UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-27428
OceanFirst Financial Corp.
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(Exact name of registrant as specified in its charter)
Delaware 22-3412577
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
975 Hooper Avenue, Toms River, NJ 08753
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732)240-4500
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(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____.
-----
As of November 7, 2001, there were 10,026,289 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
OceanFirst Financial Corp.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
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PAGE
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of September 30, 2001 and December 31, 2000.......... 1
Consolidated Statements of Income for the three
and nine months ended September 30, 2001 and 2000........ 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000............ 3
Notes to Consolidated Financial Statements............... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk 10
Part II. OTHER INFORMATION
- ---------- -----------------
Item 1. Legal Proceedings........................................ 11
Item 2. Changes in Securities.................................... 11
Item 3. Default Upon Senior Securities........................... 11
Item 4. Submission of Matters to a Vote of Security Holders...... 11
Item 5. Other Information........................................ 11
Item 6. Exhibits and Reports on Form 8-K......................... 11
Signatures ......................................................... 12
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
September 30, December 31,
2001 2000
---------- ----------
(Unaudited)
ASSETS
- ------
Cash and due from banks $ 13,484 $ 7,235
Investment securities available for sale 77,522 103,536
Federal Home Loan Bank of New York stock, at cost 22,800 20,000
Mortgage-backed securities available for sale 265,870 268,042
Loans receivable, net 1,277,102 1,136,879
Mortgage loans held for sale 40,349 35,588
Interest and dividends receivable 9,498 9,318
Real estate owned, net 55 157
Premises and equipment, net 16,604 14,676
Servicing asset 6,525 6,363
Other assets 37,244 38,423
---------- ----------
Total assets $1,767,053 $1,640,217
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $1,118,312 $1,104,188
Federal Home Loan Bank advances 86,700 127,500
Securities sold under agreements to repurchase 396,928 236,494
Advances by borrowers for taxes and insurance 6,704 6,388
Other liabilities 8,852 7,911
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Total liabilities 1,617,496 1,482,481
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Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares issued -
Common stock, $.01 par value, 55,000,000 shares authorized,
18,118,248 shares issued and 10,116,289 and 11,084,123
shares outstanding at September 30, 2001 and December 31,
2000, respectively 181 181
Additional paid-in capital 181,278 179,805
Retained earnings 128,905 121,737
Accumulated other comprehensive loss (172) (4,927)
Less: Unallocated common stock held by
Employee Stock Ownership Plan (13,036) (14,156)
Unearned Incentive Awards (645) (2,096)
Treasury stock, 8,001,959 and 7,034,125 shares
at September 30, 2001 and December 31, 2000,
respectively (146,954) (122,808)
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Total stockholders' equity 149,557 157,736
---------- ----------
Total liabilities and stockholders' equity $1,767,053 $1,640,217
========== ==========
See accompanying notes to unaudited consolidated financial statements.
1
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
For the Three Months For the Nine Months
ended September 30 ended September 30
--------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
(Unaudited) (Unaudited)
Interest income:
Loans $24,300 $21,753 $70,130 $62,395
Mortgage-backed securities 4,316 5,216 13,210 16,442
Investment securities and other 1,334 2,578 5,338 7,404
------- ------- ------- -------
Total interest income 29,950 29,547 88,678 86,241
------- ------- ------- -------
Interest expense:
Deposits 9,978 11,361 32,760 32,682
Borrowed funds 5,722 6,025 15,998 16,219
------- ------- ------- -------
Total interest expense 15,700 17,386 48,758 48,901
------- ------- ------- -------
Net interest income 14,250 12,161 39,920 37,340
Provision for loan losses 265 255 780 745
------- ------- ------- -------
Net interest income after provision
for loan losses 13,985 11,906 39,140 36,595
------- ------- ------- -------
Other income:
Fees and service charges 783 1,227 3,408 3,340
Net gain (loss) on sales of loans and securities
available for sale 1,001 (1,261) 3,505 (1,189)
Net income from other real estate operations 215 56 270 127
Other 481 400 1,388 997
------- ------- ------- -------
Total other income 2,480 422 8,571 3,275
------- ------- ------- -------
Operating expenses:
Compensation and employee benefits 5,100 4,397 15,205 12,956
Occupancy 792 646 2,227 1,785
Equipment 544 418 1,601 1,145
Marketing 477 320 1,271 1,011
Federal deposit insurance 122 120 368 360
Data processing 521 425 1,580 1,190
General and administrative 1,915 1,934 5,390 4,219
------- ------- ------- -------
Total operating expenses 9,471 8,260 27,642 22,666
------- ------- ------- -------
Income before provision for income taxes 6,994 4,068 20,069 17,204
Provision for income taxes 2,312 248 6,873 4,733
------- ------- ------- -------
Net income $ 4,682 $ 3,820 $13,196 $12,471
======= ======= ======= =======
Basic earnings per share $.51 $.38 $1.40 $1.19
======= ======= ======= =======
Diluted earnings per share $.48 $.36 $1.32 $1.16
======= ======= ======= =======
Average basic shares outstanding 9,190 10,091 9,440 10,437
======= ======= ======= =======
Average diluted shares outstanding 9,744 10,501 9,969 10,739
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
2
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the nine months
ended September 30,
-------------------
2001 2000
--------- --------
(Unaudited)
Cash flows from operating activities:
Net income $ 13,196 $ 12,471
--------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises
and equipment 1,449 1,185
Amortization of Incentive Awards 1,451 1,451
Amortization of ESOP 1,120 1,179
ESOP adjustment 986 442
Tax benefit of stock plans 487 -
Amortization and impairment of servicing asset 1,787 361
Amortization of intangible assets 269 78
Net premium amortization in excess of discount
accretion on securities 483 293
Net accretion of deferred fees and discounts
in excess of premium amortization on loans (208) (202)
Provision for loan losses 780 745
Net gain on sales of real estate owned (303) (161)
Net gain on sales of loans and securities available for sale (3,505) 1,189
Proceeds from sales of mortgage loans held for sale 273,175 51,297
Mortgage loans originated for sale (274,431) (61,866)
Increase in interest and dividends receivable (180) (1,586)
(Increase) decrease in other assets (3,832) 192
Increase (decrease) in other liabilities 941 (1,217)
--------- --------
Total adjustments 469 (6,620)
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Net cash provided by operating activities 13,665 5,851
--------- --------
Cash flows from investing activities:
Net increase in loans receivable (141,135) (85,162)
Purchase of mortgage-backed securities available for sale (49,006) -
Purchase of investment securities available for sale (92) (12,500)
Proceeds from sale of investment securities - 30,279
Proceeds from maturities of investment securities
available for sale 23,470 200
Principal payments on mortgage-backed securities
available for sale 60,879 44,498
Purchases of Federal Home Loan Bank of New York Stock (2,800) (3,200)
Proceeds from sales of real estate owned 745 974
Purchases of premises and equipment (3,377) (1,321)
Acquisition of Columbia Equities, Ltd. net of
cash and cash equivalents - (2,954)
--------- --------
Net cash used in investing activities (111,316) (29,186)
--------- --------
Continued
3
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
For the nine months
ended September 30,
----------------------
2001 2000
-------- --------
(Unaudited)
Cash flows from financing activities:
Increase in deposits $ 14,124 $ 41,057
Decrease in Federal Home Loan Bank advances (40,800) (20,396)
Increase in securities sold under agreements
to repurchase 160,434 34,118
Increase in advances by borrowers for taxes and
insurance 316 596
Exercise of stock options 993 908
Dividends paid (5,868) (5,632)
Purchase of treasury stock (25,299) (22,276)
-------- --------
Net cash provided by financing activities 103,900 28,375
-------- --------
Net increase in cash and due from banks 6,249 5,040
Cash and due from banks at beginning of period 7,235 10,007
-------- --------
Cash and due from banks at end of period $ 13,484 $ 15,047
======== ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 48,533 $ 48,971
Income taxes 5,680 4,295
Noncash investing activities:
Transfer of loans receivable to real estate owned 340 644
Mortgage loans securitized into mortgage-backed
securities 27,321 14,035
======== ========
Supplemental Information to the Consolidated Statements of Cash
Flows relating to the Acquisition of Colombia Equities, Ltd:
Non cash investing and financing transactions relating to the
Acquisition of Columbia Equities, Ltd. that are not reflected in the
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 are listed below:
Fair value of assets acquired, excluding cash and cash equivalents - $ 36,045
Liabilities assumed - (33,982)
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
OceanFirst Financial Corp.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1. Basis of Presentation
- -----------------------------
The accompanying unaudited consolidated financial statements include the
accounts of OceanFirst Financial Corp. (the "Company") and its wholly-owned
subsidiary, OceanFirst Bank (the "Bank") and its wholly-owned subsidiaries,
Columbia Equities, Ltd., OceanFirst Realty Inc. and Ocean Investment Services,
Inc.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. The results of operations for the three and nine months
ended September 30, 2001 are not necessarily indicative of the results of
operations that may be expected for all of 2001.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report to Stockholders on Form 10-K for the year ended
December 31, 2000.
Note 2. Earnings per Share
- ---------------------------
The following reconciles shares outstanding for basic and diluted earnings per
share for the three and nine months ended September 30, 2001 and 2000 (in
thousands):
Three months ended Nine months ended
September 30, September 30,
-------------------- ------------------
2001 2000 2001 2000
------ ------ ------ ------
Weighted average shares issued net of Treasury shares 10,388 11,534 10,683 11,932
Less: Unallocated ESOP shares (1,044) (1,164) (1,074) (1,195)
Unallocated incentive award shares (154) (279) (169) (300)
------ ------ ------ ------
Average basic shares outstanding 9,190 10,091 9,440 10,437
Add: Effect of dilutive securities:
Stock options 449 288 414 180
Incentive awards 105 122 115 122
------ ------ ------ ------
Average diluted shares outstanding 9,744 10,501 9,969 10,739
====== ====== ====== ======
Note 3. Comprehensive Income
- -----------------------------
For the three month periods ended September 30, 2001 and 2000 total
comprehensive income, representing net income plus or minus items recorded
directly in equity, such as the change in unrealized gains or losses on
securities available for sale amounted to $6,415,000 and $8,807,000,
respectively. For the nine months ended September 30, 2001 and 2000, total
comprehensive income amounted to $17,951,000 and $14,398,000, respectively.
Note 4. Impact of Recent Accounting Pronouncements
- --------------------------------------------------
In June 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (SFAS) No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an Amendment to FASB
Statement No. 133". SFAS No. 138 amends certain aspects of SFAS No. 133 to
simplify the accounting for derivatives and hedges under SFAS No. 133. SFAS No.
138 is effective upon the company's adoption of SFAS No. 133 (January 1, 2001).
The initial adoption of SFAS No. 133 and SFAS No. 138 did not have a material
impact on the Company's financial statements.
5
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (A Replacement
of FASB Statement 125)." SFAS No. 140 supersedes and replaces the guidance in
SFAS No. 125 and, accordingly, provides guidance on the following topics:
securitization transactions involving financial assets, sales of financial
assets such as receivables, loans, and securities; factoring transactions; wash
sales; servicing assets and liabilities, collateralized borrowing arrangements;
securities lending transactions; repurchase agreements; loan collateralized
borrowing arrangements; securities lending transactions; repurchase agreements;
loan participations; and extinguishment of liabilities. The provisions of SFAS
No. 140 are effective for transactions entered into after March 31, 2001. The
initial adoption of SFAS No. 140 did not have a material impact on the Company's
financial statements.
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS 141 also specifies the
criteria acquired intangible assets must meet to be recognized and reported
apart from goodwill. SFAS 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to
Be Disposed Of."
SFAS 142 requires that goodwill and any intangible asset determined to have an
indefinite useful life acquired after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-SFAS 142 accounting literature. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of SFAS 142.
The Company is required to adopt the provisions of SFAS 141 immediately. The
initial adoption of SFAS 141 had no impact on the Company's consolidated
financial statements. The Company is required to adopt SFAS 142 effective
January 1, 2002. As of September 30, 2001, the Company has 1.1 million in
recorded goodwill with quarterly amortization of 63,000 which will cease upon
the adoption of SFAS 142. The Company is currently evaluating the goodwill
impairment criteria of SFAS 142 and is not able to estimate the impact, if any,
that SFAS 142 may have on recorded goodwill upon the adoption of SFAS 142. The
impairment adjustment, if any, will have to be recorded by the Company by no
later than December 31, 2002. The Company does not anticipate that SFAS 142
will significantly impact the Company's accounting for currently recorded
intangible assets, primarily core deposit intangibles.
Note 5. Loans Receivable, Net
- -----------------------------
Loans receivable, net at September 30, 2001 and December 31, 2000 consisted of
the following (in thousands):
September 30, 2001 December 31, 2000
------------------- ------------------
Real estate:
One- to four-family $1,104,717 $ 993,706
Commercial real estate, multi-
family and land 100,148 89,663
Construction 8,419 7,973
Consumer 65,917 62,923
Commercial 49,285 29,687
---------- ----------
Total loans 1,328,486 1,183,952
Loans in process (2,280) (2,927)
Deferred origination costs, net 1,151 561
Unearned premium 5 19
Allowance for loan losses (9,911) (9,138)
---------- ----------
Total loans, net 1,317,451 1,172,467
Less: mortgage loans held for sale 40,349 35,588
---------- ----------
Loans receivable, net $1,277,102 $1,136,879
========== ==========
6
Note 6. Deposits
- ----------------
The major types of deposits at September 30, 2001 and December 31, 2000 were as
follows (in thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
Type of Account
- ---------------
Non-interest bearing $ 66,747 $ 49,910
NOW 207,859 170,976
Money market deposit 73,502 71,010
Savings 188,183 165,866
Time deposits 582,021 646,426
---------- ----------
$1,118,312 $1,104,188
========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets at September 30, 2001 were $1.767 billion, an increase of $126.8
million, compared to $1.640 billion at December 31, 2000.
Loans receivable, net, increased by $140.2 million to a balance of $1.277
billion at September 30, 2001, compared to a balance of $1.137 billion at
December 31, 2000. The increase was partly attributable to commercial lending
(including commercial real estate) initiatives which accounted for $30.1 million
of this growth. Additionally, mortgage loan volume was strong due to increased
refinance activity in the low interest rate environment. Deposit balances
increased $14.1 million to $1.118 billion at September 30, 2001 from $1.104
billion at December 31, 2000. Although overall deposit growth was modest, core
deposit categories, a key emphasis for the Company, increased by $78.5 million
as time deposits declined.
Stockholder's equity at September 30, 2001 decreased to $149.6 million, compared
to $157.7 million at December 31, 2000 due to the completion of the Company's
eighth stock repurchase program in August 2001 and the commencement of the
Company's ninth repurchase program immediately thereafter. The Company
repurchased 1,033,943 shares of common stock during the nine months ended
September 30, 2001 at a total cost of $25.3 million. Under the 10% repurchase
program authorized by the Board of Directors July 19, 2001, 791,976 shares
remain to be purchased as of September 30, 2001.
Results of Operations
General
Net income increased to $4.7 million for the three months ended September 30,
2001, as compared to net income of $3.8 million for the three months ended
September 30, 2000, while diluted earnings per share increased to $.48 for the
three months ended September 30, 2001, as compared to $.36 for the same prior
year period. For the nine months ended September 30, 2001, net income increased
to $13.2 million from $12.5 million for the nine months ended September 30,
2000, while diluted earnings per share increased to $1.32 for the nine months
ended September 30, 2001 as compared to $1.16 in the same prior year period.
Earnings per share is favorably affected by the Company's repurchase program,
which reduced the number of shares outstanding.
Interest Income
Interest income for the three and nine months ended September 30, 2001 was $29.9
million and $88.7 million, respectively, compared to $29.5 million and $86.2
million for the three and nine months ended September 30, 2000, respectively.
The increases in interest income were due to increases in average interest-
earning assets of $84.2 million and $61.1 million for the three and nine months
ended September 30, 2001, respectively, as compared to the same prior year
periods. The yield on interest-earning assets decreased to 7.22% and 7.34% for
the three and nine months ended September 30, 2001, respectively, as compared to
7.50% and 7.42%, respectively, for the same prior year periods. Despite the
declines, which were reflective of the general interest rate environment, the
asset yield in both periods still benefited from the Bank's strong loan growth,
which was partly funded by reductions in the lower yielding investment and
mortgage-backed securities available for sale portfolios. For the three and
nine months ended September 30, 2001 loans receivable represented 77.4% and
76.0%, respectively, of average interest-earning assets as compared to 71.5% and
70.1 %, respectively, for the same prior year periods.
7
Interest Expense
Interest expense for the three and nine months ended September 30, 2001 was
$15.7 million and $48.8 million, respectively, compared to $17.4 million and
$48.9 million for the three and nine months ended September 30, 2000,
respectively. The decrease in interest expense was primarily the result of a
decrease in the cost of interest-bearing liabilities to 4.17% and 4.45% for the
three and nine months ended September 30, 2001, respectively, as compared to
4.85% and 4.65%, respectively, in the same prior year periods. Funding costs
were partly restrained due the Company's focus on lower costing core deposit
growth. Core deposits (including non-interest-bearing deposits) represented
47.6% and 44.7% of average deposits for the three and nine months ended
September 30, 2001, respectively, as compared to 38.4% and 38.0%, respectively,
for the same prior year periods. The decline in funding costs was partly offset
by an increase in average interest-bearing liabilities which rose by $74.5
million and $59.7 million for the three and nine months ended September 30,
2001, respectively, as compared to the same prior year periods.
Provision for Loan Losses
For the three and nine months ended September 30, 2001, the Company's provision
for loan losses was $265,000 and $780,000, respectively, as compared to $255,000
and $745,000 for the same prior year periods.
Other Income
Other income was $2.5 million and $8.6 million for the three and nine months
ended September 30, 2001, respectively, compared to $422,000 and $3.3 million
for the same prior year periods. For the three and nine months ended September
30, 2000 the Company recognized a loss of $1.6 million on the restructuring sale
of $32.1 million of securities available for sale. There were no sales of
securities in 2001. For the three and nine months ended September 30, 2001 the
Company recorded a gain of $1.0 million and $3.5 million, respectively, on the
sale of loans, as compared to gains of $375,000 and $447,000, respectively, in
the same prior year periods. The increased gains from loan sales are primarily
due to the mortgage banking activities of Columbia Equities, Ltd. ("Columbia"),
a mortgage banking company acquired by the Company on August 18, 2000. The Bank
also periodically sells 30 year fixed-rate mortgage loans to assist in the
management of interest rate risk.
Total servicing fee income decreased by $797,000 and $973,000 for the three and
nine months ended September 30, 2001, respectively, as compared to the same
prior year periods due to actual and anticipated prepayments of the loans
underlying the servicing portfolio. Both 2001 periods include the recognition
of a $600,000 impairment reserve on the loan servicing asset. Excluding the
2000 loss on the sale of investment securities, the respective net gains on the
sale of loans, and the decrease in servicing fee income, other income increased
by $593,000 and $1.6 million for the three and nine months ended September 30,
2001, respectively, as compared to the same prior year periods. Fees and service
charges increased due to the growth in commercial account services, retail core
account balances, investment services and trust fees. The Company continues to
focus on growing non-interest revenue with the expected introduction of
insurance services later this year.
Operating Expenses
Operating expenses were $9.5 million and $27.6 million, respectively, for the
three and nine months ended September 30, 2001, as compared to $8.3 million and
$22.7 million, respectively, in the same prior year periods. The increases were
principally due to operating expenses associated with Columbia, and the costs
associated with the opening and operation of the Bank's fourteenth, fifteenth
and sixteenth branch offices in May 2000, February 2001 and September 2001,
respectively.
Provision for Income Taxes
Income tax expense was $2.3 million and $6.9 million for the three and nine
months ended September 30, 2001 compared to $248,000 and $4.7 million for the
same prior year periods. The Company recognized an income tax benefit of $1.1
million in the third quarter of 2000 relating to the additional charitable
donation expense associated with the 1996 formation of the OceanFirst Foundation
(the "Foundation"). The Company established the Foundation as part of the
conversion to public ownership and recorded a charitable donation expense of
$13.4 million in 1996. Charitable donations are tax deductible subject to a
limitation of 10% of annual taxable income. The Company is able to carry
forward any unused portion of the deduction for five years following the year in
which the contribution was made. Based on the Company's original estimate of
taxable income for 1996 and the carry forward period, $4.3 million of charitable
donation expense was considered not tax deductible because the Company believed
it was unlikely to realize sufficient earnings over the six year period to take
the full deduction. After considering the Company's earnings performance and
expectations for taxable income through December 31, 2001, the Company estimated
in September 2000 that an additional $3.0 million of charitable donation expense
would be recognized for tax purposes, providing for a tax benefit of $1.1
million. The Company has a remaining
8
charitable donation expense carry forward of $1,256,000 ($440,000 on an
after-tax basis) which expires on December 31, 2001.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, proceeds from the sale of
loans, Federal Home Loan Bank ("FHLB") and other borrowings and, to a lesser
extent, investment maturities. While scheduled amortization of loans is a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company has other sources of liquidity if a need for additional funds arises,
including an overnight line of credit and advances from the FHLB.
At September 30, 2001, the Company had $86.7 million of outstanding overnight
borrowings from the FHLB, an increase from $52.5 million at December 31, 2000.
The Company utilizes the overnight line from time to time to fund short-term
liquidity needs. The Company also had other borrowings of $396.9 million at
September 30, 2001, an increase from $311.5 million at December 31, 2000.
These borrowings were used to fund a wholesale leverage strategy designed to
improve returns on invested capital.
The Company's cash needs for the nine months ended September 30, 2001, were
primarily provided by principal payments on loans and mortgage-backed
securities, maturities of investment securities, proceeds from the sale of
mortgage loans held for sale and increased total borrowings. The cash was
principally utilized for loan originations, the purchase of mortgage-backed
securities and the purchase of treasury stock. For the nine months ended
September 30, 2000, the cash needs of the Company were primarily satisfied by
principal payments on loans and mortgage-backed securities, proceeds from the
sale of mortgage loans held for sale and increased deposits and total
borrowings. The cash provided was principally used for the origination of loans
and the purchase of treasury stock.
At September 30, 2001, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $127.4 million, or 7.2%, of total adjusted
assets, which is above the required level of $26.6 million or 1.5%, core
capital of $127.4 million or 7.2% of total adjusted assets, which is above the
required level of $53.2 million, or 3.0%; and risk-based capital of $137.2
million, or 13.3 % of risk-weighted assets, which is above the required level of
$82.6 million or 8.0%. The Bank is considered a "well capitalized" institution
under the Office of Thrift Supervision's prompt corrective action regulations.
Non-Performing Assets
The following table sets forth information regarding the Company's nonperforming
assets consisting of non-accrual loans and Real Estate Owned (REO). It is the
policy of the Company to cease accruing interest on loans 90 days or more past
due or in the process of foreclosure.
September 30, December 31,
2001 2000
-------- -------
(dollars in thousands)
Non-accrual loans:
Real estate:
One-to four-family $ 3,731 $ 2,594
Commercial real estate,
multi-family and land - -
Consumer 151 147
Commercial 2,368 182
------- -------
Total 6,250 2,923
REO, net 55 157
------- -------
Total non-performing assets $ 6,305 $ 3,080
======= =======
Non-performing loans as a percent of total
loans receivable .47% .25%
Non-performing assets as a percent of total
assets .36 .19
Allowance for loan losses as a percent of
total loans receivable .75 .77
Allowance for loan losses as percent of
total non-performing loans 158.58 312.62
9
The increase in non-performing loans is due primarily to one non-performing
commercial loan with an outstanding balance of $2.4 million, which was placed on
non-accrual status during the quarter ended June 30, 2001. The loan is
represented by a participation interest in a $125 million shared national credit
on a company headquartered in New Jersey, and is secured by corporate assets and
various commercial real estate properties. The Bank does not participate in any
other shared national credits.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this quarterly report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal and state tax authorities, changes in interest rates, deposit flows, the
cost of funds, demand for loan products, demand for financial services,
competition, changes in the quality or composition of the Bank's loan and
investment portfolios, changes in accounting principles, policies or guidelines,
and other economic, competitive, governmental and technological factors, and the
effects of war or terrorism activities affecting the Company's operations,
markets, products, services and prices. Further description of the risks and
uncertainties to the business are included in Item 1, Business, of the Company's
2000 Form 10-K.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's interest rate sensitivity is monitored by management through the
use of an interest rate risk (IRR) model. Based on internal IRR modeling the
Company's one year gap at September 30, 2001 was negative 14.5% as compared to
negative 10.8% at December 31, 2000. Additionally, the table below sets forth
the Company's exposure to interest rate risk as measured by the change in net
portfolio value ("NPV") and net interest income under varying rate shocks as of
September 30, 2001 and December 31, 2000. All methods used to measure interest
rate sensitivity involve the use of assumptions, which may tend to oversimplify
the manner in which actual yields and costs respond to changes in market
interest rates. The Company's interest rate sensitivity should be reviewed in
conjunction with the financial statements and notes thereto contained in the
Company's Annual Report for the year ended December 31, 2000.
At September 30, 2001, the Company's NPV in a static rate environment is less
than the NPV at December 31, 2000, reflecting the Company's declining capital
levels resulting from common stock repurchase programs and the lower interest
rate environment which reduces the value of the Company's core deposits. In a
shocked interest rate environment, the Company projects comparable changes in
NPV and Net Interest Income at September 30, 2001 as compared to December 31,
2000.
September 30, 2001 December 31, 2000
------------------------------------------------------- -------------------------------------------------
Net Portfolio Value Net Interest Income Net Portfolio Value Net Interest Income
- ------------------------------------------------------------------------------------------------------------------------
Change in
Interest
Rates in NPV NPV
Basis Points Amount % Change Ratio Amount % Change Amount % Change Ratio Amount % Change
(Rate Shock)
- ------------------------------------------------------------------------------------------------------------------------
(dollars in
thousands)
300 $ 93,943 (41.5)% 5.7% $49,589 (13.1)% $122,407 (37.9)% 8.2% $42,061 (13.9)%
200 123,012 (23.4) 7.2 52,533 (8.0) 153,064 (22.3) 9.9 44,556 (8.8)
100 146,968 (8.5) 8.4 55,181 (3.3) 179,453 (8.9) 11.3 46,728 (4.3)
Static 160,645 - 9.0 57,083 - 197,049 - 12.1 48,837 -
(100) 164,355 2.3 9.0 57,776 1.2 201,071 2.0 12.1 49,569 1.5
(200) 165,925 3.3 9.0 56,827 (0.5) 196,426 (.3) 11.6 49,483 1.3
(300) 170,058 5.9 9.3 54,409 (4.7) 186,175 (5.5) 10.9 48,675 (.3)
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party
to routine legal proceedings within the normal course of business.
Such routine legal proceedings in the aggregate are believed by
management to be immaterial to the Company's financial condition or
results of operations.
Item 2. Changes in Securities
---------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
3.1 Certificate of Incorporation of OceanFirst Financial Corp.*
3.2 Bylaws of OceanFirst Financial Corp.**
4.0 Stock Certificate of OceanFirst Financial Corp.*
b) There were no reports on Form 8-K filed during the three months
ended September 30, 2001.
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, filed on December 7, 1995, as amended,
Registration No. 33-80123.
** Incorporated herein by reference into this document from the Exhibit to
Form 10-Q, Quarterly Report, filed on August 11, 2000.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OceanFirst Financial Corp.
-------------------------------------------
Registrant
DATE: November 13, 2001 /s/ John R. Garbarino
-------------------------------------------
John R. Garbarino
Chairman of the Board, President
and Chief Executive Officer
DATE: November 13, 2001 /s/ Michael Fitzpatrick
-------------------------------------------
Michael Fitzpatrick
Executive Vice President and
Chief Financial Officer
12