OceanFirst Financial - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

As of May 8, 2003, there were 13,756,348 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.

OceanFirst Financial Corp.

INDEX TO FORM 10-Q

wOceanFirst Financial Corp.
Consolidated Statements of Financial Condition
(dollars in thousands, except per share amounts)

See accompanying Notes to Unaudited Consolidated Financial Statements.

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OceanFirst Financial Corp.
Consolidated Statements of Income
(in thousands, except per share amounts)

See accompanying Notes to Unaudited Consolidated Financial Statements.

2

OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

Continued

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OceanFirst Financial Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
(dollars in thousands)

See accompanying notes to unaudited consolidated financial statements.

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OceanFirst Financial Corp.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements include the accounts of OceanFirst Financial Corp. (the “Company”) and its wholly-owned subsidiary, OceanFirst Bank (the “Bank”) and its wholly-owned subsidiaries, Columbia Equities, Ltd., OceanFirst REIT Holdings, Inc., OceanFirst Realty Corp. and OceanFirst Services, LLC. 

The interim consolidated financial statements reflect all normal and recurring adjustments which are, in the opinion of management, considered necessary for a fair presentation of the financial condition and results of operations for the periods presented.  The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results of operations that may be expected for all of 2003.

Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report to Stockholders on Form 10-K for the year ended December 31, 2002.

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.  Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-based Compensation-Transition and Disclosure, permits the use of the intrinsic value method; however, requires the Company to disclose the pro forma net income and earnings per share as if the stock-based compensation had been accounted for using the fair value method.  Had the compensation costs for the Company’s stock option plan been determined based on the fair value method, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):

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Earnings per Share

The following reconciles shares outstanding for basic and diluted earnings per share for the three months ended March 31, 2003 and 2002 (in thousands):

Comprehensive Income

For the three month periods ended March 31, 2003 and 2002, total comprehensive income, representing net income plus or minus items recorded directly in equity, such as the change in unrealized gains or losses on securities available for sale amounted to $4,021,000 and $2,862,000, respectively. 

Note 2. Loans Receivable, Net

Loans receivable, net at March 31, 2003 and December 31, 2002 consisted of the following (in thousands):

Note 3. Deposits

The major types of deposits at March 31, 2003 and December 31, 2002 were as follows (in thousands):

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Analysis of Net Interest Income

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

The following table sets forth certain information relating to the Company for the three months ended March 31, 2003 and 2002.  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.

Comparison of Financial Condition at March 31, 2003 and December 31, 2002

Total assets at March 31, 2003 were $1.745 billion, an increase of $1.2 million, compared to $1.744  billion at December 31, 2002.

Loans receivable, net increased by $798,000 to a balance of $1.337 billion at March 31, 2003, compared to a balance of $1.336 billion at December 31, 2002. Commercial and commercial real estate loans outstanding increased $7.1 million, while one- to four-family mortgage loans declined, as the Bank actively sold 30-year fixed-rate mortgage loans during the period. 

Deposit balances decreased $33.0 million to $1.152 billion at March 31, 2003 from $1.185 billion at December 31, 2002. During the quarter a large commercial deposit relationship transferred $11.6 million to the securities sold under agreement to repurchase account.  Core deposit categories, a key emphasis for the Company, increased by $6.1 million, net of the $11.6 million mentioned above, as time deposits declined. 

Stockholders’ equity at March 31, 2003 increased to $135.4 million, compared to $135.3 million at December 31, 2002. The Company repurchased 310,800 shares of common stock during the three months ended March 31, 2003 at a total cost of $6.8 million.  Under the 10% repurchase program authorized by the Board of Directors in August 2002, 639,035 shares remain to be purchased as of March 31, 2003.  The cost of the share repurchases was partly offset by the proceeds from stock option exercises and the related tax benefit.

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Comparison of Operating Results for the Three Months Ended March 31, 2003 and March 31, 2002

General

Net income increased to $5.2 million for the three months ended March 31, 2003, as compared to net income of $5.0 million for the three months ended March 31, 2002.  Diluted earnings per share increased to $.40 for the three months ended March 31, 2003, as compared to $.36, for the same prior year period.  Earnings per share was favorably affected by the Company’s repurchase program, which reduced the number of shares outstanding.

Interest Income

Interest income for the three months ended March 31, 2003 was $25.4 million, compared to $28.4 million for the three  months ended March 31, 2002.  The decrease in interest income was due to a decline in the yield on interest-earning assets to 6.17%, for the three months ended March 31, 2003, as compared to  6.81%  for the same prior year period.  Despite the decline, which was reflective of the general interest rate environment, the asset yield continued to benefit from the Bank’s loan growth over the past year, which was partly funded by reductions in the lower-yielding investment and mortgage-backed securities available for sale portfolios.  For the three months ended March 31, 2003 loans receivable represented 85.1% of average interest-earning assets as compared to 80.6% for the same prior year period.  The asset yield for the three months ended March 31, 2003 benefited from $407,000 of income relating to an equity investment.  The comparable benefit for the prior year period was $600,000.

Interest Expense

Interest expense for the three months ended March 31, 2003 was $10.0  million compared to $12.7 million for the three months ended March 31, 2002.  The decrease in interest expense was primarily the result of a decrease in the cost of interest-bearing liabilities to 2.69% for the three months ended March 31, 2003, as compared to  3.36% in the same prior year period. Funding costs decreased due to the lower interest rate environment and also due to the Company’s focus on lower-costing core deposit growth. Core deposits (including non-interest-bearing deposits) represented 61.0% of average deposits for the three months ended March 31, 2003, as compared to 52.6% for the same prior year period. 

Provision for Loan Losses

For the three months ended March 31, 2003, the Company’s provision for loan losses was $375,000 as compared to $500,000 for the same prior year period.  The prior period provision was increased to reflect the charge-off of a large nonperforming commercial loan which was part of a shared national credit.

Other Income

Other income was $3.7 million for the three months ended March 31, 2003, compared to $2.4 million for the same prior year period.  For the three months ended March 31, 2003, the Company recorded a gain of $2.5 million on the sale of loans and securities, as compared to a gain of $394,000 in the same prior year period.  For the three months ended March 31, 2003 the gain on sale of loans and securities includes a gain of $323,000 on the sale of equity securities. 

Loan servicing income decreased by $1.2 million for the three months ended March 31, 2003, as compared to the same prior year period due to actual and anticipated prepayments of the loans underlying the servicing portfolio.  Results for the three months ended March 31, 2003 include the recognition of an impairment charge on the loan servicing asset for $1.0 million. There was no servicing impairment in the same prior period.

Fees and service charges increased by $387,000, or 26.9%, for the three months ended March 31, 2003, as compared to the same prior year period due to the growth in commercial account services, retail core account balances and trust fees.

Operating Expenses

Operating expenses were $10.6 million for the three months ended March 31, 2003, as compared to $9.9  million in the same prior year period.  The increase was principally due to the costs associated with the opening and operation of the Bank’s  seventeenth branch office in May 2002, as well as higher loan-related expenses.  Additionally, ESOP expense increased by $113,000 due to the higher average market price for the Company’s shares during the first quarter of 2003, as compared to the same prior year period.

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Provision for Income Taxes

Income tax expense was $2.8 million for the three months ended March 31, 2003, compared to $2.7 million for the same prior year period.  The effective tax rate increased slightly to  35.0% for the three months ended March 31, 2003 as compared to 34.6% for the same prior year period.

Liquidity and Capital Resources

The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, Federal Home Loan Bank (“FHLB”) and other borrowings and, to a lesser extent, investment maturities.  While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.  The Company has other sources of liquidity if a need for additional funds arises, including an overnight line of credit and advances from the FHLB.

At March 31, 2003, the Company had outstanding overnight borrowings from the FHLB of $10.5 million, an increase from no outstanding overnight borrowings at December 31, 2002.  The Company utilizes the overnight line from time to time to fund short-term liquidity needs.  The Company also had other borrowings of $426.9 million at March 31, 2003, an increase from $398.6 million at December 31, 2002. These borrowings were used to fund a wholesale leverage strategy designed to improve returns on invested capital.

The Company’s cash needs for the three months ended March 31, 2003, were primarily provided by principal payments on loans and mortgage-backed securities, increased total borrowings and proceeds from the sale of mortgage loans held for sale. The cash was principally utilized for loan originations, the purchase of mortgage-backed securities and the purchase of treasury stock.  For the three months ended March 31, 2002, the cash needs of the Company were primarily satisfied by principal payments on loans and mortgage-backed securities, maturities of investment securities and proceeds from the sale of mortgage loans held for sale.  The cash provided was principally used for the origination of loans, a reduction in total borrowings and the purchase of treasury stock.

At March 31, 2003, the Bank exceeded all of its regulatory capital requirements with tangible capital of $117.1 million, or 6.70%, of total adjusted assets, which is above the required level of $26.2 million or 1.5%; core capital of $117.1 million or 6.70% of total adjusted assets, which is above the required level of $52.4 million, or 3.0%; and risk-based  capital of $127.4 million, or 11.79% of risk-weighted assets, which is above the required level of $86.4 million or 8.0%.  The Bank is considered a “well-capitalized” institution under the Office of Thrift Supervision’s prompt corrective action regulations.

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Non-Performing Assets

The following table sets forth information regarding the Company’s non-performing assets consisting of non-accrual loans and Real Estate Owned (REO).  It is the policy of the Company to cease accruing interest on loans 90 days or more past due or in the process of foreclosure.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this quarterly report contains certain forward-looking statements which are based on certain assumptions and describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverse effect on the operations of the Company and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles and guidelines.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on statements.  The Company does not undertake- and specifically disclaims any obligation – to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.  Further description of the risks and uncertainties to the business are included in Item 1, BUSINESS of the Company’s 2002 Form 10-K.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company’s interest rate sensitivity is monitored by management through the use of an interest rate risk (IRR) model. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31, 2003, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown.  At March 31, 2003 the Company’s one year gap was positive 8.16% as compared to positive 10.05% at December 31, 2002.

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