UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-27428
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
Delaware
22-3412577
(State of other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
975 Hooper Avenue, Toms River, NJ
08754-2009
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (732)240-4500
(Former name, former address and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x
NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of August 8, 2003, there were 13,613,398 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.
INDEX TO FORM 10-Q
PAGE
PART I.
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of June 30, 2003 and December 31, 2002
1
Consolidated Statements of Income for the three and six months ended June 30, 2003 and 2002
2
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2003 and 2002
3
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002
4
Notes to Unaudited Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
8
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
13
Item 4.
Controls and Procedures
Part II.
OTHER INFORMATION
Legal Proceedings
15
Changes in Securities
Default Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits and Reports on Form 8-K
Signatures
16
Exhibits
17
OceanFirst Financial Corp.Consolidated Statements of Financial Condition (dollars in thousands, except per share amounts)
June 30, 2003
December 31, 2002
(Unaudited)
ASSETS
Cash and due from banks
$
42,009
17,192
Investment securities available for sale
78,306
91,978
Federal Home Loan Bank of New York stock, at cost
19,050
18,700
Mortgage-backed securities available for sale
132,699
138,657
Loans receivable, net
1,334,586
1,335,898
Mortgage loans held for sale
79,681
66,626
Interest and dividends receivable
6,605
6,378
Real estate owned, net
—
141
Premises and equipment, net
17,153
17,708
Servicing asset
6,171
7,907
Bank Owned Life Insurance
33,198
32,398
Other assets
11,378
10,115
Total assets
1,760,836
1,743,698
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
1,170,531
1,184,836
Securities sold under agreements to repurchase with retail customers
53,143
44,584
Securities sold under agreements to repurchase with the Federal Home Loan Bank
115,000
140,000
Federal Home Loan Bank advances
266,000
214,000
Advances by borrowers for taxes and insurance
7,266
5,952
Other liabilities
14,107
19,021
Total liabilities
1,626,047
1,608,393
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued
Common stock, $.01 par value, 55,000,000 shares authorized, 27,177,372 shares issued and 13,614,900 and 13,757,880 shares outstanding at June 30, 2003 and December 31, 2002, respectively
272
Additional paid-in capital
187,308
184,934
Retained earnings
146,430
142,224
Accumulated other comprehensive loss
(4,142
)
(3,201
Less: Unallocated common stock held by Employee Stock Ownership Plan (ESOP)
(10,579
(11,248
Treasury stock, 13,562,472 and 13,419,492 shares at June 30, 2003 and December 31, 2002, respectively
(184,500
(177,676
Total stockholders’ equity
134,789
135,305
Total liabilities and stockholders’ equity
See accompanying Notes to Unaudited Consolidated Financial Statements.
OceanFirst Financial Corp.Consolidated Statements of Income(in thousands, except per share amounts)
For the three months ended June 30,
For the six months ended June 30,
2003
2002
Interest income:
Loans
22,153
23,374
44,899
47,230
Mortgage-backed securities
1,386
2,607
2,822
5,705
Investment securities and other
774
888
2,021
2,348
Total interest income
24,313
26,869
49,742
55,283
Interest expense:
4,438
7,258
9,672
14,642
Borrowed funds
4,974
4,948
9,782
10,310
Total interest expense
9,412
12,206
19,454
24,952
Net interest income
14,901
14,663
30,288
30,331
Provision for loan losses
250
375
625
875
Net interest income after provision for loan losses
14,651
14,288
29,663
29,456
Other income:
Loan servicing loss
(1,497
(85
(2,688
(44
Fees and service charges
2,041
1,556
3,866
2,993
Net gain on sales of loans and securities available for sale
2,898
1,114
5,402
1,508
Net (loss) income from other real estate operations
(2
55
109
74
Other
387
466
818
1,000
Total other income
3,827
3,106
7,507
5,531
Operating expenses:
Compensation and employee benefits
5,028
4,997
10,120
10,259
Occupancy
798
1,811
1,590
Equipment
585
575
1,176
1,118
Marketing
548
433
969
857
Federal deposit insurance
140
124
233
Data processing
817
726
1,532
1,313
General and administrative
2,157
5,589
4,301
Total operating expenses
10,815
9,810
21,430
19,688
Income before provision for income taxes
7,663
7,584
15,740
15,299
Provision for income taxes
2,716
2,448
5,544
5,114
Net income
4,947
5,136
10,196
10,185
Basic earnings per share
0.40
0.82
0.78
Diluted earnings per share
0.38
0.37
0.73
Average basic shares outstanding
12,420
12,960
12,431
13,049
Average diluted shares outstanding
13,075
13,904
13,080
13,900
OceanFirst Financial Corp.Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) (in thousands, except per share amounts)
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Employee Stock Ownership Plan
Unearned Incentive Awards
Treasury Stock
Total
Balance at December 31, 2001
181,780
131,655
(824
(12,663
(161
(153,330
146,729
Comprehensive income:
Other comprehensive loss:
Unrealized loss on securities (net of tax benefit $112)
(192
Total comprehensive income
9,993
Earned Incentive Awards
161
Tax benefit of stock plans
558
Purchase 542,350 shares of common stock
(11,005
Allocation of ESOP stock
708
ESOP adjustment
950
Cash dividend - $.33 per share
(4,383
Exercise of stock options
(136
––
737
601
Balance at June 30, 2002
183,288
137,321
(1,016
(11,955
(163,598
144,312
Balance at December 31, 2002
Unrealized loss on securities (net of tax benefit $640)
(941
9,255
1,280
Purchase 510,152 shares of common stock
(11,368
669
1,094
Cash dividend - $.38 per share
(4,736
(1,254
4,544
3,290
Balance at June 30, 2003
See accompanying notes to Unaudited Consolidated Financial Statements.
OceanFirst Financial Corp.Consolidated Statements of Cash Flows (dollars in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of premises and equipment
1,068
972
Amortization of Incentive Awards
Amortization of ESOP
Amortization and impairment of servicing asset
3,873
1,105
Amortization of intangible assets
53
Net premium amortization in excess of discount accretion on securities
470
699
Net accretion of deferred fees and discounts on loans
(399
(46
Net gain on sales of real estate owned
(114
(80
Net gain on sales of loans and securities
(5,402
(1,508
Proceeds from sales of mortgage loans held for sale
316,632
250,147
Mortgage loans originated for sale
(326,743
(228,682
Increase in value of Bank Owned Life Insurance
(800
(974
Increase in interest and dividends receivable
(227
(671
Increase in other assets
(677
(1,920
Decrease in other liabilities
(3,634
(3,100
Total adjustments
(13,512
18,689
Net cash (used in) provided by operating activities
(3,316
28,874
Cash flows from investing activities:
Net decrease (increase) in loans receivable
1,086
(14,821
Proceeds from sale of investment securities available for sale
1,273
Purchase of investment securities available for sale
(2,330
(600
Purchase of mortgage-backed securities available for sale
(70,581
Proceeds from maturities of investment securities available for sale
14,171
Principal payments on mortgage-backed securities available for sale
75,368
55,588
(Increase) decrease in Federal Home Loan Bank of New York stock
(350
3,445
Proceeds from sales of real estate owned
255
301
Purchases of premises and equipment
(513
(2,240
Net cash provided by investing activities
18,379
41,673
Continued
OceanFirst Financial Corp. Consolidated Statements of Cash Flows (Continued) (dollars in thousands)
Cash flows from financing activities:
(Decrease) increase in deposits
(14,305
53,012
Increase (decrease) in short-term borrowings
15,559
(75,615
Proceeds from Federal Home Loan Bank advances
24,000
25,000
Repayments of Federal Home Loan Bank advances
(4,000
(43,000
Increase in advances by borrowers for taxes and insurance
1,314
273
Dividends paid
Purchase of treasury stock
Net cash provided by (used in) financing activities
9,754
(55,117
Net increase in cash and due from banks
24,817
15,430
Cash and due from banks at beginning of period
16,876
Cash and due from banks at end of period
32,306
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest
19,301
24,942
Income taxes
7,904
2,803
Noncash investing activities:
Transfer of loans receivable to real estate owned
565
Mortgage loans securitized into mortgage-backed securities
37,216
90,028
See accompanying notes to unaudited consolidated financial statements.
5
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 and six months ended June 30, 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):
Three months ended June 30,
Six months ended June 30,
Net income – as reported
Stock-based employee compensation expense included in reported net income, all relating to earned incentive awards, net of related tax effects
105
Total stock-based employee compensation expense determined under the fair value based method, including earned incentive awards and stock option grants, net of related tax effects
(105
(115
(198
(314
Net stock-based employee compensation expense not included in reported net income, all relating to stock option grants, net of related tax effects
(209
Net income – pro forma
4,842
5,021
9,998
9,976
Basic earnings per share:
As reported
.40
.82
.78
Pro forma
.39
.80
.76
Diluted earnings per share:
.38
.37
.73
.36
.72
Earnings per Share
The following reconciles shares outstanding for basic and diluted earnings per share for the three and six months ended June 30, 2003 and 2002 (in thousands):
Weighted average shares issued net of Treasury shares
13,732
14,452
13,767
14,595
Less: Unallocated ESOP shares
(1,274
(1,439
(1,294
(1,460
Unallocated incentive award shares
(38
(53
(42
(86
Add: Effect of dilutive securities:
Stock options
902
616
781
Incentive awards
30
42
33
70
Comprehensive Income
For the three month periods ended June 30, 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 $5,234,000 and $7,131,000, respectively. For the six months ended June 30, 2003 and 2002, total comprehensive income amounted to $9,255,000 and $9,993,000, respectively.
Impact of Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” was issued in May 2003. Statement 150 requires instruments within its scope to be classified as a liability (or, in some cases, as an asset). Statement 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (i.e., July 1, 2003 for calendar year entities). For financial instruments created before June 1, 2003 and still existing at the beginning of the interim period of adoption, transition generally should be applied by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attributes of the Statement. The adoption of Statement 150 did not have a significant effect on the Bank’s consolidated financial statements.
Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued on April 30, 2003. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this Statement did not have a significant effect on the Bank’s consolidated financial statements.
7
Note 2. Loans Receivable, Net
Loans receivable, net at June 30, 2003 and December 31, 2002 consisted of the following (in thousands):
Real estate:
One- to four-family
1,087,926
1,101,904
Commercial real estate, multi-family and land
156,815
142,726
Construction
13,273
11,079
Consumer
80,541
80,218
Commercial
86,598
77,968
Total loans
1,425,153
1,413,895
Loans in process
(3,066
(3,531
Deferred origination costs, net
2,945
2,239
Unearned discount
(5
Allowance for loan losses
(10,760
(10,074
Total loans, net
1,414,267
1,402,524
Less: mortgage loans held for sale
Note 3. Deposits
The major types of deposits at June 30, 2003 and December 31, 2002 were as follows (in thousands):
Type of Account
Non-interest bearing
105,795
86,290
NOW
260,027
260,762
Money market deposit
133,583
123,960
Savings
257,189
234,995
Time deposits
413,937
478,829
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2002 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as supplemented by this report, contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in our consolidated statements of financial condition at fair value or the lower of cost or fair value. Policies with respect to the methodologies used to determine the allowance for loan losses, the valuation of Mortgage Servicing Rights and judgments regarding goodwill and securities impairment are the most critical accounting policies because they are important to the presentation of the Company’s financial condition and results of operations, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions and estimates could result in material differences in the results of operations or financial condition. These critical accounting policies and their application are reviewed periodically and, at least annually, with the Audit Committee of the Board of Directors.
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 and six months ended June 30, 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.
Three Months Ended June 30,
AVERAGE BALANCE
INTEREST
AVERAGE YIELD/ COST
(Dollars in thousands)
Assets
Interest-earnings assets:
Interest-earning deposits and short-term investments
14,987
43
1.15
%
14
1.00
Investment securities
87,285
478
2.19
86,435
610
2.82
FHLB stock
19,314
253
5.24
20,695
264
5.10
131,389
4.22
185,582
5.62
Loans receivable, net (1)
1,406,405
6.30
1,323,388
7.06
Total interest-earning assets
1,659,380
5.86
1,621,502
6.63
Non-interest-earning assets
85,370
83,142
1,744,750
1,704,644
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Transaction deposits
640,137
1,267
.79
553,590
2,233
1.61
426,176
3,171
2.98
516,433
5,025
3.89
1,066,313
1.66
1,070,023
2.71
428,576
4.64
401,895
4.92
Total interest-bearing liabilities
1,494,889
2.52
1,471,918
3.32
Non-interest-bearing deposits
101,328
79,080
Non-interest-bearing liabilities
13,817
12,193
1,610,034
1,563,191
Stockholders’equity
134,716
141,453
Net interest rate spread (2)
3.34
3.31
Net interest margin (3)
3.59
3.62
Six Months Ended June 30,
14,388
83
4,010
20
91,118
1,431
3.14
86,129
1,806
4.19
19,212
507
5.28
22,200
522
4.70
126,789
4.45
199,122
5.73
1,404,249
6.39
1,334,417
7.08
1,655,756
6.01
1,645,878
6.72
83,107
82,191
1,738,863
1,728,069
635,271
2,838
.89
531,859
4,250
1.60
442,951
6,834
3.09
520,535
10,392
3.99
1,078,222
1.79
1,052,394
2.78
414,729
4.72
443,241
4.65
1,492,951
2.61
1,495,635
94,737
75,858
16,497
13,373
1,604,185
1,584,866
134,678
143,203
3.40
3.38
3.66
3.69
(1)
Amount is net of deferred loan fees, undisbursed loan funds, discounts and premiums and estimated 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.
Comparison of Financial Condition at June 30, 2003 and December 31, 2002
Total assets at June 30, 2003 were $1.761 billion, an increase of $17.1 million, compared to $1.744 billion at December 31, 2002.
9
Loans receivable, net decreased by $1.3 million to a balance of $1.335 billion at June 30, 2003, compared to a balance of $1.336 billion at December 31, 2002. Commercial and commercial real estate loans outstanding increased $22.7 million, while one- to four-family mortgage loans declined, as the Bank actively sold 30-year fixed-rate mortgage loans during the period.
Deposit balances decreased $14.3 million to $1.170 billion at June 30, 2003 from $1.184 billion at December 31, 2002. Core deposits (all deposits except certificates), a key emphasis for the Company, increased by $50.6 million, as time deposits declined.
Total borrowings, consisting of securities sold under agreements to repurchase and Federal Home Loan Bank advances, increased $35.6 million to $434.1 million at June 30, 2003, compared to a balance of $398.6 million at December 31, 2002. Repurchase agreements with retail customers increased $8.6 million as a large commercial deposit relationship transferred their balances to the securities sold under agreements to repurchase account. Overnight borrowings increased by $7.0 million and longer-term wholesale borrowings used to fund balance sheet leverage increased by $20.0 million.
Stockholders’ equity at June 30, 2003 decreased to $134.8 million, compared to $135.3 million at December 31, 2002. The Company repurchased 510,152 shares of common stock during the six months ended June 30, 2003 at a total cost of $11.4 million. Under the 10% repurchase program authorized by the Board of Directors in August 2002, 439,683 shares remain to be purchased as of June 30, 2003. The cost of the share repurchases was partly offset by proceeds from stock option exercises and the related tax benefits.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2003 and June 30, 2002
General
Net income amounted to $5.0 million and $10.2 million for the three and six months ended June 30, 2003, respectively, as compared to net income of $5.1 million and $10.2 million for the three and six months ended June 30, 2002. Diluted earnings per share increased to $.38 and $.78, respectively, for the three and six months ended June 30, 2003, as compared to $.37 and $.73, respectively, for the same prior year periods. 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 and six months ended June 30, 2003 was $24.3 million and $49.7 million, respectively, compared to $26.9 million and $55.3 million, respectively, for the three and six months ended June 30, 2002. The decrease in interest income was due to a decline in the yield on interest-earning assets to 5.86% and 6.01%, respectively, for the three and six months ended June 30, 2003, as compared to 6.63% and 6.72%, respectively, for the same prior year periods. 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 both the three and six months ended June 30, 2003 loans receivable represented 84.8% of average interest-earning assets as compared to 81.6% and 81.1%, respectively, for the same prior year periods.
Interest Expense
Interest expense for the three and six months ended June 30, 2003 was $9.4 million and $19.5 million, respectively, compared to $12.2 million and $25.0 million, respectively, for the three and six months ended June 30, 2002. The decrease in interest expense was primarily the result of a decrease in the cost of interest-bearing liabilities to 2.52% and 2.61%, respectively, for the three and six months ended June 30, 2003, as compared to 3.32% and 3.34%, respectively, in the same prior year periods. 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 63.5% and 62.2%, respectively, of average deposits for the three and six months ended June 30, 2003, as compared to 55.1% and 53.9%, respectively, for the same prior year periods.
Provision for Loan Losses
For the three and six months ended June 30, 2003, the Company’s provision for loan losses was $250,000 and $625,000, respectively, as compared to $375,000 and $875,000, respectively, for the same prior year periods. The provision for the six months ended June 30, 2002 was increased to reflect the charge-off of a large nonperforming commercial loan which was part of a shared national credit. The Company recognized a net recovery of $62,000 through the allowance for loan losses for the six months ended June 30, 2003. Additionally, non-performing loans declined to $2.6 million at June 30, 2003 as compared to $3.3 million at June 30, 2002.
10
Other Income
Other income was $3.8 million and $7.5 million, respectively, for the three and six months ended June 30, 2003, compared to $3.1 million and $5.5 million, respectively, for the same prior year periods. For the three and six months ended June 30, 2003, respectively, the Company recorded a gain of $2.9 million and $5.4 million, respectively, on the sale of loans and securities, as compared to a gain of $1.1 million and $1.5 million, respectively, in the same prior year periods. For the six months ended June 30, 2003 the gain on sale of loans and securities includes a gain of $323,000 on the sale of equity securities.
Loan servicing loss increased by $1.4 million and $2.6 million, respectively, for the three and six months ended June 30, 2003, as compared to the same prior year periods due to actual and anticipated prepayments of the loans underlying the servicing portfolio. Results for the three and six months ended June 30, 2003 include the recognition of an impairment charge on the loan servicing asset for $1.2 million and $2.2 million, respectively, as compared to an impairment of $144,000 for the six months ended June 30, 2002.
Fees and service charges increased by $485,000, or 31.2%, and $873,000, or 29.2%, respectively, for the three and six months ended June 30, 2003, as compared to the same prior year periods due to the growth in commercial account services, retail core account balances and trust fees and the establishment of a captive insurance subsidiary to recognize fee income from private mortgage insurance.
Operating Expenses
Operating expenses were $10.8 million and $21.4 million, respectively, for the three and six months ended June 30, 2003, as compared to $9.8 million and $19.7 million, respectively, in the same prior year periods. 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.
Provision for Income Taxes
Income tax expense was $2.7 million and $5.5 million, respectively, for the three and six months ended June 30, 2003, compared to $2.4 million and $5.1 million, respectively, for the same prior year periods. The effective tax rate increased slightly to 35.4% and 35.2%, respectively, for the three and six months ended June 30, 2003 as compared to 32.3% and 33.4% for the same prior year periods. The Company’s higher average stock price in 2003 as compared to 2002 increased that portion of the Company’s ESOP expense which is not deductible for tax purposes.
Liquidity and Capital Resources
The Company’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities, proceeds from the sale of loans, Federal Home Loan Bank (“FHLB”) and other borrowings and, to a lesser extent, investment maturities. While scheduled amortization of loans is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including an overnight line of credit and advances from the FHLB.
At June 30, 2003, the Company had outstanding overnight borrowings from the FHLB of $7.0 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. Securities sold under agreements to repurchase with retail customers increased to $53.1 million at June 30, 2003 from $44.6 million at December 31, 2002 as a large commercial deposit relationship transferred their balances to the securities sold under agreements to repurchase account. The Company also had other borrowings of $374.0 million at June 30, 2003, an increase from $354.0 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 six months ended June 30, 2003, were primarily satisfied 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, the funding of deposit outflows and the purchase of treasury stock. For the six months ended June 30, 2002, the cash needs of the Company were primarily satisfied by principal payments on loans and mortgage-backed securities, increased deposits 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.
In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination and sale of loans. At June 30, 2003, outstanding commitments to originate loans totaled $212.4 million;
11
outstanding unused lines of credit totaled $98.3 million; and outstanding commitments to sell loans totaled $113.8 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.
At June 30, 2003, the Bank exceeded all of its regulatory capital requirements with tangible capital of $117.3 million, or 6.7%, of total adjusted assets, which is above the required level of $26.4 million or 1.5%; core capital of $117.3 million or 6.7% of total adjusted assets, which is above the required level of $52.9 million, or 3.0%; and risk-based capital of $128.0 million, or 11.7% of risk-weighted assets, which is above the required level of $87.9 million or 8.0%. The Bank is considered a “well-capitalized” institution under the Office of Thrift Supervision’s prompt corrective action regulations.
Non-Performing Assets
The following table sets forth information regarding the Company’s 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.
(dollars in thousands)
Non-accrual loans:
One-to four-family
2,152
2,222
72
95
284
297
2,603
2,688
REO, net
Total non-performing assets
2,829
Allowance for loan losses as a percent of total loans receivable
.71
Allowance for loan losses as percent of total non-performing loans
413.37
374.78
Non-performing loans as a percent of total loans receivable
.18
.19
Non-performing assets as a percent of total assets
.15
.16
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.
12
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 June 30, 2003, which were anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. At June 30, 2003 the Company’s one-year gap was positive 8.29% as compared to positive 10.05% at December 31, 2002.
At June 30, 2003
3 Months or Less
More than 3 Months to 1 Year
More than 1 Year to 3 Years
More than 3 Years to 5 Years
More than 5 Years
Interest-earning assets: (1)
Interest-earning deposits and short- term investments
3,551
75,322
1,200
10,395
86,917
15,060
37,159
43,209
18,782
16,882
131,092
Loans receivable (2)
282,575
273,532
459,212
268,221
138,547
1,422,087
376,508
311,891
502,421
287,003
184,874
1,662,697
Money market deposit accounts
6,891
18,613
37,330
70,749
Savings accounts
13,268
35,835
71,871
136,215
NOW accounts
13,414
36,230
72,664
137,719
115,173
156,971
97,476
27,096
17,221
FHLB advances
51,000
40,000
98,000
57,000
20,000
Securities sold under agreements to repurchase
10,000
45,000
168,143
252,889
297,649
422,341
468,779
57,221
1,498,879
Interest sensitivity gap (3)
123,619
14,242
80,080
(181,776
127,653
163,818
Cumulative interest sensitivity gap
137,861
217,941
36,165
Cumulative interest sensitivity gap as a percent of total interest- earning assets
7.43
8.29
13.11
2.18
9.85
Interest-earning assets are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments, and contractual maturities.
For purposes of the gap analysis, loans receivable includes loans held for sale and non-performing loans gross of the allowance for loan losses, unamortized discounts and deferred loan fees.
Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.
Additionally, the table below sets forth the Company’s exposure to interest rate risk as measured by the change in net portfolio value (“NPV”) and net interest income under varying rate shocks as of June 30, 2003 and December 31, 2002. All methods used to measure interest rate sensitivity involve the use of assumptions, which may tend to oversimplify the manner in which actual yields and costs respond to changes in market interest rates. The Company’s interest rate sensitivity should be reviewed in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report for the year ended December 31, 2002.
Net Portfolio Value
Net Interest Income
Change in Interest Rates in Basis Points (Rate Shock)
Amount
% Change
NPV Ratio
200
151,641
(6.2
)%
8.8
59,071
1.9
151,546
(7.1
8.9
60,492
2.1
100
165,026
9.3
59,027
1.8
163,725
0.4
9.4
60,234
1.7
Static
161,663
9.0
57,984
163,127
9.2
59,230
(100)
150,134
8.3
55,003
(5.1
150,429
(7.8
8.4
56,527
(4.6
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of June 30, 2003,
the chief executive officer and the principal financial officer of the Company concluded that the Company’s disclosure controls and procedures were adequate.
Changes in internal controls. The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and principal financial officer.
PART II. OTHER INFORMATION
The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to routine legal proceedings within the normal course of business. Such routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.
Not Applicable
Defaults Upon Senior Securities
a)
Exhibits:
3.1
Certificate of Incorporation of OceanFirst Financial Corp.*
3.2
Bylaws of OceanFirst Financial Corp.**
4.0
Stock Certificate of OceanFirst Financial Corp.*
31.1
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
CEO Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002.
32.3
CFO Certification pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002.
b)
Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and Exchange Commission on April 28, 2002 which included the press release, dated April 24, 2003, announcing the Company’s financial results for the quarter ended March 31, 2003.
*
Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996, as amended, Registration No. 33-80123.
**
Incorporated herein by reference into this document from the Exhibit to Form 10-K, Annual Report, filed on March 25, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OCEANFIRST FINANCIAL CORP.
Registrant
DATE: August 14, 2003
/s/ JOHN R. GARBARINO
John R. Garbarino Chairman of the Board, President and Chief Executive Officer
/s/ MICHAEL FITZPATRICK
Michael Fitzpatrick Executive Vice President and Chief Financial Officer