UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
For the quarterly period ended March 31, 2004
For the transition period from to
Commission file number 0-27428
OceanFirst Financial Corp.
(Exact name of registrant as specified in its charter)
(State of other jurisdiction of
incorporation or organization)
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 ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
As of May 4, 2004, there were 13,343,314 shares of the Registrant’s Common Stock, par value $.01 per share, outstanding.
INDEX TO FORM 10-Q
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
Part II.
Item 5.
Item 6.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
ASSETS
Cash and due from banks
Investment securities available for sale
Federal Home Loan Bank of New York stock, at cost
Mortgage-backed securities available for sale
Loans receivable, net
Mortgage loans held for sale
Interest and dividends receivable
Real estate owned, net
Premises and equipment, net
Servicing asset
Bank Owned Life Insurance
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Securities sold under agreements to repurchase with retail customers
Securities sold under agreements to repurchase with the Federal Home Loan Bank
Federal Home Loan Bank advances
Advances by borrowers for taxes and insurance
Other liabilities
Total liabilities
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 13,362,419 and 13,350,999 shares outstanding at March 31, 2004 and December 31, 2003, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Less: Unallocated common stock held by Employee Stock Ownership Plan
Treasury stock, 13,814,953 and 13,826,373 shares at March 31, 2004 and December 31, 2003, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Interest income:
Loans
Mortgage-backed securities
Investment securities and other
Total interest income
Interest expense:
Borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income:
Loan servicing income (loss)
Fees and service charges
Net gain on sales of loans and securities available for sale
Net income from other real estate operations
Other
Total other income
Operating expenses:
Compensation and employee benefits
Occupancy
Equipment
Marketing
Federal deposit insurance
Data processing
General and administrative
Total operating expenses
Income before provision for income taxes
Provision for income taxes
Net income
Basic earnings per share
Diluted earnings per share
Average basic shares outstanding
Average diluted shares outstanding
2
Consolidated Statements of
Changes in Stockholders’ Equity (Unaudited)
Additional
Paid-In
Capital
Accumulated
OtherComprehensiveLoss
Employee
Stock
Ownership
Plan
Treasury
Balance at December 31, 2002
Comprehensive income:
Other comprehensive loss:
Unrealized loss on securities (net of tax benefit $796)
Total comprehensive income
Tax benefit of stock plans
Purchase 310,880 shares of common stock
Allocation of ESOP stock
ESOP adjustment
Cash dividend - $.20 per share
Exercise of stock options
Balance at March 31, 2003
Balance at December 31, 2003
Other comprehensive income:
Unrealized gain on securities (net of tax expense $1,728)
Purchase 249,522 shares of common stock
Balance at March 31, 2004
3
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
Amortization of ESOP
Amortization and impairment of servicing asset
Amortization of intangible assets
Net premium amortization in excess of discount accretion on securities
Net premium (accretion) of deferred fees and discounts on loans
Net gain on sales of real estate owned
Net gain on sales of loans and securities
Proceeds from sales of mortgage loans held for sale
Mortgage loans originated for sale
Increase in value of Bank Owned Life Insurance
Increase in interest and dividends receivable
Increase in other assets
Decrease in other liabilities
Total adjustments
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Net decrease (increase) in loans receivable
Proceeds from sale of investment securities available for sale
Purchase of investment securities available for sale
Purchase of mortgage-backed securities available for sale
Proceeds from maturities of investment securities available for sale
Principal payments on mortgage-backed securities available for sale
Increase in Federal Home Loan Bank of New York stock
Proceeds from sales of real estate owned
Purchases of premises and equipment
Net cash (used in) provided by investing activities
Continued
4
Consolidated Statements of Cash Flows (Continued)
Cash flows from financing activities:
Decrease in deposits
Increase in short-term borrowings
Proceeds from securities sold under agreements to repurchase with the Federal Home Loan Bank
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Increase in advances by borrowers for taxes and insurance
Dividends paid
Purchase of treasury stock
Net cash provided by financing activities
Net (decrease) increase in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes
Noncash investing activities:
Mortgage loans securitized into mortgage-backed securities
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. 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, 2004 are not necessarily indicative of the results of operations that may be expected for all of 2004.
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, 2003.
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 Standard No. 123, “Accounting for Stock-based Compensation” as amended by Statement of Financial Accounting Standard No. 148, “Accounting for Stock-based Compensation-Transition and Disclosure”, permits the use of the intrinsic value method; however, the amended statement 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 monthsended
March 31,
Net income – as reported
Total stock-based compensation expense determined under the fair value based method, net of related tax effects
Net income – pro forma
Basic earnings per share:
As reported
Pro forma
Diluted earnings per share:
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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, 2004 and 2003 (in thousands):
Weighted average shares issued net of Treasury shares
Less: Unallocated ESOP shares
Unallocated incentive award shares
Add: Effect of dilutive securities:
Stock options
Incentive awards
Comprehensive Income
For the three month periods ended March 31, 2004 and 2003, total comprehensive income, representing net income plus or minus items recorded directly in equity, such as the change in unrealized gains or losses on securities available for sale amounted to $7,144,000 and $4,021,000, respectively.
Note 2. Loans Receivable, Net
Loans receivable, net at March 31, 2004 and December 31, 2003 consisted of the following (in thousands):
Real estate:
One- to four-family
Commercial real estate, multi-family and land
Construction
Consumer
Commercial
Total loans
Loans in process
Deferred origination costs, net
Unearned discount
Allowance for loan losses
Total loans, net
Less: mortgage loans held for sale
7
Note 3. Deposits
The major types of deposits at March 31, 2004 and December 31, 2003 were as follows (in thousands):
Type of Account
Non-interest bearing
NOW
Money market deposit
Savings
Time deposits
Critical Accounting Policies
Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, 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 the 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 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.
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The following table sets forth certain information relating to the Company for the three months ended March 31, 2004, and 2003. 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.
ANALYSIS OF NET INTEREST INCOME
FOR THE QUARTERS ENDED MARCH 31,
AVERAGE
BALANCE
AVERAGEYIELD/
COST
Assets
Interest-earnings assets:
Interest-earning deposits and short term investments
Investment securities (1)
FHLB stock
Mortgage-backed securities (1)
Loans receivable, net (2)
Total interest-earning assets
Non-interest earning assets
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Transaction deposits
Total
Total interest-bearing liabilities
Non-interest-bearing deposits
Non-interest bearing liabilities
Stockholders’ equity
Net interest rate spread (3)
Net interest margin (4)
Comparison of Financial Condition at March 31, 2004 and December 31, 2003
Total assets at March 31, 2004 were $1.768 billion, an increase of $50.3 million, compared to $1.717 billion at December 31, 2003.
Loans receivable, net decreased by $8.9 million to a balance of $1.380 billion at March 31, 2004, compared to a balance of $1.389 billion at December 31, 2003. Commercial and commercial real estate loans outstanding increased $6.9 million, while one- to four-family mortgage loans declined due to sale activity.
Deposit balances decreased $8.9 million to $1.135 billion at March 31, 2004 from $1.144 billion at December 31, 2003. Core deposits (all deposits except certificates), a key emphasis for the Company, increased by $2.2 million, as time deposits declined.
Total Federal Home Loan Bank borrowings, consisting of securities sold under agreements to repurchase and advances, increased $56.1 million to $440.5 million at March 31, 2004, compared to a balance of $384.4 million at December 31, 2003. These wholesale borrowings were used to fund balance sheet leverage as the funds were invested in mortgage-backed securities available for sale.
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Stockholders’ equity at March 31, 2004 increased to $137.6 million, compared to $134.7 million at December 31, 2003. The Company repurchased 249,522 shares of common stock during the three months ended March 31, 2004 at a total cost of $6.3 million. Under the 10% repurchase program authorized by the Board of Directors in October 2003, 1,174,872 shares remain to be purchased as of March 31, 2004. The cost of the share repurchases was offset by net income, the proceeds from stock option exercises and the related tax benefit and a decrease in accumulated other comprehensive loss.
Comparison of Operating Results for the Three Months Ended March 31, 2004 and March 31, 2003
General
Net income decreased to $4.5 million for the three months ended March 31, 2004, as compared to net income of $5.2 million for the three months ended March 31, 2003. Diluted earnings per share decreased to $.35 for the three months ended March 31, 2004, as compared to $.40 for the same prior year period. Earnings per share was favorably affected by the Company’s repurchase program, which reduced the average diluted shares outstanding.
Interest Income
Interest income for the three months ended March 31, 2004 was $22.0 million, compared to $25.4 million for the three months ended March 31, 2003. The decrease in interest income was due to a decline in the yield on interest-earning assets to 5.37% for the three months ended March 31, 2004, as compared to 6.16% for the same prior year period. The generally low interest rate environment over the past year and resultant high prepayment levels caused a significant decrease in the rate earned on mortgage-related assets. Additionally, the yield on the Company’s Federal Home Loan Bank of New York stock declined to 1.41% for the quarter ended March 31, 2004 as compared to 5.34% for the same prior year quarter.
Interest Expense
Interest expense for the three months ended March 31, 2004 was $8.3 million, compared to $10.0 million for the three months ended March 31, 2003. The decrease in interest expense was primarily the result of a decrease in the cost of interest-bearing liabilities to 2.23% for the three months ended March 31, 2004, as compared to 2.69% 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 66.5% of average deposits for the three months ended March 31, 2004, as compared to 61.0% for the same prior year period.
Provision for Loan Losses
For the three months ended March 31, 2004, the Company’s provision for loan losses was $50,000 as compared to $375,000 for the same prior year period. The decrease was due to a decrease in loans receivable from December 31, 2003 to March 31, 2004 and the recognition of a net recovery of $49,000 through the allowance for loan losses for the three months ended March 31, 2004. Although non-performing loans increased $1.3 million at March 31, 2004 from December 31, 2003, these loans were previously criticized at December 31, 2003 and included in the calculation of the allowance for loan losses
Other Income
Other income was $4.7 million for the three months ended March 31, 2004, compared to $3.7 million for the same prior year period. For the three months ended March 31, 2004, the Company recorded a gain of $2.3 million on the sale of loans and securities available for sale, as compared to a gain of $2.5 million in the same prior year period. For the three months ended March 31, 2003 the gain on sale of loans and securities available for sale includes a gain of $323,000 on the sale of equity securities.
Loan servicing income increased by $1.3 million for the three months ended March 31, 2004 as compared to the same prior year period due to the prior period recognition of an impairment to the loan servicing asset for $1.0 million.
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Operating Expenses
Operating expenses were $11.4 million for the three months ended March 31, 2004, as compared to $10.6 million in the same prior year period. The increase was principally due to the significant reduction in mortgage loan closings as refinance activity declined from year ago levels. Higher loan closings increase certain deferred loan expenses which is reflected as a reduction to compensation expense.
Provision for Income Taxes
Income tax expense was $2.5 million for the three months ended March 31, 2004, as compared to $2.8 million for the same prior year period. The effective tax rate increased to 35.5% for the three months ended March 31, 2004 as compared to 35.0% for the same prior year period. The Company’s higher average stock price in 2004 as compared to 2003 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 March 31, 2004, the Company had outstanding overnight borrowings from the FHLB of $23.5 million, a decrease from $24.4 million at December 31, 2003. The Company utilizes the overnight line from time to time to fund short-term liquidity needs. The Company had total FHLB borrowings of $440.5 million at March 31, 2004, an increase from $384.4 million at December 31, 2003. The increase in borrowings was 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, 2004, 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 three months ended March 31, 2003, the cash needs of the Company 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 provided was principally used for the origination of loans, the purchase of mortgage-backed securities, the funding of deposit outflows 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 March 31, 2004, outstanding commitments to originate loans totaled $129.7 million; outstanding unused lines of credit totaled $118.1 million; and outstanding commitments to sell loans totaled $36.8 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.
At March 31, 2004, the Bank exceeded all of its regulatory capital requirements with tangible capital of $116.5 million, or 6.6%, of total adjusted assets, which is above the required level of $26.5 million or 1.5%; core capital of $116.5 million or 6.6% of total adjusted assets, which is above the required level of $53.0 million, or 3.0%; and risk-based capital of $127.2 million, or 11.2% of risk-weighted assets, which is above the required level of $90.7 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.
Non-accrual loans:
One-to four-family
Total non-performing loans
REO, net
Total non-performing assets
Allowance for loan losses as a percent of total loans receivable
Allowance for loan losses as percent of total non-performing loans
Non-performing loans as a percent of total loans receivable
Non-performing assets as a percent of total assets
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 2003 Form 10-K.
12
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, 2004, 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, 2004 the Company’s one-year gap was positive 2.55% as compared to positive 2.66% at December 31, 2003.
At March 31, 2004
3 Months
or Less
More than
3 Monthsto 1 Year
1 Year to
3 Years
3 Years to
5 Years
Interest-earning assets: (1)
Interest-earning deposits and short-term investments
Investment securities
Loans receivable (2)
Money market deposit accounts
Savings accounts
NOW accounts
FHLB advances
Securities sold under agreements to repurchase
Interest sensitivity gap (3)
Cumulative interest sensitivity gap
Cumulative interest sensitivity gap as a percent of total interest-earning assets
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 March 31, 2004 and December 31, 2003. 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, 2003.
NPV
Ratio
Change in Interest Rates in BasisPoints (Rate Shock)
200
100
Static
(100)
13
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
14
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.
Information regarding the Company’s common stock repurchases for the three month period ended March 31, 2004 is as follows:
Period
January 1, 2004 through January 31, 2004
February 1, 2004 through February 29, 2004
March 1, 2004 through March 31, 2004
On October 22, 2003 the Company announced its intention to repurchase up to 1,341,818 shares, or 10%, of its outstanding common stock. In February 2004, 82,576 of the shares noted in the table were used to complete a repurchase plan announced in August 2002.
Not Applicable
The annual meeting of stockholders was held on April 22, 2004. The following directors were elected for terms of three years: Donald E. McLaughlin, James T. Snyder and John E. Walsh. The following proposals were voted on by the stockholders:
Proposal
1) Election of Directors
Donald E. McLaughlin
James T. Snyder
John E. Walsh
2) Ratification of the appointment of KPMG LLP as independent auditors of the Company for the fiscal year ending December 31, 2004
15
a) Exhibits:
b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and Exchange Commission on January 23, 2004 which included the press release, dated January 22, 2004, announcing the Company’s financial results for the quarter ended December 31, 2003.
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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.
Registrant
DATE: May 10, 2004
/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
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Exhibit Index
Description
18