<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] 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
OCEAN FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 21-0607451
- --------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
74 Brick Boulevard, Brick, NJ 08723
- --------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (908)477-5200
----------------------
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
----- -----
As of June 30, 1996, there were no shares of the Registrant's Common Stock, par
value $.01 per share, outstanding. As of August 9, 1996, there were 9,059,124
shares of the Registrant's Common Stock, par value $.01 per share, outstanding.
<PAGE>
OCEAN FINANCIAL CORP.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- --------- --------------------- ----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 1996 (unaudited) and December 31, 1995.......... 1
Consolidated Statements of Income for the three and
six months ended June 30, 1996 and 1995 (unaudited)............ 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 (unaudited)................ 3
Notes to Unaudited Consolidated Financial Statements........... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation............................. 7
Part II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings............................................... 11
Item 2. Changes in Securities.......................................... 11
Item 3. Default Upon Senior Securities................................. 11
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Item 5. Other Information.............................................. 11
Item 6. Exhibits and Reports on Form 8-K............................... 11
Signatures................................................................ 12
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Ocean Financial Corp. (the "Company") is a Delaware corporation organized
by Ocean Federal Savings Bank (the "Bank") in November 1995 for the purpose of
acquiring all of the capital stock of the Bank to be issued in the conversion of
the Bank from a federally chartered mutual savings bank to a federally chartered
stock savings bank (the "Conversion").
The Company filed with the Securities and Exchange Commission (the "SEC")
the Registration Statement on Form S-1 under the Securities Act of 1933, as
amended, with respect to the Common Stock to be offered in connection with the
Conversion of the Bank. The Company also filed a Registration Statement on Form
8-A to register its Common Stock under the Securities Exchange Act of 1934, as
amended. Each Registration Statement was declared effective by the SEC on May
13, 1996. The Conversion, including the Company's acquisition of the Bank was
consummated on July 2, 1996. Prior to July 2, 1996, the Company was a non-
operating entity.
The financial statements and management's discussion and analysis of
financial condition and results of operations of Ocean Financial Corp. have been
omitted because the Company had not yet issued any stock, had no assets and no
liabilities, and had not conducted any business other than that of an
organizational nature as of June 30, 1996.
The information set forth herein represents the consolidated financial
statements of the Bank, in its mutual form, and its wholly-owned subsidiary as
of or for the period ending June 30, 1996. This information includes
Consolidated Statements of Financial Condition, Income and Cash Flows and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operation.
<PAGE>
OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 617 $ 8,022
Federal funds sold 42,800 -
---------- ----------
Total cash and cash equivalents 43,417 8,022
Investment securities available for sale 132,006 114,881
Federal Home Loan Bank of New York
stock, at cost 8,457 7,723
Mortgage-backed securities available for
sale 339,916 265,113
Loans receivable, net 631,510 612,696
Mortgage loans held for sale 2,776 1,894
Interest and dividends receivable 9,242 7,480
Real estate owned, net 1,281 1,367
Premises and equipment, net 9,497 7,641
Excess servicing asset 1,761 1,222
Other assets 11,949 8,406
---------- ----------
Total assets $1,191,812 $1,036,445
========== ==========
LIABILITIES AND RETAINED EARNINGS
- ---------------------------------
Deposits $ 939,147 $ 926,558
Federal Home Loan Bank borrowings - 10,400
Common stock subscriptions 153,509 -
Advances by borrowers for taxes
and insurance 3,581 3,321
Other liabilities 3,487 3,815
---------- ----------
Total liabilities 1,099,724 944,094
---------- ----------
Retained earnings:
Substantially restricted 95,165 90,281
Net unrealized (loss) gain on securities
available for sale, net of tax (3,077) 2,070
---------- ----------
Total retained earnings 92,088 92,351
---------- ----------
Total liabilities and
retained earnings $1,191,812 $1,036,445
========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
1
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OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
--------------------------- ----------------------------
1996 1995 1996 1995
----------- ------------ --------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $12,403 $12,164 $24,545 $23,790
Mortgage-backed securities 4,978 3,462 9,551 6,780
Investment securities 2,389 1,904 4,662 3,798
-------- ------- ------- -------
Total interest income 19,770 17,530 38,758 34,368
-------- ------- ------- -------
Interest expense:
Deposits 10,120 9,912 20,532 18,893
Federal Home Loan Bank borrowings 1,309 20 2,105 156
Other 144 - 144 -
-------- ------- ------- -------
Total interest expense 11,573 9,932 22,781 19,049
-------- ------- ------- -------
Net interest income 8,197 7,598 15,977 15,319
Provision for loan losses 125 237 250 474
-------- ------- ------- -------
Net interest income after
provision for loan losses 8,072 7,361 15,727 14,845
-------- ------- ------- -------
Other income:
Fees and service charges 457 391 940 811
Net gain on sales of loans
available for sale 48 35 223 36
Net gain (loss) from real estate
owned operations 47 (50) 11 (16)
Other 194 16 268 42
-------- ------- ------- -------
Total other income 746 392 1,442 873
-------- ------- ------- -------
Operating expenses:
Compensation and employee benefits 2,801 2,093 4,984 4,211
Occupancy 439 444 900 878
Equipment 188 242 332 431
Marketing 205 262 327 437
Federal deposit insurance 581 544 1,150 1,088
Data processing 209 187 430 369
General and administrative 609 559 1,369 1,155
-------- ------- ------- -------
Total operating expenses 5,032 4,331 9,492 8,569
-------- ------- ------- -------
Income before provision for
income taxes 3,786 3,422 7,677 7,149
Provision for income taxes 1,313 1,286 2,793 2,692
-------- ------- ------- -------
Net income $ 2,473 $ 2,136 $ 4,884 $ 4,457
======== ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
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OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
-------------------------
1996 1995
----------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,884 $ 4,457
--------- -------
Adjustments to reconcile net
income to net cash provided by operating
activities:
Depreciation and amortization of premises
and equipment 354 435
Amortization of excess servicing asset 102 48
Net premium amortization in excess of discount
accretion on mortgage-backed and investment
securities 651 265
Net accretion of deferred fees and discounts
in excess of premium on loans (266) (241)
Provision for loan losses 250 474
Net gain on sales of real estate owned (99) (131)
Proceeds from sales of real estate owned 814 1,819
Net gain on sales of loans available for sale (223) (36)
Increase in interest and dividends receivable (1,762) (316)
Increase in other assets (571) (2,826)
Decrease in other liabilities (328) (380)
--------- -------
Total adjustments (1,078) (889)
--------- -------
Net cash provided by operating activities 3,806 3,568
--------- -------
Cash flows from investing activities:
Net increase in loans receivable (19,427) (26,669)
Proceeds from sales of mortgage loans held for sale 19,898 1,818
Mortgage loans originated for sale (21,198) (3,546)
Purchase of investment securities available for sale (55,000) -
Purchase of mortgage-backed securities available for
sale (136,456) -
Proceeds from maturities of investments available for
sale 34,125 -
Principal payments on mortgage-backed securities
available for sale 56,633 -
Proceeds from maturities of investments held to
maturity - 9,186
Principal payments on mortgage-backed securities
held to maturity - 17,378
Purchases of Federal Home Loan Bank of New York stock (734) (400)
Purchases of premises and equipment (2,210) (588)
--------- -------
Net cash used in investing activities (124,369) (2,821)
--------- -------
</TABLE>
Continued
3
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OCEAN FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
For the six months
ended June 30,
----------------------
1996 1995
------------ --------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Increase in deposits $ 12,589 $24,940
Decrease in Federal Home Loan Bank borrowings (10,400) (16,300)
Proceeds from common stock subscriptions 153,509 -
Increase in advances by borrowers for taxes and
insurance 260 579
-------- -------
Net cash provided by financing activities 155,958 9,219
-------- -------
Net increase in cash and cash equivalents 35,395 9,966
Cash and cash equivalents at beginning of period 8,022 239
-------- -------
Cash and cash equivalents at end of period $ 43,417 $10,205
======== =======
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 20,448 $18,909
Income taxes 2,906 2,865
Noncash investing activities:
Transfer of loans receivable to real estate owned 629 2,040
Mortgage loans securitized into mortgage-backed
securities 20,213 -
======== =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
OCEAN FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- -----------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Ocean Federal Savings Bank (the "Bank") and its inactive wholly-
owned subsidiary, Dome Financial Services, Inc.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. The results of operations for the three and six months ended
June 30, 1996 are not necessarily indicative of the results of operations that
may be expected for all of 1996.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
Ocean Financial Corp.'s (the "Company") prospectus, which is a part of the
Company's Registration Statement on Form S-1 (No. 33-80123) as approved by the
Securities and Exchange Commission on May 13, 1996.
NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------
In May 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65," which requires that a
mortgage banking enterprise record as a separate asset, rights to service
mortgage loans for others, however those servicing rights are acquired. In
circumstances where mortgage loans are originated, separate asset rights to
service mortgage loans are recorded when the enterprise intends to sell or
securitize such loans and retain servicing. SFAS No. 122 was adopted by the
Bank prospectively beginning January 1, 1996. Adoption of this new statement
did not have a material impact on the Bank's financial position or results of
operations.
NOTE 3. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
- -----------------------------------------------------
On August 17, 1995, the Board of Directors 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
8,388,078 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"). The
purchase of 671,046 shares of common stock (8% of the total shares offered) by
the ESOP was funded by a loan of $13.4 million from the Company.
In exchange for 50% of the net conversion proceeds ($81.6 million), the Company
acquired 100% of the stock of the Bank and retained the remaining net conversion
proceeds at the holding company level.
Concurrent with the close of the Conversion, an additional 671,046 shares of
common stock (8% of the offering) were issued and donated by the Company to the
Ocean Federal Foundation (the "Foundation"), a private foundation dedicated to
charitable purposes within Ocean County, New Jersey and its neighboring
communities. The fair market value of the
5
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contribution of $13.4 million, will be reflected as an expense in the Company's
third quarter operating results and as an increase to capital stock and paid in
capital for the same amount. The Company also recorded a related tax benefit of
$3.7 million with a corresponding increase to the Company's deferred tax assets.
The net effect of the charitable donation on the Company's financial condition
and results of operations for the third quarter will be a decrease in net income
of $9.7 million, an increase in capital stock and paid in capital of $13.4
million and an increase in deferred tax assets of $3.7 million. Although the
Company and the Bank have received an opinion of their independent accountants
that the Company will be entitled to the deduction for the charitable
contribution, there can be no assurances that the IRS will recognize the
Foundation as a Section 501(c)(3) exempt organization or that the deduction will
be permitted. In such event, the Company's contribution to the Foundation would
be fully expensed, resulting in a further reduction in earnings in the year in
which the IRS makes such a determination.
NOTE 4. LOANS RECEIVABLE, NET
- -----------------------------
Loans receivable at June 30, 1996 and December 31, 1995 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------- ------------------
(Unaudited)
<S> <C> <C>
Real estate:
One- to four-family $591,527 $575,010
Commercial real estate, multi-
family and land 15,796 14,939
Construction 9,448 8,153
Consumer 29,558 26,867
-------- --------
Total loans 646,329 624,969
Less:
Undisbursed loan funds 4,308 2,687
Unamortized discounts, net 11 12
Deferred loan fees 1,632 1,679
Allowance for loan losses 6,092 6,001
-------- --------
Total loans, net 634,286 614,590
Less: mortgage loans held for sale 2,776 1,894
-------- --------
Loans receivable, net $631,510 $612,696
======== ========
</TABLE>
NOTE 5. DEPOSITS
- ----------------
The major types of deposits at June 30, 1996 and December 31, 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
Type of Account June 30, 1996 December 31, 1995
- --------------- ------------- -----------------
(Unaudited)
<S> <C> <C>
NOW $ 76,709 $ 75,010
Money Market deposit 71,015 70,556
Savings 181,041 175,777
Time deposits 610,382 605,215
-------- --------
$939,147 $926,558
======== ========
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Total assets at June 30, 1996, were $1.19 billion, an increase of $155.4
million, or 15.0%, compared to $1.04 billion at December 31, 1995. This growth
was funded by the receipt of $153.5 million in common stock subscriptions during
the Bank's Conversion, which was completed on July 2, 1996. The proceeds from
common stock subscription orders were primarily used to repay Federal Home Loan
Bank of New York ("FHLB") borrowings, purchase investment and mortgage-backed
securities and invest in Federal funds sold.
Total cash and cash equivalents were $43.4 million at June 30, 1996, an increase
of $35.4 million from $8.0 million at December 31, 1995. The increase in total
cash and cash equivalents was the result of inflows from common stock
subscriptions and the timing of operating and investing cash flows. Investment
securities available-for-sale increased by $17.1 million, to a balance of $132.0
million at June 30, 1996, compared to a balance of $114.9 million at December
31, 1995, and mortgage-backed securities increased by $74.8 million to $339.9
million at June 30, 1996 from $265.1 million at December 31, 1995. The increase
in investment and mortgage-backed securities is due to the Bank's strategy to
prefund expected Conversion proceeds by increasing FHLB borrowings, and
investing the borrowed funds in investment and mortgage-backed securities, with
the intention of repaying such borrowings upon consummation of the Conversion.
Loans receivable, net, increased by $18.8 million, or 3.1%, to a balance of
$631.5 million at June 30, 1996, compared to a balance of $612.7 million at
December 31, 1995. Premises and equipment increased by $1.9 million or 24.3%,
to $9.5 million at June 30, 1996, from $7.6 million at December 31, 1995, as a
result of renovations in progress to a building purchased by the Bank in July
1995, which will be the site of both a new branch office and the Bank's new
administrative facility. The renovation is due to be completed in early 1997.
Total deposits at June 30, 1996 were $939.1 million, an increase of $12.6
million, or 1.4% compared to $926.6 million at December 31, 1995. Retained
earnings at June 30, 1996, were $92.1 million, compared to $92.4 million at
December 31, 1995, as net income of $4.9 million for the six months ended June
30, 1996 was more than offset by a decrease in the net unrealized (loss) gain on
securities available-for-sale, net of tax, of $5.2 million to a $3.1 million
loss at June 30, 1996, from a $2.1 million gain at December 31, 1995. The
increase in market interest rates during 1996, negatively impacted the fair
market value of these securities.
RESULTS OF OPERATIONS
GENERAL
Net income increased $337,000, or 15.8%, to $2.5 million for the three months
ended June 30, 1996, from $2.1 million for the three months ended June 30, 1995.
For the six months ended June 30, 1996, net income increased $427,000 or 9.6%,
to $4.9 million, from $4.5 million for the six months ended June 30, 1995. The
increases were due to increases in net interest income and other income,
combined with a reduction in the provision for loan losses, partly offset by
increases in operating expenses and the provision for income taxes. The Bank's
average interest-earning assets and interest-bearing liabilities increased
significantly during the first half of 1996 as compared to 1995 due to a
strategy employed by the Bank to prefund anticipated Conversion proceeds,
through the purchase during 1996 of investment and mortgage-backed securities
funded by short-term FHLB borrowings. These borrowings were fully repaid at
June 30, 1996 through the receipt of common stock subscriptions.
7
<PAGE>
INTEREST INCOME
Interest income for the three months ended June 30, 1996 was $19.8 million,
compared to $17.5 million for the three months ended June 30, 1995, an increase
of $2.2 million, or 12.8%. For the six months ended June 30, 1996 interest
income was $38.8 million compared to $34.4 million for the same period in 1995,
an increase of $4.4 million or 12.8%. The increases in interest income were
the result of a significant increase in the average size of the mortgage-backed
securities available-for-sale portfolio due to the 1996 purchases relating to
the prefunding of Conversion proceeds strategy discussed above. Additionally,
the average balance of loans receivable and investment securities available-for-
sale also increased during the second quarter and first half of 1996 as compared
to the second quarter and first half of 1995. The increase in interest-earning
assets was more than enough to offset the effects of a lower average interest-
earning asset yield which decreased to 7.06% and 7.10% for the three and six
months ended June 30, 1996, respectively, as compared to 7.32% and 7.21% for the
three and six months ended June 30, 1995, respectively.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 1996, was $11.6 million,
compared to $9.9 million for the three months ended June 30, 1995, an increase
of $1.6 million, or 16.5%. For the six months ended June 30, 1996 interest
expense was $22.8 million, compared to $19.0 million for the same period in
1995, an increase of $3.7 million, or 19.6%. The increases in interest expense
were the result of an increase in the average outstanding balance of both
deposits and Federal Home Loan Bank borrowings. Additionally, the Bank incurred
other interest expense in the second quarter and first six months of 1996 of
$144,000, representing interest due on common stock subscriptions.
PROVISION FOR LOAN LOSSES
For the three months and six months ended June 30, 1996, the Bank's provision
for loan losses was $125,000 and $250,000, respectively, compared to $237,000
and $474,000 for same prior year periods. The decreased provisions were based
on management's assessment of the risks inherent in the Bank's loan portfolio.
OTHER INCOME
Other income increased to $746,000 and $1.4 million for the three months and six
months ended June 30, 1996, respectively, representing increases of $354,000 and
$569,000, or 90.3% and 65.2%, compared to the same prior year periods. Income
from fees and service charges increased $66,000 and $129,000, for the three and
six months ended June 30, 1996, respectively, compared to the same prior year
periods due to revisions in the Bank's fee structure. Income from the net gain
on sales of loans held for sale increased $13,000 and $187,000 for the three and
six months ended June 30, 1996, respectively, compared to the same prior year
periods. The increase was due to a higher volume of loan sales and the
adoption, effective January 1, 1996, of Statement for Financial Accounting
Standards No. 122 "Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65," which allowed the Bank to record, as a separate asset,
rights to service mortgage loans for others. The volume of loan sales decreased
significantly in the second quarter of 1996 as higher market interest rates
slowed refinancing activity. Other income increased $178,000 and $226,000 for
the three and six months ended June 30, 1996, respectively, compared to the same
prior year periods due to the recovery through June 30, 1996, of $101,000, from
the previous charge-off of a financial asset and due to the recognition of
$132,000 of income in 1996 relating to increases in the cash surrender value of
life insurance policies on Bank officers.
OPERATING EXPENSES
Operating expenses were $5.0 million and $9.5 million for the three and six
months ended June 30, 1996, respectively, representing increases of $701,000 and
8
<PAGE>
$923,000, or 16.2% and 10.8%, compared to the same prior year periods. The
increase in compensation and employee benefits expense of $708,000 and $773,000
for the three and six months ended June 30, 1996, respectively, as compared to
the same prior year periods was due to a $550,000 accrual in the second quarter
of 1996 for one-half the estimated ESOP expense for 1996. This expense was
partly offset by freezing the future accrual of benefits under the Bank's
defined benefit pension plan. Marketing expense for the three and six months
ended June 30, 1996 decreased by $57,000 and $110,000, respectively, over the
comparable prior year periods due to a decrease in donations as a result of the
formation of the Ocean Federal Foundation and a decrease in advertising.
General and administrative expense amounted to $609,000 and $1.4 million for the
three and six months ended June 30, 1996, respectively, representing increases
of $50,000 and $214,000, as compared to the same prior year periods. The
increases were due to higher loan related expenses in conjunction with higher
loan volume, especially in the first quarter of 1996.
PROVISION FOR INCOME TAXES
Income tax expense was $1.3 million and $2.8 million for the three and six
months ended June 30, 1996, respectively, compared to $1.3 million and $2.7
million for the three and six months ended June 30, 1995, respectively. The
effective tax rates for the six months ended June 30, 1996 and 1995 were 36.4%
and 37.7%, respectively.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
Legislative initiatives regarding the recapitalization of the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
("FDIC"), deposit insurance premiums, FICO bond interest payments, the merger of
SAIF and Bank Insurance Fund ("BIF"), financial industry regulatory structure
and revision of thrift and bank charters are still pending before Congress.
Management cannot predict the ultimate impact any final legislation or
regulatory actions may have on the operations of the Bank or the Company.
Without passage of legislation addressing the FDIC insurance premium disparity,
the Bank, like other thrifts in the SAIF, will continue to pay deposit insurance
premiums significantly higher than banks. As long as such premium differential
continues, it may have adverse consequences on the Bank's and the Company's
earnings and the Bank and the Company may be placed at a substantial competitive
disadvantage to banking organizations insured by the BIF.
Legislation regarding bad debt recapture has been passed by Congress and sent
to the President for signature. The legislation requires recapture of reserves
accumulated after 1987. The recapture of post 1987 reserves must be paid over a
six year period starting in 1996. The payment of the tax can be deferred in each
of 1996 and 1997 if an institution originates at least the same average annual
principal amount of mortgage loans that it originated in the six years prior to
1996. Management does not believe that this legislation will have a material
impact on the operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, FHLB borrowings and, to a lesser extent, investment
maturities and proceeds from the sale of loans. While scheduled amortization of
loans are predictable sources of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Bank has other sources of liquidity if a need for additional
funds arises, including an overnight line of credit and advances from the FHLB.
At June 30, 1996, the Bank had no outstanding overnight borrowings from the
FHLB, representing a decrease from $10.4 million at December 31, 1995. The Bank
utilizes the overnight line from time to time to fund short-term liquidity
needs.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, accrued interest receivable, certain time deposits, U.S. Treasury and
Government agencies and other securities and obligations generally having
remaining maturities of less than five years. The levels of these assets are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. As of June 30, 1996 and December 31, 1995, the Bank's
liquidity
9
<PAGE>
ratios were 18.9% and 17.2%, respectively, both in excess of the 5% minimum
regulatory requirement.
The Bank's cash needs for the six months ended June 30, 1996, were principally
provided by FHLB borrowings, increased deposits, maturities of investment
securities and principal payments on loan and mortgage-backed securities. The
cash provided was principally used for investing and financing activities, which
included the purchase of investment and mortgage-backed securities, the
origination of loans and the repayment of FHLB borrowings late in the period.
For the six months ended June 30, 1995, the cash needs of the Bank were
primarily satisfied by growth in the deposit base, investment maturities and
principal payments on loans and mortgage-backed securities. The cash was
principally utilized for loan origination and repayment of FHLB borrowings.
At June 30, 1996, the Bank exceeded all of its regulatory capital requirements
with tangible capital of $95.2 million, or 7.9%, of total adjusted assets, which
is above the required level of $18.0 million or 1.5%; core capital of $95.2
million, or 7.9% of total adjusted assets, which is above the required level of
$36.0 million, or 3.0%; and risk-based capital of $100.6 million, or 20.4% of
risk-weighted assets, which is above the required level of $39.5 million or
8.0%.
NON-PERFORMING ASSETS
The following table sets forth information regarding the Bank's nonperforming
assets consisting of non-accrual loans and Real Estate Owned (REO). The Bank
had no troubled-debt restructured loans within the meaning of SFAS 15 at June
30, 1996 or December 31, 1995. 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.
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------- -------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Real estate:
One-to four-family $ 9,373 8,296
Commercial real estate, multi-
family and land 385 154
Construction - -
Consumer 132 221
------- ------
Total 9,890 8,671
REO, net 1,281 1,367
------- ------
Total non-performing assets $11,171 10,038
======= ======
Allowance for loan losses as a percent of
total loans receivable .95% .97%
Allowance for loan losses as percent of
total non-performing loans 61.60% 69.21%
Non-performing loans as a percent of total
loans receivable 1.54% 1.40%
Non-performing assets as a percent of total
assets .94% .97%
</TABLE>
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Bank is a party to
routine legal proceedings within the normal course of business. Such
routine legal proceedings in the aggregate are believed by management
to be immaterial to the Bank's financial condition or results of
operations.
Item 2. Changes in Securities
---------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
3.1 Certificate of Incorporation of Ocean Financial Corp.*
3.2 Bylaws of Ocean Financial Corp.*
27 Financial Data Schedule (filed herewith)
b) There were no reports on Form 8-K filed during the three months
ended June 30, 1996.
- -----------------
* Incorporated herein by reference into this document from the Exhibits to Form
S-1, Registration Statement, filed on December 7, 1995, as amended,
Registration No. 33-80123.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Ocean Financial Corp.
-------------------------------
Registrant
DATE: August 13, 1996 /s/ John R. Garbarino
-----------------------------------
Chairman of the Board, President
and Chief Executive Officer
DATE: August 13, 1996 /s/ Michael Fitzpatrick
----------------------------------
Executive Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 617
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 42,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 471,922
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 634,286
<ALLOWANCE> 6,092
<TOTAL-ASSETS> 1,191,812
<DEPOSITS> 939,147
<SHORT-TERM> 0
<LIABILITIES-OTHER> 160,577
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,191,812
<INTEREST-LOAN> 24,545
<INTEREST-INVEST> 14,213
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 38,758
<INTEREST-DEPOSIT> 20,532
<INTEREST-EXPENSE> 22,781
<INTEREST-INCOME-NET> 15,977
<LOAN-LOSSES> 250
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,492
<INCOME-PRETAX> 7,677
<INCOME-PRE-EXTRAORDINARY> 7,677
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,884
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0<F1>
<LOANS-NON> 9,890
<LOANS-PAST> 0<F1>
<LOANS-TROUBLED> 0<F1>
<LOANS-PROBLEM> 0<F1>
<ALLOWANCE-OPEN> 6,001
<CHARGE-OFFS> 0<F1>
<RECOVERIES> 0<F1>
<ALLOWANCE-CLOSE> 6,092
<ALLOWANCE-DOMESTIC> 0<F1>
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
This information is not contained in the Form 10-Q.
</FN>
</TABLE>
