OceanFirst Financial (OCFC) 10-K 2005 FY Annual report

Exhibit 13

Selected Consolidated Financial and Other Data of the Company

The selected consolidated financial and other data of the Company set forth below is derived in part from, and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere in this Annual Report.

At December 31,	2005		2004		2003		2002		2001
(dollars in thousands)
Selected Financial Condition Data:
Total assets	$	1,985,357	$	1,914,275	$	1,717,409	$	1,743,698	$	1,763,666
Investment securities available for sale		83,861		83,960		80,458		91,978		80,017
Federal Home Loan Bank of New York stock		21,792		21,250		19,220		18,700		23,560
Mortgage-backed securities available for sale		85,025		124,478		86,938		138,657		233,302
Loans receivable, net		1,654,544		1,472,907		1,389,220		1,335,898		1,300,889
Mortgage loans held for sale		32,044		63,961		33,207		66,626		37,828
Deposits		1,356,568		1,270,535		1,144,205		1,184,836		1,109,043
Federal Home Loan Bank advances		354,900		312,000		314,400		214,000		272,000
Securities sold under agreements to repurchase and other borrowings		118,289		151,072		106,723		184,584		212,332
Stockholders’ equity		138,784		137,956		134,662		135,305		146,729
For the Year Ended December 31,	2005		2004		2003		2002		2001
(dollars in thousands; except per share amounts)
Selected Operating Data:
Interest income	$	102,799	$	90,952	$	94,537	$	108,456	$	118,160
Interest expense		41,873		34,931		36,894		47,624		63,148
Net interest income		60,926		56,021		57,643		60,832		55,012
Provision for loan losses		350		300		688		1,650		1,250
Net interest income after provision for loan losses		60,576		55,721		56,955		59,182		53,762
Other income		24,090		20,740		18,749		10,857		12,925
Operating expenses		54,834		48,759		44,857		40,144		39,048
Income before provision for income taxes		29,832		27,702		30,847		29,895		27,639
Provision for income taxes		10,335		9,757		10,974		9,752		9,480
Net income	$	19,497	$	17,945	$	19,873	$	20,143	$	18,159
Basic earnings per share	$	1.65	$	1.48	$	1.62	$	1.57	$	1.30
Diluted earnings per share	$	1.60	$	1.42	$	1.53	$	1.47	$	1.23

Selected Consolidated Financial and Other Data (continued)

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 9

Selected Consolidated Financial and Other Data of the Company(continued)

At or For the Year Ended December 31,	2005			2004			2003			2002			2001
Selected Financial Ratios and Other Data(1):
Performance Ratios:
Return on average assets		1.00	%		.98	%		1.14	%		1.16	%		1.06	%
Return on average stockholders’ equity		14.43			13.34			14.84			14.31			12.01
Stockholders’ equity to total assets		6.99			7.21			7.84			7.76			8.32
Tangible equity to tangible assets		6.93			7.13			7.75			7.67			8.22
Average interest rate spread(2)		3.07			3.03			3.24			3.41			2.97
Net interest margin(3)		3.30			3.23			3.48			3.70			3.37
Average interest-earning assets to average interest-bearing liabilities		109.74			110.24			110.82			109.78			110.31
Operating expenses to average assets		2.81			2.67			2.57			2.32			2.29
Efficiency ratio(4)		64.50			63.52			58.72			56.00			57.48
Asset Quality Ratios:
Non-performing loans as a percent of total loans receivable(5)(6)		.09			.23			.15			.19			.46
Non-performing assets as a percent of total assets(6)		.09			.20			.14			.16			.36
Allowance for loan losses as a percent of total loans receivable(5)		.62			.69			.75			.71			.77
Allowance for loan losses as a percent of total non-performing loans(6)		655.80			306.42			499.63			374.78			167.49
Per Share Data:
Cash dividends per common share	$	.80		$	.80		$	.78		$	.69		$	.56
Book value per common share at end of period		10.93			10.59			10.09			9.83			9.92
Tangible book value per common share at end of period		10.83			10.49			9.98			9.72			9.81
Number of full-service customer facilities:		18			17			17			17			16

(1) With the exception of end of year ratios, all ratios are based on average daily balances.

(2) The average interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3) The net interest margin represents net interest income as a percentage of average interest-earning assets.

(4) Efficiency ratio represents the ratio of operating expenses to the aggregate of other income and net interest income.

(5) Total loans receivable includes loans receivable and loans held for sale.

(6) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure (“REO”). Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans.

10 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Management’s Discussion and Analysis

of Financial Condition and Results of Operations

Overview

OceanFirst Financial Corp. (the “Company” or “OCFC”) is the holding company for OceanFirst Bank (the “Bank”). On August 17, 1995, the Board of Directors (the “Board”) of the Bank adopted a Plan of Conversion, as amended, to convert from a Federally-chartered mutual savings bank to a Federally-chartered capital stock savings bank with the concurrent formation of a holding company (the “Conversion”).

The Conversion was completed on July 2, 1996 with the issuance by the Company of 25,164,235 shares of its common stock in a public offering to the Bank’s eligible depositors and the Bank’s employee stock ownership plan (the “ESOP”). Concurrent with the close of the Conversion, an additional 2,013,137 shares of common stock (8% of the offering) were issued and donated by the Company to OceanFirst Foundation (the “Foundation”), a private foundation dedicated to charitable purposes within Ocean County, New Jersey and its neighboring communities.

On August 18, 2000 the Bank acquired Columbia Home Loans, LLC (formerly Columbia Equities, Ltd.) (“Columbia”), a mortgage banking company based in Westchester County, New York in a transaction accounted for as a purchase. Columbia offers a full product line of residential mortgage loans with operations primarily centered in New York and New Jersey. Loans are originated through loan production offices, a web site and a network of independent mortgage brokers. Additionally, on July 15, 2004, Columbia completed the acquisition of a consumer direct lending operation based in Kenilworth, New Jersey. The unit specializes in the origination of conventional and non-conforming mortgage loans through marketing agreements with Internet-, phone- and mail-based lead generators.

The Company conducts business, primarily through its ownership of the Bank which operates its administrative/branch office located in Toms River and seventeen other branch offices. Fourteen of the eighteen branch offices are located in Ocean County, New Jersey, with three branches in Monmouth County and one in Middlesex County. The Bank also operates two loan production offices.

The Company’s results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on the Company’s interest-earning assets, such as loans and investments, and the interest expense on its interest-bearing liabilities, such as deposits and borrowings. The Company also generates non-interest income such as income from loan sales, loan servicing, loan originations, merchant check card services, deposit accounts, the sale of alternative investments, trust and asset management services and other fees. The Company’s operating expenses primarily consist of compensation and employee benefits, occupancy and equipment, marketing, and other general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.

Strategy

The Company operates as a consumer-oriented bank, with a strong focus on its local community. The Bank is the oldest and largest community-based financial institution headquartered in Ocean County, New Jersey. The Company competes with generally larger and out-of-market financial service providers through its local focus and the delivery of superior service. Additionally, over the past few years, the Company has developed a more pro-active sales culture throughout the organization.

The Company’s strategy has been to consistently grow profitability while limiting credit and interest rate risk exposure. To accomplish these objectives, the Company has sought to (1) grow loans receivable through the Bank’s traditional mortgage portfolio emphasis supplemented by the offering of commercial lending services to local businesses; (2) grow core deposits (defined as all deposits other than time deposits) through de novo branch expansion and product offerings appealing to a broadened customer base; (3) increase non-interest income by expanding the menu of fee-based products and services; and (4) actively manage the Company’s capital position.

With industry consolidation eliminating most locally-headquartered competitors, the Company saw an opportunity to fill a perceived void for locally delivered commercial loan and deposit services. As such, the Company assembled an experienced team of business banking professionals responsible for offering commercial loan and deposit services and merchant check card services to businesses in Ocean County and surrounding communities. As a result of this initiative, commercial loans represented 20.2% of the Bank’s total loans receivable at December 31, 2005 as compared to only 3.6% at December 31, 1997. Commercial loan growth during 2005 of $38.6 million, or 12.7%, was significantly less than the Company’s expectations and less than the results experienced in prior years due to unfilled staff positions and heightened competition. Although staffing shortfalls have largely been cured entering 2006, the intensified competitive environment may once again keep the Company from attaining its commercial loan growth targets. The diversification of the Company’s loan products entails a higher degree of credit risk than is involved in one-to four family residential mortgage lending activity. As a consequence, management continues to employ a well-defined credit policy focusing on quality underwriting and close management and Board monitoring.

The Company seeks to increase core deposit market share in its primary market area by expanding the Bank’s branch network and improving market penetration. Over the past eight years, the Company has opened nine branch offices, six in Ocean County and three in Monmouth County. The Company has committed to the opening of new branches in Barnegat and Little Egg Harbor which are expected to open in mid 2006. Additionally, new branches in Freehold and Wall are expected to open in 2007. Finally, in mid 2006, the Whiting branch is expected to be relocated to a more convenient and prominent location. The Company is continually evaluating additional office sites within its existing market area.

At December 31, 2005, the nine most recently opened branches maintained an average core deposit mix of 71.6%. Core account development has also benefited from the Company’s efforts to attract business deposits in conjunction with its commercial lending operations and from an expanded mix of retail core account products. Additionally, marketing and incentive plans have focused on core account growth. As a result of these efforts the Company’s core deposit ratio has grown to 64.1% at December 31, 2005 as compared to only 33.0% at December 31, 1997. Core deposits are generally considered a less expensive and more stable funding source than certificates of deposit.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 11

Management’s Discussion and Analysis

of Financial Condition and Results of Operations(continued)

Management continues to diversify the Company’s product line in order to enhance non-interest income. The Company offers alternative investment products (annuities, mutual funds and life insurance) for sale through its retail branch network. The products are non-proprietary, sold through a third party vendor, and provide the Company with fee income opportunities. The Company introduced trust and asset management services in early 2000 and has also expanded the non-interest income received from small business relationships including merchant services. During 2002, the Company established a captive subsidiary to recognize fee income from private mortgage insurance. As a result of these initiatives, income from fees and service charges has increased from $1.4 million for the year ended December 31, 1997 to $9.4 million for the year ended December 31, 2005, a 27.2% average annual increase. In early 2005, the Company entered into a joint venture agreement with a title insurance agency to capture part of the revenue associated with offering title insurance to the Company’s mortgage loan customers. The joint venture had little impact on the Company’s operating results for 2005, but is expected to contribute to fee income for 2006. Also, in early 2005, the alternative investment program was expanded to add Licensed Branch Employees which will allow the Company to capture more of the revenue associated with the sale of investment products.

With post conversion capital levels exceeding 20%, management recognized the need to address the Company’s overcapitalized position in order to improve return on equity. The capital management plan implemented over the past few years includes the following components: (1) share repurchases; (2) cash dividends; and (3) wholesale leverage. During 2005 the Company repurchased 690,407 common shares. Under the 10% repurchase program authorized by the Board of Directors in October 2003, 59,648 shares remain to be purchased as of December 31, 2005. A new repurchase program, the Company’s twelfth, was announced on October 19, 2005. Under this 5% repurchase program, an additional 636,036 shares are available for repurchase. From conversion date through December 31, 2005, the Company has repurchased a total of 16.1 million common shares, 59.4% of the shares originally issued in the conversion. The Company has historically targeted a cash dividend payout of 40% to 50% of net income. The dividend has increased by 200% since the initial dividend in 1997. The Company has also used wholesale borrowings to fund purchases of investment and mortgage-backed securities and, in previous years, the retention of some 30-year fixed-rate mortgage loans. The adoption of this strategy generally increases the Company’s interest rate risk exposure. As noted below, management seeks to carefully monitor and assess the Company’s interest rate risk exposure while actively managing the balance sheet composition.

The capital management plan has successfully reduced the Company’s capital ratio from 19.4% at December 31, 1996 to 7.0% at December 31, 2005 while increasing the Company’s return on equity from 6.0% for the year ended December 31, 1997 to 14.4% for the year ended December 31, 2005.

Summary

After declining to relatively low levels in early 2004, interest rates have steadily risen over the past year, especially at the shorter end of the yield curve. The previously low interest rate environment generally had an adverse effect on the Company’s operating results. Prepayments on loans and mortgage-backed securities caused asset yields to decline at a faster rate than the cost of liabilities, causing the Company’s net interest margin to contract. The more recent rising rate environment reduced prepayment activity and caused the Company’s net interest margin to expand. However, recent increases in short-term interest rates have outpaced increases in longer-term rates resulting in a continued flattening of the interest rate yield curve. The continuation of a flat yield curve into 2006 is expected to have a negative impact on the Company’s results of operations and net interest margin as interest-earning assets, both loans and securities, are priced against longer-term indices, while interest-bearing liabilities, primarily deposits and borrowings, are priced against shorter-term indices. The Company has generally not repriced all core deposits in line with the market increases in short-term interest rates. The likely upward repricing of core deposits is also expected to have a negative impact on the Company’s results of operations and net interest margin.

The Company continues to focus on growing loans receivable, while limiting credit and interest rate risk exposure. The Company opened a joint residential/commercial loan production office in Monmouth County in late 2004. In the third quarter of 2004, the Company expanded its loan production platform through the acquisition of a consumer direct lending operation by Columbia. The acquisition increased the volume of loans sold by the Company and the related gain on sale and was also partially responsible for the increase in operating expenses.

While the Company continues to focus on growing core deposits the rise in interest rates and the muted reaction of competitors to those interest rate changes provided the Company with an opportunity to be more competitive in the market for time deposits within established pricing guidelines. Both core and time deposit balances increased during 2005. Deposit growth also benefited from the opening of the Company’s eighteenth branch office in Freehold late in the first quarter of 2005.

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2005 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at fair value or the lower of cost or fair value. Policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of Mortgage Servicing Rights and judgments regarding securities impairment are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors.

12 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Allowance for Loan Losses

The allowance for loan losses is a valuation account that reflects probable incurred losses in the loan portfolio based on management’s evaluation of the risks inherent in its loan portfolio and the general economy. The Company maintains the allowance for loan losses through provisions for loan losses that are charged to income. Charge-offs against the allowance for loan losses are taken on loans where management determines that the collection of loan principal is unlikely. Recoveries made on loans that have been charged-off are credited to the allowance for loan losses. The allowance for loan losses is maintained at an amount management considers sufficient to provide for probable losses based on evaluating known and inherent risks in the loan portfolio resulting from management’s continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, actual loan loss experience, current economic conditions, detailed analysis of individual loans for which full collectibility may not be assured, and the determination of the existence and realizable value of the collateral and guarantees securing the loan.

The Bank’s allowance for loan losses consists of a specific allowance and a general allowance, each updated on a quarterly basis. A specific allowance is determined for all assets classified as substandard, doubtful or loss where the value of the underlying collateral can reasonably be evaluated; generally those loans secured by real estate. The Bank obtains an updated appraisal whenever a loan secured by real estate becomes 90 days delinquent. The specific allowance represents the difference between the Bank’s recorded investment in the loan and the fair value of the collateral, less estimated disposal costs. A general allowance is determined for all other classified and non-classified loans. In determining the level of the general allowance, the Bank segments the loan portfolio into various risk tranches based on classification (special mention, substandard and doubtful); type of loan (mortgage, consumer and commercial); and certain underwriting characteristics. An estimated loss factor is then applied to each risk tranche. The loss factors are determined based upon historical loan loss experience, current economic conditions, underwriting standards, internal loan review results and other factors.

An overwhelming percentage of the Company’s loan portfolio, whether one-to-four family, consumer or commercial, is secured by real estate. Additionally, most of the Company’s borrowers are located in Ocean County, New Jersey and the surrounding area. These concentrations may adversely affect the Company’s loan loss experience should real estate values decline or should the Ocean County area experience an adverse economic shock.

Management believes the primary risks inherent in the portfolio are possible increases in interest rates, a decline in the economy, generally, and a decline in real estate market values. Any one or a combination of these events may adversely affect the borrowers’ ability to repay the loans, resulting in increased delinquencies, loan losses and future levels of provisions. Accordingly, the Company has provided for loan losses at the current level to address the current risk in the loan portfolio.

Although management believes that the Company has established and maintained the allowance for loan losses at adequate levels, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to make additional provisions for loan losses based upon information available to them at the time of their examination. Although management uses the best information available, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

Valuation of Mortgage Servicing Rights (“MSR”)

The estimated origination and servicing costs of mortgage loans sold in which servicing rights are retained is allocated between the loans and the servicing rights based on their estimated fair values at the time of the loan sale. Servicing assets are carried at the lower of cost or fair value and are amortized in proportion to, and over the period of, net servicing income. The estimated fair value of MSR is determined through a discounted analysis of future cash flows, incorporating numerous assumptions including servicing income, servicing costs, market discount rates, prepayment speeds and default rates. Impairment of the MSR is assessed on the fair value of those rights with any impairment recognized as a component of loan servicing fee income.

The fair value of MSR is sensitive to changes in assumptions. Fluctuations in prepayment speed assumptions have the most significant impact on the fair value of MSR. In the event that loan prepayment activities increase due to increased loan refinancing, the fair value of MSR would likely decline. In the event that loan prepayment activities decrease due to a decline in loan refinancing, the fair value of MSR would likely increase. Any measurement of MSR is limited by the existing conditions and assumptions utilized at a particular point in time, and would not necessarily be appropriate if applied at a different point in time.

Impairment of Securities

On a quarterly basis the Company evaluates whether any securities are other-than-temporarily impaired. In making this determination, the Company considers the extent and duration of the impairment, the nature and financial health of the issuer, the ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery in market value and other factors relevant to specific securities, such as the credit risk of the issuer and whether a guarantee or insurance applies to the security. If a security is determined to be other-than-temporarily impaired, an impairment loss is charged to income during the period the impairment loss is found to exist, resulting in a reduction to earnings for that period.

As of December 31, 2005, the Company concluded that any unrealized losses in the securities available for sale portfolios were temporary in nature because they were primarily related to market interest rates and not related to the underlying credit quality of the issuers of the securities. Additionally, the Company has the intent and ability to hold these investments for the time necessary to recover the amortized cost. Future events that would materially change this conclusion and require an impairment loss to be charged to operations include a change in the credit quality of the issuers.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 13

Management’s Discussion and Analysis

of Financial Condition and Results of Operations(continued)

Analysis of Net Interest Income

Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rate earned or paid on them.

The following table sets forth certain information relating to the Company for each of the years ended December 31, 2005, 2004, and 2003. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields.

	Years Ended December 31,
	2005							2004							2003
(dollars in thousands)	Average Balance			Interest		Average Yield/ Cost		Average Balance			Interest		Average Yield/ Cost		Average Balance			Interest		Average Yield/ Cost
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments	$	10,796		$	344	3.19	%	$	14,527		$	190	1.31	%	$	12,115		$	127	1.05	%
Investment securities		85,942			3,871	4.50			85,258			2,400	2.81			88,966			2,339	2.63
FHLB stock		20,105			907	4.51			22,357			405	1.81			19,518			750	3.84
Mortgage-backed securities		106,148			3,813	3.59			130,749			4,363	3.34			116,633			4,440	3.81
Loans receivable, net(1)		1,624,761			93,864	5.78			1,479,504			83,594	5.65			1,419,477			86,881	6.12
Total interest-earning assets		1,847,752			102,799	5.56			1,732,395			90,952	5.25			1,656,709			94,537	5.71
Non-interest-earning assets		101,357							97,072							90,698
Total assets	$	1,949,109						$	1,829,467						$	1,747,407
Liabilities and Equity:
Interest-bearing liabilities:
Money market deposit accounts	$	135,907		$	1,604	1.18	%	$	143,064		$	1,350	.94	%	$	132,491		$	1,372	1.04	%
Savings accounts		260,655			1,858	.71			263,133			1,310	.50			253,937			1,679	.66
Interest-bearing checking accounts		350,839			4,674	1.33			272,076			1,556	.57			262,542			1,743	.66
Time deposits		481,585			14,671	3.05			414,393			10,978	2.65			421,157			12,449	2.96
Total		1,228,986			22,807	1.86			1,092,666			15,194	1.39			1,070,127			17,243	1.61
FHLB advances		320,231			13,698	4.28			335,916			14,815	4.41			272,928			13,338	4.89
Securities sold under agreements to repurchase		132,520			5,237	3.95			142,824			4,922	3.45			151,901			6,313	4.16
Subordinated debenture		2,055			131	6.37			—			—	—			—			—	—
Total interest-bearing liabilities		1,683,792			41,873	2.49			1,571,406			34,931	2.22			1,494,956			36,894	2.47
Non-interest-bearing deposits		115,681							111,135							102,294
Non-interest-bearing liabilities		14,499							12,378							16,226
Total liabilities		1,813,972							1,694,919							1,613,476
Stockholders’ equity		135,137							134,548							133,931
Total liabilities and equity	$	1,949,109						$	1,829,467						$	1,747,407
Net interest income				$	60,926						$	56,021						$	57,643
Net interest rate spread(2)						3.07	%						3.03	%						3.24	%
Net interest margin(3)						3.30	%						3.23	%						3.48	%
Ratio of interest-earning assets to interest-bearing liabilities		109.74	%						110.24	%						110.82	%

(1) Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated loan loss allowances and includes loans held for sale and non-performing loans.

(2) Net interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by average interest-earning assets.

14 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Rate Volume Analysis. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.

	Year Ended December 31, 2005 Compared to Year Ended December 31, 2004									Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
	Increase (Decrease) Due to									Increase (Decrease) Due to
(in thousands)	Volume			Rate			Net			Volume			Rate			Net
Interest-earning assets:
Interest-earning deposits and short-term investments	$	(60	)	$	214		$	154		$	28		$	35		$	63
Investment securities		19			1,452			1,471			(98	)		159			61
FHLB stock		(45	)		547			502			97			(442	)		(345	)
Mortgage-backed securities		(861	)		311			(550	)		505			(582	)		(77	)
Loans receivable, net		8,320			1,950			10,270			3,571			(6,858	)		(3,287	)
Total interest-earning assets		7,373			4,474			11,847			4,103			(7,688	)		(3,585	)
Interest-bearing liabilities:
Money market deposit accounts		(71	)		325			254			110			(132	)		(22	)
Savings accounts		(12	)		560			548			58			(427	)		(369	)
Interest-bearing checking accounts		556			2,562			3,118			60			(247	)		(187	)
Time deposits		1,913			1,780			3,693			(196	)		(1,275	)		(1,471	)
Total		2,386			5,227			7,613			32			(2,081	)		(2,049	)
FHLB advances		(685	)		(432	)		(1,117	)		2,875			(1,398	)		1,477
Securities sold under agreements to repurchase		(370	)		685			315			(361	)		(1,030	)		(1,391	)
Subordinated debenture		131			—			131			—			—			—
Total interest-bearing liabilities		1,462			5,480			6,942			2,546			(4,509	)		(1,963	)
Net change in net interest income	$	5,911		$	(1,006	)	$	4,905		$	1,557		$	(3,179	)	$	(1,622	)

Comparison of Financial Condition at December 31, 2005 and December 31, 2004

Total assets at December 31, 2005 were $1.985 billion, an increase of $71.1 million, compared to $1.914 billion at December 31, 2004.

Mortgage-backed securities decreased $39.5 million as cash flow from these securities was used to fund loan growth. Loans receivable, net increased by $181.6 million to a balance of $1.655 billion at December 31, 2005, compared to a balance of $1.473 billion at December 31, 2004. One-to-four family mortgage loans increased $89.3 million, or 8.4%. Mortgage loan sales and prepayment activity were offset through the retention of $82.1 million in high quality adjustable rate and short-term fixed-rate loans originated by the Bank’s mortgage banking subsidiary. Previously, Columbia would have sold these loans into the secondary market. Consumer loans grew $47.6 million, or 48.0%, as the Bank maintained a renewed emphasis on this lending product. Commercial and commercial real estate loans outstanding increased $38.6 million, or 12.7%, which was less than the Company’s expectations and less than the results experienced in prior years due to unfilled staff positions and heightened competition.

Deposit balances increased $86.0 million to $1.357 billion at December 31, 2005 from $1.271 billion at December 31, 2004. Core deposits, a key emphasis for the Company, increased by $72.5 million, while time deposits increased by $13.5 million.

Total Federal Home Loan Bank borrowings, consisting of securities sold under agreements to repurchase and advances, decreased $4.1 million to $413.9 million at December 31, 2005, compared to a balance of $418.0 million at December 31, 2004. The Company utilized excess cash and due from bank balances and deposit flows to reduce Federal Home Loan Bank borrowings. During the year the Company issued subordinated debt for $5.0 million, the proceeds of which were partly used to fund the Company’s common stock repurchase program.

Stockholders’ equity at December 31, 2005 increased to $138.8 million, compared to $138.0 million at December 31, 2004. For the year ended December 31, 2005, the Company repurchased 690,407 shares of common stock at a total cost of $16.0 million. The cost of the share repurchases was offset by net income, proceeds from stock option exercises and the related tax benefit, and Employee Stock Ownership Plan amortization.

Comparison of Operating Results for the Years Ended December 31, 2005 and December 31, 2004

General

Net income increased to $19.5 million for the year ended December 31, 2005, as compared to net income of $17.9 million for the year ended December 31, 2004. Diluted earnings per share increased to $1.60 for the year ended December 31, 2005, as compared to $1.42 for the same prior year period. Earnings per share was favorably affected by the Company’s repurchase program, which reduced the average diluted shares outstanding.

Interest Income

Interest income for the year ended December 31, 2005 was $102.8 million, compared to $91.0 million for the year ended December 31, 2004. The yield on interest-earning assets increased to 5.56% for the year ended December 31, 2005, as compared to 5.25% for the same prior year period. Average

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 15

Management’s Discussion and Analysis

of Financial Condition and Results of Operations(continued)

interest-earning assets increased by $115.4 million for the year ended December 31, 2005, as compared to the same prior year period. The growth was concentrated in average loans receivable which grew $145.3 million, or 9.8%, for the year ended December 31, 2005, as compared to the same prior year period.

Interest Expense

Interest expense for the year ended December 31, 2005 was $41.9 million, compared to $34.9 million for the year ended December 31, 2004. The cost of interest-bearing liabilities increased to 2.49% for the year ended December 31, 2005, as compared to 2.22%, in the same prior year period. Average interest-bearing liabilities increased by $112.4 million for the year ended December 31, 2005, as compared to the same prior year period. The growth was concentrated in interest-bearing deposits which grew $136.3 million, or 12.5% for the year ended December 31, 2005 as compared to the same prior year period.

Net Interest Income

Net interest income for the year ended December 31, 2005 increased to $60.9 million, as compared to $56.0 million in the same prior year period. The net interest margin increased to 3.30% for the year ended December 31, 2005 from 3.23% in the same prior year period. Net interest income benefited from the wider net interest margin and the increase in average interest-earning assets as noted above.

Provision for Loan Losses

For the year ended December 31, 2005, the Company’s provision for loan losses was $350,000, as compared to $300,000 for the same prior year period. Total loans receivable increased and net charge-offs for the year ended December 31, 2005 increased to $578,000 from $414,000 for the same prior year period, however, non-performing loans decreased to $1.6 million at December 31, 2005 from $3.5 million at December 31, 2004.

Other Income

Other income was $24.1 million for the year ended December 31, 2005, compared to $20.7 million for the same prior year period. For the year ended December 31, 2005, the Company recorded gains of $13.2 million on the sale of loans and securities available for sale, as compared to gains of $10.8 million in the same prior year period. For the year ended December 31, 2004, the gain on sale of loans and securities includes a gain of $186,000 on the sale of equity securities. For the year ended December 31, 2005, the Company received proceeds from the sale of mortgage loans of $726.0 million as compared to $510.0 million for the year ended December 31, 2004. Loan sales benefited from the full year impact of the third quarter 2004 acquisition of a consumer direct lending operation by Columbia. The volume of mortgage loan originations and related loan sale activity is highly dependent on the overall level of interest rates.

Fees and service charges increased $1.1 million, or 13.8%, for the year ended December 31, 2005, as compared to the same prior year period primarily related to increases in investment services and trust fees. In early 2005 the investment services program was expanded to add Licensed Branch Employees which allowed the Company to capture more of the revenue associated with the sale of investment products. Partly as a result of this initiative fee income from investment sales increased to $1.2 million for the year ended December 31, 2005, a 60.8% increase over the comparable 2004 amount.

Operating Expenses

Operating expenses were $54.8 million for the year ended December 31, 2005, as compared to $48.8 million in the same prior year period. The increase was primarily due to the full year effect in 2005 of the costs related to the third quarter 2004 acquisition of the consumer direct lending operation, as well as increased incentive plan costs.

Provision for Income Taxes

Income tax expense was $10.3 million for the year ended December 31, 2005, as compared to $9.8 million for the same prior year period. The effective tax rate decreased slightly to 34.6% for the year ended December 31, 2005 as compared to 35.2% for the same prior year period. The Company’s lower average stock price in 2005 as compared to 2004 decreased that portion of the ESOP expense which is not deductible for tax purposes.

Comparison of Operating Results for the Years Ended December 31, 2004 and December 31, 2003

General

Net income decreased $1.9 million, or 9.7% to $17.9 million for the year ended December 31, 2004 as compared to net income of $19.9 million for the year ended December 31, 2003. Diluted earnings per share decreased 7.2%, to $1.42 for the year ended December 31, 2004 as compared to $1.53 for the year ended December 31, 2003. The smaller decrease in earnings per share is the result of the Company’s common stock repurchase program which reduced the number of shares outstanding for purposes of calculating earnings per share.

Interest Income

Interest income for the year ended December 31, 2004 was $91.0 million, compared to $94.5 million for the year ended December 31, 2003, a decrease of $3.6 million. The decrease in interest income was due to a decline in the average yield on interest-earning assets to 5.25% for the year ended December 31, 2004 as compared to 5.71% for the same prior year period. High prepayment levels caused a decrease in the rate earned on interest-earning assets and an acceleration of the amortization of net premiums on mortgage-related assets.

16 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Interest Expense

Interest expense for the year ended December 31, 2004 was $34.9 million, compared to $36.9 million for the year ended December 31, 2003, a decrease of $2.0 million. The decrease in interest expense was primarily the result of a decrease in the average cost of interest-bearing liabilities to 2.22% for the year ended December 31, 2004, as compared to 2.47% in the same prior year period. Funding costs decreased due to the lower interest rate environment during 2003 and into the first half of 2004 and also due to a change in the mix of deposit balances to lower-costing core deposits as compared to higher-costing time deposits. Core deposits represented 62.1% of average interest-bearing deposits for the year ended December 31, 2004, as compared to 60.6% for the same prior year period.

Net Interest Income

For the year ended December 31, 2004 net interest income decreased to $56.0 million, as compared to $57.6 million for the same prior year period. Although average interest-earning assets increased for the year ended December 31, 2004 as compared to the prior year, the net interest margin declined as compared to the same prior year period. The net interest margin decreased to 3.23% for the year ended December 31, 2004 from 3.48% in the same prior year period.

Provision for Loan Losses

For the year ended December 31, 2004, the Company’s provision for loan losses was $300,000, as compared to $688,000 for the year ended December 31, 2003. Although non-performing loans increased $1.3 million at December 31, 2004 from December 31, 2003 most of the increase was related to loans which were previously identified and classified at December 31, 2003 and included in the calculation of the allowance for loan losses at December 31, 2003.

Other Income

Other income was $20.7 million for the year ended December 31, 2004, as compared to $18.7 million for the year ended December 31, 2003. The net gain on sales of loans and securities available for sale includes a gain of $186,000 on the sale of equity securities for the year ended December 31, 2004, as compared to a gain of $719,000 for the same prior year period. For the year ended December 31, 2004, the Company recorded a gain of $10.6 million on the sale of loans held for sale, as compared to a gain of $11.1 million in the same prior year period. During 2003, loan sales benefited from the historically low interest rate environment which led to substantial loan origination volume from refinance activity. Most of this volume was in the 30-year fixed-rate mortgage loan product, much of which the Company sells into the secondary market. For the year ended December 31, 2004, the Company received proceeds from the sale of mortgage loans of $510.0 million as compared to $631.9 million for the year ended December 31, 2003. The volume of mortgage loan originations and related loan sale activity is highly dependent on the overall level of interest rates.

Income from loan servicing increased to $328,000 for the year ended December 31, 2004 as compared to a loss of $2.7 million for the same prior year period. The loss was due to the recognition of an impairment to the loan servicing asset of $2.2 million for the year ended December 31, 2003. The Company evaluates mortgage servicing rights for impairment on a quarterly basis. The valuation of mortgage servicing rights is determined through a discounted analysis of future cash flows, incorporating numerous assumptions which are subject to significant change in the near term. Generally, a decline in market interest rates will cause expected repayment speeds to increase resulting in a lower valuation for mortgage servicing rights and ultimately lower future servicing fee income. Fees and service charges increased by $429,000, or 5.5%, for the year ended December 31, 2004, as compared to the same prior year period due to the growth in commercial account services, retail core account balances and trust fees.

Operating Expenses

Operating expenses were $48.8 million for the year ended December 31, 2004, an increase of $3.9 million as compared to $44.9 million for the year ended December 31, 2003. Compensation expense increased due to costs related to the third quarter 2004 acquisition of a consumer direct lending operation by Columbia. The increase was also due to the reduction in mortgage loan closings, as refinance activity declined from year ago levels. Higher loan closings in the earlier periods increased deferred loan expenses which were reflected as a reduction to compensation expense. General and administrative expense decreased $1.0 million for the year ended December 31, 2004 as compared to the same prior year period primarily due to lower loan related expenses.

Provision for Income Taxes

Income tax expense was $9.8 million for the year ended December 31, 2004, compared to $11.0 million for the same prior year period. The effective tax rate decreased to 35.2% for the year ended December 31, 2004 as compared to 35.6% for the same prior year period. The Company’s lower average stock price in 2004 as compared to 2003 decreased that portion of the Company’s ESOP expense which is not deductible for tax purposes.

Cash Earnings

Stockholders’ equity is a critical measure of a company’s ability to repurchase shares, pay dividends and continue to grow. Although reported earnings and return on stockholders’ equity are traditional measures of performance, the Company believes that the change in stockholders’ equity, or “cash earnings,” and related return measures are also a significant measure of a company’s performance. Cash earnings exclude the effects of various non-cash expenses, such as the employee stock plans amortization expense and related tax benefit, as well as the amortization of intangible assets. In the case of tangible stockholders’ equity (stockholders’ equity less intangible assets) these items have either been previously charged to stockholders’ equity, as in the case of employee stock plans amortization expense, through contra-equity accounts, or do not affect tangible stockholders’ equity, such as the market appreciation of allocated ESOP shares for which the operating charge is offset by a credit to additional paid-in capital and intangible asset amortization for which the related intangible asset has already been deducted in the calculation of tangible stockholders’ equity.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 17

Management’s Discussion and Analysis

of Financial Condition and Results of Operations(continued)

The following table reconciles the Company’s net income with cash earnings. The table is a pro forma calculation which is not in accordance with Generally Accepted Accounting Principles.

Year Ended December 31,	2005		2004		2003
(in thousands, except share data)
Net income	$	19,497	$	17,945	$	19,873
Add: Employee stock plans amortization expense		3,374		3,792		4,073
Amortization of intangible assets		104		105		105
Less: Tax benefit(1)		496		548		592
Cash earnings	$	22,479	$	21,294	$	23,459
Basic cash earnings per share	$	1.91	$	1.76	$	1.91
Diluted cash earnings per share	$	1.84	$	1.68	$	1.80

(1) The Company does not receive any tax benefit for that portion of employee stock plan amortization expense relating to the ESOP fair market value adjustment.

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 sales of loans, FHLB advances 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 December 31, 2005, the Company had outstanding overnight borrowings from the FHLB of $51.9 million, an increase from no overnight borrowings at December 31, 2004. The Company utilizes the overnight line from time to time to fund short-term liquidity needs. Securities sold under agreements to repurchase with retail customers increased to $54.3 million at December 31, 2005 from $45.1 million at December 31, 2004. Like deposit flows, this funding source is dependent upon demand from the Bank’s customer base. The Company also had other borrowings with the FHLB of $362.0 million at December 31, 2005, a decrease from $418.0 million at December 31, 2004. These borrowings were used to fund loan growth and a wholesale leverage strategy designed to improve returns on invested capital.

The Company’s cash needs for the year ended December 31, 2005 were primarily provided by principal payments on loans and mortgage-backed securities, increased deposits and total borrowings and proceeds from the sale of mortgage loans held-for-sale. The cash was principally utilized for loan originations and the purchase of treasury stock. For the year ended December 31, 2004, the cash needs of the Company were primarily satisfied by principal payments on loans and mortgage-backed securities, increased deposits and total borrowings and proceeds from the sale of mortgage loans held-for-sale. The cash provided was principally used for the origination of loans, the purchase of mortgage-backed securities and the purchase of treasury stock.

In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination and sale of loans. At December 31, 2005, outstanding commitments to originate loans totaled $208.0 million; outstanding unused lines of credit totaled $127.5 million; and outstanding commitments to sell loans totaled $41.6 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

Time deposits scheduled to mature in one year or less totaled $323.9 million at December 31, 2005. Based upon historical experience, management estimates that a significant portion of such deposits will remain with the Company.

Under the Company’s stock repurchase programs, shares of OceanFirst Financial Corp. common stock may be purchased in the open market and through other privately negotiated transactions, from time-to-time, depending on market conditions. The repurchased shares are held as treasury stock for general corporate use. For the year ended December 31, 2005, the Company purchased 690,407 shares of common stock at a total cost of $16.0 million compared with purchases of 674,339 shares for the year ended December 31, 2004 at an aggregate cost of $16.2 million. At December 31, 2005, there were 59,648 shares remaining to be repurchased under the existing stock repurchase program. A new repurchase program was announced on October 19, 2005. Under this 5% repurchase program, an additional 636,036 shares are available for repurchase. Cash dividends declared and paid during the year ended December 31, 2005 were $9.5 million, a decrease from $9.7 million from the same prior year period due to the reduction in common shares outstanding. On January 19, 2006, the Board of Directors declared a quarterly cash dividend of twenty cents ($.20) per common share. The dividend is payable on February 10, 2006 to stockholders of record at the close of business on January 27, 2006.

The primary source of liquidity for OceanFirst Financial Corp., the holding company of OceanFirst Bank, is capital distributions from the banking subsidiary. For the year ended December 31, 2005, OceanFirst Financial Corp. received $15.0 million in dividend payments from OceanFirst Bank. The Company also received $5.0 million from the issuance of subordinated debt. The primary use of these funds is the payment of dividends to shareholders and the repurchase of common stock. OceanFirst Financial Corp.’s ability to continue these activities is partly dependent upon capital distributions from OceanFirst Bank. Applicable Federal law or the Bank’s regulator, may limit the amount of capital distributions OceanFirst Bank may make.

18 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

At December 31, 2005, the Bank exceeded all of its regulatory capital requirements with tangible capital of $127.7 million, or 6.4%, of total adjusted assets, which is above the required level of $29.8 million or 1.5%; core capital of $127.7 million or 6.4% of total adjusted assets, which is above the required level of $59.6 million, or 3.0%; and risk-based capital of $138.2 million, or 11.1% of risk-weighted assets, which is above the required level of $99.9 million or 8.0%. The Bank is considered a “well-capitalized” institution under the Office of Thrift Supervision’s prompt corrective action regulations.

Off-Balance-Sheet Arrangements and Contractual Obligations

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include unused consumer lines of credit and commitments to extend credit and are discussed in Note 13 to the Consolidated Financial Statements. The Company also has outstanding commitments to sell loans amounting to $41.6 million.

The following table shows the contractual obligations of the Company by expected payment period as of December 31, 2005 (in thousands). Further discussion of these commitments is included in Notes 9 and 13 to the Consolidated Financial Statements.

Contractual Obligation	Total		Less than one year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations	$	367,000	$	103,000	$	171,000	$	73,000	$	20,000
Operating Lease Obligations		15,272		1,820		3,283		2,383		7,786
Purchase Obligations		6,260		3,130		3,130		—		—
	$	388,532	$	107,950	$	177,413	$	75,383	$	27,786

Long-term debt obligations includes borrowings from the Federal Home Loan Bank, Securities Sold under Agreements to Repurchase and subordinated debenture. The borrowings have defined terms and under certain circumstances are callable at the option of the lender.

Operating leases represent obligations entered into by the Company for the use of land and premises. The leases generally have escalation terms based upon certain defined indexes.

Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consist primarily of contractual obligations under data processing servicing agreements. Actual amounts expended vary based on transaction volumes, number of users and other factors.

Asset Quality

The following table sets forth information regarding non-performing assets consisting of non-accrual loans and Real Estate Owned (“REO”) and activity in the allowance for loan losses. The Bank had no troubled-debt restructured loans and one REO property at December 31, 2005. It is the policy of the Bank to cease accruing interest on loans 90 days or more past due or in the process of foreclosure. For the years ended December 31, 2005, 2004, 2003, 2002 and 2001, respectively, the amount of interest income that would have been recognized on non-accrual loans if such loans had continued to perform in accordance with their contractual terms was $115,000, $128,000, $96,000, $87,000, and $379,000.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 19

Management’s Discussion and Analysis

of Financial Condition and Results of Operations(continued)

At or For The Year Ended December 31,	2005			2004			2003			2002			2001
(dollars in thousands)
Non-accrual loans:
Real estate:
One- to four-family	$	1,084		$	1,337		$	1,712		$	2,222		$	3,661
Commercial real estate, multi-family and land		—			744			242			74			—
Consumer		299			784			90			95			151
Commercial		212			623			118			297			2,368
Total		1,595			3,488			2,162			2,688			6,180
REO, net		278			288			252			141			133
Total non-performing assets	$	1,873		$	3,776		$	2,414		$	2,829		$	6,313
Allowance for loan losses:
Balance at beginning of year	$	10,688		$	10,802		$	10,074		$	10,351		$	9,138
Less: Net charge-offs (recoveries)		578			414			(40	)		1,927			37
Add: Provision for loan losses		350			300			688			1,650			1,250
Balance at end of year	$	10,460		$	10,688		$	10,802		$	10,074		$	10,351
Ratio of net charge-offs (recoveries) during the year to average net loans outstanding during the year		.04	%		.03	%		.00	%		.14	%		.00	%
Allowance for loan losses as percent of total loans receivable (1)		.62			.69			.75			.71			.77
Allowance for loan losses as a percent of total non-performing loans (2)		655.80			306.42			499.63			374.78			167.49
Non-performing loans as a percent of total loans receivable (1)(2)		.09			.23			.15			.19			.46
Non-performing assets as a percent of total assets(2)		.09			.20			.14			.16			.36

(1) Total loans receivable includes loans receivable and loans held for sale.

(2) Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans.

The Company has developed an internal asset classification system which classifies assets depending on risk of loss characteristics. The asset classifications comply with certain regulatory guidelines. At December 31, 2005, the Bank had $2.2 million of assets, including all REO, classified as “Substandard,” $59,000 of assets classified as “Doubtful” and no assets classified as “Loss.” Additionally, “Special Mention” assets totaled $15.5 million at December 31, 2005. These loans are classified as Special Mention due to past delinquencies or other identifiable weaknesses.

The Substandard classification consists primarily of one-to-four family residential loans, home equity credit lines and real estate owned. The Special Mention classification includes a commercial business relationship with an outstanding balance of $8.3 million, net of a $4.5 million participation. The relationship consists of eleven loans and is secured by liens on all corporate assets, including mortgages on commercial real estate used as a locally owned grocery store chain and by residential property of the principals. The loans were current as to payments, but were classified as Special Mention due to shrinking profit margins and increased balance sheet leverage.

The provision for loan losses increased by $50,000 for the year ended December 31, 2005, as compared to the prior year. Net charge-offs increased to $578,000 for the year ended December 31, 2005, as compared to $414,000 for the same prior year period. Additionally, total loans receivable increased $150.5 million, or 9.7%, at December 31, 2005, as compared to December 31, 2004. Mitigating these increases was a decrease of $1.9 million in non-performing loans.

Management of Interest Rate Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending, investment and deposit-taking activities. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. To that end, management actively monitors and manages interest rate risk exposure.

The principal objectives of the Company’s interest rate risk management function are to evaluate the interest rate risk inherent in certain balance sheet accounts; determine the level of risk appropriate given the Company’s business focus, operating environment, capital and liquidity requirements and performance objectives; and manage the risk consistent with Board approved guidelines. Through such management, the Company seeks to reduce the exposure of its operations to changes in interest rates. The Company monitors its interest rate risk as such risk relates to its operating strategies. The Company’s Board of Directors has established an Asset Liability Committee (“ALCO”) consisting of members of the Company’s management, responsible for reviewing the Company’s asset liability policies and interest rate risk position. ALCO meets monthly and reports trends and the Company’s interest rate risk position to the Board of Directors on a quarterly basis. The extent of the movement of interest rates, higher or lower, is an uncertainty that could have an impact on the earnings of the Company.

20 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

The Company utilizes the following strategies to manage interest rate risk: (1) emphasizing the origination for portfolio of fixed-rate mortgage loans generally having terms to maturity of not more than fifteen years, adjustable-rate loans, floating-rate and balloon maturity commercial loans, and consumer loans consisting primarily of home equity loans and lines of credit; (2) holding primarily short-term and/or adjustable- or floating-rate mortgage-backed and investment securities; (3) attempting to reduce the overall interest rate sensitivity of liabilities by emphasizing core and longer-term deposits; and (4) extending the maturities on wholesale borrowings for up to ten years. The Company may also sell fixed-rate mortgage loans into the secondary market. In determining whether to retain fixed-rate mortgages, management considers the Company’s overall interest rate risk position, the volume of such loans, the loan yield and the types and amount of funding sources. The Company periodically retains fixed-rate mortgage loan production in order to improve yields and increase balance sheet leverage. During periods when fixed-rate mortgage loan production is retained, the Company generally attempts to extend the maturity on part of its wholesale borrowings for up to ten years. For the past few years, the Company has sold most 30-year fixed-rate mortgage loan originations in the secondary market. In addition, during 2005 the Company sold a significant volume of 15-year fixed-rate mortgage loan originations. The Company currently does not participate in financial futures contracts, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments, but may do so in the future to manage interest rate risk.

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest rates, an institution with a negative gap position theoretically would not be in as favorable a position, compared to an institution with a positive gap, to invest in higher-yielding assets. This may result in the yield on the institution’s assets increasing at a slower rate than the increase in its cost of interest-bearing liabilities. Conversely, during a period of falling interest rates, an institution with a negative gap might experience a repricing of its assets at a slower rate than its interest-bearing liabilities, which, consequently, may result in its net interest income growing at a faster rate than an institution with a positive gap position.

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2005 which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. At December 31, 2005 the Company’s one year gap was negative 0.02% . Except as stated below, the amount of assets and liabilities which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at December 31, 2005, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three month period and subsequent selected time intervals. Loans receivable reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Loans were projected to prepay at rates between 3.0% and 35.0% annually. Mortgage-backed securities were projected to prepay at rates between 26.0% and 28.0% annually. Savings accounts, interest-bearing checking accounts and money market deposit accounts were assumed to decay, or run-off, at 1.50% per month. Prepayment and decay rates can have a significant impact on the Company’s estimated gap. There can be no assurance that projected prepayment rates for loans and mortgage-backed securities will be achieved or that projected decay rates for deposits will be realized.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 21

Management’s Discussion and Analysis

of Financial Condition and Results of Operations(continued)

At December 31, 2005	3 Months or Less			More than 3 Months to 1 Year			More than 1 Year to 3 Years			More than 3 Years to 5 Years			More than 5 Years			Total
(dollars in thousands)
Interest-earning assets(1):
Interest-earning deposits and short-term investments	$	5,144		$	—		$	—		$	—		$	—		$	5,144
Investment securities		75,729			2,384			—			—			6,471			84,584
FHLB stock		—			—			—			—			21,792			21,792
Mortgage-backed securities		7,504			15,374			26,045			36,829			618			86,370
Loans receivable(2)		257,134			293,826			549,357			328,409			263,726			1,692,452
Total interest-earning assets		345,511			311,584			575,402			365,238			292,607			1,890,342
Interest-bearing liabilities:
Money market deposit accounts		5,549			15,213			31,763			72,644			—			125,169
Savings accounts		10,758			29,496			61,585			140,850			—			242,689
Interest-bearing checking accounts		16,923			46,400			96,877			221,587			—			381,787
Time deposits		93,846			230,103			124,446			31,369			6,971			486,735
FHLB advances		80,900			74,000			115,000			70,000			15,000			354,900
Securities sold under agreements to repurchase and other borrowings		54,289			—			56,000			3,000			5,000			118,289
Total interest-bearing liabilities		262,265			395,212			485,671			539,450			26,971			1,709,569
Interest sensitivity gap(3)	$	83,246		$	(83,628	)	$	89,731		$	(174,212	)	$	265,636		$	180,773
Cumulative interest sensitivity gap	$	83,246		$	(382	)	$	89,349		$	(84,863	)	$	180,773		$	180,773
Cumulative interest sensitivity gap as a percent of total interest-earning assets		4.40	%		(0.02	)%		4.73	%		(4.49	)%		9.56	%		9.56	%
Cumulative interest-earning assets as a percent of cumulative interest-bearing liabilities		131.74	%		99.94	%		107.82	%		94.96	%		110.57	%		110.57	%

(1) Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.

(2) For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.

(3) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

Certain shortcomings are inherent in gap analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and decay rates would likely deviate significantly from those assumed in the calculation. Finally, the ability of many borrowers to service their adjustable-rate loans may be impaired in the event of an interest rate increase.

Another method of analyzing an institution’s exposure to interest rate risk is by measuring the change in the institution’s net portfolio value (“NPV”) and net interest income under various interest rate scenarios. NPV is the difference between the net present value of assets, liabilities and off-balance sheet contracts. The NPV ratio, in any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The Company’s interest rate sensitivity is monitored by management through the use of an interest rate risk (“IRR”) model which measures IRR by modeling the change in NPV and net interest income over a range of interest rate scenarios. The Office of Thrift Supervision (“OTS”) also produces an NPV only analysis using its own model, based upon data submitted on the Bank’s quarterly Thrift Financial Reports. The results produced by the OTS may vary from the results produced by the Company’s model, primarily due to differences in the assumptions utilized including estimated loan prepayment rates, reinvestment rates and deposit decay rates. The following table sets forth the Company’s NPV and net interest income projections as of December 31, 2005 and 2004, as calculated by the Company (in thousands). For purposes of this table, the Company used prepayment speeds and deposit decay rates similar to those used in calculating the Company’s gap.

22 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

At December 31, 2005, the Company’s NPV in a static rate environment is greater than the NPV at December 31, 2004 primarily reflecting the continued growth of core deposits and the increased value of those deposits.

	December 31, 2005
Change in Interest Rates in Basis Points (Rate Shock)	Net Portfolio Value						Net Interest Income
	Amount		% Change		NPV Ratio		Amount		% Change
200	$	191,412	(13.4	)%	10.2	%	$	58,488	(1.3	)%
100		211,514	(4.3	)	11.0			59,147	(0.2	)
Static		221,078	—		11.2			59,283	—
(100)		220,257	(0.4	)	11.0			58,652	(1.1	)
(200)		208,516	(5.7	)	10.4			56,769	(4.2	)

	December 31, 2004
	Net Portfolio Value						Net Interest Income
Change in Interest Rates in Basis Points (Rate Shock)	Amount		% Change		NPV Ratio		Amount		% Change
200	$	185,995	(9.7	)%	10.1	%	$	59,967	1.9	%
100		200,162	(2.8	)	10.6			59,661	1.4
Static		205,868	—		10.7			58,856	—
(100)		204,583	(0.6	)	10.5			57,699	(2.7	)
(200)		—	—		—			—	—

As is the case with the gap calculation, certain shortcomings are inherent in the methodology used in the NPV and net interest income IRR measurements. The model requires the making of certain assumptions which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. First, the model assumes that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured. Second, the model assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Third, the model does not take into account the Company’s business or strategic plans. Accordingly, although the above measurements do provide an indication of the Company’s IRR exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates on the Company’s NPV and net interest income and can be expected to differ from actual results.

Impact of Inflation and Changing Prices

The consolidated financial statements and notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company are monetary in nature. As a result, interest rates have a greater impact on the Company’s performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this annual report contains certain forward-looking statements which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake - and specifically disclaims any obligation - to publicly release the 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. Further description of the risks and uncertainties to the business are included in Item 1, BUSINESS of the Company’s 2005 Form 10K.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 23

Consolidated Statements of Financial Condition

(dollars in thousands, except per share amounts)

December 31, 2005 and 2004	2005			2004
Assets
Cash and due from banks	$	31,108		$	74,021
Investment securities available for sale (notes 3 and 9)		83,861			83,960
Federal Home Loan Bank of New York stock, at cost (note 9)		21,792			21,250
Mortgage-backed securities available for sale (notes 4 and 9)		85,025			124,478
Loans receivable, net (notes 5 and 9)		1,654,544			1,472,907
Mortgage loans held for sale		32,044			63,961
Interest and dividends receivable (note 6)		7,089			6,033
Real estate owned, net		278			288
Premises and equipment, net (note 7)		16,118			16,037
Servicing asset (note 5)		9,730			8,790
Bank Owned Life Insurance (BOLI)		36,002			34,990
Intangible assets		1,272			1,376
Other assets (note 10)		6,494			6,184
Total assets	$	1,985,357		$	1,914,275
Liabilities and Stockholders’ Equity
Deposits (note 8)	$	1,356,568		$	1,270,535
Securities sold under agreements to repurchase with retail customers (note 9)		54,289			45,072
Securities sold under agreements to repurchase with the Federal Home Loan Bank (note 9)		59,000			106,000
Federal Home Loan Bank advances (note 9)		354,900			312,000
Subordinated debenture (note 9)		5,000			—
Advances by borrowers for taxes and insurance		7,699			6,289
Other liabilities (note 10)		9,117			36,423
Total liabilities		1,846,573			1,776,319
Commitments and contingencies (note 13)
Stockholders’ equity (notes 2, 10, 11 and 12):
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 12,698,505 and 13,024,204 shares outstanding at December 31, 2005 and 2004, respectively		272			272
Additional paid-in capital		197,621			193,723
Retained earnings		164,613			157,575
Accumulated other comprehensive loss		(1,223	)		(667	)
Less: Unallocated common stock held by Employee Stock Ownership Plan		(7,472	)		(8,652	)
Treasury stock, 14,478,867 and 14,153,168 shares at December 31, 2005 and 2004, respectively		(215,027	)		(204,295	)
Common stock acquired by Deferred Compensation Plan		1,383			986
Deferred Compensation Plan liability		(1,383	)		(986	)
Total stockholders’ equity		138,784			137,956
Total liabilities and stockholders’ equity	$	1,985,357		$	1,914,275

See accompanying notes to consolidated financial statements.

24 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Consolidated Statements of Income

(in thousands, except per share amounts)

Years Ended December 31, 2005, 2004 and 2003	2005		2004		2003
Interest income:
Loans	$	93,864	$	83,594	$	86,881
Mortgage-backed securities		3,813		4,363		4,440
Investment securities and other		5,122		2,995		3,216
Total interest income		102,799		90,952		94,537
Interest expense:
Deposits (note 8)		22,807		15,194		17,243
Borrowed funds		19,066		19,737		19,651
Total interest expense		41,873		34,931		36,894
Net interest income		60,926		56,021		57,643
Provision for loan losses (note 5)		350		300		688
Net interest income after provision for loan losses		60,576		55,721		56,955
Other income:
Loan servicing income (loss) (note 5)		280		328		(2,654	)
Fees and service charges		9,434		8,289		7,860
Net gain on sales of loans and securities available for sale (note 3)		13,183		10,832		11,842
Income on Bank Owned Life Insurance		1,122		1,256		1,550
Other		71		35		151
Total other income		24,090		20,740		18,749
Operating expenses:
Compensation and employee benefits (note 11)		31,184		27,242		22,240
Occupancy (note 13)		4,539		3,840		3,592
Equipment		2,531		2,341		2,434
Marketing		2,914		2,020		2,193
Federal deposit insurance		507		478		478
Data processing		3,243		2,959		2,994
General and administrative		9,916		9,879		10,926
Total operating expenses		54,834		48,759		44,857
Income before provision for income taxes		29,832		27,702		30,847
Provision for income taxes (note10)		10,335		9,757		10,974
Net Income	$	19,497	$	17,945	$	19,873
Basic earnings per share (note 1)	$	1.65	$	1.48	$	1.62
Diluted earnings per share (note 1)	$	1.60	$	1.42	$	1.53
Average basic shares outstanding (note 1)		11,786		12,108		12,291
Average diluted shares outstanding (note 1)		12,219		12,666		13,017

See accompanying notes to consolidated financial statements.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 25

Consolidated Statements of Changes in Stockholders’ Equity

(dollars in thousands, except per share amounts)

Years Ended December 31, 2005, 2004 and 2003	Common Stock		Additional Paid-In Capital		Retained Earnings				Accumulated Other Comprehensive Loss			Employee Stock Ownership Plan			Treasury Stock			Common Stock Acquired by Deferred Compensation Plan		Deferred Compensation Plan Liability			Total
Balance at December 31, 2002	$	272	$	184,934	$	142,224			$	(3,201	)	$	(11,248	)	$	(177,676	)	$	255	$	(255	)	$	135,305
Comprehensive income:
Net income		—		—		19,873				—			—			—			—		—			19,873
Other comprehensive loss:
Unrealized gain on securities (net of tax expense $ 123)		—		—		—				268			—			—			—		—			268
Reclassification adjustment for gains included in net income (net of tax expense of $ 252)		—		—		—				(467	)		—			—			—		—			(467	)
Total comprehensive income																								19,674
Acceleration of stock option vesting		—		249		—				—			—			—			—		—			249
Tax benefit of stock plans		—		1,945		—				—			—			—			—		—			1,945
Purchase 867,259 shares of common stock		—		—		—				—			—			(20,620	)		—		—			(20,620	)
Allocation of ESOP stock		—		—		—				—			1,337			—			—		—			1,337
ESOP adjustment		—		2,487		—				—			—			—			—		—			2,487
Cash dividend – $.78 per share		—		—		(9,618	)			—			—			—			—		—			(9,618	)
Exercise of stock options		—		—		(1,675	)			—			—			5,578			—		—			3,903
Purchase of stock for the deferred compensation plan, net		—		—		—				—			—						308		(308	)		—
Balance at December 31, 2003		272		189,615		150,804				(3,400	)		(9,911	)		(192,718	)		563		(563	)		134,662
Comprehensive income:
Net income		—		—		17,945				—			—			—			—		—			17,945
Other comprehensive income:
Unrealized gain on securities (net of tax expense $ 1,953)		—		—		—				2,854			—			—			—		—			2,854
Reclassification adjustment for gains included in net income (net of tax expense $ 65)		—		—		—				(121	)		—			—			—		—			(121	)
Total comprehensive income		—		—		—		��		—			—			—			—					20,678
Stock Award		—		202		—				—			—			—			—		—			202
Tax benefit of stock plans		—		1,575		—				—			—			—			—		—			1,575
Purchase 674,339 shares of common stock		—		—		—				—			—			(16,247	)		—		—			(16,247	)
Allocation of ESOP stock		—		—		—				—			1,259			—			—		—			1,259
ESOP adjustment		—		2,331		—				—			—			—			—		—			2,331
Cash dividend – $.80 per share		—		—		(9,686	)			—			—			—			—		—			(9,686	)
Exercise of stock options		—		—		(1,488	)			—			—			4,670			—		—			3,182
Purchase of stock for the deferred compensation plan, net		—		—		—				—			—			—			423		(423	)		—
Balance at December 31, 2004		272		193,723		157,575				(667	)		(8,652	)		(204,295	)		986		(986	)		137,956
Comprehensive income:
Net income		—		—		19,497				—			—			—			—		—			19,497
Other comprehensive income:
Unrealized loss on securities (net of tax benefit $ 377)		—		—		—				(544	)		—			—			—		—			(544	)
Reclassification adjustment for gains included in net income (net of tax expense $ 7)		—		—		—				(12	)		—			—			—		—			(12	)
Total comprehensive income		—		—		—				—			—			—			—					18,941
Stock Award		—		130		—				—			—			—			—		—			130
Tax benefit of stock plans		—		1,704		—				—			—			—			—		—			1,704
Purchase 690,407 shares of common stock		—		—		—				—			—			(15,962	)		—		—			(15,962	)
Allocation of ESOP stock		—		—		—				—			1,180			—			—		—			1,180
ESOP adjustment		—		2,064		—				—			—			—			—		—			2,064
Cash dividend – $.80 per share		—		—		(9,469	)			—			—			—			—		—			(9,469	)
Exercise of stock options		—		—		(2,990	)			—			—			5,230			—		—			2,240
Purchase of stock for the deferred compensation plan, net		—		—		—				—			—			—			397		(397	)		—
Balance at December 31, 2005	$	272	$	197,621	$	164,613			$	(1,223	)	$	(7,472	)	$	(215,027	)	$	1,383	$	(1,383	)	$	138,784

See accompanying notes to consolidated financial statements.

26 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Consolidated Statements of Cash Flows

(in thousands)

Years Ended December 31, 2005, 2004 and 2003	2005			2004			2003
Cash flows from operating activities:
Net income	$	19,497		$	17,945		$	19,873
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		2,030			2,053			2,118
Amortization of ESOP		1,180			1,259			1,337
ESOP adjustment		2,064			2,331			2,487
Stock awards		130			202			249
Tax benefit of stock plans		1,704			1,575			1,945
Amortization and impairment of servicing asset		2,252			1,905			4,976
Amortization of intangible assets		104			105			105
Net premium amortization in excess of discount accretion on securities		793			1,270			1,287
Net premium (accretion) of deferred fees and discounts on loans		178			(177	)		(209	)
Provision for loan losses		350			300			688
Deferred taxes		334			(886	)		1,037
Net gain on sale of premises and equipment		(28	)		—			—
Net gain on sales of real estate owned		—			(5	)		(114	)
Net gain on sales of loans and securities available for sale		(13,183	)		(10,832	)		(11,842	)
Proceeds from sales of mortgage loans held for sale		726,041			510,041			631,854
Mortgage loans originated for sale		(684,153	)		(533,371	)		(591,854	)
Increase in value of Bank Owned Life Insurance		(1,122	)		(1,256	)		(1,550	)
Proceeds from Bank Owned Life Insurance		110			214			—
(Increase) decrease in interest and dividends receivable		(1,056	)		(556	)		901
(Increase) decrease in other assets		(261	)		(94	)		530
(Decrease) increase in other liabilities		(27,306	)		25,156			(7,754	)
Total adjustments		10,161			(766	)		36,191
Net cash provided by operating activities		29,658			17,179			56,064
Cash flows from investing activities:
Net increase in loans receivable		(182,165	)		(84,098	)		(54,053	)
Proceeds from sales of investment and mortgage-backed securities available for sale		7,828			545			2,237
Purchase of investment securities available for sale		(4,427	)		(802	)		(3,540	)
Purchase of mortgage-backed securities available for sale		(7,704	)		(82,844	)		(70,581	)
Proceeds from maturities of investment securities available for sale		4,670			2,116			15,371
Principal payments on mortgage-backed securities available for sale		37,473			43,478			118,857
Purchases of Federal Home Loan Bank of New York stock		(542	)		(2,030	)		(520	)
Proceeds from sales of real estate owned		10			257			255
Proceeds from sale of premises and equipment		49			—			—
Purchases of premises and equipment		(2,132	)		(1,617	)		(883	)
Net cash (used in) provided by investing activities		(146,940	)		(124,995	)		7,143
Cash flows from financing activities:
Increase (decrease) in deposits		86,033			126,330			(40,631	)
Increase (decrease) in short-term borrowings		61,117			(16,051	)		16,539
Proceeds from Federal Home Loan Bank advances		54,000			121,000			70,000
Repayments of Federal Home Loan Bank Advances		(99,000	)		(89,000	)		(64,000	)
Proceeds from securities sold under agreements to repurchase		—			44,000			—
Repayments of securities sold under agreements to repurchase		(11,000	)		(18,000	)		—
Proceeds from subordinated debenture		5,000			—			—
Increase in advances by borrowers for taxes and insurance		1,410			137			200
Exercise of stock options		2,240			3,182			3,903
Dividends paid		(9,469	)		(9,686	)		(9,618	)
Purchase of treasury stock		(15,962	)		(16,247	)		(20,620	)
Net cash provided by (used in ) financing activities		74,369			145,665			(44,227	)
Net (decrease) increase in cash and due from banks		(42,913	)		37,849			18,980
Cash and due from banks at beginning of year		74,021			36,172			17,192
Cash and due from banks at end of year	$	31,108		$	74,021		$	36,172
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest	$	42,159		$	34,630		$	36,884
Income taxes		19,151			7,387			8,044
Noncash investing activities:
Transfer of loans receivable to real estate owned		—			288			264

See accompanying notes to consolidated financial statements.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 27

Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies

Principles of Consolidation

The 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 Home Loans, LLC (“Columbia”), OceanFirst REIT Holdings, Inc., and its wholly-owned subsidiary OceanFirst Realty Corp. and OceanFirst Services, LLC, and its wholly-owned subsidiary OFB Reinsurance, Ltd. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain amounts previously reported have been reclassified to conform to the current year’s presentation.

Business

The Bank provides a range of community banking services to customers through a network of branches in Ocean, Monmouth and Middlesex counties in New Jersey. The Bank is subject to competition from other financial institutions; it is also subject to the regulations of certain regulatory agencies and undergoes periodic examinations by those regulatory authorities.

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statement of financial condition and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates and assumptions.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of real estate acquired in connection with foreclosures or in settlement of loans and the valuation of mortgage servicing rights. In connection with the determination of the allowances for loan losses and Real Estate Owned (“REO”), management obtains independent appraisals for significant properties.

Cash Equivalents

Cash equivalents consist of interest-bearing deposits in other financial institutions and loans of Federal funds. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

Investment and Mortgage-Backed Securities

The Company classifies all investment and mortgage-backed securities as available-for-sale. Securities available-for-sale include securities that management intends to use as part of its asset/liability management strategy. Such securities are carried at fair value and unrealized gains and losses, net of related tax effect, are excluded from earnings, but are included as a separate component of stockholders’ equity. Gains or losses on the sale of such securities are included in other income using the specific identification method. Securities are evaluated for other-than-temporary impairment on a quarterly basis.

Loans Receivable

Loans receivable, other than loans held-for-sale, are stated at unpaid principal balance, plus unamortized premiums less unearned discounts, net of deferred loan origination and commitment fees and costs, and the allowance for loan losses.

Loan origination and commitment fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the level-yield method over the contractual life of the specifically identified loans, adjusted for actual prepayments.

Loans on which interest is more than 90 days past due, including impaired loans, and other loans in the process of foreclosure are placed on non-accrual status. Interest income previously accrued on these loans, but not yet received, is reversed in the current period. Any interest subsequently collected is credited to income in the period of recovery only after the full principal balance has been brought current. A loan is returned to accrual status when all amounts due have been received and the remaining principal balance is deemed collectible.

A loan is considered impaired when it is deemed probable that the Company will not collect all amounts due according to the contractual terms of the loan agreement. The Company has defined the population of impaired loans to be all non-accrual commercial real estate, multi-family, land, construction and commercial loans in excess of $250,000. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the fair value of the collateral or the present value of the loan’s expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and installment loans, are specifically excluded from the impaired loan portfolio.

Mortgage Loans Held-for-Sale

The Company regularly sells part of its mortgage loan originations. Mortgage loans held-for-sale are carried at the lower of unpaid principal balance, net, or market value on an aggregate basis.

Allowance for Loan Losses

The adequacy of the allowance for loan losses is based on management’s evaluation of the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions. Additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged off. The allowance is reduced by loan charge-offs. Loans are charged-off when management believes such loans are uncollectible.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company’s market area. In addition, various regulatory agencies, as an integral part of their routine examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

Mortgage Servicing Rights, or MSR

The Company recognizes as a separate asset the rights to service mortgage loans, whether those rights are acquired through purchase or loan origination activities. MSR are amortized in proportion to and over the estimated period of net servicing income. The estimated fair value of MSR is determined through a discounted analysis of future cash flows, incorporating numerous assumptions including servicing income, servicing costs, market discount rates, prepayment speeds and default rates. Impairment of the MSR is assessed on the fair value of those rights with any impairment recognized as a component of loan servicing fee income.

28 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Real Estate Owned

Real estate owned is carried at the lower of cost or fair value, less estimated costs to sell. When a property is acquired, the excess of the loan balance over fair value is charged to the allowance for loan losses. A reserve for real estate owned may be established to provide for subsequent declines in the fair values of properties. Real estate owned is carried net of any related reserve. Operating results from real estate owned, including rental income, operating expenses, and gains and losses realized from the sales of real estate owned are recorded as incurred.

Premises and Equipment

Land is carried at cost and premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or leases. Repair and maintenance items are expensed and improvements are capitalized. Gains and losses on dispositions are reflected in current operations.

Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Impact of New Accounting Pronouncements

Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised 2004) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. The revised Statement requires entities to disclose information needed about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Company beginning January 1, 2006. The Company must use either the modified prospective or the modified retrospective transition method. The adoption of Statement 123(R) will cause the Company to recognize additional expense upon the grant of stock options.

FASB Staff Position No. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (the “FSP”), was issued on November 3, 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss. The FSP also addresses accounting considerations subsequent to the recognition of an other-than-temporary impairment on a debt security, and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The FSP replaces the impairment guidance in EITF Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations (principally Statement of Financial Accounting Standards No. 115 and SEC Staff Accounting Bulletin 59). Under the FSP, impairment losses must be recognized in earnings equal to the entire difference between the security’s cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. The Company does not expect that the application of the FSP will have a material impact on its financial condition, results of operations or financial statement disclosures.

In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 requires retroactive application to prior periods’ financial statements of a voluntary change in accounting principles unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier application permitted to accounting changes and corrections of errors made in fiscal years beginning after May 31, 2005.

Stock-based Compensation

The Company accounts for stock-based compensation using the intrinsic value method under Accounting Principles Board No. 25. On December 22, 2005, the Company accelerated the vesting of 645,535 outstanding unvested stock options awarded to directors and officers of the Bank. Of the 645,535 stock options for which vesting was accelerated 464,516, or 72% were “in the money” options having exercise prices from $14.33 to $23.23. The remaining 181,019, or 28%, were “out of the money” options having exercise prices from $23.44 to $27.11. The acceleration was undertaken in an attempt to eliminate compensation expense that the Company would otherwise be required to recognize with respect to these unvested stock options upon adopting Statement 123 (R). The Company recognized a pre-tax charge of $27,000 in the fourth quarter while eliminating potential pre-tax compensation expense in future periods of approximately $2.3 million, of which $1.0 million would have been incurred during the year ended December 31, 2006. Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-based Compensation-Transition and Disclosure, permits the use of the intrinsic value method; however, requires the Company to disclose the pro forma net income and earnings per share as if the stock-based compensation had been accounted for using the fair value method. Had the compensation costs for the Company’s stock option plan been determined based on the fair value method, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data).

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 29

Notes to Consolidated Financial Statements(continued)

	2005			2004			2003
Net income:
As reported	$	19,497		$	17,945		$	19,873
Stock-based compensation expense included in reported net income, net of related tax effects		85			131			162
Total stock-based compensation expense determined under the fair value based method including earned incentive awards and stock option grants, net of related tax effects		(2,450	)		(711	)		(669	)
Net stock-based compensation expense not included in reported net income, all relating to stock option grants, net of related tax effects		(2,365	)		(580	)		(507	)
Pro forma	$	17,132		$	17,365		$	19,366
Basic earnings per share:
As reported	$	1.65		$	1.48		$	1.62
Pro forma		1.45			1.43			1.58
Diluted earnings per share:
As reported	$	1.60		$	1.42		$	1.53
Pro forma		1.40			1.37			1.49
Weighted average fair value of an option share granted during the year	$	4.05		$	4.66		$	4.45

The fair value of stock options granted by the Company was estimated through the use of the Black-Scholes option pricing model applying the following assumptions:

	2005		2004		2003
Risk-free interest rate	3.95	%	4.21	%	2.79	%
Expected option life	6 years		6 years		6 years
Expected volatility	22	%	23	%	25	%
Expected dividend yield	3.41	%	3.36	%	3.25	%

Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items recorded directly in equity, such as unrealized gains or losses on securities available for sale.

Intangible Assets

The Company accounts for intangible assets under SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 eliminated amortization of goodwill and requires that an annual impairment test be performed. The Company has determined that there is no impairment to goodwill based on the criteria of SFAS 142. The Company’s intangible assets, primarily core deposit intangibles, are being amortized over a period of ten years.

Bank-Owned Life Insurance

Bank-owned life insurance (BOLI) is accounted for using the cash surrender value method and is recorded at its realizable value. The change in the net asset value is included in other non-interest income.

Segment Reporting

As a community-oriented financial institution, substantially all of the Bank’s operations involve the delivery of loan and deposit products to customers. The Bank makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the only operating segment for financial reporting purposes.

Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding plus potential common stock, utilizing the treasury stock method. All share amounts exclude unallocated shares of stock held by the Employee Stock Ownership Plan (“ESOP”) and the Incentive Plan.

The following reconciles shares outstanding for basic and diluted earnings per share for the years ended December 31, 2005, 2004 and 2003 (in thousands):

Year ended December 31,	2005		2004		2003
Weighted average shares outstanding	12,817		13,241		13,585
Less: Unallocated ESOP shares	(956	)	(1,101	)	(1,255	)
Unallocated Incentive Award shares and shares held by deferred compensation plan	(75	)	(32	)	(39	)
Average basic shares outstanding	11,786		12,108		12,291
Add: Effect of dilutive securities:
Stock options	362		533		695
Incentive Awards and shares held by deferred compensation plan	71		25		31
Average diluted shares outstanding	12,219		12,666		13,017

(2) Regulatory Matters

Office of Thrift Supervision (“OTS”) regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2005, the Bank was required to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier 1 (core) capital to total adjusted assets of 3.0%; and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%.

Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institution’s financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally an institution is considered well capitalized if it has a Tier 1 ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. At December 31, 2005 and 2004 the Bank was considered well capitalized.

30 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2005 and 2004, compared to the OTS minimum capital adequacy requirements and the OTS requirements for classification as a well capitalized institution (in thousands).

	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action
As of December 31, 2005:	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tangible capital	$	127,731	6.4	%	$	29,787	1.5	%	$	—	—	%
Core capital		127,731	6.4			59,575	3.0			99,291	5.0
Tier 1 risk-based capital		127,731	10.2			49,960	4.0			74,941	6.0
Risk-based capital		138,152	11.1			99,921	8.0			124,901	10.0
As of December 31, 2004:	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tangible capital	$	118,232	6.2	%	$	28,672	1.5	%	$	—	—	%
Core capital		118,232	6.2			57,344	3.0			95,573	5.0
Tier 1 risk-based capital		118,232	9.7			48,656	4.0			72,984	6.0
Risk-based capital		128,790	10.6			97,311	8.0			121,639	10.0

OTS regulations impose limitations upon all capital distributions by savings institutions, like the Bank, such as dividends and payments to repurchase or otherwise acquire shares. The Company may not declare or pay cash dividends on or repurchase any of its shares of common stock if the effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements, the amount required for the liquidation account, or if such declaration and payment would otherwise violate regulatory requirements.

(3) Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at December 31, 2005 and 2004 are as follows (in thousands):

December 31, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
U. S. agency obligations	$	201	$	—	$	(1	)	$	200
State and municipal obligations		4,131		26		—			4,157
Corporate debt securities		75,528		—		(1,898	)		73,630
Equity investments		4,724		1,150		—			5,874
	$	84,584	$	1,176	$	(1,899	)	$	83,861
December 31, 2004	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
U. S. Government obligations	$	998	$	—	$	(6	)	$	992
U. S. agency obligations		208		—		(3	)		205
State and municipal obligations		3,812		50		—			3,862
Corporate debt securities		75,449		—		(2,274	)		73,175
Equity investments		4,344		1,382		—			5,726
	$	84,811	$	1,432	$	(2,283	)	$	83,960

Gains realized during 2005, 2004 and 2003 on the sale of investment securities available for sale totaled $136,000, $186,000 and $719,000, respectively. There were no losses realized during 2005, 2004 or 2003 on the sale of investment securities available for sale.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at December 31, 2005 by contractual maturity, are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2005, investment securities available for sale with an amortized cost and estimated market value of $77,275,000 and $75,402,000, respectively, were callable prior to the maturity date.

December 31, 2005	Amortized Cost		Estimated Market Value
Less than one year	$	2,585	$	2,585
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		77,275		75,402
	$	79,860	$	77,987

The carrying value of investment securities pledged as required security for deposits and for other purposes required by law amounted to $1,948,000 and $1,197,000 at December 31, 2005 and 2004, respectively. Additionally, the carrying value of investment securities pledged as collateral for reverse repurchase agreements amounted to $75,603,000 and $73,175,000 at December 31, 2005 and 2004, respectively.

The estimated market value and unrealized loss for investment securities available for sale at December 31, 2005 and 2004, segregated by the duration of the unrealized loss are as follows (in thousands):

December 31, 2005

	Less than 12 months					12 months or longer					Total
	Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses
U.S. agency obligations	$	200	$	(1	)	$	—	$	—		$	200	$	(1	)
Corporate debt securities		—		—			73,630		(1,898	)		73,630		(1,898	)
	$	200	$	(1	)	$	73,630	$	(1,898	)	$	73,830	$	(1,899	)

December 31, 2004

	Less than 12 months					12 months or longer					Total
	Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses
U.S. Government obligations	$	992	$	(6	)	$	—	$	—		$	992	$	(6	)
U.S. agency obligations		—		—			205		(3	)		205		(3	)
Corporate debt securities		—		—			73,175		(2,274	)		73,175		(2,274	)
	$	992	$	(6	)	$	73,380	$	(2,277	)	$	74,372	$	(2,283	)

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 31

Notes to Consolidated Financial Statements(continued)

The United States Government and agency obligations in the tables above are either direct obligations of the Unites States Government or are issued by one of the stockholder-owned corporations chartered by the United States Government, whose debt obligations are rated AA or better by one of the internationally-recognized credit rating services. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated market value of the securities.

The corporate debt securities are issued by other financial institutions each with an investment grade credit rating of BBB or better as rated by one of the internationally-recognized credit rating services. These floating rate securities were purchased during the period May 1998 to September 1998 and have paid coupon interest continuously since issuance. Floating rate debt securities such as these pay a fixed interest rate spread over LIBOR. Following the purchase of these securities, the required spread increased for these types of securities causing a decline in the market price. Although these investment securities are available for sale, the Company has the ability to hold these securities until maturity at which time the Company expects to receive the fully amortized cost.

(4) Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at December 31, 2005 and 2004 are as follows (in thousands):

December 31, 2005	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
FHLMC	$	10,964	$	61	$	(216	)	$	10,809
FNMA		72,861		23		(1,353	)		71,531
GNMA		2,545		140		—			2,685
	$	86,370	$	224	$	(1,569	)	$	85,025
December 31, 2004	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
FHLMC	$	17,729	$	87	$	(48	)	$	17,768
FNMA		103,297		91		(687	)		102,701
GNMA		3,729		280		—			4,009
	$	124,755	$	458	$	(735	)	$	124,478

There were no gains realized on the sale of mortgage-backed securities available for sale during 2005, 2004 or 2003. Losses realized during 2005 on the sale of mortgage-backed securities available for sale totaled $117,000. There were no losses realized during 2004 and 2003 on the sale of mortgage-backed securities available for sale.

The contractual maturities of mortgage-backed securities available for sale generally exceed 20 years; however, the effective lives are expected to be shorter due to principal prepayments.

The carrying value of mortgage-backed securities pledged as required security for deposits and for other purposes required by law amounted to $6,013,000 and $14,067,000 at December 31, 2005 and December 31, 2004, respectively. The carrying value of mortgage-backed securities pledged as collateral for reverse repurchase agreements amounted to $76,274,000 and $101,186,000 at December 31, 2005 and 2004, respectively.

The estimated market value and unrealized loss for mortgage-backed securities available for sale at December 31, 2005 and 2004 segregated by the duration of the unrealized loss are as follows (in thousands):

December 31, 2005

	Less than 12 months				12 months or longer					Total
	Estimated Market Value		Unrealized Losses		Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses
FHLMC	$	—		—	$	7,302	$	(216	)	$	7,302	$	(216	)
FNMA		—		—		62,349		(1,353	)		62,349		(1,353	)
	$	—	$	—	$	69,651	$	(1,569	)	$	69,651	$	(1,569	)

December 31, 2004

	Less than 12 months				12 months or longer					Total
	Estimated Market Value		Unrealized Losses		Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses
FHLMC	$	—	$	—	$	8,719	$	(48	)	$	8,719	$	(48	)
FNMA		—		—		87,166		(687	)		87,166		(687	)
	$	—	$	—	$	95,885	$	(735	)	$	95,885	$	(735	)

The mortgage-backed securities are issued and guaranteed by either FHLMC or FNMA, stockholder-owned corporations chartered by the United States Government, whose debt obligations are rated AA or better by one of the internationally recognized credit rating services. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated market value of the mortgage-backed securities. Although these mortgage-backed securities are available for sale, the Company has the ability to hold these securities until maturity at which time the Company expects to receive the fully amortized cost.

(5) Loans Receivable, Net

A summary of loans receivable at December 31, 2005 and 2004 follows (in thousands):

December 31,	2005			2004
Real estate mortgage:
One-to-four family	$	1,150,447		$	1,061,108
Commercial real estate, multi-family and land		278,922			243,299
FHA insured & VA guaranteed		4,735			1,516
		1,434,104			1,305,923
Real estate construction		22,739			19,189
Consumer		146,911			99,279
Commercial		64,300			61,290
Total loans		1,668,054			1,485,681
Loans in process		(7,646	)		(5,970	)
Deferred origination costs, net		4,596			3,888
Unamortized discount		—			(4	)
Allowance for loan losses		(10,460	)		(10,688	)
		(13,510	)		(12,774	)
	$	1,654,544		$	1,472,907

32 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

At December 31, 2005, 2004 and 2003 loans in the amount of $1,595,000, $3,488,000 and $2,162,000, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income. At December 31, 2005, there were no impaired loans. At December 31, 2004, the impaired loan portfolio consisted of one commercial real estate loan for $744,000 for which general allocations to the allowance for loan losses of $149,000 were identified. If interest income on nonaccrual loans and impaired loans had been current in accordance with their original terms, approximately $115,000, $128,000 and $96,000 of interest income for the years ended December 31, 2005, 2004 and 2003, respectively, would have been recorded. At December 31, 2005, there were no commitments to lend additional funds to borrowers whose loans are classified as nonperforming.

An analysis of the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands):

Year Ended December 31,	2005			2004			2003
Balance at beginning of year	$	10,688		$	10,802		$	10,074
Provision charged to operations		350			300			688
Charge-offs		(684	)		(487	)		(258	)
Recoveries		106			73			298
Balance at end of year	$	10,460		$	10,688		$	10,802

An analysis of the servicing asset for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands):

Year Ended December 31,	2005			2004			2003
Balance at beginning of year	$	8,790		$	7,473		$	7,907
Capitalized mortgage servicing rights		3,192			3,222			4,542
Amortization and impairment charges		(2,252	)		(1,905	)		(4,976	)
Balance at end of year	$	9,730		$	8,790		$	7,473

Loans serviced for others amounted to $910.3 million at December 31, 2005, all of which relate to residential loans. The estimated fair value of the servicing asset at December 31, 2005 was $15,526,000.

(6) Interest and Dividends Receivable

A summary of interest and dividends receivable at December 31, 2005 and 2004 follows (in thousands):

December 31,	2005		2004
Loans	$	6,080	$	5,162
Investment securities		660		362
Mortgage-backed securities		349		509
	$	7,089	$	6,033

(7) Premises and Equipment, Net

Premises and equipment at December 31, 2005 and 2004 are summarized as follows (in thousands):

December 31,	2005			2004
Land	$	3,195		$	3,195
Buildings and improvements		15,506			15,507
Leasehold improvements		2,187			2,052
Furniture and equipment		12,708			11,428
Automobiles		277			194
Construction in progress		533			2
Total		34,406			32,378
Accumulated depreciation and amortization		(18,288	)		(16,341	)
	$	16,118		$	16,037

(8) Deposits

Deposits, including accrued interest payable of $239,000 and $210,000 at December 31, 2005 and 2004, respectively, are summarized as follows (in thousands):

December 31,	2005				2004
	Amount		Weighted Average Cost		Amount		Weighted Average Cost
Non-interest bearing accounts	$	120,188	—	%	$	106,492	—	%
Interest-bearing checking accounts		381,787	1.78			297,919	.81
Money market deposit accounts		125,169	1.34			142,893	1.01
Savings accounts		242,689	.73			250,032	.50
Time deposits		486,735	3.49			473,199	2.67
	$	1,356,568	2.01	%	$	1,270,535	1.40	%

Included in time deposits at December 31, 2005 and 2004, respectively, is $110,488,000 and $112,464,000 in deposits of $100,000 and over.

Time deposits at December 31, 2005 mature as follows (in thousands):

Year Ended December 31,
2006	$	323,925
2007		76,380
2008		57,651
2009		13,776
2010		8,032
Thereafter		6,971
	$	486,735

Interest expense on deposits for the years ended December 31, 2005, 2004 and 2003 was as follows (in thousands):

Year Ended December 31,	2005		2004		2003
Interest-bearing checking accounts	$	4,674	$	1,556	$	1,743
Money market deposit accounts		1,604		1,350		1,372
Savings accounts		1,858		1,310		1,679
Time deposits		14,671		10,978		12,449
	$	22,807	$	15,194	$	17,243

(9) Borrowed Funds

Borrowed funds are summarized as follows (in thousands):

December 31,	2005				2004
	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Federal Home Loan Bank advances	$	354,900	4.27	%	$	312,000	4.32	%
Securities sold under agreements to repurchase		113,289	4.27			151,072	3.64
Subordinated debenture		5,000	6.35			—	—
	$	473,189	4.29	%	$	463,072	4.10	%

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 33

Notes to Consolidated Financial Statements(continued)

Information concerning Federal Home Loan Bank (“FHLB”) advances and securities sold under agreements to repurchase (“reverse repurchase agreements”) is summarized as follows (in thousands):

	FHLB Advances						Reverse Repurchase Agreements
	2005			2004			2005			2004
Average balance	$	320,231		$	335,916		$	132,520		$	142,824
Maximum amount outstanding at any month end		363,000			361,200			152,445			159,835
Average interest rate for the year		4.28	%		4.41	%		3.95	%		3.45	%
Amortized cost of collateral:
Corporate securities		—			—		$	75,528		$	75,449
Mortgage-backed securities		—			—			77,641			101,408
Other securities		—			—			1,948			—
Estimated market value of collateral:
Corporate securities		—			—			73,630			73,175
Mortgage-backed securities		—			—			76,274			101,186
Other securities		—			—			1,973			—

The securities collateralizing the reverse repurchase agreements are delivered to the lender with whom each transaction is executed or to a third party custodian. The lender, who may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, agrees to resell to the Company substantially the same securities at the maturity of the reverse repurchase agreements.

FHLB advances and reverse repurchase agreements have contractual maturities at December 31, 2005 as follows (in thousands):

Year Ended December 31,	FHLB Advances		Reverse Repurchase Agreements
2006	$	154,900	$	54,289
2007		75,000		15,000
2008		40,000		41,000
2009		40,000		3,000
2010		30,000		—
Thereafter		15,000		—
	$	354,900	$	113,289
Amount callable by lender prior to the maturity date	$	22,000	$	40,000

On August 4, 2005, the Company issued $5,000,000 of subordinated debt at a fixed interest rate of 6.35%. Accrued interest is due quarterly with principal due at the maturity date of November 23, 2015.

The Bank has an available overnight line of credit with the FHLB for $100,000,000 which expires July 31, 2006. The Bank also has available from the FHLB, a one-month overnight repricing line of credit for $100,000,000 which expires July 31, 2006. When utilized, both lines carry a floating interest rate of 10-15 basis points over the current Federal funds rate. All FHLB advances, including the lines of credit, are secured by the Bank’s mortgage loans, mortgage-backed securities and FHLB stock. As a member of the FHLB of New York, the Company is required to maintain a minimum investment in the capital stock of the FHLB, at cost, in an amount equal to 0.20% of the Bank’s mortgage-related assets, plus 4.5% of the specified value of certain transactions between the Bank and the FHLB.

(10) Income Taxes

The provision for income taxes for the years ended December 31, 2005, 2004 and 2003 consists of the following (in thousands):

Year Ended December 31,	2005			2004			2003
Current:
Federal	$	9,500		$	10,179		$	9,448
State		501			464			489
Total Current		10,001			10,643			9,937
Deferred:
Federal		710			(626	)		1,297
State		(376	)		(260	)		(260	)
Total deferred		334			(886	)		1,037
	$	10,335		$	9,757		$	10,974

Included in other comprehensive income (loss) is income tax expense (benefit) attributable to net unrealized gains (losses) on securities available for sale in the amount of $(384,000), $1,888,000 and $(129,000) for the years ended December 31, 2005, 2004 and 2003, respectively. Included in stockholders’ equity is income tax benefit attributable to stock plans in the amount of $1,704,000, $1,575,000 and $1,945,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

A reconciliation between the provision for income taxes and the expected amount computed by multiplying income before the provision for income taxes times the applicable statutory Federal income tax rate for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands):

Year Ended December 31,	2005			2004			2003
Income before provision for income taxes	$	29,832		$	27,702		$	30,847
Applicable statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
Computed “expected” Federal income tax expense	$	10,441		$	9,696		$	10,796
Increase(decrease) in Federal income tax expense resulting from:
ESOP adjustment		722			816			870
ESOP dividends		(368	)		(317	)		(290	)
Earnings on life insurance		(393	)		(440	)		(543	)
State income taxes net of Federal benefit		82			132			149
Other items, net		(149	)		(130	)		(8	)
	$	10,335		$	9,757		$	10,974

Included in other assets at December 31, 2005 and 2004 is a net deferred tax asset of $4,054,000 and $4,004,000, respectively. In addition, at December 31, 2005 and 2004 the Company recorded a current tax (receivable) payable of $(2,089,000) and $8,700,000, respectively.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2005 and 2004 are presented below (in thousands):

34 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

December 31,	2005			2004
Deferred tax assets:
Allowance for loan and real estate owned losses per books	$	4,273		$	4,366
Reserve for uncollected interest		33			62
Deferred compensation		1,023			1,017
Premises and equipment, differences in depreciation		310			45
Other reserves		162			95
Stock plans		72			124
ESOP		—			59
Unrealized loss on securities available for sale		845			461
Intangible assets		51			74
Lease termination costs		32			64
Penalty on early extinguishment of debt		11			82
Partnership investment income		—			181
State alternative minimum tax		885			642
State net operating loss carry forward		1,379			963
Total gross deferred tax assets		9,076			8,235
Less valuation allowance		1,379			963
Deferred tax assets, net		7,697			7,272
Deferred tax liabilities:
Excess servicing on sale of mortgage loans		(1,331	)		(1,146	)
Investments, discount accretion		(280	)		(248	)
Deferred loan and commitment costs, net		(2,000	)		(1,774	)
Loans held for sale		—			(100	)
ESOP		(32	)		—
Total deferred tax liabilities		(3,643	)		(3,268	)
Net deferred tax assets	$	4,054		$	4,004

The Company has determined that a valuation allowance should be established for the state net operating loss carryforward as it was considered unlikely that the Bank, due to its REIT subsidiary, would have sufficient earnings to realize the benefit. The Company has determined that it is not required to establish a valuation reserve for the remaining net deferred tax asset account since it is “more likely than not” that the net deferred tax assets will be realized through future reversals of existing taxable temporary differences, future taxable income and tax planning strategies. The conclusion that it is “more likely than not” that the remaining net deferred tax assets will be realized is based on the history of earnings and the prospects for continued growth. Management will continue to review the tax criteria related to the recognition of deferred tax assets.

Retained earnings at December 31, 2005 includes approximately $10,750,000 for which no provision for income tax has been made. This amount represents an allocation of income to bad debt deductions for tax purposes only. Events that would result in taxation of these reserves include failure to qualify as a bank for tax purposes, distributions in complete or partial liquidation, stock redemptions and excess distributions to shareholders. At December 31, 2005 the Company had an unrecognized deferred tax liability of $4,391,000 with respect to this reserve.

(11) Employee Stock Ownership Plan

As part of the Conversion, the Bank established an Employee Stock Ownership Plan (“ESOP”) to provide retirement benefits for eligible employees. All full-time employees are eligible to participate in the ESOP after they attain age 21 and complete one year of service during which they work at least 1,000 hours. ESOP shares are first allocated to employees who also participate in the Bank’s Incentive Savings (401K) Plan in an amount equal to 50% of the first 6% of the employees contribution. During 2005, 2004 and 2003, 18,646, 14,409 and 13,802 shares, respectively, were either released or committed to be released under this formula. The remaining ESOP shares are allocated among participants on the basis of compensation earned during the year. Employees are fully vested in their ESOP account after the completion of five years of credited service or completely if service was terminated due to death, retirement, disability, or change in control of the Company. ESOP participants are entitled to receive distributions from the ESOP account only upon termination of service, which includes retirement and death.

The ESOP originally borrowed $13,421,000 from the Company to purchase 2,013,137 shares of common stock issued in the conversion. On May 12, 1998, the initial loan agreement was amended to allow the ESOP to borrow an additional $8,200,000 in order to fund the purchase of 633,750 shares of common stock. At the same time the term of the loan was extended from the initial twelve years to thirty years. The amended loan is to be repaid from discretionary contributions by the Bank to the ESOP trust. The Bank intends to make contributions to the ESOP in amounts at least equal to the principal and interest requirement of the debt, assuming a fixed interest rate of 8.25%.

The Bank’s obligation to make such contributions is reduced to the extent of any dividends paid by the Company on unallocated shares and any investment earnings realized on such dividends. As of December 31, 2005 and 2004 contributions to the ESOP, which were used to fund principal and interest payments on the ESOP debt, totaled $2,127,000 and $2,267,000, respectively. During 2005 and 2004, $813,000 and $935,000, respectively, of dividends paid on unallocated ESOP shares were used for debt service. At December 31, 2005 and 2004, the loan had an outstanding balance of $7,369,000 and $8,772,000, respectively, and the ESOP had unallocated shares of 886,029 and 1,026,060, respectively. At December 31, 2005, the unallocated shares had a fair value of $20,166,000. The unamortized balance of the ESOP is shown as unallocated common stock held by the ESOP and is reflected as a reduction of stockholders’ equity.

For the years ended December 31, 2005, 2004 and 2003, the Bank recorded compensation expense related to the ESOP of $3,244,000, $3,590,000 and $3,824,000, respectively, including $2,064,000, $2,331,000 and $2,487,000, respectively, representing additional compensation expense to reflect the increase in the average fair value of committed to be released and allocated shares in excess of the Bank’s cost. As of December 31, 2005, 1,635,012 shares had been allocated to participants and 125,847 shares were committed to be released.

(12) Incentive Plan

The Company has established the Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan (the “Incentive Plan”) which authorizes the granting of stock options and awards of Common Stock and the OceanFirst Financial Corp. 2000 Stock Option Plan which authorizes the granting of stock options. On April 24, 2003 the Company’s shareholders ratified an amendment of the OceanFirst Financial Corp. 2000 Stock Option Plan which increased the number of shares available under option. The purpose of these plans is to attract and retain qualified personnel in key positions, provide officers, employees and non-employee directors (“Outside Directors”) with a proprietary interest in the Company as an incentive to contribute to the success of the Company, promote the attention of management to other stockholders’ concerns and reward employees for outstanding performance. All officers, other employees and Outside Directors of the Company and its affiliates are eligible to receive awards under the plans.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 35

Notes to Consolidated Financial Statements(continued)

Under the Incentive Plan and the Amended 2000 Stock Option Plan, the Company is authorized to issue up to 4,153,564 shares subject to option. All options expire 10 years from the date of grant and generally vest at the rate of 20% per year. The exercise price of each option equals the market price of the Company’s stock on the date of grant.

A summary of option activity for the years ended December 31, 2005, 2004 and 2003 follows:

	2005				2004				2003
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at beginning of year	2,215,514		$	15.47	2,291,337		$	13.71	2,483,146		$	11.58
Granted	18,850			22.06	395,276			22.57	378,305			23.51
Exercised	(483,414	)		10.23	(388,708	)		10.86	(507,991	)		9.90
Forfeited	(18,540	)		22.33	(82,391	)		22.34	(62,123	)		19.36
Outstanding at end of year	1,732,410		$	16.90	2,215,514		$	15.47	2,291,337		$	13.71
Options exercisable	1,723,426				1,337,326				1,521,233

The following table summarizes information about stock options outstanding at December 31, 2005:

	Options Outstanding		Options Exercisable
Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$ 9.60- 9.87	511,350	1.09 years	$	9.61	511,350	$	9.61
10.00-12.87	128,882	3.09		11.57	128,882		11.57
13.06-16.96	22,691	4.86		14.34	22,691		14.34
17.14-17.88	377,941	6.16		17.88	377,791		17.88
18.64-23.23	387,016	8.42		22.45	381,706		22.45
23.44-27.11	304,530	7.53		23.50	301,006		23.50
	1,732,410	5.16 years	$	16.90	1,723,426	$	16.90

(13) Commitments, Contingencies and Concentrations of Credit Risk

The Company, in the normal course of business, is party to financial instruments and commitments which involve, to varying degrees, elements of risk in excess of the amounts recognized in the consolidated financial statements. These financial instruments and commitments include unused consumer lines of credit and commitments to extend credit.

At December 31, 2005, the following commitments and contingent liabilities existed which are not reflected in the accompanying consolidated financial statements (in thousands):

December 31,	2005
Unused consumer and construction loan lines of credit (primarily floating-rate)	$	69,104
Unused commercial loan lines of credit (primarily floating-rate)		58,411
Other commitments to extend credit:
Fixed-Rate		90,428
Adjustable-Rate		89,130
Floating-Rate		28,397

The Company’s fixed-rate loan commitments expire within 90 days of issuance and carried interest rates ranging from 4.38% to 9.25% at December 31, 2005.

The Company’s maximum exposure to credit losses in the event of nonperformance by the other party to these financial instruments and commitments is represented by the contractual amounts. The Company uses the same credit policies in granting commitments and conditional obligations as it does for financial instruments recorded in the consolidated statements of financial condition.

These commitments and obligations do not necessarily represent future cash flow requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s assessment of risk. Substantially all of the unused consumer and construction loan lines of credit are collateralized by mortgages on real estate.

At December 31, 2005, the Company is obligated under noncancelable operating leases for premises and equipment. Rental expense under these leases aggregated approximately $2,030,000, $1,655,000 and $1,419,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

The projected minimum rental commitments as of December 31, 2005 are as follows (in thousands):

Year ended December 31,
2006	$	1,820
2007		1,670
2008		1,613
2009		1,458
2010		925
Thereafter		7,786
	$	15,272

The Company grants one-to-four family and commercial first mortgage real estate loans to borrowers primarily located in Ocean, Middlesex and Monmouth Counties, New Jersey and other surrounding areas of New York City. The Company also originates interest-only one-to-four family mortgage loans in which the borrower makes only interest payments for the first five, seven or ten years of the mortgage loan term. This feature will result in future increases in the borrower’s loan repayment when the contractually required repayments increase due to the required amortization of the principal amount. These payment increases could affect a borrower’s ability to repay the loan. The amount of interest-only one-to-four family mortgage loans at December 31, 2005 was $199.4 million. The ability of borrowers’ to repay their obligations are dependent upon various factors including the borrowers’ income

36 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

and net worth, cash flows generated by the underlying collateral, value of the underlying collateral and priority of the Company’s lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Company’s control; the Company is, therefore, subject to risk of loss.

The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or guarantees are required for all loans.

Contingencies

The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. Management and its legal counsel are of the opinion that the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

(14) Fair Value of Financial Instruments

Fair value estimates, methods and assumptions are set forth below for the Company’s financial instruments.

Cash and Due from Banks

For cash and due from banks, the carrying amount approximates fair value.

Investments and Mortgage-Backed Securities

The fair value of investment and mortgage-backed securities is estimated based on bid quotations received from securities dealers, if available. If a quoted market price was not available, fair value was estimated using quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued.

Federal Home Loan Bank of New York Stock

The fair value for Federal Home Loan Bank of New York stock is its carrying value since this is the amount for which it could be redeemed. There is no active market for this stock and the Company is required to maintain a minimum investment based upon the outstanding balance of mortgage related assets and outstanding borrowings.

Loans

Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as residential mortgage, construction, consumer and commercial. Each loan category is further segmented into fixed and adjustable rate interest terms.

Fair value of performing and non-performing loans was estimated by discounting the future cash flows, net of estimated prepayments, at a rate for which similar loans would be originated to new borrowers with similar terms.

Deposits

The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, and interest-bearing checking accounts and money market accounts are, by definition, equal to the amount payable on demand. The related insensitivity of the majority of these deposits to interest rate changes creates a significant inherent value which is not reflected in the fair value reported. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowed Funds

Fair value estimates are based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.

Commitments to Extend Credit and Sell Loans

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The estimated fair values of the Bank’s financial instruments as of December 31, 2005 and 2004 are presented in the following tables (in thousands). Since the fair value of off-balance sheet commitments approximate book value and are not significant, these disclosures are not included.

December 31, 2005	Book Value		Fair Value
Financial Assets:
Cash and due from banks	$	31,108	$	31,108
Investment securities available for sale		83,861		83,861
Mortgage-backed securities available for sale		85,025		85,025
Federal Home Loan Bank of New York stock		21,792		21,792
Loans receivable and mortgage loans held for sale		1,686,588		1,673,670
Financial Liabilities:
Deposits		1,356,568		1,350,337
Borrowed funds		473,189		470,001

December 31, 2004	Book Value		Fair Value
Financial Assets:
Cash and due from banks	$	74,021	$	74,021
Investment securities available for sale		83,960		83,960
Mortgage-backed securities available for sale		124,478		124,478
Federal Home Loan Bank of New York stock		21,250		21,250
Loans receivable and mortgage loans held for sale		1,536,868		1,546,284
Financial Liabilities:
Deposits		1,270,535		1,267,722
Borrowed funds		463,072		471,136

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, deferred tax assets, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 37

Notes to Consolidated Financial Statements(continued)

(15) Parent-Only Financial Information

The following condensed statements of financial condition at December 31, 2005 and 2004 and condensed statements of operations and cash flows for the years ended December 31, 2005, 2004 and 2003 for OceanFirst Financial Corp. (parent company only) reflects the Company’s investment in its wholly-owned subsidiary, the Bank, using the equity method of accounting.

CONDENSED STATEMENTS OF FINANCIAL CONDITION

(in thousands)

December 31,	2005		2004
Assets
Cash and due from banks	$	7	$	7
Advances to subsidiary Bank		2,894		4,970
Investment securities		5,874		5,726
ESOP loan receivable		7,369		8,772
Investment in subsidiary Bank		128,073		119,003
Total assets	$	144,217	$	138,478
Liabilities and Stockholders’ Equity
Subordinated debenture		5,000		—
Other liabilities		433		522
Stockholders’ equity		138,784		137,956
Total liabilities and stockholders’ equity	$	144,217	$	138,478

CONDENSED STATEMENTS OF OPERATIONS

(in thousands)

Year ended December 31,	2005		2004			2003
Dividend income - Subsidiary Bank	$	15,000	$	20,000		$	25,000
Dividend income - Investment securities		477		484			468
Gain on sale - Investment securities		136		186			719
Interest income - Advances to subsidiary Bank		46		47			39
Interest income - ESOP loan receivable		724		841			961
Total dividend and interest income		16,383		21,558			27,187
Interest expense - subordinated debenture		131		—			—
Operating expenses		1,167		1,212			1,272
Income before income taxes and undistributed earnings/(distributions in excess of earnings) of subsidiary Bank		15,085		20,346			25,915
Provision for income taxes		31		119			390
Income before undistributed earnings/ (distributions in excess of earnings) of subsidiary Bank		15,054		20,227			25,525
Undistributed earnings/(distributions in excess of earnings)of subsidiary Bank		4,443		(2,282	)		(5,652	)
Net income	$	19,497	$	17,945		$	19,873

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

Year ended December 31,	2005			2004			2003
Cash flows from operating activities:
Net income	$	19,497		$	17,945		$	19,873
Decrease (increase) in advances to subsidiary Bank		2,076			1,513			(1,028	)
(Undistributed earnings of) distributions in excess of earnings of subsidiary Bank		(4,443	)		2,282			5,652
Gain on sale of investment securities		(136	)		(186	)		(719	)
Increase (decrease) in other liabilities		38			(332	)		205
Net cash provided by operating activities		17,032			21,222			23,983
Cash flows from investing activities:
Proceeds from sale of investment securities		199			545			2,237
Purchase of investment securities		(443	)		(441	)		(1,332	)
Repayments on ESOP loan receivable		1,403			1,425			1,447
Net cash provided by investing activities		1,159			1,529			2,352
Cash flows from financing activities:
Proceeds from subordinated debenture		5,000			—			—
Dividends paid		(9,469	)		(9,686	)		(9,618	)
Purchase of treasury stock		(15,962	)		(16,247	)		(20,620	)
Exercise of stock options		2,240			3,182			3,903
Net cash used in financing activities		(18,191	)		(22,751	)		(26,335	)
Net increase in cash and due from banks		—			—			—
Cash and due from banks at beginning of year		7			7			7
Cash and due from banks at end of year	$	7		$	7		$	7

SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA

(Unaudited)

Quarter ended	Dec. 31		Sept. 30		June 30		March 31
(dollars in thousands, except per share data)
2005
Interest income	$	27,290	$	26,328	$	24,860	$	24,321
Interest expense		11,880		10,918		9,931		9,144
Net interest income		15,410		15,410		14,929		15,177
Provision for loan losses		—		100		200		50
Net interest income after provision for loan losses		15,410		15,310		14,729		15,127
Other income		5,984		6,314		5,918		5,874
Operating expenses		14,116		14,192		13,157		13,369
Income before provision for income taxes		7,278		7,432		7,490		7,632
Provision for income taxes		2,432		2,602		2,615		2,686
Net Income	$	4,846	$	4,830	$	4,875	$	4,946
Basic earnings per share	$	.41	$	.41	$	.41	$	.42
Diluted earnings per share	$	.40	$	.40	$	.40	$	.40
2004
Interest income	$	23,589	$	23,187	$	22,145	$	22,031
Interest expense		9,107		8,917		8,637		8,270
Net interest income		14,482		14,270		13,508		13,761
Provision for loan losses		150		50		50		50
Net interest income after provision for loan losses		14,332		14,220		13,458		13,711
Other income		6,607		4,951		4,513		4,669
Operating expenses		13,374		12,275		11,678		11,432
Income before provision for income taxes		7,565		6,896		6,293		6,948
Provision for income taxes		2,572		2,444		2,272		2,469
Net Income	$	4,993	$	4,452	$	4,021	$	4,479
Basic earnings per share	$	.42	$	.37	$	.33	$	.37
Diluted earnings per share	$	.40	$	.35	$	.32	$	.35

38 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Report of Independent

Registered Public Accounting Firm

The Board of Directors and Stockholders

OceanFirst Financial Corp.:

We have audited the accompanying consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OceanFirst Financial Corp. and subsidiary as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Short Hills, New Jersey

March 1, 2006

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 39

Management Report on Internal Control

Over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the Company’s internal control over financial reporting as of December 31, 2005. This assessment was based on criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2005, the Company maintained effective internal control over financial reporting based on those criteria. The Company’s independent registered public accounting firm has issued an audit report on our assessment of, and the effective operation of, the Company’s internal control over financial reporting. This report appears on page 41.

40 |OceanFirst Financial Corp. (OCFC)| Annual Report 2005

Report of Independent

Registered Public Accounting Firm

The Board of Directors and Stockholders

OceanFirst Financial Corp.:

We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that OceanFirst Financial Corp. and subsidiary (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that OceanFirst Financial Corp. and subsidiary maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, OceanFirst Financial Corp. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 1, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Short Hills, New Jersey

March 1, 2006

Annual Report 2005 |OceanFirst Financial Corp. (OCFC) | 41