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 June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 August 9, 2002, there were 14,212,080 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
OceanFirst Financial Corp.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
PAGE
----
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition
as of June 30, 2002 and December 31, 2001 1
Consolidated Statements of Income for the three
and six months ended June 30, 2002 and 2001 2
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 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 11
Part II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Default Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
June 30, December 31,
2002 2001
--------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 32,306 $ 16,876
Investment securities available for sale 79,423 80,017
Federal Home Loan Bank of New York
stock, at cost 20,115 23,560
Mortgage-backed securities available for sale 177,905 233,302
Loans receivable, net 1,314,316 1,300,889
Mortgage loans held for sale 17,871 37,828
Interest and dividends receivable 8,303 7,632
Real estate owned, net 477 133
Premises and equipment, net 17,998 16,730
Servicing asset 8,983 7,628
Other assets 39,564 39,071
----------- ----------
Total assets $1,717,261 $1,763,666
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $1,162,055 $1,109,043
Federal Home Loan Bank advances 199,000 272,000
Securities sold under agreements to repurchase 191,717 212,332
Advances by borrowers for taxes and insurance 6,644 6,371
Other liabilities 13,533 17,191
----------- ----------
Total liabilities 1,572,949 1,616,937
----------- ----------
Stockholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares issued - -
Common stock, $.01 par value, 55,000,000 shares authorized,
27,177,372 shares issued and 14,306,021 and 14,791,334
shares outstanding at June 30, 2002 and December 31,
2001, respectively 181 181
Additional paid-in capital 183,288 181,780
Retained earnings 137,412 131,746
Accumulated other comprehensive loss (1,016) (824)
Less: Unallocated common stock held by
Employee Stock Ownership Plan (11,955) (12,663)
Unearned Incentive Awards - (161)
Treasury stock, 12,871,351 and 12,386,038 shares
at June 30, 2002 and December 31, 2001,
respectively (163,598) (153,330)
----------- ----------
Total stockholders' equity 144,312 146,729
----------- ----------
Total liabilities and stockholders' equity $1,717,261 $1,763,666
=========== ==========
See accompanying notes to unaudited consolidated financial statements.
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
For the three months For the six months
ended June 30 ended June 30
------------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Interest income:
Loans $ 23,374 $23,099 $47,230 $45,830
Mortgage-backed securities 2,607 4,520 5,705 8,894
Investment securities and other 888 1,801 2,348 4,004
-------- ------- ------- -------
Total interest income 26,869 29,420 55,283 58,728
-------- ------- ------- -------
Interest expense:
Deposits 7,258 11,065 14,642 22,782
Borrowed funds 4,948 5,414 10,310 10,275
-------- ------- ------- -------
Total interest expense 12,206 16,479 24,952 33,057
-------- ------- ------- -------
Net interest income 14,663 12,941 30,331 25,671
Provision for loan losses 375 260 875 515
-------- ------- ------- -------
Net interest income after provision
for loan losses 14,288 12,681 29,456 25,156
-------- ------- ------- -------
Other income:
Fees and service charges 1,471 1,270 2,949 2,625
Net gain on sales of loans and securities
available for sale 1,114 1,426 1,508 2,504
Net income from other real estate operations 55 40 74 55
Other 466 556 1,000 907
-------- ------- ------- -------
Total other income 3,106 3,292 5,531 6,091
-------- ------- ------- -------
Operating expenses:
Compensation and employee benefits 4,997 4,737 10,259 10,105
Occupancy 798 742 1,590 1,436
Equipment 575 562 1,118 1,057
Marketing 433 457 857 794
Federal deposit insurance 124 123 250 246
Data processing 726 568 1,313 1,059
General and administrative 2,157 1,874 4,301 3,476
-------- ------- ------- -------
Total operating expense 9,810 9,063 19,688 18,173
-------- ------- ------ -------
Income before provision for income taxes 7,584 6,910 15,299 13,074
Provision for income taxes 2,448 2,417 5,114 4,561
-------- ------- ------- -------
Net income $ 5,136 $ 4,493 $10,185 $ 8,513
======== ======= ======= =======
Basic earnings per share $ .40 $ .32 $ .78 $ .59
======== ======= ======= =======
Diluted earnings per share $ .37 $ .30 $ .73 $ .56
======== ======= ======= =======
Average basic shares outstanding 12,960 14,255 13,049 14,393
======== ======= ======= =======
Average diluted shares outstanding 13,904 14,970 13,900 15,089
======== ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
2
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the six months
ended June 30,
------------------------
2002 2001
-------- -------
(Unaudited)
Cash flows from operating activities:
Net income $ 10,185 $ 8,513
--------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises
and equipment 972 951
Amortization of Incentive Awards 161 968
Amortization of ESOP 708 742
ESOP adjustment 950 619
Amortization of servicing asset 1,105 759
Amortization of intangible assets 53 179
Net premium amortization in excess of discount
accretion on securities 699 308
Net accretion of deferred fees and discounts
in excess of premium amortization on loans (46) (83)
Provision for loan losses 875 515
Net gain on sales of real estate owned (80) (86)
Net gain on sales of loans and securities available for sale (1,508) (2,504)
Proceeds from sales of mortgage loans held for sale 250,147 165,375
Mortgage loans originated for sale (228,682) (152,435)
Increase in value of Bank Owned Life Insurance (974) (796)
(Increase) decrease in interest and dividends receivable (671) 372
Increase in other assets (1,920) (1,805)
(Decrease) increase in other liabilities (3,100) 2,740
--------- --------
Total adjustments 18,689 15,819
--------- --------
Net cash provided by operating activities 28,874 24,332
--------- --------
Cash flows from investing activities:
Net increase in loans receivable (14,821) (81,411)
Purchase of mortgage-backed securities available for sale - (49,006)
Purchase of investment securities available for sale (600) (92)
Proceeds from maturities of investment securities
available for sale - 13,500
Principal payments on mortgage-backed securities
available for sale 55,588 37,369
Decrease (increase) in Federal Home Loan Bank of New York stock 3,445 (850)
Proceeds from sales of real estate owned 301 434
Purchases of premises and equipment (2,240) (2,324)
--------- --------
Net cash provided by (used in) investing activities 41,673 (82,380)
--------- --------
Continued
3
OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
For the six months
ended June 30,
-----------------------
2002 2001
------- ------
(Unaudited)
Cash flows from financing activities:
Increase in deposits $ 53,012 $ 2,132
(Decrease) increase in short-term borrowings (75,615) 46,471
Proceeds from Federal Home Loan Bank advances 25,000 80,000
Repayments of Federal Home Loan Bank advances (43,000) (20,000)
Proceeds from securities sold under agreements
to repurchase - 33,000
Repayments of securities sold under agreements to
repurchase - (56,000)
Increase in advances by borrowers for taxes and
insurance 273 760
Exercise of stock options 601 863
Dividends paid (4,383) (3,912)
Purchase of treasury stock (11,005) (15,326)
---------- ---------
Net cash (used in) provided by financing activities (55,117) 67,988
---------- ---------
Net increase in cash and due from banks 15,430 9,940
Cash and due from banks at beginning of period 16,876 7,235
---------- ---------
Cash and due from banks at end of period $ 32,306 $ 17,175
========== =========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 24,942 $ 33,389
Income taxes 2,803 1,747
Noncash investing activities:
Transfer of loans receivable to real estate owned 565 340
Mortgage loans securitized into mortgage-backed
securities 90,028 11,698
========== =========
See accompanying notes to unaudited consolidated financial statements.
4
OceanFirst Financial Corp.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of OceanFirst Financial Corp. (the "Company") and its wholly-owned
subsidiary, OceanFirst Bank (the "Bank") and its wholly-owned subsidiaries,
Columbia Equities, Ltd., OceanFirst REIT Holdings, Inc., OceanFirst Realty Corp.
and OceanFirst Services, LLC.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. The results of operations for the three months ended June 30,
2002 are not necessarily indicative of the results of operations that may be
expected for all of 2002.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report to Stockholders on Form 10-K for the year ended
December 31, 2001.
Note 2. Earnings per Share
The following reconciles shares outstanding for basic and diluted earnings per
share for the three months ended June 30, 2002 and 2001 (in thousands):
Three months ended Six months ended
June 30, June 30,
-------------------- -----------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted average shares issued net of Treasury shares 14,452 16,056 14,595 16,250
Less: Unallocated ESOP shares (1,439) (1,611) (1,460) (1,632)
Unallocated incentive award shares (53) (190) (86) (225)
------- ------ ------ ------
Average basic shares outstanding 12,960 14,255 13,049 14,393
Add: Effect of dilutive securities:
Stock options 902 622 781 588
Incentive awards 42 93 70 108
------- ------- ------ ------
Average diluted shares outstanding 13,904 14,970 13,900 15,089
======= ======= ====== ======
Note 3. Comprehensive Income
For the three month periods ended June 30, 2002 and 2001 total comprehensive
income, representing net income plus or minus items recorded directly in equity,
such as the change in unrealized gains or losses on securities available for
sale amounted to $7,131,000 and $5,410,000, respectively. For the six months
ended June 30, 2002 and 2001, total comprehensive income amounted to $9,993,000
and $11,535,000.
Note 4. Impact of Recent Accounting Pronouncements
In July, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.
5
In April, 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
The Statement, among other things, rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishments of Debt, as amended. Under SFAS No. 4, as amended,
gains and losses from the extinguishment of debt were required to be classified
as an extraordinary item, if material. Under SFAS No. 145, gains or losses from
the extinguishment of debt are to be classified as a component of operating
income, rather than an extraordinary item. SFAS No. 145 is effective for fiscal
years beginning after May 15, 2002, with early adoption of the provisions
related to the rescission of SFAS No. 4 encouraged. Upon adoption, companies
must reclassify prior period amounts previously classified as an extraordinary
item.
The Company elected to adopt the provisions related to the rescission of SFAS
No. 4 effective April 1, 2002. The adoption resulted in a second quarter 2002
debt prepayment penalty of $72,000 being classified in general and
administrative expenses. The Company recognized an extraordinary loss, net of
tax of $1,085,000 in the fourth quarter of 2001 pertaining to debt prepayment
penalties. The gross prepayment penalty of $1,669,000 will be reclassified as a
component of general and administrative expenses in 2001, with the related tax
benefit of $584,000 reported as a component of income tax expense in the
consolidated financial statements for the year ending December 31, 2001.
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed periodically for impairment. SFAS 142 requires that goodwill and any
intangible asset determined to have an indefinite useful life acquired after
June 30, 2001 not be amortized, but continue to be evaluated for impairment in
accordance with the appropriate pre-SFAS 142 accounting literature. The Company
adopted SFAS 142 effective January 1, 2002. As of December 31, 2001, the Company
had $1.0 million in unamortized goodwill with annual amortization of $253,000
which ceased upon the adoption of SFAS 142. The cessation of goodwill
amortization for the three and six months ended June 30, 2002 did not have a
significant impact on the Company's consolidated financial statements as
compared to the same prior year period. The Company has determined that there is
no impairment to goodwill based on the criteria of SFAS 142. The adoption of
SFAS 142 did not significantly impact the Company's accounting for currently
recorded intangible assets, primarily core deposit intangibles.
On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal or Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," it retains many of the fundamental
provisions of that Statement. The Statement is effective for fiscal years
beginning after December 15, 2001. The initial adoption of SFAS No. 144 did not
have a significant impact on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires an enterprise to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets. The Company is required to adopt the provisions of SFAS No. 143 for
fiscal years beginning after June 15, 2002. The Company does not anticipate that
SFAS No. 143 will significantly impact the Company's consolidated financial
statements.
6
Note 5. Loans Receivable, Net
Loans receivable, net at June 30, 2002 and December 31, 2001 consisted of the
following (in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Real estate:
One- to four-family $1,070,352 $1,110,282
Commercial real estate, multi-
family and land 125,498 112,318
Construction 9,948 9,082
Consumer 75,152 67,039
Commercial 61,314 51,756
----------- ----------
Total loans 1,342,264 1,350,477
Loans in process (3,120) (2,458)
Deferred origination costs, net 1,882 1,048
Unearned (discount) premium (7) 1
Allowance for loan losses (8,832) (10,351)
---------- ----------
Total loans, net 1,332,187 1,338,717
Less: mortgage loans held for sale 17,871 37,828
---------- ----------
Loans receivable, net $1,314,316 $1,300,889
========== ==========
Note 6. Deposits
The major types of deposits at June 30, 2002 and December 31, 2001 were as
follows (in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Type of Account
Non-interest bearing $ 83,693 $ 73,799
NOW 248,289 212,328
Money market deposit 102,398 78,903
Savings 217,368 196,879
Time deposits 510,307 547,134
---------- ----------
$1,162,055 $1,109,043
========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets at June 30, 2002 were $1.717 billion, a decrease of $46.4 million,
compared to $1.764 billion at December 31, 2001.
Loans receivable, net and mortgage loans held for sale together decreased by
$6.5 million to a balance of $1.332 billion at June 30, 2002, compared to a
balance of $1.339 billion at December 31, 2001. Commercial and commercial real
estate loans outstanding increased $22.7 million while one- to four-family
mortgage loans declined, as the Bank actively sold 30-year fixed-rate mortgage
loans during the period.
Proceeds from the loan sales and the cash flow from mortgage-backed securities
were used to reduce total borrowings (Federal Home Loan Bank advances and
securities sold under agreements to repurchase) which declined by $93.6 million,
to $390.7 million at June 30, 2002 from $484.3 million at December 31, 2001. The
sale of 30-year fixed-rate mortgage loans and the reduction in the total
borrowings reduces the Company's interest rate risk exposure and better
positions the Bank for the higher rate environment expected later in 2002.
Deposit balances increased $53.0 million to $1.162 billion at June 30, 2002 from
$1.109 billion at December 31, 2001. Core deposit categories, a key emphasis for
the Company, increased by $89.8 million as time deposits declined.
7
Stockholders' equity at June 30, 2002 decreased to $144.3 million, compared to
$146.7 million at December 31, 2001 due to the execution of the Company's ninth
stock repurchase program. The Company repurchased 542,350 shares of common stock
during the six months ended June 30, 2002 at a total cost of $11.0 million.
Under the 10% repurchase program authorized by the Board of Directors, July 19,
2001, 241,814 shares remain to be purchased as of June 30, 2002.
Results of Operations
General
Net income increased to $5.1 million and $10.2 million for the three and six
months ended June 30, 2002, respectively, as compared to net income of $4.5
million and $8.5 million for the three and six months ended June 30, 2001,
respectively. Diluted earnings per share increased to $.37 and $.73,
respectively, for the three and six months ended June 30, 2002, as compared to
$.30 and $.56, respectively, for the same prior year periods. 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 six months ended June 30, 2002 was $26.9
million and $55.3 million, respectively, compared to $29.4 million and $58.7
million, respectively, for the three and six months ended June 30, 2001. The
decrease in interest income was due to a decline in the yield on
interest-earning assets to 6.67% and 6.75%, respectively, for the three and six
months ended June 30, 2002, as compared to 7.28% and 7.41%, respectively, for
the same prior year periods. Despite the decline, which was reflective of the
general interest rate environment, the asset yield 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 six months ended June 30, 2002 loans receivable
represented 82.1% and 81.4%, respectively, of average interest-earning assets as
compared to 75.1% and 75.2%, respectively, for the same prior year periods.
Interest Expense
Interest expense for the three and six months ended June 30, 2002 was $12.2
million and $25.0 million, respectively, compared to $16.5 million and $33.1
million, respectively, for the three and six months ended June 30, 2001. The
decrease in interest expense was primarily the result of a decrease in the cost
of interest-bearing liabilities to 3.32% and 3.34%, respectively, for the three
and six months ended June 30, 2002, as compared to 4.50% and 4.60%,
respectively, in the same prior year periods. Funding costs were partly
restrained due to the Company's focus on lower-costing core deposit growth. Core
deposits (including non-interest-bearing deposits) represented 55.1% and 53.9%,
respectively, of average deposits for the three and six months ended June 30,
2002, as compared to 44.6% and 43.2%, respectively, for the same prior year
periods.
Provision for Loan Losses
For the three and six months ended June 30, 2002, the Company's provision for
loan losses was $375,000 and $875,000, respectively, as compared to $260,000 and
$515,000, respectively, for the same prior year periods. The increase was due to
the deterioration and charge-off during the first quarter of a non-performing
commercial loan.
Other Income
Other income was $3.1 million and $5.5 million, respectively, for the three and
six months ended June 30, 2002, compared to $3.3 million and $6.1 million,
respectively, for the same prior year periods. For the three and six months
ended June 30, 2002 the Company recorded a gain of $1.1 million and $1.5
million, respectively, on the sale of loans, as compared to a gain of $1.4
million and $2.5 million, respectively, in the same prior year periods.
Servicing fee income for the three and six months ended June 30, 2002 was
adversely effected by the recognition of a $144,000 impairment reserve on the
Company's loan servicing asset.
Excluding the respective net gains on the sale of loans and the impairment to
the loan servicing asset, other income increased by $270,000, or 14.5%, and
$580,000, or 16.2%, for the three and six months ended June 30, 2002, 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 and
trust fees.
8
Operating Expenses
Operating expenses were $9.8 million and $19.7 million, respectively, for the
three and six months ended June 30, 2002, as compared to $9.1 million and $18.2
million, respectively, in the same prior year periods. The increases were
principally due to the costs associated with the opening and operation of the
Bank's sixteenth and seventeenth branch offices in September 2001 and May 2002,
as well as higher loan related expenses. Additionally, general and
administrative expenses for the three and six months ended June 30, 2002 include
a $72,000 prepayment penalty on the early termination of an $8.0 million
borrowing. Compensation expense benefited from the elimination, in February
2002, of the amortization expense relating to the stock awards granted under the
1997 Incentive Plan, a cost savings of $484,000 and $806,000, respectively, for
the three and six months ended June 30, 2002 as compared to the same prior year
periods. This savings was partly offset by an increase in ESOP expense of
$205,000 and $296,000 for the three and six months ended June 30, 2002,
respectively, due to the higher average market price for OCFC shares during
2002.
Provision for Income Taxes
Income tax expense was $2.4 million and $5.1 million, respectively, for the
three and six months ended June 30, 2002, compared to $2.4 and $4.6 million,
respectively, for the same prior year periods. The effective tax rate decreased
to 32.3% and 33.4%, respectively, for the three and six months ended June 30,
2002 as compared to 35.0% and 34.9%, respectively, for the same prior year
periods. The decrease was due to a change in Federal tax regulations allowing
for the deductibility of ESOP dividends beginning in 2002. On July 2, 2002, the
New Jersey legislature passed the New Jersey Business Tax Reform Act. The effect
of this legislation on the Company is approximately $400,000 to $600,000 (before
federal tax benefit) in additional state taxes per year, or approximately $.02
to $.03 per diluted share after the federal tax benefit. The tax is retroactive
to January 1, 2002 and will be reflected in the Company's third quarter
operating results.
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 June 30, 2002, the Company had no outstanding overnight borrowings from the
FHLB, a decrease from $80.0 million at December 31, 2001. The Company utilizes
the overnight line from time to time to fund short-term liquidity needs. The
Company also had other borrowings of $390.7 million at June 30, 2002, a decrease
from $484.3 million at December 31, 2001. These borrowings were used to fund a
wholesale leverage strategy designed to improve returns on invested capital.
The Company's cash needs for the six months ended June 30, 2002, were primarily
provided by principal payments on loans and mortgage-backed securities,
increased deposits and proceeds from the sale of mortgage loans held for sale.
The cash was principally utilized for loan originations, a reduction in total
borrowings and the purchase of treasury stock. For the six months ended June 30,
2001, the cash needs of the Company were primarily satisfied by principal
payments on loans and mortgage-backed securities, maturities of investment
securities, proceeds from the sale of mortgage loans held for sale and increased
total borrowings. The cash provided was principally used for the origination of
loans, the purchase of mortgage-backed securities and the purchase of treasury
stock.
At June 30, 2002, the Bank exceeded all of its regulatory capital requirements
with tangible capital of $122.8 million, or 7.2%, of total adjusted assets,
which is above the required level of $25.7 million or 1.5%; core capital of
$122.8 million or 7.2% of total adjusted assets, which is above the required
level of $51.4 million, or 3.0%; and risk-based capital of $131.5 million, or
12.4% of risk-weighted assets, which is above the required level of $84.8
million or 8.0%. The Bank is considered a "well capitalized" institution under
the Office of Thrift Supervision's prompt corrective action regulations.
9
Non-Performing Assets
The following table sets forth information regarding the Company's 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.
June 30, December 31,
2002 2001
----------------- -----------------
(dollars in thousands)
Non-accrual loans:
Real estate:
One-to four-family $ 3,130 $ 3,661
Commercial real estate,
multi-family and land - -
Consumer 114 151
Commercial 45 2,368
------- -------
Total 3,289 6,180
REO, net 477 133
------- -------
Total non-performing assets $ 3,766 $ 6,313
======= =======
Non-performing loans as a percent of total
loans receivable .25% .46%
Non-performing assets as a percent of total
assets .22 .36
Allowance for loan losses as a percent of
total loans receivable .66 .77
Allowance for loan losses as percent of
total non-performing loans 268.53 167.49
The decrease in non-performing loans is primarily due to the first quarter
charge-off of a non-performing commercial loan with an outstanding balance of
$2.4 million. The loan is a participation interest in a $125 million shared
national credit on a company headquartered in New Jersey, and is secured by
corporate assets and various commercial real estate properties. The Bank does
not participate in any other shared national credits. The creditor filed for
bankruptcy protection in March 2002 and an orderly asset liquidation appears
less likely. Any future recovery of principal would increase the Bank's
allowance for loan losses.
Recent Developments
On July 2, 2002, the New Jersey legislature passed the New Jersey Business Tax
Reform Act. The effect of this legislation on the Company is approximately
$400,000 to $600,000 in additional state taxes per year, or approximately $.02
to $.03 per diluted share after the Federal tax benefit. The tax is retroactive
to January 1, 2002 and will be reflected in the Company's third quarter
operating results.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this quarterly report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal and state tax authorities, changes in interest rates, deposit flows, the
cost of funds, demand for loan products, demand for financial services,
competition, changes in the quality or composition of the Bank's loan and
investment portfolios, changes in accounting principles, policies or guidelines,
and other economic, competitive, governmental and technological factors, and the
effects of war or terrorism activities affecting the Company's operations,
markets, products, services and prices. Further description of the risks and
uncertainties to the business are included in Item 1, Business, of the Company's
2001 Form 10-K.
10
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 June 30, 2002 was positive 10.4% as compared to
negative 6.7% at December 31, 2001. Additionally, the table below sets forth the
Company's exposure to interest rate risk as measured by the change in net
portfolio value ("NPV") and net interest income under varying rate shocks as of
June 30, 2002 and December 31, 2001. All methods used to measure interest rate
sensitivity involve the use of assumptions, which may tend to oversimplify the
manner in which actual yields and costs respond to changes in market interest
rates. The Company's interest rate sensitivity should be reviewed in conjunction
with the financial statements and notes thereto contained in the Company's
Annual Report for the year ended December 31, 2001.
At June 30, 2002 passbook, NOW and Money Market accounts ("core deposits") were
assumed to decay, or runoff, at a slower rate than at December 31, 2001. The
slower decay rate was partly responsible for reducing the Company's negative
gap, increasing NPV in a static rate environment and reducing interest rate
sensitivity in a shocked interest rate environment. The increase in core
deposits and the decline in time deposits from December 31, 2001 to June 30,
2002 also contributed to this trend. Also, assumed prepayment speeds for
mortgage loans and mortgage-backed securities were higher at June 30, 2002 as
compared to December 31, 2001 due to the lower interest rate environment.
Finally, interest rate volatility was favorably impacted by the Bank's sale of
30-year fixed-rate mortgage loans during the six months ended June 30, 2002. The
proceeds from these sales were used to reduce overnight borrowings which
declined by $80.0 million from December 31, 2001 to June 30, 2002.
June 30, 2002 December 31, 2001
------------------------------------------------------- -----------------------------------------------------
Net Portfolio Value Net Interest Income Net Portfolio Value Net Interest Income
- ------------------------------------------------------------------------- ------- ---------------------------------------------
Change in
Interest Rates
in Basis Points NPV NPV
(Rate Shock) Amount % Change Ratio Amount % Change Amount % Change Ratio Amount % Change
- ----------------- ---------- ----------- ------- --------- ----------- ---------- ----------- -------- -- --------- ---------
(dollars in
thousands)
200 $166,005 (9.6)% 10.0% $59,107 1.5% $118,006 (22.1)% 7.0% $58,369 (5.3)%
100 184,545 .5 10.8 59,218 1.7 141,155 (6.8) 8.2 60,366 (2.1)
Static 183,702 - 10.6 58,231 - 151,507 - 8.6 61,649 -
(100) 170,965 (6.9) 9.7 55,964 (3.9) 154,728 2.1 8.6 62,177 .9
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings of a
material nature at the present time. From time to time, the
Company is a party to routine legal proceedings within the
normal course of business. Such routine legal proceedings in
the aggregate are believed by management to be immaterial to
the Company's financial condition or results of operations.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
3.1 Certificate of Incorporation of OceanFirst
Financial Corp.*
3.2 Bylaws of OceanFirst Financial Corp.**
4.0 Stock Certificate of OceanFirst Financial Corp.*
99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
b) The Company filed an 8-K on June 26, 2002 which included
by Exhibit, the written presentation OceanFirst Financial
Corp. provided to current and prospective investors on
June 26, 2002 and June 27, 2002.
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, filed on December 7, 1995, as amended,
Registration No. 33-80123.
** Incorporated herein by reference into this document from the Exhibit to
Form 10-Q, Quarterly Report, filed on August 11, 2000.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OceanFirst Financial Corp.
Registrant
DATE: August 14, 2002 /s/ John R. Garbarino
-----------------------------------
John R. Garbarino
Chairman of the Board, President
and Chief Executive Officer
DATE: August 14, 2002 /s/ Michael Fitzpatrick
-----------------------------------
Michael Fitzpatrick
Executive Vice President and
Chief Financial Officer
13