OCEANFIRST FINANCIAL CORP (Form: 10-K, Received: 03/15/2004 12:29:16)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

¨	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 or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

975 Hooper Avenue, Toms River, New Jersey 08753

(Address of principal executive offices)

Registrant’s telephone number, including area code: (732) 240-4500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of class)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. x

Indicate by checkmark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act. Yes x No ¨ .

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, i.e., persons other than the directors and executive officers of the registrant, was $336,191,744, based upon the closing price of such common equity as of the last business day of the registrant’s most recently completed year-end.

The number of shares outstanding of the registrant’s Common Stock as of March 8, 2004 was 13,341,044.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the year ended December 31, 2003, are incorporated by reference into Part II of this Form 10-K.

Portions of the Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

INDEX


		PAGE
PART I

Item 1.	Business	1

Item 2.	Properties	30

Item 3.	Legal Proceedings	31

Item 4.	Submission of Matters to a Vote of Security Holders	31

PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	32

Item 6.	Selected Financial Data	32

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 8.	Financial Statements and Supplementary Data	32

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	32

Item 9A	Disclosure Controls and Procedures	32

PART III

Item 10	Directors and Executive Officers of the Registrant	33

Item 11	Executive Compensation	33

Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholders	33

Item 13	Certain Relationships and Related Transactions	34

PART IV

Item 14	Principal Accountant Fees and Services	34

Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K	34

Signatures		37

PART I

Item 1.

Business

General

OceanFirst Financial Corp. (the “Company”) was organized by the Board of Directors of OceanFirst Bank (the “Bank”) for the purpose of acquiring all of the capital stock of the Bank issued in connection with the Bank’s conversion from mutual to stock form, which was completed on July 2, 1996. 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. At December 31, 2003, the Company had consolidated total assets of $1.7 billion and total stockholders’ equity of $134.7 million. The Company was incorporated under Delaware law and is a savings and loan holding company subject to regulation by the Office of Thrift Supervision (“OTS”), the Federal Deposit Insurance Corporation (“FDIC”) and the Securities and Exchange Commission (“SEC”). Currently, the Company does not transact any material business other than through its subsidiary, the Bank.

The Bank was originally founded as a state-chartered building and loan association in 1902, and converted to a federal savings and loan association in 1945. The Bank became a federally chartered mutual savings bank in 1989. The Bank’s principal business has been and continues to be attracting retail deposits from the general public in the communities surrounding its branch offices and investing those deposits, together with funds generated from operations and borrowings, primarily in single-family, owner-occupied residential mortgage loans within its market area. To a significantly lesser extent, the Bank invests in other types of loans including commercial real estate, multi-family, construction, consumer and commercial loans. The Bank also invests in mortgage-backed securities, securities issued by the U.S. Government and agencies thereof, corporate securities and other investments permitted by applicable law and regulations. As a mortgage banking subsidiary of the Bank, Columbia originates, sells and services a full product line of residential mortgage loans. Columbia sells virtually all loan production into the secondary market, except that the Bank will often purchase adjustable-rate and short-term fixed-rate mortgage loans originated by Columbia for inclusion in its loan portfolio. The Bank also periodically sells part of its 30-year fixed rate mortgage loan production primarily due to interest rate risk considerations. Presently, servicing rights are retained in connection with most loan sales. The Bank’s revenues are derived principally from interest on its loans, and to a lesser extent, interest on its investment and mortgage-backed securities. The Bank also receives income from fees and service charges on loan and deposit products and from the sale of trust and asset management services and alternative investment products, e.g., mutual funds, annuities and life insurance. The Bank’s primary sources of funds are deposits, principal and interest payments on loans and mortgage-backed securities (“MBS”), proceeds from the sale of loans, Federal Home Loan Bank (“FHLB”) advances and other borrowings and to a lesser extent, investment maturities.

The Company’s Internet website address is www.oceanfirst.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

In addition to historical information, this Form 10-K 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 such 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.

Market Area and Competition

The Bank is a community-oriented financial institution, offering a wide variety of financial services to meet the needs of the communities it serves. The Bank conducts its business through an administrative and branch office located in Toms River, Ocean County, New Jersey, and sixteen additional branch offices, thirteen located in Ocean County, two located in Monmouth County and one located in Middlesex County, New Jersey. The Bank’s deposit gathering base is concentrated in the communities surrounding its offices. While its lending area extends throughout New Jersey, most of the Bank’s mortgage loans are secured by properties located in Ocean County and Southern Monmouth County. Columbia’s loan volume is primarily derived from the tri-state area around New York City. Columbia conducts business through an administrative and production office in Valhalla, New York and satellite production offices in Islandia, New York; Danbury, Connecticut; and Clifton, New Jersey.

The Bank is the oldest and largest community-based financial institution headquartered in Ocean County, New Jersey, which is located along the central New Jersey shore. Ocean County is among the fastest growing population areas in New Jersey and has a significant number of retired residents who have traditionally provided the Bank with a stable source of deposit funds. The economy in the Bank’s primary market area is based upon a mixture of service and retail trade. Other employment is provided by a variety of wholesale trade, manufacturing, Federal, state and local government, hospitals and utilities. The area is also home to commuters working in New Jersey suburban areas around New York and Philadelphia.

The Bank faces significant competition both in making loans and in attracting deposits. The State of New Jersey has a high density of financial institutions, many of which are branches of significantly larger institutions which have greater financial resources than the Bank, all of which are competitors of the Bank to varying degrees. The Bank’s competition for loans comes principally from commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies and insurance companies. Its most direct competition for deposits has historically come from commercial banks, savings banks, savings and loan associations and credit unions although the Bank also faces increasing competition for deposits from short-term money market funds, other corporate and government securities funds, internet only providers and from other financial service institutions such as brokerage firms and insurance companies.

Lending Activities

Loan Portfolio Composition . The Bank’s loan portfolio consists primarily of conventional first mortgage loans secured by one- to four-family residences. At December 31, 2003, the Bank had total loans outstanding of $1.433 billion, of which $1.082 billion or 75.5% of total loans were one- to four-family, residential mortgage loans. The remainder of the portfolio consisted of $178.0 million of commercial real estate, multi-family and land loans, or 12.4% of total loans; $11.3 million of real estate construction loans, or .8% of total loans; $81.5 million of consumer loans, primarily home equity loans and lines of credit, or 5.7% of total loans; and $80.3 million of commercial loans, or 5.6% of total loans. Included in total loans are $33.2 million in loans held for sale at December 31, 2003. At that same date, 46.8% of the Bank’s total loans had adjustable interest rates.

The types of loans that the Bank may originate are subject to federal and state law and regulations. Interest rates charged by the Bank on loans are affected by the demand for such loans and the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by, among other things, economic conditions, monetary policies of the federal government, including the Federal Reserve Board, and legislative tax policies.

The following table sets forth the composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.


	At December 31
	2003					2002					2001					2000					1999
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
Real estate:
One - to four-family	$	1,081,901		75.50	%	$	1,101,904		77.94	%	$	1,110,282		82.22	%	$	993,706		83.93	%	$	917,481		87.04	%
Commercial real estate, multi-family and land		177,969		12.42			146,149		10.34			112,318		8.32			89,663		7.57			57,142		5.42
Construction		11,274		.79			11,079		.78			9,082		.67			7,973		.67			7,791		.74
Consumer ⁽¹⁾		81,455		5.68			80,218		5.67			67,039		4.96			62,923		5.32			56,040		5.32
Commercial		80,328		5.61			74,545		5.27			51,756		3.83			29,687		2.51			15,569		1.48

Total loans		1,432,927		100.00	%		1,413,895		100.00	%		1,350,477		100.00	%		1,183,952		100.00	%		1,054,023		100.00	%

Loans in process		(3,829	)				(3,531	)				(2,458	)				(2,927	)				(2,790	)
Deferred origination costs (fees), net		4,136					2,239					1,048					561					(78	)
Unamoritized (discount) premium, net		(5	)				(5	)				1					19					43
Allowance for loan losses		(10,802	)				(10,074	)				(10,351	)				(9,138	)				(8,223	)

Total loans, net		1,422,427					1,402,524					1,338,717					1,172,467					1,042,975
Less:
Mortgage loans held for sale		33,207					66,626					37,828					35,588					—

Loans receivable, net	$	1,389,220				$	1,335,898				$	1,300,889				$	1,136,879				$	1,042,975

Total loans:
Adjustable rate	$	670,398		46.79	%	$	622,348		44.02	%	$	591,724		43.82	%	$	485,660		41.02	%	$	470,238		44.61	%
Fixed rate		762,529		53.21			791,547		55.98			758,753		56.18			698,292		58.98			583,785		55.39

	$	1,432,927		100.00	%	$	1,413,895		100.00	%	$	1,350,477		100.00	%	$	1,183,952		100.00	%	$	1,054,023		100.00	%

⁽¹⁾	Consists primarily of home equity loans and lines of credit, and to a lesser extent, loans on savings accounts, automobile and student loans.

Loan Maturity . The following table shows the contractual maturity of the Bank’s total loans at December 31, 2003. There was $33.2 million in loans, held for sale at December 31, 2003. The table does not include principal repayments. Principal repayments, including prepayments on total loans was $519.2 million, $397.0 million and $229.6 million for the years ended December 31, 2003, 2002 and 2001, respectively.


	At December 31, 2003
	One-to Four- Family		Commercial real estate, multi-family and land		Construction		Consumer		Commercial		Total Loans Receivable
	(In thousands)
One year or less	$	39,418	$	18,950	$	11,274	$	6,933	$	45,959	$	122,534

After one year:
More than one year to three years		85,582		41,469		—		12,561		25,362		164,974
More than three years to five years		94,903		73,632		—		10,554		934		180,023
More than five years to ten years		247,513		34,770		—		21,838		7,996		312,117
More than ten years to twenty years		325,465		6,270		—		29,569		54		361,358
More than twenty years		289,020		2,878		—		—		23		291,921

Total due after December 31, 2004		1,042,483		159,019		—		74,522		34,369		1,310,393

Total amount due	$	1,081,901	$	177,969	$	11,274	$	81,455	$	80,328	$	1,432,927

Loans in process												(3,829	)
Deferred origination costs, net												4,136
Unamortized discount, net												(5	)
Allowance for loan losses												(10,802	)

Total loans, net												1,422,427
Less: Mortgage loans held for sale												33,207

Loans receivable, net											$	1,389,220

The following table sets forth at December 31, 2003, the dollar amount of total loans receivable contractually due after December 31, 2004, and whether such loans have fixed interest rates or adjustable interest rates.


	Due After December 31, 2004
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans:
One- to four-family	$	599,798	$	442,685	$	1,042,483
Commercial real estate, multi-family and land		90,948		68,071		159,019
Consumer		22,818		51,704		74,522
Commercial		1,230		33,139		34,369

Total loans receivable	$	714,794	$	595,599	$	1,310,393

Origination, Sale, Servicing and Purchase of Loans . The Bank’s residential mortgage lending activities are conducted primarily by commissioned loan representatives in the exclusive employment of the Bank and through the Bank’s branch offices. The Bank originates both adjustable-rate and fixed-rate loans. The ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate mortgage (“ARM”) loans, which is affected by the current and expected future level of interest rates. Columbia, as a mortgage banker, sells virtually all loan production except that the Bank will often purchase adjustable-rate and short-term fixed-rate mortgage loans originated by Columbia for inclusion in its loan portfolio. Columbia retains servicing rights for most of the loans sold. The Bank also periodically sells part of the 30-year, fixed-rate mortgage loans that it originates. See “Loan Servicing.” At December 31, 2003 there were $33.2 million in loans categorized as held for sale.

The following table sets forth the Bank’s loan originations, purchases, sales, principal repayments and loan activity for the periods indicated.


	For the Year December 31,
	2003		2002		2001
	(In thousands)
Total loans:
Beginning balance	$	1,413,895	$	1,350,477	$	1,183,952

Loans originated:
One- to four-family		1,057,337		730,794		682,171
Commercial real estate, multi-family and land		34,650		59,634		36,695
Construction		12,667		13,715		13,361
Consumer		23,697		56,605		37,020
Commercial		30,854		55,235		49,291

Total loans originated		1,159,205		915,983		818,538

Total		2,573,100		2,266,460		2,002,490
Less:
Principal repayments		519,178		397,038		229,637
Sales of loans		620,731		454,910		421,922
Transfer to REO		264		617		454

Total loans	$	1,432,927	$	1,413,895	$	1,350,477

One- to Four-Family Mortgage Lending . The Bank offers both fixed-rate and adjustable-rate mortgage loans secured by one- to four-family residences with maturities up to 30 years. Substantially all of such loans are secured by property located in the Bank’s primary market area. Loan originations are typically generated by commissioned loan representatives and their contacts with the local real estate industry, members of the local communities and the Bank’s existing or past customers.

At December 31, 2003, the Bank’s total loans outstanding were $1.433 billion, of which $1.082 billion, or 75.5%, were one- to four-family residential mortgage loans, primarily single-family and owner-occupied. To a lesser extent and included in this activity are mortgage loans secured by seasonal second homes. The average size of the Bank’s one- to four-family mortgage loan was approximately $134,000 at December 31, 2003. The Bank currently offers a number of ARM loan programs with interest rates which adjust every one-, three-, five- or ten-years. The Bank’s ARM loans generally provide for periodic (not less than 2%) and overall (not more than 6%) caps on the increase or decrease in the interest rate at any adjustment date and over the life of the loan. The interest rate on these loans is indexed to the applicable one-, three-, five- or ten-year U.S. Treasury constant maturity yield, with a repricing margin which ranges generally from 2.75% to 3.25% above the index. The Bank also offers three-, five-, and seven -year ARM loans which operate as fixed-rate loans for three, five, or seven years and then convert to one-year ARM loans for the remainder of the term. The ARM loans are then indexed to a margin of generally 2.75% to 3.25% above the one-year U.S. Treasury constant maturity yield.

Generally, ARM loans pose credit risks different than risks inherent in fixed-rate loans, primarily because as interest rates rise, the payments of the borrower rise, thereby increasing the potential for delinquency and default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates. In order to minimize risks, borrowers of one-year ARM loans with a loan-to-value ratio of 75% or less are qualified at the fully-indexed rate (the applicable U.S. Treasury index plus the margin, rounded to the nearest one-eighth of one percent), and borrowers of one-year ARM loans with a loan-to-value ratio over 75% are qualified at the higher of the fully indexed rate or the initial rate plus the 2% annual interest rate cap. The Bank does not originate ARM loans which provide for negative amortization. The Bank does offer ARM loans which require interest only payments for a fixed term and then convert to a fully amortizing loan until maturity.

The Bank’s fixed-rate mortgage loans currently are made for terms from 10 to 30 years. At December 31, 2003, the Bank had commitments for the origination of fixed-rate one-to-four family mortgage loans totaling $53.8 million. The normal terms for such commitments provide for a maximum of 60 days rate lock upon receipt of a 1.0% refundable deposit charged on the mortgage amount. The Bank may periodically sell part of the 30-year, fixed-rate residential mortgage loans that it originates. The Bank retains the servicing on all loans sold. The Bank generally retains for its portfolio shorter term, fixed-rate loans with maturities of 15 years or less, and certain longer term fixed-rate loans, generally consisting of loans to facilitate the sale of Real Estate Owned (“REO”), loans to officers, directors or employees of the Bank and “jumbo”, or non-conforming loans (i.e., loans which are not eligible for purchase by FNMA or FHLMC because of loan size or credit underwriting criteria). The Bank may retain all or most of its longer term fixed rate loans after considering volume and yield and after evaluating interest rate risk and capital management considerations. The retention of 30-year fixed-rate mortgage loans may increase the level of interest rate risk carried by the Bank, as the rates on these loans will not adjust during periods of rising interest rates and the loans can be subject to substantial increases in prepayments during periods of falling interest rates.

The Bank’s policy is to originate one- to four-family residential mortgage loans in amounts up to 80% of the lower of the appraised value or the selling price of the property securing the loan and up to 97% of the appraised value or selling price if private mortgage insurance is obtained (up to 100% for certain

Community Reinvestment Act related programs covered by private mortgage insurance). Generally, independent appraisals are obtained for loans secured by real property, however, as allowed by FIRREA, under certain defined circumstances, a real estate collateral analysis is obtained instead. The average loan to value of the Bank’s one-to-four family mortgage loans was 51% at December 31, 2003. Title insurance is required for all purchase money mortgage loans and for all refinance loans of $250,000 or more. Mortgage loans originated by the Bank include due-on-sale clauses which provide the Bank with the contractual right to declare the loan immediately due and payable in the event the borrower transfers ownership of the property without the Bank’s consent. Due-on-sale clauses are an important means of adjusting the rates on the Bank’s fixed-rate mortgage loan portfolio and the Bank has generally exercised its rights under these clauses.

Commercial Real Estate, Multi-Family and Land Lending . The Bank originates commercial real estate loans that are secured by properties, or properties under construction, generally used for business purposes such as small office buildings or retail facilities, the majority of which are located in the Bank’s primary market area. The Bank’s underwriting procedures provide that commercial real estate loans may be made in amounts up to 80% of the appraised value of the property. The Bank currently originates commercial real estate loans with terms of up to twenty-five years with fixed or adjustable rates which are indexed to a margin above the one-, three-, or five-year U.S. Treasury constant maturity yield. In reaching its decision on whether to make a commercial real estate loan, the Bank considers the net operating income of the property and the borrower’s expertise, credit history, profitability and the term and quantity of leases. The Bank has generally required that the properties securing commercial real estate loans have debt service coverage ratios of at least 130%. The Bank typically requires the personal guarantee of the principal borrowers for all commercial real estate loans. The Bank’s commercial real estate loan portfolio at December 31, 2003 was $170.2 million, or 11.9% of total loans. The largest commercial real estate loan in the Bank’s portfolio at December 31, 2002 was a performing loan for which the Bank had an outstanding carrying balance of $7.2 million, net of a $5.9 million participation sold, secured by a first lien position on all corporate assets including a first mortgage on commercial real estate primarily used as a health, fitness and sports facility and as a private school. The average size of the Bank’s commercial real estate loans at December 31, 2003 was approximately $560,000.

The Bank also originates multi-family mortgage loans and land loans on a limited and highly selective basis. The Bank’s multi-family loans and land loans at December 31, 2003, totaled $4.6 million and $3.2 million, respectively.

Loans secured by commercial real estate and multi-family residential properties are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting policies, which require such loans to be qualified at origination on the basis of the property’s income and debt coverage ratio.

Construction Lending . At December 31, 2003, construction loans totaled $11.3 million, or .8%, of the Bank’s total loans outstanding. The Bank originates residential construction loans primarily on a construction/permanent basis with such loans converting to an amortizing loan following the completion of the construction phase. Most of the Bank’s construction loans are made to individuals building their primary residence, while, to a lesser extent, loans are made to finance a second home or to developers known to the Bank in order to build single-family houses for sale, which loans become due and payable over terms not exceeding 18 months. The current policy of the Bank is to charge interest rates on its construction loans which float at margins which are generally .5% to 2.0% above the prime rate (as

published in the Wall Street Journal ). The Bank’s construction loans increase the interest rate sensitivity of its earning assets. At December 31, 2003, the Bank had 37 residential construction loans, with the largest loan commitment being approximately $1,200,000. The Bank may originate construction loans to individuals and contractors on approved building lots in amounts up to 75% of the appraised value of the land and the building. Once construction is complete, the loans are converted to permanent amortizing loans with maturities similar to the Bank’s other one- to four-family mortgage products. The Bank requires an appraisal of the property, credit reports, and financial statements on all principals and guarantors, among other items, for all construction loans.

Construction lending, by its nature, entails additional risks compared to one- to four-family mortgage lending, attributable primarily to the fact that funds are advanced based upon a security interest in a project which is not yet complete. As a result, construction lending often involves the disbursement of substantial funds with repayment dependent on the success of the ultimate project and the ability of the borrower or guarantor to repay the loan. Because of these factors, the analysis of prospective construction loan projects requires an expertise that is different in significant respects from that which is required for residential mortgage lending. The Bank seeks to address these risks through its underwriting procedures.

Consumer Loans . The Bank also offers consumer loans. At December 31, 2003, the Bank’s consumer loans totaled $81.5 million, or 5.7% of the Bank’s total loan portfolio. Of that amount, home equity loans comprised $25.3 million, or 31.1%; home equity lines of credit comprised $55.4 million, or 68.0%; loans on savings accounts totaled $436,000, or .5%; and automobile, student and overdraft line of credit loans totaled $308,000 or .4%.

The Bank originates home equity loans secured by one- to four-family residences. These loans are originated as either adjustable-rate or fixed-rate loans with terms ranging from 10 to 20 years. Home equity loans are typically made on owner-occupied, one- to four-family residences and generally to Bank customers. Generally, these loans are subject to a 80% loan-to-value limitation, including any other outstanding mortgages or liens, although the Bank will also originate loans with loan-to-value limitations of up to 90%, subject to more restrictive underwriting requirements.

The Bank also offers a variable rate home equity line of credit which extends a credit line based on the applicant’s income and equity in the home. Generally, the credit line, when combined with the balance of the first mortgage lien, may not exceed 80% of the appraised value of the property at the time of the loan commitment, although the Bank will also originate loans with loan-to-value limitations of up to 90%, subject to more restrictive underwriting requirements. Home equity lines of credit are secured by a mortgage on the underlying real estate. The Bank presently charges no origination fees for these loans, but may in the future charge origination fees for its home equity lines of credit. A borrower is required to make monthly payments of principal and interest, at a minimum of $50, based upon a 10, 15 or 20 year amortization period. Generally, the adjustable rate of interest charged is the prime rate of interest (as published in the Wall Street Journal ) plus up to 1.25%. The loans have an 18% lifetime cap on interest rate adjustments.

Commercial Lending . At December 31, 2003, commercial loans totaled $80.3 million, or 5.6% of the Bank’s total loans outstanding. The Commercial Lending group’s primary function is to service the business communities’ banking and financing needs in the Bank’s primary market area. The Commercial Lending group originates both commercial real estate loans and commercial loans (including loans for working capital; fixed asset purchases; and acquisition, receivable and inventory financing). Credit facilities such as lines of credit and term loans will be used to facilitate these requests. In all cases, the

Bank will review and analyze financial history and capacity, collateral value, strength and character of the principals, and general payment history of the borrower and principals in coming to a credit decision.

A well-defined credit policy has been approved by the Bank’s Board of Directors. This policy discourages high risk credits, while focusing on quality underwriting, sound financial strength and close monitoring. Commercial business lending, both secured and unsecured, is generally considered to involve a higher degree of risk than secured residential real estate lending. Risk of loss on a commercial business loan is dependent largely on the borrower’s ability to remain financially able to repay the loan out of ongoing operations. If the Bank’s estimate of the borrower’s financial ability is inaccurate, the Bank may be confronted with a loss of principal on the loan. The Bank’s largest commercial loan at December 31, 2003 had an outstanding balance of $2.9 million, net of a $4.3 million participation sold, and was secured by a first lien on all corporate assets. The average size of the Bank’s commercial loans at December 31, 2003 was approximately $130,000.

Loan Approval Procedures and Authority . The Board of Directors establishes the loan approval policies of the Bank. The Board of Directors has authorized the approval of loans secured by real estate up to $3.0 million and unsecured loans up to $1.0 million by various employees of the Bank, on a scale which requires approval by personnel with progressively higher levels of responsibility as the loan amount increases. A minimum of two employees’ signatures are required to approve residential loans over conforming loan limits. Loans secured by real estate in amounts over $3.0 million for new borrowers and $5.0 million for existing borrowers and loans not secured by real estate over $1.0 million require approval by the Loan Committee of the Board of Directors. Loans secured by real estate in excess of $5.0 million for new borrowers and $7.0 million for existing borrowers require approval by the Board of Directors. Pursuant to OTS regulations, loans to one borrower generally cannot exceed 15% of the Bank’s unimpaired capital, which at December 31, 2003 amounted to $16.9 million. At December 31, 2003, the Bank’s maximum loan exposure to a single borrower was $8.4 million, which is consistent with the Bank’s conservative lending approach.

Loan Servicing . Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, making inspections as required of mortgaged premises, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. The Bank also services mortgage loans for others. All of the loans currently being serviced for others are loans which have been sold by the Bank. At December 31, 2003, the Bank was servicing $723.3 million of loans for others. For the years ended December 31, 2003, 2002 and 2001, loan servicing loss, net of related amortization and write down of the loan servicing asset, totaled ($2,654,000), ($2,203,000) and ($838,000), respectively. The losses were due to the recognition of impairments to the loan servicing asset for $2,173,000, $2,117,000 and $600,000 for the years ended December 31, 2003, 2002 and 2001, respectively. 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 repayment speeds to increase resulting in a lower valuation for mortgage servicing rights and ultimately lower future servicing fee income.

Delinquencies and Classified Assets . The Board of Directors performs a monthly review of all delinquent loan totals which includes loans sixty days or more past due, and the detail of each loan thirty days or more past due that was originated within the past year. In addition, the Chief Risk Officer prepares a quarterly list of all classified loans and a narrative report of classified commercial, commercial real estate, multi-family, land and construction loans. The procedures taken by the Bank with respect to delinquencies vary depending on the nature of the loan and period of delinquency. When a borrower

fails to make a required payment on a loan, the Bank takes a number of steps to have the borrower cure the delinquency and restore the loan to current status. The Bank generally sends the borrower a written notice of non-payment after the loan is first past due. In the event payment is not then received, additional letters and phone calls generally are made. If the loan is still not brought current and it becomes necessary for the Bank to take legal action, which typically occurs after a loan is delinquent at least 90 days or more, the Bank will commence foreclosure proceedings against any real property that secures the loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or an acceptable workout accommodation is not agreed upon before the foreclosure sale, the real property securing the loan generally is sold at foreclosure.

The Bank’s Internal Asset Classification Committee, which is chaired by the Senior Vice President/Chief Risk Officer who reports directly to the Audit Committee of the Board of Directors, reviews and classifies the Bank’s assets quarterly and reports the results of its review to the Board of Directors. The Bank classifies assets in accordance with certain regulatory guidelines established by the OTS which are applicable to all savings associations. At December 31, 2003, the Bank had $8.5 million of assets, including all REO, classified as Substandard, $4,000 of assets classified as Doubtful and no assets classified as Loss. Loans and other assets may also be placed on a watch list as “Special Mention” assets. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “Special Mention.” Special Mention assets totaled $3.5 million at December 31, 2003. These loans are classified as Special Mention due to past delinquencies or other identifiable weaknesses. At December 31, 2003, the largest loan relationship classified as Substandard was a commercial mortgage to a construction company with an outstanding balance of $1.9 million which is current as to payments, but which is classified due to previously weak financial performance. The loan is secured by business assets and two commercial real estate properties. The largest loan relationship classified as Special Mention was represented by a commercial mortgage to a marina with a total balance of $1.9 million which was also current as to payments, but which is classified due to weakened operating results. The loan is well-secured by real estate and rent assignments.

Non-Accrual Loans and REO

The following table sets forth information regarding non-accrual loans and REO. The Bank had no troubled-debt restructured loans and one REO property at December 31, 2003. 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, 2003, 2002, 2001, 2000, and 1999, respectively, the amount of interest income that would have been recognized on nonaccrual loans if such loans had continued to perform in accordance with their contractual terms was $96,000, $87,000, $379,000, $132,000, and $52,000.


	December 31,
	2003			2002			2001			2000			1999
	(Dollars in Thousands)
Non-accrual loans:
Real estate:
One- to four-family	$	1,712		$	2,222		$	3,661		$	2,594		$	2,401
Commercial real estate, multi-family and land		242			74			—			—			362
Consumer		90			95			151			147			222
Commercial		118			297			2,368			182			—

Total		2,162			2,688			6,180			2,923			2,985
REO, net ⁽¹⁾		252			141			133			157			292

Total non-performing assets	$	2,414		$	2,829		$	6,313		$	3,080		$	3,277

Allowance for loan losses as a percent of total loans receivable ⁽²⁾		.75	%		.71	%		.77	%		.77	%		.78	%
Allowance for loan losses as a percent of total non-performing loans ⁽³⁾		499.63			374.78			167.49			312.62			275.48
Non-performing loans as a percent of total loans receivable ⁽²⁾⁽³⁾		.15			.19			.46			.25			.28
Non-performing assets as a percent of total assets ⁽³⁾		.14			.16			.36			.19			.21

⁽¹⁾	REO balances are shown net of related loss allowances.

⁽²⁾	Total loans includes loans receivable and mortgage loans held for sale, less undisbursed loan funds, deferred loan fees and unamortized premiums and discounts.

⁽³⁾	Non-performing assets consist of non-performing loans and REO. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure.

Allowance for Loan Losses . 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 an amount management considers sufficient to provide for estimated losses based on evaluating known and inherent risks in the loan portfolio resulting from 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 and anticipated 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, future adjustments to the allowance may be necessary due to economic, operating, regulatory and other conditions beyond the Company’s control.

The Bank’s allowance consists of three elements – a specific allowance, a general allowance and an unallocated allowance. A specific allowance is determined for all assets classified as substandard, doubtful or loss where the value of the underlying collateral can reasonably be evaluated; generally those loans secured by real estate. The Bank obtains an updated appraisal whenever a loan secured by real estate becomes 90 days delinquent. The specific allowance represents the difference between the Bank’s recorded investment in the loan and the fair value of the collateral, less estimated disposal costs. A general allowance is determined for all other classified and non-classified loans. In determining the level of the general allowance, the Bank segments the loan portfolio into various risk tranches based on classification (special mention, substandard and doubtful); type of loan (mortgage, consumer and commercial); and, certain underwriting characteristics. An estimated loss factor is then applied to each risk tranche. The loss factors are determined based upon historical loan loss experience, current economic conditions, underwriting standards, internal loan review results and other factors. Finally, an unallocated allowance is maintained for economic uncertainty, unidentified deterioration in classified assets and other uncertainties inherent in the evaluation process.

As of December 31, 2003 and 2002, the Bank’s allowance for loan losses was .75% and .71%, respectively, of total loans. The Bank had non-accrual loans of $2.2 million and $2.7 million at December 31, 2003 and 2002, respectively. The Bank will continue to monitor and modify its allowances for loan losses as conditions dictate.

The following table sets forth activity in the Bank’s allowance for estimated loan losses for the periods set forth in the table.


	At or for the Year Ended
	2003			2002			2001			2000			1999
	(Dollars in thousands)
Balance at beginning of year	$	10,074		$	10,351		$	9,138		$	8,223		$	7,460

Charge-offs:
Real Estate:
One- to four-family		78			149			98			77			114
Commercial real estate, multi-family and land		—			—			—			—			58
Consumer		—			2			—			10			37
Commercial		180			2,368			—			5			32

Total		258			2,519			98			92			241
Recoveries		298			592			61			22			104

Net charge-offs		(40	)		1,927			37			70			137

Provision for loan losses		688			1,650			1,250			985			900

Balance at end of year	$	10,802		$	10,074		$	10,351		$	9,138		$	8,223

Ratio of net charge-offs during the year to average net loans outstanding during the year		.00	%		.14	%		.00	%		.01	%		.01	%

The following table sets forth the Bank’s percent of allowance for loan losses to total allowance and the percent of loans to total loans in each of the categories listed at the dates indicated (Dollars in thousands).


	At December 31,
	2003							2002						2001						2000								1999
	Amount		Percent of Allowance to Total Allowance		Percent of Loans in Each Category to Total Loans			Amount		Percent of Allowance to Total Allowance		Percent of Loans in Each Category to Total Loans		Amount		Percent of Allowance to Total Allowance		Percent of Loans in Each Category to Total Loans		Amount		Percent of Allowance to Total Allowance		Percent of Loans in Each Category to Total Loans		Amount		Percent of Allowance to Total Allowance		Percent of Loans in Each Category to Total Loans
One- to four-family	$	1,978	18.31	%		75.50	%	$	2,417	23.99	%	77.94	%	$	2,547	24.60	%	82.22	%	$	2,831	30.98	%	83.93	%	$	2,577	31.34	%	87.04	%
Commercial real estate, multi- family and land		4,347	40.24			12.42			3,341	33.17		10.34			1,867	18.03		8.32			2,018	22.08		7.57			1,352	16.44		5.42
Construction		81	.75			.79			83	.82		.78			68	.66		.67			38	.42		.67			38	.46		.74
Consumer		781	7.23			5.68			754	7.48		5.67			625	6.04		4.96			585	6.40		5.32			543	6.60		5.32
Commercial		1,415	13.10			5.61			1,423	14.13		5.27			2,461	23.78		3.83			1,282	14.03		2.51			622	7.57		1.48
Unallocated		2,200	20.37			—			2,056	20.41		—			2,783	26.89		—			2,384	26.09		—			3,091	37.59		—

Total	$	10,802	100.00	%	$	100.00	%	$	10,074	100.00	%	100.00	%	$	10,351	100.00	%	100.00	%	$	9,138	100.00	%	100.00	%	$	8,223	100.00	%	100.00	%

Investment Activities

Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certificates of deposit of insured banks and savings institutions, bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in commercial paper, investment-grade corporate debt securities and mutual funds whose assets conform to the investments that a Federally chartered savings institution is otherwise authorized to make directly.

The investment policy of the Bank as established by the Board of Directors attempts to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complement the Bank’s lending activities. Specifically, the Bank’s policies generally limit investments to government and Federal agency-backed securities and other non-government guaranteed securities, including corporate debt obligations, that are investment grade. The Bank’s policies provide that all investment purchases must be approved by two officers (either the Vice President/Treasurer, Executive Vice President/Chief Financial Officer or the President/Chief Executive Officer) and be ratified by the Board of Directors.

Investment and mortgage-backed securities identified as held to maturity are carried at cost, adjusted for amortization of premium and accretion of discount, which are recognized as adjustments to interest income. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Bank has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified 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. At December 31, 2003, all of the Bank’s investment and mortgage-backed securities were classified as available for sale.

Mortgage-backed Securities . Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which, in general, are passed from the mortgage originators, through intermediaries that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such intermediaries may be private issuers, or agencies including FHLMC, FNMA and GNMA that guarantee the payment of principal and interest to investors. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a certain range and with varying maturities. The underlying pool of mortgages can be composed of either fixed-rate or ARM loans.

The actual maturity of a mortgage-backed security varies, depending on when the mortgagors repay or prepay the underlying mortgages. Prepayments of the underlying mortgages may shorten the life of the security, thereby affecting its yield to maturity and the related market value of the mortgage-backed security. The prepayments of the underlying mortgages depend on many factors, including the type of mortgages, the coupon rates, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages, the general levels of market interest rates, and general economic conditions. GNMA mortgage-backed securities that are backed by assumable Federal Housing Authority (“FHA”) or Department of Veterans Affairs (“VA”) loans generally have a longer life than conventional non-assumable loans underlying FHLMC and FNMA mortgage-backed securities. During periods of

falling mortgage interest rates, prepayments generally increase, as opposed to periods of increasing interest rates when prepayments generally decrease. If the interest rate of underlying mortgages significantly exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages. Prepayment experience is more difficult to estimate for adjustable-rate mortgage-backed securities.

The Bank has significant investments in mortgage-backed securities and has utilized such investments to complement its lending activities. The Bank invests in a large variety of mortgage-backed securities, including ARM, balloon and fixed-rate mortgage-backed securities, the majority of which are directly insured or guaranteed by FHLMC, FNMA and GNMA. At December 31, 2003, mortgage-backed securities totaled $86.9 million, or 5.1% of total assets, including $1.2 million in collateralized mortgage obligations (“CMOs”), all of which were classified as available for sale. CMOs are securities created by segregating or portioning cash flows from mortgage pass-through securities or from pools of mortgage loans. CMOs provide a broad range of mortgage investment vehicles by tailoring cash flows from mortgages to meet the varied risk and return preferences of investors. These securities enable the issuer to “carve up” the cash flows from the underlying securities and thereby create multiple classes of securities with different maturity and risk characteristics. The Bank invests in U.S. Government agency and government sponsored enterprise CMOs and privately-issued CMOs.

CMOs issued by FHLMC, FNMA, GNMA and private interests amounted to $0, $0, $1,173,000, and $22,000, respectively, at December 31, 2003 and $27,951,000, $16,021,000, $20,275,000 and $13,559,000, respectively, at December 31, 2002. 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 internationally-recognized securities rating services. 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.

The following table sets forth the Bank’s mortgage-backed securities activities for the periods indicated.


	For the Year Ended December 31,
	2003			2002			2001
	(In thousands)
Beginning balance	$	138,657		$	233,302		$	268,042
Mortgage-backed securities purchased		70,581			65,845			49,006
Less: Principal repayments		(118,857	)		(156,723	)		(89,916	)
Amortization of premium		(1,387	)		(1,534	)		(759	)
Change in net unrealized gain (loss) on mortgage-backed securities available for sale		(2,056	)		(2,233	)		6,929

Ending balance	$	86,938		$	138,657		$	233,302

The following table sets forth certain information regarding the amortized cost and market value of the Bank’s mortgage-backed securities at the dates indicated.


	At December 31,
	2003				2002				2001
	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value
	(In thousands)
Mortgage-backed securities:
FHLMC	$	6,588	$	6,673	$	14,615	$	14,856	$	29,650	$	30,383
FNMA		72,248		71,868		31,293		31,653		22,646		23,088
GNMA		6,714		7,202		13,432		14,342		23,229		23,649
CMOs		1,193		1,195		77,066		77,806		153,293		156,182

Total mortgage-backed securities	$	86,743	$	86,938	$	136,406	$	138,657	$	228,818	$	233,302

Investment Securities . The following table sets forth certain information regarding the amortized cost and market values of the Bank’s investment securities at the dates indicated.


	At December 31,
	2003				2002				2001
	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value
	(In thousands)
Investment securities:
U.S. Government and agency obligations	$	1,210	$	1,213	$	1,200	$	1,216	$	1,200	$	1,198
State and municipal obligations		5,565		5,626		5,562		5,604		5,561		5,313
Corporate debt securities		75,364		67,944		88,439		79,407		75,199		68,253
Equity investments		4,263		5,675		4,449		5,751		3,849		5,253

Total investment securities	$	86,402	$	80,458	$	99,650	$	91,978	$	85,809	$	80,017

The table below sets forth certain information regarding the amortized cost, weighted average yields and contractual maturities, excluding scheduled principal amortization, of the Bank’s investment and mortgage-backed securities, excluding equity securities, as of December 31, 2003. 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, 2003
													Total
	One Year or Less Amortized Cost			More than One Year to Five Years Amortized Cost			More than Five Years to Ten Years Amortized Cost			More than Ten Years Amortized Cost			Amortized Cost			Market Value
	(Dollars in thousands)
Investment securities:
U.S. Government and agency obligations	$	—		$	1,210		$	—		$	—		$	1,210		$	1,213
State and municipal obligations ⁽¹⁾		—			—			—			5,565			5,565			5,626
Corporate debt securities ⁽²⁾		—			—			—			75,364			75,364			67,944

Total investment securities	$	—		$	1,210		$	—		$	80,929		$	82,139		$	74,783

Weighted average yield		—	%		1.90	%		—	%		2.31	%		2.30	%

Mortgage-backed securities:
FHLMC	$	257		$	351		$	52		$	5,928		$	6,588		$	6,673
FNMA		373			1,011			19			70,845			72,248			71,868
GNMA		29			27			99			6,559			6,714			7,202
CMOs		—			—			23			1,170			1,193			1,195

Total mortgage-backed securities	$	659		$	1,389		$	193		$	84,502		$	86,743		$	86,938

Weighted average yield		6.82	%		6.95	%		11.61	%		3.82	%		3.91	%

⁽¹⁾	Tax equivalent yield.

⁽²⁾	All of the Bank’s corporate debt securities with maturities over one year carry interest rates which adjust to a spread over Libor on a quarterly basis.

Sources of Funds

General . Deposits, loan and MBS repayments and prepayments, proceeds from sales of loans, investment maturities, cash flows generated from operations and FHLB advances and other borrowings are the primary sources of the Bank’s funds for use in lending, investing and for other general purposes.

Deposits . The Bank offers a variety of deposit accounts with a range of interest rates and terms. The Bank’s deposits consist of money market accounts, savings accounts, NOW accounts, non-interest bearing accounts and time deposits. For the year ended December 31, 2003, time deposits constituted 35.9% of total average deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition. The Bank’s deposits are obtained predominantly from the areas in which its branch offices are located. The Bank relies on its community banking focus stressing customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Bank’s ability to attract and retain deposits. The Bank does not use brokers to obtain deposits.

The following table presents the deposit activity of the Bank for the periods indicated:


	For the Year Ended December 31,
	2003			2002		2001
	(In thousands)
Net (withdrawals) deposits	$	(57,107	)	$	49,521	$	(34,646	)
Interest credited on deposit accounts		16,476			26,272		39,501

Total (decrease) increase in deposit accounts	$	(40,631	)	$	75,793	$	4,855

At December 31, 2003, the Bank had $46.2 million in time deposits in amounts of $100,000 or more maturing as follows:


Maturity Period	Amount		Weighted Average Rate
	(Dollars in thousands)
Three months or less	$	9,818	1.63	%
Over three through six months		9,424	2.99
Over six through 12 months		9,614	3.10
Over 12 months		17,333	3.96

Total	$	46,189	3.09

The following table sets forth the distribution of the Bank’s average deposit accounts for the periods indicated and the weighted average interest rates at the end of each period, on each category of deposits presented.


	At or For the Years Ended December 31,
	2003						2002						2001
	Average Balance		Percent of Total Average Deposits		Weighted Average Yield		Average Balance		Percent of Total Average Deposits		Weighted Average Yield		Average Balance		Percent of Total Average Deposits		Weighted Average Yield
	(Dollars in thousands)
Money market deposit accounts	$	132,491	11.30	%	.90	%	$	101,817	8.81	%	1.38	%	$	73,966	6.61	%	1.86	%
Savings accounts		253,937	21.66		.49			218,279	18.88		1.00			178,335	15.93		1.54
NOW accounts		262,542	22.39		.47			254,149	21.99		.99			198,186	17.70		1.60
Non-interest-bearing accounts		102,294	8.73		—			78,294	6.77		—			64,330	5.74		—

Total		751,264	64.08		.49			652,539	56.45		.94			514,817	45.98		1.41

Time deposits:
Six months or less		64,544	5.50		1.05			73,935	6.40		1.58			112,608	10.06		2.86
Over 6 through 12 months		79,922	6.82		1.32			94,321	8.16		2.05			108,507	9.69		3.17
Over 12 through 24 months		76,510	6.53		1.94			114,583	9.91		2.89			139,870	12.49		4.50
Over 24 months		98,071	8.36		4.41			112,435	9.73		5.04			137,360	12.27		5.98
IRA/KEOGH		102,110	8.71		3.29			108,045	9.35		4.18			106,489	9.51		5.04

Total time deposits		421,157	35.92		2.72			503,319	43.55		3.36			604,834	54.02		4.39

Total average deposits	$	1,172,421	100.00	%	1.24	%	$	1,155,858	100.00	%	1.92	%	$	1,119,651	100.00	%	2.88	%

Borrowings . From time to time the Bank has obtained term advances from the Federal Home Loan Bank of New York (“FHLB-NY”) as an alternative to retail deposit funds and may do so in the future as part of its operating strategy. FHLB-NY term advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These term advances are collateralized primarily by certain of the Bank’s mortgage loans and investment and mortgage-backed securities and secondarily by the Bank’s investment in capital stock of the FHLB-NY. In addition, the Bank has an available overnight line of credit with the FHLB-NY for $50 million which expires November 25, 2004. The Bank also has available from the FHLB-NY a one-month, overnight repricing line of credit for $50 million which also expires on November 25, 2004. When utilized, both lines carry a floating interest rate of 10 basis points over the current federal funds rate and are secured by the Bank’s mortgage loans, mortgage-backed securities, U.S. Government and agency securities and FHLB-NY stock. The maximum amount that the FHLB-NY will advance to member institutions, including the Bank, fluctuates from time to time in accordance with the policies of the OTS and the FHLB-NY. At December 31, 2003, the Bank had $24.4 million in outstanding borrowings against the FHLB-NY lines of credit and $290.0 million under various term advances.

The Bank also borrows funds using securities sold under agreements to repurchase. Under this form of borrowing specific U.S. Government agency, corporates and/or mortgage-backed securities are pledged as collateral to secure the borrowing. These pledged securities are not under the Bank’s control. At December 31, 2003, the Bank had borrowed $106.7 million through securities sold under agreements to repurchase. (See note 9 to the consolidated financial statements in the 2003 Annual Report to Stockholders.)

Subsidiary Activities

The Bank owns three subsidiaries – Columbia Equities, Ltd., OceanFirst Services, LLC and OceanFirst REIT Holdings, Inc.

Columbia Equities, Ltd. was acquired by the Bank on August 18, 2000 and operates as a mortgage banking subsidiary based in Westchester County, New York. Columbia originates, sells and services a full product line of residential mortgage loans primarily in New York, New Jersey and Connecticut. Loans are originated through six retail branches and to a lesser extent, a web site and a network of independent mortgage brokers. Columbia sells virtually all loan production into the secondary market or, to a lesser extent, the Bank. Presently, servicing rights are retained in connection with most loan sales.

OceanFirst Services LLC was originally organized in 1982 under the name Dome Financial Services, Inc. to engage in the sale of all-savers life insurance. Prior to 1998 the subsidiary was inactive, however, in 1998, the Bank began to sell non-deposit investment products (annuities, mutual funds and insurance) through a third party marketing firm to Bank customers through this subsidiary, recognizing fee income from such sales. OFB Reinsurance, Ltd. was established in 2002 as a subsidiary of OceanFirst Services LLC to reinsure a percentage of the private mortgage insurance risks on 1-4 family residential mortgages originated by the Bank and Columbia Equities, Ltd.

OceanFirst REIT Holdings, Inc. was established in 2001 and acts as the holding company for OceanFirst Realty Corp. OceanFirst Realty Corp. was established in 1997 and is intended to qualify as a real estate investment trust, which may, among other things, be utilized by the Company to raise capital in the future. Upon formation of OceanFirst Realty Corp., the Bank transferred $668 million of mortgage loans to this subsidiary.

Personnel

As of December 31, 2003, the Bank had 403 full-time employees and 85 part-time employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good.

REGULATION AND SUPERVISION

General

As a savings and loan holding company, the Company is required by Federal law to file reports with, and otherwise comply with, the rules and regulations of the OTS. The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary Federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank System and, with respect to deposit insurance, of the Savings Association Insurance Fund (“SAIF”) managed by the FDIC. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company.

Holding Company Regulation

The Company is a nondiversified unitary savings and loan holding company within the meaning of Federal law. Under prior law, a unitary savings and loan holding company, such as the Company, was not generally restricted as to the types of business activities in which it may engage, provided that the Bank continued to be a qualified thrift lender (“QTL”). See “Federal Savings Institution Regulation - QTL Test.” The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a savings association after May 4, 1999 unless it engages only in the financial activities permitted for financial holding companies under the law or for multiple savings and loan holding companies as described below. Further, the Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for activities with respect to unitary savings and loan holding companies existing prior to May 4, 1999, such as the Company, so long as the Bank continues to comply with the QTL test. The Company qualifies for the grandfather provision. Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would generally be limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. However, the OTS has issued an interpretation concluding that multiple savings and loan holding companies may also engage in activities permitted for financial holding companies.

A savings and loan holding company is prohibited from, directly or indirectly, acquiring more than 5% of the voting stock of another savings institution or savings and loan holding company, without prior written approval of the OTS and from acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS considers the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the deposit insurance funds, the convenience and needs of the community and competitive factors.

The OTS may not approve any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, Federal regulations do prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS which has the authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution.

Acquisition of the Company . Under the Federal Change in Control Act (“CIBCA”), a notice must be submitted to the OTS if any person (including a company), or group acting in concert, seeks to acquire 10% or more of the Company’s outstanding voting stock, unless the OTS has found that the acquisition will not result in a change of control of the Company. Under the CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

Federal Savings Institution Regulation

Business Activities . The activities of Federal savings institutions are governed by Federal law and regulations. These laws and regulations delineate the nature and extent of the activities in which Federal savings banks may engage. In particular, many types of lending authority for Federal savings banks, e.g . , commercial, non-residential real property loans and consumer loans, are limited to a specified percentage of the institution’s capital or assets.

Capital Requirements . The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system), and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain

off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available for sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The following table presents the Bank’s capital position at December 31, 2003. The Bank met each of its capital requirements at that date.


							Capital
	Actual Capital		Required Capital		Excess Amount		Actual Percent		Required Percent
	(Dollars in thousands)
Tangible	$	114,967	$	25,832	$	89,135	6.68	%	1.50	%
Core (Leverage)		114,967		51,665		63,302	6.68		3.00
Risk-based		125,715		88,652		37,063	11.34		8.00

Prompt Corrective Regulatory Action . The OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the OTS is required to appoint a receiver or conservator for an institution that is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Insurance of Deposit Accounts . The Bank is a member of the SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points of assessable deposits for the healthiest institutions to 27 basis points for the riskiest.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation (“FICO”) to recapitalize the predecessor to the SAIF. During 2003, FICO payments for SAIF members approximated 1.64 basis points.

The Bank’s assessment rate for fiscal 2003 was zero basis points and the total assessments paid for this period (including the FICO assessment) was $185,000. The FDIC has authority to increase insurance assessments. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Loans to One Borrower . Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral. At December 31, 2003, the Bank’s limit on loans to one borrower was $16.9 million, and the Bank’s largest aggregate outstanding balance of loans to one borrower was $8.4 million, which is consistent with the Bank’s conservative lending approach.

QTL Test . The HOLA requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least nine months out of each 12 month period. Additionally, education loans, credit card loans and small business loans may be considered “qualified thrift investments.”

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 2003, the Bank maintained in excess of 100% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

Limitation on Capital Distributions . OTS regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the OTS is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under OTS regulations ( i.e. , generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be

undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with OTS. If an application is not required, the institution must still provide prior notice to OTS of the capital distribution if, like the Bank, it is a subsidiary of a holding company. In the event the Bank’s capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank’s ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice.

Assessments . Savings institutions are required to pay assessments to the OTS to fund the agency’s operations. The assessments, paid on a semi-annual basis, are based upon the institution’s total assets, including consolidated subsidiaries as reported in the Bank’s latest quarterly thrift financial report. The assessments paid by the Bank for the fiscal year ended December 31, 2003 totaled $298,000.

Transactions with Related Parties . The Bank’s authority to engage in transactions with “affiliates” ( e.g ., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by Federal law. The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Federal law. The purchase of low quality assets from affiliates is generally prohibited. The transactions with affiliates must be on terms and under circumstances, that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002, generally prohibits loans by the Company to its executive officers and directors. However, the Act contains a specific exemption for loans from the Bank to its executive officers and directors in compliance with Federal banking laws. Under such law, the Bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law limits both the individual and aggregate amount of loans the Bank may make to insiders based, in part, on the Bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment, except for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees.

Enforcement . The OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to the institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The FDIC has the authority to recommend to the Director of the OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Standards for Safety and Soundness . The Federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the Federal banking agencies use to identify and address problems at insured depository

institutions before capital becomes impaired. If the OTS determines that a savings institution fails to meet any standard prescribed by the guidelines, the OTS may require the institution to submit an acceptable plan to achieve compliance with the standard.

Federal Home Loan Bank System

The Bank is a member of the Federal Home Loan Bank (“FHLB”) System, which consists of 12 regional FHLBs. Each FHLB provides member institutions with a central credit facility. The Bank, as a member of the FHLB-NY is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the FHLB-NY, whichever is greater. The Bank was in compliance with this requirement with an investment in FHLB-NY stock at December 31, 2003 of $19.2 million.

The FHLBs are required to provide funds for the previous resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLB imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future FHLB advances increased, the Bank’s net interest income would likely also be reduced. Recent legislation has changed the structure of the FHLB funding obligations for insolvent thrifts, revised the capital structure of the FHLB and implemented entirely voluntary membership for FHLB. Management cannot predict the effect that these changes may have with respect to its FHLB membership.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $45.4 million; a 10% reserve ratio is applied above $45.4 million. The first $6.6 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank complies with the foregoing requirements.

FEDERAL AND STATE TAXATION

Federal Taxation

General . The Company and the Bank report their income on a calendar year basis using the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank’s reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the Company. The Bank has not been audited by the IRS in over 10 years. For its 2003 taxable year, the Bank is subject to a maximum Federal income tax rate of 35.0%.

Bad Debt Reserves . For fiscal years beginning prior to December 31, 1995, savings institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986 (the “Code”) were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans (generally secured by interests in real property improved or to be

improved) under (i) the Percentage of Taxable Income Method (the “PTI Method”) or (ii) the Experience Method. The reserve for nonqualifying loans was computed using the Experience Method.

The Small Business Job Protection Act of 1996 (the “1996 Act”), which was enacted on August 20, 1996, requires savings institutions to recapture ( i.e. , take into taxable income) certain portions of their accumulated bad debt reserves. The 1996 Act repeals the reserve method of accounting for bad debts effective for tax years beginning after 1995. Thrift institutions that would be treated as small banks are allowed to utilize the Experience Method applicable to such institutions, while thrift institutions that are treated as large banks (those generally exceeding $500 million in assets) are required to use only the specific charge-off method. Thus, the PTI Method of accounting for bad debts is no longer available for any financial institution.

A savings institution required to change its method of computing reserves for bad debts will treat such change as a change in method of accounting, initiated by the taxpayer, and having been made with the consent of the IRS. Any Section 481(a) adjustment required to be taken into income with respect to such change generally will be taken into income ratably over a six-taxable year period, beginning with the first taxable year beginning after 1995, subject to the residential loan requirement.

Under the 1996 Act, for its current and future taxable years, the Bank is not permitted to make additions to its tax bad debt reserves. In addition, the Bank is required to recapture ( i.e., take into taxable income) over a six year period the excess of the balance of its tax bad debt reserves as of December 31, 1995 over the balance of such reserves as of December 31, 1987. Since the Bank satisfied the residential loan requirement provision for 1996 and 1997 as described above, the six year recapture period became effective for the 1998 tax year. As a result of such recapture, the Bank will incur an additional tax liability of approximately $2.3 million. The Bank has accrued for this liability in the consolidated financial statements.

Distributions . Under the 1996 Act, if the Bank makes “non-dividend distributions” to the Company, such distributions will be considered to have been made from the Bank’s unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the extent thereof, and then from the Bank’s supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in the Bank’s income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank’s current or accumulated earnings and profits will not be so included in the Bank’s income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

Corporate Alternative Minimum Tax . The Internal Revenue Code of 1986, as amended (the “Code”) imposes a tax on alternative minimum taxable income (“AMTI”) at a rate of 20%. The excess of the bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers of which the

Bank currently has none. AMTI is increased by an amount equal to 75% of the amount by which the Bank’s adjusted current earnings exceeds its AMTI (determined without regard to this preference and prior to reduction for net operating losses). The Bank does not expect to be subject to the AMTI.

Dividends Received Deduction and Other Matters . The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend then 80% of any dividends received may be deducted.

State and Local Taxation

New Jersey Taxation . The Bank files New Jersey income tax returns. For New Jersey income tax purposes, savings institutions were previously taxed at a rate equal to 3% of taxable income. On July 2, 2002, the New Jersey legislature passed the New Jersey Business Tax Reform Act (the “Tax Reform Act”). The legislation increased the tax rate on savings institutions, such as the Bank, from 3% to 9% of taxable income. The legislation was retroactive to January 1, 2002. For this purpose, “taxable income” generally means federal taxable income, subject to certain adjustments (including addition of interest income on State and municipal obligations).

The Tax Reform Act also provided for an Alternative Minimum Assessment (AMA) tax based on the larger of gross receipts or gross profits, as defined.

The Company is required to file a New Jersey income tax return because it will be doing business in New Jersey. For New Jersey tax purposes, regular corporations are presently taxed at a rate equal to 9% of taxable income. However, if the Company meets certain requirements, it may be eligible to elect to be taxed as a New Jersey Investment Company at a tax rate presently equal to 3.60% (40% of 9%) of taxable income.

New York Taxation. Columbia is subject to New York State income tax at a rate of 9.95% (including a commuter transportation surcharge). The tax is measured by “entire net income” which is Federal taxable income with adjustments.

Delaware Taxation . As a Delaware holding company not earning income in Delaware, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware.

Item 2.

Properties

The Bank conducts its business through its administrative office, which includes a branch office, and 16 other full service offices located in Ocean, Monmouth and Middlesex Counties and through the administrative and loan production offices of Columbia. The Company believes that the Bank’s current facilities will be adequate to meet the present and immediately foreseeable needs of the Bank and the Company.


Location	Leased or Owned	Original Year Leased or Acquired	Date of Lease Expiration ⁽²⁾	Net Book Value of Property or Leasehold Improvements at December 31, 2003
				(Dollars in thousands)

Administrative Office:

975 Hooper Avenue
Toms River, New Jersey 08754	Owned	1995	—	$	8,720

Branch Offices:

Adamston:	Leased	1999	07/31/09		174
385 Adamston Road
Brick, New Jersey 08723

Berkeley:	Leased	1984	11/30/04		87
Holiday City Plaza
730 Jamaica Boulevard
Toms River, New Jersey 08757

Brick:	Owned	1960	—		1,029
321 Chambers Bridge Road
Brick, New Jersey 08723

Concordia:	Leased	1985	07/31/05		37
1 Concordia Shopping Mall
Box 3
Cranbury, New Jersey 08512

Route 37 West:	Leased	2001	10/31/05		1,295
55 Bananier Drive
Toms River, New Jersey 08755

Jackson:	Leased	2002	05/01/07		1,017
260 North County Line Road
Jackson, New Jersey 08527

Lacey:	Leased	1997	01/31/18		207
900 Lacey Road
Forked River, New Jersey 08731

Lake Ridge:	Leased	1998	01/31/18		33
147 Route 70, Suite 1
Toms River, New Jersey 08755

Manahawkin
205 Route 72 West	Leased	2001	10/31/11		857
Manahawkin, NJ 08050

Pavilion:	Leased	1989	09/30/18		318
70 Brick Boulevard
Brick, New Jersey 08723


Location	Leased or Owned	Original Year Leased or Acquired	Date of Lease Expiration ⁽²⁾	Net Book Value of Property or Leasehold Improvements at December 31, 2003
				(Dollars in thousands)

Point Pleasant Beach:	Owned	1937	—	48
701 Arnold Avenue
Point Pleasant, New Jersey 08742

Point Pleasant Boro:	Owned	1971	—	674
2400 Bridge Avenue
Point Pleasant, New Jersey 08742

Route 88:	Leased	2000	03/31/07	679
3100 Route 88
Point Pleasant, New Jersey 08742

Spring Lake Heights:	Leased	1999	10/31/09	69
2401 Route 71
Spring Lake Heights, New Jersey 07762

Wall Township:	Leased	1999	02/28/10	292
2445 Route 34
Manasquan, New Jersey 08736

Whiting:	Leased	1983	10/31/04	41
Whiting Shopping Center
P. O. Box 20
Whiting, New Jersey 08759

Other Properties ⁽¹⁾ :	Owned	1986	—	386
730 Brick Boulevard
Brick, New Jersey 08723

Columbia Equities, Ltd.:

400 Columbus Avenue	Leased	2001	07/01/07	346
Valhalla, New York 10595

2950 S. Expressway, Suite 234	Leased	2002	03/31/09	84
Islandia, New York 11749

⁽¹⁾	The property was formerly utilized by the Bank, was subsequently subleased and is now vacant.

⁽²⁾	The Company may also hold options to renew leases for additional terms upon expiration of the current lease.

Item 3.

Legal Proceedings

The Company and the Bank are not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such other routine legal proceedings in the aggregate are believed by management to be immaterial to the Company’s financial condition or results of operations.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

Information relating to the market for Registrant’s common equity and related stockholder matters appears under “Shareholder Information” on the Inside Back Cover in the Registrant’s 2003 Annual Report to Stockholders and is incorporated herein by reference.

Item 6.

Selected Financial Data

The above-captioned information appears under “Selected Consolidated Financial and Other Data of the Company” in the Registrant’s 2003 Annual Report to Stockholders on pages 9 and 10 is incorporated herein by reference.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The above-captioned information appears under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Registrant’s 2003 Annual Report to Stockholders on pages 11 through 22 and is incorporated herein by reference.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The above captioned information appears under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Management of Interest Rate Risk” in the Registrant’s 2003 Annual Report to Stockholders on pages 12 through 14 and is incorporated herein by reference.

Item 8.

Financial Statements and Supplementary Data

The Consolidated Financial Statements of OceanFirst Financial Corp. and its subsidiary, together with the report thereon by KPMG LLP appears in the Registrant’s 2003 Annual Report to Stockholders on pages 23 through 39 and are incorporated herein by reference.

Item 9.

Change In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Disclosure Controls and Procedures

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 December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

Item 10.

Directors and Executive Officers of the Registrant

In accordance with General Instruction G(3), the information relating to directors and executive officers of the Registrant required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 22, 2004, to be filed pursuant to Regulation 14A not later than 120 days after the fiscal year covered by this report.

Item 11.

Executive Compensation

In accordance with General Instruction G(3), the information relating to executive compensation required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 22, 2004, to be filed pursuant to Regulation 14A not later than 120 days after the fiscal year covered by this report.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholders

In accordance with General Instruction G(3), the information relating to security ownership of certain beneficial owners and management and related shareholders required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 22, 2004, to be filed pursuant to Regulation 14A not later than 120 days after the fiscal year covered by this report.

Information regarding the Company’s equity compensation plans existing as of December 31, 2003 is as follows:


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted- average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	2,291,337	$	13.71	817,911
Equity compensation plans not approved by security holders	—		—	—
Total	2,291,337	$	13.71	817,911

Item 13.

Certain Relationships and Related Transactions

In accordance with General Instruction G(3), the information relating to certain relationships and related transactions required by Part III is incorporated herein by reference from the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on April 22, 2004, to be filed pursuant to Regulation 14A not later than 120 days after the fiscal year covered by this report.

PART IV

Item 14.

Principal Accountant Fees and Services

The information relating to the principal accountant fees and expenses is incorporated by reference to the Registrant’s Proxy Statement for the Annual Meeting to be held on April 22, 2004, which will be filed within 120 days after the fiscal year covered by this report.

Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)	The following documents are filed as a part of this report:

(1)	Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 2003 Annual Report to Stockholders.


		PAGE
Independent Auditors’ Report		39

Consolidated Statements of Financial Condition at December 31, 2003 and 2002		23

Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001		24

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001		25

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001		26

Notes to Consolidated Financial Statements for the Years Ended December 31, 2003, 2002 and 2001		27-38

The remaining information appearing in the 2003 Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein.

(2)	All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

(3)

Exhibits

(a)

The following exhibits are filed as part of this report.



2.1		Stock Purchase Agreement by and among Richard S. Pardes (the sole stockholder of Columbia Equities, Ltd.) and Columbia Equities, Ltd. and OceanFirst Bank as buyer, dated June 27, 2000 (without exhibits) (2)

3.1		Certificate of Incorporation of OceanFirst Financial Corp. (1)

3.2		Bylaws of OceanFirst Financial Corp. (6)

3.3		Certificate of Ownership Merging Ocean Interim, Inc. into OceanFirst Financial Corp. (6)

4.0		Stock Certificate of OceanFirst Financial Corp.(1)

10.1		Form of OceanFirst Bank Employee Stock Ownership Plan (1)

10.1(a)		Amendment to OceanFirst Bank Employee Stock Ownership Plan (3)

10.2		OceanFirst Bank Employees’ Savings and Profit Sharing Plan (1)

10.3		OceanFirst Bank 1995 Supplemental Executive Retirement Plan (1)

10.4		OceanFirst Bank Deferred Compensation Plan for Directors (1)

10.5		OceanFirst Bank Deferred Compensation Plan for Officers (1)

10.7		OceanFirst Bank Performance Achievement Awards Program (1)

10.8		Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan (4)

10.9		Form of Employment Agreement between OceanFirst Bank and certain executive officers, including Michael J. Fitzpatrick and John R. Garbarino (1)

10.10		Form of Employment Agreement between OceanFirst Financial Corp. and certain executive officers, including Michael J. Fitzpatrick and John R. Garbarino (1)

10.11		Form of Change in Control Agreement between OceanFirst Bank and certain executive officers, including John K. Kelly and Robert M. Pardes (1)

10.12		Form of Change in Control Agreement between OceanFirst Financial Corp. and certain executive officers, including John K. Kelly and Robert M. Pardes (1)

10.13		2000 Stock Option Plan (5)

10.14		Form of Employment Agreement between Columbia Equities, Ltd. and Robert M. Pardes (6).

10.15		Amendment of the OceanFirst Financial Corp. 2000 Stock Option Plan (7)

13.0		Portions of 2003 Annual Report to Stockholders (filed herewith)

21.0		Subsidiary information is incorporated herein by reference to “Part I - Subsidiaries”

23.0		Consent of KPMG LLP (filed herewith)

31.1		Rule 13a-14(a)/15d-14(c) Certification of Chief Executive Officer (filed herewith)

31.2		Rule 13a-14(a)/15d-14(c) Certification of Chief Financial Officer (filed herewith)

32.1		Section 1350 Certification of Chief Executive Officer (filed herewith)

32.2		Section 1350 Certification of Chief Financial Officer (filed herewith)

99.1		OceanFirst Financial Corp. Code of Ethics and Standards of Personal Conduct (filed herewith)

(1)	Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement, effective May 13, 1996 as amended, Registration No. 33-80123.

(2)	Incorporated herein by reference from the Exhibits to Form 8-K filed on June 28, 2000.

(3)	Incorporated herein by reference from the Exhibits to Form 10-K filed on March 25, 1997.

(4)	Incorporated herein by reference from Form 14-A Definitive Proxy Statement filed on March 19, 1998.

(5)	Incorporated herein by reference from Form 14-A Definitive Proxy Statement filed on March 17, 2000.

(6)	Incorporated herein by reference from the Exhibits to Form 10-K filed on March 23, 2003.

(7)	Incorporated herein by reference from the Form 14-A Definitive Proxy Statement filed on March 21, 2003.

(b)	Reports on Form 8-K

The Company filed a report on Form 8-K with the Securities and Exchange Commission on October 24, 2003 which included the press release, dated October 23, 2003, announcing the Company’s financial results for the quarter ended September 30, 2003.

CONFORMED

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

By:		/s/ John R. Garbarino

		John R. Garbarino Chairman of the Board, President and Chief Executive Officer and Director

Date:		March 10, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.


Name		Date

/s/ John R. Garbarino John R. Garbarino Chairman of the Board, President and Chief Executive Officer (principal executive officer)		March 10, 2004

/s/ Michael J. Fitzpatrick Michael J. Fitzpatrick Executive Vice President and Chief Financial Officer (principal accounting and financial officer)		March 10, 2004

/s/ Thomas F. Curtin Thomas F. Curtin Director		March 10, 2004

/s/ Carl Feltz, Jr. Carl Feltz, Jr. Director		March 10, 2004



/s/ John W. Chadwick John W. Chadwick Director		March 10, 2004

/s/ Donald E. McLaughlin Donald E. McLaughlin Director		March 10, 2004

/s/ Diane F. Rhine Diane F. Rhine Director		March 10, 2004

/s/ Frederick E. Schlosser Frederick E. Schlosser Director		March 10, 2004

/s/ James T. Snyder James T. Snyder Director		March 10, 2004

/s/ John E. Walsh John E. Walsh Director		March 10, 2004

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,	2003		2002		2001		2000		1999
*(dollars in thousands)*

Selected Financial Condition Data:
Total assets	$	1,717,409	$	1,743,698	$	1,763,666	$	1,640,217	$	1,590,907
Investment securities available for sale		80,458		91,978		80,017		103,536		120,780
Federal Home Loan Bank of New York stock		19,220		18,700		23,560		20,000		16,800
Mortgage-backed securities available for sale		86,938		138,657		233,302		268,042		346,182
Loans receivable, net		1,389,220		1,335,898		1,300,889		1,136,879		1,042,975
Mortgage loans held for sale		33,207		66,626		37,828		35,588		—
Deposits		1,144,205		1,184,836		1,109,043		1,104,188		1,056,950
Federal Home Loan Bank advances		314,400		214,000		272,000		127,500		115,000
Securities sold under agreements to repurchase		106,723		184,584		212,332		236,494		239,867
Stockholders’ equity		134,662		135,305		146,729		157,736		167,530

For the Year Ended December 31,	2003		2002		2001		2000		1999
*(dollars in thousands; except per share amounts)*

Selected Operating Data:
Interest income	$	94,537	$	108,456	$	118,160	$	116,105	$	107,347
Interest expense		36,894		47,624		63,148		66,412		58,809

Net interest income		57,643		60,832		55,012		49,693		48,538
Provision for loan losses		688		1,650		1,250		985		900

Net interest income after provision for loan losses		56,955		59,182		53,762		48,708		47,638
Other income		18,749		10,857		12,925		6,145		5,226
Operating expenses		44,857		40,144		39,048		31,645		27,852

Income before provision for income taxes		30,847		29,895		27,639		23,208		25,012
Provision for income taxes		10,974		9,752		9,480		6,826		8,665

Net income	$	19,873	$	20,143	$	18,159	$	16,382	$	16,347

Basic earnings per share	$	1.62	$	1.57	$	1.30	$	1.06	$	.91

Diluted earnings per share	$	1.53	$	1.47	$	1.23	$	1.02	$	.89

Selected Consolidated Financial and Other Data (continued)

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 9

Selected Consolidated Financial and Other Data of the Company (continued)


At or For the Year Ended December 31,	2003			2002			2001			2000			1999
Selected Financial Ratios and Other Data ⁽¹⁾ :

Performance Ratios:
Return on average assets		1.14	%		1.16	%		1.06	%		1.01	%		1.04	%
Return on average stockholders’ equity		14.84			14.31			12.01			10.45			8.90
Stockholders’ equity to total assets		7.84			7.76			8.32			9.62			10.53
Tangible equity to tangible assets		7.75			7.67			8.22			9.52			10.48
Average interest rate spread ⁽²⁾		3.24			3.41			2.97			2.75			2.70
Net interest margin ⁽³⁾		3.48			3.70			3.37			3.20			3.20
Average interest-earning assets to average interest-bearing liabilities		110.82			109.78			110.31			110.39			112.94
Operating expenses to average assets		2.57			2.32			2.29			1.96			1.78
Operating efficiency ratio ⁽⁴⁾		58.72			56.00			57.48			56.67			51.80

Asset Quality Ratios:

Non-performing loans as a percent of total loans receivable ⁽⁵⁾⁽⁶⁾		0.15			0.19			0.46			0.25			0.28
Non-performing assets as a percent of total assets ⁽⁶⁾		0.14			0.16			0.36			0.19			0.21
Allowance for loan losses as a percent of total loans receivable ⁽⁵⁾		0.75			0.71			0.77			0.77			0.78
Allowance for loan losses as a percent of total non-performing loans ⁽⁶⁾		499.63			374.78			167.49			312.62			275.48

Per Share Data

Dividends per common share	$	.78		$	.69		$	.56		$	.48		$	.38
Book value per common share at end of period		10.09			9.83			9.92			9.49			8.85
Tangible book value per common share at end of period		9.98			9.72			9.81			9.38			8.80

Number of full-service customer facilities		17			17			16			14			13

(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 due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 10

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

OceanFirst Financial Corp. (the “Company” or “OCFC”) is the holding company for OceanFirst Bank (the “Bank”). On August 17, 1995, the Board of Directors (the “Board”) 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 25,164,235 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 2,013,137 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 four retail branches, a web site and a network of independent mortgage brokers. The fourth office, in Islandia, New York on Long Island was added in September 2002. 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 River and sixteen other branch offices. Fourteen of the seventeen branch offices are located in Ocean County, New Jersey, with two branches in Monmouth County and one in Middlesex County.

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, 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 Company’s 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.

During 2003, interest rates declined to historically low levels. Borrowers took advantage of the low interest rate environment to refinance their debt as prepayments of loan principal escalated to unprecedented levels throughout the industry. This difficult operating environment generally had an adverse effect on the Company’s operating results for 2003. Prepayments on loans and mortgage-backed securities caused asset yields to decline at a faster rate than the cost of liabilities, causing the Company’s net interest margin to contract. Loan servicing income and the resultant value of the Company’s servicing asset was also adversely affected by the heavy prepayment activity. The Company did benefit from a higher volume of loan originations, much of which was sold. The gain on these sales substantially increased the Company’s non-interest income for the year.

Strategy

The Company operates as a consumer-oriented bank, with a strong focus on its local community. The Bank is the oldest and largest community-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 (defined as all deposits other than certificates) 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, 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 18.0% of the Bank’s total loans receivable at December 31, 2003 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 and improving market penetration. Over the past six years, the Company has opened eight new branch offices, six in Ocean County including a new branch in Jackson which opened during 2002 and two in Southern Monmouth County, the Company’s first branches in this county. The Company has committed to the opening of a new branch office in Little Egg Harbor Township, also in Ocean County, which is expected to open in late 2004. The Company is continually evaluating additional office sites within its existing market area.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 11

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

At December 31, 2003, the eight new branches maintained an average core deposit mix of 84.2%. 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. Additionally, marketing and incentive plans have focused almost exclusively on core account growth. As a result of these efforts the Company’s core deposit ratio has grown to 66.1% at December 31, 2003 as compared to only 33.0% 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. The Company offers alternative investment products (annuities, mutual funds and life insurance) 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. The Company introduced trust and asset management services in early 2000 and has also expanded the non-interest income received from small business relationships including merchant services. During 2002, the Company established a captive subsidiary to recognize fee income from private mortgage insurance. As a result of these initiatives, income from fees and service charges has increased from $1.4 million for the year ended December 31, 1997 to $7.9 million for the year ended December 31, 2003, a 33.7% average annual increase.

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 2003 the Company repurchased 867,259 common shares. Under the 10% repurchase program authorized by the Board of Directors in August 2002, 82,576 shares remain to be purchased as of December 31, 2003. A new repurchase program, the Company’s eleventh, was announced on October 22, 2003. Under this 10% repurchase program, an additional 1,341,818 shares are available for repurchase. From conversion date through December 31, 2003, the Company has repurchased a total of 14.8 million common shares, 54.4% 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 200% since the initial dividend in 1997. The Company has also used wholesale borrowings to fund purchases of investment and mortgage-backed securities and, in previous years, the retention of some 30-year fixed-rate mortgage loans. 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 capital ratio from 19.4% at December 31, 1996 to 7.8% at December 31, 2003 while increasing the Company’s return on equity from 6.0% for the year ended December 31, 1997 to 14.8% for the year ended December 31, 2003. 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.

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 change 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 inherent 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 exposure 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 mortgage-backed 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. The Company continued the practice resumed in 2002 of selling most 30-year fixed-rate mortgage loan originations into the secondary market. The Company currently does not participate in financial futures contracts, 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.

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

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 12

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 theoretically 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.

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 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 December 31, 2003 the Company’s one year gap was positive 2.66%. 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. The table is intended to provide an approximation of the projected repricing of assets and liabilities at December 31, 2003, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three month period and subsequent selected time intervals. 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 were projected to prepay at rates between 3.0% and 66.0% annually. Mortgage-backed securities were projected to prepay at rates between 12.0% and 44.0% annually. Savings accounts, negotiable order of withdrawal (“NOW”) and money market deposit accounts were assumed to decay, or run-off, at 1.75% 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.


At December 31, 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			Total
*(dollars in thousands)*

Interest-earning assets ⁽¹⁾ :
Interest-earning deposits and short-term investments	$	2,236		$	—		$	—		$	—		$	—		$	2,236
Investment securities		75,364			—			1,210			5,565			4,263			86,402
FHLB stock		—			—			—			—			19,220			19,220
Mortgage-backed securities		10,743			29,420			21,342			23,164			2,074			86,743
Loans receivable ⁽²⁾		226,483			235,639			438,011			320,560			208,405			1,429,098

Total interest-earning assets		314,826			265,059			460,563			349,289			233,962			1,623,699

Interest-bearing liabilities:
Money market deposit accounts		7,161			19,341			38,791			73,519			—			138,812
Savings accounts		13,393			36,175			72,553			137,508			—			259,629
NOW accounts		12,857			34,727			69,649			132,021			—			249,254
Time deposits		93,749			183,227			62,827			30,628			17,411			387,842
FHLB advances		37,400			62,000			118,000			67,000			30,000			314,400
Securities sold under agreements to repurchase		36,723			—			20,000			50,000			—			106,723

Total interest-bearing liabilities		201,283			335,470			381,820			490,676			47,411			1,456,660

Interest sensitivity gap ⁽³⁾	$	113,543		$	(70,411	)	$	78,743		$	(141,387	)	$	186,551		$	167,039

Cumulative interest sensitivity gap	$	113,543		$	43,132		$	121,875		$	(19,512	)	$	167,039		$	167,039

Cumulative interest sensitivity gap as a percent of total interest-earning assets		6.99	%		2.66	%		7.51	%		(1.20	)%		10.29	%		10.29	%

Cumulative interest-earning assets as a percent of cumulative interest-bearing liabilities		156.41	%		108.04	%		113.27	%		98.62	%		111.47	%		111.47	%

(1)	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.

(2)	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.

(3)	Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 13

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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 interest 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 produced 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, 2003 and 2002, as calculated by the Company (in thousands). For purposes of this table, the Company used prepayment speeds and deposit decay rates similar to those used in calculating the Company’s gap.


December 31, 2003
Change in Interest Rates in Basis Points (Rate Shock)	Net Portfolio Value						Net Interest Income
Change in Interest Rates in Basis Points (Rate Shock)	Amount		% Change		NPV Ratio		Amount		% Change
200	$	155,632	(11.4	)%	9.4	%	$	55,414	0.2	%
100		171,554	(2.3	)	10.1			55,681	0.7
Static		175,576	—		10.1			55,286	—
(100)		169,366	(3.5	)	9.6			53,122	(3.9	)

December 31, 2002
Change in Interest Rates in Basis Points (Rate Shock)	Net Portfolio Value						Net Interest Income
Change in Interest Rates in Basis Points (Rate Shock)	Amount		% Change		NPV Ratio		Amount		% Change
200	$	151,546	(7.1	)%	8.9	%	$	60,492	2.1	%
100		163,725	0.4		9.4			60,234	1.7
Static		163,127	—		9.2			59,230	—
(100)		150,429	(7.8	)	8.4			56,527	(4.6	)

At December 31, 2003, the Company’s NPV in a static rate environment is greater than the NPV at December 31, 2002 reflecting the Company’s increased reliance on core deposits and the reduced cost of FHLB borrowings. In a rising rate environment, the Company projects a less favorable percent change in NPV and net interest income at December 31, 2003 than was the case at December 31, 2002 due to reduced cash flow expectations on amortizing assets as expected prepayment speeds slowed.

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 one REO property at December 31, 2003. 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, 2003, 2002, 2001, 2000 and 1999, 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 $96,000, $87,000, $379,000, $132,000 and $52,000.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 14


At or for the year ended December 31,	2003			2002			2001			2000			1999
*(dollars in thousands)*

Non-accrual loans:
Real estate:
One- to four-family	$	1,712		$	2,222		$	3,661		$	2,594		$	2,401
Commercial real estate, multi-family and land		242			74			—			—			362
Consumer		90			95			151			147			222
Commercial		118			297			2,368			182			—

Total		2,162			2,688			6,180			2,923			2,985
REO, net		252			141			133			157			292

Total non-performing assets	$	2,414		$	2,829		$	6,313		$	3,080		$	3,277

Allowance for loan losses:
Balance at beginning of year	$	10,074		$	10,351		$	9,138		$	8,223		$	7,460
Less: Net charge-offs (recoveries)		(40	)		1,927			37			70			137
Add: Provision for loan losses		688			1,650			1,250			985			900

Balance at end of year	$	10,802		$	10,074		$	10,351		$	9,138		$	8,223

Ratio of net charge-offs (recoveries) during the year to average net loans outstanding during the year		.00	%		.14	%		.00	%		.01	%		.01	%
Allowance for loan losses as percent of total loans receivable ⁽¹⁾		.75			.71			.77			.77			.78
Allowance for loan losses as a percent of total non-performing loans ⁽²⁾		499.63			374.78			167.49			312.62			275.48
Non-performing loans as a percent of total loans receivable ⁽¹⁾⁽²⁾		.15			.19			.46			.25			.28
Non-performing assets as a percent of total assets ⁽²⁾		.14			.16			.36			.19			.21

(1)	Total loans receivable includes loans receivable and loans held for sale, net of undisbursed loan funds, deferred loan fees and unamortized discounts/premiums.

(2)	Non-performing assets consist of non-performing loans and real estate acquired through foreclosure. Non-performing loans consist of all loans 90 days or more past due and other loans in the process of foreclosure. It is the Company’s policy to cease accruing interest on all such loans.

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, 2003, the Bank had $8.5 million of assets, including all REO, classified as “Substandard,” $4,000 of assets classified as “Doubtful” and no assets classified as “Loss.” Additionally, “Special Mention” assets totaled $3.5 million at December 31, 2003. These loans are classified as Special Mention due to past delinquencies or other identifiable weaknesses.

The Substandard classification includes a commercial mortgage loan to a construction company with an outstanding balance of $1.9 million which is current as to payments, but which is classified due to previously poor operating results. The loan is secured by business assets and two commercial real estate properties. The Special Mention classification includes a commercial loan to a marina with an outstanding balance of $1.9 million which is also current as to payments, but which is classified due to weakened operating results. The loan is well secured by real estate and rent assignments.

The provision for loan losses decreased by $962,000 for the year ended December 31, 2003, as compared to the prior year to reflect the decline in non-performing assets, the relatively stable loan balances and related loan composition and the reduction in net charge-offs (recoveries). For the year ended December 31, 2002 net charge-offs totalled $1.9 million, with $1.8 million of this amount represented by one non-performing commercial loan. For the year ended December 31, 2003, the Company experienced a net recovery of $40,000. The determination of the adequacy of the allowance for loan losses is a critical accounting policy of the Company. 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.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 15

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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 for each of the years ended December 31, 2003, 2002, and 2001. 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.


	Years Ended December 31,
	2003							2002							2001
*(dollars in thousands)*	Average Balance			Interest		Average Yield/ Cost		Average Balance			Interest		Average Yield/ Cost		Average Balance			Interest		Average Yield/ Cost
Assets:
Interest-earning assets:
Interest-earning deposits and short-term investments	$	12,115		$	127	1.05	%	$	12,258		$	200	1.63	%	$	1,735		$	51	2.94	%
Investment securities		88,966			2,339	2.63			86,760			2,993	3.45			89,483			5,084	5.68
FHLB stock		19,518			750	3.84			20,283			966	4.76			21,336			1,283	6.01
Mortgage-backed securities		116,633			4,440	3.81			180,618			9,870	5.46			268,221			17,024	6.35
Loans receivable, net ⁽¹⁾		1,419,477			86,881	6.12			1,344,910			94,427	7.02			1,250,049			94,718	7.58

Total interest-earning assets		1,656,709			94,537	5.71			1,644,829			108,456	6.59			1,630,824			118,160	7.24
Non-interest-earning assets		90,698							85,962							75,303

Total assets	$	1,747,407						$	1,730,791						$	1,706,127

Liabilities and Equity:
Interest-bearing liabilities:
Money market deposit accounts	$	132,491			1,372	1.04	%	$	101,817		$	1,813	1.78	%	$	73,966		$	1,744	2.36	%
Savings accounts		253,937			1,679	.66			218,279			2,955	1.35			178,335			3,342	1.87
NOW accounts		262,542			1,743	.66			254,149			3,610	1.42			198,186			4,476	2.26
Time deposits		421,157			12,449	2.96			503,319			19,105	3.80			604,834			31,927	5.28

Total		1,070,127			17,243	1.61			1,077,564			27,483	2.55			1,055,321			41,489	3.93
FHLB advances		272,928			13,338	4.89			237,987			11,612	4.88			188,411			8,918	4.73
Securities sold under agreements to repurchase		151,901			6,313	4.16			180,692			8,529	4.72			234,608			12,741	5.43

Total interest-bearing liabilities		1,494,956			36,894	2.47			1,496,243			47,624	3.18			1,478,340			63,148	4.27
Non-interest-bearing deposits		102,294							78,294							64,330
Non-interest-bearing liabilities		16,226							15,563							12,314

Total liabilities		1,613,476							1,590,100							1,554,984
Stockholders’ equity		133,931							140,691							151,143

Total liabilities and equity	$	1,747,407						$	1,730,791						$	1,706,127

Net interest income				$	57,643						$	60,832						$	55,012

Net interest rate spread ⁽²⁾						3.24	%						3.41	%						2.97	%

Net interest margin ⁽³⁾						3.48	%						3.70	%						3.37	%

Ratio of interest-earning assets to interest-bearing liabilities		110.82	%						109.78	%						110.31	%

(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.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 16

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, 2003 Compared to Year Ended December 31, 2002									Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
	Increase (Decrease) Due to									Increase (Decrease) Due to
*(in thousands)*	Volume			Rate			Net			Volume			Rate			Net
Interest-earning assets:
Interest-earning deposits and short-term investments	$	(2	)	$	(71	)	$	(73	)	$	181		$	(32	)	$	149
Investment securities		74			(728	)		(654	)		(449	)		(1,642	)		(2,091	)
FHLB stock		(35	)		(181	)		(216	)		(61	)		(256	)		(317	)
Mortgage-backed securities		(2,930	)		(2,500	)		(5,430	)		(4,778	)		(2,376	)		(7,154	)
Loans receivable, net		5,030			(12,576	)		(7,546	)		6,947			(7,238	)		(291	)

Total interest-earning assets		2,137			(16,056	)		(13,919	)		1,840			(11,544	)		(9,704	)

Interest-bearing liabilities:
Money market deposit accounts		448			(889	)		(441	)		561			(492	)		69
Savings accounts		421			(1,697	)		(1,276	)		655			(1,042	)		(387	)
NOW accounts		116			(1,983	)		(1,867	)		1,064			(1,930	)		(866	)
Time deposits		(2,827	)		(3,829	)		(6,656	)		(4,802	)		(8,020	)		(12,822	)

Total		(1,842	)		(8,398	)		(10,240	)		(2,522	)		(11,484	)		(14,006	)
FHLB advances		1,702			24			1,726			2,404			290			2,694
Securities sold under agreements to repurchase		(1,270	)		(946	)		(2,216	)		(2,685	)		(1,527	)		(4,212	)

Total interest-bearing liabilities		(1,410	)		(9,320	)		(10,730	)		(2,803	)		(12,721	)		(15,524	)

Net change in net interest income	$	3,547		$	(6,736	)	$	(3,189	)	$	4,643		$	1,177		$	5,820

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2003 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.

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

Total assets at December 31, 2003 were $1.717 billion, a decrease of $26.3 million, compared to $1.744 billion at December 31, 2002.

Mortgage-backed securities available for sale decreased by $51.7 million, to $86.9 million at December 31, 2003, from $138.7 million at December 31, 2002 as this portfolio experienced heavy prepayment activity during the year.

Loans receivable net, increased by $53.3 million to a balance of $1.389 billion at December 31, 2003, compared to a balance of $1.336 billion at December 31, 2002. Commercial and commercial real estate loans outstanding increased $37.6 million, or 17.0%, while one- to-four-family loans rose only modestly as the Bank actively sold 30-year fixed-rate mortgage loans during the period. The large volume of loan sales combined with heavy loan prepayment speeds would have resulted in a more significant decline in one- to-four-family mortgage loans except that the Bank retained $143.3 million in high quality adjustable-rate and short-term fixed-rate loans originated by its mortgage banking subsidiary. Previously, Columbia would have sold these loans into the secondary market.

Mortgage loans held for sale decreased by $33.4 million to a balance of $33.2 million at December 31, 2003, compared to a balance of $66.6 million at December 31, 2002. As interest rates rose during the second half of 2003 refinance activity slowed reducing loan volume.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 17

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Deposit balances decreased $40.6 million to $1.144 billion at December 31, 2003 from $1.184 billion at December 31, 2002. Core deposits, however, the Company’s primary focus, grew $50.4 million while certificate balances declined by $91.0 million. The Company believes that the low interest rate environment existing throughout 2003 caused certificate holders to seek higher returns in alternative investments.

Total borrowings (Federal Home Loan Bank (“FHLB”) advances and securities sold under agreements to repurchase) increased by $22.5 million, to $421.1 million at December 31, 2003 from $398.6 million at December 31, 2002. With deposit balances declining, the Company relied on additional borrowings to fund loan growth.

Stockholders’ equity at December 31, 2003 decreased to $134.7 million, compared to $135.3 million at December 31, 2002. For the year ended December 31, 2003, the Company repurchased 867,259 shares of common stock at a total cost of $20.6 million. The costs of the repurchase program and a cash dividend of $9.6 million were largely offset by net income of $19.9 million, stock option exercises and related tax benefits of $5.8 million and non-cash ESOP expenses of $3.8 million.

Comparison of Operating Results for the Years Ended December 31, 2003 and December 31, 2002

General

Net income decreased $270,000, or 1.3%, to $19.9 million for the year ended December 31, 2003 as compared to net income of $20.1 million for the year ended December 31, 2002. Diluted earnings per share increased 4.1%, to $1.53 for the year ended December 31, 2003 as compared to $1.47 for the year ended December 31, 2002. The growth 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.

Interest Income

Interest income for the year ended December 31, 2003 was $94.5 million, compared to $108.5 million for the year ended December 31, 2002, a decrease of $13.9 million. The decrease in interest income was due to a decline in the yield on interest-earning assets to 5.71% for the year ended December 31, 2003 as compared to 6.59% for the same prior year period. High prepayment levels caused a decrease in the rate earned on interest-earning assets and an acceleration of the amortization of net premiums on mortgage-related assets. Additionally, the Company did not receive a dividend on its Federal Home Loan Bank of New York stock for the fourth quarter of 2003. As a result, FHLB stock dividends decreased to $750,000 for the year ended December 31, 2003 as compared to $966,000 for the same prior year period.

Interest Expense

Interest expense for the year ended December 31, 2003 was $36.9 million, compared to $47.6 million for the year ended December 31, 2002, a decrease of $10.7 million. The decrease in interest expense was primarily the result of a decrease in the average cost of interest-bearing liabilities to 2.47% for the year ended December 31, 2003, as compared to 3.18% in the same prior year period. Funding costs decreased due to the lower interest rate environment and also due to a change in the mix of deposit balances to lower-costing core deposits as compared to higher costing certificates. Core deposits (including non-interest-bearing deposits) represented 64.1% of average deposits for the year ended December 31, 2003, as compared to 56.5% for the same prior year period.

Provision for Loan Losses

For the year ended December 31, 2003, the Company’s provision for loan losses was $688,000, as compared to $1.7 million for the year ended December 31, 2002. The provision for the year ended December 31, 2002 was increased to reflect the charge-off of a large non-performing commercial loan which was part of a shared national credit. In reducing the provision for 2003, the Company considered that non-performing loans declined to $2.2 million at December 31, 2003 as compared to $2.7 million at December 31, 2002. Additionally, the Company recognized a net recovery of $40,000 through the allowance for loan losses for the year ended December 31, 2003.

Other Income

Other income was $18.7 million for the year ended December 31, 2003, as compared to $10.9 million for the year ended December 31, 2002. The net gain on the sales of loans and securities includes a gain of $719,000 on the sale of equity securities for the year ended December 31, 2003 as compared to no such gains for the same prior year period. For the year ended December 31, 2003 the Company recorded a gain of $11.1 million, on the sale of loans, as compared to a gain of $4.5 million in the same prior year period. Loan sales benefited from the historically low interest rate environment in effect during most of 2003 which led to heavy refinance volume and increased loan originations. Most of this volume was in the 30-year fixed-rate mortgage loan product, much of which is sold into the secondary market. Additionally, mortgage loans sold at Columbia benefited from a full year of loan volume at a loan origination office on Long Island which was added in September 2002. For the year ended December 31, 2003, the Company received proceeds from the sale of mortgage loans of $631.9 million as compared to $459.4 million for the year ended December 31, 2002. The volume of mortgage loan originations and related loan sale activity is highly dependent on the overall level of interest rates. The Company

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 18

experienced decreasing loan volume towards the end of 2003 as market interest rates rose from the lows experienced in mid-year. Income from loan servicing was a loss of $2.7 million for the year ended December 31, 2003 as compared to a loss of $2.2 million for the same prior year period. The loss was due to the recognition of an impairment to the loan servicing asset for $2.2 million for the year ended December 31, 2003 as compared to a servicing impairment of $2.1 million in the same prior year period. 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 repayment speeds to increase resulting in a lower valuation for mortgage servicing rights and ultimately lower future servicing fee income. Fees and service charges increased by $1.4 million, or 21.9% for the year ended December 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 and the establishment in late 2002 of a captive subsidiary to recognize fee income from private mortgage insurance.

Operating Expenses

Operating expenses were $44.9 million for the year ended December 31, 2003, an increase of $4.7 million as compared to $40.1 million for the year ended December 31, 2002. Compensation expense for the year ended December 31, 2003 included a non-cash severance expense of $249,000 relating to the acceleration of stock option grants. Additionally, ESOP expense increased $345,000 for the year ended December 31, 2003 as compared to the same prior year period due to the Company’s higher average stock price. Costs for temporary personnel and overtime also increased in 2003 as compared to 2002, primarily related to the Company’s increased loan volume. General and administrative expense increased $1.8 million for the year ended December 2003 as compared to the same prior year period primarily due to higher loan related expenses and additional costs for professional services.

Provision for Income Taxes

Income tax expense was $11.0 million for the year ended December 31, 2003, compared to $9.8 for the same prior year period. The effective tax rate increased to 35.6% for the year ended December 31, 2003 as compared to 32.6% for the same prior year period. 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. Additionally, for the year ended December 31, 2002, the provision for income taxes included a $374,000 tax benefit relating to the passage of the New Jersey Business Tax Reform Act. The legislation increased the tax rate on savings institutions, such as the Bank from 3% to 9%. As a result, deferred tax assets were increased to reflect their expected recognition at the higher tax rate of 9% and current period expense was decreased.

Comparison of Operating Results for the Years Ended December 31, 2002 and December 31, 2001

General

Net income increased $2.0 million, or 10.9%, to $20.1 million for the year ended December 31, 2002 as compared to net income of $18.2 million for the year ended December 31, 2001. Diluted earnings per share increased 19.5%, to $1.47 for the year ended December 31, 2002 as compared to $1.23 for the year ended December 31, 2001. 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.

Interest Income

Interest income for the year ended December 31, 2002 was $108.5 million, compared to $118.2 million for the year ended December 31, 2001, a decrease of $9.7 million. The decrease in interest income was due to a decline in the yield on interest-earning assets to 6.59% for the year ended December 31, 2002 as compared to 7.24% for the same prior year period. Despite this decline, which was reflective of the general interest rate environment, the asset yield continued to benefit from the Bank’s loan growth, which was partly funded by reductions in the lower-yielding mortgage-backed securities available for sale portfolio. For the year ended December 31, 2002 loans receivable represented 81.9% of average interest-earning assets as compared to 76.7% for the same prior year period.

Interest Expense

Interest expense for the year ended December 31, 2002 was $47.6 million, compared to $63.1 million for the year ended December 31, 2001, a decrease of $15.5 million. The decrease in interest expense was primarily the result of a decrease in the average cost of interest-bearing liabilities to 3.18% for the year ended December 31, 2002, as compared to 4.27% 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 56.5% of average deposits for the year ended December 31, 2002, as compared to 46.0% for the same prior year period.

Provision for Loan Losses

For the year ended December 31, 2002, the Company’s provision for loan losses was $1.7 million, as compared to $1.3 million for the year ended December 31, 2001. The increased provision reflects the growth in loans receivable and a change in the overall loan mix to a greater concentration of commercial loans. Additionally, the Company experienced a net charge-off of $1.8 million on a single commercial loan further impacting the provision.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 19

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Other Income

Other income was $10.9 million for the year ended December 31, 2002, as compared to $12.9 million for the year ended December 31, 2001. For the year ended December 31, 2002 the Company recorded a gain of $4.5 million, on the sale of loans, as compared to a gain of $6.0 million in the same prior year period. Loan servicing income decreased by $1.4 million for the year ended December 31, 2002, as compared to the same prior year period due to the recognition of an impairment to the loan servicing asset for $2.1 million for the year ended December 31, 2002 as compared to a servicing impairment of $600,000 in the same prior year period. Fees and service charges increased by $935,000, or 17.0% for the year ended December 31, 2002, 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 $40.1 million for the year ended December 31, 2002, as compared to $39.0 million for the year ended December 31, 2001. Operating expenses for the year ended December 31, 2001 include a $1.7 million charge resulting from the restructuring 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 significantly lower cost. For the year ended December 31, 2002, the Company incurred fees on early debt extinguishment of $72,000. Excluding the respective prepayment penalties, operating expenses increased $2.7 million for the year ended December 31, 2002, as compared to the same prior year period. This increase was principally due to costs associated with the opening and operation of the Bank’s sixteenth and seventeenth branch offices in September 2001 and May 2002, as well as higher loan-related expenses. Compensation expense benefited from the elimination, in February 2002, of the amortization expense relating to the stock awards granted under the 1997 Incentive Plan, a cost savings of $1.8 million for the year ended December 31, 2002 as compared to the same prior year period. This savings was partly offset by an increase in ESOP expense of $652,000 for the year ended December 31, 2002 due to the higher average market price for OCFC shares during 2002.

Provision for Income Taxes

Income tax expense was $9.8 million for the year ended December 31, 2002, compared to $9.5 for the same prior year period. On July 2, 2002, the New Jersey legislature passed the New Jersey Business Tax Reform Act. The legislation provided for an Alternative Minimum Assessment (AMA) tax based on either gross receipts or gross profits and also increased the tax rate on savings institutions, such as the Bank, from 3% to 9%. The legislation was retroactive to January 1, 2002. The net effect of the legislation on the Company was to recognize a tax benefit of $374,000 for the year ended December 31, 2002, as deferred tax assets were increased to reflect their expected recognition at the higher tax rate of 9%.

Cash Earnings

Stockholders’ equity is a critical measure of a company’s ability to repurchase shares, pay dividends and continue to grow. Although reported earnings and return on stockholders’ equity are traditional measures of performance, the Company believes that the change in stockholders’ equity, or “cash earnings,” and related return measures are also a significant measure of a company’s performance. Cash earnings exclude the effects of various non-cash expenses, such as the employee stock plans amortization expense and related tax benefit, as well as the amortization of intangible assets. In the cases of tangible stockholders’ equity (stockholders’ equity less intangible assets) these items have either been previously charged to stockholders’ equity, as in the case of employee stock plans amortization expense, through contra-equity accounts, or do not affect tangible stockholders’ equity, such as the market appreciation of allocated ESOP shares for which the operating charge is offset by a credit to additional paid-in capital and intangible asset amortization for which the related intangible asset has already been deducted in the calculation of tangible stockholders’ equity.

The following table reconciles the Company’s net income with cash earnings. The table is a pro forma calculation which is not in accordance with Generally Accepted Accounting Principles.


Year Ended December 31,	2003		2002		2001
*(in thousands, except share data)*

Net income	$	19,873	$	20,143	$	18,159
Add: Employee stock plans amortization expense		4,073		3,640		4,762
Amortization of intangible assets		104		105		359
Less: Tax benefit ⁽¹⁾		591		590		1,327

Cash earnings	$	23,459	$	23,298	$	21,953

Basic cash earnings per share	$	1.91	$	1.82	$	1.58

Diluted cash earnings per share	$	1.80	$	1.70	$	1.49

(1)	The Company does not receive any tax benefit for that portion of employee stock plan amortization expense relating to the ESOP fair market value adjustment.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 20

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, 2003, the Company had outstanding overnight borrowings from the FHLB, of $24.4 million an increase from no outstanding 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 decreased to $36.7 million at December 31, 2003 from $44.6 million at December 31, 2002. Like deposit flows, this funding source is dependent upon demand from the Bank’s customer base. The Company also had borrowings with the FHLB of $384.4 million at December 31, 2003, an increase from $354.0 million at December 31, 2002. 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, 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, the funding of deposit outflows and the purchase of treasury stock. For the year ended December 31, 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, the purchase of investment and mortgage-backed securities, 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 December 31, 2003, outstanding commitments to originate loans totaled $119.6 million; outstanding unused lines of credit totaled $121.4 million; and outstanding commitments to sell loans totaled $37.2 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

At December 31, 2003, the Bank exceeded all of its regulatory capital requirements with tangible capital of $115.0 million, or 6.68%, of total adjusted assets, which is above the required level of $25.8 million or 1.5%; core capital of $115.0 million or 6.68% of total adjusted assets, which is above the required level of $51.7 million, or 3.0%; and risk-based capital of $125.7 million, or 11.34% of risk-weighted assets, which is above the required level of $88.7 million or 8.0%. The Bank is considered a “well capitalized” institution under the Office of Thrift Supervision’s prompt corrective action regulations.

Off-Balance-Sheet Arrangements and Contractual Obligations

In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding. These financial instruments and commitments include unused consumer lines of credit and commitments to extend credit and are discussed in Note 13 to the Consolidated Financial Statements. The Company also has outstanding commitments to sell loans amounting to $37.2 million.

The following table shows the contractual obligations of the Company by expected payment period as of December 31, 2003 (in thousands). Further discussion of these commitments is included in Notes 9 and 13 to the Consolidated Financial Statements.


Contractual Obligation	Total		Less than one year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations	$	360,000	$	75,000	$	138,000	$	117,000	$	30,000
Operating Lease Obligations		5,657		990		1,643		1,093		1,931
Purchase Obligations		12,554		2,551		5,101		4,902		—

	$	378,211	$	78,541	$	144,744	$	122,995	$	31,931

Long-term debt obligations includes borrowings from the Federal Home Loan Bank and Securities Sold under Agreements to Repurchase. The borrowings have defined terms and under certain circumstances are callable at the option of the lender.

Operating leases represent obligations entered into by the Company for the use of land, premises and equipment. The leases generally have escalation terms based upon certain defined indexes.

Purchase obligations represent legally binding and enforceable agreements to purchase goods and services from third parties and consists primarily of contractual obligations under data processing servicing agreements. Actual amounts expended vary based on transaction volumes, number of users and other factors.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 21

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

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 Company’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 Company’s consolidated financial statements.

FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) was issued in January 2003 and was reissued as FASB Interpretation No. 46 (revised December 2003) (“FIN 46R”). For public entities, FIN 46 or FIN 46R is applicable to all special-purpose entities (SPEs) in which the entity holds a variable interest no later than the end of the first reporting period ending after December 15, 2003, and immediately to all entities created after January 31, 2003. The effective dates of FIN 46R vary depending on the type of reporting enterprise and the type of entity that the enterprise is involved with. FIN 46 and FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 and FIN 46R provides guidance on the identification of entities controlled through means other than voting rights. FIN 46 and FIN 46R specifies how a business enterprise should evaluate its involvement in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. Conversely, effective dispersion of risks among the parties involved, requires that a company that previously consolidated a special purpose entity, upon adoption of FIN 46 or FIN 46R, to deconsolidate such entity. The adoption of FIN 46 and FIN 46R is not expected to have a significant impact on the consolidated financial statements of the Company.

Private Securities Litigation Reform Act Safe Harbor Statement

In addition to historical information, this annual 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 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 such 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 10K.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 22

Consolidated Statements of Financial Condition

December 31, 2003 and 2002

(dollars in thousands, except per share amounts)


	2003			2002
Assets
Cash and due from banks	$	36,172		$	17,192
Investment securities available for sale (notes 3 and 9)		80,458			91,978
Federal Home Loan Bank of New York stock, at cost (note 9)		19,220			18,700
Mortgage-backed securities available for sale (notes 4 and 9)		86,938			138,657
Loans receivable, net (notes 5 and 9)		1,389,220			1,335,898
Mortgage loans held for sale		33,207			66,626
Interest and dividends receivable (note 6)		5,477			6,378
Real estate owned, net		252			141
Premises and equipment, net (note 7)		16,473			17,708
Servicing asset (note 5)		7,473			7,907
Bank Owned Life Insurance (BOLI)		33,948			32,398
Other assets (note 10)		8,571			10,115

Total assets	$	1,717,409		$	1,743,698

Liabilities and Stockholders’ Equity
Deposits (note 8)	$	1,144,205		$	1,184,836
Securities sold under agreements to repurchase with retail customers (note 9)		36,723			44,584
Securities sold under agreements to repurchase with the Federal Home Loan Bank (note 9)		70,000			140,000
Federal Home Loan Bank advances (note 9)		314,400			214,000
Advances by borrowers for taxes and insurance		6,152			5,952
Other liabilities (note 10)		11,267			19,021

Total liabilities		1,582,747			1,608,393

Commitments and contingencies (note 13)
Stockholders’ equity (notes 2, 10, 11 and 12):
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 13,350,999 and 13,757,880 shares outstanding at December 31, 2003 and 2002, respectively		272			272
Additional paid-in capital		189,615			184,934
Retained earnings		150,804			142,224
Accumulated other comprehensive loss		(3,400	)		(3,201	)
Less: Unallocated common stock held by Employee Stock Ownership Plan		(9,911	)		(11,248	)
Treasury stock, 13,826,373 and 13,419,492 shares at December 31, 2003 and 2002, respectively		(192,718	)		(177,676	)

Total stockholders’ equity		134,662			135,305

Total liabilities and stockholders’ equity	$	1,717,409		$	1,743,698

See accompanying notes to consolidated financial statements.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 23

Consolidated Statements of Income

(in thousands, except per share amounts)


Years Ended December 31, 2003, 2002 and 2001	2003			2002			2001
Interest income:
Loans	$	86,881		$	94,427		$	94,718
Mortgage-backed securities		4,440			9,870			17,024
Investment securities and other		3,216			4,159			6,418

Total interest income		94,537			108,456			118,160

Interest expense:
Deposits (note 8)		17,243			27,483			41,489
Borrowed funds		19,651			20,141			21,659

Total interest expense		36,894			47,624			63,148

Net interest income		57,643			60,832			55,012
Provision for loan losses (note 5)		688			1,650			1,250

Net interest income after provision for loan losses		56,955			59,182			53,762

Other income:
Loan servicing loss (note 5)		(2,654	)		(2,203	)		(838	)
Fees and service charges		7,860			6,450			5,515
Net gain on sales of loans and securities available for sale (note 3)		11,842			4,530			5,954
Net income from other real estate operations		113			151			271
Income on Bank Owned Life Insurance		1,550			1,874			1,696
Other		38			55			327

Total other income		18,749			10,857			12,925

Operating expenses:
Compensation and employee benefits (notes 11 and 12)		22,240			20,324			19,987
Occupancy (note 13)		3,592			3,330			3,385
Equipment		2,434			2,281			2,168
Marketing		2,193			1,988			1,711
Federal deposit insurance		478			474			489
Data processing		2,994			2,584			2,128
General and administrative		10,926			9,091			7,511
Prepayment penalty on early extinguishment of debt (note 9)		—			72			1,669

Total operating expenses		44,857			40,144			39,048

Income before provision for income taxes		30,847			29,895			27,639
Provision for income taxes (note10)		10,974			9,752			9,480

Net Income	$	19,873		$	20,143		$	18,159

Basic earnings per share	$	1.62		$	1.57		$	1.30

Diluted earnings per share	$	1.53		$	1.47		$	1.23

Average basic shares outstanding (note 1)		12,291			12,819			13,932

Average diluted shares outstanding (note 1)		13,017			13,696			14,756

See accompanying notes to consolidated financial statements.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 24

Consolidated Statements of Changes in Stockholders’ Equity

(dollars in thousands, except per share amounts)


Years Ended December 31, 2003, 2002 and 2001	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, 2000	$	272	$	179,805	$	121,646		$	(4,927	)	$	(14,156	)	$	(2,096	)	$	(122,808	)	$	157,736

Comprehensive income:
Net income		—		—		18,159			—			—			—			—			18,159
Other comprehensive gain:
Unrealized gain on securities (net of tax expense $2,409)		—		—		—			4,103			—			—			—			4,103

Total comprehensive income																					22,262

Earned Incentive Awards		—		—		—			—			—			1,935			—			1,935
Tax benefit of stock plans		—		641		—			—			—			—			—			641
Purchase 1,954,714 shares of common stock		—		—		—			—			—			—			(31,921	)		(31,921	)
Allocation of ESOP stock		—		—		—			—			1,493			—			—			1,493
ESOP adjustment		—		1,334		—			—			—			—			—			1,334
Cash dividend – $.56 per share		—		—		(7,943	)		—			—			—			—			(7,943	)
Exercise of stock options		—		—		(207	)		—			—			—			1,399			1,192

Balance at December 31, 2001		272		181,780		131,655			(824	)		(12,663	)		(161	)		(153,330	)		146,729

Comprehensive income:
Net income		—		—		20,143			—			—			—			—			20,143
Other comprehensive gain:
Unrealized gain on securities (net of tax expense $1,642)		—		—		—			(2,377	)		—			—			—			(2,377	)

Total comprehensive income																					17,766

Earned Incentive Awards		—		—		—			—			—			161			—			161
Tax benefit of stock plans		—		1,090		—			—			—						—			1,090
Purchase 1,240,750 shares of common stock		—		—		—			—			—			—			(27,427	)		(27,427	)
Allocation of ESOP stock		—		—		—			—			1,415			—			—			1,415
ESOP adjustment		—		2,064		—			—			—			—			—			2,064
Cash dividend – $.69 per share		—		—		(8,916	)		—			—			—			—			(8,916	)
Exercise of stock options		—		—		(658	)		—			—			—			3,081			2,423

Balance at December 31, 2002		272		184,934		142,224			(3,201	)		(11,248	)		—			(177,676	)		135,305

Comprehensive income:
Net income		—		—		19,873			—			—			—			—			19,873
Other comprehensive loss:
Unrealized loss on securities (net of tax benefit $129)		—		—		—			(199	)		—			—			—			(199	)

Total comprehensive income																					19,674

Acceleration of stock option vesting		—		249		—			—			—			—			—			249
Tax benefit of stock plans		—		1,945		—			—			—			—			—			1,945
Purchase 867,259 shares of common stock		—		—		—			—			—			—			(20,620	)		(20,620	)
Allocation of ESOP stock		—		—		—			—			1,337			—			—			1,337
ESOP adjustment		—		2,487		—			—			—			—			—			2,487
Cash dividend – $.78 per share		—		—		(9,618	)		—			—			—			—			(9,618	)
Exercise of stock options		—		—		(1,675	)		—			—			—			5,578			3,903

Balance at December 31, 2003	$	272	$	189,615	$	150,804		$	(3,400	)	$	(9,911	)	$	—		$	(192,718	)	$	134,662

See accompanying notes to consolidated financial statements.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 25

Consolidated Statements of Cash Flows

(in thousands)


Years Ended December 31, 2003, 2002 and 2001	2003			2002			2001
Cash flows from operating activities:
Net income	$	19,873		$	20,143		$	18,159

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		2,118			2,048			1,960
Amortization of Incentive Awards		—			161			1,935
Amortization of ESOP		1,337			1,415			1,493
ESOP adjustment		2,487			2,064			1,334
Acceleration of stock option vesting		249			—			—
Tax benefit of stock plans		1,945			1,090			641
Amortization and impairment of servicing asset		4,976			4,423			2,503
Amortization of intangible assets		105			105			359
Net premium amortization in excess of discount accretion on securities		1,287			1,451			683
Net accretion of deferred fees and discounts in excess of premium amortization on loans		(209	)		(469	)		(407	)
Provision for loan losses		688			1,650			1,250
Deferred taxes		1,037			554			(1,500	)
Net gain on sales of real estate owned		(114	)		(148	)		(308	)
Net gain on sales of loans and securities available for sale		(11,842	)		(4,530	)		(5,954	)
Proceeds from sales of mortgage loans held for sale		631,854			459,440			427,876
Mortgage loans originated for sale		(591,854	)		(488,410	)		(424,162	)
Increase in value of Bank Owned Life Insurance		(1,550	)		(1,874	)		(1,696	)
Decrease in interest and dividends receivable		901			1,254			1,686
Decrease (increase) in other assets		530			(491	)		(3,988	)
(Decrease) increase in other liabilities		(7,754	)		1,830			9,280

Total adjustments		36,191			(18,437	)		12,985

Net cash provided by operating activities		56,064			1,706			31,144

Cash flows from investing activities:
Net increase in loans receivable		(54,053	)		(36,807	)		(165,307	)
Proceeds from sales of investment and mortgage-backed securities available for sale		2,237			—			—
Purchase of investment securities available for sale		(3,540	)		(13,758	)		(1,292	)
Purchase of mortgage-backed securities available for sale		(70,581	)		(65,845	)		(49,006	)
Proceeds from maturities of investment securities available for sale		15,371			—			24,470
Principal payments on mortgage-backed securities available for sale		118,857			156,723			89,916
(Purchases) redemptions of Federal Home Loan Bank of New York stock		(520	)		4,860			(3,560	)
Proceeds from sales of real estate owned		255			757			786
Purchases of premises and equipment		(883	)		(3,026	)		(4,014	)

Net cash provided by (used in) investing activities		7,143			42,904			(108,007	)

Cash flows from financing activities:
(Decrease) increase in deposits		(40,631	)		75,793			4,855
Increase (decrease) in short-term borrowings		16,539			(67,748	)		41,338
Proceeds from Federal Home Loan Bank advances		70,000			25,000			155,000
Repayments of Federal Home Loan Bank Advances		(64,000	)		(43,000	)		(38,000	)
Proceeds from securities sold under agreements to repurchase		—			—			10,000
Repayments of securities sold under agreements to repurchase		—			—			(48,000	)
Increase (decrease) in advances by borrowers for taxes and insurance		200			(419	)		(17	)
Exercise of stock options		3,903			2,423			1,192
Dividends paid		(9,618	)		(8,916	)		(7,943	)
Purchase of treasury stock		(20,620	)		(27,427	)		(31,921	)

Net cash (used in) provided by financing activities		(44,227	)		(44,294	)		86,504

Net increase in cash and due from banks		18,980			316			9,641
Cash and due from banks at beginning of year		17,192			16,876			7,235

Cash and due from banks at end of year	$	36,172		$	17,192		$	16,876

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest	$	36,884		$	48,063		$	64,798
Income taxes		8,044			3,240			7,600
Noncash investing activities:
Transfer of loans receivable to real estate owned		264			617			454
Mortgage loans securitized into mortgage-backed securities	$	40,931		$	129,623		$	90,563

See accompanying notes to consolidated financial statements.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 26

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 wholly-owned subsidiary, OceanFirst Bank (the “Bank”) and its wholly-owned subsidiaries, Columbia Equities, Ltd. (“Columbia”), OceanFirst REIT Holdings, Inc., OceanFirst Realty Corp. and OceanFirst Services, LLC. and its wholly-owned subsidiary OFB Reinsurance, LTD. 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.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statement No. 4, 44 and 65, Amendment of FASB Statement No. 13, and Technical Corrections.” The Statement, among other things, rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt”, as amended. Under SFAS No. 4, as amended, gains and losses from the extinguishment of debt were required to be classified as an extraordinary item, if material. Under SFAS No. 145, gains or losses from the extinguishment of debt are to be classified as a component of operating income, rather than an extraordinary item.

The Company elected to adopt the provisions related to the rescission of SFAS No. 4 effective April 1, 2002. The adoption resulted in a debt prepayment penalty of $72,000 for the year ended December 31, 2002, being classified in general and administrative expenses. The Company recognized an extraordinary loss, net of tax of $1,085,000 for the year ended December 31, 2001 pertaining to debt prepayment penalties. The gross prepayment penalty of $1,669,000 has been reclassified as a component of general and administrative expenses in 2001, with the related tax benefit of $584,000 reported as a component of income tax expense in the consolidated financial statement for the year ending December 31, 2001.

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 costs, and the allowance for loan losses.

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 non-accrual 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.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 27

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.

Mortgage Servicing Rights, or MSR

The Company recognizes as a separate asset the rights to service mortgage loans, whether those rights are acquired through purchase or loan origination activities. MSR are amortized in proportion to and over the estimated period of net servicing income. The estimated fair value of MSR 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 with any impairment recognized as a component of loan servicing fee income.

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 may be established to provide for subsequent declines in the fair values of properties. Real estate owned is carried net of any 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. 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)


	2003			2002			2001
Net income:
As reported	$	19,873		$	20,143		$	18,159

Stock based employee compensation expense included in reported net income, net of related tax effects		162			105			1,257
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		(669	)		(523	)		(2,175	)

Net stock based employee compensation expense not included in reported net income, all relating to stock option grants, net of related tax effects		(507	)		(418	)		(918	)

Pro forma	$	19,366		$	19,725		$	17,241

Basic earnings per share:
As reported	$	1.62		$	1.57		$	1.30
Pro forma		1.58			1.54			1.24

Diluted earnings per share:
As reported	$	1.53		$	1.47		$	1.23
Pro forma		1.49			1.44			1.17

Weighted average fair value of an option share granted during the year	$	4.45		$	4.85		$	3.08

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:


	2003		2002		2001
Risk-free interest rate	2.79	%	4.79	%	4.91	%
Expected option life	6 years		6 years		6 years
Expected volatility	25	%	31	%	22	%
Expected dividend yield	3.25	%	3.25	%	3.35	%

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 28

Notes to Consolidated Financial Statements (continued)

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

For the year ended December 31, 2001, goodwill and core deposit premiums were amortized using the straight line method over periods from five to ten years. Effective January 1, 2002 the Company adopted SFAS 142 “Goodwill and Other Intangible Assets.” SFAS 142 established new standards for goodwill acquired in a business combination. SFAS 142 eliminated amortization of goodwill and instead required a transitional goodwill impairment test to be performed within six months from the date of adoption and requires an annual impairment test be performed thereafter. As of December 31, 2001 the Company had $1.0 million in unamortized goodwill with annual amortization of $253,000, or $.01 per share, which ceased upon the adoption of SFAS 142. The cessation of goodwill for the year ended December 31, 2002 did not have a significant impact on the Company’s consolidated financial statements as compared to the same prior year periods. The Company has determined that there is no impairment to goodwill based on the criteria of SFAS 142. The adoption of SFAS 142 did not impact the Company’s accounting for currently recorded intangible assets, primarily core deposit intangibles which are being amortized over a period of ten years.

Segment Reporting

As a community-oriented financial institution, substantially all of the Bank’s operations involve the delivery of loan and deposit products to customers. The Bank makes operating decisions and assesses performance based on an ongoing review of these community banking operations, which constitute the only operating segment for financial reporting purposes.

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, 2003, 2002 and 2001 (in thousands):


Year ended December 31,	2003		2002		2001
Weighted average shares outstanding	13,585		14,305		15,768
Less: Unallocated ESOP shares	(1,255	)	(1,418	)	(1,588	)
Unallocated Incentive Award shares	(39	)	(68	)	(248	)

Average basic shares outstanding	12,291		12,819		13,932
Add: Effect of dilutive securities:
Stock options	695		822		623
Incentive Awards	31		55		201

Average diluted shares outstanding	13,017		13,696		14,756

(2) 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, 2003 was approximately $6.3 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.

Office of Thrift Supervision (“OTS”) regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2003, 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, 2003 and 2002 the Bank was considered well capitalized.

The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2003 and 2002, compared to the OTS minimum capital adequacy requirements and the OTS requirements for classification as a well capitalized institution (in thousands).


	Actual				For capital adequacy purposes				To be well capitalized under prompt corrective action
As of December 31, 2003:	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tangible capital	$	114,967	6.7	%	$	25,832	1.5	%	$	—	—	%
Core capital		114,967	6.7			51,665	3.0			86,108	5.0
Tier 1 risk-based capital		114,967	10.4			44,326	4.0			66,489	6.0
Risk-based capital		125,715	11.3			88,652	8.0			110,814	10.0


As of December 31, 2002:
Tangible capital	$	115,304	6.6	%	$	26,132	1.5	%	$	—	—	%
Core capital		115,304	6.6			52,265	3.0			87,108	5.0
Tier 1 risk-based capital		115,304	10.7			43,175	4.0			64,763	6.0
Risk-based capital		125,240	11.6			86,350	8.0			107,938	10.0

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 29

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.

(3) Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at December 31, 2003 and 2002 are as follows (in thousands):


December 31, 2003	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
United States Government and agency obligations	$	1,210	$	3	$	—		$	1,213
State and municipal obligations		5,565		61		—			5,626
Corporate debt securities		75,364		—		(7,420	)		67,944
Equity investments		4,263		1,412		—			5,675

	$	86,402	$	1,476	$	(7,420	)	$	80,458


December 31, 2002	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
United States Government and agency obligations	$	1,200	$	16	$	—		$	1,216
State and municipal obligations		5,562		42		—			5,604
Corporate debt securities		88,439		—		(9,032	)		79,407
Equity investments		4,449		1,302		—			5,751

	$	99,650	$	1,360	$	(9,032	)	$	91,978

Gains realized on the sale of investment securities available for sale during 2003 totaled $719,000. There were no losses realized on the sale of investment securities available for sale during 2003. There were no realized gains or losses during 2002 or 2001.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at December 31, 2003 by contractual maturity, are shown below (in thousands). Actual maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2003, investment securities available for sale with an amortized cost and estimated market value of $80,929,000 and $73,570,000, respectively, were callable prior to the maturity date.


December 31, 2003	Amortized Cost		Estimated Market Value
Less than one year	$	—	$	—
Due after one year through five years		1,210		1,213
Due after five years through ten years		—		—
Due after ten years		80,929		73,570

	$	82,139	$	74,783

The carrying value of investment securities pledged as required security for deposits and for other purposes required by law amounted to $1,210,000 and $1,213,000 at December 31, 2003 and 2002, respectively.

The estimated market value and unrealized loss for investment securities available for sale at December 31, 2003, segregated by the duration of the unrealized loss are as follows (in thousands):


December 31, 2003
	Less than 12 months				12 months or longer					Total
	Estimated Market Value		Unrealized Losses		Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses
Corporate debt securities	$	—	$	—	$	67,944	$	(7,420	)	$	67,944	$	(7,420	)

	$	—	$	—	$	67,944	$	(7,420	)	$	67,944	$	(7,420	)

The corporate debt securities are issued by other financial institutions all with an investment grade credit rating of BBB or better as rated by one of the internationally-recognized credit rating services. These floating rate securities were purchased during the period May 1998 to September 1998 and have paid coupon interest continuously since issuance. Floating rate debt securities such as these pay a fixed interest rate spread over LIBOR. Following the purchase of these securities, the required spread increased for these types of securities causing a decline in the market price. Although these investment securities are available for sale, the Company has the ability to hold these securities until maturity at which time the Company expects to receive its fully amortized cost.

(4) Mortgage-Backed Securities Available for Sale

The amortized cost and estimated market value of mortgage-backed securities available for sale at December 31, 2003 and 2002 are as follows (in thousands):


December 31, 2003	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
FHLMC	$	6,588	$	89	$	(4	)	$	6,673
FNMA		72,248		114		(494	)		71,868
GNMA		6,714		488		—			7,202
Collateralized mortgage obligations		1,193		2		—			1,195

	$	86,743	$	693	$	(498	)	$	86,938


December 31, 2002	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
FHLMC	$	14,615	$	245	$	(4	)	$	14,856
FNMA		31,293		363		(3	)		31,653
GNMA		13,432		910		—			14,342
Collateralized mortgage obligations		77,066		754		(14	)		77,806

	$	136,406	$	2,272	$	(21	)	$	138,657

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 30

Notes to Consolidated Financial Statements (continued)

There were no gains or losses realized on the sale of mortgage-backed securities available for sale during 2003, 2002 or 2001.

Collateralized mortgage obligations issued by GNMA and private interests amounted to $1,173,000 and $22,000, respectively, at December 31, 2003. Collateralized mortgage obligations issued by FHLMC, FNMA, GNMA and private interests amounted to $27,951,000, $16,021,000, $20,275,000 and $13,559,000, respectively, at December 31, 2002. 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 internationally recognized credit rating services. The privately-issued CMOs are subject to certain credit-related risks normally not associated with U.S. Government Agency and Government Sponsored Enterprise 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.

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.

The carrying value of mortgage-backed securities pledged as required security for deposits and for other purposes required by law amounted to $7,397,000 and $1,141,000 at December 31, 2003 and December 31, 2002, respectively.

The estimated market value and unrealized loss for mortgage-backed securities available for sale at December 31, 2003, segregated by the duration of the unrealized loss are as follows (in thousands):


December 31, 2003
	Less than 12 months					12 months or longer					Total
	Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses
FHLMC	$	445	$	(1	)	$	307	$	(3	)	$	752	$	(4	)
FNMA		66,353		(490	)		1,235		(4	)		67,588		(494	)

	$	66,798	$	(491	)	$	1,542	$	(7	)	$	68,340	$	(498	)

The mortgage-backed securities in the table above are issued and guaranteed by either FHLMC or FNMA, stockholder-owned corporations chartered by the United States Government, whose debt obligations are rated AA or better by one of the internationally recognized credit rating services. The Company considers the unrealized losses to be the result of changes in interest rates which over time can have both a positive and negative impact on the estimated market value of the mortgage-backed securities.

(5) Loans Receivable, Net

A summary of loans receivable at December 31, 2003 and 2002 follows (in thousands):


December 31,	2003			2002
Real estate mortgage:
One to four-family	$	1,045,841		$	1,030,171
Commercial real estate, multi-family and land		177,969			146,149
FHA insured & VA guaranteed		2,853			5,107

		1,226,663			1,181,427

Real estate construction		11,274			11,079
Consumer		81,455			80,218
Commercial		80,328			74,545

Total loans		1,399,720			1,347,269

Loans in process		(3,829	)		(3,531	)
Deferred origination costs, net		4,136			2,239
Unamortized discount		(5	)		(5	)
Allowance for loan losses		(10,802	)		(10,074	)

		(10,500	)		(11,371	)

	$	1,389,220		$	1,335,898

At December 31, 2003, 2002 and 2001 loans in the amount of $2,162,000, $2,688,000, and $6,180,000, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income. The Company had no impaired loans at December 31, 2003 and 2002. If interest income on nonaccrual loans and impaired loans had been current in accordance with their original terms, approximately $96,000, $87,000 and $379,000 of interest income for the years ended December 31, 2003, 2002 and 2001, respectively, would have been recorded. At December 31, 2003, 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, 2003, 2002 and 2001 is as follows (in thousands):


Year Ended December 31,	2003			2002			2001
Balance at beginning of year	$	10,074		$	10,351		$	9,138
Provision charged to operations		688			1,650			1,250
Charge-offs		(258	)		(2,519	)		(98	)
Recoveries		298			592			61

Balance at end of year	$	10,802		$	10,074		$	10,351

An analysis of the servicing asset for the years ended December 31, 2003, 2002 and 2001 is as follows (in thousands):


Year Ended December 31,	2003			2002			2001
Balance at beginning of year	$	7,907		$	7,628		$	6,363
Capitalized mortgage servicing rights		4,542			4,702			3,768
Amortization and impairment charges		(4,976	)		(4,423	)		(2,503	)

Balance at end of year	$	7,473		$	7,907		$	7,628

The estimated fair value of the servicing asset at December 31, 2003 was $10,427,000.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 31

(6) Interest and Dividends Receivable

A summary of interest and dividends receivable at December 31, 2003 and 2002 follows (in thousands):


December 31,	2003		2002
Loans	$	4,770	$	5,284
Investment securities		288		329
Mortgage-backed securities		419		765

	$	5,477	$	6,378

(7) Premises and Equipment, Net

Premises and equipment at December 31, 2003 and 2002 are summarized as follows (in thousands):


December 31,	2003			2002
Land	$	3,195		$	3,195
Buildings and improvements		15,506			15,366
Leasehold improvements		2,052			2,042
Furniture and equipment		12,383			11,656
Automobiles		270			264
Construction in progress		—			36

Total		33,406			32,559
Accumulated depreciation and amortization		(16,933	)		(14,851	)

	$	16,473		$	17,708

(8) Deposits

Deposits, including accrued interest payable of $36,000 and $178,000 at December 31, 2003 and 2002, respectively, are summarized as follows (in thousands):


December 31,	2003				2002
	Amount		Weighted Average Cost		Amount		Weighted Average Cost
Non-interest bearing accounts	$	108,668	—	%	$	86,290	—	%
NOW accounts		249,254	.47			260,762	.99
Money market deposit accounts		138,812	.90			123,960	1.38
Savings accounts		259,629	.49			234,995	1.00
Time deposits		387,842	2.72			478,829	3.36

	$	1,144,205	1.24	%	$	1,184,836	1.92	%

Included in time deposits at December 31, 2003 and 2002, respectively, is $46,189,00 and $69,168,000 in deposits of $100,000 and over.

Time deposits at December 31, 2003 mature as follows (in thousands):


Year ended December 31,
2004	$	276,976
2005		36,875
2006		25,952
2007		21,123
2008		9,505
Thereafter		17,411

	$	387,842

Interest expense on deposits for the years ended December 31, 2003, 2002 and 2001 was as follows (in thousands):


Year ended December 31,	2003		2002		2001
NOW accounts	$	1,743	$	3,610	$	4,476
Money market deposit accounts		1,372		1,813		1,744
Savings accounts		1,679		2,955		3,342
Time deposits		12,449		19,105		31,927

	$	17,243	$	27,483	$	41,489

(9) Borrowed Funds

Borrowed funds are summarized as follows (in thousands):


December 31,	2003				2002
	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Federal Home Loan Bank advances	$	314,400	4.63	%	$	214,000	5.17	%
Securities sold under agreements to repurchase		106,723	3.73			184,584	4.39

	$	421,123	4.40	%	$	398,584	4.81	%

Information concerning Federal Home Loan Bank (“FHLB”) advances and securities sold under agreements to repurchase (“reverse repurchase agreements”) is summarized as follows (in thousands):


	FHLB Advances						Reverse Repurchase Agreements
	2003			2002			2003			2002
Average balance	$	272,928		$	237,987		$	151,901		$	180,692
Maximum amount outstanding at any month end		321,300			309,900			173,039			190,455
Average interest rate for the year		4.89	%		4.88	%		4.16	%		4.72	%

Amortized cost of collateral:
Corporate securities		—			—		$	75,364		$	59,430
Mortgage-backed securities		—			—			66,123			114,934

Estimated market value of collateral:
Corporate securities		—			—			67,944			52,147
Mortgage-backed securities		—			—			65,883			117,054

The securities collateralizing the reverse repurchase agreements are not held by the Company, as they are delivered to the lender with whom each transaction is executed or to a third party custodian. 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.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 32

Notes to Consolidated Financial Statements (continued)

FHLB advances and reverse repurchase agreements have contractual maturities at December 31, 2003 as follows (in thousands):


	FHLB Advances		Reverse Repurchase Agreements
2004	$	99,400	$	36,723
2005		70,000		—
2006		48,000		20,000
2007		53,000		15,000
2008		14,000		35,000
Thereafter		30,000		—

	$	314,400	$	106,723

Amount callable by lender prior to the maturity date	$	50,000	$	70,000

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. In the second quarter of 2002, the Bank prepaid $8,000,000 of outstanding borrowings with a weighted average cost of 3.70%, incurring a prepayment penalty of $72,000.

The Bank has an available overnight line of credit with the FHLB for $50,000,000 which expires November 25, 2004. The Bank also has available from the FHLB, a one-month overnight repricing line of credit for $50,000,000 which expires November 25, 2004. 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.

(10) Income Taxes

The provision for income taxes for the years ended December 31, 2003, 2002 and 2001 consists of the following (in thousands):


Year Ended December 31,	2003			2002			2001
Current:
Federal	$	9,448		$	8,556		$	10,922
State		489			642			58

Total Current		9,937			9,198			10,980

Deferred:
Federal		1,297			1,355			(1,500	)
State		(260	)		(801	)		—

Total deferred		1,037			554			(1,500	)

		$ 10,974		$	9,752		$	9,480

On July 2, 2002, the New Jersey legislature passed the New Jersey Business Tax Reform Act. The legislation provided for an Alternative Minimum Assessment (AMA) tax based on either gross receipts or gross profits and also increased the tax rate on savings institutions, such as the Bank, from 3% to 9%. The legislation was retroactive to January 1, 2002. The net effect of the legislation on the Company was to recognize a tax benefit of $374,000 for the year ended December 31, 2002, as deferred tax assets were increased to reflect their expected recognition at the higher tax rate of 9%.

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 $(129,000), $1,642,000 and $2,409,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Included in stockholders’ equity is income tax benefit attributable to stock plans in the amount of $1,945,000, $1,090,000 and $641,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

A reconciliation between the provision for income taxes and the expected amount computed by multiplying income before the provision for income taxes times the applicable statutory Federal income tax rate for the years ended December 31, 2003, 2002 and 2001 is as follows (in thousands):


Year Ended December 31,	2003			2002			2001
Income before provision for income taxes	$	30,847		$	29,895		$	27,639
Applicable statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
Computed “expected” Federal income tax expense	$	10,796		$	10,463		$	9,674
Increase(decrease) in Federal income tax expense resulting from:
ESOP adjustment		870			722			467
ESOP dividends		(290	)		(229	)		—
Earnings on life insurance		(543	)		(656	)		(594	)
State income taxes net of Federal benefit		149			(391	)		38
Other items, net		(8	)		(157	)		(105	)

	$	10,974		$	9,752		$	9,480

Included in other assets at December 31, 2003 and 2002 is a net deferred tax asset of $5,049,000 and $5,957,000, respectively. In addition, at December 31, 2003 and 2002 the Company recorded a current tax payable of $7,175,000 and $7,219,000, respectively.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 33

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2002 are presented below (in thousands):


December 31,	2003			2002
Deferred tax assets:
Allowance for loan and real estate owned losses per books	$	4,412		$	4,318
Reserve for uncollected interest		40			45
Deferred compensation		492			462
Premises and equipment, differences in depreciation		960			547
Other reserves		74			138
Stock plans		260			216
ESOP		127			180
Unrealized loss on securities available for sale		2,349			2,220
Intangible assets		98			128
Lease termination costs		94			130
Penalty on early extinguishment of debt		197			471
Partnership investment income		—			175
State alternative minimum tax		479			271

Total deferred tax assets		9,582			9,301

Deferred tax liabilities:
Allowance for loan and real estate owned losses for tax purposes		—			(167	)
Excess servicing on sale of mortgage loans		(834	)		(1,309	)
Investments, discount accretion		(207	)		(180	)
Deferred loan and commitment costs, net		(1,939	)		(1,688	)
Undistributed income of real estate investment trust subsidiary		(1,553	)		—

Total deferred tax liabilities		(4,533	)		(3,344	)

Net deferred tax assets	$	5,049		$	5,957

The Company has determined that it is not required to establish a valuation reserve for the net deferred tax asset account since it is “more likely than not” that the net 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 net 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.

Retained earnings at December 31, 2003 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, 2003 the Company had an unrecognized deferred tax liability of $4,391,000 with respect to this reserve.

(11) 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 employees contribution. During 2003, 2002 and 2001, 13,802, 13,847 and 15,565 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 2,013,137 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 633,750 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, 2003 and 2002 contributions to the ESOP, which were used to fund principal and interest payments on the ESOP debt, totaled $2,408,000 and $2,548,000, respectively. During 2003 and 2002, $1,034,000 and $1,035,000, respectively, of dividends paid on unallocated ESOP shares were used for debt service. At December 31, 2003 and 2002, the loan had an outstanding balance of $10,197,000 and $11,644,000, respectively, and the ESOP had unallocated shares of 1,175,352 and 1,333,905, respectively. At December 31, 2003, the unallocated shares had a fair value of $31,911,000. 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, 2003, 2002 and 2001, the Bank recorded compensation expense related to the ESOP of $3,824,000, $3,479,000 and $2,827,000, respectively, including $2,487,000, $2,064,000 and $1,334,000, 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, 2003, 1,324,802 shares had been allocated to participants and 146,734 shares were committed to be released.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 34

Notes to Consolidated Financial Statements (continued)

(12) Incentive Plan

The Company has established the Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan (the “Incentive Plan”) which authorizes the granting of stock options and awards of Common Stock and the OceanFirst Financial Corp. 2000 Stock Option Plan which authorizes the granting of stock options. On April 24, 2003 the Company’s shareholders ratified an amendment of the OceanFirst Financial Corp. 2000 Stock Option Plan which increased the number of shares available under option. The purpose of these 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 1,006,569 shares in the open market at a cost of $10,176,000. These shares were awarded to officers and directors. Such amounts represented deferred compensation and were accounted for as a reduction of stockholders’ equity. Awards vested at the rate of 20% per year except that the Company determined that certain awards were also contingent upon attainment of certain performance goals by the Company, which performance goals were established by a committee of Outside Directors. The final vesting of awards occurred on February 4, 2002. The Company recorded compensation expense relating to stock awards of $0, $161,000 and $1,935,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

Under the Incentive Plan and the Amended 2000 Stock Option Plan, the Company is authorized to issue up to 4,153,564 shares 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.

A summary of option activity for the years ended December 31, 2003, 2002 and 2001 follows:


	2003				2002				2001
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding at beginning of year	2,483,146		$	11.58	2,253,773		$	10.01	2,348,567		$	9.90
Granted	378,305			23.51	514,261			17.95	52,667			15.08
Exercised	(507,991	)		9.90	(248,662	)		9.75	(119,864	)		9.95
Forfeited	(62,123	)		19.36	(36,226	)		16.55	(27,597	)		12.67

Outstanding at end of year	2,291,337		$	13.71	2,483,146		$	11.58	2,253,773		$	10.01

Options exercisable	1,521,233				1,889,429				1,632,341

The following table summarizes information about stock options outstanding at December 31, 2003:


	Options Outstanding				Options Exercisable
Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$ 9.29 to $9.87	1,176,754	3.10 years	$	9.60	1,176,429	$	9.60
10.00 to 12.87	256,385	4.90		11.26	231,450		11.16
13.06 to 16.96	41,229	6.89		14.28	20,496		14.10
17.14 to 17.88	450,695	8.00		17.88	90,649		17.88
18.64 to 22.01	11,024	8.36		20.64	2,209		20.64
23.44 to 27.82	355,250	9.51		23.51	—		—

	2,291,337	5.35 years	$	13.71	1,521,233	$	10.41

(13) 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, 2003, the following commitments and contingent liabilities existed which are not reflected in the accompanying consolidated financial statements (in thousands):


December 31,	2003
Unused consumer and construction loan lines of credit (primarily floating-rate)	$	67,585

Unused commercial loan lines of credit (primarily floating-rate)		53,798

Other commitments to extend credit:
Fixed-Rate		64,673
Adjustable-Rate		36,766
Floating-Rate		18,134

The Company’s fixed-rate loan commitments expire within 90 days of issuance and carried interest rates ranging from 4.75% to 7.00% at December 31, 2003.

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.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 35

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, 2003, the Company is obligated under noncancelable operating leases for premises and equipment. Rental expense under these leases aggregated approximately $1,419,000, $1,263,000 and $1,647,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

The projected minimum rental commitments as of December 31, 2003 are as follows (in thousands):


Year ended December 31,
2004	$	990
2005		844
2006		799
2007		706
2008		387
Thereafter		1,931

	$	5,657

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.

(14) 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 investment 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 or the outstanding borrowings to the FHLB.

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.

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.

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 36

Notes to Consolidated Financial Statements (continued)

The estimated fair values of the Bank’s financial instruments as of December 31, 2003 and 2002 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.


December 31, 2003	Book Value		Fair Value
Financial Assets:
Cash and due from banks	$	36,172	$	36,172
Investment securities available for sale		80,458		80,458
Mortgage-backed securities available for sale		86,938		86,938
Federal Home Loan Bank of New York stock		19,220		19,220
Loans receivable and mortgage loans held for sale		1,422,427		1,447,711
Financial Liabilities:
Deposits		1,144,205		1,146,370
Borrowed funds	$	421,123	$	443,048

December 31, 2002	Book Value		Fair Value
Financial Assets:
Cash and due from banks	$	17,192	$	17,192
Investment securities available for sale		91,978		91,978
Mortgage-backed securities available for sale		138,657		138,657
Federal Home Loan Bank of New York stock		18,700		18,700
Loans receivable and mortgage loans held for sale		1,402,524		1,444,850
Financial Liabilities:
Deposits		1,184,836		1,192,417
Borrowed funds	$	398,584	$	425,123

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.

(15) Parent-Only Financial Information

The following condensed statements of financial condition at December 31, 2003 and 2002 and condensed statements of operations and cash flows for the years ended December 31, 2003, 2002 and 2001 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,	2003		2002
Assets
Cash and due from banks	$	7	$	7
Advances to subsidiary Bank		6,483		5,455
Investment securities		5,675		5,751
ESOP loan receivable		10,197		11,644
Investment in subsidiary Bank		113,171		113,065

Total assets	$	135,533	$	135,922

Liabilities and Stockholders’ Equity
Other liabilities		871	$	617
Stockholders’ equity		134,662		135,305

Total liabilities and stockholders’ equity	$	135,533	$	135,922

CONDENSED STATEMENTS OF OPERATIONS

(in thousands)


Year ended December 31,	2003			2002			2001
Dividend income - Subsidiary Bank	$	25,000		$	35,000		$	15,000
Dividend income - Investment securities		468			659			140
Gain on sale - Investment securities		719			—			—
Interest income - Advances to subsidiary Bank		39			57			411
Interest income - ESOP loan receivable		961			1,082			1,204

Total dividend and interest income		27,187			36,798			16,755
Operating expenses		1,272			1,299			1,226

Income before income taxes and equity in (distributions in excess) undistributed earnings of subsidiary Bank		25,915			35,499			15,529
Provision for income taxes		390			187			156

Income before equity in (distributions in excess of) undistributed earnings of subsidiary Bank		25,525			35,312			15,373
Equity in (distributions in excess of) undistributed earnings of subsidiary Bank		(5,652	)		(15,169	)		2,786

Net income	$	19,873		$	20,143		$	18,159

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 37

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)


Year ended December 31,	2003			2002			2001
Cash flows from operating activities:
Net income	$	19,873		$	20,143		$	18,159
(Increase) decrease in advances to subsidiary Bank		(1,028	)		(2,452	)		18,969
(Equity in) distributions in excess of undistributed earnings of subsidiary Bank		5,652			15,169			(2,786	)
Deferred taxes		—			—			1,309
Gain on sale of investment securities		(719	)		—			—
Increase (decrease) in other liabilities		205			32			(307	)
Reduction in Incentive Awards		—			161			1,935

Net cash provided by operating activities		23,983			33,053			37,279

Cash flows from investing activities:
Proceeds from sale of investment securities		2,237			—			—
Purchase of investment securities		(1,332	)		(600	)		(92	)
Repayments on ESOP loan receivable		1,447			1,467			1,485

Net cash provided by investing activities		2,352			867			1,393

Cash flows from financing activities:
Dividends paid		(9,618	)		(8,916	)		(7,943	)
Purchase of treasury stock		(20,620	)		(27,427	)		(31,921	)
Exercise of stock options		3,903			2,423			1,192

Net cash used in financing activities		(26,335	)		(33,920	)		(38,672	)

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)*

2003
Interest income	$	22,097	$	22,699	$	24,313	$	25,428
Interest expense		8,537		8,904		9,412		10,041

Net interest income		13,560		13,795		14,901		15,387
Provision for loan losses		15		48		250		375

Net interest income after provision for loan losses		13,545		13,747		14,651		15,012
Other income		5,608		5,634		3,827		3,680
Operating expenses		12,369		11,057		10,815		10,616

Income before provision for income taxes		6,784		8,324		7,663		8,076
Provision for income taxes		2,437		2,994		2,716		2,827

Net Income	$	4,347	$	5,330	$	4,947	$	5,249

Basic earnings per share	$	.36	$	.43	$	.40	$	.42

Diluted earnings per share	$	.34	$	.41	$	.38	$	.40

2002
Interest income	$	25,902	$	27,271	$	26,869	$	28,414
Interest expense		10,973		11,699		12,206		12,746

Net interest income		14,929		15,572		14,663		15,668
Provision for loan losses		400		375		375		500

Net interest income after provision for loan losses		14,529		15,197		14,288		15,168
Other income		3,986		1,340		3,106		2,425
Operating expenses		10,557		9,899		9,810		9,878

Income before provision for income taxes		7,958		6,638		7,584		7,715
Provision for income taxes		2,790		1,848		2,448		2,666

Net Income	$	5,168	$	4,790	$	5,136	$	5,049

Basic earnings per share	$	.41	$	.38	$	.40	$	.38

Diluted earnings per share	$	.39	$	.35	$	.37	$	.36

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 38

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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

LOGO

Short Hills, New Jersey

February 20, 2004

OceanFirst Financial Corp. (OCFC) | 2003 Annual Report | 39

Exhibit 23

INDEPENDENT ACCOUNTANTS’ CONSENT

The Board of Directors

OceanFirst Financial Corp.:

We consent to incorporation by reference in the registration statement (No. 333-42088) on Form S-8, pertaining to the OceanFirst Financial Corp. 2000 Stock Option Plan, and in the registration statement (No. 33-34143) on Form S-8, pertaining to the OceanFirst Financial Corp. 1997 Incentive Plan, and in the registration statement (No. 33-34145), on Form S-8, pertaining to the Retirement Plan for OceanFirst Bank, of OceanFirst Financial Corp., of our report dated February 20, 2004, relating to the consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary as of December 31, 2003 and 2002 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, 2003, which report is incorporated by reference in the December 31, 2003 Annual Report on Form 10-K of OceanFirst Financial Corp.

KPMG LLP

Short Hills, New Jersey

March 12, 2004

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a)/15d-14(c)

I, John R. Garbarino, certify that:

I have reviewed this annual report on Form 10-K of OceanFirst Financial Corp.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), for the registrant and have:

Designed such disclosure controls and procedures or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: March 10, 2004				/s/ John R. Garbarino

				John R. Garbarino Chief Executive Officer (principal executive officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a)/15d-14(c)

I, Michael Fitzpatrick certify that:

I have reviewed this annual report on Form 10-K of OceanFirst Financial Corp.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: March 10, 2004				/s/ Michael Fitzpatrick

				Michael Fitzpatrick Chief Financial Officer (principal financial officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 1350

In connection with the Annual Report of OceanFirst Financial Corp. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Garbarino, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

To my knowledge the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/ John R. Garbarino

John R. Garbarino

Chief Executive Officer

March 10, 2004

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 1350

In connection with the Annual Report of OceanFirst Financial Corp. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Fitzpatrick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as added by §906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

/s/ Michael Fitzpatrick

Michael Fitzpatrick

Chief Financial Officer

March 10, 2004

Exhibit 99.1

OceanFirst Financial Corp.

OceanFirst Bank

CODE OF ETHICS

AND

STANDARDS OF PERSONAL CONDUCT

NOVEMBER 19, 2003

CODE OF ETHICS

AND

STANDARDS OF PERSONAL CONDUCT

TABLE OF CONTENTS



I. PURPOSE				1

II. SCOPE				1

III. OVERALL POLICY				1

IV. SPECIFIC POLICIES

A. Conflicts of Interest				1

B. Protection of Confidential Information				2

C. Investments				2

D. Outside Activities				4

E. Board Directorships and Partnerships				4

F. Improper Payments				4

G. Trade Associations and Relations with Competitors				4

H. Advertising Policy				4

I. Political Activity/Contributions/Political Action Committees				4

J. Public Statements				5

K. Financial Responsibility				5

L. Use of Bank Letterhead or Postage				5

M. Personal Conduct				5

N. Receipt of Benefits				5

O. Loans to Representatives				5



P. Transactions with the Bank/Holding Company				6

Q. Obligations Regarding Financial Information, Records and Disclosures				6

R. Accounting or Auditing Matters				7

S. Compliance				7

T. Code Violations				7

U. Securities Policies and Insider Trading				7

V. Amendments or Waivers for Senior Financial Officers				8

V. ADMINISTRATION AND RESPONSIBILITY FOR COMPLIANCE				8

EXHIBIT A

CODE OF ETHICS

AND

STANDARDS OF PERSONAL CONDUCT

PURPOSE

This Policy establishes the standards of ethical business behavior and personal conduct for the directors, officers, employees, attorneys and/or agents (together referred to as “Representatives”) of OceanFirst Financial Corp. (the “Holding Company”), OceanFirst Bank (the “Bank”) and their subsidiaries. The term “OceanFirst” means the Holding Company, the Bank and their subsidiaries.

Fundamental to OceanFirst’s continued success is the perpetuation of integrity and the highest ethical standards among all of OceanFirst’s Representatives. The intent of this policy is to safeguard OceanFirst’s tradition of strong moral, ethical and social standards of conduct. This policy is not a replacement for policies and procedures that address the specifics of our business or which may impose stricter or more detailed requirements.

II.

SCOPE

This policy applies to all Representatives of OceanFirst.

III.	OVERALL POLICY

A bank, as a business built upon public trust and confidence, depends upon a favorable perception by customers, shareholders, federal and state regulators and others in both the business community and the general community. It is imperative that OceanFirst Representatives conduct their business and personal actions honestly and ethically. Representatives must ensure that no one observing their actions would have reason to believe that even the slightest irregularity or impropriety in their conduct exists or could be implied.

Since OceanFirst is a publicly traded company, it is particularly critical that OceanFirst Representatives learn about and comply with securities law requirements and restrictions concerning trading company stock while occupying insider positions, as well as the prohibition on disclosing material information relating to the Holding Company or the Bank, which is not generally available to the public.

IV.	SPECIFIC POLICIES

Conflicts of Interest

Representatives of OceanFirst are expected to conduct their private business and personal activities involving OceanFirst, its customers or third parties honestly, ethically and in a manner that avoids conflicts of interest. A conflict

of interest cannot be defined precisely, only illustrated. The basic factor that exists in all conflict situations is a division of loyalty between the company’s best interests and the personal interests of the individual. The following examples illustrate types of situations that may cause conflicts:

A Representative has a personal financial interest in an outside business or venture that conducts business or has a financial relationship with OceanFirst so that one’s judgment on behalf of OceanFirst might reasonably be influenced by that outside relationship.

A Representative may not advance his or her personal or business interests, or those of someone with whom he or she has a personal or business relationship at the expense of OceanFirst. On any matter coming before the Board of Directors in which a Representative has an interest, he or she shall disclose to the Board: 1) the nature and extent of the interest; 2) all material non-privileged information and facts as to the matter under consideration; and 3) the Representative shall refrain from participating in and, if a director, from voting following the Board’s deliberations.

Representatives may not take personal advantage of corporate opportunities which are of present or practical advantage to OceanFirst and which are within the corporate powers of OceanFirst.

No lending officer or employee should loan, review a loan or make any decision regarding a loan to himself or herself or to any customer, syndicate or corporation in which he or she has a present or prospective financial interest.

Protection of Confidential Information

All OceanFirst Representatives shall be supplied with, acknowledge and honor the terms of the Privacy Policy adopted by the Board of Directors. In addition to possible penalties imposed by any state or federal regulation or statute, violation of the Policy, if proven, will subject the Representative to discharge or removal from his/her position of trust.

Except for information authorized for public disclosure by the Board of Directors, or as required or permitted by appropriate governmental agency or law, no financial or other information regarding OceanFirst or any of its activities is to be provided to any person not employed by OceanFirst.

Investments in Customers and Suppliers

No investment interest, direct or indirect, in the business of any of the Bank’s customers or suppliers is permitted except as outlined below in paragraphs 2a, 2b and 3. Any exceptions must be reported to and approved in advance by the Board of Directors. This prohibition applies to all OceanFirst Representatives

and their families and to all forms of investment including, but not limited to, securities, investment in proprietorships, limited liability companies, joint ventures or similar business activities.

Investments are permitted in public companies which are customers or suppliers, if the securities of the company are listed on an organized exchange or are traded in the over-the-counter market or if it is otherwise evident that such investments are not being made on terms that are any more favorable than those terms available to the general public, subject, however, to the following restrictions:

Caution should be exercised by each Representative to ensure that the nature and amount of such permitted investments are in such amounts as are prudent for a person maintaining a financial condition entirely within conservative limits.

Acceptance of preferential treatment in the form of an allocation of “hot” issues that are, or may become, in such demand that the broker, investment banker, issuer or other seller of such securities could reasonably expect to receive or has already received favorable treatment by reason of making the allocation available is prohibited.

Investments in “limited partnership interests” will be permitted if it is evident that such investments are not being made on terms more favorable than those that are available to the general public. In the case of “limited partnership investments”, it would be important that an individual’s investment be only one of several such interests sold to the general public and in such amounts as are prudent for a person maintaining a financial condition entirely within conservative limits.

Personal investments or investments of immediate family members should never involve the use of any confidential information which might be considered to be “insider information,” i.e. information not publicly disclosed.

Investment activity involving pledging or hypothecating stock and trading in brokerage margin accounts is permitted only if done in a financially responsible manner, executed in accordance with all federal regulations, including Federal Reserve Regulations T, U and X, and all applicable Company and Bank policies, including those governing insider trading, confidentiality and the SEC Short-Swing Profit Rule.

Outside Activities

Representatives must keep outside business activities, such as a second job or self-employment, completely separate from a Representative’s activities with Ocean First. Representatives have been and are encouraged to be active and involved participants in their community. Such activities should be limited by the person’s own interests and reasonable time requirements. Representatives are discouraged, however, and may be prohibited from engaging in any outside interest or employment to the extent that it will divert time or attention from or adversely impact the performance of Bank duties. Representatives may not use company assets, facilities, materials or the services of other employees for outside activities unless specifically authorized by the company, such as for volunteer work.

Board Directorships and Partnerships

Except for religious or non-profit organizations, no Representative shall serve as a director of a board, without approval of the Bank’s Board of Directors.

Improper Payments

OceanFirst prohibits making payments to any governmental, political, business or labor organization or individual, except as authorized by law. Use of any Bank personnel or resources in violation of any federal, state or local law or regulation or personnel policy is strictly prohibited.

Trade Associations and Relations with Competitors

OceanFirst will act with trade associations and competitors only on behalf of ethical and beneficial social objectives and will not participate in business activities that are or could be construed to be in violation of anti-trust laws.

Advertising Policy

The content and impact of all advertising shall be accurate and in accordance with all federal and state laws to which OceanFirst is subject.

Political Activity/Contributions/Political Action Committees

It is OceanFirst’s policy not to contribute money, property or services to any government official, political party or candidate whether local, state or federal.

OceanFirst is prohibited from offering or allowing the use of its facilities, equipment and personnel in connection with any federal, state or local election or campaign.

Representatives of OceanFirst may, and are encouraged to, engage in any governmental regulatory or elective process in which they are interested. This

participation may be on an individual basis, group basis or as a member of a political action committee. Each Representative may act only on his/her own behalf and shall not make any representation, direct or implied, that he/she speaks for or represents the position of OceanFirst.

The above requirements do not prohibit OceanFirst representatives from participation in and contributing to any legitimate political action committee established and operated pursuant to applicable law.

Public Statements

Although OceanFirst has a policy of maintaining good relations with the news media and tries to accommodate media inquiries, information concerning the Holding Company and the Bank should not be made available to the public except in accordance with OceanFirst’s established policies concerning disclosure of information. For these and other reasons, any inquiry made about OceanFirst or a customer by the news media should be referred to a senior Bank officer or the Marketing Department.

Financial Responsibility

All Representatives should conduct their financial affairs in a responsible manner so as to be above criticism.

Use of OceanFirst Letterhead or Postage

No Representative may use official OceanFirst stationery or postage for personal or non-job related purposes, particularly if such use would imply endorsement by OceanFirst on a personal matter or makes reference to Bank employment in matters of personal dispute.

Personal Conduct

All Representatives of OceanFirst shall be required to conduct themselves in accordance with the Standards of Conduct set forth in the Employee Handbook, as updated from time to time.

Receipt of Benefits

Acceptance of gifts, favors or preferential treatment from customers or vendors of OceanFirst is prohibited, except as specifically permitted by a written policy of OceanFirst. The Bank maintains a written policy regarding receipt of benefits which must be complied with by all Representatives.

Loans to Representatives

OceanFirst shall comply with applicable law, including Regulation O of the Federal Reserve Board, standard credit underwriting procedures and any policy adopted by it and applicable to loan applications received from Representatives.

Transactions with the Bank/Holding Company

Except as permitted by law or approved policy, Representatives should not use their position to profit personally at the expense of OceanFirst and should not solicit or accept preferential treatment from the institution or its affiliates. Representatives should consistently seek to avoid any transaction which would give the appearance of preferential treatment or usurpation of OceanFirst policy. Whenever a Representative enters into a transaction with the Holding Company or the Bank in which there will be an exchange of consideration outside of the normal employer/employee or director relationship, the Board shall first review and approve such transaction and note same in the minutes. In approving any transaction, the Board should consider the following:

whether the Representative obtained a deal that was more favorable to him/her than otherwise available to the general public,

whether the transaction creates an actual conflict of interest or the appearance of a conflict of interest,

whether the Board of Directors was fully informed of the transaction and approved it (with the interested party abstaining) after full discussion, and

whether OceanFirst complied with all applicable laws or regulations governing the transaction, including any required prior written regulatory approval.

Obligations Regarding Financial Information, Records and Disclosures

All Representatives, including in particular, the Chief Executive Officer, the Chief Financial Officer, the Treasurer and the Controller, (the “Senior Financial Officers”) shall:

provide full, fair, accurate, timely and understandable disclosure in reports and documents that OceanFirst files with or submits to the Securities and Exchange Commission;

comply with rules and regulations of federal, state and local governments and other regulatory agencies that affect the conduct of OceanFirst business and its financial reporting;

act in good faith, responsibly and with due care, competence and diligence, without misrepresenting material facts or allowing the Representative’s independent judgment to be subordinated;

share knowledge and maintain skills relevant and necessary to carry out the Representative’s duties at OceanFirst; and

promptly bring to the attention of General Counsel any information concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the company’s ability to record, process, summarize and report financial data; or (b) any fraud, dishonesty, illegality or unethical conduct, whether or not material, that involves management or other employees who have a role in the company’s financial reporting, disclosures or internal controls.

Accounting or Auditing Matters

Concerns or complaints regarding questionable accounting or auditing matters should be reported in accordance with the Complaint Procedure established by the Audit Committee, a copy of which is attached as Exhibit A.

Compliance

It is the policy of OceanFirst and the obligation of each Representative to comply with all applicable laws, rules and regulations to which OceanFirst is subject, including, without limitation, employment, harassment, discrimination, safety, securities, consumer protection, privacy and banking laws. It is the further obligation of each Representative to comply with all policies and procedures of OceanFirst which are designed to establish compliance with applicable laws.

Code Violations

Representatives are obligated to report violations of this Code promptly to the Representative’s immediate supervisor or the Human Resources Manager, as appropriate, who shall confidentially and promptly investigate allegations and, if warranted, initiate remedial action. There shall be no retaliation against any Representative who reports an alleged violation of the Code of Ethics in good faith.

Securities Policies and Insider Trading

OceanFirst maintains a policy on insider trading and confidentiality of information that provides more complete guidance on the subject of insider trading, including rules on trading in company securities by individuals who have access to certain financial information. Engaging in insider trading or providing confidential information that is used in insider trading is illegal and can result in substantial fines and criminal penalties.

Directors and executive officers are also directed to review Holding Company policies on trading and filing responsibilities including the SEC Short-Swing Profit

Rule, Short Sale Restrictions and Filing Responsibilities Compliance Program which applies to OceanFirst directors and executive officers, who must comply with these policies.

Amendments or Waivers for Directors, Senior Financial Officers and Executive Officers

Waivers of any requirement of this Code of Ethics will be extremely rare. Requests for waivers by any Director, Senior Financial Officer or Executive Officer as defined under SEC Rules and Regulations, must be presented in writing to the Board of Directors for approval. If the Board approves a waiver to the Code of Ethics at the request of a Director, a Senior Financial Officer or Executive Officer, the waiver shall be disclosed and reported on Form 8-K or otherwise as authorized by the SEC, within 5 business days.

Any amendment to the Code of Ethics that applies to Directors, Senior Financial Officers and Executive Officers must be approved by the Board of Directors, disclosed and reported on Form 8-K or otherwise as authorized by the SEC, within 5 business days.

V.	ADMINISTRATION AND RESPONSIBILITY FOR COMPLIANCE

The primary accountability and responsibility for this Code of Ethics and Standards of Personal Conduct Policy rests with each Representative. Each OceanFirst supervisor and manager has the additional responsibility to demonstrate by example what compliance with this Policy means. Failure to adhere to the Code will result in disciplinary action, which may include termination of a Representative’s employment or relationship with OceanFirst.

Exhibit A

Complaint Procedures for Accounting and Auditing Matters

OceanFirst (the “Company”) encourages individuals, including all employees, to raise concerns regarding any suspected violations of accounting, accounting controls or auditing standards and practices as provided in these Procedures. Any employee may submit a good faith complaint regarding accounting or auditing matters to the Company without fear of dismissal or retaliation of any kind. The Company’s Audit Committee will oversee treatment of employee concerns in this area.

The Audit Committee has established the following procedures for (1) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (“Accounting Matters”); and (2) confidential and anonymous submission by employees of concerns regarding questionable Accounting Matters.

Receipt of Complaints Regarding Accounting Matters

Individuals may report their complaints or concerns regarding Accounting Matters, on a confidential or anonymous basis, if desired, in writing to the General Counsel of the Company at OceanFirst Bank, 975 Hooper Avenue, Toms River, NJ, 08753, or by calling the General Counsel at (732) 240-4500, extension 7508. The General Counsel shall immediately notify the Chairman of the Audit Committee of all complaints.

2.	Employees may also forward complaints or concerns regarding Accounting Matters on a confidential or anonymous basis, if desired, to the Audit Committee of the Company through regular mail marked CONFIDENTIAL and addressed as follows:

Chairman of the Audit Committee

OceanFirst Bank

975 Hooper Avenue

Toms River, NJ 08753

Scope of Matters Covered by These Procedures

These procedures relate to concerns or complaints of individuals, including employees, relating to questionable Accounting Matters, including, without limitation, the following:

1.	fraud or deliberate error in the preparation, evaluation, review or audit of any financial statement of the Company;

2.	fraud or deliberate error in the recording and maintaining of financial records of the Company;

3.	deficiencies in or noncompliance with the Company’s internal accounting control;

4.	misrepresentation or false statement to or by a senior officer or accountant regarding a matter contained in the financial records, financial reports or audit reports of the Company; or

5.	deviation from full and fair reporting of the Company’s financial condition.

Treatment of Complaints

Upon receipt of a complaint, the Chairman of the Audit Committee will direct General Counsel to (i) determine whether the complaint actually pertains to Accounting Matters; and (ii) when possible, acknowledge receipt of the complaint to the sender. Complaints relating to Accounting Matters will be reviewed under Audit Committee direction and oversight by the General Counsel or such other persons as the Audit Committee determines to be appropriate in its sole discretion. Confidentiality will be maintained to the fullest extent possible, consistent with the need to conduct an adequate review.

Prompt and appropriate corrective action will be taken when and as warranted in the judgment of the Audit Committee.

The Company will not discharge, demote, suspend, threaten, harass or in any manner discriminate against any employee in the terms and conditions of employment based upon any lawful actions of the employee with respect to good faith reporting of Accounting Matters.

Reporting and Retention of Complaints and Investigations

At the direction of the Audit Committee, the General Counsel will maintain a log of all complaints, tracking their receipt, investigation and resolution, and shall prepare a periodic summary report thereof for the Audit Committee. Copies of complaints and the log will be maintained in compliance with the Company’s document retention policy.