<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] 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 22-3412577
-------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
975 Hooper Avenue, Toms River, NJ 08753
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code: (732) 240-4500
------------------------------------
(Former name, former address and formal fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____.
-----
As of November 6, 1998, there were 14,757,428 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
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PAGE
----
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1998 (unaudited) and December 31, 1997................................... 1
Consolidated Statements of Income for the three and nine
months ended September 30, 1998 and 1997 (unaudited)......................................... 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 (unaudited)......................................... 3
Notes to Unaudited Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................... 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk.................................... 11
Part II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings............................................................................ 13
Item 2. Changes in Securities........................................................................ 13
Item 3. Default Upon Senior Securities............................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
Item 5. Other Information............................................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................................. 13
Signatures ............................................................................................. 14
</TABLE>
<PAGE>
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
(Unaudited)
ASSETS
- ------
<S> <C> <C>
Cash and due from banks $ 8,738 $ 2,225
Federal funds sold - -
----------- -----------
Cash and cash equivalents 8,738 2,225
Investment securities available for sale 145,468 207,357
Federal Home Loan Bank of New York
stock, at cost 15,042 14,980
Mortgage-backed securities available for
sale 428,955 457,148
Loans receivable, net 893,417 783,695
Interest and dividends receivable 10,242 11,064
Real estate owned, net 576 1,198
Premises and equipment, net 14,251 14,279
Other assets 27,645 19,001
----------- -----------
Total assets $ 1,544,334 $ 1,510,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 1,028,522 $ 976,764
Federal Home Loan Bank borrowings 27,000 20,400
Securities sold under agreements to repurchase 275,405 288,200
Advances by borrowers for taxes and insurance 5,453 4,773
Other liabilities 11,368 5,266
----------- -----------
Total liabilities 1,347,748 1,295,403
----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares issued - -
Common stock, $.01 par value, 55,000,000 shares authorized,
18,118,248 shares issued and 14,757,428 and 15,705,720 shares
outstanding at September 30, 1998 and December 31, 1997,
respectively 181 181
Additional paid-in capital 178,306 177,223
Retained earnings-substantially restricted 102,606 97,487
Accumulated other comprehensive income (1,728) 989
Less: Unallocated common stock held by
Employee Stock Ownership Plan (18,079) (10,903)
Unearned Incentive Awards (6,447) (7,897)
Treasury Stock at cost (3,360,820 and 2,412,528 shares
at September 30, 1998 and December 31, 1997, respectively) (58,253) (41,536)
----------- -----------
Total stockholders' equity 196,586 215,544
----------- -----------
Total liabilities and stockholders'
equity $ 1,544,334 $ 1,510,947
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
Note: Shares and related amounts for prior periods have been adjusted for the
two-for-one stock split effected in the form of a 100% stock dividend
paid on May 15, 1998.
1
<PAGE>
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ----------------------
1998 1997 1998 1997
------ ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $17,048 $14,637 $49,465 $42,328
Mortgage-backed securities 5,853 7,192 19,185 19,602
Investment securities and other 3,593 3,739 10,290 10,493
------- ------- ------- --------
Total interest income 26,494 25,568 78,940 72,423
------- ------- ------- --------
Interest expense:
Deposits 11,248 11,001 32,923 31,901
Borrowed funds 4,412 3,657 13,194 8,300
------- ------- ------- -------
Total interest expense 15,660 14,658 46,117 40,201
------- ------- ------- -------
Net interest income 10,834 10,910 32,823 32,222
Provision for loan losses 225 225 675 675
------- ------- -------- -------
Net interest income after provision for loan losses 10,609 10,685 32,148 31,547
------- ------- -------- -------
Other income:
Fees and service charges 622 477 1,663 1,427
Net gain on sales of loans available for sale 53 1 221 1
Net income from other real estate operations 20 5 160 12
Other 181 89 506 294
------- ------- ------- -------
Total other income 876 572 2,550 1,734
------- ------- ------- -------
Operating expenses:
Compensation and employee benefits 3,710 3,492 10,994 10,290
Occupancy 490 480 1,408 1,445
Equipment 343 307 1,011 978
Marketing 301 138 1,053 541
Federal deposit insurance 217 210 651 506
Data processing 319 288 945 959
General and administrative 924 809 2,897 2,311
------- ------- ------- -------
Total operating expenses 6,304 5,724 18,959 17,030
------- ------- ------- -------
Income before provision for income taxes 5,181 5,533 15,739 16,251
Provision for income taxes 1,845 1,993 5,692 5,906
------- ------- ------- -------
Net income $ 3,336 $ 3,540 $10,047 $10,345
======= ======= ======= ========
Basic earnings per share $ .25 $ .24 $ .74 $ .66
======= ======= ======= ========
Diluted earnings per share $ .25 $ .23 $ .72 $ .65
======= ======= ======= ========
Average basic shares outstanding 13,202 14,834 13,517 15,706
======= ======= ======= ========
Average diluted shares outstanding 13,505 15,169 13,893 15,887
======= ======= ======= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
Note: Earnings per share and shares outstanding for prior periods have been
adjusted for the two-for-one stock split effected in the form of a 100%
stock dividend paid on May 15, 1998.
2
<PAGE>
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
-----------------------
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,047 $ 10,345
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises
and equipment 1,093 1,008
Amortization of Incentive Awards 1,450 1,289
Amortization of ESOP 1,024 1,071
ESOP adjustment 826 613
Tax benefit of stock plans 257 -
Amortization of servicing asset 238 138
Net premium amortization in excess of discount
accretion on securities 2,524 2,719
Net accretion of deferred fees and discounts
in excess of premium amortization on loans (380) (272)
Provision for loan losses 675 675
Net gain on sales of real estate owned (107) (184)
Net gain on sales of loans available for sale (221) (1)
Proceeds from sales of mortgage loans held for sale 15,962 703
Mortgage loans originated for sale (16,132) -
Decrease (increase) in interest and dividends receivable 822 (2,456)
Increase in other assets (5,866) (612)
Increase in other liabilities 6,102 1,007
--------- ---------
Total adjustments 8,267 5,698
--------- ---------
Net cash provided by operating activities 18,314 16,043
--------- ---------
Cash flows from investing activities:
Net increase in loans receivable (110,864) (77,843)
Purchase of investment securities available for sale (126,986) (50,984)
Purchase of mortgage-backed securities available for sale (131,172) (202,319)
Proceeds from maturities of investment securities
available for sale 185,160 20,270
Principal payments on mortgage-backed securities
available for sale 156,243 123,253
Purchases of Federal Home Loan Bank of New York stock (62) (4,709)
Proceeds from sales of real estate owned 1,576 2,205
Purchases of premises and equipment (1,065) (1,407)
--------- ---------
Net cash used in investing activities (27,170) (191,534)
--------- ---------
</TABLE>
Continued
3
<PAGE>
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
For the nine months
ended September 30,
------------------------
1998 1997
------------------------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Acquisition of deposits $ 10,732 --
Deposit premium (1,030) --
Increase in deposits 41,026 31,006
Increase in Federal Home Loan Bank borrowings 6,600 9,600
(Decrease) increase in securities sold under agreements
to repurchase (12,795) 169,793
Increase in advances by borrowers for taxes and
insurance 680 854
Dividends paid (4,927) (3,287)
Purchase of Incentive Award stock -- (10,176)
Purchase of ESOP shares (8,200) --
Purchase of treasury stock (16,717) (29,546)
--------- ---------
Net cash provided by financing activities 15,369 168,244
--------- ---------
Net increase (decrease) in cash and cash equivalents 6,513 (7,247)
Cash and cash equivalents at beginning of period 2,225 5,372
--------- ---------
Cash and cash equivalents at end of period $ 8,738 $ 1,875
========= =========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 45,691 $ 39,656
Income taxes 20 5,346
Noncash investing activities:
Transfer of loans receivable to real estate owned 847 1,455
Mortgage loans securitized into mortgage-backed
securities 16,082 --
========= =========
</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 Financial Corp. (the "Company") and its wholly-owned
subsidiary, Ocean Federal Savings Bank (the "Bank") and its wholly-owned
subsidiaries, Ocean Federal Realty Inc. and Ocean Investment 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 nine months ended
September 30, 1998 are not necessarily indicative of the results of operations
that may be expected for all of 1998.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report to Stockholders on Form 10-K for the year ended
December 31, 1997.
NOTE 2. EARNINGS PER SHARE
- ---------------------------
Amounts per common share for prior periods have been adjusted for the
two-for-one stock split effected in the form of a 100% stock dividend declared
by the Company's Board of Directors on April 22, 1998 and paid on May 15, 1998.
The following reconciles shares outstanding for basic and diluted earnings per
share for the three and nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares issued net of Treasury shares 15,172 16,647 15,322 17,470
Less: Unallocated ESOP Shares (1,424) (1,142) (1,243) (1,177)
Unallocated incentive award shares (546) (671) (562) (587)
------- ------- ------- -------
Average basic shares outstanding 13,202 14,834 13,517 15,706
Add: Effect of dilutive securities:
Stock options 166 190 222 97
Incentive awards 137 145 154 84
------- ------- ------- -------
Average diluted shares outstanding 13,505 15,169 13,893 15,887
======= ======= ======= =======
</TABLE>
NOTE 3. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------
Effective January 1, 1998, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Under SFAS 130,
comprehensive income is divided into net income and other comprehensive income.
Other comprehensive income includes items previously recorded directly inequity,
such as unrealized gains or losses on
5
<PAGE>
securities available for sale. Comparative financial statements provided for
earlier periods have been reclassified to conform with the provisions of this
Statement.
SFAS 130 requires total comprehensive income and its components to be displayed
on the face of a financial statement for annual financial statements. For
interim financial statements, SFAS 130 requires only total comprehensive income
to be reported and allows such disclosure to be presented in the notes to the
interim financial statements.
For the three month periods ended September 30, 1998 and 1997 total
comprehensive income (loss) amounted to $(161,000) and $6,266,000, respectively.
For the nine month periods ended September 30, 1998 and 1997, total
comprehensive income amounted to $7,330,000 and $13,131,000, respectively.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information about changes in the benefit
obligations and fair value of plan assets that will facilitate financial
analysis, and eliminates certain required disclosures of previous accounting
pronouncements. SFAS 132 is effective for fiscal years beginning after December
15, 1997. Earlier application is encouraged. Restatement of disclosures for
earlier periods provided for comparative purposes is required unless the
information is not readily available. As SFAS 132 affects disclosure
requirements, it is not expected to have an impact on the financial statements
of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Actitivies." This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities. SFAS
No. 133 supersedes the disclosure requirements in SFAS No. 80, 105 and 119. This
statement is effective for periods after June 15, 1999. The adoption of SFAS No.
133 is not expected to have a material impact on the financial position or
results of operations of the Company.
In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement amends FASB
Statement 65 "Accounting for Certain Mortgage Banking Activities" to require
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of this Statement is not
expected to have a material impact on the financial position or results of
operations of the Company.
6
<PAGE>
NOTE 4. LOANS RECEIVABLE, NET
- -----------------------------
Loans receivable, net at September 30, 1998 and December 31, 1997 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
Real estate:
One- to four-family $802,662 $711,548
Commercial real estate, multi-
family and land 36,139 25,699
Construction 7,284 8,748
Consumer 51,635 45,417
Commercial 6,340 2,904
--------- ---------
Total loans 904,060 794,316
Less:
Loans in process 2,712 2,867
Deferred fees 676 1,133
Unearned discounts 9 9
Allowance for loan losses 7,246 6,612
--------- ---------
Total loans, net 893,417 783,695
Less: mortgage loans held for sale - -
--------- ---------
Loans receivable, net $893,417 $783,695
========= =========
</TABLE>
NOTE 5. DEPOSITS
- ----------------
The major types of deposits at September 30, 1998 and December 31, 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
Type of Account (Unaudited)
- ---------------
<S> <C> <C>
Non-interest bearing $ 21,686 $ 13,149
NOW 85,950 77,994
Money market deposit 74,147 67,979
Savings 168,140 163,202
Time deposits 678,599 654,440
---------- ----------
$1,028,522 $ 976,764
========== ==========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Total assets at September 30, 1998 were $1.544 billion, an increase of $33.4
million, compared to $1.511 billion at December 31, 1997.
Investment securities available for sale decreased by $61.9 million, to a
balance of $145.5 million at September 30, 1998, compared to a balance of $207.4
million at December 31, 1997, and mortgage-backed securities available for sale
decreased by $28.2 million, to $429.0 million at September 30, 1998, from $457.1
million at December 31, 1997. The investment and mortgage-backed securities
available for sale portfolios decreased in order to fund growth in the Bank's
loans receivable. Loans receivable, net, increased by $109.7 million, or 14.0%,
to a balance of $893.4 million at September 30, 1998, compared to a balance of
$783.7 million at December 31, 1997. The increase was largely attributable to
robust residential loan growth (including mortgage refinance activity) in the
Bank's market area, as well as commercial lending (including
7
<PAGE>
commercial real estate) initiatives which accounted for $13.9 million of this
growth. Included in the residential loan growth is $64.0 million of 30-year
fixed-rate non-conforming mortgage loans which the Bank retained in portfolio,
while $16.1 million of 30-year fixed-rate mortgage loans were sold. In the past,
the Bank has often sold most of this product into the secondary market. Of the
loans retained, the Bank funded $58.5 million with repurchase agreements with
approximate terms of three to seven years, mitigating part of the interest rate
risk associated with retaining these mortgages.
Total deposits at September 30, 1998 were $1.029 billion, an increase of $51.8
million, compared to $976.8 million at December 31, 1997. On June 29, 1998, the
Company completed the purchase of $10.7 million in deposit balances from Summit
Bank's Whiting, New Jersey branch, for a deposit premium of $1.0 million.
Stockholders' equity at September 30, 1998 was $196.6 million, compared to
$215.5 million at December 31, 1997. The Company repurchased 948,292 shares of
common stock during the nine months ended September 30, 1998 for $16.7 million,
fully completing the remainder of a 5% repurchase program announced in October
1997 and another 5% repurchase program announced in July 1998. Additionally,
during the second quarter of 1998, the Company loaned $8.2 million to the Bank's
Employee Stock Ownership Plan ("ESOP" or the "Plan") which enabled the ESOP
trustee to purchase 422,500 shares of common stock. After the initial 12 year
ESOP term expires in year 2008, these shares will begin to be allocated to
employees covered by the Plan at which time they will be expensed by the
Company.
RESULTS OF OPERATIONS
GENERAL
Net income decreased to $3.3 million for the three months ended September 30,
1998 as compared to net income of $3.5 million for the three months ended
September 30, 1997. For the nine months ended September 30, 1998 net income
decreased to $10.0 million from $10.3 million for the nine months ended
September 30, 1997.
INTEREST INCOME
Interest income for the three months ended September 30, 1998 was $26.5 million,
compared to $25.6 million for the three months ended September 30, 1997, an
increase of $926,000, or 3.6%. For the nine months ended September 30, 1998,
interest income was $78.9 million compared to $72.4 million for the same period
in 1997, an increase of $6.5 million or 9.0%. The increases in interest income
were the result of increases in the average balance of loans receivable which
increased by $143.5 million and $133.5 million for the three and nine months
ended September 30, 1998, respectively, as compared to the same prior year
periods. For the three months ended September 30, 1998, a $77.0 million increase
in earning assets was largely offset by a decline in the yield on earning assets
which decreased to 7.11% as compared to 7.24% for the same period in 1997 due to
declines in yields for loans and investment and mortgage-backed securities. For
the nine months ended September 30, 1998 the yield on earning assets increased 1
basis point to 7.14% as compared to the same period in 1997 as declines in
yields for loans and investment securities were offset by a shift in the asset
mix from lower yielding securities to higher yielding loans receivable.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1998 was $15.7
million, compared to $14.7 million for the three months ended September 30,
1997, an increase of $1.0 million, or 6.8%. For the nine months ended September
30, 1998 interest expense was $46.1 million compared to $40.2 million for the
same period in 1997, an increase of $5.9 million or 14.7%. The increases in
interest expense were primarily the result of an increase in the average
outstanding balance of total borrowings (Federal Home Loan Bank and securities
sold under agreements to repurchase) which increased by $46.3 million and $106.8
million for the three and nine months ended September 30, 1998, respectively, as
compared to the same prior year periods and an additional increase in average
interest-bearing deposits of $50.1 million and $38.4 million for the three and
nine months ended September 30, 1998, respectively, as compared to the same
prior year periods. The increase in wholesale borrowings was part of a leverage
strategy adopted in late 1996 to improve returns on invested capital. Proceeds
from the borrowings were invested in mortgage loans and investment and
mortgage-backed securities. The average cost of interest-bearing liabilities
decreased to 4.79% for the three months ended September 30, 1998, as compared to
4.84% for the same prior year period, due to the recent market decline in
interest rates. For the nine months ended September 30, 1998,
8
<PAGE>
the average cost of interest-bearing liabilities increased to 4.79%, as compared
to 4.70% for the same prior year period due to a greater percentage increase in
higher cost wholesale funding over retail deposit funding.
PROVISION FOR LOAN LOSSES
For the three and nine months ended September 30, 1998, the Company's provision
for loan losses was $225,000 and $675,000, respectively, unchanged from the same
prior year periods. The Company's non-performing assets declined by $1.4 million
at September 30, 1998 as compared to September 30, 1997 allowing for stable
provisions despite loan growth.
OTHER INCOME
Other income increased to $876,000 and $2.6 million for the three and nine
months ended September 30, 1998, respectively, compared to $572,000 and $1.7
million for the same prior year periods. The increases were primarily due to
gains recognized on the sale of 30-year fixed-rate mortgage loans, which the
Company periodically sells as part of the management of interest rate risk.
These gains amounted to $53,000 and $221,000 for the three and nine months ended
September 30, 1998, respectively. Additionally, deposit related fees (part of
fees and service charges) increased by $129,000 and $315,000 for the three and
nine months ended September 30, 1998, respectively, as compared to the same
prior year periods, due to growth in commercial account services and retail core
account balances. The Company also realized $40,000 in fee income during the
third quarter of 1998 from the sale of alternative investment products, a
service the Company introduced late in this year's second quarter. The growth in
these fees was partly offset by reductions in loan servicing fees due to
prepayments of the loans underlying the servicing portfolio.
OPERATING EXPENSES
Operating expenses were $6.3 million and $19.0 million for the three and nine
months ended September 30, 1998, representing increases of $580,000 and $1.9
million compared to the same prior year periods. For the nine months ended
September 30, 1998, the increase was partly due to higher non-cash charges
relating to the Employee Stock Ownership Plan and expenses associated with the
stock awards granted to directors and officers under the 1997 Incentive Plan.
For the three and nine months ended September 30, 1998, marketing expense
increased by $163,000 and $512,000 as the Bank aggressively promoted its new
retail checking products. The Bank also opened its eleventh branch office in
early April of 1998.
PROVISION FOR INCOME TAXES
Income tax expense was $1.8 million and $5.7 million for the three and nine
months ended September 30, 1998, respectively, compared to $2.0 million and $5.9
million for the three and nine months ended September 30, 1997, respectively.
The effective tax rate was relatively stable at 36.2% for the nine months ended
September 30, 1998 as compared to 36.3% for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans, FHLB and other borrowings and, to a lesser extent, investment
maturities and proceeds from the sale of loans. 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 September 30, 1998, the Company had $27.0 outstanding in overnight borrowings
from the FHLB, representing an increase from $20.4 million at December 31, 1997.
The Company utilizes the overnight line from time to time to fund short-term
liquidity needs. The Company also borrowed $275.4 million at September 30, 1998
through securities sold under agreements to repurchase, a decrease from $288.2
million at December 31, 1997. These borrowings were used to fund a wholesale
leverage strategy designed to improve returns on invested capital.
9
<PAGE>
The Company's cash needs for the nine months ended September 30, 1998, were
principally provided by maturities of investment securities available for sale,
principal payments on loans and mortgage-backed securities and increased
deposits, including a deposit acquisition. The cash provided was principally
used for investing activities, which included the purchase of investment and
mortgage-backed securities and the origination of loans. For the nine months
ended September 30, 1997, the cash needs of the Company were primarily satisfied
by principal payments on loans and mortgage-backed securities, securities sold
under agreements to repurchase and increased deposits. The cash was principally
utilized for loan originations, purchases of investment and mortgage-backed
securities and the purchase of treasury stock.
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 4% 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 September 30, 1998 and December 31, 1997, the Bank's
liquidity ratios were 38.7% and 9.8%, respectively, both in excess of the
minimum regulatory requirement.
At September 30, 1998, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $164.1 million, or 10.68%, of total
adjusted assets, which is above the required level of $23.0 million or 1.5%;
core capital of $164.1 million or 10.68% of total adjusted assets, which is
above the required level of $61.5 million, or 4.0%; and risk-based capital of
$171.2 million, or 23.2% of risk-weighted assets, which is above the required
level of $59.0 million or 8.0%. The Bank is considered a "well capitalized"
institution under the Office of Thrift Supervision's prompt corrective action
regulations.
NON-PERFORMING ASSETS
The following table sets forth information regarding the Company's nonperforming
assets consisting of non-accrual loans and Real Estate Owned (REO). The Company
had no troubled-debt restructured loans within the meaning of SFAS 15 at
September 30, 1998 or December 31, 1997. It is the policy of the Company to
cease accruing interest on loans 90 days or more past due or in the process of
foreclosure.
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
Non-accrual loans:
Real estate:
One-to four-family $5,059 $5,062
Commercial real estate,
multi-family and land 574 382
Consumer 161 110
------- -------
Total 5,794 5,554
REO, net 576 1,198
------- -------
Total non-performing assets $6,370 $6,752
======= =======
Non-performing loans as a percent of total
loans receivable .64% .70%
Non-performing assets as a percent of total
assets .41% .45%
Allowance for loan losses as a percent of
total loans receivable .80% .83%
Allowance for loan losses as percent of
total non-performing loans 125.06% 119.03%
</TABLE>
10
<PAGE>
IMPACT OF YEAR 2000
The Company has developed a formal project plan to prepare its systems,
hardware, and facilities for the Year 2000. The project plan has been in place
since 1997 and is designed to follow the guidelines and recommendations of the
Federal Financial Institutions Examination Council (FFIEC). The Year 2000 effort
is being implemented by qualified personnel from areas throughout the Company.
As stated in the FFIEC guidelines, the Company has created a plan consisting of
five phases. The phases include awareness, assessment, renovation, validation
and implementation. The awareness phase was completed with the development of a
Year 2000 committee and a formal reporting and tracking process. A thorough
analysis of all hardware, software, and facilities that may be effected by the
turn of the century was done to complete the assessment phase. Based on this
analysis, items were prioritized and the renovation effort was started. The
Company primarily utilizes third-party vendors to provide processing of its
mission critical systems. Vendors are being closely monitored to ensure that
renovation and validation dates are met. The planned completion date for all
renovations is December 31, 1998 with all validation and implementation
scheduled to be complete by June 30, 1999. Detailed updates are provided to the
Board of Directors covering all aspects of the project on a periodic basis.
In the case where third party systems fail or are not completed on time, there
is the potential to experience operational problems throughout the Company. To
reduce the risk of any problem due to this type of failure, contingency plans
are being drafted for all mission critical functions and systems. The
contingency plans will address other methods and vendors that may be required to
continue to do business. In the event that any mission critical system
renovation or validation falls behind schedule, the Company may decide to
execute contingency plans to ensure uninterrupted service to customers.
The cost of the Year 2000 project is estimated to be between $300,000 and
$400,000. The cost includes all renovation, testing, and contingency planning
expense for in-house and third-party processing. The expense for the nine months
ended September 30, 1998 is $52,000. The expenses associated with the Year 2000
project are not considered to be incremental to the Company in total. Although
the expense was necessitated by the Year 2000 project, the Company has realized
substantial improvements in its internal system technology.
Estimated expenses and completion dates associated with this project are based
on all known facts and available resources. It is the expectation that the
represented estimates will not change materially, but there can be no guarantee
that the estimates will be achieved. Factors that may influence changes in the
estimates include, but are not limited to, expenses associated for obtaining
qualified personnel, ability to correctly identify and renovate all functions
related to the Year 2000 and other similar items.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
In addition to historical information, this quarterly report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal and state tax authorities, changes in interest rates, deposit flows, the
cost of funds, demand for loan products, demand for financial services,
competition, changes in the quality or composition of the Bank's loan and
investment portfolios, changes in accounting principles, policies or guidelines,
and other economic, competitive, governmental and technological factors
affecting the Company's operations, markets, products, services and prices.
Further description of the risks and uncertainties to the business are included
in Item 1, Business, of the Company's 1997 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's interest rate sensitivity is monitored by management through the
use of an interest rate risk (IRR) model. Based on internal IRR modeling,
management does not believe that there has been a material change in the
Company's interest rate sensitivity from December 31, 1997 to September 30,
1998. All methods used to measure interest rate sensitivity involve the use of
assumptions, which may tend to oversimplify the manner in which actual yields
and costs
11
<PAGE>
respond to changes in market interest rates. The Company's interest
rate sensitivity should be reviewed in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report for the fiscal year
ended December 31, 1997.
12
<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
Company is a party to routine legal proceedings within the
normal course of business. Such routine legal proceedings in
the aggregate are believed by management to be immaterial to
the Company's financial condition or results of operations.
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.*
4.0 Stock Certificate of Ocean Financial Corp.*
10.8 Amended and Restated Ocean Financial Corp. 1997 Incentive Plan
(filed herewith)
27 Financial Data Schedule (filed herewith)
b) There were no reports on Form 8-K filed during the three months
ended September 30, 1998.
* 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.
13
<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: November 12, 1998 /s/ John R. Garbarino
----------------------
John R. Garbarino
Chairman of the Board, President
and Chief Executive Officer
DATE: November 12, 1998 /s/ Michael Fitzpatrick
-----------------------
Michael Fitzpatrick
Executive Vice President and
Chief Financial Officer
14
<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED
OCEAN FINANCIAL CORP.
1997 INCENTIVE PLAN
The Amended and Restated Ocean Financial Corp. 1997 Incentive Plan
(the "Plan") is effective as of October 21, 1998 and reflects certain
amendments to the provisions of the Ocean Financial Corp. 1997 Incentive Plan,
which was effective February 4, 1997.
1. DEFINITIONS.
-----------
(a) "Affiliate" means (i) a member of a controlled group of
corporations of which the Holding Company is a member or (ii) an unincorporated
trade or business which is under common control with the Holding Company as
determined in accordance with Section 414(c) of the Code and the regulations
issued thereunder. For purposes hereof, a "controlled group of corporations"
shall mean a controlled group of corporations as defined in Section 1563(a) of
the Code determined without regard to Section 1563(a)(4) and (e)(3)(C).
(b) "Alternate Option Payment Mechanism" refers to one of several
methods available to a Participant to fund the exercise of a stock option set
out in Section 11 hereof. These mechanisms include: broker assisted cashless
exercise and stock for stock exchange.
(c) "Award" means a grant of one or some combination of one or more
Non-statutory Stock Options, Incentive Stock Options and Stock Awards under the
provisions of this Plan.
(d) "Bank" means Ocean Federal Savings Bank.
(e) "Board of Directors" or "Board" means the board of directors of
the Holding Company or the Bank and directors emeritus of the Holding Company or
the Bank.
(f) "Change in Control" means a change in control of the Bank or
Holding Company 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 Exchange Act; or (ii) results in
a Change in Control within the meaning of the Home Owners' Loan Act of 1933, as
amended ("HOLA") and 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 such rules and regulations 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 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company and any securities
purchased by any tax qualified employee benefit plan of the Bank; or (B)
individuals who constitute the Board of Directors of the Holding Company 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 a 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
1
<PAGE>
Bank or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity; or (D) after a solicitation of
shareholders of the Holding Company, by someone other than current management of
the Holding Company, stockholders approve a plan of reorganization, merger or
consolidation of the Holding Company or Bank or similar transaction with one or
more corporations, as a result of which the outstanding shares of the class of
securities then subject to the plan would be exchanged for or converted into
cash or property or securities not issued by the Bank or the Holding Company; or
(E) a tender offer is made for 20% or more of the voting securities of the Bank
or the Holding Company and such offer is successful.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means a committee consisting of the entire Board of
Directors or consisting solely of two or more members of the Board of Directors
who are defined as Non-Employee Directors as such term is defined under Rule
16b-3(b)(3)(i) under the Exchange Act as promulgated by the Securities and
Exchange Commission.
(i) "Common Stock" means the Common Stock of the Holding Company,
par value, $.01 per share or any stock exchanged for shares of Common Stock
pursuant to Section 15 hereof.
(j) "Date of Grant" means the effective date of an Award.
(k) "Disability" means the permanent and total inability by
reason of mental or physical infirmity, or both, of a Participant to perform the
work customarily assigned to him or, in the case of a Director, to serve on the
Board. Additionally, a medical doctor selected or approved by the Board of
Directors must advise the Committee that it is either not possible to determine
when such Disability will terminate or that it appears probable that such
Disability will be permanent during the remainder of said Participant's
lifetime.
(l) "Effective Date" means February 4, 1997, the effective date of
the Plan.
(m) "Employee" means any person who is currently employed by the
Holding Company or an Affiliate, including officers, but such term shall not
include Outside Directors.
(n) "Employee Participant" means an Employee who holds an
outstanding Award under the terms of the Plan.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(p) "Exercise Price" means the purchase price per share of Common
Stock deliverable upon the exercise of each Option in order for the option to be
exchanged for shares of Common Stock.
(q) "Fair Market Value" means, when used in connection with the
Common Stock on a certain date, the average of the high and low bid prices of
the Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") or the New York Stock Exchange ("NYSE")
(as published by the Wall Street Journal, if published) on such date or if the
Common Stock was not traded on such date, on the next preceding day on which the
Common Stock was traded thereon or the last previous date on which a sale is
reported. If the Common Stock is not traded on the NASDAQ or the NYSE, the Fair
Market Value of the Common Stock is the value so determined by the Board in good
faith.
(r) "Holding Company" means Ocean Financial Corp.
2
<PAGE>
(s) "Incentive Stock Option" means an Option granted by the
Committee to a Participant, which Option is designated by the Committee as an
Incentive Stock Option pursuant to Section 7 hereof and is intended to be such
under Section 422 of the Code.
(t) "Limited Right" means the right to receive an amount of cash
based upon the terms set forth in Section 8 hereof.
(u) "Non-statutory Stock Option" means an Option to a Participant
pursuant to Section 6 hereof, which is not designated by the Committee as an
Incentive Stock Option or which is redesignated by the Committee as a Non-
statutory Stock Option or which is designated an Incentive Stock Option under
Section 7 hereof, but does not meet the requirements of such under Section 422
of the Code.
(v) "Option" means the right to buy a fixed amount of Common
Stock at the Exercise Price within a limited period of time designated as the
term of the option as granted under Section 6 or 7 hereof.
(w) "Outside Director" means a member of the Board of Directors
or a Director Emeritus of the Holding Company or its Affiliates, who is not also
an Employee.
(x) "Outside Director Participant" means an Outside Director who
holds an outstanding Award under the terms of the Plan.
(y) "Participant(s)" means collectively an Employee Participant
and/or an Outside Director Participant who hold(s) outstanding Awards under the
terms of the Plan.
(z) "Performance Goal" is a specific condition or goal which may be
set by the Committee as a prerequisite to the vesting of a Stock Award in
accordance with Section 9(b) hereof.
(aa) "Retirement" with respect to an Employee Participant means
termination of employment which constitutes retirement under any tax qualified
plan maintained by the Bank. However, "Retirement" will not be deemed to have
occurred for purposes of this Plan if a Participant continues to serve as a
consultant to or on the Board of Directors of the Holding Company or its
Affiliates even if such Participant is receiving retirement benefits under any
retirement plan of the Holding Company or its Affiliates. With respect to an
Outside Director Participant, "Retirement" means the termination of service from
the Board of Directors of the Holding Company or its Affiliates following
written notice to the Board as a whole of such Outside Director's intention to
retire, except that an Outside Director Participant shall not be deemed to have
"retired" for purposes of the Plan in the event he continues to serve as a
consultant to the Board or as an advisory director or director emeritus,
including pursuant to any retirement plan of the Holding Company or the Bank.
(bb) "Stock Awards" are Awards of Common Stock which may vest
immediately or over a period of time. Vesting of Stock Awards under Section 9
hereof may be contingent upon the occurrence of specified events or the
attainment of specified performance goals as determined by the Committee.
(cc) "Termination for Cause" shall mean, in the case of a Director,
removal from the Board of Directors, or, in the case of an Employee, termination
of employment, in both such cases as determined by the Board of Directors,
because of Participant'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 in the case of an employee
without a written employment agreement with the Bank or Holding Company, any
other grounds provided for under employment policies of the Bank or Holding
Company in effect at the Effective Date or as amended from time to time.
3
<PAGE>
(dd) "Trust" means a trust established by the Board in connection
with this Plan to hold Plan assets for the purposes set forth herein.
(ee) "Trustee" means that person or persons and entity or entities
approved by the Board to hold legal title to any of the Trust assets for the
purposes set forth herein.
2. ADMINISTRATION.
--------------
(a) The Plan shall be administered by the Committee. The
Committee is authorized, subject to the provisions of the Plan, to grant awards
to Employees and establish such rules and regulations as it deems necessary for
the proper administration of the Plan and to make whatever determinations and
interpretations in connection with the Plan it deems necessary or advisable. All
determinations and interpretations made by the Committee shall be binding and
conclusive on all Employee Participants and Outside Director Participants in the
Plan and on their legal representatives and beneficiaries.
(b) Awards to Outside Directors of the Holding Company or its
Affiliates shall be granted by the Board of Directors or the Committee, pursuant
to the terms of this Plan.
(c) Actual transference of the Award requires no, nor allows any,
discretion by the Trustee.
3. TYPES OF AWARDS AND RELATED RIGHTS.
-----------------------------------
The following Awards and related rights as described below in
Paragraphs 6 through 12 hereof may be granted under the Plan:
(a) Non-statutory Stock Options
(b) Incentive Stock Options
(c) Limited Rights
(d) Stock Awards
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 15 hereof, the maximum
number of shares of Common Stock reserved for Awards under the Plan is 1,174,330
shares which number may not be in excess of 14 % of the outstanding shares of
the Common Stock determined immediately as of the Effective Date. Subject to
adjustment as provided in Section 15 hereof, the maximum number of shares of
Common Stock reserved hereby for purchase pursuant to the exercise of Options
and Option-related Awards granted under the Plan is 838,807 shares, which number
may not be in excess of 10% of the outstanding shares of Common Stock as of the
Effective Date. The maximum number of the shares of Common Stock reserved for
award as Stock Awards is 335,523 shares, which number is not in excess of 4% of
the outstanding shares of Common Stock as of the Effective Date. These shares
of Common Stock may be either authorized but unissued shares or authorized
shares previously issued and reacquired by the Holding Company. To the extent
that Options and Stock Awards are granted under the Plan, the shares underlying
such Awards will be unavailable for any other use including future grants under
the Plan except that, to the extent that Stock Awards or Options terminate,
expire, or are forfeited without having been exercised (or in cases where a
Limited Right has been granted in connection with an option, the amount of such
Limited Right received in lieu of the exercise of such option), new Awards may
be made with respect to those shares underlying such terminated, expired or
forfeited Options or Stock Awards.
4
<PAGE>
5. ELIGIBILITY.
-----------
Subject to the terms herein, all Employees and Outside Directors
shall be eligible to receive Awards under the Plan.
6. NON-STATUTORY STOCK OPTIONS.
---------------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded under the Plan, from time to
time, grant Non-statutory Stock Options to Employees and Outside Directors, upon
such terms and conditions as the Committee may determine. Further, subject to
receipt of stockholder approval, the Committee may grant Non-statutory Stock
Options in exchange for and upon surrender of previously granted Awards under
this Plan under such terms and conditions as the Committee may determine. Non-
statutory Stock Options granted under this Plan are subject to the following
terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock
--------------
Option shall be determined by the Committee, and once determined and documented
in an NSO Agreement, may not be revised without stockholder approval or in
accordance with Section 15 hereof. Such Exercise Price shall not be less than
100% of the Fair Market Value of the Holding Company's Common Stock on the Date
of Grant. Shares of Common Stock underlying a Non-statutory Stock Option may be
purchased only upon full payment of the Exercise Price or upon operation of an
Alternate Option Payment Mechanism set out in Section 11 hereof.
(b) Terms of Non-statutory Stock Options. The term during which
------------------------------------
each Non-statutory Stock Option may be exercised shall be determined by the
Committee, but in no event shall a Non-statutory Stock Option be exercisable in
whole or in part more than 10 years from the Date of Grant. The Committee shall
determine the date on which each Non-statutory Stock Option shall become
exercisable. The shares of Common Stock underlying each Non-statutory Stock
Option installment may be purchased in whole or in part by the Participant at
any time during the term of such Non-statutory Stock Option after such
installment becomes exercisable. The Committee may, in its sole discretion,
accelerate the time at which any Non-statutory Stock Option may be exercised in
whole or in part. The acceleration of any Non-statutory Stock Option under the
authority of this paragraph shall create no right, expectation or reliance on
the part of any other Participant or that certain Participant regarding any
other unaccelerated Non-statutory Stock Options. Unless determined otherwise by
the Committee and except in the event of the Participant's death or pursuant to
a domestic relations order, a Non-statutory Stock Option is not transferable and
may be exercisable in his lifetime only by the Participant to whom it is
granted. Upon the death of a Participant, a Non-statutory Stock Option is
transferable by will or the laws of descent and distribution.
(c) NSO Agreement. The terms and conditions of any Non-statutory
--------------
Stock Option granted shall be evidenced by an agreement (the "NSO Agreement")
which shall be subject to the terms and conditions of the Plan.
(d) Termination of Employment or Service. Unless otherwise
------------------------------------
determined by the Committee, upon the termination of a Participant's employment
or service for any reason other than Disability, death or Termination for Cause,
the Participant's Non-statutory Stock Options shall be exercisable only as to
those shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three months following termination.
Notwithstanding any provisions set forth herein or contained in any NSO
Agreement relating to an award of a Non-statutory Stock Option, in the event of
termination of the Participant's employment or service for Disability or death,
all Non-statutory Stock Options held by such Participant shall immediately vest
and be exercisable for one year after such termination of service, and, in the
event of a
5
<PAGE>
Termination for Cause, all rights under the Participant's Non-statutory Stock
Options shall expire immediately upon such Termination for Cause.
(e) Change in Control. Unless otherwise determined by the
-----------------
Committee, and notwithstanding any other provision of the Plan, in the event of
a Change in Control, all Non-statutory Stock Options held by the Participant,
whether or not vested at such time, shall become vested to the Participant or
his legal representatives or beneficiaries upon the Change in Control.
7. INCENTIVE STOCK OPTIONS.
-----------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares reserved but unawarded under the Plan, from time to
time, grant Incentive Stock Options to Employees upon such terms and conditions
as the Committee may determine. Incentive Stock Options granted pursuant to the
Plan shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock
--------------
Option shall be not less than 100% of the Fair Market Value of the Common Stock
on the Date of Grant. However, if at the time an Incentive Stock Option is
granted to an Employee Participant, such Employee Participant owns Common Stock
representing more than 10% of the total combined voting securities of the
Holding Company (or, under Section 424(d) of the Code, is deemed to own Common
Stock representing more than 10% of the total combined voting power of all
classes of stock of the Holding Company, by reason of the ownership of such
classes of stock, directly or indirectly, by or for any brother, sister, spouse,
ancestor or lineal descendent of such Employee Participant, or by or for any
corporation, partnership, estate or trust of which such Employee Participant is
a shareholder, partner or beneficiary) ("10% Owner"), the Exercise Price per
share of Common Stock deliverable upon the exercise of each Incentive Stock
Option shall not be less than 110% of the Fair Market Value of the Common Stock
on the Date of Grant. Shares may be purchased only upon payment of the full
Exercise Price or upon operation of an Alternate Option Payment Mechanism set
out in Section 11 hereof.
(b) Amounts of Incentive Stock Options. Incentive Stock Options
----------------------------------
may be granted to any Employee in such amounts as determined by the Committee;
provided that the amount granted is consistent with the terms of Section 422 of
the Code. In the case of an Option intended to qualify as an Incentive Stock
Option, the aggregate Fair Market Value (determined as of the time the Option is
granted) of the Common Stock with respect to which Incentive Stock Options
granted are exercisable for the first time by the Employee Participant during
any calendar year (under all plans of the Employee Participant's employer
corporation and its parent and subsidiary corporations) shall not exceed
$100,000. The provisions of this Section 7(b) shall be construed and applied in
accordance with Section 422(d) of the Code and the regulations, if any,
promulgated thereunder. To the extent an Award of an Incentive Stock Option
under this Section 7 exceeds this $100,000 limit, the portion of the Award in
excess of such limit shall be deemed a Non-statutory Stock Option. The Committee
shall have discretion to redesignate Options granted as Incentive Stock Options
as Non-Statutory Stock Options. Such Non-statutory Stock Options shall be
subject to Section 6 hereof.
(c) Terms of Incentive Stock Options. The term during which each
--------------------------------
Incentive Stock Option may be exercised shall be determined by the Committee,
but in no event shall an Incentive Stock Option be exercisable in whole or in
part more than 10 years from the Date of Grant. If at the time an Incentive
Stock Option is granted to an Employee Participant who is a 10% Owner, the
Incentive Stock Option granted to such Employee Participant shall not be
exercisable after the expiration of five years from the Date of Grant. No
Incentive Stock Option is transferable except by will or the laws of descent
and distribution and is exercisable in his or her lifetime only by the Employee
Participant to whom it is granted. The designation of a beneficiary does not
constitute a transfer.
6
<PAGE>
The Committee shall determine the date on which each Incentive Stock
Option shall become exercisable. The shares comprising each installment of the
Incentive Stock Option may be purchased in whole or in part at any time during
the term of such Option after such installment becomes exercisable. The
Committee may, in its sole discretion, accelerate the time at which any
Incentive Stock Option may be exercised in whole or in part. The acceleration
of any Incentive Stock Option under the authority of this paragraph shall not
create a right, expectation or reliance on the part of any other Participant or
that certain Participant regarding any other unaccelerated Incentive Stock
Options.
(d) ISO Agreement. The terms and conditions of any Incentive Stock
-------------
Option granted shall be evidenced by an agreement (the "ISO Agreement") which
shall be subject to the terms and conditions of the Plan.
(e) Termination of Employment. Unless otherwise determined by the
-------------------------
Committee, upon the termination of an Employee Participant's employment for any
reason other than Disability, death or Termination for Cause, the Employee
Participant's Incentive Stock Options shall be exercisable only as to those
shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three months following termination.
Notwithstanding any provision set forth herein or contained in any ISO Agreement
relating to an award of an Incentive Stock Option, in the event of termination
of the Employee Participant's employment for Disability or death, all Incentive
Stock Options held by such Employee Participant shall immediately vest and be
exercisable for one year after such termination, and, in the event of
Termination for Cause, all rights under the Employee Participant's Incentive
Stock Options shall expire immediately upon termination. No Incentive Stock
Option shall be eligible for treatment as an Incentive Stock Option in the event
such Incentive Stock Option is exercised more than three months following the
date of Participant's cessation of employment. In no event shall an Incentive
Stock Option be exercisable beyond the expiration of the Incentive Stock Option
term.
(f) Change in Control. Unless otherwise determined by the
-----------------
Committee, and notwithstanding any other provision of the Plan, in the event of
a Change in Control, all Incentive Stock Options held by the Participant,
whether or not vested at such time, shall become vested to the Participant or
his legal representatives or beneficiaries upon the Change in Control.
(g) Compliance with Code. The Incentive Stock Options granted
--------------------
under this Section 7 are intended to qualify as "incentive stock options" within
the meaning of Section 422 of the Code, but the Holding Company makes no
warranty as to the qualification of any Option as an incentive stock option
within the meaning of Section 422 of the Code. All Options that do not so
qualify shall be treated as Non-statutory Stock Options.
8. LIMITED RIGHT.
-------------
Simultaneously with the grant of any Option to an Employee or Outside
Director, the Committee may grant a Limited Right with respect to all or some of
the shares covered by such Option. Limited Rights granted under this Plan are
subject to the following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be
---------------
exercisable in whole or in part before the expiration of six months from the
Date of Grant of the Limited Right. A Limited Right may be exercised only in
the event of a Change in Control that is not to be accounted for as a pooling of
interests or in the event the Holding Company's independent auditors opine that
the exercise of such Limited Rights would not adversely affect the accounting
treatment intended for the Change in Control.
7
<PAGE>
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, and only when the Fair Market Value of the underlying
shares on the day of exercise is greater than the Exercise Price of the
underlying Option.
Upon exercise of a Limited Right, the underlying Option shall cease to
be exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the purchase price and the Fair Market Value of the Common
Stock subject to the underlying option. The Limited Right is transferable only
when the underlying option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall
-------
promptly receive from the Holding Company an amount of cash equal to the
difference between the Exercise Price of the underlying option and the Fair
Market Value of the Common Stock subject to the underlying Option on the date
the Limited Right is exercised, multiplied by the number of shares with respect
to which such Limited Right is exercised. Payments shall be less any applicable
tax withholding as set forth in Section 16 hereof.
9. STOCK AWARD.
-----------
The Committee may, subject to the limitations of the Plan, from time
to time, make an Award of shares of Common Stock to Employees and Outside
Directors ("Stock Awards"). The Stock Awards shall be made subject to the
following terms and conditions:
(a) Payment of the Stock Award. The Stock Award may only be made
--------------------------
in whole shares of Common Stock. Stock Awards may only be granted from shares
reserved under the Plan but unawarded at the time the new Stock Award is made.
(b) Terms of the Stock Awards. The Committee shall determine the
-------------------------
dates on which Stock Awards granted to a Participant shall vest and any specific
conditions or performance goals which must be satisfied prior to the vesting of
any installment or portion of the Stock Award. Notwithstanding other paragraphs
in this Section 9, the Committee may, in its sole discretion, accelerate the
vesting of any Stock Award. The acceleration of any Stock Award under the
authority of this paragraph shall create no right, expectation or reliance on
the part of any other Participant or that certain Participant regarding any
other unaccelerated Stock Awards.
(c) Stock Award Agreement. The terms and conditions of any Stock
---------------------
Award shall be evidenced by an agreement (the "Stock Award Agreement") which
such Stock Award Agreement will be subject to the terms and conditions of the
Plan. Each Stock Award Agreement shall set forth:
(i) the period over which the Stock Award will vest;
(ii) the performance goals, if any, which must be satisfied
prior to the vesting of any installment or portion of
the Stock Award. The performance goals may be set by the
Committee on an individual level, for all Participants,
for all Awards made during a given period of time, or
for all Awards for indefinite periods;
(d) Certification of Attainment of the Performance Goal. No Stock
---------------------------------------------------
Award of portion thereof that is subject to a performance goal is to be
distributed to an Employee Participant until the Committee certifies that the
underlying performance goal has been achieved, or in the case of an Outside
Director Participant, until an independent third party presents a certification
to the Board of Directors that the underlying performance goal associated with a
Stock Award has been achieved.
8
<PAGE>
(e) Termination of Employment or Service. Unless otherwise
------------------------------------
determined by the Committee, upon the termination of a Participant's employment
or service for any reason other than Disability, death or Termination for Cause,
the Participant's unvested Stock Awards as of the date of termination shall be
forfeited and any rights the Participant had to such unvested Stock Awards shall
become null and void. Notwithstanding any provisions set forth herein or
contained in any NSO Agreement relating to an award of a Non-statutory Stock
Option, in the event of termination of the Participant's service due to
Disability or death, all unvested Stock Awards held by such Participant,
including any portion of a Stock Award subject to a performance goal, shall
immediately vest and, in the event of the Participant's Termination for Cause,
the Participant's unvested Stock Awards as of the date of such termination shall
be forfeited and any rights the Participant had to such unvested Stock Awards
shall become null and void.
(f) Change in Control. Unless otherwise determined by the
-----------------
Committee, and notwithstanding any other provision of the Plan, in the event of
a Change in Control, all Stock Awards held by the Participant, whether or not
vested at such time, shall become vested to the Participant or his legal
representatives or beneficiaries upon the Change in Control.
(g) Non-Transferability. Except to the extent permitted by the
-------------------
Code, the rules promulgated under Section 16(b) of the Exchange Act or any
successor statutes or rules:
(i) The recipient of a Stock Award shall not sell, transfer,
assign, pledge, or otherwise encumber shares subject to
the Stock Award until full vesting of such shares has
occurred. For purposes of this section, the separation
of beneficial ownership and legal title through the use
of any "swap" transaction is deemed to be a prohibited
encumbrance.
(ii) Unless determined otherwise by the Committee and except
in the event of the Participant's death or pursuant to a
domestic relations order, a Stock Award is not
transferable and may be earned in his lifetime only by
the Participant to whom it is granted. Upon the death of
a Participant, a Stock Award is transferable by will or
the laws of descent and distribution. The designation of
a beneficiary does not constitute a transfer.
(iii) If a recipient of a Stock Award is subject to the
provisions of Section 16 of the Exchange Act, shares of
Common Stock subject to such Stock Award may not,
without the written consent of the Committee (which
consent may be given in the Stock Award Agreement), be
sold or otherwise disposed of within six months
following the date of grant of the Stock Award .
(h) Accrual of Dividends. Whenever shares of Common Stock
--------------------
underlying a Stock Award are distributed to a Participant or beneficiary thereof
under the Plan, such Participant or beneficiary shall also be entitled to
receive, with respect to each such share distributed, a payment equal to any
cash dividends or distributions (other than distributions in shares of Common
Stock) and the number of shares of Common Stock equal to any stock dividends,
declared and paid with respect to a share of the Common Stock if the record date
for determining shareholders entitled to receive such dividends falls between
the date the relevant Stock Award was granted and the date the relevant Stock
Award or installment thereof is distributed. There shall also be distributed an
appropriate amount of net earnings, if any, of the Trust with respect to any
dividends paid out.
(i) Voting of Stock Awards. After a Stock Award has been granted,
----------------------
but for which the shares covered by such Stock Award have not yet been earned
and distributed to the Participant pursuant to the Plan, the Participant shall
be entitled to direct the Trustee as to the voting of such shares of Common
Stock which the Stock Award covers subject to the rules and procedures adopted
by the Committee for this purpose. All shares
9
<PAGE>
of Common Stock held by the Trust as to which Participants are not entitled to
direct, or have not directed the voting, shall be voted by the Trustee in the
same proportion as the Common Stock covered by Stock Awards which have been
awarded is voted.
10. PAYOUT ALTERNATIVES
-------------------
Payments due to a Participant upon the exercise or redemption of an
Award, may be made subject to the following terms and conditions:
(a) Discretion of the Committee. The Committee has the sole
---------------------------
discretion to determine what form of payment (whether monetary, Common Stock, a
combination of payout alternatives or otherwise) it shall use in making
distributions of payments for all Awards. If the Committee requests any or all
Participants to make an election as to form of distribution or payment, it shall
not be considered bound by the election.
(b) Payment in the form of Common Stock. Any shares of Common
-----------------------------------
Stock tendered in satisfaction of an obligation arising under this Plan shall be
valued at the Fair Market Value of the Common Stock on the day preceding the
date of the issuance of such stock to the Participant.
11. ALTERNATE OPTION PAYMENT MECHANISM
----------------------------------
The Committee has sole discretion to determine what form of payment
it will accept for the exercise of an Option. The Committee may indicate
acceptable forms in the ISO or NSO Agreement covering such Options or may
reserve its decision to the time of exercise. No Option is to be considered
exercised until payment in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by
------------
certified check.
(b) Borrowed Funds. To the extent permitted by law, the Committee
--------------
may portion of the exercise price of an Option to be paid through borrowed
funds.
(c) Exchange of Common Stock.
------------------------
(i) The Committee may permit payment by the tendering of
previously acquired shares of Common Stock. This
includes the use of "pyramiding transactions" whereby
some number of Options are exercised; then the shares
gained through the exercise are tendered back to the
Holding Company as payment for a greater number of
Options. This transaction may be repeated as needed to
exercise all of the Options available .
(ii) Any shares of Common Stock tendered in payment of the
exercise price of an Option shall be valued at the Fair
Market Value of the Common Stock on the date prior to
the date of exercise.
12. RIGHTS OF A SHAREHOLDER: NONTRANSFERABILITY.
-------------------------------------------
No Participant shall have any rights as a shareholder with respect to
any shares of Common Stock covered by an Option until the date of issuance of a
stock certificate for such shares. Nothing in this Plan or in any Award granted
confers on any person any right to continue in the employ or service of the
Holding Company or its Affiliates or interferes in any way with the right of the
Holding Company or its Affiliates to terminate a Participant's services as an
officer or other employee at any time.
10
<PAGE>
Except as permitted under the Code (with respect to Incentive Stock
Options) and the rules promulgated pursuant to Section 16(b) of the Exchange Act
or any successor statutes or rules, no Award under the Plan shall be
transferable by the Participant other than by will or the laws of intestate
succession or pursuant to a domestic relations order or unless determined
otherwise by the Committee.
13. AGREEMENT WITH GRANTEES.
-----------------------
Each Award will be evidenced by a written agreement(s) (whether
constituting an NSO Agreement, ISO Agreement, Stock Award Agreement or any
combination thereof), executed by the Participant and the Holding Company or its
Affiliates that describes the conditions for receiving the Awards including the
date of Award, the Exercise Price if any, the terms or other applicable periods,
and other terms and conditions as may be required or imposed by the Plan, the
Committee, or the Board of Directors, and may describe or specify tax law
considerations or applicable securities law considerations.
14. DESIGNATION OF BENEFICIARY.
--------------------------
A Participant may, with the consent of the Committee, designate a
person or persons to receive, in the event of death, any Award to which the
Participant would then be entitled. Such designation will be made upon forms
supplied by and delivered to the Holding Company and may be revoked in writing.
If a Participant fails effectively to designate a beneficiary, then the
Participant's estate will be deemed to be the beneficiary.
15. DILUTION AND OTHER ADJUSTMENTS.
------------------------------
In the event of any change in the outstanding shares of Common Stock
by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares, or
other similar corporate change, or other increase or decrease in such shares
without receipt or payment of consideration by the Holding Company, or in the
event a capital distribution is made, the Committee will make such adjustments
to Awards to prevent dilution, diminution or enlargement of the rights of the
Participant, as the Committee deems appropriate, including any or all of the
following:
(a) adjustments in the aggregate number or kind of shares of
Common Stock or other securities that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of
Common Stock or other securities underlying Awards already made under the Plan;
(c) adjustments in the exercise price of outstanding Incentive
and/or Non-statutory Stock Options, or any Limited Rights attached to such
Options.
Alternatively, the Committee could provide the participant with a cash
benefit for shares underlying vested, but unexercised options, in order to
achieve the aforementioned effect. All awards under this Plan shall be binding
upon any successors or assigns of the Holding Company.
11
<PAGE>
16. TAX WITHHOLDING.
---------------
Awards under this Plan shall be subject to tax withholding to the
extent required by any governmental authority. Any withholding shall comply with
Rule 16b-3 or any amendment or successor rule. Shares of Common Stock withheld
to pay for tax withholding amounts shall be valued at their Fair Market Value on
the date the Award is deemed taxable to the Participant and such shares shall be
considered to have been awarded and forfeited.
17. AMENDMENT OF THE PLAN.
---------------------
The Board of Directors may at any time, and from time to time,
subject to applicable rules and regulations and shareholder approval when
required under the Plan, modify or amend the Plan, or any Award granted under
the Plan, in any respect, prospectively or retroactively; provided however, that
provisions governing grants of Incentive Stock Options, unless permitted by the
rules and regulations or staff pronouncements promulgated under the Code shall
be submitted for shareholder approval to the extent required by such law,
regulation or interpretation.
Failure to ratify or approve amendments or modifications by
shareholders shall be effective only as to the specific amendment or
modification requiring such ratification, or as otherwise determined by the
Board of Directors. Other provisions, sections, and subsections of this Plan
will remain in full force and effect.
No such termination, modification or amendment may adversely affect
the rights of a Participant under an outstanding Award without the written
permission of such Participant.
18. EFFECTIVE DATE OF PLAN.
----------------------
The Plan became effective on February 4, 1997. All amendments are
effective upon approval by the Board of Directors, subject to shareholder
ratification when specifically required under the Plan.
19. TERMINATION OF THE PLAN.
-----------------------
The right to grant Awards under the Plan will terminate upon the
earlier of: (i) ten (10) years after the Effective Date; (ii) the issuance of a
number of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards which together with the exercise of Limited Rights
is equivalent to the maximum number of shares reserved under the Plan as set
forth in Section 4. The Board of Directors has the right to suspend or terminate
the Plan at any time, provided that no such action will, without the consent of
a Participant, adversely affect a Participant's vested rights under a previously
granted Award.
20. APPLICABLE LAW.
--------------
The Plan will be administered in accordance with the laws of the
State of Delaware and applicable federal law.
21. DELEGATION OF AUTHORITY
-----------------------
The Committee may delegate all authority for: the determination of
forms of payment to be made by or received by the Plan; the execution of Award
agreements; the determination of Fair Market Value; and the determination of all
other aspects of administration of the Plan to the executive officer(s) of the
Holding Company or the Bank. The Committee may rely on the descriptions,
representations, reports and estimates provided to it by the management of the
Holding Company or the Bank for determinations to be made pursuant
12
<PAGE>
to the Plan, including the attainment of performance goals. However, only the
Committee or a portion of the Committee may certify the attainment of a
performance goal.
IN WITNESS WHEREOF, the Holding Company has established this Plan to
be executed by its duly authorized executive officer and the corporate seal to
be affixed and duly attested, effective as of the 18th day of February, 1998.
[CORPORATE SEAL] OCEAN FINANCIAL CORP.
October 21, 1998 By: /s/ John R. Garbarino
- ---------------- -----------------------------
Date Chairman of the Board
ADOPTED BY THE BOARD OF DIRECTORS:
October 21, 1998 By: /s/ John K. Kelly
- ---------------- -----------------------------
Date Corporate Secretary
13
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<PERIOD-START> JAN-01-1998
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