Exhibit 13
Financial Highlights
(dollars in thousands, except per share amounts)
At or For The Year Ended December 31, 2001 2000 1999
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Selected Financial Condition Data:
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Total assets $ 1,763,666 $1,640,217 $1,590,907
Loans receivable, net 1,300,889 1,136,879 1,042,975
Deposits 1,109,043 1,104,188 1,056,950
Stockholders' equity 146,729 157,736 167,530
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Selected Operating Data:
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Net interest income 55,012 49,693 48,538
Non-interest income 12,925 6,145 5,226
Non-interest expense 37,379 31,645 27,852
Net income 18,159 16,382 16,347
Diluted earnings per share 1.85 1.54 1.33
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Selected Financial Ratios:
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Stockholders' equity per common share 14.88 14.23 13.27
Cash dividend per share .84 .72 .57
Stockholders' equity to total assets (capital ratio) 8.32% 9.62% 10.53%
Return on average assets 1.06 1.01 1.04
Return on average stockholders' equity 12.01 10.45 8.90
Average interest rate spread 2.97 2.75 2.70
Net interest margin 3.37 3.20 3.20
Operating expenses to average assets 2.19 1.96 1.78
Operating efficiency ratio 55.02 56.67 51.80
Non-performing loans to total loans receivable .46 .25 .28
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Actual contributions to stockholders' equity and resultant cash
earnings data/(1)/:
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Cash earnings $ 21,953 $ 19,426 $ 19,283
Diluted cash earnings per share 2.23 1.82 1.57
Return on average assets 1.29% 1.20% 1.23%
Return on average stockholders' equity 14.52 12.39 10.50
Operating efficiency ratio 47.49 48.96 43.94
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/(1) Cash earnings are determined by adding (net of taxes) to reported earnings
the noncash expenses stemming from the amortization and appreciation of
allocated shares in the Company's stock-related benefit plans and the
amortization of intangible assets./
Earnings Per Share (EPS)
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[CHART]
Return On Equity (ROE)
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[CHART]
1
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"OceanFirst delivered record-shattering earnings per share, net income and
return on average shareholder equity in 2001:"
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Annual Dividend Per Share
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[CHART]
Letter to our Shareholders
March 2002
Dear Fellow Shareholders:
OceanFirst Financial achieved extraordinary success in what was certainly
one of the most tumultuous years in its history. Surpassing the goals we had
set, we delivered record-breaking financial results in the face of unprecedented
interest rate volatility engineered by the Federal Reserve. We also carried out
aggressive initiatives to bolster our strong competitive position as the
preeminent provider of financial services to the Central Jersey Shore community.
As we commemorate our 100th year, we look forward to continuing our outstanding
performance in order to build the value of your OceanFirst investment.
Excellent Financial Results
OceanFirst delivered record-shattering earnings per share (EPS), net income
and return on average shareholder equity (ROE) in 2001. EPS grew 20.1% to $1.85
on a fully diluted basis, while net income rose 10.8% to $18.2 million. ROE
surpassed 12% for the first time since our 1996 initial public offering. This
outstanding performance generated two increases in the cash dividend paid on
your shares during the year, and an additional increase announced shortly after
the close of the fourth quarter. The dividend rose a total of 5 CENTS,
representing a 26.3% increase from the first quarter of 2001. Since the initial
dividend was declared in 1997, cash dividends have increased an impressive 140%.
We achieved excellent results in other performance measures as well:
. Cash EPS outpaced reported EPS, growing by 22.5% to $2.23.
Cash earnings are determined by adding to reported earnings the noncash expenses
associated with employee benefit and incentive plans and with the amortization
2
of intangible assets, all net of associated tax benefits. Cash earnings are
important as they provide additional capital which can be utilized to support
higher levels of share repurchases, cash dividends and asset growth.
. We established over 9,000 new deposit relationships in 2001. As a result,
our core deposits at year-end represented 50.7% of total deposits versus only
41.5% at the end of 2000. Core deposits are less interest-rate-sensitive and
represent a more stable source of funding than CDs. We achieved the increases in
core deposits across the entire depositor spectrum-among consumers, among
businesses and among public entities.
. We also built new relationships on the lending side, increasing loans
receivable by 14.4%. Commercial loan growth was especially strong: Balances
climbed 37.4% to $164.1 million, exceeding our targets for the year. At the
close of 2001, commercial loans represented 12.5% of total loans receivable,
compared with 10.4% at the end of 2000. This diversification of our loan
portfolio enhanced our overall asset yield. In last year's strong
residential-mortgage-lending market, which was driven by refinancing activity,
record mortgage origination volume was accompanied by record mortgage sales. We
sold many of our long-term, fixed-rate loans to help manage our exposure to
interest rate risk and to generate impressive gains in non-interest income.
. We achieved our stated goal of growing top-line revenue. Expansion of
top-line revenue is critical to sustain growth in earnings. In 2001, net
interest income rose 10.7%, and total other income climbed by a striking 110.3%.
Our net interest margin finished the year strongly, averaging 3.58% in the
fourth quarter versus 3.15% a year earlier.
[CHART]
[CHART]
3
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"The integrity of the Bank's loan portfolio was largely unaffected by the 2001
recession."
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Initiatives Strengthen Competitive Position
We accomplished two of the goals we established at the start of last year.
We capitalized on the acquisition of Columbia Equities, Ltd. as our new mortgage
banking subsidiary, and we took aggressive steps to strengthen our presence in
the retail banking market.
[GRAPHIC]
We succeeded in fully integrating the operations of Columbia (based in
Westchester County, New York) with those of OceanFirst Bank. The market
expansion and greater product diversity that we achieved enhanced our mortgage
origination capabilities and enabled us to take fuller advantage of the strong
residential mortgage market which prevailed throughout the year.
[PHOTO] [PHOTO] [PHOTO] [PHOTO] [PHOTO]
The OceanFirst Financial Corp. Board of Directors (from left to right):
John R. Garbarino,
Chairman and
Chief Executive Officer;
Thomas F. Curtin;
John E. Walsh;
Frederick E. Schlosser;
James T. Snyder;
John W. Chadwick;
Diane F. Rhine;
Carl Feltz Jr.;
Donald E. McLaughlin.
In the retail banking arena, we witnessed the maturation of the one to two
strategically located branch offices we established in each of the last several
years. In addition, we entered a new Ocean County market with the successful
opening of our Manahawkin branch office, which is projected to become profitable
during 2002. We also significantly improved our existing market coverage by
relocating our Holiday City South office to a new location on State Highway
Route 37 West in Toms River. The relocated branch, which is triple its original
size, has reinvigorated our market presence by providing drive-in service,
expanded parking and highway visibility. Both of these offices have become
strong core deposit generators in just a short period of time.
4
Another initiative we had planned for 2001 was placed on hold due to an
unanticipated, dramatic change in market conditions. As noted in last year's
report, we had intended to develop insurance services as a new product line.
However, we postponed our plans, at least temporarily, due to the horrific
terrorist attacks of 9/11, which disrupted the insurance markets and led to the
disappearance of attractive paths of entry into the insurance sector. We
concluded shortly after 9/11 that not entering the insurance arena at this time
was preferable to making an ill-advised entrance.
[GRAPHIC]
Other initiatives we did pursue included the following:
. We made significant strides in managing interest rate risk.
In addition to the aforementioned long term fixed rate loan sales, we locked in
lower rates
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
on borrowings during the fourth quarter by replacing higher-cost wholesale
borrowings with those having lower current rates and similar maturities.
. Credit risk in our portfolio was also well managed: The nominal increase
we reported in non-performing assets during the year was due primarily to
difficulties experienced with a participation in a shared national credit. We
note that our $2.4 million portion of the total $125 million credit relationship
represents the only shared national credit in our portfolio. The integrity of
the Bank's loan portfolio was largely unaffected by the 2001 recession.
5
. We progressed smartly in our pursuit of new relationships in the local
government banking market. We bid on, and won, core banking relationships with
several prominent public entities during the period.
. Our Trust and Asset Management Services business, launched in 2000,
gained additional market share and generated solid increases in revenue. New
relationships we developed provided growth in assets under management. This
business line continues to have great potential in our market.
[PHOTO] [PHOTO] [PHOTO] [PHOTO] [PHOTO]
The OceanFirst senior management team (from left to right):
John R. Garbarino,
President and
Chief Executive Officer;
Karl E. Reinheimer;
Michael J. Fitzpatrick;
Robert M. Pardes;
John K. Kelly.
. We completed our eighth stock repurchase program since 1997, and
immediately announced the start of the Company's ninth program. During 2001, we
repurchased an additional 1.3 million shares, bringing the total number
repurchased to 8.4 million - or 46.6% of our original 1996 offering.
Our next 100 years... began on January 28, 2002.
Throughout the current year, we plan to focus on the following key
objectives:
. EPS Growth Above 15%. At the heart of our shareholder-value-creation
strategy is consistent revenue and net income growth, which translates into
higher EPS for our shareholders.
. Balance Sheet Growth and Reconfiguration. To achieve the desired revenue
gains, we will continue to emphasize the growth of both core deposits and loans.
We will seek out new business relationships, and nurture existing ones. We will
also continue to reconfigure the balance sheet. Core deposit gains of recent
6
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"At the heart of our shareholder-valuecreation strategy is consistent revenue
and net income growth, which translates into higher EPS for our shareholders."
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years will be preserved, and the loan portfolio will be given a more commercial
orientation. As always, we will pursue commercial loan growth in a prudent,
methodical manner with a wary eye on credit risk management.
.Risk Management. Effective management of risk is always vital to a
financial institution's long-term viability and earnings performance. During the
year, we will create and adopt a customized risk management framework to
strengthen the process throughout the Company and ensure that the risk culture
at OceanFirst remains both disciplined and conservative.
[GRAPHIC]
.Improved Use of Technology. The Company has already taken steps to
upgrade its current banking information technology platform to a Siebel Systems,
Inc. Customer Relationship Management system. The ongoing maturation of our
sales and service culture demands the technological support the Siebel system
affords. The new technology will help us acquire customers and will enhance
customer satisfaction and loyalty. Providing our staff with a complete picture
of the relationship we have with each customer will facilitate the consultative
sales and exceptional customer service we promise.
. Insurance Products Business Line. This market, shocked as it was in 2001
by the events of 9/11, will be revisited in 2002 to see if we can make an
appropriate entry. We continue to believe that, if properly executed, the
incorporation of insurance products into our line of financial services can
significantly enhance our stream of non-interest revenue.
7
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"Since 1996, when we became a public company, we have successfully expanded our
corporate mission to include not only delivering quality services, but also
increasing the value of our shareholders` investment."
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OceanFirst begins its second 100 years in the bittersweet position of
celebrating its centennial anniversary in the midst of a recession and a war
against terrorism, while also saying farewell to a friend and longtime
associate. For 42 of those 100 years, Robert E. Knemoller has faithfully served
the Company, first as an Officer and more recently a Director, making
innumerable contributions to its success. The Board regretfully accepted Bob's
resignation at its February 2002 meeting and immediately elected him as Director
Emeritus. As previously announced, the remainder of his un-expired Board term
will be completed through the appointment of prominent local businessman, John
W. Chadwick. The Board gratefully acknowledges Mr. Knemoller's years of loyal
service to OceanFirst and looks forward to the advice and counsel of Mr.
Chadwick. Throughout its long history, OceanFirst often experienced unusual
events and unsettling world conditions. In the face of those difficulties, we
never lost our focus on delivering quality financial services to our market.
Since 1996, when we became a public company, we have successfully expanded our
corporate mission to include not only delivering quality services, but also
increasing the value of our shareholders' investment. It is our pursuit and
successful execution of this redefined mission that today positions OceanFirst
Financial Corp. as an attractive choice for our investors.
As always, we thank you for your continued support.
Very truly yours,
/s/ John R. Garbarino
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John R. Garbarino
Chairman, President and Chief Executive Officer
8
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, 2001 2000 1999 1998 1997
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(dollars in thousands)
Selected Financial Condition Data:
Total assets $1,763,666 $1,640,217 $1,590,907 $1,561,744 $1,510,947
Investment securities available for sale 80,017 103,536 120,780 137,405 207,357
Federal Home Loan Bank of New York stock 23,560 20,000 16,800 16,800 14,980
Mortgage-backed securities available for sale 233,302 268,042 346,182 381,840 457,148
Loans receivable, net 1,300,889 1,136,879 1,042,975 941,011 783,695
Mortgage loans held for sale 37,828 35,588 -- 25,140 --
Deposits 1,109,043 1,104,188 1,056,950 1,035,251 976,764
Federal Home Loan Bank advances 272,000 127,500 115,000 40,000 20,400
Securities sold under agreements to repurchase 212,332 236,494 239,867 272,108 288,200
Stockholders' equity 146,729 157,736 167,530 197,740 215,544
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For the Year Ended December 31, 2001 2000 1999 1998 1997
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(dollars in thousands: except per share amounts)
Selected Operating Data:
Interest income $ 118,160 $ 116,105 $ 107,347 $ 105,557 $ 98,656
Interest expense 63,148 66,412 58,809 61,399 55,608
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Net interest income 55,012 49,693 48,538 44,158 43,048
Provision for loan losses 1,250 985 900 900 900
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Net interest income after provision for loan losses 53,762 48,708 47,638 43,258 42,148
Other income 12,925 6,145 5,226 2,411 2,509
Operating expenses 37,379 31,645 27,852 25,457 23,145
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Income before provision for income taxes and
extraordinary item 29,308 23,208 25,012 20,212 21,512
Provision far income taxes 10,064 6,826 8,665 7,240 7,687
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Income before extraordinary item 19,244 16,382 16,347 12,972 13,825
Extraordinary item, net of tax - prepayment penalty
on debt extinguishment (1,085) -- -- -- --
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Net income $ 18,159 $ 16,382 $ 16,347 $ 12,972 $ 13,825
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Basic earnings per share $ 1.96 $ 1.59 $ 1.36 $ .97 $ .90
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Diluted earnings per share $ 1.85 $ 1.54 $ 1.33 $ .95 $ .88
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Selected Consolidated Financial and Other Data (continued)
13
Selected Consolidated Financial and Other Data of the Company
(continued)
At or For the Year Ended December 31, 2001 2000 1999 1998 1997
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Selected Financial Ratios and Other Data/(1)/:
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Performance Ratios:
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Return on average assets 1.06% 1.01% 1.04% 0.85% 0.97%
Return on average stockholders' equity 12.01 10.45 8.90 6.36 6.00
Stockholders' equity to total assets 8.32 9.62 10.53 12.66 14.27
Tangible equity to tangible assets 8.22 9.52 10.48 12.61 14.27
Average interest rate spread /(2)/ 2.97 2.75 2.70 2.39 2.39
Net interest margin /(3)/ 3.37 3.20 3.20 2.98 3.12
Average interest-earning assets to average
interest-bearing liabilities 110.31 110.39 112.94 114.35 117.95
Operating expenses to average assets 2.19 1.96 1.78 1.66 1.63
Operating efficiency ratio /(4)/ 55.02 56.67 51.80 54.67 50.80
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Asset Quality Ratios:
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Non-performing loans as a percent of total
loans receivable /(5)//(6)/ 0.46 0.25 0.28 0.56 0.70
Non-performing assets as a percent of total
assets /(6)/ 0.36 0.19 0.21 0.35 0.45
Allowance for loan losses as a percent of total
loans receivable /(5)/ 0.77 0.77 0.78 0.76 0.83
Allowance for loan losses as a percent of total
non-performing loans /(6)/ 167.49 312.62 275.48 137.54 119.03
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Per Share Data
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Dividends per common share $ .84 $ .72 $ .57 $ .46 $ .30
Book value per common share at end of period 14.88 14.23 13.27 13.52 13.72
Tangible book value per common share at end of
period 14.71 14.07 13.20 13.45 13.72
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Number of full-service customer facilities 16 14 13 11 10
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/(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) Operating 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,
net of undisbursed loan funds, deferred loan fees and unamortized
discounts/premiums./
/(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 cue and other loans in the process of
foreclosure. It is the Company's policy to cease accruing interest on all
such loans./
14
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
OceanFirst Financial Corp. (the "Company") is the holding company for OceanFirst
Bank (the "Bank"). On August 17, 1995. the Board of Directors 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
16,776,156 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 1,342,092 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 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 in New York, New Jersey and Connecticut. Loans are originated
through three retail branches, a web site and a network of independent mortgage
brokers. The Company's consolidated results of operations include Columbia's
results commencing on August 18, 2000.
The Company conducts business, primarily through its ownership of the Bank which
operates its administrative/branch office located in Toms Fiver and fifteen
other branch offices. Thirteen of the sixteen branch offices are located in
Ocean County, New Jersey, with two branches in Monmouth County and one in
Middlesex County.
Strategy
The Company operates as a consumer-oriented bank, with a strong focus on its
local community. The Bank is the oldest and largest conmmunity-based financial
institution headquartered in Ocean County, New Jersey. The Company competes with
generally larger and out-of-market financial service providers through this
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 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, over the past few years the
Company has assembled an experienced team of business banking professionals
responsible for offering commercial loan and deposit services and merchant
credit card services to businesses in Ocean County and surrounding communities.
As a result of this initiative, commercial loans represented 12.2% of the Bank's
total loan portfolio at December 31, 2001 as compared to only 3.6% at December
31, 1997. 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 of this strategy, management has
developed 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, Over the past three years, the
Company has opened five new branch offices, three in Ocean County and two in
Southern Monmouth County, the Company's first branches in this county. The de
novo branch openings include a second branch in Point Pleasant Boro and a branch
in Manahawkin, both opened in 2001. Additionally, during 2001, the Holiday City
South branch was relocated to a more prominent location. The Company has
committed to the opening of a new branch in Jackson, also in Ocean County,
during the second quarter of 2002. The Company is also evaluating additional
office sites within its existing market area.
At December 31, 2001, the five new branches maintain an average core deposit mix
of 80.1%. 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. As a result
of these efforts the Company's core deposit ratio has grown to 50.7% at December
31, 2001 as compared to only 13.0% at December 31, 1997. Core deposits are
generally considered a less expensive and more stable funding source than
certificates of deposit.
Management continues to diversify the Company's retail product line in order to
enhance non-interest income. During 1998, the Company began offering alternative
investment products (annuities and mutual funds) 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. In 1999, the menu
of alternative investment products was expanded to include life insurance and
the Company introduced trust and asset management services in early 2000.
Finally, the Company has also expanded the non-interest income received from
small business relationships including BankCard services.
15
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
Non-Interest Income
(in thousands)
[CHART]
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 2001 the Company completed its eighth common
stock repurchase program and in August 2001 the Board of Directors authorized a
ninth repurchase plan for 10% of the outstanding common shares, or 1,040,476
shares. Through December 31, 2001, the Company has repurchased a total of 8.4
million common shares, 46.6% 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 140% since the initial dividend in
1997. The Company has used wholesale borrowings to fund purchases of investment
and mortgage-backed securities and the retention of some 30-year fixed-rate
mortgage loans, much of which had previously been sold. 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 core capital
ratio from 19.4% at December 31, 1996 to 8.3% at December 31, 2001 while
increasing the Company's return on equity from 6.0% for the year ended December
31, 1997 to 12.0% for the year ended December 31, 2001. Management believes that
prudent loan underwriting standards, the continued high concentration of
lower-risk 1- to 4- family mortgage loans, and other effective risk management
practices will allow the Company to continue to reduce capital levels in the
foreseeable future.
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, Securities 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 credit card services,
deposit accounts, the sale of alternative investments, trust and asset
management services and other fees. The Companys 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.
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 increase 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 included 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 vulnerability 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 Committee")
consisting of members of the Company's management, responsible for reviewing
the Company's asset/liability policies and interest rate risk position. The ALCO
Committee 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 a
negative impact on the earnings of the Company.
The Company utilizes the following strategies to manage interest rate risk: (1)
emphasizing the origination for portfolio of fixed-rate mortgage loans 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 mortgagebacked 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 30-year fixed-rate mortgage loans into the secondary
market. In determining whether to retain 30-year 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 30-year 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
attempts to extend the maturity on part of its wholesale borrowings for up to
ten years. With the substantial decline in interest rates during 2001, the
Company resumed its practice of selling most 30-year fixed-rate mortgage loans
into the secondary market. The Company currently does not participate in hedging
programs, 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.
16
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 generally 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.
At December 31, 2001 the Company's one year gap was negative 6.70%. In
performing this calculation, 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. 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 on
residential properties were projected to repay at rates between 14% and 25%
annually. Mortgage-backed securities were projected to prepay at rates between
10% and 27% annually. Passbook accounts, negotiable order of withdrawal ("NOW")
and money market; accounts were assumed to decay, or run-off, at 2.78% 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 will be realized.
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 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
provided 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 as of December 31, 2001 and 2000, as calculated by the Company.
For purposes of this table, prepayment speeds and deposit decay rates similar to
those used in calculating the Company's gap were used.
December 31, 2001
- ------------------------------------------------------------------
Change in Net Portfolio Value Net Interest Income
Interest ------------------------------------------------
Rates
in Basis Points NPV
(Rate Shock) Amount %Change Ratio Amount %Change
==================================================================
200 $118,006 (22.1)% 7.0% $58,369 (5.3)%
100 141,155 (6.8) 8.2 60,366 (2.1)
Static 151,507 -- 8.6 61,649 --
(100) 154,728 2.1 8.6 62,177 .9
(200) 153,274 1.2 8.4 60,781 (1.4)
- ------------------------------------------------------------------
December 31, 2000
- ------------------------------------------------------------------
Change in Net Portfolio Value Net Interest Income
Interest ------------------------------------------------
Rates
in Basis Points NPV
(Rate Shock) Amount %Change Ratio Amount %Change
==================================================================
200 $153,064 (22.3)% 9.9% $44,556 (8.8)%
100 179,453 (8.9) 11.3 46,728 (4.3)
Static 197,049 -- 12.1 48,837 --
(100) 201,071 2.0 12.1 49,569 (1.5)
(200) 196,426 (.3) 11.6 49,483 (1.3)
- ------------------------------------------------------------------
17
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
At December 31, 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 a smaller percent change
in NPV and net interest income at December 31, 2001 than was the case at
December 31, 2000.
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 net interest income and can be
expected to differ from actual results.
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
2 REO properties at December 31, 2001. 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, 2001, 2000, 1999, 1998 and 1997,
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 $379,000, $132,000, $52,000, $270,000 and $278,000.
- -------------------------------------------------------------------------------------------------
At or for the year ended December 31, 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------
(dollars in thousands)
Non-accrual loans:
Real estate:
One to four-family $ 3,661 $2,594 $2,401 $4,605 $5,062
Commercial real estate, multi-family and land -- -- 362 574 382
Construction -- -- -- -- --
Consumer 151 147 222 245 110
Commercial loans 2,368 182 -- -- --
- -------------------------------------------------------------------------------------------------
Total 6,180 2,923 2,985 5,424 5,554
REO, net 133 157 292 43 1,198
- -------------------------------------------------------------------------------------------------
Total non-performing assets $ 6,313 $3,080 $3,277 $5,467 $6,752
=================================================================================================
Allowance for loan losses:
Balance at beginning of year $ 9,138 $8,223 $7,460 $6,612 $6,021
Less: Net charge-offs 37 70 137 52 309
Add: Provision for loan losses 1,250 985 900 900 900
- -------------------------------------------------------------------------------------------------
Balance at end of year $10,351 $9,138 $8,223 $7,460 $6,612
=================================================================================================
Ratio of net charge-offs during the year
to average net loans outstanding during the .00% .01% .01% .01% .05%
year
Allowance for loan losses as
percent of total loans receivable .77 .77 .78 .76 .83
Allowance for loan losses as a
percent of total non-performing loans 167.49 312.62 275.48 137.54 119.03
Non-performing loans as a percent
of total loans receivable .46 .25 .28 .56 .70
Non-performing assets as a percent of total
assets .36 .19 .21 .35 .45
- -------------------------------------------------------------------------------------------------
18
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, 2001,
the Bank had $4.1 million of assets, including all REO, classified as
"Substandard," $2.4 million of assets classified as "Doubtful" and no assets
classified as "Loss." Additionally, "Special Mention" assets totaled $4.8
million at December 31, 2001. These loans are classified as Special Mention due
to past delinquencies or other identifiable weaknesses. The increase in
non-performing loans as a whole and assets classified as Doubtful is primarily
due to one non-performing commercial loan with an outstanding balance of $2.4
million which became non-accrual in the first quarter of 2001. The Bank holds a
participation interest in a $12.5 million shared national credit on a company
headquartered in New Jersey which is secured by various corporate assets. The
Bank does not participate in any other shared national credits.
The provision for loan losses increased by $265,000 for the year ended December
31, 2001, as compared to the prior year to reflect the higher level of
non-performing assets and the significant loan growth, especially in higher risk
commercial loans. Net charge-offs, however, of $37,000 for 2001 remain modest.
The allowance for loan losses is established through a provision for loan losses
based on management's evaluation of the risks inherent in its loan portfolio and
the general economy. The allowance for loan losses is maintained at a level
management considers sufficient to provide for estimated losses based on
evaluating known and inherent risks in the loan portfolio based upon
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. Additions to the allowance are
charged to earnings. 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, the level
of allowance for loan losses remains an estimate which is subject to significant
judgment and short-term change. Future adjustments to the allowance may be
necessary due to economic, operating, regulatory and other conditions beyond the
Company's control.
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.
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 at
December 31, 2001 and for each of the years ended December 31, 2001, 2000, and
1999. 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.
19
Management's Discussion and Analysis
of Financial Condition and Results of Operations ;continued)
At December 31, Years Ended December 31,
==========================================================================================================================
2001 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Average Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
==========================================================================================================================
Assets:
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning deposits
and short-term investments $ 5,614 1.00% $ 1,735 $ 51 2.94% $ 404 $ 22 5.45%
Investment securities 80,017 3.36 89,483 5,084 5.68 120,000 8,797 7.33
FHLB stock 23,560 5.20 21,336 1,283 6.01 18,118 1,203 6.64
Mortgage-backed securities 233,302 6.25 268,221 17,024 6.35 309,929 20,948 6.76
Loans receivable, net /(l)/ 1,338,717 7.27 1,250,049 94,718 7.58 1,105,851 85,135 7.70
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,681,210 6.89 1,630,824 118,160 7.24 1,554,302 116,105 7.47
Non-interest-earning assets 82,456 75,303 63,219
- --------------------------------------------------------------------------------------------------------------------------
Total assets $1,763,666 $1,706,127 $1,617,521
==========================================================================================================================
Liabilities and Equity:
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
- --------------------------------------------------------------------------------------------------------------------------
Money market deposit accounts $ 78,903 1.86 $ 73,966 $ 1,744 2.36% $ 76,570 $ 1,998 2.61%
Savings accounts 196,879 1.54 178,335 3,342 1.87 170,604 3,445 2.02
NOW accounts 212,328 1.60 198,186 4,476 2.26 130,423 2,534 1.94
Time deposits 547,134 4.39 604,834 31,927 5.28 667,911 36,689 5.49
- --------------------------------------------------------------------------------------------------------------------------
Total 1,035,244 3.08 1,055,321 41,489 3.93 1,045,508 44,666 4.27
FHLB advances 272,000 3.97 188,411 8,918 4.73 105,456 6,654 6.31
Securities sold under
agreements to repurchase 212,332 4.88 234,608 12,741 5.43 257,086 15,092 5.87
- --------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing
liabilities 1,519,576 3.49 1,478,340 63,148 4.27 1,408,050 66,412 4.72
Non-interest-bearing
liabilities 97,361 76,644 52,734
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,616,937 1,554,984 1,460,784
Stockholders' equity 146,729 151,143 156,737
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and
equity $1,763,666 $1,706,127 $1,617,521
==========================================================================================================================
Net interest income $55,012 $ 49,693
==========================================================================================================================
Net interest rate
spread /(2)/ 3.40% 2.97% 2.75%
==========================================================================================================================
Net interest margin /(3)/ 3.74% 3.37% 3.20%
==========================================================================================================================
Ratio of interest-earning
assets to interest-bearing
liabilities 110.64% 110.31% 110.39%
==========================================================================================================================
Years Ended December 31,
===================================================================
1999
- -------------------------------------------------------------------
(dollars in thousands) Average
Average Yield/
Balance Interest Cost
===================================================================
Assets:
- -------------------------------------------------------------------
Interest-earning assets:
- -------------------------------------------------------------------
Interest-earning deposits
and short-term investments $ 2,860 $ 103 3.60%
Investment securities 122,848 7,840 6.38
FHLB stock 16,800 1,142 6.80
Mortgage-backed securities 375,239 23,622 6.30
Loans receivable, net /(l)/ 997,772 74,640 7.48
- -------------------------------------------------------------------
Total interest-earning assets 1,515,519 107,347 7.08
Non-interest-earning assets 50,231
- -------------------------------------------------------------------
Total assets $1,565,750
===================================================================
Liabilities and Equity:
- -------------------------------------------------------------------
Interest-bearing liabilities:
- -------------------------------------------------------------------
Money market deposit accounts $ 77,478 $ 2,090 2.70%
Savings accounts 173,798 3,518 2.02
NOW accounts 111,356 1,711 1.54
Time deposits 657,536 33,601 5.11
- -------------------------------------------------------------------
Total 1,020,168 40,920 4.01
FHLB advances 67,857 3,853 5.68
Securities sold under
agreements to repurchase 253,811 14,036 5.53
- -------------------------------------------------------------------
Total Interest-bearing
liabilities 1,341,836 58,809 4.38
Non-interest-bearing
liabilities 40,209
- -------------------------------------------------------------------
Total liabilities 1,382,045
- -------------------------------------------------------------------
Stockholders' equity 183,705
- -------------------------------------------------------------------
Total liabilities and equity $1,565,750
===================================================================
Net interest income $ 48,538
===================================================================
Net interest rate spread /(2)/ 2.70%
===================================================================
Net interest margin /(3)/ 3.20%
===================================================================
Ratio of interest-earning
assets to interest-bearing
liabilities 112.94%
===================================================================
/(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./
20
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, 2001 Year Ended December 31, 2000
Compared to Compared to
Year Ended December 31, 2000 Year Ended December 31,1999
-------------------------------------------------------------
Increase(Decrease) Increase(Decrease)
Due to Due to
-------------------------------------------------------------
(in thousands) Volume Rate Net Volume Rate Net
===============================================================================================================
Interest-earning assets:
Interest-earning deposits and short-term
investments $ 43 $ (14) $ 29 $ (117) $ 36 $ (81)
Investment securities (1,970) (1,743) (3,713) (186) 1,143 957
FHLB stock 201 (121) 80 88 (27) 61
Mortgage-backed securities (2,705) (1,219) (3,924) (4,316) 1,642 (2,674)
Loans receivable, net 10,931 (1,348) 9,583 8,254 2,241 10,495
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets 6,500 (4,445) 2,055 3,723 5,035 8,758
- ---------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market deposit accounts (67) (187) (254) (24) (68) (92)
Savings accounts 155 (258) (103) (73) -- (73)
NOW accounts 1,474 468 1,942 327 496 823
Time deposits (3,389) (1,373) (4,762) 541 2,547 3,083
- ---------------------------------------------------------------------------------------------------------------
Total (1,827) (1,350) (3,177) 771 2,975 3,746
FHLB advances 4,245 (1,981) 2,264 2,334 467 2,801
Securities sold under agreements to repurchase (1,266) (1,085) (2,351) 183 873 1,056
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,152 (4,416) (3,264) 3,288 4,315 7,603
- ---------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 5,348 $ (29) $5,319 $ 435 $ 720 $ 1,155
===============================================================================================================
Comparison of Financial Condition at December 31, 2001 and December 31, 2000
Total assets at December 31, 2001 were $1.764 billion, an increase of $123.4
million, compared to $1.640 billion at December 31, 2000.
Investment securities available for sale decreased by $23.5 million, to a
balance of $80.0 million at December 31, 2001, compared to a balance of $103.5
million at December 31, 2000, and mortgage-backed securities available for sale
decreased by $34.7 million, to $233.3 million at December 31, 2001, from $268.0
million at December 31, 2000. The investment and mortgage-backed securities
available for sale portfolios decreased in order to partly fund growth in the
Bank's loans receivable.
Loans receivable, net, increased by $164.0 million, or 14.4%, to a balance of
$1.301 billion at December 31, 2001, compared to a balance of $1,137 billion at
December 31, 2000. The increase was largely attributable to growth in mortgage
loans as the Bank acquired certain mortgage loans, primarily high quality
adjustable-rate and short-term fixed-rate loans, from Columbia. Previously,
Columbia would have sold these loans into the secondary market. Additionally,
commercial lending (including commercial real estate) grew by $44.7 million, or
37.4%.
Deposit balances increased $4.9 million to $1.109 billion at December 31, 2001
from $1.104 billion at December 31, 2000, partly due to the results of new
branches opened in 2001. Core deposit categories, a key emphasis for the
Company, increased by $104.1 million or 22.8%, as time deposits declined.
Total borrowings, represented by Federal Home Loan Bank advances and securities
sold under agreements to repurchase increased by $120.3 million to $484.3
million at December 31, 2001 from $364.0 million at December 31, 2000. The
additional borrowings were used to fund the Banks loan growth and common stock
repurchase programs.
Stockholders' equity at December 31, 2001 decreased to $146.7 million, compared
to $157.7 million at December 31, 2000 due to the execution of the Company's
eighth and ninth stock repurchase programs. For the year ended December 31,
2001, the Company repurchased 1,303,143 shares of common stock at a total cost
of $31.9 million. Under the 10% repurchase program authorized by the Board of
Directors in July 2001, 522,776 shares remain to be purchased as of December
31, 2001.
21
Results of Operations
Comparison of Operating Results for the Years Ended December 31, 2001 and
December 31, 2000
General
Net income increased $1.8 million or 10.8%, to $18.1 million for the year ended
December 31, 2001 as compared to net income of $16.3 million for the year ended
December 31, 2000. Diluted earnings per share increased 20.1%, to $1.85 for the
year ended December 31, 2001 as compared to $1.54 for the year ended December
31, 2000. The higher percentage increase 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. Net income for the
year ended December 31, 2001 was reduced by an extraordinary item of $1.1
million net of tax, resulting from the extinguishment of certain financial
liabilities. The Bank prepaid $23.0 million of outstanding borrowings with a
weighted average cost of 6.23% incurring a prepayment penalty on the early debt
extinguishment. The funds were reborrowed at comparable maturities, but at a
lower cost benefiting future periods. For 2002 alone, the restructuring will
decrease interest expense by $409,000.
Interest Income
Interest income for the year ended December 31, 2001 was $118.2 million,
compared to $116.1 million for the year ended December 31, 2000, an increase of
$2.1 million. The increase in interest income was due to an increase in average
interest-earning assets of $76.5 million, partly offset by a decrease in the
yield on interest-earning assets. The yield on average interest-earning assets
decreased to 7.24% on average for year ended December 31, 2001. from 7.47% on
average in the prior year. Despite this decline, which was reflective of the
lower interest rate environment, the asset yield still benefited from a change
in the mix of average interest-earning assets towards a higher concentration of
loans receivable with a corresponding reduction of lower-yielding investment and
mortgage-backed securities. For the year ended December 31, 2001 loans
receivable represented 76.7% of average interest-earning assets as compared to
71.1% for the same prior year period.
Interest Expense
Interest expense for the year ended December 31, 2001 was $63.1 million,
compared to $66.4 million for the year ended December 31. 2000, a decrease of
$3.3 million, or 4.9%. The decrease in interest expense was primarily the result
of a decrease in the average cost of interest-bearing liabilities, which
decreased to 4.27% for the year ended December 31, 2001, as compared to 4.72%
for the prior year, partly offset by an increase in average interest-bearing
liabilities which rose by $70.3 million for the year ended December 31, 2001 as
compared to the prior year. The Company's focus on lower cost core deposit
growth contributed to the decrease in interest expense, as core deposits
represented 46.0% of average deposits (including non-interest-earning deposits)
for the year ended December 31, 2001, as compared to 38.6% for the same prior
year period.
Provision for Loan Losses
For the year ended December 31, 2001, the Company's provision for loan losses
was $1.3 million, an increase of $265,000, or 26.9% from the same prior year
period to reflect the growth in loans receivable and a change in overall loan
mix to a greater concentration of commercial loans.
Other Income
Other income was $12.9 million for the year ended December 31, 2001, as compared
to $6.1 million for the same prior year period. The net gain (loss) on the sale
of loans and securities was a $6.0 million gain for the year ended December 31,
2001 as compared to a $41,000 loss for the prior year. The loss for the year
ended December 31, 2000 was due to a loss of $1,636,000 on the sale of $31.9
million in mortgage-backed securities available for sale. For the year ended
December 31, 2001, the Company sold $421.9 million in mortgage loans at a gain
of $6.0 million as compared to the sale of $117.5 million in mortgage loans at a
gain of $1.6 million in the prior year. The increased gains from loan sales are
primarily due to the mortgage banking activities of Columbia. The Bank also
periodically sells 30-year fixed-rate mortgage loans to assist in the management
of interest rate risk. Both the Bank and Columbia benefited from the lower
interest rate environment in effect during 2001, the resulting heavy refinance
activity and the related gains from the sale of these loans.
Fees and service charges remained stable at $4.7 million for both the year ended
December 31, 2001 and 2000. Loan servicing income decreased by $1.4 million for
the year ended December 31, 2001 as compared to the prior year due to actual and
anticipated prepayments of the loans underlying the servicing portfolio. 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 prepayment speeds to increase resulting in a
lower valuation for mortgage servicing rights and ultimately lower future
servicing fee income.
Excluding loan servicing income, fees and service charges increased by $1.4
million, or 32.8%, for the year ended December 31, 2001 as compared to the prior
year due to fees associated with the growth in commercial account services and
retail core account balances as well as the addition of fee income from trust
and asset management services introduced late in the first quarter of 2000.
Other income increased by $675,000 for the year ended December 31, 2001 as
compared to the prior year primarily due to an increase in the Bank's investment
in Bank Owned Life Insurance(BOLI).
22
Operating Expenses
Operating expenses were $37.4 million for the year ended December 31, 2001, an
increase of $5.7 million compared to the same prior year period. The increase
was primarily due to operating expenses associated with Columbia and the costs
associated with the opening and operation of the Banks fourteenth, fifteenth and
sixteenth branch offices in May 2000, February 2001 and September 2001,
respectively. Occupancy costs for the year ended December 31, 2001, also include
$373,000 of lease termination costs incurred in connection with the relocation
of Columbia's corporate headquarters to more efficient office space. Columbia
leased a new facility which will reduce occupancy cost by approximately $120,000
in 2002.
Provision for Income Taxes
Income tax expense attributable to income before extraordinary item was $10.1
million for the year ended December 31, 2001, compared to $6.8 million for the
year ended December 31, 2000. Income tax expense for 2000 included the
recognition of a $1.1 million tax benefit relating to the charitable donation
expense associated with the 1996 formation of the OceanFirst Foundation.
Charitable donations are tax deductible subject to a limitation of 10% of annual
taxable income, however, the Company was able to carry forward the 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 strong earnings performance
and expectations for taxable income through December 31, 2001, the Company, in
the third quarter of 2000, estimated that an additional $3.0 million of
charitable donation expense could be recognized for tax purposes, providing for
a tax benefit of $1.1 million. The Company had a remaining charitable expense
carry forward of $1,229,000 ($430,000 on an after-tax basis) which expired on
December 31, 2001.
Comparison of Operating Results for the Years Ended December 31, 2000 and
December 31,1999
General
Net income increased $35,000 or .2%, to $16.4 million for the year ended
December 31, 2000 as compared to net income of $16.3 million for the year ended
December 31, 1999. Diluted earnings per share increased 15.8%, to $1.54 for the
year ended December 31, 2000 as compared to $1.33 for the year ended December
31, 1999.
Interest Income
Interest income for the year ended December 31, 2000 was $116.1 million,
compared to $107.3 million for the year ended December 31, 1995, an increase of
$8.8 million. The increase in interest income was due to an increase in the
yield on interest-earning assets and an increase in average interest-earning
assets. The yield on average interest-earning assets increased to 7.47% on
average for the year ended December 31, 2000, from 7.08% on average in the same
prior year period partly due to a higher rate environment and partly due to a
change in the mix of average interest-earning assets towards a higher
concentration of loans receivable with a corresponding reduction of lower
yielding investment and mortgage-backed securities. For the year ended December
31, 2000 loans receivable represented 71.1% of average interest-earning assets
as compared to 65.8% for the same prior year period.
Interest Expense
Interest expense for the year ended December 31, 2000 was $66.4 million,
compared to $58.8 million for the year ended December 31, 1999, an increase of
$7.6 million, or 12.9%. The increase in interest expense was primarily the
result of an increase in the average cost of interest-bearing liabilities which
increased to 4.72% for the year ended December 31, 2000, as compared to 4.38%
for the same prior year period and an increase in average interest-bearing
liabilities which rose by $66.2 million for the year ended December 31, 2000, as
compared to the same prior year period. The Company's focus on lower cost core
deposit growth moderated the increase in interest expense, as core deposits
represented 38.6% of average deposits (including non-interest-earning deposits)
for the year ended December 31, 2000, as compared to 37.2% for the same prior
year period.
Provision for Loan Losses
For the year ended December 31, 2000, the Company's provision for loan losses
was $985,000, an increase of $85,000, or 9.4% from the same prior year period to
reflect the growth in loans receivable and a change in overall loan mix to a
greater concentration of commercial loans. The Company's non-performing assets
declined slightly to $2.9 million at December 31, 2000, as compared to $3.0
million at December 31, 1999.
Other Income
Other income was $6.1 million for the year ended December 31, 2000 as compared
to $5.2 million for the same prior year period. The net (loss) gain on the sale
of loans and securities was a $41,000 loss for the year ended December 31, 2000
as compared to a $557,000 gain for the same prior year period. The loss for the
year ended December 31, 2000 was due to a loss of $1,636,000 on the sale of
$31.9 million in mortgage-backed securities available for sale. For the same
prior year period the Company recognized a loss of $49,000 on the sale of
investment securities available for sale. For the year ended December 31, 2000,
the Company sold $117.5 million in mortgage loans at a gain of $1,595.000, as
compared to the sale of $48.1 million in mortgage loans at a gain of $606,000 in
the same prior year period. The increased gains from loan sales are primarily
due to the mortgage banking activities for Columbia.
23
Results of Operations (continued)
Fees and service charges increased by $1.1 million or 30.8% for the year ended
December 31, 2000 as compared to the same prior year period due to fees
associated with the growth in commercial account services and retail core
account balances as well as the addition of fee income from trust and asset
management services introduced late in the first quarter of 2000.
Operating Expenses
Operating expenses were $31.6 million for the year ended December 31, 2000, an
increase of $3.8 million compared to the same prior year period. The increase
was partly due to operating and related expenses associated with Columbia, the
costs associated with the opening of the Bank's twelfth and thirteenth branch
offices in September and October 1999; the Bank's fourteenth branch office in
May 2000 and the introduction of the Company's Trust and Asset Management
business line. Federal deposit insurance decreased by $380,000 for the year
ended December 31, 2000 as compared to the same prior year period due to a
decline in the assessment rate.
Provision for Income Taxes
Income tax expense was $6.8 million for the year ended December 31, 2000,
compared to $8.7 million for the year ended December 31, 1999. Income tax
expense decreased as the Company recognized a tax benefit of $1.1 million in
2000 relating to the recognition, for tax purposes, of previously unrecognized
charitable donation expense associated with the 1996 formation of OceanFirst
Foundation.
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 are predictable sources 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, 2001, the Company had $80.0 million in 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 $404.3 million at
December 31, 2001, an increase from $311.5 million at December 31, 2000. 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, 2001 were primarily
satisfied by proceeds from the sale of mortgage loans held for sale, maturities
of investment securities available for sale, principal payments on loans and
mortgage-backed securities 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 year ended December 31,
2000, the cash needs of the Company were primarily satisfied by maturities of
investment securities available for sale, principal payments on loans and
mortgage-backed securities, proceeds from the sale of mortgage-backed securities
and increased deposits. The cash provided was principally utilized for loan
originations, the purchase of investment and mortgage-backed securities and the
purchase of treasury stock.
At December 31, 2001, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $126.0 million, or 7.16% of total adjusted
assets, which is above the required level of $26.4 million or 1.5%; core capital
of $126.0 million or 7.16% of total adjusted assets, which is above the required
level of $52.8 million, or 3.0%; and risk-based capital of $136.2 million, or
12.99% of risk-weighted assets, which is above the required level of $83.9
million or 8.0%. The Bank is considered a "well capitalized" institution under
the Office of Thrift Supervision's prompt corrective action regulations.
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.
Impact of New 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 was 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.
24
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)." SPAS 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 were 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 periodically for impairment.
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 December 31, 2001, the Company has $1.0 million in
unamortized goodwill with annual amortization of $253,000 which will cease upon
the adoption of SFAS 142. The Company is currently evaluating the transitional
goodwill impairment criteria of SFAS 142 and is not able to estimate the impact,
if any, that SFAS 142 may have on recorded goodwill. The impairment adjustment,
if any, will have to be identified by June 30, 2002 and measured and recorded by
the Company no later than December 31, 2002. The impairment adjustment, if any,
will be recognized as a cumulative effect of a change in accounting principle
and will be recorded in the first interim reporting period of 2002. 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 of 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.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this annual 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
affecting the Company's operations, markets, products, services and prices.
Further description of the risks and uncertainties of the business are included
in Item 1, BUSINESS of the Company's 2001 Form 10-K.
25
Consolidated Statements of Financial Condition
December 31, 2001 and 2000
(dollars in thousands, except per share amounts) 2001 2000
- ------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 16,876 $ 7,235
Investment securities available for sale (notes 4 and 10) 80,017 103,536
Federal Home Loan Bank of New York stock, at cost (note 10) 23,560 20,000
Mortgage-backed securities available for sale (notes 5 and 10) 233,302 268,042
Loans receivable, net (notes 6 and 10) 1,300,889 1,136,879
Mortgage loans held for sale 37,828 35,588
Interest and dividends receivable (note 7) 7,632 9,318
Real estate owned, net 133 157
Premises and equipment, net (note 8) 16,730 14,676
Servicing asset (note 6) 7,628 6,363
Other assets (note 11) 39,071 38,423
- ------------------------------------------------------------------------------------------------------------
Total assets $ 1,763,666 $ 1,640,217
============================================================================================================
Liabilities and Stockholders' Equity
Deposits (note 9) $ 1,109,043 $ 1,104,188
Federal Home Loan Bank advances (note 10) 272,000 127,500
Securities sold under agreements to repurchase (note 10) 212,332 236,494
Advances by borrowers for taxes and insurance 6,371 6,388
Other liabilities (note 11) 17,191 7,911
- ------------------------------------------------------------------------------------------------------------
Total liabilities 1,616,937 1,482,481
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity (notes 3, 11, 12 and 13):
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued -- --
Common stock, $.O1 par value, 55,000,000 shares authorized, 18,118,248 shares
issued and 9,860,889 and 11,084,123 shares outstanding at December 31, 2001
and 2000, respectively 181 181
Additional paid-in capital 181,780 179,805
Retained earnings 131,746 121,737
Accumulated other comprehensive loss (824) (4,927)
Less: Unallocated common stock held by Employee Stock Ownership Plan (12,663) (14,156)
Unearned Incentive Awards (161) (2,096)
Treasury stock, 8,257,359 and 7,034,125 shares at December 31, 2001 and
2000, respectively (153,330) (122,808)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 46,729 157,736
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 14)
Total liabilities and stockholders' equity $ 1,763,666 $ 1,640,217
============================================================================================================
See accompanying notes to consolidated financial statements.
26
Consolidated Statements of Income
(in thousands, except per share amounts)
Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999
=========================================================================================================
Interest income:
Loans $ 94,718 $ 85,135 $74,640
Mortgage-backed securities 17,024 20,948 23,622
Investment securities and other 6,418 10,022 9,085
- ---------------------------------------------------------------------------------------------------------
Total interest income 118,160 116,105 107,347
- ---------------------------------------------------------------------------------------------------------
Interest expense:
Deposits (note 9) 41,489 44,666 40,920
Borrowed funds 21,659 21,746 17,889
- ---------------------------------------------------------------------------------------------------------
Total interest expense 63,148 66,412 58,809
- ---------------------------------------------------------------------------------------------------------
Net interest income 55,012 49,693 48,538
Provision for loan losses (note 6) 1,250 985 900
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 53,762 48,708 47,638
- ---------------------------------------------------------------------------------------------------------
Other income:
Fees and service charges 4,677 4,667 3,569
Net gain (loss) on sales of loans and securities available for sale 5,954 (41) 557
(notes 4 and 5)
Net income from other real estate operations 271 171 148
Other 2,023 1,348 952
- ---------------------------------------------------------------------------------------------------------
Total other income 12,925 6,145 5,226
- ---------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation and employee benefits (notes 12 and 13) 19,987 17,870 15,378
Occupancy (note 14) 3,385 2,261 2,133
Equipment 2,168 1,661 1,375
Marketing 1,711 1,685 1,733
Federal deposit insurance 489 479 859
Data processing 2,128 1,702 1,333
General and administrative 7,511 5,987 5,041
- ---------------------------------------------------------------------------------------------------------
Total operating expenses 37,379 31,645 27,852
- ---------------------------------------------------------------------------------------------------------
Income before provision for income taxes and extraordinary item 29,308 23,208 25,012
Provision for income taxes (note 11) 10,064 6,826 8,665
- ---------------------------------------------------------------------------------------------------------
Income before extraordinary item 19,244 16,382 16,347
Extraordinary item, net of tax - prepayment penalty on debt
extinguishment (notes 10 and 11) (1,085) -- --
- ---------------------------------------------------------------------------------------------------------
Net Income $ 18,159 $ 16,382 $16,347
=========================================================================================================
Basic earnings per share
Income before extraordinary item $ 2.07 $ 1.59 $ 1.36
Extraordinary item, net of tax (.11) -- --
- ---------------------------------------------------------------------------------------------------------
Net income $ 1.96 $ 1.59 $ 1.36
=========================================================================================================
Diluted earnings per share
Income before extraordinary item $ 1.96 $ 1.54 $ 1.33
Extraordinary item, not of tax (.11) -- --
- ---------------------------------------------------------------------------------------------------------
Net income $ 1.85 $ 1.54 $ 1.33
=========================================================================================================
Average basic shares outstanding (note 1) 9,288 10,293 11,990
=========================================================================================================
Average diluted shares outstanding (note 1) 9,837 10,666 12,299
=========================================================================================================
See accompanying notes to consolidated financial statements.
27
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)
Accumulated Employee
Additional Other Stock
Common Paid-In Retained Comprehensive Ownership
Years Ended December 31, 2001, 2000 and 1999 Stock Capital Earnings (Loss)Income Plan
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 181 $178,309 $ 103,982 $(1,226) $(17,376)
Comprehensive income:
Net income -- -- 16,347 -- --
Other comprehensive loss:
Unrealized loss on securities (net of tax
benefit $4,917) -- -- -- (8,373) --
Reclassification adjustment for losses
included in net income (net of
tax benefit $18) -- -- -- 31 --
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- -- -- -- --
Purchase 2,010,061 shares of common stock -- -- -- -- --
Allocation of ESOP stock -- -- -- -- 1,649
ESOP adjustment -- 541 -- -- --
Cash dividend - $.57 per share -- -- (7,157) -- --
Exercise of stock options -- -- (3) -- --
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 181 178,850 113,169 (9,568) (15,727)
- ------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 16,382 -- --
Other comprehensive gain:
Unrealized gain on securities (net of tax
expense $2,153) -- -- -- 3,578 --
Reclassification adjustment for losses
included in net income
(net of tax benefit $573) -- -- -- 1,063 --
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- -- -- -- --
Tax benefit of stock plans -- 258 -- -- --
Purchase 1,614,892 shares of common stock -- -- -- -- --
Allocation of ESOP stock -- -- -- -- 1,571
ESOP adjustment -- 697 -- -- --
Cash dividend- $.72 per share -- -- (7,622) -- --
Exercise of stock options -- -- (192) -- --
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 181 179,805 121,737 (4,927) (14,156)
- ------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 18,159 -- --
Other comprehensive gain:
Unrealized gain on securities (net of tax
expense $2,409) -- -- -- 4,103 --
- ------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- -- -- -- --
Tax benefit of stock plans -- 641 -- -- --
Purchase 1,303,143 shares of common stock -- -- -- -- --
Allocation of ESOP stock -- -- -- -- 1,493
ESOP adjustment -- 1,334 -- -- --
Cash dividend -$.84 per share -- -- (7,943) -- --
Exercise of stock options -- -- (207) -- --
- ------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 181 $181,780 $ 131,746 $ (824) $(12,663)
============================================================================================================
Unearned
Incentive Treasury
Years Ended December 31, 2001, 2000 and 1999 Awards Stock Total
- -----------------------------------------------------------------------------------
Balance at December 31, 1998 $(5,963) $(60,167) $ 197,740
Comprehensive income:
Net income -- -- 16,347
Other comprehensive loss:
Unrealized loss on securities (net of tax
benefit $4,917) -- -- (8,373)
Reclassification adjustment for losses
included in net income (net of
tax benefit $18) -- -- 31
- -----------------------------------------------------------------------------------
Total comprehensive income -- -- 8,005
- -----------------------------------------------------------------------------------
Earned Incentive Awards 1,933 -- 1,933
Purchase 2,010,061 shares of common stock -- (35,198) (35,198)
Allocation of ESOP stock -- -- 1,649
ESOP adjustment -- -- 541
Cash dividend - $.57 per share -- -- (7,157)
Exercise of stock options -- 20 17
- -----------------------------------------------------------------------------------
Balance at December 31, 1999 (4,030) (95,345) 167,530
- -----------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 16,382
Other comprehensive gain:
Unrealized gain on securities (net of tax
expense $2,153) -- -- 3,578
Reclassification adjustment for losses
included in net income
(net of tax benefit $573) -- -- 1,063
- -----------------------------------------------------------------------------------
Total comprehensive income -- -- 21,023
- -----------------------------------------------------------------------------------
Earned Incentive Awards 1,934 -- 1,934
Tax benefit of stock plans -- -- 258
Purchase 1,614,892 shares of common stock -- (28,800) (28,800)
Allocation of ESOP stock -- -- 1,571
ESOP adjustment -- -- 697
Cash dividend- $.72 per share -- -- (7,622)
Exercise of stock options -- 1,337 1,145
- -----------------------------------------------------------------------------------
Balance at December 31, 2000 (2,096) (122,808) 157,736
- -----------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 18,159
Other comprehensive gain:
Unrealized gain on securities (net of tax
expense $2,409) -- -- 4,103
- -----------------------------------------------------------------------------------
Total comprehensive income -- -- 22,262
- -----------------------------------------------------------------------------------
Earned Incentive Awards 1,935 -- 1,935
Tax benefit of stock plans -- -- 641
Purchase 1,303,143 shares of common stock -- (31,921) (31,921)
Allocation of ESOP stock -- -- 1,493
ESOP adjustment -- -- 1,334
Cash dividend - $.84 per share -- -- (7,943)
Exercise of stock options -- 1,399 1,192
- -----------------------------------------------------------------------------------
Balance at December 31,2001 $ (161) $(153,330) $ 146,729
===================================================================================
See accompanying notes to consolidated financial statements.
28
Consolidated Statements of Cash Flows
(in thousands, except per share amounts)
Years Ended December 31, 2001, 2000 and 1999 2001 2000 1999
=============================================================================================================
Cash flows from operating activities:
Net income $ 18,159 $ 16,382 $ 16,347
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 1,960 1,640 1,509
Amortization of Incentive Awards 1,935 1,934 1,933
Amortization of ESOP 1,493 1,571 1,649
ESOP adjustment 1,334 697 541
Amortization of servicing asset 2,503 673 351
Amortization of intangible assets 359 103 103
Net premium amortization in excess of discount accretion on securities 683 384 1,044
Net accretion of deferred fees and discounts in excess of premium
amortization on loans (407) (280) (310)
Provision for loan losses 1,250 985 900
Deferred taxes (1,500) (318) 757
Net gain on sales of real estate owned (308) (209) (246)
Net (gain) loss on sales of loans and securities available for sale (5,954) 41 (557)
Proceeds from sales of mortgage loans held for sale 427,876 119,139 48,719
Mortgage loans originated for sale (424,162) (130,761) (22,973)
Increase in value of Bank Owned Life Insurance (1,696) (1,194) (808)
Decrease (increase) in interest and dividends receivable 1,686 (752) 1,352
(Increase) decrease in other assets (3,988) 6,914 (1,576)
Increase (decrease) in other liabilities 9,921 1,656 (5,979)
- -------------------------------------------------------------------------------------------------------------
Total adjustments 12,985 2,223 26,409
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,144 18,605 42,756
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans receivable (165,307) (95,377) (103,663)
Proceeds from sales of investment and mortgage-backed securities
available for sale -- 30,279 121
Purchase of investment securities available for sale (1,292) (21,089) (15,423)
Purchase of mortgage-backed securities available for sale (49,006) (5,059) (97,251)
Proceeds from maturities of investment securities available for sale 24,470 37,700 30,043
Principal payments on mortgage-backed securities available for sale 89,916 58,901 120,460
Purchases of Federal Home Loan Bank of New York stock (3,560) (3,200) --
Proceeds from sales of real estate owned 786 1,211 1,106
Purchases of premises and equipment (4,014) (2,108) (1,451)
Purchase of Bank Owned Life Insurance -- (8,000) --
Acquisition of Columbia Equities, Ltd., net of cash and cash
equivalents -- (2,954) --
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (108,007) (9,696) (66,058)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in deposits 4,855 47,238 21,699
Increase (decrease) in short-term borrowings 41,338 50,127 (71,741)
Proceeds from Federal Home Loan Bank advances 155,000 55,000 105,000
Repayments of Federal Home Loan Bank Advances (38,000) (127,696) --
Proceeds from securities sold under agreements to repurchase 10,000 85,000 83,754
Repayments of securities sold under agreements to repurchase (48,000) (86,000) (74,254)
(Decrease) increase in advances by borrowers for taxes and insurance (17) (73) 894
Exercise of stock options 1,192 1,145 17
Dividends paid (7,943) (7,622) (7,157)
Purchase of treasury stock (31,921) (28,800) (35,198)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 86,504 (11,681) 23,014
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 9,641 (2,772) (288)
Cash and due from banks at beginning of year 7,235 10,007 10,295
- -------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 16,876 $ 7,235 $ 10,007
=============================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 64,798 $ 66,073 $ 58,238
Income taxes 7,600 5,310 13,416
Noncash investing activities:
Transfer of loans receivable to real estate owned 454 768 1,109
Mortgage loans securitized into mortgage-backed securities $ 90,563 $ 23,042 $ 37,200
=============================================================================================================
See accompanying notes to consolidated financial statements.
29
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 whollyowned subsidiary, OceanFirst Bank
(the "Bank") and its whollyowned subsidiaries, Columbia Equities, Ltd.
("Columbia"), OceanFirst REIT Holdings, Inc., OceanFirst Realty Corp. and
OceanFirst Services, LLC. 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 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.
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 the allowance for loan losses.
Discounts and premiums are recognized in income using the level-yield method
over the estimated lives of the loans.
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 in which interest is more than 90 days past due, including impaired loans,
and other loans in the process of foreclosure are placed on nonaccrual 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. 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 intended 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.
30
Mortgage Servicing Rights, or MSR
The Company recognizes as a separate asset the rights to service mortgage loans,
whether those rights are acquired through loan purchase or loan origination
activities. MSR's are amortized in proportion to and over the estimated period
of net servicing income. MSR's are stratified by underlying loan type (primarily
fixed and adjustable) and interest rate. The estimated fair value of each MSR
stratum 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 on a stratum-by-stratum basis
with any impairment recognized through a valuation allowance for each impaired
stratum. Individual allowances for each stratum are then adjusted in subsequent
periods to reflect changes in the measurement of impairment.
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 has been established to provide for subsequent declines in the fair
values of properties. Real estate owned is carried net of the 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.
Stock Based Compensation
The Company accounts for stock based compensation using the intrinsic value
method under Accounting Principles Board No. 25 and accordingly has recognized
no compensation expense under this method. The fair value pro-forma disclosures
required by Statement of Financial Accounting Standards No. 123 are included in
note 13 - Incentive Plan.
Comprehensive Income
Comprehensive income is divided into net income and other comprehensive income.
Other comprehensive income includes items recorded directly in equity, such as
unrealized gains or losses on securities available for sale.
Intangible Assets
Goodwill and core deposit premiums are amortized using the straight line method
over periods from five to ten years. Intangible assets are periodically
evaluated for impairment in response to changes in circumstances or events.
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, 2001, 2000 and 1999 (in thousands):
Year ended December 31, 2001 2000 1999
===========================================================
Weighted average shares
outstanding 10,512 11,766 13,727
Less: Unallocated ESOP shares (1,059) (1,180) (1,309)
Unallocated Incentive
Award shares (165) (293) (428)
- -----------------------------------------------------------
Average basic shares
outstanding 9,288 10,293 11,990
Add: Effect of dilutive
securities:
Stock options 415 225 148
Incentive Awards 134 148 161
- -----------------------------------------------------------
Average diluted shares
outstanding 9,837 10,666 12,299
===========================================================
(2) Acquisition
The Bank completed the acquisition of Columbia, a mortgage brokerage company
based in Westchester County, New York on August 18, 2000 in a transaction
accounted for as a purchase. Accordingly, the assets and liabilities of Columbia
were recorded on the books of the Bank at their fair market values of $37.1
million and $34.1 million, respectively. The purchase price was $4 million. The
Company's consolidated results of operations include Columbia's results
commencing on August 18, 2000. Pro-forma financial information was not presented
for the period prior to the acquisition due to the insignificance of Columbia's
operating results.
(3) Regulatory Matters
At the time of the conversion to a federally chartered stock savings bank, the
Bank established a liquidation account with a balance equal to its retained
earnings at March 31, 1996. The balance in the liquidation account at December
31, 2001 was approximately $10.1 million. The liquidation account will be
maintained for the benefit of eligible account holders who continue to maintain
their accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that the eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible account holder's interest in the liquidation account. In
the event of a complete liquidation, each eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
31
Notes to Consolidated Financial Statements (continued)
Office of Thrift Supervision (OTS) regulations require savings institutions to
maintain minimum levels of regulatory capital. Under the regulations in effect
at December 31, 2001, 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,
2001 and 2000 the Bank was considered well capitalized.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 2001 and 2000, compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a well capitalized
institution (in thousands).
To be well
For capitalized
capital under prompt
adequecy corrective
Actual purposes action
================================================================================
As of December 3l, 2001: Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
Tangible capital $125,952 7.2% $26,396 1.5% $ -- --%
Core capital 125,952 7.2 52,791 3.0 87,985 5.0
Tier 1 risk-based
capital 125,952 12.0 41,947 4.0 62,920 6.0
Risk-based capital 136,223 13.0 83,894 8.0 104,867 10.0
- --------------------------------------------------------------------------------
As of December 31, 2000:
- --------------------------------------------------------------------------------
Tangible capital $119,591 7.3% $24,653 1.5% $ -- --%
Core capital 119,591 7.3 49,307 3.0 82,178 5.0
Tier 1 risk-based
capital 119,591 12.9 37,099 4.0 55,649 6.0
Risk-based capital 128,597 13.9 74,198 8.0 92,748 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.
(4) Investment Securities Available for Sale
The amortized cost and estimated market value of investment securities available
for sale at December 31, 2001 and 2000 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2001 Cost Gains Losses Value
- ---------------------------------------------------------------------
United States
Government
and agency
obligations $ 1,200 $ -- $ (2) $ 1,198
State and municipal
obligations 5,561 -- (248) 5,313
Corporate debt
securities 75,199 -- (6,946) 68,253
Equity investments 3,849 1,404 -- 5,253
- ---------------------------------------------------------------------
$ 85,809 $1,404 $(7,196) $80,017
- ---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2000 Cost Gains Losses Value
- ---------------------------------------------------------------------
United States
Government
and agency
obligations $ 24,469 $ 4 $ (100) $ 24,373
State and municipal
obligations 5,561 -- (405) 5,156
Corporate debt
securities 75,124 -- (5,508) 69,616
Equity investments 3,757 634 -- 4,391
- ---------------------------------------------------------------------
$108,911 $638 $(6,013) $103,536
=====================================================================
Gross losses on the sale of investment securities available for sale of $49,000
were realized in 1999. There were no gains realized during 2001, 2000 or 1999.
The amortized cost and estimated market value of investment securities available
for sale, excluding equity investments, at December 31, 2001 by contractual
maturity, are shown below (in thousands). Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. At December 31, 2001,
investment securities available for sale with an amortized cost and estimated
market value of $75,745,000 and $68,551,000 respectively, were callable prior to
the maturity date.
Estimated
Amortized Market
December 31, 2001 Cost Value
==============================================================
Less than one year $ -- $ --
Due after one year through five years 1,200 1,198
Due after five years through ten years -- --
Due after ten years 80,760 73,566
- --------------------------------------------------------------
$81,960 $74,764
==============================================================
32
(5) Mortgage-Backed Securities Available for Sale
The amortized cost and estimated market value of mortgage backed securities
available for sale at December 31, 2001 and 2000 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2001 Cost Gains Losses Value
=========================================================================
FHLMC $ 29,650 $ 733 $ -- $ 30,383
FNMA 22,646 445 (3) 23,088
GNMA 23,229 420 -- 23,649
Collateralized mortgage
obligations 153,293 2,889 -- 156,182
- -------------------------------------------------------------------------
$228,818 $4,487 $ (3) $233,302
=========================================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2000 Cost Gains Losses Value
=========================================================================
FHLMC $ 48,888 $ 95 $ (199) $ 48,784
FNMA 37,172 82 (245) 37,009
GNMArities 34,092 -- (252) 33,840
Collateralized mortgage
obligations 150,335 176 (2,102) 148,409
- -------------------------------------------------------------------------
$270,487 $ 353 $(2,798) $268,042
=========================================================================
Gross losses on the sale of mortgage-backed securities available for sale of
$1,636,000 were realized in 2000. There were no gains realized during 2001, 2000
or 1999.
Collateralized mortgage obligations issued by FHLMC, FNMA, GNMA and private
interests amounted to $45,338,000, $22,254,000, $24,328,000 and $64,262,000,
respectively, at December 31, 2001 and $39,458,000, $16,303,000, $7,581,000 and
$85,067,000, respectively, at December 31, 2000. The privately issued CMOs have
generally been underwritten by large investment banking firms with the timely
payment of principal and interest on these securities supported (credit
enhanced) in varying degrees by either insurance issued by a financial guarantee
insurer, letters of credit or subordination techniques. Substantially all such
securities are triple "A" rated by one or more of the nationally recognized
securities rating agencies. The privately-issued CMOs are subject to certain
credit-related risks normally not associated with U.S. Government Agency CMOs.
Among such risks is the limited loss protection generally provided by the
various forms of credit enhancements as losses in excess of certain levels are
not protected. Furthermore, the credit enhancement itself is subject to the
creditworthiness of the enhancer. Thus, in the event a credit enhancer does not
fulfill its obligations, the CMO holder could be subject to risk of loss similar
to a purchaser of a whole loan pool. Management believes that the credit
enhancements are adequate to protect the Company from losses and has, therefore,
not provided an allowance for losses on its privately-issued CMOs.
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 anticipated prepayments.
(6) Loans Receivable, Net
A summary of loans receivable at December 31, 2001 and 2000 follows (in
thousands):
December 31, 2001 2000
===============================================================================
Real estate mortgage:
One to four-family $ 1,070,096 $ 956,336
Commercial real estate, multi-family and land 112,318 89,663
FHA insured & VA guaranteed 2,358 1,782
- -------------------------------------------------------------------------------
1,184,772 1,047,781
- -------------------------------------------------------------------------------
Real estate construction 9,082 7,973
Consumer 67,039 62,923
Commercial 51,756 29,687
- -------------------------------------------------------------------------------
Total loans 1,312,649 1,148,364
- -------------------------------------------------------------------------------
Loans in process (2,458) (2,927)
Deferred origination costs, net 1,048 561
Unamortized premium 1 19
Allowance for loan losses (10,351) (9,138)
- -------------------------------------------------------------------------------
(11,760) (11,485)
- -------------------------------------------------------------------------------
$ 1,300,889 $ 1,136,879
===============================================================================
At December 31, 2001, 2000 and 1999 loans in the amount of $6,180,000,
$2,923,000 and $2,985,000, respectively, were three or more months delinquent or
in the process of foreclosure and the Company was not accruing interest income.
At December 31, 2001, the impaired loan portfolio consisted of one commercial
loan for $2,368,000 for which general and specific allocations to the allowance
for loan losses of $1,184,000 were identified. The Company had no impaired loans
at December 31, 2000 and 1999. If interest income on nonaccrual loans and
impaired loans had been current in accordance with their original terms,
approximately $379,000, $132,000 and $52,000 of interest income for the years
ended December 31, 2001, 2000 and 1999, respectively, would have been recorded.
At December 31, 2001, 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,
2001, 2000 and 1999 is as follows (in thousands):
Year Ended December 31, 2001 2000 1999
===============================================================================
Balance at beginning of year $ 9,138 $ 8,223 $ 7,460
Provision charged to operations 1,250 985 900
Charge-offs (98) (92) (241)
Recoveries 61 22 104
- -------------------------------------------------------------------------------
Balance at end of year $ 10,351 $ 9,138 $ 8,223
===============================================================================
An analysis of the servicing asset for the years ended December 31, 2001, 2000
and 1999 is as follows (in thousands):
Year Ended December 31, 2001 2000 1999
===============================================================================
Balance at beginning of year $ 6,363 $ 2,244 $ 1,406
Purchase, net of sales -- 3,481 --
Capitalized mortgage servicing rights 3,768 1,311 1,189
Amortization (2,503) (673) (351)
- -------------------------------------------------------------------------------
Balance at end of year $ 7,628 $ 6,363 $ 2,244
===============================================================================
The estimated fair value of the servicing asset at December 31, 2001 was
$8,917,000.
33
Notes to Consolidated Financial Statements (continued)
(7) Interest and Dividends Receivable
A summary of interest and dividends receivable at December 31, 2001 and 2000
follows (in thousands):
December 31, 2001 2000
===============================================================
Loans $5,829 $6,480
Investment securities 436 1,177
Mortgage-backed securities 1,367 1,661
- ---------------------------------------------------------------
$7,632 $9,318
===============================================================
(8) Premises and Equipment, Net
Premises and equipment at December 31, 2001 and 2000 are summarized as follows
(in thousands):
December 31, 2001 2000
==================================================================
Land $ 3,195 $ 3,195
Buildings and improvements 14,203 11,255
Leasehold improvements 1,667 1,619
Furniture and equipment 9,820 8,647
Automobiles 164 118
Construction in progress 484 687
- ------------------------------------------------------------------
Total 29,533 25,521
Accumulated depreciation and amortization (12,803) (10,845)
- ------------------------------------------------------------------
$ 16,730 $ 14,676
==================================================================
(9) Deposits
Deposits, including accrued interest payable of $560,000 and $459,000 at
December 31, 2001 and 2000, respectively, are summarized as follows (in
thousands):
December 31, 2001 2000
===============================================================================
Weighted Weighted
Average Average
Amount Cost Amount Cost
- -------------------------------------------------------------------------------
Non-interest bearing accounts $ 73,799 --% $ 49,910 --%
NOW accounts 212,328 1.60 170,976 2.83
Money market deposit accounts 78,903 1.86 71,010 2.58
Savings accounts 196,879 1.54 165,866 2.00
Time deposits 547,134 4.39 646,426 5.82
- -------------------------------------------------------------------------------
$1,109,043 2.88% $1,104,188 4.31%
===============================================================================
Included in time deposits at December 31, 2001, and 2000, respectively, is
$82,498,000 and $90,172,000 in deposits of $100,000 and over.
Time deposits at December 31, 2001 mature as follows (in thousands):
Year ended December 31,
=========================================
2002 $393,355
2003 87,647
2004 43,914
2005 10,389
2006 6,616
Thereafter 5,213
- -----------------------------------------
$547,134
=========================================
Interest expense on deposits for the years ended December 31, 2001, 2000 and
1999 was as follows (in thousands):
Year ended December 31, 2001 2000 1999
===========================================================
NOW accounts $ 4,476 $ 2,534 $ 1,711
Money market deposit accounts 1,744 1,998 2,090
Savings accounts 3,342 3,445 3,518
Time deposits 31,927 36,689 33,601
- -----------------------------------------------------------
$41,489 $44,666 $40,920
===========================================================
(10) Borrowed Funds
Borrowed funds are summarized as follows (in thousands):
December 31, 2001 2000
===============================================================================
Weighted Weighted
Average Average
Amount Rate Amount Rate
- -------------------------------------------------------------------------------
Federal Home Loan Bank advances $272,000 3.97% $127,500 6.00%
Securities sold under
agreements to repurchase 212,332 4.88 236,494 5.79
- -------------------------------------------------------------------------------
484,332 4.37% $363,994 5.86%
===============================================================================
Information concerning Federal Home Loan Bank ("FHLB") advances and securities
sold under agreements to repurchase ("reverse repurchase agreements") is
summarized as follows (in thousands):
Reverse
FHLB Repurchase
Advances Agreements
==============================================================================
2001 2000 2001 2000
- ------------------------------------------------------------------------------
Average balance $188,411 $105,456 $234,608 $257,086
Maximum amount outstanding
at any month end 272,000 154,000 254,996 277,000
Average interest rate for the year 4.73% 6.31% 5.43% 5.87%
- ------------------------------------------------------------------------------
U.S. Government agencies and mortgage-backed securities pledged as collateral
under reverse repurchase agreements at December 31
- ------------------------------------------------------------------------------
Amortized cost -- -- $219,540 $244,790
Estimated market value -- -- 223,691 242,617
==============================================================================
The securities collateralizing the reverse repurchase agreements are not under
the Company's control, as they are delivered to the lender with whom each
transaction is executed. The lender, who may sell, loan or otherwise dispose of
such securities to other parties in the normal course of their operations, agree
to resell to the Company substantially the same securities at the maturities of
the agreement.
34
FHLB advances and reverse repurchase agreements have contractual maturities at
December 31, 2001 as follows (in thousands):
Reverse
FHLB Repurchase
Year ended December 31 advances Agreements
================================================================================
2002 $115,000 $ 32,332
2003 23,000 40,000
2004 27,000 45,000
2005 42,000 25,000
2006 45,000 20,000
Thereafter 20,000 50,000
- --------------------------------------------------------------------------------
$272,000 $212,332
================================================================================
Amount callable by lender prior to the maturity date $ 70,000 $180,000
================================================================================
In the fourth quarter of 2001, the Bank prepaid $23,000,000 of outstanding
borrowings with a weighted average cost of 6.23%, incurring a prepayment
penalty on the early debt extinguishment of $1,669,000. The funds were
reborrowed at comparable maturities but at an average cost of only 4.48%.
The Bank has an available overnight line of credit with the FHLB for
$50,000,000 which expires November 25, 2002. The Bank also has available from
the FHLB, a one-month overnight repricing line of credit for $50,000,000 which
expires November 25, 2002. When utilized, both lines carry a floating interest
rate of 10 basis points over the current Federal funds rate. All FHLB advances,
including the lines of credit, are secured by the Bank's mortgage loans,
mortgaged-backed securities, U. S. Government agency obligations 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 Federal Home Loan Bank of New
York, at cost, in an amount not less than 1% of its outstanding home loans
(including mortgage-backed securities) or 5% of its outstanding notes payable to
the FHLB.
(11) Income Taxes
Legislation was enacted in August 1996 which repealed for tax purposes the
percentage of taxable income bad debt reserve method. As a result, the Company
must instead use the direct charge-off method to compute its bad debt deduction.
The legislation also requires the Company to recapture its post-1987 additions
to the tax bad debt reserve which amounted to $778,000 and $1,166,000 at
December 31, 2001 and 2000, respectively. The Company has accrued for this
liability in the consolidated financial statements.
Retained earnings at December 31, 2001 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, 2001 the
Company had an unrecognized deferred tax liability of $3,870,000 with respect to
this reserve.
The provision for income taxes attributable to income before extraordinary item
for the years ended December 31, 2001, 2000 and 1999 consists of the following
(in thousands):
Year Ended December 31, 2001 2000 1999
================================================================================
Current:
Federal $ 11,506 $ 7,091 $7,870
State 58 53 38
- --------------------------------------------------------------------------------
Total Current 11,564 7,144 7,908
Deferred:
Federal (1,500) (318) 757
- --------------------------------------------------------------------------------
$ 10,064 $ 6,826 $8,665
================================================================================
Included in other comprehensive income is income tax expense (benefit)
attributable to net unrealized gains (losses) on securities available for sale
in the amount of $2,409,000, $2,726,000 and $(4,899,000) for the years ended
December 31, 2001, 2000 and 1999, respectively. Included in the extraordinary
item is an income tax benefit of $584,000 in 2001.
A reconciliation between the provision for income taxes and the expected amount
computed by multiplying income before extraordinary item and the provision for
income taxes times the applicable statutory Federal income tax rate for the
years ended December 31, 2001, 2000 and 1999 is as follows (in thousands):
Year Ended December 31, 2001 2000 1999
===============================================================================
Income before provision
for income taxes and
extraordinary item $ 29,308 $ 23,208 $25,012
Applicable statutory
Federal income tax rate 35.0% 35.0% 35.0%
Computed "expected" Federal
income tax expense $ 10,258 $ 8,123 $ 8,754
Increase(decrease) in Federal
income
tax expense resulting from:
Decrease in deferred tax
valuation allowance
relating to
charitable donation -- (1,060) --
ESOP adjustment 467 244 189
Earnings on life insurance (594) (418) (233)
State income taxes net of
Federal benefit 38 35 24
Other items, net (105) (98) (19)
- -------------------------------------------------------------------------------
$ 10,064 $ 6,826 $ 8,665
===============================================================================
Included in other assets at December 31, 2001 and 2000 is a net deferred tax
asset of $4,881,000 and $5,790,000, respectively. In addition, at December 31,
2001 and 2000 the Company recorded a current tax payable (refund) of $2,536,000
and $(263,000), respectively.
35
Notes to Consolidated Financial Statements (continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2001 and
2000 are presented below (in thousands):
December 31, 2001 2000
======================================================
Deferred tax assets:
Allowance for loan and real estate
owned losses per books $ 3,836 $ 3,519
Reserve for uncollected interest 117 94
Deferred compensation 523 369
Premises and equipment,
differences in depreciation 528 364
Other reserves 171 199
Stock awards 716 656
ESOP 176 176
Charitable donation -- 1,613
Unrealized loss on securities
available for sale 484 2,893
Intangible assets 91 60
Lease termination costs 138 --
Penalty on extinguishment of debt 607 --
Other 8 31
- ------------------------------------------------------
Total gross deferred tax assets 7,395 9,974
- ------------------------------------------------------
Less valuation allowance -- (430)
- ------------------------------------------------------
Deferred tax assets, net 7,395 9,544
- ------------------------------------------------------
Deferred tax liabilities:
Allowance for loan and real estate
owned losses for tax purposes (287) (438)
Excess servicing on sale of
mortgage loans (882) (414)
Investments, discount accretion (117) (89)
Deferred loan and commitment
costs, net (1,228) (1,114)
Undistributed income of real estate
investment trust subsidiary -- (1,699)
- ------------------------------------------------------
Total deferred tax liabilities (2,514) (3,754)
- ------------------------------------------------------
Net deferred tax assets $ 4,881 $ 5,790
======================================================
The Company, as part of the conversion, recorded a charitable donation expense
of $14,258,000 in 1996. Under the Internal Revenue Code, charitable donations
are tax deductible subject to a limitation based on 10% of the Company's annual
taxable income. The Company, however, is able to carry forward any unused
portion of the deduction for five years following the year in which the
contribution is made. Based on the Company's estimate of taxable income for 1996
and the carry forward period, $4,258,000 of the charitable donation expense was
initially considered non tax deductible as it was unlikely that the Company
would realize sufficient earnings over the six year period to take the full
deduction. As a result, the Company established a deferred tax valuation
allowance of $1,490,000 relating to the nondeductible expense. In 2000, after
considering the Company's actual earnings performance and expectations for
taxable income through December 31, 2001, the Company estimated that an
additional $3,029,000 of charitable donation expense could be recognized for tax
purposes, providing for a benefit of $1,060,000.
The Company has determined that it is not required to establish a valuation
reserve for the remaining deferred tax asset account since it is "more likely
than not" that the remaining 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 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.
(12) 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
employee's contribution. During 2001, 2000 and 1999, 10,377, 10,861 and 11,544
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 1,342,092
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 422,500 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, 2001 and 2000, contributions to
the ESOP, which were used to fund principal and interest payments on the ESOP
debt, totaled $2,689,000 and $2,830,000, respectively. During 2001 and 2000,
$935,000 and $890,000, respectively, of dividends paid on unallocated ESOP
shares were used for debt service. At December 31, 2001 and 2000, the loan had
an outstanding balance of $13,111,000 and $14,596,000, respectively, and the
ESOP had unallocated shares of 1,001,146 and 1,119,196, respectively. At
December 31, 2001, the unallocated shares had a fair value of $24,188,000. 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, 2001, 2000 and 1999, the Bank recorded
compensation expense related to the ESOP of $2,827,000, $2,268,000 and
$2,190,000, respectively, including $1,334,000, $697,000 and $541,000,
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, 2001, 653,536 shares had
been allocated to participants and 109,910 shares were committed to be released.
36
(13) Incentive Plan
On February 4, 1997, a special meeting of the Company's shareholders ratified
the OceanFirst Financial Corp. 1997 Incentive Plan which was subsequently
amended on February 18, 1998. The Amended and Restated OceanFirst Financial
Corp. 1997 Incentive Plan (the "Incentive Plan") authorizes the granting of
options to purchase Common Stock, option-related awards and awards of Common
Stock. On April 19, 2000, the Company's shareholders ratified the OceanFirst
Financial Corp. 2000 Stock Option Plan (the "Stock Option Plan") which
authorizes the granting of stock options. The purpose of both 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 stockholder's 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.
During 1997, the Company acquired 671,046 shares in the open market at a cost of
$10,176,000. These shares have been awarded to officers and directors. Such
amounts represent deferred compensation and have been accounted for as a
reduction of stockholders' equity. Awards vest at the rate of 20% per year
except that the Company has determined that certain awards are also contingent
upon attainment of certain performance goals by the Company, which performance
goals would be established by a committee of Outside Directors ("Committee").
The first and second annual installments vested on the first and second
anniversary dates of the date of grant. Vesting of 25% of the third annual
installment, and 50% of each of the fourth and fifth annual installments, are
subject to the attainment of performance goals established by the Committee. The
performance goals may be set by the Committee on an individual basis, for all
Stock Awards made during a given period of time, or for all Stock Awards for
indefinite periods. No Stock Award that is subject to a performance goal is to
be distributed to an employee until the Committee confirms that the underlying
performance goal has been achieved. No Stock Award that is subject to a
performance goal is to be distributed to an Outside Director until an
independent third party confirms that the underlying performance goal has been
achieved. The Committee established certain levels of earnings per share growth
as the performance goal for 2001. As a result of the Company attaining the
earnings per share growth specified by the Committee, all of the shares in the
fifth annual installment will vest on February 4, 2002. The Company recorded
compensation expense relating to stock awards of $1,935,000, $1,934,000 and
$1,933,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Under the Incentive Plan and Stock Option Plan, the Company is authorized to
issue up to 1,677,614 shares and 631,000 shares, respectively, 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.
The Company accounts for stock option awards using the intrinsic value method
and has recognized no compensation expense in 2001, 2000 and 1999. SFAS 123
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):
2001 2000 1999
==================================================================
Net income:
As reported $18,159 $16,382 $16,347
Pro forma 17,241 15,499 15,343
- ------------------------------------------------------------------
Basic earnings per share;
As reported 1.96 $ 1.59 $ 1.36
Pro forma 1.86 1.51 1.28
- ------------------------------------------------------------------
Diluted earnings per share:
As reported 1.85 $ 1.54 $ 1.33
Pro forma 1.75 1.45 1.25
- ------------------------------------------------------------------
Weighted average fair value of an
option share granted during the year $ 4.62 $ 4.64 $ 4.02
==================================================================
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:
2001 2000 1999
==================================================================
Risk-free interest rate 4.91% 6.06% 5.76%
Expected option life 6 years 6 years 6 years
Expected volatility 22% 24% 25%
Expected dividend yield 3.35% 3.25% 3.20%
==================================================================
A summary of option activity for the years ended December 31, 2001, 2000 and
1999 follows:
2001 2000 1999
=======================================================================================
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------
Outstanding at
beginning of year 1,565,711 $14.85 1,674,003 $14.72 1,642,827 $14.67
Granted 35,111 22.62 88,441 18.94 58,287 16.26
Exercised (79,909) 14.93 (108,310) 14.85 (1,208) 14.41
Forfeited (18,398) 19.01 (88,423) 15.72 (25,903) 15.33
- ---------------------------------------------------------------------------------------
Outstanding at
end of year 1,502,515 $15.01 1,565,711 $14.85 1,674,003 $14.72
=======================================================================================
At December 31, 2001 2000 1999
- --------------------------------------------------------------------------
Options exercisible 1,088,227 854,847 626,761
Range of exercise prices $13.94-$26.70 $13.94-$21.09 $1394-$19.88
Weighted average
remaining contractual life 5.5 years 6.4 years 7.2 years
==========================================================================
37
Notes to Consolidated Financial Statements (continued)
(14) 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, 2001, the following commitments and contingent liabilities
existed which are not reflected in the accompanying consolidated financial
statements (in thousands):
December 31, 2001
============================================================
Unused consumer and construction loan
lines of credit (primarily floating-rate) $ 39,135
- ------------------------------------------------------------
Unused commercial loan lines of credit (primarily
floating-rate) 32,208
- ------------------------------------------------------------
Other commitments to extend credit:
Fixed-Rate 110,362
Adjustable-Rate 59,796
Floating-Rate 6,060
============================================================
The Company's fixed-rate loan commitments expire within 90 days of issuance and
carried interest rates ranging from 4.00% to 9.62% at December 31, 2001.
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, 2001, the Company is obligated under noncancellable operating
leases for premises and equipment. Rental expense under these leases aggregated
approximately $1,647,000, $843,000 and $604,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
The projected minimum rental commitments as of December 31, 2001 are as follows
(in thousands):
Year ended December 31
===============================
2002 $ 967
2003 910
2004 911
2005 765
2006 720
Thereafter 3,175
- -------------------------------
$7,448
===============================
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. Its borrowers' abilities to repay their obligations are dependent
upon various factors including the borrowers' income 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
(15) 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 investments 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
balance based upon the unpaid principal of home mortgage loans and
mortgage-backed securities.
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.
38
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposits, savings, and NOW 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 to Purchase or Sell Securities
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,
2001 and 2000 are presented in the following tables (in thousands). Since the
fair value of off-balance sheet commitments approximate book value, these
disclosures are not included.
Book Fair
December 31, 2001 Value Value
============================================================================
Financial Assets:
Cash and due from banks $ 16,876 $ 16,876
Investment securities available for sale 80,017 80,017
Mortgage-backed securities available for sale 233,302 233,302
Federal Home Loan Bank of New York stock 23,560 23,560
Loans receivable and mortgage loans held for sale 1,338,717 1,351,532
Financial Liabilities:
Deposits 1,109,043 1,114,551
Borrowed funds $ 484,332 $ 509,897
============================================================================
Book Fair
December 31, 2000 Value Value
============================================================================
Financial Assets:
Cash and due from banks $ 7,235 $ 7,235
Investment securities available for sale 103,536 103,536
Mortgage-backed securities available for sale 268,042 268,042
Federal Home Loan Bank of New York stock 20,000 20,000
Loans receivable and mortgage loans held for sale 1,172,467 1,181,446
Financial Liabilities:
Deposits 1,104,188 1,101,477
Borrowed funds $ 363,994 $ 371,399
============================================================================
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.
(16) Parent-Only Financial Information
The following condensed statements of financial condition at December 31, 2001
and 2000 and condensed statements of operations and cash flows for the years
ended December 31 2001, 2000 and 1999 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, 2001 2000
=================================================================
Assets
- -----------------------------------------------------------------
Cash and due from banks $ 7 $ 7
Advances to subsidiary Bank 3,003 21,972
Investment securities 5,253 4,391
ESOP loan receivable 13,111 14,596
Investment in subsidiary Bank 125,936 116,067
Other assets -- 1,071
- -----------------------------------------------------------------
Total assets $147,310 $158,104
=================================================================
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------
Other liabilities $ 581 $ 368
Stockholders' equity 146,729 157,736
- -----------------------------------------------------------------
Total liabilities and stockholders' equity $147,310 $158,104
=================================================================
39
Notes to Consolidated Financial Statements (continued)
CONDENSED STATEMENTS OF OPERATIONS
(in thousand)
Year ended December 31, 2001 2000 1999
=============================================================================
Dividend income - Subsidiary Bank $15,000 $ 46,000 $ 36,500
Interest income - Investment securities 140 144 29
Interest income -Advances to
subsidiary Bank 411 1,229 210
Interest income- ESOP loan receivable 1,204 1,328 1,453
- -----------------------------------------------------------------------------
Total dividend and interest income 16,755 48,701 38,192
Loss on sale of securities available for sale -- -- 49
Other operating expenses 1,226 1,198 1,186
- -----------------------------------------------------------------------------
Income before income taxes and equity in
(distributions in excess) undistributed
earnings of subsidiary Bank 15,529 47,503 36,957
Provision (benefit) for income taxes 156 (597) 150
- -----------------------------------------------------------------------------
Income before equity in (distributions
in excess of) undistributed earnings of
subsidiary Bank 15,373 48,100 36,807
Equity in (distributions in excess of)
undistributed earnings of subsidiary Bank 2,786 (31,718) (20,460)
- -----------------------------------------------------------------------------
Net income $18,159 $ 16,382 $ 16,347
=============================================================================
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, 2001 2000 1999
===============================================================================
Cash flows from operating activities:
Net income $ 18,159 $ 16,382 $ 16,347
Decrease (increase) in advances
to subsidiary Bank 18,969 (16,100) 1,767
(Equity in) distributions in excess of
undistributed earnings of subsidiary Bank (2,786) 31,718 20,460
Loss on sale of securities available for sale -- -- 49
Deferred taxes 1,309 (381) 1,081
(Decrease) increase in other liabilities (307) 311 (326)
Reduction in Incentive Awards 1,935 1,934 1,933
- -------------------------------------------------------------------------------
Net cash provided by operating activities 37,279 33,864 41,311
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities (92) (89) (611)
Sale of investment securities -- -- 121
Repayments on ESOP loan receivable 1,485 1,502 1,517
- -------------------------------------------------------------------------------
Net cash provided by investing activities 1,393 1,413 1,027
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid (7,943) (7,622) (7,157)
Purchase of treasury stock (31,921) (28,800) (35,198)
Exercise of stock options 1,192 1,145 17
- -------------------------------------------------------------------------------
Net cash used in financing activities (38,672) (35,277) (42,338)
- -------------------------------------------------------------------------------
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)
- --------------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------------
Interest income $29,480 $29,950 $29,420 $29,310
Interest expense 14,390 15,700 16,479 16,579
- --------------------------------------------------------------------------------------
Net interest income 15,090 14,250 12,941 12,731
Provision for loan losses 470 265 260 255
- --------------------------------------------------------------------------------------
Net intereset income after
provision for loan losses 14,620 13,985 12,681 12,476
Other income 4,353 2,480 3,292 2,800
Operating expenses 9,735 9,471 9,063 9,110
- --------------------------------------------------------------------------------------
Income before provision
for income taxes and extra-
ordinary item 9,238 6,994 6,910 6,166
Provision for income taxes 3,190 2,312 2,417 2,145
- --------------------------------------------------------------------------------------
Income before extraordinary
item 6,048 4,682 4,493 4,021
Extraordinary item, net of tax-
prepayment penalty on debt
extinguishment (1,085) -- -- --
- --------------------------------------------------------------------------------------
Net income $ 4,963 $ 4,682 $ 4,493 $ 4,021
======================================================================================
Basic earnings per share
Income before extraordinary
item $ .68 $ .51 $ .47 $ .42
Extraordinary item, net of tax (.12) -- -- --
- --------------------------------------------------------------------------------------
Net income per share $ .56 $ .51 $ .47 $ .42
- --------------------------------------------------------------------------------------
Diluted earnings per share
Income before extraordinary
item $ .64 $ .48 $ .45 $ .40
Extraordinary item, net of tax (.11) -- -- --
- --------------------------------------------------------------------------------------
Net income per share $ .53 $ .48 $ .45 $ .40
======================================================================================
2000
- --------------------------------------------------------------------------------------
Interest income $29,863 $29,547 $28,613 $28,082
Interest expense 17,511 17,386 16,069 15,446
- --------------------------------------------------------------------------------------
Net interest income 12,352 12,161 12,544 12,636
Provision for loan losses 240 255 250 240
- --------------------------------------------------------------------------------------
Net intereset income after
provision for loan losses 12,112 11,906 12,294 12,396
Other income 2,871 422 1,522 1,330
Operating expenses 8,980 8,260 7,211 7,194
- --------------------------------------------------------------------------------------
Income before provision
for income taxes 6,003 4,068 6,605 6,532
Provision for income taxes 2,093 248 2,267 2,218
- --------------------------------------------------------------------------------------
Net income $ 3,910 $ 3,820 $ 4,338 $ 4,314
======================================================================================
Basic earnings per share $ .39 $ .38 $ .42 $ .40
======================================================================================
Diluted earnings per share $ .38 $ .36 $ .41 $ .39
======================================================================================
40
Independent Auditors' Report
The Board of Directors and Stockholders
OceanFirst Financial Corp:
We have audited the consolidated statements of financial condition of OceanFirst
Financial Corp. and subsidiary as of December 31, 2001 and 2000, 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, 2001.
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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
- ------------------------
Short Hills, New Jersey
January 16, 2002
41
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will be held on April 18, 2002 at 10:00 a.m.
at Doolan's at 700 State Highway 71 North, Spring Lake Heights, New Jersey.
INVESTOR RELATIONS
Copies of the Company's earnings releases and financial publications, including
the annual report on Form 10-K (without exhibits) filed with the Securities and
Exchange Commission are available without charge by contacting:
Sally Dennis, Assistant Vice President, Ext. 7516
sdennis@oceanfirst.com
STOCK TRANSFER AGENT AND REGISTRAR
Shareholders wishing to change the name, address or ownership of stock, to
report lost certificates or to consolidate accounts are asked to contact the
Company's stock registrar and transfer agent directly:
American Stock Transfer & Trust Co.
Shareholder Relations Department
59 Maiden Lane
New York, NY 10038
(800)937-5449
INDEPENDENT AUDITORS
KPMG LLP
150 John F. Kennedy Parkway
Short Hills, NJ 07078
SECURITIES COUNSEL
Muldoon Murphy & Faucette LLP
5101 Wisconsin Avenue, NW
Washington, DC 20016
Market Information
for Common Stock
OceanFirst Financial Corp.'s common stock is traded on the Nasdaq Stock Market
under the symbol OCFC. The stock is customarily listed as OceanF in the Asbury
Park Press and the Ocean County Observer. The table below shows the reported
high and low daily closing prices of the common stock during the periods
indicated in 2001 and 2000.
2001
- ----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------
High 24.00 26.95 26.70 25.62
Low 21.44 21.50 23.50 23.29
2000
- ---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------
High 16.75 18.87 21.25 24.62
Low 15.00 14.62 18.37 19.31
As of December 31, 2001, the Company had approximately 4,000 shareholders,
including the number of persons or entities holding stock in nominee or street
name through various brokers and banks.