OCEANFIRST FINANCIAL CORP (Form: 10-K, Received: 03/15/2005 11:00:01)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

¨	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)

The Nasdaq Stock Exchange

(Name of each exchange on which registered)

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. ¨

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the 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 $296,704,120, based upon the closing price of such common equity as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of the registrant’s Common Stock as of March 7, 2005 was 12,967,223.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the year ended December 31, 2004, are incorporated by reference into Part II of this Form 10-K.

Portions of the Proxy Statement for the 2005 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	32

Item 4.	Submission of Matters to a Vote of Security Holders	32

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32

Item 6.	Selected Financial Data	32

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 8.	Financial Statements and Supplementary Data	33

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	33

Item 9A.	Disclosure Controls and Procedures	33

Item 9B.	Other Information	34

	PART III

Item 10.	Directors and Executive Officers of the Registrant	34

Item 11.	Executive Compensation	34

Item 12.	Security Ownership of Certain Beneficial Owners and Management	34

Item 13.	Certain Relationships and Related Transactions	35

Item 14.	Principal Accounting Fees and Services	35

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	35

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 Home Loans, LLC (formerly Columbia Equities, Ltd.) (“Columbia”), a mortgage banking company based in Westchester County, New York in a transaction accounted for as a purchase. On July 15, 2004, Columbia completed the acquisition of a consumer direct lending operation based in Kenilworth, New Jersey. At December 31, 2004, the Company had consolidated total assets of $1.9 billion and total stockholders’ equity of $138.0 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. 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 mortgage loan production in order to manage interest rate risk and liquidity. 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 the Bank’s lending activities are concentrated in the sub markets served by its branch office network, lending activities extend throughout New Jersey, and to a lesser extent, adjacent markets served by Columbia. Lending activities are supported by loan production offices in Red Bank and Kenilworth, New Jersey. 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 several satellite production offices in adjacent markets.

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, 2004, the Bank had total loans outstanding of $1.550 billion, of which $1.127 billion or 72.7% of total loans were one- to four-family, residential mortgage loans. The remainder of the portfolio consisted of $243.3 million of commercial real estate, multi-family and land loans, or 15.7% of total loans; $19.2 million of real estate construction loans, or 1.2% of total loans; $99.3 million of consumer loans, primarily home equity loans and lines of credit, or 6.4% of total loans; and $61.3 million of commercial loans, or 4.0% of total loans. Included in total loans are $64.0 million in loans held for sale at December 31, 2004. At that same date, 54.8% 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
	2004					2003					2002					2001					2000
	Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total		Amount			Percent of Total
	(Dollars in thousands)
Real estate:
One- to four-family	$	1,126,585		72.70	%	$	1,081,901		75.50	%	$	1,101,904		77.94	%	$	1,110,282		82.22	%	$	993,706		83.93	%
Commercial real estate, multi-family and land		243,299		15.70			205,066		14.31			146,149		10.34			112,318		8.32			89,663		7.57
Construction		19,189		1.23			11,274		.79			11,079		.78			9,082		.67			7,973		.67
Consumer (1)		99,279		6.41			81,455		5.68			80,218		5.67			67,039		4.96			62,923		5.32
Commercial		61,290		3.96			53,231		3.72			74,545		5.27			51,756		3.83			29,687		2.51

Total loans		1,549,642		100.00	%		1,432,927		100.00	%		1,413,895		100.00	%		1,350,477		100.00	%		1,183,952		100.00	%

Loans in process		(5,970	)				(3,829	)				(3,531	)				(2,458	)				(2,927	)
Deferred origination costs, net		3,888					4,136					2,239					1,048					561
Unamoritized (discount) premium, net		(4	)				(5	)				(5	)				1					19
Allowance for loan losses		(10,688	)				(10,802	)				(10,074	)				(10,351	)				(9,138	)

Total loans, net		1,536,868					1,422,427					1,402,524					1,338,717					1,172,467
Less:
Mortgage loans held for sale		63,961					33,207					66,626					37,828					35,588

Loans receivable, net	$	1,472,907				$	1,389,220				$	1,335,898				$	1,300,889				$	1,136,879

Total loans:
Adjustable rate	$	849,034		54.79	%	$	670,398		46.79	%	$	622,348		44.02	%	$	591,724		43.82	%	$	485,660		41.02	%
Fixed rate		700,608		45.21			762,529		53.21			791,547		55.98			758,753		56.18			698,292		58.98

	$	1,549,642		100.00	%	$	1,432,927		100.00	%	$	1,413,895		100.00	%	$	1,350,477		100.00	%	$	1,183,952		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, 2004. There was $64.0 million in loans, held for sale at December 31, 2004. The table does not include principal repayments. Principal repayments, including prepayments on total loans was $443.6 million, $519.2 million and $397.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.


	At December 31, 2004
	One-to Four- Family		Commercial real estate, multi-family and land		Construction		Consumer		Commercial		Total Loans Receivable
	(In thousands)
One year or less	$	66	$	34,879	$	19,189	$	630	$	20,272	$	75,036

After one year:
More than one year to three years		2,284		28,719		—		1,970		17,535		50,508
More than three years to five years		9,604		92,947		—		4,477		10,926		117,954
More than five years to ten years		68,495		63,278		—		20,939		11,378		164,090
More than ten years to twenty years		321,413		15,061		—		71,263		1,179		408,916
More than twenty years		724,723		8,415		—		—		—		733,138

Total due after December 31, 2004		1,126,519		208,420		—		98,649		41,018		1,474,606

Total amount due	$	1,126,585	$	243,299	$	19,189	$	99,279	$	61,290	$	1,549,642

Loans in process												(5,970	)
Deferred origination costs, net												3,888
Unamortized discount, net												(4	)
Allowance for loan losses												(10,688	)

Total loans, net												1,536,868
Less: Mortgage loans held for sale												63,961

Loans receivable, net											$	1,472,907

The following table sets forth at December 31, 2004, the dollar amount of total loans receivable contractually due after December 31, 2005, and whether such loans have fixed interest rates or adjustable interest rates.


	Due After December 31, 2005
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans:
One-to four-family	$	521,967	$	604,552	$	1,126,519
Commercial real estate, multi-family and land		114,950		93,470		208,420
Consumer		30,357		68,292		98,649
Commercial		27,909		13,109		41,018

Total loans receivable	$	695,183	$	779,423	$	1,474,606

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 may purchase adjustable-rate and short-term fixed-rate mortgage loans originated by Columbia for inclusion in its loan portfolio. Based upon availability and best execution Columbia sells its loan production on both a servicing released and servicing retained basis. The Bank also periodically sells part of its mortgage production in order to manage interest rate risk and liquidity. See “Loan Servicing.” At December 31, 2004 there were $64.0 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,
	2004		2003		2002
	(In thousands)
Total loans:
Beginning balance	$	1,432,927	$	1,413,895	$	1,350,477

Loans originated:
One-to four-family		817,198		1,057,337		730,794
Commercial real estate, multi-family and land		88,758		34,650		59,634
Construction		17,320		12,667		13,715
Consumer		76,844		23,697		56,605
Commercial		59,909		30,854		55,235

Total loans originated		1,060,029		1,159,205		915,983

Total		2,492,956		2,573,100		2,266,460
Less:
Principal repayments		443,631		519,178		397,038
Sales of loans		499,395		620,731		454,910
Transfer to REO		288		264		617

Total loans	$	1,549,642	$	1,432,927	$	1,413,895

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. The majority 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, 2004, the Bank’s total loans outstanding were $1.550 billion, of which $1.127 billion, or 72.7%, were one- to four-family residential mortgage loans, primarily single-family and owner-occupied. To a lesser extent and included in this activity are residential mortgage loans secured by seasonal second homes and non-owner occupied investment properties. The average size of the Bank’s one- to four-family mortgage loan was approximately $153,000 at December 31, 2004. 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 2.50% 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 2.50% 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. Borrowers for interest only ARM loans are qualified based on the same payment used to qualify for a fully amortizing ARM loan.

The Bank’s fixed-rate mortgage loans currently are made for terms from 10 to 30 years. The normal terms for fixed-rate loan 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 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 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 Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) because of loan size or credit underwriting criteria). The Bank may retain a portion 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 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 Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), under certain defined circumstances, a real estate collateral analysis is obtained instead. The average loan-to-value ratio of the Bank’s one-to-four family mortgage loans was 51% at December 31, 2004. Title insurance is required for all first mortgage loans. 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 corresponding 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, 2004 was $237.9 million, or 15.4% of total loans. The largest commercial real estate loan in the Bank’s portfolio at December 31, 2004 was a performing loan for which the Bank had an outstanding carrying balance of $9.0 million, secured by a first mortgage on commercial real estate used as a health care facility. The average size of the Bank’s commercial real estate loans at December 31, 2004 was approximately $538,000.

The commercial real estate portfolio includes loans for the construction of commercial properties. Typically, these loans are underwritten based upon commercial leases in place prior to funding. In many cases, commercial construction loans are extended to owners that intend to occupy the property for business operations, in which case the loan is based upon the financial capacity of the related business and the owner of the business. At December 31, 2004, the Bank had an outstanding balance in commercial construction loans of $15.8 million.

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, 2004, totaled $3.7 million and $1.7 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, 2004, residential construction loans totaled $19.2 million, or 1.2%, 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 generally 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, 2004, the Bank had 49 residential construction loans, with the largest loan commitment being $2.6 million. 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 either paid in full or 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, 2004, the Bank’s consumer loans totaled $99.3 million, or 6.4% of the Bank’s total loan portfolio. Of that amount, home equity loans comprised $30.5 million, or 30.7%; home equity lines of credit comprised $68.0 million, or 68.5%; loans on savings accounts totaled $493,000, or .5%; and automobile, student and overdraft line of credit loans totaled $254,000 or .3%.

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 5 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. The Bank also offers home equity lines of credit which require the payment of interest only during the first five years with fully amortizing payments thereafter. Generally, the adjustable rate of interest charged is based upon the prime rate of interest (as published in the Wall Street

Journal ), although the range of interest rates charged may vary from 1.0% below prime to 1.5% over prime. The loans have an 18% lifetime cap on interest rate adjustments.

Commercial Lending . At December 31, 2004, commercial loans totaled $61.3 million, or 4.0% 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, 2004 had an outstanding balance of $4.9 million and was secured by a first lien on all corporate assets. The average size of the Bank’s commercial loans at December 31, 2004 was approximately $163,000.

Loan Approval Procedures and Authority . The Board of Directors establishes the loan approval policies of the Bank based on total exposure to the individual borrower. The Board of Directors has authorized the approval of loans secured by real estate up to a total exposure of $3.0 million and unsecured loans up to a total exposure of $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 a total exposure of $3.0 million for new borrowers and a total exposure of $5.0 million for existing borrowers and loans not secured by real estate over a total exposure of $1.0 million require approval by the Loan Committee of the Board of Directors. Loans secured by real estate in excess of a total exposure of $5.0 million for new borrowers and a total exposure of $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, 2004 amounted to $17.7 million. At December 31, 2004, the Bank’s maximum loan exposure to a single borrower was $11.6 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, 2004, the Bank was servicing $805.4 million of loans for others. For the years ended December 31, 2004, 2003 and 2002, loan servicing income (loss), net of related amortization and write down of the loan servicing asset, totaled $328,000, ($2,654,000) and ($2,203,000), respectively. The losses in 2003 and 2002 were due to the recognition of impairments to the loan servicing asset for $2,173,000 and $2,117,000 for the years ended December 31, 2003 and 2002, 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 compiles 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 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, 2004, the Bank had $5.0 million of assets, including all REO, classified as Substandard, $226,000 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 $12.3 million at December 31, 2004. Loans are classified as Special Mention due to past delinquencies or other identifiable weaknesses. At December 31, 2004, the largest loan relationship classified as Substandard was a commercial mortgage to a construction company with an outstanding balance of $1.3 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 with a balance of $8.9 million, net of a $5.6 million participation sold. The relationship consists of three loans and is secured by liens on all corporate assets, including mortgages on commercial real estate primarily used as a health, fitness and sports facility and as a private school. The loans were current as to payments, but were classified as Special Mention due to debt covenant violations which have been subsequently renegotiated.

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, 2004. 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, 2004, 2003, 2002, 2001 and 2000, 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 $128,000, $96,000, $87,000, $379,000, and $132,000.


	December 31,
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Non-accrual loans:
Real estate:
One-to-four family	$	1,337		$	1,712		$	2,222		$	3,661		$	2,594
Commercial real estate, multi-family and land		744			242			74			—			—
Consumer		784			90			95			151			147
Commercial		623			118			297			2,368			182

Total		3,488			2,162			2,688			6,180			2,923
REO, net(1)		288			252			141			133			157

Total non-performing assets	$	3,776		$	2,414		$	2,829		$	6,313		$	3,080

Allowance for loan losses as a percent of total loans receivable (2)		.69	%		.75	%		.71	%		.77	%		.77	%
Allowance for loan losses as a percent of total non-performing loans (3)		306.42			499.63			374.78			167.49			312.62
Non-performing loans as a percent of total loans receivable(2)(3)		.23			.15			.19			.46			.25
Non-performing assets as a percent of total assets(3)		.20			.14			.16			.36			.19

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

(2)	Total loans includes loans receivable and mortgage loans held for sale.

(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 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, 2004 and 2003, the Bank’s allowance for loan losses was .69% and .75%, respectively, of total loans. The Bank had non-accrual loans of $3.5 million and $2.2 million at December 31, 2004 and 2003, 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
	2004			2003			2002			2001			2000
	(Dollars in thousands)
Balance at beginning of year	$	10,802		$	10,074		$	10,351		$	9,138		$	8,223

Charge-offs:
Real Estate:
One- to four-family		175			78			149			98			77
Commercial real estate, multi-family and land		—			—			—			—			—
Consumer		—			—			2			—			10
Commercial		312			180			2,368			—			5

Total		487			258			2,519			98			92
Recoveries		73			298			592			61			22

Net charge-offs		414			(40	)		1,927			37			70

Provision for loan losses		300			688			1,650			1,250			985

Balance at end of year	$	10,688		$	10,802		$	10,074		$	10,351		$	9,138

Ratio of net charge-offs during the year to average net loans outstanding during the year		.03	%		.00	%		.14	%		.00	%		.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,
	2004						2003						2002						2001						2000
	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	$	1,940	18.15	%	72.70	%	$	1,978	18.31	%	75.50	%	$	2,417	23.99	%	77.94	%	$	2,547	24.60	%	82.22	%	$	2,831	30.98	%	83.93	%
Commercial real estate, multi- family and land		3,895	36.44		15.70			4,347	40.24		14.31			3,341	33.17		10.34			1,867	18.03		8.32			2,018	22.08		7.57
Construction		144	1.35		1.23			81	.75		.79			83	.82		.78			68	.66		.67			38	.42		.67
Consumer		1,037	9.70		6.41			781	7.23		5.68			754	7.48		5.67			625	6.04		4.96			585	6.40		5.32
Commercial		1,970	18.43		3.96			1,415	13.10		3.72			1,423	14.13		5.27			2,461	23.78		3.83			1,282	14.03		2.51
Unallocated		1,702	15.93		—			2,200	20.37		—			2,056	20.41		—			2,783	26.89		—			2,384	26.09		—

Total	$	10,688	100.00	%	100.00	%	$	10,802	100.00	%	100.00	%	$	10,074	100.00	%	100.00	%	$	10,351	100.00	%	100.00	%	$	9,138	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 must 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 the Bank has the intent and 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, but not necessarily 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, 2004, 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 the Government National Mortgage Association (“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, 2004, mortgage-backed securities totaled $124.5 million, or 6.5% of total assets. The Bank held no collateralized mortgage obligations (“CMOs”) at December 31, 2004. The Bank has previously invested in U.S. Government agency and government sponsored enterprise CMOs and privately-issued CMOs.

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


	For the Year Ended December 31,
	2004			2003			2002
	(In thousands)
Beginning balance	$	86,938		$	138,657		$	233,302
Mortgage-backed securities purchased		82,844			70,581			65,845
Less: Principal repayments		(43,478	)		(118,857	)		(156,723	)
Amortization of premium		(1,353	)		(1,387	)		(1,534	)
Change in net unrealized loss on mortgage-backed securities available for sale		(473	)		(2,056	)		(2,233	)

Ending balance	$	124,478		$	86,938		$	138,657

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,
	2004				2003				2002
	Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value
	(In thousands)
Mortgage-backed securities:
FHLMC	$	17,729	$	17,768	$	6,588	$	6,673	$	14,615	$	14,856
FNMA		103,297		102,701		72,248		71,868		31,293		31,653
GNMA		3,729		4,009		6,714		7,202		13,432		14,342
CMOs		—		—		1,193		1,195		77,066		77,806

Total mortgage-backed securities	$	124,755	$	124,478	$	86,743	$	86,938	$	136,406	$	138,657

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


	At December 31,
	2004				2003				2002
	Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value		Amortized Cost		Estimated Market Value
	(In thousands)
Investment securities:
U.S. Government and agency obligations	$	1,206	$	1,197	$	1,210	$	1,213	$	1,200	$	1,216
State and municipal obligations		3,812		3,862		5,565		5,626		5,562		5,604
Corporate debt securities		75,449		73,175		75,364		67,944		88,439		79,407
Equity investments		4,344		5,726		4,263		5,675		4,449		5,751

Total investment securities	$	84,811	$	83,960	$	86,402	$	80,458	$	99,650	$	91,978

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, 2004. 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, 2004
													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			Estimated Market Value
	(Dollars in thousands)
Investment securities:
U.S. Government and agency obligations	$	998		$	208		$	—		$	—		$	1,206		$	1,197
State and municipal obligations (1)		—			—			—			3,812			3,812			3,862
Corporate debt securities (2)		—			—			—			75,449			75,449			73,175

Total investment securities	$	998		$	208		$	—		$	79,261		$	80,467		$	78,234

Weighted average yield		1.85	%		2.13	%		—	%		3.00	%		2.98	%

Mortgage-backed securities:
FHLMC	$	22		$	62		$	19		$	17,626		$	17,729		$	17,768
FNMA		3			433			15			102,846			103,297			102,701
GNMA		—			2			78			3,649			3,729			4,009
CMOs		—			—			—			—			—			—

Total mortgage-backed securities	$	25		$	497		$	112		$	124,121		$	124,755		$	124,478

Weighted average yield		7.48	%		7.22	%		12.25	%		4.15	%		4.17	%

(1)	State and municipal obligations are reported at 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, interest-bearing checking accounts accounts, non-interest bearing accounts and time deposits. For the year ended December 31, 2004, time deposits constituted 34.4% 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,
	2004		2003			2002
	(In thousands)
Net deposits (withdrawals)	$	111,765	$	(57,107	)	$	49,521
Interest credited on deposit accounts		14,565		16,476			26,272

Total increase (decrease) in deposit accounts	$	126,330	$	(40,631	)	$	75,793

At December 31, 2004, the Bank had $112.5 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	$	46,543	2.17	%
Over three through six months		16,047	2.47
Over six through 12 months		15,338	2.21
Over 12 months		34,536	3.79

Total	$	112,464	2.72

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,
	2004						2003						2002
	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	$	143,064	11.88	%	1.01	%	$	132,491	11.30	%	.90	%	$	101,817	8.81	%	1.38	%
Savings accounts		263,133	21.86		.50			253,937	21.66		.49			218,279	18.88		1.00
Interest-bearing checking accounts		272,076	22.61		.81			262,542	22.39		.47			254,149	21.99		.99
Non-interest-bearing accounts		111,135	9.23		—			102,294	8.73		—			78,294	6.77		—

Total		789,408	65.58		.64			751,264	64.08		.49			652,539	56.45		.94

Time deposits:
Six months or less		68,058	5.65		1.95			64,544	5.50		1.05			73,935	6.40		1.58
Over 6 through 12 months		67,610	5.62		1.69			79,922	6.82		1.32			94,321	8.16		2.05
Over 12 through 24 months		67,655	5.62		2.12			76,510	6.53		1.94			114,583	9.91		2.89
Over 24 months		123,588	10.27		3.68			98,071	8.36		4.41			112,435	9.73		5.04
IRA/KEOGH		87,482	7.26		3.10			102,110	8.71		3.29			108,045	9.35		4.18

Total time deposits		414,393	34.42		2.67			421,157	35.92		2.72			503,319	43.55		3.36

Total average deposits	$	1,203,801	100.00	%	1.40	%	$	1,172,421	100.00	%	1.24	%	$	1,155,858	100.00	%	1.92	%

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 July 29, 2005. The Bank also has available from the FHLB-NY a one-month, overnight repricing line of credit for $50 million which also expires on July 29, 2005. The Bank expects both lines to be renewed upon expiration. 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, 2004, the Bank had no outstanding borrowings against the FHLB-NY lines of credit and $312.0 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, 2004, the Bank had borrowed $151.1 million through securities sold under agreements to repurchase. (See note 9 to the consolidated financial statements in the 2004 Annual Report to Stockholders.)

Risk Factors

Rising interest rates may hurt profits . Interest rates were recently at historically low levels. However, since June 30, 2004, the Federal Reserve has increased its target for the Federal funds rate several times. If interest rates continue to rise or if the yield curve continues to flatten, and if rates on deposits and borrowings reprice upwards faster than the rates on loans and investments, the Company would experience compression of its interest rate spread and net interest margin, which would have a negative effect on profitability.

Increased emphasis on commercial lending may expose the Bank to increased lending risks . At December 31, 2004, $304.6 million, or 19.7%, of the Bank’s total loans consisted of commercial, multi-family and land real estate loans, and commercial business loans. This portfolio has grown in recent years and the Bank intends to continue to emphasize these types of lending. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of the Bank’s commercial borrowers have more than one loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Bank to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

A downturn in the local economy or a decline in real estate values could hurt profits . Nearly all of the Bank’s loans are secured by real estate or are made to businesses in Ocean and Monmouth Counties, New Jersey. As a result of this concentration, a downturn in the local economy could cause significant increases in nonperforming loans, which would hurt profits. In recent years there has been a significant increase in real estate values in the Bank’s market area. As a result of rising home prices, loans have been well collateralized. A decline in real estate values could cause some mortgage loans to become inadequately collateralized, which would expose the Bank to a greater risk of loss.

The Bank operates in a highly regulated environment and may be adversely affected by changes in laws and regulations . The Bank is subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, the Bank’s chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of deposits. The Company and the Bank are subject to regulation and supervision by the Office of Thrift Supervision. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and determination of the level of the allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on operations.

The Company’s allowance for loan losses may be inadequate, which could hurt the Company’s earnings . The Company’s allowance for loan losses may prove to be inadequate to cover actual loan losses and if the Company is required to increase its allowance, current earnings may be reduced. When borrowers default and do not repay the loans that the Bank makes to them, the Company may lose money. The Company’s experience shows that some borrowers either will not pay on time or will not pay at all, which will require the Company to cancel or “charge-off” the defaulted loan or loans. The Company provides for losses by reserving what it believes to be an adequate amount to absorb any probable inherent losses. A “charge-off” reduces the Company’s reserve for possible loan losses. If the Company’s reserves were insufficient, it would be required to record a larger reserve, which would reduce earnings for that period.

Subsidiary Activities

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

Columbia Home Loans, LLC 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 retail branches and to a lesser extent, a web site and a network of independent mortgage brokers. Additionally, on July 15, 2004, Columbia completed the acquisition of a consumer direct lending operation based in Kenilworth, New Jersey. The unit specializes in the origination of conventional and non-conforming mortgage loans through marketing agreements with high-profile internet-based lead generators. Columbia sells virtually all loan production into the secondary market or, to a lesser extent, the Bank.

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 one-to-four family residential mortgages originated by the Bank and Columbia.

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, 2004, the Bank had 458 full-time employees and 65 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, 2004. 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	$	118,232	$	28,672	$	89,560	6.19	%	1.50	%
Core (Leverage)		118,232		57,344		60,888	6.19		3.00
Risk-based		128,790		97,311		31,479	10.59		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 2004, FICO payments for SAIF members approximated 1.51 basis points.

The Bank’s assessment rate for fiscal 2004 was zero basis points and the total assessments paid for this period (including the FICO assessment) was $171,000. 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, 2004, the Bank’s limit on loans to one borrower was $17.7 million, and the Bank’s largest aggregate outstanding balance of loans to one borrower was $11.6 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, 2004, 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 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 the OTS. If an application is not required, the institution must still provide prior notice to the 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. The OTS has notified the Bank that it does not object to the payment of capital dividends, so long as the Bank remains well capitalized after each capital distribution, and also maintains a tier one core leverage ratio above 6.0% after each capital distribution.

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, 2004 totaled $308,000.

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 must not involve more than the normal risk of repayment and are required to be made on terms substantially the same as those offered to unaffiliated individuals, 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 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, 2004 of $21.3 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.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily interest-bearing checking 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 $47.6 million; a 10% reserve ratio is applied above $47.6 million. The first $7.0 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 2004 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 was 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 incurred an additional tax liability of approximately $2.3 million. The Bank 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 does 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, through loan production offices and through the administrative and loan production offices of Columbia. The Freehold branch has been leased and is expected to open late in the first quarter of 2005.


Location	Leased or Owned	Original Year Leased or Acquired	Date of Lease Expiration(1)	Net Book Value of Property or Leasehold Improvements at December 31, 2004
				(Dollars in thousands)
Administrative Office:

975 Hooper Avenue Toms River, New Jersey 08754	Owned	1995	—	$	7,318

Branch Offices:

Adamston: 385 Adamston Road Brick, New Jersey 08723	Leased	1999	07/31/09		81

Berkeley: Holiday City Plaza 730 Jamaica Boulevard Toms River, New Jersey 08757	Leased	1984	11/30/09		0

Brick: 321 Chambers Bridge Road Brick, New Jersey 08723	Owned	1960	—		875

Concordia: 1 Concordia Shopping Mall 1600 Perinneville Road Monroe, New Jersey 08331	Leased	1985	07/31/10		1

Route 37 West: 55 Bananier Drive Toms River, New Jersey 08755	Leased	2001	10/31/06		1,172

Freehold: Poet’s Square Shopping Center 48 Thoreau Drive Freehold, New Jersey 07728	Leased	2004	01/01/15		0

Jackson: 260 North County Line Road Jackson, New Jersey 08527	Leased	2002	05/01/07		886

Lacey: 900 Lacey Road Forked River, New Jersey 08731	Leased	1997	01/31/18		156

Lake Ridge: 147 Route 70, Suite 1 Toms River, New Jersey 08755	Leased	1998	01/31/18		2

Manahawkin: 205 Route 72 West Manahawkin, NJ 08050	Leased	2001	10/31/11		771

Pavilion: 70 Brick Boulevard Brick, New Jersey 08723	Leased	1989	09/30/18		249


Location	Leased or Owned	Original Year Leased or Acquired	Date of Lease Expiration(1)	Net Book Value of Property or Leasehold Improvements at December 31, 2004
				(Dollars in thousands)
Point Pleasant Beach: 701 Arnold Avenue Point Pleasant, New Jersey 08742	Owned	1937	—	8

Point Pleasant Boro: 2400 Bridge Avenue Point Pleasant, New Jersey 08742	Owned	1971	—	585

Route 88: 3100 Route 88 Point Pleasant, New Jersey 08742	Leased	2000	03/31/07	620

Spring Lake Heights: 2401 Route 71 Spring Lake Heights, New Jersey 07762	Leased	1999	10/31/09	13

Wall Township: 2445 Route 34 Manasquan, New Jersey 08736	Leased	1999	02/28/10	188

Whiting: Whiting Shopping Center Whiting, New Jersey 08759	Leased	1983	10/31/07	0

Other Properties:

730 Brick Boulevard Brick, New Jersey 08723	Owned	1986	—	375

331 Newman Springs Road, Suite 131 Red Bank, New Jersey 07701	Leased	2004	11/15/09	79

Columbia Home Loans, LLC:

400 Columbus Avenue Valhalla, New York 10595	Leased	2001	07/01/07	130

2950 S. Expressway, Suite 234 Islandia, New York 11749	Leased	2002	03/31/09	0

1700 Galloping Hill Road (2) Kenilworth, New Jersey 07033	Leased	2004	11/30/06	123

623 Stewart Avenue Garden City, New York 11530	Leased	2004	08/31/09	59

901 Black Horse Pike Turnersville, New Jersey 08012	Leased	2004	04/30/05	45

26 Mill Plain Road Danbury, Connecticut 06811	Leased	2004	02/28/05	46

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

(2)	The property is also used as a residential loan production office for the Bank.

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, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 2004 Annual Report to Stockholders and is incorporated herein by reference.

Information regarding the Company’s common stock repurchases for the three month period ended December 31, 2004 is as follows:


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2004 through October 31, 2004	15,220	$	23.78	15,220	850,751
November 1, 2004 through November 30, 2004	31,896	$	24.83	31,896	818,855
December 1, 2004 through December 31, 2004	68,800	$	24.97	68,800	750,055

On October 23, 2003, the Company announced its intention to repurchase up to 1,341,818 shares, or 10%, of its outstanding common stock.

Item 6.

Selected Financial Data

The above-captioned information appears under “Selected Consolidated Financial and Other Data of the Company” in the Registrant’s 2004 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 2004 Annual Report to Stockholders on pages 11 through 21 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 2004 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 2004 Annual Report to Stockholders on pages 22 through 37 and are incorporated herein by reference.

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Disclosure Controls and Procedures

Evaluation of 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 year ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting . The Management Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm appear in the Registrant’s 2004 Annual Report to Stockholders on pages 38 and 39 and are incorporated herein by reference.

Item 9B.

Other Information

None

PART III

Item 10.

Directors and Executive Officers of the Registrant

The information relating to directors and executive officers of the Registrant and the Registrant’s compliance with Section 16(a) of the Exchange Act 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 21, 2005 at page 9.

Item 11.

Executive Compensation

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 21, 2005 at pages 16 through 20.

Item 12.

Security Ownership of Certain Beneficial Owners and Management

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 21, 2005 at pages 8 and 9.

Information regarding the Company’s equity compensation plans existing as of December 31, 2004 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	2,215,514	$	15.47	504,990
Equity compensation plans not approved by security holders	—		—	—
Total	2,215,514	$	15.47	504,990

Item 13.

Certain Relationships and Related Transactions

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 21, 2005 at page 24.

Item 14.

Principal Accounting 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 21, 2005 at page 13.

PART IV

Item 15.

Exhibits and Financial Statement Schedules

(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 2004 Annual Report to Stockholders.


		PAGE
Report of Independent Registered Public Accounting Firm		37

Consolidated Statements of Financial Condition at December 31, 2004 and 2003		22

Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002		23

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002		24

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002		25

Notes to Consolidated Financial Statements for the Years Ended December 31, 2004, 2003 and 2002		26-36

The remaining information appearing in the 2004 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, John R. Garbarino and Robert M. Pardes (1)

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

10.11		Form of Change in Control Agreement between OceanFirst Bank and certain executive officers, including John K. Kelly, Joseph R. Iantosca and Vito R. Nardelli (filed herewith)

10.12		Form of Change in Control Agreement between OceanFirst Financial Corp. and certain executive officers, including John K. Kelly, Joseph R. Iantosca and Vito R. Nardelli (filed herewith)

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)

10.16		Form of OceanFirst Financial Corp. 2000 Stock Option Plan Non-Statutory Option Award Agreement (filed herewith)

10.17		Form of Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan Stock Award Agreement (filed herewith)

13.0		Portions of 2004 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 Certifications (filed herewith)

99.1		OceanFirst Financial Corp. Code of Ethics and Standards of Personal Conduct (8)

(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.

(8)	Incorporated herein by reference from the Exhibits to Form 10-K filed on March 15, 2004.

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 8, 2005

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				March 8, 2005
John R. Garbarino
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)

/s/ Michael J. Fitzpatrick				March 8, 2005
Michael J. Fitzpatrick
Executive Vice President and
Chief Financial Officer
(principal accounting and financial officer)

/s/ Joseph J. Burke				March 8, 2005
Joseph J. Burke
Director

/s/ Thomas F. Curtin				March 8, 2005
Thomas F. Curtin
Director



/s/ Carl Feltz, Jr.				March 8, 2005
Carl Feltz, Jr.
Director

/s/ John W. Chadwick				March 8, 2005
John W. Chadwick
Director

/s/ Donald E. McLaughlin				March 8, 2005
Donald E. McLaughlin
Director

/s/ Diane F. Rhine				March 8, 2005
Diane F. Rhine
Director

/s/ James T. Snyder				March 8, 2005
James T. Snyder
Director

/s/ John E. Walsh				March 8, 2005
John E. Walsh
Director

Exhibit 10.11

OCEANFIRST BANK

TWO YEAR CHANGE IN CONTROL AGREEMENT

This AGREEMENT is made effective as of by and between OceanFirst Bank (the “Bank”), a federally chartered savings institution, with its principal administrative office at 975 Hooper Avenue, Toms River, New Jersey 08753, (“Executive”), and OceanFirst Financial Corp. (the “Holding Company”), a corporation organized under the laws of the State of Delaware which is the holding company of the Bank.

WHEREAS, the Bank wishes to protect Executive’s position for the period provided in this Agreement; and

WHEREAS, Executive has agreed to serve in the employ of the Bank.

NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows:

1.	TERM OF AGREEMENT .

The term of the OceanFirst Bank Two Year Change in Control Agreement (the “Agreement”) shall be deemed to have commenced as of the date first above written and shall continue for a period of twenty-four (24) full calendar months thereafter. Commencing on the first anniversary date of this Agreement and continuing at each anniversary date thereafter, the Board of Directors of the Bank (“Board”) may extend the Agreement for an additional year. The Board will review the Agreement and Executive’s performance annually for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board’s meeting.

2.	CHANGE IN CONTROL .

(a) Upon the occurrence of a Change in Control of the Bank or the Holding Company (as herein defined) followed at any time during the term of this Agreement by the termination of Executive’s employment, other than for Cause, as defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in his annual compensation or benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control.

(b) For purposes of this Plan, a “Change in Control” of the Bank or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1 of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); or (ii) results in a Change in

Control of the Bank or the Holding Company within the meaning of the Home Owners’ Loan Act of 1933, as amended, the Federal Deposit Insurance Act, or the Rules and Regulations promulgated by the Office of Thrift Supervision (“OTS”) (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control as set forth under the Rules and Regulations of the OTS, the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank or the Holding Company representing 25% or more of the Bank’s or the Holding Company’s outstanding voting securities or right to acquire such securities except for any voting securities of the Bank purchased by the Holding Company in connection with the conversion of the Bank to the stock form and any voting securities purchased by any employee benefit plan of the Bank or the Holding Company, or (B) individuals who constitute the Board on the date hereof (the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company’s stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs in which the Bank or Holding Company is not the resulting entity; provided, however, that such an event listed above will be deemed to have occurred or to have been effectuated upon the receipt of all required regulatory approvals not including the lapse of any statutory periods.

(c) Executive shall not have the right to receive termination benefits pursuant to Section 3 hereof upon Termination for Cause. The term “Termination for Cause” shall mean termination because of Executive’s personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the Board of Directors of the Bank at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after the Date of Termination for Cause. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 8 hereof through the Date of Termination for Cause, stock options and related limited rights granted to Executive under any stock option plan shall not be exercisable nor shall any unvested awards granted to Executive under any stock benefit plan of the Bank, the Company or any subsidiary or affiliate thereof, vest. At the Date of Termination for Cause, such stock options and related limited rights and any such unvested awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause.

3.	TERMINATION BENEFITS .

(a) Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by termination of the Executive’s employment due to: (1) Executive’s dismissal or (2) Executive’s voluntary termination pursuant to Section 2(a), unless such termination is due to Termination for Cause, the Bank and the Holding Company shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to two (2) times Executive’s average annual compensation for the five most recent taxable years that Executive has been employed by the Bank or such lesser number of years in the event that Executive shall have been employed by the Bank for less than five years. Such average annual compensation shall include Base Salary, commissions, bonuses, contributions on Executive’s behalf to any pension and/or profit sharing plan, severance payments, retirement payments, directors or committee fees, fringe benefits paid or to be paid to the Executive in any such year and payment of any expense items without accountability or business purpose or that do not meet the Internal Revenue Service requirements for deductibility by the Bank; provided however , that any payment under this provision and subsection 3(b) below shall not exceed three (3) times the Executive’s average annual compensation. At the election of Executive, which election is to be made prior to a Change in Control, such payment shall be made in a lump sum. In the event that no election is made, payment to Executive will be made on a monthly basis in approximately equal installments during the remaining term of this Agreement.

(b) Upon the occurrence of a Change in Control of the Bank or the Holding Company followed at any time during the term of this Agreement by Executive’s voluntary or involuntary termination of employment, other than for Termination for Cause, the Bank shall cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Bank or Holding Company for Executive prior to his severance, except to the extent such coverage may be changed in its application to all Bank or Holding Company employees on a nondiscriminatory basis. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months from the Date of Termination.

(c) Notwithstanding the preceding paragraphs of this Section 3, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the “Termination Benefits”) constitute an “excess parachute payment” under Section 280G of the Code or any successor thereto, and in order to avoid such a result Termination Benefits will be reduced, if necessary, to an amount (the “Non-Triggering Amount”), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive’s “base amount,” as determined in accordance with said Section 280G. The allocation of the reduction required hereby among the Termination Benefits provided by the preceding paragraphs of this Section 3 shall be determined by Executive.

4.	NOTICE OF TERMINATION .

(a) Any purported termination by the Bank or by Executive in connection with a Change in Control shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice which

shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated.

(b) “Date of Termination” shall mean the date specified in the Notice of Termination (which, in the instance of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given).

(c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute in connection with a Change in Control, in the event the Executive is terminated for reasons other than Termination for Cause, the Bank will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to his annual salary) and continue him as a participant in all compensation, benefit and insurance plans in which he was participating when the notice of dispute was given, until the earlier of: (1) the resolution of the dispute in accordance with this Agreement or (2) the expiration of the remaining term of this Agreement as determined as of the Date of Termination.

5.	SOURCE OF PAYMENTS .

It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank. Further, the Holding Company guarantees such payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Holding Company.

6.	EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS .

This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.

Nothing in this Agreement shall confer upon Executive the right to continue in the employ of Bank or shall impose on the Bank any obligation to employ or retain Executive in its employ for any period.

7.	NO ATTACHMENT .

(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect.

(b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Bank and their respective successors and assigns.

8.	MODIFICATION AND WAIVER .

(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.

(b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

9.	REQUIRED REGULATORY PROVISIONS .

(a) The board of directors may terminate Executive’s employment at any time, but any termination by the board of directors, other than Termination for Cause, shall not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 2 hereinabove.

(b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. §1818(e)(3) or (g)(1)), the Bank’s obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended.

(c) If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. §1818(c)(4) or (g)(1)), all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.

(d) If the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties.

(e) All obligations under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution: (i) by the Director of the Office of Thrift Supervision (or his or her designee) at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the Director of the Office of Thrift Supervision (or his or her designee) at the time the Director (or his or her designee) approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action.

(f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. §1828(k) and any rules and regulations promulgated thereunder.

10.	REINSTATEMENT OF BENEFITS UNDER SECTION 9(b) .

In the event Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice described in Section 9(b) hereof (the “Notice”) during the term of this Agreement and a Change in Control, as defined herein, occurs, the Bank will assume its obligation to pay and Executive will be entitled to receive all of the termination benefits provided for under Section 3 of this Agreement upon the Bank’s receipt of a dismissal of charges in the Notice.

11.	SEVERABILITY .

If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.

12.	HEADINGS FOR REFERENCE ONLY .

The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references to the masculine shall apply equally to the feminine.

13.	GOVERNING LAW .

The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of New Jersey but only to the extent not preempted by Federal law.

14.	ARBITRATION .

Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank’s main office, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.

15.	PAYMENT OF COSTS AND LEGAL FEES .

All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank (which payments are guaranteed by the Holding Company pursuant to Section 5 hereof) if Executive is successful on the merits pursuant to a legal judgment, arbitration or settlement.

16.	INDEMNIFICATION .

(a) The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) as permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys’ fees and the cost of reasonable settlements.

(b) Any payments made to Executive pursuant to this Section are subject to and conditioned upon compliance with 12 C.F.R.§ 545.121 and any rules or regulations promulgated thereunder.

17.	SUCCESSOR TO THE BANK .

The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank’s obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place.

SIGNATURES

IN WITNESS WHEREOF, OceanFirst Bank and OceanFirst Financial Corp. have caused this Agreement to be executed by their duly authorized officers, and Executive has signed this Agreement, on the day of , 2004.


ATTEST:	OCEANFIRST BANK

	By:
Secretary		Officer

SEAL

ATTEST:	OCEANFIRST FINANCIAL CORP.
		(Guarantor)

	By:
Secretary	Officer

SEAL

WITNESS:


		Executive

Exhibit 10.12

OCEANFIRST FINANCIAL CORP.

TWO YEAR CHANGE IN CONTROL AGREEMENT

This AGREEMENT is made effective as of , by and between OceanFirst Financial Corp. (the “Holding Company”), a corporation organized under the laws of the State of Delaware, with its office at 975 Hooper Avenue, Toms River, New Jersey 08753, and (“Executive”). The term “Bank” refers to OceanFirst Bank, the wholly-owned subsidiary of the Holding Company or any successor thereto.

WHEREAS, the Holding Company wishes to protect his position for the period provided in this Agreement; and

WHEREAS, Executive has agreed to serve in the employ of the Holding Company or an affiliate thereof.

NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows:

1.	TERM OF AGREEMENT .

The period of this Agreement shall be deemed to have commenced as of the date first above written and shall continue for a period of twenty-four (24) full calendar months thereafter. Commencing on the date of the execution of this Agreement, the term of this Agreement shall be extended for one day each day until such time as the board of directors of the Holding Company (the “Board”) or Executive elects not to extend the term of the Agreement by giving written notice to the other party in accordance with Section 8 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the third anniversary of the date of such written notice.

2.	CHANGE IN CONTROL .

(a) Upon the occurrence of a Change in Control of the Holding Company (as herein defined) followed at any time during the term of this Agreement by the termination of Executive’s employment, the provisions of Section 3 shall apply. Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in annual compensation or material reduction in benefits, or relocation of his principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, unless such termination is because of death or termination for cause.

(b) For purposes of this Agreement, a “Change in Control” of the Bank or Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section

13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); or (ii) results in a Change in Control of the Bank or the Holding Company within the meaning of the Home Owners’ Loan Act of 1933, as amended, the Federal Deposit Insurance Act, or the Rules and Regulations promulgated by the Office of Thrift Supervision (“OTS”) (or its predecessor agency), as in effect on the date hereof (provided, that in applying the definition of change in control as set forth under the rules and regulations of the OTS, the Board shall substitute its judgment for that of the OTS); or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any “person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Holding Company representing 20% or more of the Bank’s or the Holding Company’s outstanding voting securities except for any voting securities of the Bank purchased by the Holding Company in connection with the conversion of the Bank to the stock form and any voting securities purchased by any employee benefit plan of the Bank, or (B) individuals who constitute the Board on the date hereof (the “Incumbent Board”) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company’s stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs in which the Bank or Holding Company is not the resulting entity; provided, however, that such an event listed above will be deemed to have occurred or to have been effectuated upon the receipt of all required federal regulatory approvals not including the lapse of any statutory waiting periods, or (D) a proxy statement is distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Bank with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Holding Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Bank or Holding Company then outstanding.

(c) Executive shall not have the right to receive termination benefits pursuant to Section 3 hereof upon Termination for Cause. The term “Termination for Cause” shall mean termination because of a material loss to the Holding Company or one of its Subsidiaries caused by Executive’s intentional failure to perform stated duties, personal dishonesty, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order, or any material breach of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. During the period beginning on the date of the Notice of Termination for

Cause pursuant to Section 8 hereof through the Date of Termination, stock options and related limited rights granted to Executive under any stock option plan shall not be exercisable nor shall any unvested awards granted to Executive under any stock benefit plan of the Bank, the Holding Company or any subsidiary or affiliate thereof, vest. At the Date of Termination, such stock options and related limited rights and any such unvested awards, shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination For Cause.

3.	TERMINATION BENEFITS .

(a) Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by the voluntary or involuntary termination of Executive’s employment, other than for Termination for Cause, the Holding Company shall be obligated to pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to two (2) times Executive’s average annual compensation for the five most recent taxable years that Executive has been employed by the Bank or such lesser number of years in the event that Executive shall have been employed by the Bank for less than five years. Such annual compensation shall include Base Salary, commissions, bonuses, contributions on behalf of Executive to any pension and profit sharing plan, severance payments, director or committee fees and fringe benefits paid or to be paid to the Executive during such years. At the election of Executive which election is to be made prior to a Change in Control, such payment shall be made in a lump sum. In the event that no election is made, payment to Executive will be made on a monthly basis in approximately equal installments during the remaining term of this Agreement. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment.

(b) Upon the occurrence of a Change in Control of the Bank or the Holding Company followed at any time during the term of this Agreement by Executive’s termination of employment, other than for Termination for Cause, the Holding Company shall cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his severance, except to the extent such coverage may be changed in its application to all Bank employees. Such coverage and payments shall cease upon expiration of thirty-six (36 ) full calendar months following the Date of Termination.

(i)

the aggregate payments or benefits to be made or afforded to Executive, which are deemed to be parachute payments as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) or any successor thereof, (the “Termination Benefits”) would be deemed to include an “excess parachute payment” under Section 280G of the Code; and

(ii)

if such Termination Benefits were reduced to an amount (the “Non-Triggering Amount”), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive’s “base amount,” as determined in accordance with said Section 280G and the Non-Triggering Amount

less the product of the marginal rate of any applicable state and federal income tax and the Non Triggering Amount would be greater than the aggregate value of the Termination Benefits (without such reduction) minus (i) the amount of tax required to be paid by the Executive thereon by Section 4999 of the Code and further minus (ii) the product of the Termination Benefits and the marginal rate of any applicable state and federal income tax, then the Termination Benefits shall be reduced to the Non-Triggering Amount. The allocation of the reduction required hereby among the Termination Benefits shall be determined by the Executive.

4.	NOTICE OF TERMINATION .

(a) Any purported termination by the Holding Company, or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated.

(b) “Date of Termination” shall mean the date specified in the Notice of Termination (which, in the case of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given).

(c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Holding Company will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to his current annual salary) and continue him as a participant in all compensation, benefit and insurance plans in which he was participating when the notice of dispute was given, until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 4(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement.

5.	SOURCE OF PAYMENTS .

It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Holding Company. Further, the Holding Company guarantees such payment and provision of all amounts and benefits due hereunder to Executive and, if such amount and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid and provided by the Holding Company.

6.	EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS .

This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Holding Company and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.

Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Holding Company or shall impose on the Holding Company any obligation to employ or retain Executive in its employ for any period.

7.	NO ATTACHMENT .

(b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Holding Company and their respective successors and assigns.

8.	MODIFICATION AND WAIVER .

(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.

9.	REINSTATEMENT OF BENEFITS UNDER BANK AGREEMENT .

In the event Executive is suspended and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice described in Section 9(b) of the Change-in-Control Agreement between Executive and the Bank dated February 18, 2004 (the “Bank Agreement”) during the term of this Agreement and a Change in Control, as defined herein, occurs the Holding Company will assume its obligation to pay and Executive will be entitled to receive all of the termination benefits provided for under Section 3 of the Bank Agreement upon the notification of the Holding Company of the Bank’s receipt of a dismissal of charges in the Notice.

10.	EFFECT OF ACTION UNDER BANK AGREEMENT .

Notwithstanding any provision herein to the contrary, to the extent that payments and benefits are paid to or received by Executive under the Bank Agreement between Executive and Bank, the amount of such payments and benefits paid by the Bank will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement.

11.	SEVERABILITY .

12.	HEADINGS FOR REFERENCE ONLY .

The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references herein to the masculine shall apply to both the masculine and the feminine.

13.	GOVERNING LAW .

The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of New Jersey.

14.	ARBITRATION .

Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Holding Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.

15.	PAYMENT OF LEGAL FEES .

All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company if Executive is successful pursuant to a legal judgment, arbitration or settlement.

16.	INDEMNIFICATION .

The Holding Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at

its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under Delaware law and as provided in the Holding Company’s certificate of incorporation against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Holding Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys’ fees and the cost of reasonable settlements.

17.	SUCCESSOR TO THE HOLDING COMPANY .

The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Holding Company, expressly and unconditionally to assume and agree to perform the Holding Company’s obligations under this Agreement, in the same manner and to the same extent that the Holding Company would be required to perform if no such succession or assignment had taken place.

SIGNATURES

IN WITNESS WHEREOF, OceanFirst Financial Corp. has caused this Agreement to be executed by its duly authorized officer, and Executive has signed this Agreement, on the day of , 2004.


ATTEST:	OCEANFIRST FINANCIAL CORP.

	By:
Secretary		Officer

WITNESS:


	Executive

Seal

Exhibit 10.16

OCEANFIRST FINANCIAL CORP.

2000 STOCK OPTION PLAN

NON-STATUTORY OPTION AWARD AGREEMENT


Name of Recipient:		_________________
Number of Shares
Subject to Options:		_________________

Grant of Limited Rights:		Yes x No

Exercise Price:		_________________

Term of Options:		10 years, commencing (the “Date of Grant”).

Payment of Exercise Price:		The exercise price may be paid in cash, borrowed funds (to the extent permitted by law) or with previously acquired Common Stock.

Effective Date:		_________________

Vesting Schedule:		20% is earned after each year of continuous service, commencing on and on each thereafter through .

Voting:		The Recipient will having voting rights over the Common Stock actually acquired only upon the exercise of the Non-statutory Stock Options and acquisition of the Common Stock.

Distribution:		Shares of Common Stock subject to the Non-statutory Stock Options will be distributed as soon as practicable upon exercise.

Designation of Beneficiary:		A Beneficiary may be designated in writing to receive, in the event of death, any award to which the Recipient would be entitled pursuant to the OceanFirst Financial Corp. 2000 Stock Option Plan (the “Plan”) under this Non-statutory Option Award Agreement.

Effect of termination of employment because of:

(a) Death or Disability:		Non-statutory Stock Options which have not yet vested, vest upon death or Disability. After termination of employment all Non-statutory Stock Options are exercisable for one year after such termination of employment, but not after the tenth anniversary of the Date of Grant. Vested Limited Rights may be exercised only upon a Change in Control.


(b) Retirement:		All unexercised Non-statutory Stock Options that are vested as of the date of termination are exercisable for a period of three years following termination, but not after the tenth anniversary of the Date of Grant. All unvested Non-statutory Stock options are forfeited and the rights to such unvested Non-statutory Options cease upon termination of employment.

(c) Cause:		All unvested Non-statutory Stock Options and all vested Non-statutory Stock Options not yet exercised expire immediately upon termination of employment.

(d) Other reasons:		All unexercised Non-statutory Stock Options that are vested as of the date of termination are exercisable for a period of three months following termination, but not after the tenth anniversary of the Date of Grant. All unvested Non-statutory Stock Options are forfeited and the rights to such unvested Non-statutory Stock Options cease upon termination of employment.

Non-Transferability:		No Non-statutory Stock Option shall be transferable by the Recipient other than by will or the laws of interstate succession or pursuant to a domestic relations order or unless determined otherwise by the committee.

This Non-statutory Option Award Agreement is subject to the terms and conditions of the Plan. Neither the Plan nor this grant create any right on the part of any employee to continue in the employ of OceanFirst Bank, OceanFirst Financial Corp. or any affiliates thereof. All capitalized terms herein shall have the same meaning as those contained in the Plan.

The Recipient hereby acknowledges that all decisions, determinations and interpretations of the Board of Directors, or the committee hereof, in respect of the Plan and this Non-statutory Option Award Agreement shall be final and conclusive.

IN WITNESS WHEREOF, OceanFirst Financial Corp. has caused this Non-statutory Option Award Agreement to be executed, and said recipient has hereunto set his hand, as of day of , 2005.


OCEANFIRST FINANCIAL CORP.

By:

RECIPIENT

Exhibit 10.17

AMENDED AND RESTATED

OCEANFIRST FINANCIAL CORP.

1997 INCENTIVE PLAN

STOCK AWARD AGREEMENT


Name of Recipient:		_______________

Total Stock Award:		_______________

Installment Schedule:		_______________
		_______________

Vesting Schedule:		Installments are earned after each period of continuous employment commencing on and on each , thereafter through .

Date of Grant:		_______________

Distribution:		Shares of Common Stock plus any dividends and earnings on such shares, will be distributed as soon as practicable upon vesting.

Effect of termination of
Employment because of:

(a) Death or Disability:		All unvested shares subject to this Stock Award vest immediately upon such termination of employment.

(b) Cause:		All unvested shares subject to this Stock Award shall be forfeited as of the date of termination and any rights the Recipient had to such shares become null and void.

(c) Other Reasons:		Unless otherwise determined by the Committee, all unvested shares subject to this Stock Award shall be forfeited as of the date of termination and any rights the Recipient had to such shares become null and void.

Voting:		A Recipient is entitled to direct the Trustee as to the voting of shares subject to this Stock Award that have been granted, but have not yet been earned and distributed.


Non-Transferability:		The Recipient of this Stock Award shall not sell, transfer, assign, pledge or otherwise encumber shares subject to this Stock Award until full vesting of such shares has occurred.

		Unless determined otherwise by the Committee and except in the event of the Recipient’s death or pursuant to a domestic relations order, this Stock Award is not transferable and may be earned only in the Recipient’s lifetime. Upon the death of the Recipient, this Stock Award is transferable by will or the laws of descent and distribution.

In the event the Recipient is subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended, the Committee must give written consent to permit the shares subject to this Stock Award Agreement to be sold or otherwise disposed of within six (6) months following the Date of Grant of this Stock Award.


Designation of Beneficiary:		A Beneficiary may be designated in writing to receive in the event of death, any award to which the Recipient would be entitled pursuant to the Plan under the Stock Award Agreement.

The Stock Award Agreement is subject to the terms and conditions of the Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan (the “Plan”). Neither the Plan or this grant create any right on the part of an employee to continue in the service of OceanFirst Bank, OceanFirst Financial Corp. or any affiliates thereof. All capitalized terms herein shall have the same meaning as those contained in the Plan.

The Recipient hereby acknowledges that all decisions, determinations and interpretations of the Board of Directors, or the Committee thereof, in respect of the Plan and this Stock Award Agreement shall be final and conclusive.

IN WITNESS WHEREOF, OceanFirst Financial Corp. has caused this Stock Award Agreement to be executed, and said Recipient has hereunto set his hand, as of this day of , 2005.


OCEANFIRST FINANCIAL CORP.

By:

RECIPIENT

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,	2004		2003		2002		2001		2000
*(dollars in thousands)*
Selected Financial Condition Data:
Total assets	$	1,914,275	$	1,717,409	$	1,743,698	$	1,763,666	$	1,640,217
Investment securities available for sale		83,960		80,458		91,978		80,017		103,536
Federal Home Loan Bank of New York stock		21,250		19,220		18,700		23,560		20,000
Mortgage-backed securities available for sale		124,478		86,938		138,657		233,302		268,042
Loans receivable, net		1,472,907		1,389,220		1,335,898		1,300,889		1,136,879
Mortgage loans held for sale		63,961		33,207		66,626		37,828		35,588
Deposits		1,270,535		1,144,205		1,184,836		1,109,043		1,104,188
Federal Home Loan Bank advances		312,000		314,400		214,000		272,000		127,500
Securities sold under agreements to repurchase		151,072		106,723		184,584		212,332		236,494
Stockholders’ equity		137,956		134,662		135,305		146,729		157,736

For the Year Ended December 31,	2004		2003		2002		2001		2000
*(dollars in thousands; except per share amounts)*
Selected Operating Data:
Interest income	$	90,952	$	94,537	$	108,456	$	118,160	$	116,105
Interest expense		34,931		36,894		47,624		63,148		66,412

Net interest income		56,021		57,643		60,832		55,012		49,693
Provision for loan losses		300		688		1,650		1,250		985

Net interest income after provision for loan losses		55,721		56,955		59,182		53,762		48,708
Other income		20,740		18,749		10,857		12,925		6,145
Operating expenses		48,759		44,857		40,144		39,048		31,645

Income before provision for income taxes		27,702		30,847		29,895		27,639		23,208
Provision for income taxes		9,757		10,974		9,752		9,480		6,826

Net income	$	17,945	$	19,873	$	20,143	$	18,159	$	16,382

Basic earnings per share	$	1.48	$	1.62	$	1.57	$	1.30	$	1.06

Diluted earnings per share	$	1.42	$	1.53	$	1.47	$	1.23	$	1.02

Selected Consolidated Financial and Other Data (continued)

OceanFirst Financial Corp. (OCFC) | Annual Report 2004| 9

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


At or For the Year Ended December 31,	2004			2003			2002			2001			2000
Selected Financial Ratios and Other Data ⁽¹⁾ :

Performance Ratios:
Return on average assets		.98	%		1.14	%		1.16	%		1.06	%		1.01	%
Return on average stockholders’ equity		13.34			14.84			14.31			12.01			10.45
Stockholders’ equity to total assets		7.21			7.84			7.76			8.32			9.62
Tangible equity to tangible assets		7.13			7.75			7.67			8.22			9.52
Average interest rate spread ⁽²⁾		3.03			3.24			3.41			2.97			2.75
Net interest margin ⁽³⁾		3.23			3.48			3.70			3.37			3.20
Average interest-earning assets to average interest-bearing liabilities		110.24			110.82			109.78			110.31			110.39
Operating expenses to average assets		2.67			2.57			2.32			2.29			1.96
Operating efficiency ratio ⁽⁴⁾		63.52			58.72			56.00			57.48			56.67

Asset Quality Ratios:

Non-performing loans as a percent of total loans receivable ⁽⁵⁾⁽⁶⁾		.23			.15			.19			.46			.25
Non-performing assets as a percent of total assets ⁽⁶⁾		.20			.14			.16			.36			.19
Allowance for loan losses as a percent of total loans receivable ⁽⁵⁾		.69			.75			.71			.77			.77
Allowance for loan losses as a percent of total non-performing loans ⁽⁶⁾		306.42			499.63			374.78			167.49			312.62

Per Share Data:

Dividends per common share	$	.80		$	.78		$	.69		$	.56		$	.48
Book value per common share at end of period		10.59			10.09			9.83			9.92			9.49
Tangible book value per common share at end of period		10.49			9.98			9.72			9.81			9.38

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

(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.

(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.

10 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

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 Home Loans, LLC (formerly 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 loan production offices, a web site and a network of independent mortgage brokers. Additionally, on July 15, 2004, Columbia completed the acquisition of a consumer direct lending operation based in Kenilworth, New Jersey. The unit specializes in the origination of conventional and non-conforming mortgage loans through marketing agreements with high-profile Internet-, phone- and mail-based lead generators.

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 Bank also operates two loan production offices.

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 check 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 2004, short-term interest rates began to rise from the historically low levels experienced in 2003. Longer-term interest rates such as those on fixed-rate mortgage loans, however, remained at relatively low levels. Borrowers continued to take advantage of relatively low fixed-rate mortgage loans to refinance their debt and loan prepayment levels remained high although at lower levels than in 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. The lower level of refinances in 2004 as compared to 2003 benefited the Company’s loan servicing income which was not adversely impacted by servicing impairments as it was in 2003. The lower volume of loan originations decreased the Company’s income from the sale of loans despite the Company’s efforts to expand loan production capacity. As noted above, Columbia acquired a consumer direct lending operation on July 15, 2004. Additionally, the Bank opened a residential loan production office in Union County during the third quarter of 2004 and a residential/commercial loan production office in Monmouth County during the fourth quarter of 2004. Operating expenses increased due to the mid-year acquisition by Columbia and also due to the decline in mortgage loan closings. Higher loan closings in 2003 increased deferred loan expenses which were reflected as a reduction to compensation expense.

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 time deposits) through de novo branch expansion and product offerings appealing to a broadened customer base; (3) increase non-interest income by expanding the menu of fee-based products and services; and (4) actively manage the Company’s capital position.

With industry consolidation eliminating most locally-headquartered competitors, the Company saw an opportunity to fill a perceived void for locally delivered commercial loan and deposit services. As such, the Company has assembled an experienced team of business banking professionals responsible for offering commercial loan and deposit services and merchant check card services to businesses in Ocean County and surrounding communities. As a result of this initiative, commercial loans represented 19.7% of the Bank’s total loans receivable at December 31, 2004 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 seven years, the Company has opened eight new branch offices, six in Ocean County 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 Freehold, in Monmouth County, which

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 11

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

is expected to open in the second quarter of 2005. Additionally, new branches in Little Egg Harbor and Waretown, in Ocean County, are expected to open in late 2005. The Company is continually evaluating additional office sites within its existing market area.

At December 31, 2004, the eight new branches maintained an average core deposit mix of 75.8%. 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 on core account growth. As a result of these efforts the Company’s core deposit ratio has grown to 62.8% at December 31, 2004 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 $8.3 million for the year ended December 31, 2004, a 29.2% average annual increase. In early 2005, the Company entered into a joint venture agreement with a title insurance agency to capture part of the revenue associated with providing title insurance to the Company’s mortgage loan customers. Also, in early 2005, the alternative investment program was expanded to add Licensed Branch Employees which will allow the Company to capture more of the revenue associated with the sale of investment products.

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 2004 the Company repurchased 674,339 common shares. Under the 10% repurchase program authorized by the Board of Directors in October 2003, 750,055 shares remain to be purchased as of December 31, 2004. From conversion date through December 31, 2004, the Company has repurchased a total of 15.5 million common shares, 56.9% 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 7.2% at December 31, 2004 while increasing the Company’s return on equity from 6.0% for the year ended December 31, 1997 to 13.3% for the year ended December 31, 2004.

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 ten 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 fixed-rate mortgage loans into the secondary market. In determining whether to retain 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 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. For the past few years, the Company has sold most 30-year fixed-rate mortgage loan originations into the secondary market. In addition, during 2004 the Company sold a significant volume of 15-year fixed-rate mortgage loan originations. The Company currently does not participate in financial futures

12 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

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 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, 2004 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, 2004 the Company’s one year gap was positive 5.14%. 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, 2004, 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 25.0% and 29.0% annually. Savings accounts, interest-bearing checking accounts 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 for deposits will be realized.


At December 31, 2004	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	$	45,954		$	—		$	—		$	—		$	—		$	45,954
Investment securities		75,449			—			1,206			3,812			4,344			84,811
FHLB stock		—			—			—			—			21,250			21,250
Mortgage-backed securities		11,288			28,662			33,830			50,024			951			124,755
Loans receivable ⁽²⁾		234,864			244,157			476,346			315,270			273,035			1,543,672

Total interest-earning assets		367,555			272,819			511,382			369,106			299,580			1,820,442

Interest-bearing liabilities:
Money market deposit accounts		7,372			19,910			39,931			75,680			—			142,893
Savings accounts		12,899			34,838			69,871			132,424			—			250,032
Interest-bearing checking accounts		15,389			41,508			83,247			157,775			—			297,919
Time deposits		120,553			151,333			126,190			60,598			14,525			473,199
FHLB advances		42,000			42,000			123,000			70,000			35,000			312,000
Securities sold under agreements to repurchase		50,072			9,000			48,000			44,000			—			151,072

Total interest-bearing liabilities		248,285			298,589			490,239			540,477			49,525			1,627,115

Interest sensitivity gap ⁽³⁾	$	119,270		$	(25,770	)	$	21,143		$	(171,371	)	$	250,055		$	193,327

Cumulative interest sensitivity gap	$	119,270		$	93,500		$	114,643		$	(56,728	)	$	193,327		$	193,327

Cumulative interest sensitivity gap as a percent of total interest-earning assets		6.55	%		5.14	%		6.30	%		(3.12	)%		10.62	%		10.62	%

Cumulative interest-earning assets as a percent of cumulative interest- bearing liabilities		148.04	%		117.10	%		111.05	%		96.40	%		111.88	%		111.88	%

(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) | Annual Report 2004 | 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 projections as of December 31, 2004 and 2003, 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, 2004
	Net Portfolio Value						Net Interest Income
Change in Interest Rates in Basis Points (Rate Shock)	Amount		% Change		NPV Ratio		Amount		% Change
200	$	185,995	(9.7	)%	10.1	%	$	59,967	1.9	%
100		200,162	(2.8	)	10.6			59,661	1.4
Static		205,868	—		10.7			58,856	—
(100)		204,583	(0.6	)	10.5			57,699	(2.7	)


December 31, 2003
	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	)

At December 31, 2004, the Company’s NPV in a static rate environment is greater than the NPV at December 31, 2003 reflecting the continued growth of core deposits and the increased value of those deposits.

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 NPV and 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, 2004. 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, 2004, 2003, 2002, 2001 and 2000, 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 $128,000, $96,000, $87,000, $379,000 and $132,000.

14 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004


At or For The Year Ended December 31,	2004			2003			2002			2001			2000
*(dollars in thousands)*

Non-accrual loans:
Real estate:
One-to four-family	$	1,337		$	1,712		$	2,222		$	3,661		$	2,594
Commercial real estate, multi-family and land		744			242			74			—			—
Consumer		784			90			95			151			147
Commercial		623			118			297			2,368			182

Total		3,488			2,162			2,688			6,180			2,923
REO, net		288			252			141			133			157

Total non-performing assets	$	3,776		$	2,414		$	2,829		$	6,313		$	3,080

Allowance for loan losses:
Balance at beginning of year	$	10,802		$	10,074		$	10,351		$	9,138		$	8,223
Less: Net charge-offs (recoveries)		414			(40	)		1,927			37			70
Add: Provision for loan losses		300			688			1,650			1,250			985

Balance at end of year	$	10,688		$	10,802		$	10,074		$	10,351		$	9,138

Ratio of net charge-offs (recoveries) during the year to average net loans outstanding during the year		.03	%		.00	%		.14	%		.00	%		.01	%
Allowance for loan losses as percent of total loans receivable ⁽¹⁾		.69			.75			.71			.77			.77
Allowance for loan losses as a percent of total non-performing loans ⁽²⁾		306.42			499.63			374.78			167.49			312.62
Non-performing loans as a percent of total loans receivable ⁽¹⁾⁽²⁾		.23			.15			.19			.46			.25
Non-performing assets as a percent of total assets ⁽²⁾		.20			.14			.16			.36			.19

(1)	Total loans receivable includes loans receivable and loans held for sale.

(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, 2004, the Bank had $5.1 million of assets, including all REO, classified as “Substandard,” $226,000 of assets classified as “Doubtful” and no assets classified as “Loss.” Additionally, “Special Mention” assets totaled $12.3 million at December 31, 2004. 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 $1.2 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 real estate loan relationship with an outstanding balance of $8.9 million, net of a $5.6 million participation sold. The relationship consists of three loans and is secured by liens on all corporate assets, including mortgages on commercial real estate used as a health fitness and sports facility and as a private school. The loans were current as to payments, but were classified as Special Mention due to debt covenant violations.

The provision for loan losses decreased by $388,000 for the year ended December 31, 2004, as compared to the prior year. Although non-performing loans increased $1.3 million at December 31, 2004 from December 31, 2003, most of the increase was related to loans which were previously identified and classified at December 31, 2003 and included in the calculation of the allowance for loan losses at December 31, 2003. 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) | Annual Report 2004 | 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, 2004, 2003, and 2002. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown except where noted otherwise. Average balances are derived from average daily balances. The yields and costs include fees which are considered adjustments to yields.


	Years Ended December 31,
	2004							2003							2002
*(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	$	14,527		$	190	1.31	%	$	12,115		$	127	1.05	%	$	12,258		$	200	1.63	%
Investment securities		85,258			2,400	2.81			88,966			2,339	2.63			86,760			2,993	3.45
FHLB stock		22,357			405	1.81			19,518			750	3.84			20,283			966	4.76
Mortgage-backed securities		130,749			4,363	3.34			116,633			4,440	3.81			180,618			9,870	5.46
Loans receivable, net ⁽¹⁾		1,479,504			83,594	5.65			1,419,477			86,881	6.12			1,344,910			94,427	7.02

Total interest-earning assets		1,732,395			90,952	5.25			1,656,709			94,537	5.71			1,644,829			108,456	6.59
Non-interest-earning assets		97,072							90,698							85,962

Total assets	$	1,829,467						$	1,747,407						$	1,730,791

Liabilities and Equity:
Interest-bearing liabilities:
Money market deposit accounts	$	143,064			1,350	.94	%	$	132,491			1,372	1.04	%	$	101,817		$	1,813	1.78	%
Savings accounts		263,133			1,310	.50			253,937			1,679	.66			218,279			2,955	1.35
Interest-bearing checking accounts		272,076			1,556	.57			262,542			1,743	.66			254,149			3,610	1.42
Time deposits		414,393			10,978	2.65			421,157			12,449	2.96			503,319			19,105	3.80

Total		1,092,666			15,194	1.39			1,070,127			17,243	1.61			1,077,564			27,483	2.55
FHLB advances		335,916			14,815	4.41			272,928			13,338	4.89			237,987			11,612	4.88
Securities sold under agreements to repurchase		142,824			4,922	3.45			151,901			6,313	4.16			180,692			8,529	4.72

Total interest-bearing liabilities		1,571,406			34,931	2.22			1,494,956			36,894	2.47			1,496,243			47,624	3.18
Non-interest-bearing deposits		111,135							102,294							78,294
Non-interest-bearing liabilities		12,378							16,226							15,563

Total liabilities		1,694,919							1,613,476							1,590,100
Stockholders’ equity		134,548							133,931							140,691

Total liabilities and equity	$	1,829,467						$	1,747,407						$	1,730,791

Net interest income				$	56,021						$	57,643						$	60,832

Net interest rate spread ⁽²⁾						3.03	%						3.24	%						3.41	%

Net interest margin ⁽³⁾						3.23	%						3.48	%						3.70	%

Ratio of interest-earning assets to interest-bearing liabilities		110.24	%						110.82	%						109.78	%

(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.

16 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

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, 2004 Compared to Year Ended December 31, 2003									Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
	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	$	28		$	35		$	63		$	(2	)	$	(71	)	$	(73	)
Investment securities		(98	)		159			61			74			(728	)		(654	)
FHLB stock		97			(442	)		(345	)		(35	)		(181	)		(216	)
Mortgage-backed securities		505			(582	)		(77	)		(2,930	)		(2,500	)		(5,430	)
Loans receivable, net		3,571			(6,858	)		(3,287	)		5,030			(12,576	)		(7,546	)

Total interest-earning assets		4,103			(7,688	)		(3,585	)		2,137			(16,056	)		(13,919	)

Interest-bearing liabilities:
Money market deposit accounts		110			(132	)		(22	)		448			(889	)		(441	)
Savings accounts		58			(427	)		(369	)		421			(1,697	)		(1,276	)
Interest-bearing checking accounts		60			(247	)		(187	)		116			(1,983	)		(1,867	)
Time deposits		(196	)		(1,275	)		(1,471	)		(2,827	)		(3,829	)		(6,656	)

Total		32			(2,081	)		(2,049	)		(1,842	)		(8,398	)		(10,240	)
FHLB advances		2,875			(1,398	)		1,477			1,702			24			1,726
Securities sold under agreements to repurchase		(361	)		(1,030	)		(1,391	)		(1,270	)		(946	)		(2,216	)

Total interest-bearing liabilities		2,546			(4,509	)		(1,963	)		(1,410	)		(9,320	)		(10,730	)

Net change in net interest income	$	1,557		$	(3,179	)	$	(1,622	)	$	3,547		$	(6,736	)	$	(3,189	)

Critical Accounting Policies

Note 1 to the Company’s Audited Consolidated Financial Statements for the year ended December 31, 2004 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, 2004 and December 31, 2003

Total assets at December 31, 2004 were $1.914 billion, an increase of $196.9 million, compared to $1.717 billion at December 31, 2003.

Mortgage-backed securities available for sale increased by $37.5 million, to $124.5 million at December 31, 2004, from $86.9 million at December 31, 2003. Early in the year, the Company increased borrowings to fund the purchase of mortgage-backed securities.

Loans receivable net, increased by $83.7 million to a balance of $1.473 billion at December 31, 2004, compared to a balance of $1.389 billion at December 31, 2003. Commercial and commercial real estate loans outstanding increased $46.3 million, or 17.9%, while one- to four-family loans rose $15.3 million. The increase was muted by the large volume of loan sales and heavy loan prepayments from refinance activity. Loan sales and prepayments were offset through the retention of $110.3 million in high quality adjustable-rate and short-term fixed-rate loans originated by the Bank’s mortgage-banking subsidiary. Previously, Columbia would have sold these loans into the secondary market.

Mortgage loans held-for-sale increased by $30.8 million to a balance of $64.0 million at December 31, 2004, compared to a balance of $33.2 million at December 31, 2003 due to the expanded production capacity of the Bank’s mortgage-banking subsidiary.

Deposit balances increased $126.3 million to $1.271 billion at December 31, 2004 from $1.144 billion at December 31, 2003. Core deposits, the Company’s primary focus, grew $41.0 million while time deposits increased $85.3 million. As short-term interest rates rose during 2004, time deposits became a more attractive investment option.

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 17

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

Total borrowings (Federal Home Loan Bank (“FHLB”) advances and securities sold under agreements to repurchase) increased by $41.9 million, to $463.1 million at December 31, 2004 from $421.1 million at December 31, 2003. The Company increased borrowings primarily to fund the purchase of mortgage-backed securities.

Stockholders’ equity at December 31, 2004 increased to $138.0 million, compared to $134.7 million at December 31, 2003. For the year ended December 31, 2004, the Company repurchased 674,339 shares of common stock at a total cost of $16.2 million. The costs of the repurchase program and a cash dividend of $9.7 million were more than offset by net income of $17.9 million, stock option exercises and related tax benefits of $4.8 million and non-cash ESOP expenses of $3.6 million.

Comparison of Operating Results for the Years Ended December 31, 2004 and December 31, 2003

General

Net income decreased $1.9 million, or 9.7% to $17.9 million for the year ended December 31, 2004 as compared to net income of $19.9 million for the year ended December 31, 2003. Diluted earnings per share decreased 7.2%, to $1.42 for the year ended December 31, 2004 as compared to $1.53 for the year ended December 31, 2003. The smaller decrease 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, 2004 was $91.0 million, compared to $94.5 million for the year ended December 31, 2003, a decrease of $3.6 million. The decrease in interest income was due to a decline in the average yield on interest-earning assets to 5.25% for the year ended December 31, 2004 as compared to 5.71% 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.

Interest Expense

Interest expense for the year ended December 31, 2004 was $34.9 million, compared to $36.9 million for the year ended December 31, 2003, a decrease of $2.0 million. The decrease in interest expense was primarily the result of a decrease in the average cost of interest-bearing liabilities to 2.22% for the year ended December 31, 2004, as compared to 2.47% in the same prior year period. Funding costs decreased due to the lower interest rate environment during 2003 and into the first half of 2004 and also due to a change in the mix of deposit balances to lower-costing core deposits as compared to higher-costing time deposits. Core deposits represented 62.1% of average interest-bearing deposits for the year ended December 31, 2004, as compared to 60.6% for the same prior year period.

Net Interest Income

For the year ended December 31, 2004 net interest income decreased to $56.0 million, as compared to $57.6 million for the same prior year period. Although average interest-earning assets increased for the year ended December 31, 2004 as compared to the prior year, the net interest margin declined as compared to the same prior year period. The net interest margin decreased to 3.23% for the year ended December 31, 2004 from 3.48% in the same prior year period.

Provision for Loan Losses

For the year ended December 31, 2004, the Company’s provision for loan losses was $300,000, as compared to $688,000 for the year ended December 31, 2003. Although non-performing loans increased $1.3 million at December 31, 2004 from December 31, 2003 most of the increase was related to loans which were previously identified and classified at December 31, 2003 and included in the calculation of the allowance for loan losses at December 31, 2003.

Other Income

Other income was $20.7 million for the year ended December 31, 2004, as compared to $18.7 million for the year ended December 31, 2003. The net gain on sales of loans and securities includes a gain of $186,000 on the sale of equity securities for the year ended December 31, 2004, as compared to a gain of $719,000 for the same prior year period. For the year ended December 31, 2004, the Company recorded a gain of $10.6 million on the sale of loans held for sale, as compared to a gain of $11.1 million in the same prior year period. During 2003, loan sales benefited from the historically low interest rate environment which led to substantial loan origination volume from refinance activity. Most of this volume was in the 30-year fixed-rate mortgage loan product, much of which the Company sells into the secondary market. For the year ended December 31, 2004, the Company received proceeds from the sale of mortgage loans of $510.0 million as compared to $631.9 million for the year ended December 31, 2003. The volume of mortgage loan originations and related loan sale activity is highly dependent on the overall level of interest rates.

Income from loan servicing increased to $328,000 for the year ended December 31, 2004 as compared to a loss of $2.7 million for the same prior year period. The loss was due to the recognition of an impairment to the loan servicing asset of $2.2 million for the year ended December 31, 2003. 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 $429,000, or 5.5%, for the year ended December 31, 2004, as compared to the same prior year period due to the growth in commercial account services, retail core account balances and trust fees.

18	\| OceanFirst Financial Corp. (OCFC) \| Annual Report 2004

Operating Expenses

Operating expenses were $48.8 million for the year ended December 31, 2004, an increase of $3.9 million as compared to $44.9 million for the year ended December 31, 2003. Compensation expense increased due to costs related to the third quarter 2004 acquisition of a consumer direct lending operation by Columbia Home Loans, LLC, the Company’s mortgage banking subsidiary. The increase was also due to the reduction in mortgage loan closings, as refinance activity declined from year ago levels. Higher loan closings in the earlier periods increased deferred loan expenses which were reflected as a reduction to compensation expense. General and administrative expense decreased $1.0 million for the year ended December 31, 2004 as compared to the same prior year period primarily due to lower loan related expenses.

Provision for Income Taxes

Income tax expense was $9.8 million for the year ended December 31, 2004, compared to $11.0 million for the same prior year period. The effective tax rate decreased to 35.2% for the year ended December 31, 2004 as compared to 35.6% for the same prior year period. The Company’s lower average stock price in 2004 as compared to 2003 decreased that portion of the Company’s ESOP expense which is not deductible for tax purposes.

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 average 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 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.

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 19

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

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 million 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.

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,	2004		2003		2002
*(in thousands, except share data)*

Net income	$	17,945	$	19,873	$	20,143
Add: Employee stock plans amortization expense		3,792		4,073		3,640
Amortization of intangible assets		105		105		105
Less: Tax benefit ⁽¹⁾		548		592		590

Cash earnings	$	21,294	$	23,459	$	23,298

Basic cash earnings per share	$	1.76	$	1.91	$	1.82

Diluted cash earnings per share	$	1.68	$	1.80	$	1.70

(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.

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 is a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company has other sources of liquidity if a need for additional funds arises, including an overnight line of credit and advances from the FHLB.

At December 31, 2004, the Company had no outstanding overnight borrowings from the FHLB, a decrease from $24.4 million in overnight borrowings at December 31, 2003. The Company utilizes the overnight line from time to time to fund short-term liquidity needs. Securities sold under agreements to repurchase with retail customers increased to $45.1 million at December 31, 2004 from $36.7 million at December 31, 2003. 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 $418.0 million at December 31, 2004, an increase from $360.0 million at December 31, 2003. 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, 2004 were primarily provided by principal payments on loans and mortgage-backed securities, increased deposits and total borrowings and proceeds from the sale of mortgage loans held-for-sale. The cash was principally utilized for loan originations, the purchase of mortgage-backed securities and the purchase of treasury stock. For the year ended December 31, 2003, the cash needs of the Company were primarily satisfied by principal payments on loans and mortgage-backed securities, increased total borrowings and

20 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

proceeds from the sale of mortgage loans held-for-sale. The cash provided was principally used for the origination of loans, the purchase of mortgage-backed securities, the funding of deposit outflows and the purchase of treasury stock.

In the normal course of business, the Company routinely enters into various commitments, primarily relating to the origination and sale of loans. At December 31, 2004, outstanding commitments to originate loans totaled $182.3 million; outstanding unused lines of credit totaled $134.0 million; and outstanding commitments to sell loans totaled $52.9 million. The Company expects to have sufficient funds available to meet current commitments in the normal course of business.

At December 31, 2004, the Bank exceeded all of its regulatory capital requirements with tangible capital of $118.2 million, or 6.2%, of total adjusted assets, which is above the required level of $28.7 million or 1.5%; core capital of $118.2 million or 6.2% of total adjusted assets, which is above the required level of $57.3 million, or 3.0%; and risk-based capital of $128.8 million, or 10.6% of risk-weighted assets, which is above the required level of $97.3 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 $52.9 million.

The following table shows the contractual obligations of the Company by expected payment period as of December 31, 2004 (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	$	418,000	$	98,000	$	171,000	$	114,000	$	35,000
Operating Lease Obligations		9,133		1,646		2,859		2,223		2,405
Purchase Obligations		11,010		3,670		7,340		—		—

	$	438,143	$	103,316	$	181,199	$	116,223	$	37,405

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 consist primarily of contractual obligations under data processing servicing agreements. Actual amounts expended vary based on transaction volumes, number of users and other factors.

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.

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 2004 Form 10K.

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 21

Consolidated Statements of Financial Condition


(dollars in thousands, except per share amounts)

December 31, 2004 and 2003	2004			2003
Assets
Cash and due from banks	$	74,021		$	36,172
Investment securities available for sale (notes 3 and 9)		83,960			80,458
Federal Home Loan Bank of New York stock, at cost (note 9)		21,250			19,220
Mortgage-backed securities available for sale (notes 4 and 9)		124,478			86,938
Loans receivable, net (notes 5 and 9)		1,472,907			1,389,220
Mortgage loans held for sale		63,961			33,207
Interest and dividends receivable (note 6)		6,033			5,477
Real estate owned, net		288			252
Premises and equipment, net (note 7)		16,037			16,473
Servicing asset (note 5)		8,790			7,473
Bank Owned Life Insurance (BOLI)		34,990			33,948
Intangible assets		1,376			1,481
Other assets (note 10)		6,184			7,090

Total assets	$	1,914,275		$	1,717,409


Liabilities and Stockholders’ Equity
Deposits (note 8)	$	1,270,535		$	1,144,205
Securities sold under agreements to repurchase with retail customers (note 9)		45,072			36,723
Securities sold under agreements to repurchase with the Federal Home Loan Bank (note 9)		106,000			70,000
Federal Home Loan Bank advances (note 9)		312,000			314,400
Advances by borrowers for taxes and insurance		6,289			6,152
Other liabilities (note 10)		36,423			11,267

Total liabilities		1,776,319			1,582,747

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 13,024,204 and 13,350,999 shares outstanding at December 31, 2004 and 2003, respectively		272			272
Additional paid-in capital		193,723			189,615
Retained earnings		157,575			150,804
Accumulated other comprehensive loss		(667	)		(3,400	)
Less: Unallocated common stock held by Employee Stock Ownership Plan		(8,652	)		(9,911	)
Treasury stock, 14,153,168 and 13,826,373 shares at December 31, 2004 and 2003, respectively		(204,295	)		(192,718	)

Total stockholders’ equity		137,956			134,662

Total liabilities and stockholders’ equity	$	1,914,275		$	1,717,409

See accompanying notes to consolidated financial statements.

22 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

Consolidated Statements of Income

(in thousands, except per share amounts)


Years Ended December 31, 2004, 2003 and 2002	2004		2003			2002
Interest income:
Loans	$	83,594	$	86,881		$	94,427
Mortgage-backed securities		4,363		4,440			9,870
Investment securities and other		2,995		3,216			4,159

Total interest income		90,952		94,537			108,456

Interest expense:
Deposits (note 8)		15,194		17,243			27,483
Borrowed funds		19,737		19,651			20,141

Total interest expense		34,931		36,894			47,624

Net interest income		56,021		57,643			60,832
Provision for loan losses (note 5)		300		688			1,650

Net interest income after provision for loan losses		55,721		56,955			59,182

Other income:
Loan servicing income (loss) (note 5)		328		(2,654	)		(2,203	)
Fees and service charges		8,289		7,860			6,450
Net gain on sales of loans and securities available for sale (note 3)		10,832		11,842			4,530
Net income from other real estate operations		7		113			151
Income on Bank Owned Life Insurance		1,256		1,550			1,874
Other		28		38			55

Total other income		20,740		18,749			10,857

Operating expenses:
Compensation and employee benefits (notes 11 and 12)		27,242		22,240			20,324
Occupancy (note 13)		3,840		3,592			3,330
Equipment		2,341		2,434			2,281
Marketing		2,020		2,193			1,988
Federal deposit insurance		478		478			474
Data processing		2,959		2,994			2,584
General and administrative		9,879		10,926			9,163

Total operating expenses		48,759		44,857			40,144

Income before provision for income taxes		27,702		30,847			29,895
Provision for income taxes (note 10)		9,757		10,974			9,752

Net Income	$	17,945	$	19,873		$	20,143

Basic earnings per share	$	1.48	$	1.62		$	1.57

Diluted earnings per share	$	1.42	$	1.53		$	1.47

Average basic shares outstanding (note 1)		12,108		12,291			12,819

Average diluted shares outstanding (note 1)		12,666		13,017			13,696

See accompanying notes to consolidated financial statements.

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 23

Consolidated Statements of Changes in Stockholders’ Equity

(dollars in thousands, except per share amounts)


Years Ended December 31, 2004, 2003 and 2002	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Employee Stock Ownership Plan			Unearned Incentive Awards			Treasury Stock			Total
Balance at December 31, 2001	$	272	$	181,780	$	131,655		$	(824	)	$	(12,663	)	$	(161	)	$	(153,330	)	$	146,729

Comprehensive income:
Net income		—		—		20,143			—			—			—			—			20,143
Other comprehensive loss:
Unrealized loss on securities (net of tax benefit $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 gain on securities (net of tax expense $123)		—		—		—			268			—			—			—			268
Reclassification adjustment for gains included in net income (net of tax expense of $252)		—		—		—			(467	)		—			—			—			(467	)

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

Comprehensive income:
Net income		—		—		17,945			—			—			—			—			17,945
Other comprehensive income:
Unrealized gain on securities (net of tax expense $1,953)		—		—		—			2,854			—			—			—			2,854
Reclassification adjustment for gains included as net income (net of tax expense $65)		—		—		—			(121	)		—			—			—			(121	)

Total comprehensive income																					20,678

Stock Award		—		202		—			—			—			—			—			202
Tax benefit of stock plans		—		1,575		—			—			—			—			—			1,575
Purchase 674,339 shares of common stock		—		—		—			—			—			—			(16,247	)		(16,247	)
Allocation of ESOP stock		—		—		—			—			1,259			—			—			1,259
ESOP adjustment		—		2,331		—			—			—			—			—			2,331
Cash dividend – $.80 per share		—		—		(9,686	)		—			—			—						(9,686	)
Exercise of stock options		—		—		(1,488	)		—			—			—			4,670			3,182

Balance at December 31, 2004	$	272	$	193,723	$	157,575		$	(667	)	$	(8,652	)	$	—		$	(204,295	)	$	137,956

See accompanying notes to consolidated financial statements.

24 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

Consolidated Statements of Cash Flows

(in thousands)


Years Ended December 31, 2004, 2003 and 2002	2004			2003			2002
Cash flows from operating activities:
Net income	$	17,945		$	19,873		$	20,143

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises and equipment		2,053			2,118			2,048
Amortization of Incentive Awards		—			—			161
Amortization of ESOP		1,259			1,337			1,415
ESOP adjustment		2,331			2,487			2,064
Stock awards		202			249			—
Tax benefit of stock plans		1,575			1,945			1,090
Amortization and impairment of servicing asset		1,905			4,976			4,423
Amortization of intangible assets		105			105			105
Net premium amortization in excess of discount accretion on securities		1,270			1,287			1,451
Net accretion of deferred fees and discounts in excess of premium amortization on loans		(177	)		(209	)		(469	)
Provision for loan losses		300			688			1,650
Deferred taxes		(886	)		1,037			554
Net gain on sales of real estate owned		(5	)		(114	)		(148	)
Net gain on sales of loans and securities available for sale		(10,832	)		(11,842	)		(4,530	)
Proceeds from sales of mortgage loans held for sale		510,041			631,854			459,440
Mortgage loans originated for sale		(533,371	)		(591,854	)		(488,410	)
Increase in value of Bank Owned Life Insurance		(1,042	)		(1,550	)		(1,874	)
(Increase) decrease in interest and dividends receivable		(556	)		901			1,254
(Increase) decrease in other assets		(94	)		530			(491	)
Increase (decrease) in other liabilities		25,156			(7,754	)		1,830

Total adjustments		(766	)		36,191			(18,437	)

Net cash provided by operating activities		17,179			56,064			1,706

Cash flows from investing activities:
Net increase in loans receivable		(84,098	)		(54,053	)		(36,807	)
Proceeds from sales of investment and mortgage-backed securities available for sale		545			2,237			—
Purchase of investment securities available for sale		(802	)		(3,540	)		(13,758	)
Purchase of mortgage-backed securities available for sale		(82,844	)		(70,581	)		(65,845	)
Proceeds from maturities of investment securities available for sale		2,116			15,371			—
Principal payments on mortgage-backed securities available for sale		43,478			118,857			156,723
(Purchases) redemptions of Federal Home Loan Bank of New York stock		(2,030	)		(520	)		4,860
Proceeds from sales of real estate owned		257			255			757
Purchases of premises and equipment		(1,617	)		(883	)		(3,026	)

Net cash (used in) provided by investing activities		(124,995	)		7,143			42,904

Cash flows from financing activities:
Increase (decrease) in deposits		126,330			(40,631	)		75,793
(Decrease) increase in short-term borrowings		(16,051	)		16,539			(67,748	)
Proceeds from Federal Home Loan Bank advances		121,000			70,000			25,000
Repayments of Federal Home Loan Bank Advances		(89,000	)		(64,000	)		(43,000	)
Proceeds from securities sold under agreements to repurchase		44,000			—			—
Repayments of securities sold under agreements to repurchase		(18,000	)		—			—
Increase (decrease) in advances by borrowers for taxes and insurance		137			200			(419	)
Exercise of stock options		3,182			3,903			2,423
Dividends paid		(9,686	)		(9,618	)		(8,916	)
Purchase of treasury stock		(16,247	)		(20,620	)		(27,427	)

Net cash provided by (used in ) financing activities		145,665			(44,227	)		(44,294	)

Net increase in cash and due from banks		37,849			18,980			316
Cash and due from banks at beginning of year		36,172			17,192			16,876

Cash and due from banks at end of year	$	74,021		$	36,172		$	17,192

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest	$	34,630		$	36,884		$	48,063
Income taxes		7,387			8,044			3,240
Noncash investing activities:
Transfer of loans receivable to real estate owned		288			264			617

See accompanying notes to consolidated financial statements.

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 25

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 Home Loans, LLC (“Columbia”), OceanFirst REIT Holdings, Inc., and its wholly-owned subsidiary 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.

Business

The Bank provides a range of community 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. Securities are evaluated for other-than-temporary impairment on a quarterly basis.

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 held-for-sale are carried at the lower of unpaid principal balance, net, or market value on an aggregate basis.

Allowance for Loan Losses

The adequacy of the allowance for loan losses is based on management’s evaluation of the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and current economic conditions. Additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged off. The allowance is reduced by loan charge-offs. Loans are charged-off when management believes such loans are uncollectible.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company’s market area. In addition, various regulatory agencies, as an integral part of their routine examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.

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.

26 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

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.

Impact of New Accounting Pronouncements

FASB Statement No. 123 (revised 2004) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Statement 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The revised Statement generally requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity’s ability to account for share-based compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issued to Employees, which was permitted under Statement 123, as originally issued. The revised Statement requires entities to disclose information needed about the nature of the share-based payment transactions and the effects of those transactions on the financial statements. Statement 123(R) is effective for the Company beginning July 1, 2005. The Company must use either the modified prospective or the modified retrospective transition method. Early adoption of this Statement for interim or annual periods for which financial statements or interim reports have not been issued is permitted. The Company is currently evaluating the transition provisions of Statement 123(R) and does not know the impact on the consolidated financial statements at this time.

The guidance in EITF 03-1 was effective for other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. However, the guidance contained in paragraphs 10-20 of the Issue has been delayed by FSP EITF Issue 03-1-1, “The Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,’” posted on September 30, 2004. The disclosure requirements continue to be effective in annual financial statements for fiscal years ending after December 15, 2003. The Company will evaluate the impact on its consolidated financial statements, if any, when the recognition and measurement requirements for other-than-temporary impairment are finalized.

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).


	2004			2003			2002
Net income:
As reported	$	17,945		$	19,873		$	20,143

Stock-based compensation expense included in reported net income, net of related tax effects		131			162			105
Total stock-based compensation expense determined under the fair value based method including earned incentive awards and stock option grants, net of related tax effects		(711	)		(669	)		(523	)

Net stock-based compensation expense not included in reported net income, all relating to stock option grants, net of related tax effects		(580	)		(507	)		(418	)

Pro forma	$	17,365		$	19,366		$	19,725

Basic earnings per share:
As reported	$	1.48		$	1.62		$	1.57
Pro forma		1.43			1.58			1.54

Diluted earnings per share:
As reported	$	1.42		$	1.53		$	1.47
Pro forma		1.37			1.49			1.44

Weighted average fair value of an option share granted during the year	$	4.66		$	4.45		$	4.85

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:


	2004		2003		2002
Risk-free interest rate	4.21	%	2.79	%	4.79	%
Expected option life	6 years		6 years		6 years
Expected volatility	23	%	25	%	31	%
Expected dividend yield	3.36	%	3.25	%	3.25	%

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 27

Notes to Consolidated Financial Statements (continued)

Comprehensive Income

Comprehensive income is divided into net income and other comprehensive income (loss). Other comprehensive income (loss) includes items recorded directly in equity, such as unrealized gains or losses on securities available for sale.

Intangible Assets

The Company accounts for intangible assets under SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 eliminated amortization of goodwill and requires that an annual impairment test be performed. The Company has determined that there is no impairment to goodwill based on the criteria of SFAS 142. SFAS 142 does 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.

Bank-Owned Life Insurance

Bank-owned life insurance (BOLI) is accounted for using the cash surrender value method and is recorded at its realizable value. The change in the net asset value is included in other non-interest income.

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, 2004, 2003 and 2002 (in thousands):


Year ended December 31,	2004		2003		2002
Weighted average shares outstanding	13,241		13,585		14,305
Less: Unallocated ESOP shares	(1,101	)	(1,255	)	(1,418	)
Unallocated Incentive
Award shares	(32	)	(39	)	(68	)

Average basic shares outstanding	12,108		12,291		12,819
Add: Effect of dilutive securities:
Stock options	533		695		822
Incentive Awards	25		31		55

Average diluted shares outstanding	12,666		13,017		13,696

(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, 2004 was approximately $5.1 million. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that the eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held.

Office of Thrift Supervision (“OTS”) regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2004, 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, 2004 and 2003 the Bank was considered well capitalized.

The following is a summary of the Bank’s actual capital amounts and ratios as of December 31, 2004 and 2003, 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, 2004:	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tangible capital		118,232	6.2	%		28,672	1.5	%		—	—	%
Core capital		118,232	6.2			57,344	3.0			95,573	5.0
Tier 1 risk-based capital		118,232	9.7			48,656	4.0			72,984	6.0
Risk-based capital		128,790	10.6			97,311	8.0			121,639	10.0


As of December 31, 2003:
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

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.

28	\| OceanFirst Financial Corp. (OCFC) \| Annual Report 2004

(3) Investment Securities Available for Sale

The amortized cost and estimated market value of investment securities available for sale at December 31, 2004 and 2003 are as follows (in thousands):


December 31, 2004	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
United States Government and agency obligations	$	1,206	$	—	$	(9	)	$	1,197
State and municipal obligations		3,812		50		—			3,862
Corporate debt securities		75,449		—		(2,274	)		73,175
Equity investments		4,344		1,382		—			5,726

	$	84,811	$	1,432	$	(2,283	)	$	83,960


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

Gains realized on the sale of investment securities available for sale during 2004 and 2003 totaled $186,000 and $719,000, respectively. There were no losses realized on the sale of investment securities available for sale during 2004 and 2003. There were no realized gains or losses during 2002.

The amortized cost and estimated market value of investment securities available for sale, excluding equity investments, at December 31, 2004 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, 2004, investment securities available for sale with an amortized cost and estimated market value of $79,261,000 and $77,037,000, respectively, were callable prior to the maturity date.


December 31, 2004	Amortized Cost		Estimated Market Value
Less than one year	$	998	$	992
Due after one year through five years		208		205
Due after five years through ten years		—		—
Due after ten years		79,261		77,037

	$	80,467	$	78,234

The carrying value of investment securities pledged as required security for deposits and for other purposes required by law amounted to $1,197,000 and $1,213,000 at December 31, 2004 and 2003, respectively.

The estimated market value and unrealized loss for investment securities available for sale at December 31, 2004 and 2003, segregated by the duration of the unrealized loss are as follows (in thousands):


	Less than 12 months					12 months or longer					Total
December 31, 2004	Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses			Estimated Market Value		Unrealized Losses
U.S. Government and agency obligations	$	992	$	(6	)	$	205	$	(3	)	$	1,197	$	(9	)
Corporate debt securities		—		—			73,175		(2,274	)		73,175		(2,274	)

	$	992	$	(6	)	$	73,380	$	(2,277	)	$	74,372	$	(2,283	)


	Less than 12 months				12 months or longer					Total
December 31, 2003	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 United States Government and agency obligations in the tables above are either direct obligations of the Unites States Government or are issued by one of the 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 securities.

The corporate debt securities are issued by other financial institutions each 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 the 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, 2004 and 2003 are as follows (in thousands):


December 31, 2004	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Market Value
FHLMC	$	17,729	$	87	$	(48	)	$	17,768
FNMA		103,297		91		(687	)		102,701
GNMA		3,729		280		—			4,009

	$	124,755	$	458	$	(735	)	$	124,478

OceanFirst Financial Corp. (OCFC) | Annual Report 2004| 29

Notes to Consolidated Financial Statements (continued)


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

There were no gains or losses realized on the sale of mortgage-backed securities available for sale during 2004, 2003 or 2002.

Collateralized mortgage obligations issued by GNMA and private interests amounted to $1,173,000 and $22,000, respectively, at December 31, 2003.

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 principal prepayments.

The carrying value of mortgage-backed securities pledged as required security for deposits and for other purposes required by law amounted to $14,067,000 and $7,397,000 at December 31, 2004 and December 31, 2003, respectively.

The estimated market value and unrealized loss for mortgage-backed securities available for sale at December 31, 2004 and 2003 segregated by the duration of the unrealized loss are as follows (in thousands):


December 31, 2004
	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	$	—	$	—	$	8,719	$	(48	)	$	8,719	$	(48	)
FNMA		—		—		87,166		(687	)		87,166		(687	)

	$	—	$	—	$	95,885	$	(735	)	$	95,885	$	(735	)


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 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, 2004 and 2003 follows (in thousands):


December 31,	2004			2003
Real estate mortgage:
One to four-family	$	1,061,108		$	1,045,841
Commercial real estate, multi-family and land		243,299			205,066
FHA insured & VA guaranteed		1,516			2,853

		1,305,923			1,253,760

Real estate construction		19,189			11,274
Consumer		99,279			81,455
Commercial		61,290			53,231

Total loans		1,485,681			1,399,720

Loans in process		(5,970	)		(3,829	)
Deferred origination costs, net		3,888			4,136
Unamortized discount		(4	)		(5	)
Allowance for loan losses		(10,688	)		(10,802	)

		(12,774	)		(10,500	)

	$	1,472,907		$	1,389,220

At December 31, 2004, 2003 and 2002 loans in the amount of $3,488,000, $2,162,000 and $2,688,000, respectively, were three or more months delinquent or in the process of foreclosure and the Company was not accruing interest income. At December 31, 2004, the impaired loan portfolio consisted of one commercial real estate loan for $744,000 for which general allocations to the allowance for loan losses of $149,000 were identified. The Company had no impaired loans at December 31, 2003. If interest income on nonaccrual loans and impaired loans had been current in accordance with their original terms, approximately $128,000, $96,000 and $87,000 of interest income for the years ended December 31, 2004, 2003 and 2002, respectively, would have been recorded. At December 31, 2004, 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, 2004, 2003 and 2002 is as follows (in thousands):


Year Ended December 31,	2004			2003			2002
Balance at beginning of year	$	10,802		$	10,074		$	10,351
Provision charged to operations		300			688			1,650
Charge-offs		(487	)		(258	)		(2,519	)
Recoveries		73			298			592

Balance at end of year	$	10,688		$	10,802		$	10,074

An analysis of the servicing asset for the years ended December 31, 2004, 2003 and 2002 is as follows (in thousands):


Year Ended December 31,	2004			2003			2002
Balance at beginning of year	$	7,473		$	7,907		$	7,628
Capitalized mortgage servicing rights		3,222			4,542			4,702
Amortization and impairment charges		(1,905	)		(4,976	)		(4,423	)

Balance at end of year	$	8,790		$	7,473		$	7,907

The estimated fair value of the servicing asset at December 31, 2004 was $10,328,000.

30	\| OceanFirst Financial Corp. (OCFC) \|Annual Report 2004

(6) Interest and Dividends Receivable

A summary of interest and dividends receivable at December 31, 2004 and 2003 follows (in thousands):


December 31,	2004		2003
Loans	$	5,162	$	4,770
Investment securities		362		288
Mortgage-backed securities		509		419

	$	6,033	$	5,477

(7) Premises and Equipment, Net

Premises and equipment at December 31, 2004 and 2003 are summarized as follows (in thousands):


December 31,	2004			2003
Land	$	3,195		$	3,195
Buildings and improvements		15,507			15,506
Leasehold improvements		2,052			2,052
Furniture and equipment		11,428			12,383
Automobiles		194			270
Construction in progress		2			—

Total		32,378			33,406
Accumulated depreciation and amortization		(16,341	)		(16,933	)

	$	16,037		$	16,473

(8) Deposits

Deposits, including accrued interest payable of $210,000 and $36,000 at December 31, 2004 and 2003, respectively, are summarized as follows (in thousands):


December 31,	2004				2003
	Amount		Weighted Average Cost		Amount		Weighted Average Cost
Non-interest bearing accounts	$	106,492	—	%	$	108,668	—	%
Interest-bearing checking accounts		297,919	.81			249,254	.47
Money market deposit accounts		142,893	1.01			138,812	.90
Savings accounts		250,032	.50			259,629	.49
Time deposits		473,199	2.67			387,842	2.72

	$	1,270,535	1.40	%	$	1,144,205	1.24	%

Included in time deposits at December 31, 2004 and 2003, respectively, is $112,464,000 and $46,189,000 in deposits of $100,000 and over.

Time deposits at December 31, 2004 mature as follows (in thousands):


Year Ended December 31,
2005	$	271,886
2006		91,506
2007		34,684
2008		46,804
2009		13,794
Thereafter		14,525

	$	473,199

Interest expense on deposits for the years ended December 31, 2004, 2003 and 2002 was as follows (in thousands):


Year Ended December 31,	2004		2003		2002
Interest-bearing checking accounts	$	1,556	$	1,743	$	3,610
Money market deposit accounts		1,350		1,372		1,813
Savings accounts		1,310		1,679		2,955
Time deposits		10,978		12,449		19,105

	$	15,194	$	17,243	$	27,483

(9) Borrowed Funds

Borrowed funds are summarized as follows (in thousands):


December 31,	2004				2003
	Amount		Weighted Average Rate		Amount		Weighted Average Rate
Federal Home Loan Bank advances	$	312,000	4.32	%	$	314,400	4.63	%
Securities sold under agreements to repurchase		151,072	3.64			106,723	3.73

	$	463,072	4.10	%	$	421,123	4.40	%

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
	2004			2003			2004			2003
Average balance	$	335,916		$	272,928		$	142,824		$	151,901
Maximum amount outstanding at any month end		361,200			321,300			159,835			173,039
Average interest rate for the year		4.41	%		4.89	%		3.45	%		4.16	%

Amortized cost of collateral:
Corporate securities		—			—		$	75,449		$	75,364
Mortgage-backed securities		—			—			101,408			66,123

Estimated market value of collateral:
Corporate securities		—			—			73,175			67,944
Mortgage-backed securities		—			—			101,186			65,883

The securities collateralizing the reverse repurchase agreements 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, agrees to resell to the Company substantially the same securities at the maturity of the reverse repurchase agreements.

FHLB advances and reverse repurchase agreements have contractual maturities at December 31, 2004 as follows (in thousands):


Year Ended December 31,	FHLB Advances		Reverse Repurchase Agreements
2005	$	84,000	$	59,072
2006		59,000		27,000
2007		64,000		21,000
2008		35,000		41,000
2009		35,000		3,000
Thereafter		35,000		—

	$	312,000	$	151,072

Amount callable by lender prior to the maturity date	$	32,000	$	70,000

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 31

Notes to Consolidated Financial Statements (continued)

The Bank has an available overnight line of credit with the FHLB for $50,000,000 which expires July 29, 2005. The Bank also has available from the FHLB, a one-month overnight repricing line of credit for $50,000,000 which expires July 29, 2005. 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, mortgage-backed securities 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 FHLB, 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, 2004, 2003 and 2002 consists of the following (in thousands):


Year Ended December 31,	2004			2003			2002
Current:
Federal	$	10,179		$	9,448		$	8,556
State		464			489			642

Total Current		10,643			9,937			9,198

Deferred:
Federal		(626	)		1,297			1,355
State		(260	)		(260	)		(801	)

Total deferred		(886	)		1,037			554

	$	9,757		$	10,974		$	9,752

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 (loss) is income tax expense (benefit) attributable to net unrealized gains (losses) on securities available for sale in the amount of $1,888,000, $(129,000) and $(1,642,000) for the years ended December 31, 2004, 2003 and 2002, respectively. Included in stockholders’ equity is income tax benefit attributable to stock plans in the amount of $1,575,000, $1,945,000 and $1,090,000 for the years ended December 31, 2004, 2003 and 2002, 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, 2004, 2003 and 2002 is as follows (in thousands):


Year Ended December 31,	2004			2003			2002
Income before provision for income taxes	$	27,702		$	30,847		$	29,895
Applicable statutory Federal income tax rate		35.0	%		35.0	%		35.0	%
Computed “expected” Federal income tax expense	$	9,696		$	10,796		$	10,463
Increase(decrease) in Federal income tax expense resulting from:
ESOP adjustment		816			870			722
ESOP dividends		(317	)		(290	)		(229	)
Earnings on life insurance		(440	)		(543	)		(656	)
State income taxes net of Federal benefit		132			149			(391	)
Other items, net		(130	)		(8	)		(157	)

	$	9,757		$	10,974		$	9,752

Included in other assets at December 31, 2004 and 2003 is a net deferred tax asset of $3,901,000 and $4,903,000, respectively. In addition, at December 31, 2004 and 2003 the Company recorded a current tax payable of $8,597,000 and $7,029,000, respectively.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below (in thousands):


December 31,	2004			2003
Deferred tax assets:
Allowance for loan and real estate owned losses per books	$	4,366		$	4,412
Reserve for uncollected interest		62			40
Deferred compensation		989			860
Premises and equipment, differences in depreciation		45			31
Other reserves		95			74
Stock plans		124			157
ESOP		59			127
Unrealized loss on securities available for sale		461			2,349
Intangible assets		74			98
Lease termination costs		64			94
Penalty on early extinguishment of debt		82			197
Partnership investment income		—			180
Loans held for sale		—			303
State alternative minimum tax		648			478

Total deferred tax assets		7,069			9,400

Deferred tax liabilities:
Excess servicing on sale of mortgage loans		(1,146	)		(834	)
Investments, discount accretion		(248	)		(207	)
Deferred loan and commitment costs, net		(1,774	)		(1,939	)
Undistributed income of real estate investment trust subsidiary		—			(1,517	)

Total deferred tax liabilities		(3,168	)		(4,497	)

Net deferred tax assets	$	3,901		$	4,903

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,

32 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

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, 2004 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, 2004 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 2004, 2003 and 2002, 14,409, 13,802 and 13,847 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, 2004 and 2003 contributions to the ESOP, which were used to fund principal and interest payments on the ESOP debt, totaled $2,267,000 and $2,408,000, respectively. During 2004 and 2003, $935,000 and $1,034,000, respectively, of dividends paid on unallocated ESOP shares were used for debt service. At December 31, 2004 and 2003, the loan had an outstanding balance of $8,772,000 and $10,197,000, respectively, and the ESOP had unallocated shares of 1,026,060 and 1,175,352, respectively. At December 31, 2004, the unallocated shares had a fair value of $25,292,000. 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, 2004, 2003 and 2002, the Bank recorded compensation expense related to the ESOP of $3,590,000, $3,824,000 and $3,479,000, respectively, including $2,331,000, $2,487,000 and $2,064,000, 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, 2004, 1,482,850 shares had been allocated to participants and 137,978 shares were committed to be released.

(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, $0 and $161,000 for the years ended December 31, 2004, 2003 and 2002, 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, 2004, 2003 and 2002 follows:


	2004				2003				2002
	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	2,291,337		$	13.71	2,483,146		$	11.58	2,253,773		$	10.01
Granted	395,276			22.57	378,305			23.51	514,261			17.95
Exercised	(388,708	)		10.86	(507,991	)		9.90	(248,662	)		9.75
Forfeited	(82,391	)		22.34	(62,123	)		19.36	(36,226	)		16.55

Outstanding at end of year	2,215,514		$	15.47	2,291,337		$	13.71	2,483,146		$	11.58

Options exercisable	1,337,326				1,521,233				1,889,429

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 33

Notes to Consolidated Financial Statements (continued)

The following table summarizes information about stock options outstanding at December 31, 2004:


	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
$ 9.60 - $ 9.87	902,212	2.09 years	$	9.61	902,212	$	9.61
10.00 - 12.87	187,971	3.82		11.29	183,621		11.26
13.06 - 16.91	39,561	5.89		14.28	26,953		14.17
17.14 - 17.88	393,461	7.16		17.88	160,190		17.88
18.64 - 23.23	379,153	9.38		22.48	3,144		20.42
23.44 - 27.11	313,156	8.53		23.51	61,206		23.49

	2,215,514	5.36 years	$	15.47	1,337,326	$	11.58

(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, 2004, the following commitments and contingent liabilities existed which are not reflected in the accompanying consolidated financial statements (in thousands):


December 31,	2004
Unused consumer and construction loan lines of credit (primarily floating-rate)	$	79,307

Unused commercial loan lines of credit (primarily floating-rate)		54,705

Other commitments to extend credit:
Fixed-Rate		69,624
Adjustable-Rate		82,619
Floating-Rate		30,105

The Company’s fixed-rate loan commitments expire within 90 days of issuance and carried interest rates ranging from 5.00% to 6.63% at December 31, 2004.

The Company’s maximum exposure to credit losses in the event of nonperformance by the other party to these financial instruments and commitments is represented by the contractual amounts. The Company uses the same credit policies in granting commitments and conditional obligations as it does for financial instruments recorded in the consolidated statements of financial condition.

These commitments and obligations do not necessarily represent future cash flow requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s assessment of risk. Substantially all of the unused consumer and construction loan lines of credit are collateralized by mortgages on real estate.

At December 31, 2004, the Company is obligated under noncancelable operating leases for premises and equipment. Rental expense under these leases aggregated approximately $1,655,000, $1,419,000 and $1,263,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

The projected minimum rental commitments as of December 31, 2004 are as follows (in thousands):


Year ended December 31,
2005	$	1,646
2006		1,582
2007		1,277
2008		1,193
2009		1,030
Thereafter		2,405

	$	9,133

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 from 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.

34 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

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 interest-bearing checking accounts 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 Sell Loans

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The estimated fair values of the Bank’s financial instruments as of December 31, 2004 and 2003 are presented in the following tables (in thousands). Since the fair value of off-balance sheet commitments approximate book value and are not significant, these disclosures are not included.


December 31, 2004	Book Value		Fair Value
Financial Assets:
Cash and due from banks	$	74,021	$	74,021
Investment securities available for sale		83,960		83,960
Mortgage-backed securities available for sale		124,478		124,478
Federal Home Loan Bank of New York stock		21,250		21,250
Loans receivable and mortgage loans held for sale		1,536,868		1,546,284
Financial Liabilities:
Deposits		1,270,535		1,267,722
Borrowed funds		463,072		471,136

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

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, 2004 and 2003 and condensed statements of operations and cash flows for the years ended December 31, 2004, 2003 and 2002 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,	2004		2003
Assets
Cash and due from banks	$	7	$	7
Advances to subsidiary Bank		4,970		6,483
Investment securities		5,726		5,675
ESOP loan receivable		8,772		10,197
Investment in subsidiary Bank		119,003		113,171

Total assets	$	138,478	$	135,533

Liabilities and Stockholders’ Equity
Other liabilities	$	522	$	871
Stockholders’ equity		137,956		134,662

Total liabilities and stockholders’ equity	$	138,478	$	135,533

OceanFirst Financial Corp. (OCFC) | Annual Report 2004 | 35

CONDENSED STATEMENTS OF OPERATIONS

(in thousands)


Year ended December 31,	2004			2003			2002
Dividend income - Subsidiary Bank	$	20,000		$	25,000		$	35,000
Dividend income - Investment securities		484			468			659
Gain on sale - Investment securities		186			719			—
Interest income - Advances to subsidiary Bank		47			39			57
Interest income - ESOP loan receivable		841			961			1,082

Total dividend and interest income		21,558			27,187			36,798
Operating expenses		1,212			1,272			1,299

Income before income taxes and distributions in excess of earnings of subsidiary Bank		20,346			25,915			35,499
Provision for income taxes		119			390			187

Income before distributions in excess of earnings of subsidiary Bank		20,227			25,525			35,312
Distributions in excess of earnings of subsidiary Bank		(2,282	)		(5,652	)		(15,169	)

Net income	$	17,945		$	19,873		$	20,143

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)


Year ended December 31,	2004			2003			2002
Cash flows from operating activities:
Net income	$	17,945		$	19,873		$	20,143
Decrease (increase) in advances to subsidiary Bank		1,513			(1,028	)		(2,452	)
Distributions in excess of earnings of subsidiary Bank		2,282			5,652			15,169
Gain on sale of investment securities		(186	)		(719	)		—
(Decrease) increase in other liabilities		(332	)		205			32
Reduction in Incentive Awards		—			—			161

Net cash provided by operating activities		21,222			23,983			33,053

Cash flows from investing activities:
Proceeds from sale of investment securities		545			2,237			—
Purchase of investment securities		(441	)		(1,332	)		(600	)
Repayments on ESOP loan receivable		1,425			1,447			1,467

Net cash provided by investing activities		1,529			2,352			867

Cash flows from financing activities:
Dividends paid		(9,686	)		(9,618	)		(8,916	)
Purchase of treasury stock		(16,247	)		(20,620	)		(27,427	)
Exercise of stock options		3,182			3,903			2,423

Net cash used in financing activities		(22,751	)		(26,335	)		(33,920	)

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)*
2004
Interest income	$	23,589	$	23,187	$	22,145	$	22,031
Interest expense		9,107		8,917		8,637		8,270

Net interest income		14,482		14,270		13,508		13,761
Provision for loan losses		150		50		50		50

Net interest income after provision for loan losses		14,332		14,220		13,458		13,711
Other income		6,607		4,951		4,513		4,669
Operating expenses		13,374		12,275		11,678		11,432

Income before provision for income taxes		7,565		6,896		6,293		6,948
Provision for income taxes		2,572		2,444		2,272		2,469

Net Income	$	4,993	$	4,452	$	4,021	$	4,479

Basic earnings per share	$	.42	$	.37	$	.33	$	.37

Diluted earnings per share	$	.40	$	.35	$	.32	$	.35

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

36 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

Report of Independent

Registered Public Accounting Firm

The Board of Directors and Stockholders

OceanFirst Financial Corp.:

We have audited the accompanying consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary (the “Company”) as of December 31, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 1, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

LOGO

Short Hills, New Jersey

March 1, 2005

OceanFirst Financial Corp. (OCFC) | Annual Report 2004| 37

Management Report on Internal Control

Over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the Company’s internal control over financial reporting as of December 31, 2004. This assessment was based on criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2004, the Company maintained effective internal control over financial reporting based on those criteria. The Company’s independent registered public accounting firm has issued an audit report on our assessment of, and the effective operation of, the Company’s internal control over financial reporting. This report appears on page 39.

38 | OceanFirst Financial Corp. (OCFC) | Annual Report 2004

Report of Independent

Registered Public Accounting Firm

The Board of Directors and Stockholders

OceanFirst Financial Corp.:

We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that OceanFirst Financial Corp. and subsidiary (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that OceanFirst Financial Corp. and subsidiary maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by COSO. Also, in our opinion, OceanFirst Financial Corp. and subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary as of December 31, 2004 and 2003, 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, 2004, and our report dated March 1, 2005 expressed an unqualified opinion on those consolidated financial statements.

LOGO

Short Hills, New Jersey

March 1, 2005

OceanFirst Financial Corp. (OCFC) | Annual Report 2004| 39

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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. 333-34143) on Form S-8, pertaining to the OceanFirst Financial Corp. 1997 Incentive Plan, and in the registration statement (No. 333-34145), on Form S-8, pertaining to the Retirement Plan for OceanFirst Bank, of OceanFirst Financial Corp., of our report dated March 1, 2005, relating to the consolidated statements of financial condition of OceanFirst Financial Corp. and subsidiary as of December 31, 2004 and 2003 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, 2004, management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004 which reports are incorporated by reference in the December 31, 2004 Annual Report on Form 10-K of OceanFirst Financial Corp.

KPMG LLP

Short Hills, New Jersey

March 11, 2005

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)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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;

Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

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 functions):

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 8, 2005				/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 8, 2005				/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, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned 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 8, 2005

/s/ Michael Fitzpatrick

Michael Fitzpatrick

Chief Financial Officer

March 8, 2005

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