit from
the Bank's previously strong loan growth, which was partly funded by reductions
in the lower-yielding investment and mortgage-backed securities available for
sale portfolios. For the three and nine months ended September 30, 2002 loans
receivable represented 81.6% and 81.4%, respectively, of average
interest-earning assets as compared to 77.4% and 76.0%, respectively, for the
same prior year periods.
Interest Expense
Interest expense for the three and nine months ended September 30, 2002 was
$11.7 million and $36.7 million, respectively, compared to $15.7 million and
$48.8 million, respectively, for the three and nine months ended September 30,
2001. The decrease in interest expense was primarily the result of a decrease in
the cost of interest-bearing liabilities to 3.15% and 3.27%, respectively, for
the three and nine months ended September 30, 2002, as compared to 4.17% and
4.45%, respectively, in the same prior year periods. Funding costs decreased due
to the lower interest rate environment and also due to the Company's focus on
lower-costing core deposit growth. Core deposits (including non-interest-bearing
deposits) represented 58.0% and 55.3%, respectively, of average deposits for the
three and nine months ended September 30, 2002, as compared to 47.6% and 44.7%,
respectively, for the same prior year periods.
Provision for Loan Losses
For the three and nine months ended September 30, 2002, the Company's provision
for loan losses was $375,000 and $1.3 million, respectively, as compared to
$265,000 and $780,000, respectively, for the same prior year periods. The
year-to-date increase was due to the deterioration and charge-off during the
first quarter of a non-performing commercial loan.
Other Income
Other income was $1.3 million and $6.9 million, respectively, for the three and
nine months ended September 30, 2002, compared to $2.5 million and $8.6 million,
respectively, for the same prior year periods. For the three and nine months
ended September 30, 2002, the Company recorded a gain of $1.3 million and $2.8
million, respectively, on the sale of loans, as compared to a gain of $1.0
million and $3.5 million, respectively, in the same prior year periods.
Loan servicing income decreased by $1.4 million and $1.5 million for the three
and nine months ended September 30, 2002, respectively, as compared to the same
prior year periods due to actual and anticipated prepayments of the loans
underlying the servicing portfolio. Results for the three and nine months ended
September 30, 2002 include the recognition of impairment reserves on the loan
servicing asset for $1.9 million and $2.1 million, respectively, as compared to
a servicing impairment of $600,000 in the same prior year periods.
8
Fees and service charges increased by $279,000, or 20.0%, and $707,000, or 17.8%
for the three and nine months ended September 30, 2002, respectively, as
compared to the same prior year periods due to the growth in commercial account
services, retail core account balances and trust fees.
Operating Expenses
Operating expenses were $9.9 million and $29.6 million, respectively, for the
three and nine months ended September 30, 2002, as compared to $9.5 million and
$27.6 million, respectively, in the same prior year periods. The increases were
principally due to the costs associated with the opening and operation of the
Bank's sixteenth and seventeenth branch offices in September 2001 and May 2002,
as well as higher loan-related expenses. Compensation expense benefited from the
elimination, in February 2002, of the amortization expense relating to the stock
awards granted under the 1997 Incentive Plan, a cost savings of $483,000 and
$1.3 million, respectively, for the three and nine months ended September 30,
2002 as compared to the same prior year periods. This savings was partly offset
by an increase in ESOP expense of $172,000 and $469,000 for the three and nine
months ended September 30, 2002, respectively, due to the higher average market
price for OCFC shares during 2002.
Provision for Income Taxes
Income tax expense was $1.8 million and $7.0 million, respectively, for the
three and nine months ended September 30, 2002, compared to $2.3 and $6.9
million, respectively, for the same prior year periods. The effective tax rate
decreased to 27.8% and 31.7%, respectively, for the three and nine months ended
September 30, 2002 as compared to 33.1% and 34.2 %, respectively, for the same
prior year periods. The decrease was partly due to a change in Federal tax
regulations allowing for the deductibility of ESOP dividends beginning in 2002.
Also, on July 2, 2002, the New Jersey legislature passed the New Jersey Business
Tax Reform Act. The legislation provided for an Alternative Minimum Assessment
(AMA) tax based on either gross receipts or gross profits and also increased the
tax rate on savings institutions, such as the Bank, from 3% to 9%. The
legislation was retroactive to January 1, 2002 and its effects are reflected in
the Company's third quarter operating results. The net effect of the legislation
on the Company was to recognize a tax benefit of $389,000 for the three and nine
months ended September 30, 2002, as deferred tax assets were increased to
reflect their expected recognition at the higher tax rate of 9%. The Company
expects the legislation to have no significant impact on the tax provision in
future periods.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, proceeds from the sale of
loans, Federal Home Loan Bank ("FHLB") and other borrowings and, to a lesser
extent, investment maturities. While scheduled amortization of loans is a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company has other sources of liquidity if a need for additional funds arises,
including an overnight line of credit and advances from the FHLB.
At September 30, 2002, the Company had no outstanding overnight borrowings from
the FHLB, a decrease from $80.0 million at December 31, 2001. The Company
utilizes the overnight line from time to time to fund short-term liquidity
needs. The Company also had other borrowings of $395.2 million at September 30,
2002, a decrease from $484.3 million at December 31, 2001. These borrowings were
used to fund a wholesale leverage strategy designed to improve returns on
invested capital.
The Company's cash needs for the nine months ended September 30, 2002, were
primarily provided by principal payments on loans and mortgage-backed
securities, increased deposits and proceeds from the sale of mortgage loans held
for sale. The cash was principally utilized for loan originations, the purchase
of mortgage-backed securities, a reduction in total borrowings and the purchase
of treasury stock. For the nine months ended September 30, 2001, the cash needs
of the Company were primarily satisfied by principal payments on loans and
mortgage-backed securities, maturities of investment securities, proceeds from
the sale of mortgage loans held for sale and increased total borrowings. The
cash provided was principally used for the origination of loans, the purchase of
mortgage-backed securities and the purchase of treasury stock.
At September 30, 2002, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $118.5 million, or 6.9%, of total adjusted
assets, which is above the required level of $25.8 million or 1.5%; core capital
of $118.5 million or 6.9% of total adjusted assets, which is above the required
level of $51.6 million, or 3.0%; and risk-based capital of $128.0 million, or
12.0% of risk-weighted assets, which is above the required level of $85.5
million or 8.0%. The Bank is considered a "well-capitalized" institution under
the Office of Thrift Supervision's prompt corrective action regulations.
9
Non-Performing Assets
The following table sets forth information regarding the Company's
non-performing assets consisting of non-accrual loans and Real Estate Owned
(REO). It is the policy of the Company to cease accruing interest on loans 90
days or more past due or in the process of foreclosure.
September 30, December 31,
2002 2001
------------- ------------
(dollars in thousands)
Non-accrual loans:
Real estate:
One-to four-family $ 2,554 $ 3,661
Commercial real estate,
multi-family and land 74 --
Consumer 107 151
Commercial 45 2,368
------------- ------------
Total 2,780 6,180
REO, net 359 133
------------- ------------
Total non-performing assets $ 3,139 $ 6,313
============= ============
Non-performing loans as a percent of total
loans receivable .21% .46%
Non-performing assets as a percent of total
assets .18 .36
Allowance for loan losses as a percent of
total loans receivable .72 .77
Allowance for loan losses as percent of
total non-performing loans 347.66 167.49
The decrease in non-performing loans is primarily due to the first quarter
charge-off of a non-performing commercial loan with an outstanding balance of
$2.4 million. The loan is a participation interest in a $125 million shared
national credit on a company headquartered in New Jersey, and is secured by
corporate assets and various commercial real estate properties. The Bank does
not participate in any other shared national credits. During the third quarter,
the Bank recovered $580,000 of this charge-off which increased the allowance for
loan losses.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this quarterly report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal and state tax authorities, changes in interest rates, deposit flows, the
cost of funds, demand for loan products, demand for financial services,
competition, changes in the quality or composition of the Bank's loan and
investment portfolios, changes in accounting principles, policies or guidelines,
and other economic, competitive, governmental and technological factors, and the
effects of war or terrorism activities affecting the Company's operations,
markets, products, services and prices. Further description of the risks and
uncertainties to the business are included in Item 1, Business, of the Company's
2001 Form 10-K.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's interest rate sensitivity is monitored by management through the
use of an interest rate risk (IRR) model. Based on internal IRR modeling the
Company's one-year gap at September 30, 2002 was positive 11.5% as compared to
negative 6.7% at December 31, 2001. Additionally, the table below sets forth the
Company's exposure to interest rate risk as measured by the change in net
portfolio value ("NPV") and net interest income under varying rate shocks as of
September 30, 2002 and December 31, 2001. All methods used to measure interest
rate sensitivity involve the use of assumptions, which may tend to oversimplify
the manner in which actual yields and costs respond to changes in market
interest rates. The Company's interest rate sensitivity should be reviewed in
conjunction with the financial statements and notes thereto contained in the
Company's Annual Report for the year ended December 31, 2001.
10
At September 30, 2002 savings, NOW, non-interest bearing and Money Market
accounts ("core deposits") were assumed to decay, or runoff, at a slower rate
than at December 31, 2001. The slower decay rate was partly responsible for
reducing the Company's negative gap and increasing NPV in a static rate
environment. The increase in core deposit balances and the decline in time
deposit balances from December 31, 2001 to September 30, 2002 also contributed
to this trend. Also, assumed prepayment speeds for mortgage loans and
mortgage-backed securities were higher at September 30, 2002 as compared to
December 31, 2001 due to the lower interest rate environment. Finally, interest
rate sensitivity was affected by the Bank's sale of 30-year fixed-rate mortgage
loans during the nine months ended September 30, 2002. The proceeds from these
sales were used to reduce overnight borrowings which declined by $80.0 million
from December 31, 2001 to September 30, 2002.
September 30, 2002 December 31, 2001
-------------------------------------------------------- -------------------------------------------------------
Net Portfolio Value Net Interest Income Net Portfolio Value Net Interest Income
- -------------------------------------------------------------------------- -------------------------------------------------------
Change in
Interest Rates
in Basis Points NPV NPV
(Rate Shock) Amount % Change Ratio Amount % Change Amount % Change Ratio Amount % Change
- -------------------------------------------------------------------------- -------------------------------------------------------
(dollars in
thousands)
200 $ 160,233 (3.5)% 9.5% $ 60,908 5.9% $ 118,006 (22.1)% 7.0% $ 58,369 (5.3)%
100 170,726 2.8 9.9 59,752 3.9 141,155 (6.8) 8.2 60,366 (2.1)
Static 166,117 - 9.5 57,519 - 151,507 - 8.6 61,649 -
(100) 146,469 (11.8) 8.3 53,500 (7.0) 154,728 2.1 8.6 62,177 .9
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company maintains controls
and procedures designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Based upon their evaluation of those controls and procedures performed within 90
days of the filing date of this report, the chief executive officer and the
principal financial officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
Changes in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer and principal financial officer.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to routine legal proceedings within the normal course of
business. Such routine legal proceedings in the aggregate are
believed by management to be immaterial to the Company's
financial condition or results of operations.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
3.1 Certificate of Incorporation of OceanFirst Financial Corp.*
3.2 Bylaws of OceanFirst Financial Corp.**
4.0 Stock Certificate of OceanFirst Financial Corp.*
b) There were no reports on Form 8-K filed during the three
months ended September 30, 2002.
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, filed on December 7, 1995, as amended,
Registration No. 33-80123.
** Incorporated herein by reference into this document from the Exhibit to
Form 10-Q, Quarterly Report, filed on August 11, 2000.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OceanFirst Financial Corp.
---------------------------------
Registrant
DATE: November 13, 2002 /s/ John R. Garbarino
---------------------------------
John R. Garbarino
Chairman of the Board, President
and Chief Executive Officer
DATE: November 13, 2002 /s/ Michael Fitzpatrick
---------------------------------
Michael Fitzpatrick
Executive Vice President and
Chief Financial Officer
13
CERTIFICATION
I, John R. Garbarino, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of OceanFirst
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of the
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ John R. Garbarino
--------------------------------
John R. Garbarino
Chief Executive Officer
(principal executive officer)
14
CERTIFICATION
I, Michael J. Fitzpatrick, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of OceanFirst
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
the internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Michael Fitzpatrick
------------------------------
Michael Fitzpatrick
Chief Financial Officer
(principal financial officer)
15