<PAGE>
O c e a n F i n a n c i a l C o r p .
[PHOTO]
1 9 9 8
A n n u a l R e p o r t
<PAGE>
[MAP]
Our Mission Statement
---------------------
Ocean Financial Corp. develops shareholder value as a community-focused
financial services organization.
[PHOTO]
Ocean Federal Savings Bank, the subsidiary of Ocean Financial Corp., is located
in the central coastal area of New Jersey between the major metropolitan cities
of New York and Philadelphia. With administrative offices in Toms River, New
Jersey (shown above), Ocean Federal provides financial services to retail and
business customers throughout the Jersey Shore market.
Table of Contents
- ------------------------------------------------------------
Financial Highlights 1
- ------------------------------------------------------------
Letter to our Shareholders 2
- ------------------------------------------------------------
Board of Directors 5
- ------------------------------------------------------------
Bank Services 6
- ------------------------------------------------------------
Selected Financial Data 11
- ------------------------------------------------------------
Management's Discussion and Analysis 13
- ------------------------------------------------------------
Consolidated Financial Statements 21
- ------------------------------------------------------------
Directors and Senior Officers 38
- ------------------------------------------------------------
Shareholder Information Inside Back Cover
- ------------------------------------------------------------
<PAGE>
Financial Highlights
- -------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
At or For The Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $ 1,561,744 $ 1,510,947 $ 1,303,865
- -----------------------------------------------------------------------------------------------------
Loans receivable, net 941,011 783,695 678,728
- -----------------------------------------------------------------------------------------------------
Deposits 1,035,251 976,764 934,730
- -----------------------------------------------------------------------------------------------------
Stockholders' equity 197,740 215,544 252,789
- -----------------------------------------------------------------------------------------------------
Net interest income 44,158 43,048 36,379
- -----------------------------------------------------------------------------------------------------
Provision for loan losses 900 900 700
- -----------------------------------------------------------------------------------------------------
Net income before non-recurring items 13,525 13,825 11,576
- -----------------------------------------------------------------------------------------------------
Net income (loss) 12,972 13,825 (1,729)
- -----------------------------------------------------------------------------------------------------
Diluted earnings per share (3) 0.95 0.88 N/A
- -----------------------------------------------------------------------------------------------------
Stockholders' equity per common share (3) 13.52 13.72 13.95
- -----------------------------------------------------------------------------------------------------
Stockholders' equity to total assets at end of year 12.66% 14.27% 19.39%
- -----------------------------------------------------------------------------------------------------
Performance Ratios (1):
- -----------------------------------------------------------------------------------------------------
Return on average assets 0.88% 0.97% 1.00%
- -----------------------------------------------------------------------------------------------------
Return on average stockholders' equity 6.63 6.00 6.91
- -----------------------------------------------------------------------------------------------------
Average interest rate spread 2.39 2.39 2.61
- -----------------------------------------------------------------------------------------------------
Net interest margin 2.98 3.12 3.22
- -----------------------------------------------------------------------------------------------------
Operating expenses to average assets 1.66 1.63 1.73
- -----------------------------------------------------------------------------------------------------
Operating efficiency ratio 53.69 50.80 51.11
- -----------------------------------------------------------------------------------------------------
Actual contributions to stockholders' equity and
resultant cash earnings data (2) (before
non-recurring items):
- -----------------------------------------------------------------------------------------------------
Cash earnings $ 16,688 $ 16,823 $ 12,456
- -----------------------------------------------------------------------------------------------------
Diluted cash earnings per share (3) 1.22 1.08 N/A
- -----------------------------------------------------------------------------------------------------
Return on average assets 1.09% 1.19% 1.07%
- -----------------------------------------------------------------------------------------------------
Return on average stockholders' equity 8.18 7.30 7.43
- -----------------------------------------------------------------------------------------------------
Operating efficiency ratio 44.60 41.76 47.87
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Performance ratios are calculated to exclude the effect of non-recurring
charges in 1998 relating to the loss on the sale of mortgage-backed
securities and in 1996 for a charitable donation and the special Savings
Association Insurance Fund assessment.
(2) Cash earnings are determined by adding (net of taxes) to reported earnings
the non-cash expenses stemming from the amortization and appreciation of
allocated shares in the Company's stock-related benefit plans and the
amortization of a premium relating to a deposit acquisition.
(3) Per share 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.
Ocean Federal Savings Bank, the sole subsidiary of Ocean Financial Corp.,
founded in 1902, is a federally chartered stock savings bank with ten branches
located in Ocean County and one in Middlesex County. It is the oldest and
largest community-based financial institution headquartered in Ocean County, New
Jersey.
<PAGE>
Letter to our Shareholders
- --------------------------------------------------------------------------------
March, 1999
Dear Fellow Shareholders,
Of the goals established for 1998, enhancing the value of your shares in Ocean
Financial Corp. was, as always, preeminent. While we can claim to have added
value to your Ocean Financial investment during the past twelve months, we
believe that consistent attention to this goal over time argues for a reflection
on how shareholder value is actually enhanced.
In our view, with Ocean Federal Savings Bank, the subsidiary of the Ocean
Financial Corp., positioned as the Community Bank of choice in one of New
Jersey's fastest growing markets, shareholder value is principally built from
the intrinsic, franchise value accorded to the Bank. It therefore follows that
to succeed in building shareholder value over time, it is paramount to make the
Bank a more profitable, yet attractive institution to both the community and its
employees. This strategic objective has become a key focus of the Company's
current mission.
For Ocean Financial Corp., 1998 was more than the transition into the third year
of operations for a parent Holding Company of a Financial Institution with
nearly 100 years experience. It marked the next step in the Company's long-term
plan for building shareholder value:
o Diluted earnings per common share for the year amounted to $.95, an 8%
increase over the $.88 earned in 1997.
o Cash earnings (the amount by which stockholder equity changes solely by
virtue of operating results) grew to $1.22 from $1.08 per diluted share in
1997, a 13% increase.
o In May, the cash dividend on the common stock was increased 20% and the
stock was split two-for-one.
o The Board of Directors authorized the fourth and fifth stock repurchase
programs. When completed, all five repurchase programs will have resulted
in the Company repurchasing over four million shares, amounting to 22.6% of
the common stock originally issued in 1996.
o Stock repurchases have been invaluable in reducing the healthy, though
inflated, capital ratio of the Company from over 20% in 1996, to 14.3% and
12.7% at the respective 1997 and 1998 year ends.
[PHOTO]
The Ocean Federal Savings Bank senior management team (from left to right) John
R. Garbarino, President and Chief Executive Officer; Karl E. Reinheimer; Michael
J. Fitzpatrick; Michael E. Barrett and John K. Kelly.
Cash earnings
(the amount by
which stockholder
equity changes
solely by virtue of
operating results)
grew to $1.22
from $1.08 per
diluted share
in 1997, a
13% increase.
2 . Ocean Financial Corp. . OCFC
<PAGE>
o The $.12 per share paid to stockholders of record early in 1999 marks the
eighth consecutive quarterly dividend declared by the Board.
Throughout the year additional shareholder value was thus created through the
activities of Ocean Financial Corp.
Similarly, among significant benchmarks for the subsidiary Bank:
o Deposits surpassed $1 billion, representing 6% growth entirely in core
accounts, as CD balances remained essentially unchanged in the low interest
rate environment.
o The Bank's loan portfolio grew over 20%, topping $941 million at year end.
Commercial loan growth was solid for the year.
o As a pleasant consequence of this growth mix, the Bank's loan-to-deposit
ratio increased dramatically from 80% to 91%.
o At midyear, the Bank purchased the branch deposits of the Whiting office
closed by Summit Bank. These deposits were successfully transferred to the
existing Ocean Federal branch across the street.
o A new branch office was also opened in the Lake Ridge section of Toms
River, attracting $13 million in deposits in only nine months.
With 11 current branches, and more planned for 1999, Ocean Federal Savings Bank
is the only well-established community bank headquartered in Ocean County
serving the Jersey shore. This has extended Ocean Federal the unique opportunity
to essentially "redefine" community banking in the area. Through these
activities, franchise value was added to the Bank, further enhancing Ocean
Financial Corp. shareholder value.
As the Corporate mission statement (see inside cover) clearly sets forth, the
Company is focused on shareholder value built in a community banking niche. The
Company is NOT a nationwide or statewide banking organization and has no
international exposure. Neither is planned growth driven by a voracious appetite
for acquisitions and the need to expand operations or market reach at all costs.
At the other end of the spectrum, the Company is far more than a de novo,
start-up community bank, devoid of essential financial products or the
technology and capital resources required to deliver efficient, effective
service.
Ocean Federal Savings Bank is purely and simply, clearly focused on the
communities served since the turn of the last century. As Money Magazine noted
recently, Monmouth and Ocean Counties remain among the "most desirable regions"
in which to live in the entire nation, based on economic stability, employment
opportunities, and other quality-of-life factors. We certainly agree with those
editors, and feel fortunate indeed to conduct our business in such a desirable
market.
In the coming year, the Bank will seek to continue to grow franchise value by
pursuing a more diverse customer base and providing new products and services
through expanded delivery systems:
o Plans for two new branch offices are well under way in Spring Lake Heights
and Wall Township, broadening the reach into southern Monmouth County.
o Extended service hours for customers to conduct their banking more
conveniently will be introduced.
o A Web site will be launched to further facilitate the delivery of the
Bank's financial services to the customer who chooses a computer banking
option.
Year Over Year Loan Growth
[BAR CHART APPEARS HERE]
1995 1996 1997 1998
---- ----- ----- -----
3.4% 10.8% 15.5% 20.1%
Loan-to-Deposit Ratio
[BAR CHART APPEARS HERE]
1995 1996 1997 1998
---- ----- ----- -----
66.1% 72.6% 80.2% 90.9%
Ocean Financial Corp. . OCFC . 3
<PAGE>
Letter to our Shareholders
- --------------------------------------------------------------------------------
o Commercial loans and core deposits will be targeted to become a greater
percentage of the balance sheet as the Bank seeks to capture a more
significant portion of the underserved small business market.
o Trust and Asset Management services will be implemented as a community
financial services business line.
o The Bank's non-traditional deposit product program and related services,
"Investment Services at the Ocean", will support the Company's plans to
grow non-interest income, while fulfilling the community's expectations of
the Bank as a trusted resource providing a full range of financial
services.
These improvements establish a greater competitive edge for the Community Bank,
and once realized, provide the Company with a stronger capacity for enhancing
future franchise and ultimately, shareholder value.
These plans will be implemented with a clear focus on the most important
remaining event of this century, the coming of the new millennium. At your
company, "Y2K" is not merely a new buzzword in the 1999 vocabulary, rather for
some time at Ocean Financial, it has represented a very important, potential
problem which every employee has been focused on addressing. Ocean Financial has
been getting ready for the year 2000, technologically, since early in 1997.
We're looking forward to successfully serving the financial needs of our
community in the new century... and so are our computers.
Despite the ambitious plans and past success, however, the personal satisfaction
we realize in "making a difference" is often life's greatest reward. We continue
to take great pride in our active involvement with local charities, schools, and
social service agencies, fulfilling our commitment to the community. Through the
operations of The Ocean Federal Foundation, established and fully expensed by
the Bank in 1996, nearly $3 million in grants has been awarded to needy and
deserving organizations throughout our local communities, $1.2 million in 1998
alone. As important, though perhaps less visible, were the quiet efforts of
individual Ocean Federal employees unselfishly volunteering their own time to
community activities too numerous to document here.
At Ocean Financial Corp., we encourage such extra effort -- but not merely for
its good corporate citizenship and benefits to society. It is because, above
all, we believe in just that: Extra effort.
Only by working smarter... trying harder... and planning ahead to reach each
well-defined community banking goal... can we build value for your investment
and help you, our shareholders, reach your goals.
And that, more than anything else, is what we value most.
On behalf of the employees, officers, and Directors of Ocean Financial Corp. and
Ocean Federal Savings Bank, I thank you for your trust in us -- and look forward
to seeing you at the Annual Meeting on April 22, 1999.
Sincerely,
/s/ John R. Garbarino
John R. Garbarino
Chairman, President and
Chief Executive Officer
We're looking
forward to
successfully
serving the
financial needs
of our community
in the new century
...and so are
our computers.
4 . Ocean Financial Corp. . OCFC
<PAGE>
Board of Directors
- --------------------------------------------------------------------------------
[PHOTO]
Pictured from top right, clockwise:
John R. Garbarino - Chairman, President
and Chief Executive Officer
Donald E. McLaughlin - Audit
Committee Chairman
Thomas F. Curtin - Human
Resources/Compensation
Committee Chairman
Michael E. Barrett - Executive Vice President
Frederick E. Schlosser - Audit Committee,
Human Resources/Compensation Committee
Robert E. Kuemoller - Audit Committee
Budget and Planning Committee
Diane F. Rhine - Human Resources/
Compensation Committee
Carl Feltz Jr. - Budget and Planning Committee
James T. Snyder - Budget and Planning
Committee Chairman
Ocean Financial Corp. . OCFC . 5
<PAGE>
The Value of Personal Service
- --------------------------------------------------------------------------------
Financial experts have been predicting it for years: The age of consolidation.
An era of megamergers, economies of scale, and growth through insatiable
acquisitions.
At Ocean Financial Corp., we believe in "consolidating" too. Except our efforts
are concentrated on bringing everything together locally. As THE Community Bank
in our local market, thinking first about those who live, work, bank and invest
here is not just being "responsive." It's our responsibility.
Which is why such careful thought went into the 1998 introduction of new
products designed to serve our customers better, and to ultimately build value
for our shareholders. Offering a wider choice in retail checking -- including a
spectrum of interest-
[PHOTO]
Assistant Manager, Ruth D. Louis, at our Toms River branch, greets each customer
with a smile.
bearing accounts and a VISA(R) check card -- allowed us to broaden relationships
with existing customers while attracting over 9,000 new checking accounts. Our
investment services, including mutual funds, annuities and other non-traditional
products, also encouraged a full-service connection that might otherwise have
been lost to competition.
On that note, retaining customers, enhancing branch traffic and cross-selling
bank services were a major focus in 1998 and will continue to be emphasized
going forward.
Our Retail Division is designed to cater to customer needs with a team approach
to service that provides one-stop decision making and even faster responses to
their requests. We believe these efforts, and other aggressive measures, will
give the Bank a competitive edge in 1999 and beyond.
For example, stronger penetration into the consumer loan, equity loan and line
of credit markets will be pursued in 1999, along with our sustained emphasis on
originating residential mortgage loans. Retail deposit growth will also continue
to be a priority, improving the mix of core deposits vs. lower-margin funding
such as CDs. Traditional fee income enhancement will also be sought, as will the
analysis of office support functions to provide maximum operating efficiencies.
Finally, to increase the Bank's market presence, two new branches will open in
1999, representing our first entree into Monmouth County. Our Spring Lake
Heights office is scheduled for the third quarter, followed by our Wall Township
office slated for the fourth quarter.
Overall, these efforts are built on the belief that thoughtful planning serves
us far better than a philosophy of quick fixes. In an age when consolidations
can alter relationships overnight, remaining true to our community bank
strengths will not just ensure we survive "merger mania."
We will thrive because of it.
Checking Account Growth
- --------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
6 . Ocean Financial Corp. . OCFC
<PAGE>
"I live here...
and work here.
But most banks
[PHOTO] seem to do neither.
Why should I
'reach high' or
'climb mountains'
when there's
someone around
the corner who
wants to help me?"
Ocean Financial Corp. . OCFC . 7
<PAGE>
"Our old bank said
a loan was 'out of
the question.' so I [PHOTO]
asked them one:
How can you
make a lending
decision about my
main office when
your's isn't even in
the state?"
8 . Ocean Financial Corp. . OCFC
<PAGE>
The Value of Relationships
- --------------------------------------------------------------------------------
A marina owner in Ocean County was content with his large regional bank. That
is, until his business line of credit matured, and his loan officer wouldn't
return calls. After being "stood up" for a scheduled meeting without even
receiving an apology, he called the Commercial Lending team at Ocean Federal
instead. Shortly after, a new $1.2 million line was all his, along with merchant
services to help his business grow faster.
A local doctor's practice in Monmouth County was expanding, with plans to add an
office in Ocean County. Yet his commercial mortgage application had been
lingering for a month throughout his bank's vast loan department. With time
running out to acquire the perfect location, he asked Ocean Federal for help.
Our team responded with a verbal commitment in 24 hours, resulting in a mortgage
for the new office and refinancing the mortgage on the original location. Now he
is looking forward to the opening of our new branch office in Wall Township
later this year.
These are true stories with real, happy endings. Yet for those who've become
disenchanted with the lending policies of larger, non-community-based banks,
they are actually happy beginnings.
The new relationships developed through our loan officers provide solid proof
that no one knows Jersey Shore businesses better, or understands their unique
challenges quite so well. Which is why the newly expanded Commercial Lending
division has seen such impressive growth in its short history, improving in
sales and shareholder value each year. In 1998, over $26 million in total loans
were originated, representing a 41.8% increase from the prior year. Working
closely with our retail branch managers and residential lending officers, our
team shared referrals -- and success stories -- with commercial customers in
promising markets like commercial real estate, manufacturing, and healthcare.
Also in 1998, we expanded our commercial product menu, including new
enhancements to Cash Management services like Account Analysis and Sweep
Investment Accounts.
Adding to our core business banking services like deposit accounts, escrow
management and employee retirement plans, we will continue to roll out new
products in 1999. For example, business customers can look forward to Internet
account access in 1999, providing added speed and convenience for their company
banking needs.
With an ever present emphasis on quality, loan growth remains a priority. Our
focus will be to capitalize on current relationships by providing in-depth local
knowledge and prompt, responsive service -- then cross-selling whenever possible
over business lines. Additionally, Ocean Federal's growing branch network,
including our upcoming Monmouth County offices, will also open more avenues.
Of course, our most important "address" isn't located in any one branch. It is
in how we address each customer: With the respect they deserve as successful
members of our business community.
And with the friendliness one shares with a good neighbor.
[PHOTO]
Mary Huff, Vice President Commercial Lending, visits a local -- and loyal --
business customer to discuss financing options for the company's expansion.
Ocean Financial Corp. . OCFC . 9
<PAGE>
The Value of Commitment
- --------------------------------------------------------------------------------
You could call it "investing in our future" with a positive "return on equity"
that Ocean Financial Corp. shares in the community.
We prefer to think of it as "giving back" to those who've supported us.
In 1998, our commitment to the community was stronger than ever, especially in
support of the service organizations and programs that make our neighborhoods a
better place to live. This was perhaps most obvious through the continued
activities of The Ocean Federal Foundation, the private nonprofit foundation
established and fully expensed in 1996 by Ocean Federal Savings Bank to provide
assistance to charitable endeavors in our communities.
Over $1.2 million was awarded by the Foundation last year -- including grants to
such deserving efforts as programs to support the arts, education, not-for-
profit medical organizations, and housing for the disadvantaged.
[PHOTO]
From funding for the disadvantaged to support for the arts, the Foundation
continues to help improve quality of life in our community.
Cerebral Palsy of Monmouth and Ocean, for example, obtained over $100,000 to
help build a home for individuals with physical handicaps. Coastal Caregivers
and Caregivers of Toms River received over $37,000 in funding for their ongoing
efforts to provide services for the elderly. A grant for $73,000 made it
possible to establish a local Big Brothers Big Sisters chapter. In addition,
cultural programs such as the "Festival of the Atlantic" and Brick Township's
Summerfest were able to continue with the assistance of the Foundation. These
popular summer concert series on our beaches are enjoyed by thousands of
residents and vacationers.
On a related note, as most of America cheered them on to a World Championship,
we took special pride in the accomplishments of the 1998 Toms River East Little
League team. Although our loan to finance their all-season practice facility may
not be the only reason our "home team" enjoyed such success -- it felt good to
be one of their earliest fans.
Fans, who like all loyal supporters, are with the team through thick and thin.
Just as we've been for our neighbors for nearly 100 years.
[PHOTO]
Crowned World Champion in 1998, the Toms River East Little League team brought
pride and more than a few smiles to all of us here in Ocean County.
In 1998, our commitment
to the community was
stronger than ever,
especially in support of
the service organizations
and programs that make
our neighborhoods a
better place to live.
10 . Ocean Financial Corp. . OCFC
<PAGE>
Selected Consolidated Financial
and Other Data of the Company
- --------------------------------------------------------------------------------
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,561,744 $ 1,510,947 $ 1,303,865 $ 1,036,445 $ 971,651
- -----------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity -- -- -- -- 127,451
- -----------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale 137,405 207,357 174,028 114,881 --
- -----------------------------------------------------------------------------------------------------------------------------
FHLB-NY stock 16,800 14,980 8,457 7,723 7,323
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity -- -- -- -- 224,569
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities available for sale 381,840 457,148 395,542 265,113 --
- -----------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 941,011 783,695 678,728 612,696 592,315
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale 25,140 -- 727 1,894 --
- -----------------------------------------------------------------------------------------------------------------------------
Deposits 1,035,251 976,764 934,730 926,558 867,420
- -----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank borrowings 30,000 20,400 8,800 10,400 --
- -----------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 282,108 288,200 99,322 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 197,740 215,544 252,789 92,351 82,334
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands except per share amounts)
Selected Operating Data:
- -----------------------------------------------------------------------------------------------------------------------------
Interest income $ 105,557 $ 98,656 $ 80,236 $ 70,210 $ 63,683
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense 61,399 55,608 43,857 40,004 32,373
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 44,158 43,048 36,379 30,206 31,310
- -----------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 900 900 700 950 1,129
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 43,258 42,148 35,679 29,256 30,181
- -----------------------------------------------------------------------------------------------------------------------------
Other income 2,411 2,509 2,881 1,356 2,057
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses 25,457 23,145 39,206 18,006 17,104
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 20,212 21,512 (646) 12,606 15,134
- -----------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 7,240 7,687 1,083 4,659 5,405
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 12,972 $ 13,825 $ (1,729) $ 7,947 $ 9,729
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ .97 $ .90 $ (.39) N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ .95 $ .88 $ (.39) N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
Net income before non-recurring items (2) $ 13,525 $ 13,825 $ 11,576 $ 7,947 $ 9,729
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Earnings (loss) per share for 1996 is for the period from July 2, 1996 (date of
conversion) to December 31, 1996 Per share 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.
Selected Consolidated Financial and Other Data (continued)
Ocean Financial Corp. . OCFC . 11
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (1):
- -----------------------------------------------------------------------------------------------------------------------------
Performance Ratios:
- -----------------------------------------------------------------------------------------------------------------------------
Return on average assets 0.85% 0.97% (.15)% 0.80% 1.02%
- -----------------------------------------------------------------------------------------------------------------------------
Return on average assets, as adjusted (2) 0.88 0.97 1.00 0.80 1.02
- -----------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity 6.36 6.00 (1.03) 9.44 12.54
- -----------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity, as adjusted (2) 6.63 6.00 6.91 9.44 12.54
- -----------------------------------------------------------------------------------------------------------------------------
Average stockholders' equity to average assets 13.33 16.25 14.42 8.51 8.11
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity to total assets at end of year 12.66 14.27 19.39 8.91 8.47
- -----------------------------------------------------------------------------------------------------------------------------
Average interest rate spread (3) 2.39 2.39 2.61 2.79 3.07
- -----------------------------------------------------------------------------------------------------------------------------
Net interest margin (4) 2.98 3.12 3.22 3.13 3.34
- -----------------------------------------------------------------------------------------------------------------------------
Average interest-earning assets to average
- -----------------------------------------------------------------------------------------------------------------------------
interest-bearing liabilities 114.35 117.95 115.84 107.98 107.71
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses to average assets 1.66 1.63 3.37 1.82 1.79
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses to average assets, as adjusted (2) 1.66 1.63 1.73 1.82 1.79
- -----------------------------------------------------------------------------------------------------------------------------
Operating efficiency ratio (5) 54.67 50.80 99.86 57.05 51.26
- -----------------------------------------------------------------------------------------------------------------------------
Operating efficiency ratio, as adjusted (2)(5) 53.69 50.80 51.11 57.05 51.26
- -----------------------------------------------------------------------------------------------------------------------------
Regulatory Capital Ratios (Bank Only):
- -----------------------------------------------------------------------------------------------------------------------------
Tangible capital 10.78 11.91 12.69 8.72 8.43
- -----------------------------------------------------------------------------------------------------------------------------
Core capital 10.78 11.91 12.69 8.72 8.43
- -----------------------------------------------------------------------------------------------------------------------------
Risk-based capital 22.77 29.88 32.04 21.34 20.34
- -----------------------------------------------------------------------------------------------------------------------------
Asset Quality Ratios:
- -----------------------------------------------------------------------------------------------------------------------------
Non-performing loans as a percent of total loans receivable (6)(7) 0.56 0.70 1.12 1.40 1.83
- -----------------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percent of total assets (7) 0.35 0.45 0.71 0.97 1.29
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of total loans receivable (6) 0.76 0.83 0.88 0.97 0.94
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of total non-performing loans (7) 137.54 119.03 78.23 69.21 51.27
- -----------------------------------------------------------------------------------------------------------------------------
Number of full-service customer facilities 11 10 9 8 8
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) With the exception of end of year ratios, all ratios are based on average
daily balances for 1998, 1997, 1996 and 1995 and average monthly balances
for 1994.
(2) Performance ratios are calculated to exclude the effect of non-recurring
charges in 1998 relating to the loss on the sale of mortgage-backed
securities and in 1996 relating to a charitable donation and the special
Savings Association Insurance Fund assessment.
(3) The average interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities.
(4) The net interest margin represents net interest income as a
percentage of average interest-earning assets.
(5) Operating efficiency ratio represents the ratio of operating expenses to
the aggregate of other income and net interest income.
(6) Total loans receivable includes loans receivable and loans held for sale,
less undisbursed loan funds, deferred loan fees and unamortized
discounts/premiums.
(7) Non-performing assets consist of non-performing loans and real estate
acquired through foreclosure ("REO"). Non-performing loans consist of all
loans 90 days or more past due and other loans in the process of
foreclosure. It is the Company's policy to cease accruing interest on all
such loans.
12 . Ocean Financial Corp. . OCFC
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
General
Ocean Financial Corp. (the "Company") was incorporated on November 21, 1995, and
is the holding company for Ocean Federal Savings Bank (the "Bank"). 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
16,776,156 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 1,342,092 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 1,342,092 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 contribution of $13.4 million was
reflected as an expense in the Company's 1996 operating results and as an
increase to capital stock and paid in capital for the same amount.
The Company had no operations prior to July 2, 1996 and, accordingly, the
results of operations prior to that date reflect only those of the Bank and its
subsidiaries.
The Company conducts business, primarily through its ownership of the Bank which
operates its administrative/branch office located in Toms River and ten other
branch offices. Ten of the eleven branch offices are located in Ocean County,
New Jersey with the eleventh branch in Middlesex County.
The Company has historically operated as a consumer-oriented federal savings
bank, with a focus on offering traditional savings deposit and loan products to
its local community. In recent years, the Company's strategy has been to
maintain profitability while limiting its credit and interest rate risk
exposure. To accomplish these objectives, the Company has sought to: (1) control
credit risk by emphasizing the origination of single-family, owner-occupied
residential mortgage loans and consumer loans, consisting primarily of home
equity loans and lines of credit; (2) offer superior service and competitive
rates to increase the core deposit base consistent with its capital management
goals; (3) invest funds in excess of loan demand in mortgage-backed and
investment securities; and (4) control operating expenses.
The Company expects to continue to capitalize on its strengths -- the delivery
of traditional thrift products and services (primarily single-family mortgages)
with a high level of customer service, thereby maintaining its community
orientation. Despite this emphasis, the Company took steps from 1996 to 1998 to
modify its historical operating strategy. With industry consolidation
eliminating most locally headquartered competitors, the Company saw an
opportunity to fill a perceived void for locally delivered commercial loan and
deposit services. As such, in the second half of 1996 the Company assembled an
experienced team of commercial lending professionals and began offering
commercial loan and deposit services and merchant credit card services to
businesses in Ocean County and surrounding communities.
Management believes that the diversification of the Company's loan products may
expose the Company to a higher degree of credit risk than is involved in the
Company's one- to four-family residential mortgage lending activity. As a
consequence of this strategy, management has developed a well-defined credit
policy focusing on quality underwriting and close management and Board
monitoring.
With the significant increase in capital arising from the stock conversion, the
Company adopted a leverage strategy in late 1996 to improve returns on capital.
The strategy included the retention of most 30-year fixed rate mortgage loans,
most of which had previously been sold and the use of wholesale borrowings to
fund purchases of investment and mortgage-backed securities. The adoption of
this strategy may increase the Company's interest rate risk exposure. As noted
below, management seeks to carefully monitor and assess the Company's interest
rate risk exposure while actively managing the balance sheet composition.
Management is also seeking to increase the Company's market share in its primary
market area by expanding the Bank's branch network. During 1996, the Company
opened a branch office in Toms River at the site of its new administrative
offices. In February 1997, a new branch opened in Lacey Township. In 1998, the
Company opened an additional branch office in Toms River during the second
quarter. Branches in Wall Township and Spring Lake Heights, both in Southern
Monmouth County, are expected to open during the latter part of 1999. The
Company is also evaluating additional office sites within its existing market
area.
Management is also seeking to diversify its retail product line. During 1998,
the Company began offering alternative investment products (annuities and mutual
funds) for sale through its retail branch network. The products are non-
proprietary, sold through a third party vendor, and provide the Company with fee
income opportunities. In 1999, the menu of alternative investment products will
be expanded to include life insurance. The Company is also planning the
introduction of trust and asset management services during 1999.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on the
Company's interest-earning assets, such as loans and investments, and the
interest expense on its interest-bearing liabilities, such as deposits and
borrowings. The Company also generates non-interest income such as income from
secondary marketing activities, loan servicing and other fees. The Company's
operating expenses primarily consist of compensation and employee benefits,
general and administrative expenses, federal deposit insurance premiums,
occupancy and equipment expenses, marketing expenses and other operating
expenses. The Company's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory agencies.
Ocean Financial Corp. - OCFC Page 13
<PAGE>
- --------------------------------------------------------------------------------
Management of Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending, investment and deposit taking activities. The Company's
profitability is affected by fluctuations in interest rates. A sudden and
substantial increase in interest rates may adversely impact the Company's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent or on the same basis. To
that end, management actively monitors and manages its interest rate risk
exposure.
The principal objectives of the Company's interest rate risk management function
are to evaluate the interest rate risk included in certain balance sheet
accounts; determine the level of risk appropriate given the Company's business
focus, operating environment, capital and liquidity requirements and performance
objectives; and manage the risk consistent with Board approved guidelines.
Through such management, the Company seeks to reduce the vulnerability of its
operations to changes in interest rates. The Company monitors its interest rate
risk as such risk relates to its operating strategies. The Company's Board of
Directors has established an Asset/Liability Committee ("ALCO Committee")
consisting of members of the Company's management, responsible for reviewing the
Company's asset/liability policies and interest rate risk position. The ALCO
Committee meets monthly and reports trends and the Company's interest rate risk
position to the Board of Directors on a quarterly basis. The extent of the
movement of interest rates, higher or lower, is an uncertainty that could have a
negative impact on the earnings of the Company.
In recent years, the Company has utilized the following strategies to manage
interest rate risk: (i) emphasizing the origination for portfolio of fixed-rate
mortgage loans having terms to maturity of not more than fifteen years,
adjustable-rate loans, and consumer loans consisting primarily of home equity
loans and lines of credit; (ii) holding primarily short-term and/or adjustable-
rate mortgage-backed and investment securities; and (iii) attempting to reduce
the overall interest rate sensitivity of liabilities by emphasizing core and
longer-term deposits. The Company also periodically sells 30-year fixed-rate
mortgage loans into the secondary market. In determining whether to retain 30-
year fixed-rate mortgages, management considers the Company's overall interest
rate risk position, the volume of such loans, the loan yield and the types and
amount of funding sources. During 1997 and 1998 the Company began retaining most
of its 30-year fixed rate mortgage loan production in order to improve yields
and increase balance sheet leverage. Management felt that the significant
capital position of the Company resulting from the Conversion, mitigated the
additional interest rate risk associated with retaining these mortgages.
Additionally, the Company extended the maturity on part of its wholesale
borrowings for up to ten years.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Accordingly, during a period of rising
interest rates, an institution with a negative gap position generally would not
be in as favorable a position, compared to an institution with a positive gap,
to invest in higher yielding assets. This may result in the yield on the
institution's assets increasing at a slower rate than the increase in its cost
of interest-bearing liabilities. Conversely, during a period of falling interest
rates, an institution with a negative gap might experience a repricing of its
assets at a slower rate than its interest-bearing liabilities, which,
consequently, may result in its net interest income growing at a faster rate
than an institution with a positive gap position.
At December 31, 1998 the Company's one year gap was negative 10.6%. In
performing this calculation, except as stated below, the amount of assets and
liabilities which reprice or mature during a particular period were determined
in accordance with the earlier of term to repricing or the contractual maturity
of the asset or liability. Loans receivable reflect principal balances expected
to be redeployed and/or repriced as a result of contractual amortization and
anticipated prepayments of adjustable-rate loans and fixed-rate loans, and as a
result of contractual rate adjustments on adjustable-rate loans. Loans on
residential properties were projected to repay at rates between 6% and 30%
annually. Mortgage-backed securities were projected to prepay at rates between
20% and 30% annually. Passbook accounts, negotiable order of withdrawal ("NOW")
and money market accounts were assumed to decay at 3.33% per month. Prepayment
and decay rates can have a significant impact on the Company's estimated gap.
There can be no assurance that projected prepayment rates for loans and
mortgage-backed securities will be achieved or that projected decay rates will
be realized.
14 . Ocean Financial Corp. . OCFC
<PAGE>
- -------------------------------------------------------------------------------
Certain shortcomings are inherent in gap analysis. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable-rate loans, have features which restrict changes in interest rates
both on a short-term basis and over the life of the asset. Further, in the event
of a change in interest rates, prepayment and decay rates would likely deviate
significantly from those assumed in the calculation. Finally, the ability of
many borrowers to service their adjustable-rate loans may be impaired in the
event of an interest rate increase.
Another method of analyzing an institution's exposure to interest rate risk is
by measuring the change in the institution's net portfolio value ("NPV") and net
interest income under various interest rate scenarios. NPV is the difference
between the net present value of assets, liabilities and off-balance sheet
contracts. The NPV ratio, in any interest rate scenario, is defined as the NPV
in that scenario divided by the market value of assets in the same scenario. The
Company's interest rate sensitivity is monitored by management through the use
of an interest rate risk ("IRR") model which measures IRR by modeling the change
in NPV and net interest income over a range of interest rate scenarios. The
Office of Thrift Supervision ("OTS") also produces an NPV only analysis using
its own model, based upon data submitted on the Bank's quarterly Thrift
Financial Reports, the results of which may vary from the results provided by
the Company's model, primarily due to differences in the assumptions utilized
including estimated loan prepayment rates, reinvestment rates and deposit decay
rates. The table below sets forth the Company's NPV and net interest income as
of December 31, 1998 and 1997, as calculated by the Company.
As is the case with the gap calculation, certain shortcomings are inherent in
the methodology used in the NPV and net interest income IRR measurements. The
model requires the making of certain assumptions which may tend to oversimplify
the manner in which actual yields and costs respond to changes in market
interest rates. First, the model assumes that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured. Second, the model assumes that
a particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Third, the model does not take into account the Company's business
or strategic plans. Accordingly, although the measurements below do provide an
indication of the Company's IRR exposure at a particular point in time, such
measurements are not intended to provide a precise forecast of the effect of
changes in market interest rates on the Company's net interest income and can be
expected to differ from actual results.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Change in -----------------------------------------------------------------------------------------------------------------------
Interest Net Portfolio Value Net Interest Income Net Portfolio Value Net Interest Income
Rates in --------------------------------- --------------------- -------------------------------- ----------------------
Basis Points NPV NPV
(Rate Shock) Amount % Change Ratio Amount % Change Amount % Change Ratio Amount % Change
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
400 $ 140,420 (42.6)% 10.0 $ 40,490 (16.1)% $ 148,630 (40.7)% 10.9 $ 36,892 (22.1)%
- ------------------------------------------------------------------------------------------------------------------------------------
300 170,890 (30.1) 11.8 43,131 (10.6) 181,482 (27.6) 12.9 40,423 (14.6)
- ------------------------------------------------------------------------------------------------------------------------------------
200 202,431 (17.2) 13.5 45,347 (6.0) 213,613 (14.8) 14.7 44,085 (6.9)
- ------------------------------------------------------------------------------------------------------------------------------------
100 225,510 (7.8) 14.7 46,979 (2.7) 234,059 (6.6) 15.8 45,959 (2.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Static 244,538 -- 15.5 48,260 -- 250,697 -- 16.5 47,342 --
- ------------------------------------------------------------------------------------------------------------------------------------
(100) 256,618 4.9 15.9 49,023 1.6 255,243 1.8 16.5 48,446 2.3
- ------------------------------------------------------------------------------------------------------------------------------------
(200) 261,974 7.1 15.9 49,392 2.3 256,799 2.4 16.3 49,072 3.7
- ------------------------------------------------------------------------------------------------------------------------------------
(300) 264,595 8.2 15.9 49,336 2.2 258,282 3.0 16.1 50,261 6.2
- ------------------------------------------------------------------------------------------------------------------------------------
(400) 264,239 8.1 15.6 48,951 1.4 258,579 3.1 15.8 51,310 8.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Ocean Financial Corp. . OCFC . 15
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income also
depends upon the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them.
The following table sets forth certain information relating to the Company at
December 31, 1998 and for each of the years ended December 31, 1998, 1997, and
1996. The yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods shown
except where noted otherwise. Average balances are derived from average daily
balances. The yields and costs include fees which are considered adjustments to
yields.
<TABLE>
<CAPTION>
At December 31, Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning deposits and
short-term investments $ 7,424 2.94% $ 5,375 $ 295 5.49% $ 2,852 $ 155 5.43%
- ------------------------------------------------------------------------------------------------------------------------------
Investment securities (1) 137,405 6.50 173,158 11,461 6.62 196,650 13,302 6.76
- ------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net (2) 966,151 7.55 863,172 67,038 7.77 725,866 57,540 7.93
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities (3) 381,840 6.32 423,516 25,669 6.06 442,500 26,907 6.08
- ------------------------------------------------------------------------------------------------------------------------------
FHLB stock 16,800 7.00 15,096 1,094 7.25 11,271 752 6.67
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,509,620 7.11 1,480,317 105,557 7.13 1,379,139 98,656 7.15
- ------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 52,124 49,428 38,829
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $1,561,744 $1,529,745 $1,417,968
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity:
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
- ------------------------------------------------------------------------------------------------------------------------------
Money market deposit accounts $ 77,690 2.59% $ 71,800 2,026 2.82% $ 68,972 2,028 2.94%
- ------------------------------------------------------------------------------------------------------------------------------
Savings accounts 172,036 2.03 167,058 3,442 2.06 168,733 3,877 2.30
- ------------------------------------------------------------------------------------------------------------------------------
NOW accounts 106,363 1.59 89,679 1,517 1.69 77,785 1,388 1.78
- ------------------------------------------------------------------------------------------------------------------------------
Time deposits 657,008 5.35 663,483 36,819 5.55 637,425 35,667 5.60
- ------------------------------------------------------------------------------------------------------------------------------
Total 1,013,097 4.18 992,020 43,804 4.42 952,915 42,960 4.51
- ------------------------------------------------------------------------------------------------------------------------------
FHLB borrowings 30,000 5.13 19,947 1,061 5.32 7,207 414 5.74
- ------------------------------------------------------------------------------------------------------------------------------
Securities sold under
agreements to repurchase 282,108 5.33 282,590 16,534 5.85 209,089 12,234 5.85
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,325,205 4.45 1,294,557 61,399 4.74 1,169,211 55,608 4.76
- ------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities 38,799 31,222 18,395
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,364,004 1,325,779 1,187,606
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 197,740 203,966 230,362
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,561,744 $1,529,745 $1,417,968
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income $44,158 $43,048
- ------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread (4) 2.66% 2.39% 2.39%
- ------------------------------------------------------------------------------------------------------------------------------
Net interest margin (5) 3.20% 2.98% 3.12%
- ------------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 113.92% 114.35% 117.95%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1996
- ---------------------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
- ---------------------------------------------------------------------------
Interest-earning assets:
- ---------------------------------------------------------------------------
Interest-earning deposits and
short-term investments $ 4,872 $ 251 5.15%
- ---------------------------------------------------------------------------
Investment securities (1) 148,378 9,710 6.54
- ---------------------------------------------------------------------------
Loans receivable, net (2) 637,453 50,324 7.89
- ---------------------------------------------------------------------------
Mortgage-backed securities (3) 331,669 19,413 5.85
- ---------------------------------------------------------------------------
FHLB stock 8,323 538 6.46
- ---------------------------------------------------------------------------
Total interest-earning assets 1,130,695 80,236 7.10
- ---------------------------------------------------------------------------
Non-interest-earning assets 31,810
- ---------------------------------------------------------------------------
Total assets $1,162,505
- ---------------------------------------------------------------------------
Liabilities and Equity:
- ---------------------------------------------------------------------------
Interest-bearing liabilities:
- ---------------------------------------------------------------------------
Money market deposit accounts $ 70,209 1,994 2.84%
- ---------------------------------------------------------------------------
Savings accounts 175,060 4,069 2.32
- ---------------------------------------------------------------------------
NOW accounts 72,265 1,371 1.90
- ---------------------------------------------------------------------------
Time deposits 609,620 33,555 5.50
- ---------------------------------------------------------------------------
Total 927,154 40,989 4.42
- ---------------------------------------------------------------------------
FHLB borrowings 30,000 39,135 2,298 5.87
- ---------------------------------------------------------------------------
Securities sold under
agreements to repurchase 9,803 570 5.81
- ---------------------------------------------------------------------------
Total interest-bearing liabilities 976,092 43,857 4.49
- ---------------------------------------------------------------------------
Non-interest-bearing liabilities 18,778
- ---------------------------------------------------------------------------
Total liabilities 994,870
- ---------------------------------------------------------------------------
Stockholders' equity 167,635
- ---------------------------------------------------------------------------
Total liabilities and equity $ 1,162,505
- ---------------------------------------------------------------------------
Net interest income $36,379
- ---------------------------------------------------------------------------
Net interest rate spread (4) 2.61%
- ---------------------------------------------------------------------------
Net interest margin (5) 3.22%
- ---------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 115.84%
- ---------------------------------------------------------------------------
</TABLE>
(1) Includes investment securities available for sale.
(2) Amount is net of deferred loan fees, undisbursed loan funds, discounts and
premiums and estimated loan loss allowances and includes loans held for
sale and non-performing loans.
(3) Includes mortgage-backed securities available for sale.
(4) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
16 . Ocean Financial Corp. . OCFC
<PAGE>
Rate Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionally to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Compared to
Year Ended December 31, 1997 Year Ended December 31, 1996
---------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning deposits and short-term investments $ 138 $ 2 $ 140 $ (109) $ 13 $ (96)
- ------------------------------------------------------------------------------------------------------------------------------
Investment securities (1,569) (272) (1,841) 3,256 336 3,592
- ------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 10,681 (1,183) 9,498 6,962 254 7,216
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities (1,150) (88) (1,238) 6,705 789 7,494
- ------------------------------------------------------------------------------------------------------------------------------
FHLB stock 272 70 342 196 18 214
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 8,372 (1,471) 6,901 17,010 1,410 18,420
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
- ------------------------------------------------------------------------------------------------------------------------------
Money market deposit accounts 82 (84) (2) (35) 69 34
- ------------------------------------------------------------------------------------------------------------------------------
Savings accounts (38) (397) (435) (155) (37) (192)
- ------------------------------------------------------------------------------------------------------------------------------
NOW accounts 202 (73) 129 104 (87) 17
- ------------------------------------------------------------------------------------------------------------------------------
Time deposits 1,469 (317) 1,152 1,510 602 2,112
- ------------------------------------------------------------------------------------------------------------------------------
Total 1,715 (871) 844 1,424 547 1,971
- ------------------------------------------------------------------------------------------------------------------------------
FHLB borrowings 679 (32) 647 (1,834) (50) (1,884)
- ------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 4,300 -- 4,300 11,660 4 11,664
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 6,694 (903) 5,791 11,250 501 11,751
- ------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 1,678 $ (568) $ 1,110 $ 5,760 $ 909 $ 6,669
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Comparison of Financial Condition at December 31, 1998
and December 31, 1997
Total assets at December 31, 1998 were $1.562 billion, an increase of $50.8
million, compared to $1.511 billion at December 31, 1997.
Investment securities available for sale decreased by $70.0 million, to a
balance of $137.4 million at December 31, 1998, compared to a balance of $207.4
million at December 31, 1997, and mortgage-backed securities available for sale
decreased by $75.3 million, to $381.8 million at December 31, 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. In December 1998, the Bank also sold $51.3 million of
adjustable-rate mortgage-backed securities with high prepayment speeds. The sale
proceeds funded the purchase of $28.9 million in whole loans. Loans receivable,
net, increased by $157.3 million, or 20.1%, to a balance of $941.0 million at
December 31, 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 commercial real estate) initiatives which
accounted for $20.4 million of this growth. Included in the residential loan
growth is $125.7 million of 30-year fixed-rate mortgage loans which the Bank
retained in portfolio, while $16.1 million of 30-year fixed-rate mortgage loans
were sold. The Company is also holding $25.1 million of mortgage loans held for
sale at December 31, 1998, all of which were 30-year fixed rate mortgage loans.
The sale was completed in January 1999 at an after-tax gain of $328,000. In the
past, the Bank has often sold most of its fixed-rate 30-year loan production
into the secondary market. For the loans retained, the Bank acquired funding
with terms of three to ten years, mitigating part of the interest rate risk
associated with retaining these mortgages.
Total deposits at December 31, 1998 were $1.035 billion, an increase of $58.5
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 December 31, 1998 was $197.7 million, compared to $215.5
million at December 31, 1997. The Company repurchased 1.1 million shares of
common stock during the year ended December 31, 1998 for $18.6 million, fully
completing the remainder of a 5% repurchase program announced in October 1997;
another 5% repurchase program announced in July 1998; and partially completing
an additional 5% repurchase program announced in November 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. Allocations during the
initial 12 year ESOP term which expires in year 2008, will not be affected by
the purchase of these shares and, therefore, no compensation expense will be
recognized by the Company relating to the allocation of these shares to plan
participants until at least the year 2009.
Results of Operations
General
Net income decreased to $13.0 million for the year ended December 31, 1998 as
compared to net income of $13.8 million for the year ended December 31, 1997.
Diluted earnings per share, however, increased 8.0%, to $.95 for the year ended
December 31, 1998, as compared to $.88 for the year ended December 31, 1997.
Ocean Financial Corp. . OCFC . 17
<PAGE>
The increase in earnings per share is the result of the Company's repurchase
program and the additional ESOP purchases, both of which reduced the number of
shares outstanding for purposes of calculating earnings per share.
Interest Income
Interest income for the year ended December 31, 1998 was $105.6 million,
compared to $98.7 million for the year ended December 31, 1997, an increase of
$6.9 million or 7.0%. The increase in interest income was the result of an
increase in the average balance of loans receivable which increased by $137.3
million for the year ended December 31, 1998. The increase in the year-over-year
average balance of loans receivable more than offset a $42.5 million decrease in
the average balance of investment and mortgage-backed securities. Overall
interest-earning assets increased $101.2 million for the year ended December 31,
1998, as compared to the year ended December 31, 1997. The average yield
declined slightly to 7.13% for the year ended December 31, 1998, as compared to
7.15% for the year ended December 31, 1997.
Interest Expense
Interest expense for the year ended December 31, 1998 was $61.4 million,
compared to $55.6 million for the year ended December 31, 1997, an increase of
$5.8 million, or 10.4%. The increase in interest expense was 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 $86.2 million for the year ended December 31, 1998, as
compared to the same prior year period and an additional increase in average
interest-bearing deposits of $39.1 million for the year ended December 31, 1998,
as compared to the same prior year period. 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 4.74% for the year ended December 31,
1998, as compared to 4.76% for the same prior year period.
Provision for Loan Losses
For the year ended December 31, 1998, the Company's provision for loan losses
was $900,000, unchanged from the same prior year period. The Company's non-
performing assets declined by $1.3 million at December 31, 1998, as compared to
December 31, 1997 allowing for stable provisions despite loan growth.
Management of the Company is responsible for the determination of the level of
the allowance for loan losses. The allowance for loan losses is maintained at a
level sufficient to provide for estimated losses based on evaluating known and
inherent risks in the loan portfolio and upon management's continuing analysis
of the factors underlying the quality of the loan portfolio. These factors
include changes in the size and composition of the loan portfolio, actual loan
loss experience, current and anticipated economic conditions, detailed analysis
of individual loans for which full collectibility may not be assured, and
determination of the existence and realizable value of the collateral and
guarantees securing the loan. Additions to this allowance are charged to
earnings. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to provide additions to the allowance based
upon information available to them at the time of their examination. Although
management uses the best information available, future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions beyond the Company's control.
Other Income
Other income decreased to $2.4 million for the year ended December 31, 1998,
compared to $2.5 million for the same prior year period. The decrease was due to
the recognition of a $850,000 loss on the sale of mortgage-backed securities.
Excluding the loss, other income increased $752,000, or 30.0% for the year ended
December 31, 1998, as compared to the prior year. The increase was 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 $228,000 for the year ended December 31, 1998.
Additionally, deposit related fees (part of fees and service charges) increased
by $476,000 for the year ended December 31, 1998, as compared to the same prior
year period, due to growth in commercial account services and retail core
account balances. The Company also realized $104,000 in fee income during 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. Total servicing fee income declined by
$424,000 for the year ended December 31, 1998, as compared to the prior year.
Operating Expenses
Operating expenses were $25.5 million for the year ended December 31, 1998, an
increase of $2.3 million compared to the same prior year period. For the year
ended December 31, 1998, marketing expense increased $677,000 as the Bank
aggressively promoted its new retail checking products. The Bank also opened its
eleventh branch office in early April of 1998. Out-of-pocket expenses associated
with readying the Company's data processing systems for the Year 2000 amounted
to $102,000 during 1998.
Provision for Income Taxes
Income tax expense was $7.2 million for the year ended December 31, 1998,
compared to $7.7 million for the year ended December 31, 1997. The effective tax
rate was relatively stable at 35.8% for the year ended December 31, 1998, as
compared to 35.7% for the same prior year period.
Comparison of operating results for the years ended December 31, 1997 and
December 31, 1996
General
Net income increased to $13.8 million for the year ended December 31, 1997, as
compared to a net loss of $1.7 million for the year ended December 31, 1996.
Prior year amounts were adversely affected by a charge of $5.7 million ($3.7
million after tax) representing the Bank's share of a special assessment to
recapitalize the Savings Association Insurance Fund ("SAIF") of the FDIC.
Additionally, concurrent with the close of the Company's stock offering on July
2, 1996, the Company funded The Ocean Federal Foundation with a one-time
donation of 1,342,092 shares of common stock, resulting in a charge of $13.4
million ($9.7 million after tax).
Interest Income
Interest income for the year ended December 31, 1997 was $98.6 million, compared
to $80.2 million for the year ended December 31, 1996, an increase of $18.4
million, or 23.0%. The increase in interest income was the result of increases
in the average size of the investment and mortgage-backed securities available
for sale portfolios, due to the investment, in 1997, of funds received from
wholesale borrowings. Also, the average balance of loans receivable increased
$88.4 million for the year ended December 31, 1997, as compared to the same
prior year period. The increase in interest income was further augmented by an
increase in the yield on average interest earning assets, which improved to
7.15% on average in 1997, from 7.10% on average in 1996.
Interest Expense
Interest expense for the year ended December 31, 1997 was $55.6 million,
compared to $43.9 million for the year ended December 31, 1996, an increase of
$11.7 million or 26.8%. The
18 . Ocean Financial Corp. . OCFC
<PAGE>
increase in interest expense was primarily the result of an increase in the
average outstanding balance of total borrowings, as previously discussed, and a
smaller average increase in deposits. The average cost of interest-bearing
liabilities also increased to 4.76% for the year ended December 31, 1997, as
compared to 4.49% 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 year ended December 31, 1997, the Company's provision for loan losses
was $900,000, compared to $700,000 for the same prior year period. The increase
was due to overall loan growth and the introduction of commercial business loans
which generally carry greater credit risk than the 1-4 family mortgage loans
which have been the Bank's historical focus.
Other Income
Other income was $2.5 million for the year ended December 31, 1997, compared to
$2.9 million for the same prior year period. Income from the net gain (loss) on
sales of loans and securities decreased $410,000 for the year ended December 31,
1997, compared to the same prior year period. The decrease was due to the
recognition of a loss of $142,000 in 1997 on the sale of a mortgage-backed
security. Additionally, the Company sold $2.7 million of 30-year fixed rate
mortgage loans in 1997, a decrease of $21.5 million as compared to $24.2 million
sold in 1996. Management determined that the significant capital position of the
Company mitigated the additional interest rate risk associated with retaining
these mortgages.
Operating Expenses
Operating expenses were $23.1 million and $39.2 million for the year ended
December 31, 1997, a decrease of $16.1 million compared to the same prior year
period. The charitable donation to The Ocean Federal Foundation in the third
quarter of 1996 accounted for $13.4 million of the decrease. Additionally,
federal deposit insurance expense declined by $7.3 million for the year ended
December 31, 1997, compared to the same prior year period due to the special
SAIF assessment of $5.7 million recorded in the third quarter of 1996. As a
result of the special assessment insurance premiums on SAIF-insured deposits
declined to 6.5 basis points per $100 of deposits effective January 1, 1997, as
compared to 23 basis points in 1996.
The increase in compensation and employee benefits expense of $3.7 million for
the year ended December 31, 1997, as compared to the same prior year period, was
due to the expense associated with the amortization, beginning in February 1997,
of incentive stock awards and the higher expense associated with the Bank's
Employee Stock Ownership Plan as a result of the increase in the Company's stock
price over its initial $10 per share cost. The ESOP expense was partly offset by
eliminating matching contributions under the Bank's 401K Plan.
Equipment expense increased by $426,000 for the year ended December 31, 1997,
compared to the same prior year period due to the establishment of two new
branch offices and the upgrade of computer equipment. General and administrative
expenses increased by $386,000 for the year ended December 31, 1997, compared to
the same prior year period due to expenses associated with operating as a
publicly-owned holding company.
Provision for Income Taxes
Income tax expense was $7.7 million for the year ended December 31, 1997,
compared to $1.1 million for the year ended December 31, 1996 due to the
significant increase in income before income taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB and other borrowings and,
to a lesser extent, investment maturities and proceeds from the sale of loans
and securities. While scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition. The Company has other
sources of liquidity if a need for additional funds arises, including an
overnight line of credit and advances from the FHLB.
At December 31, 1998, the Company had $30.0 million of outstanding 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 $282.1 million at
December 31, 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.
The Company's cash needs for the year ended December 31, 1998, were principally
provided by maturities of investment securities available for sale, principal
payments on loans and mortgage-backed securities, proceeds from the sale of
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, the
origination of loans and the purchase of treasury stock. For the year ended
December 31, 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 provided 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 December 31, 1998 and 1997, the Bank's liquidity ratios were
12.5% and 9.8%, respectively, both in excess of the minimum regulatory
requirement.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $167.9 million, or 10.8%, of total
adjusted assets, which is above the required level of $23.4 million or 1.5%;
core capital of $167.9 million or 10.8% of total adjusted assets, which is above
the required level of $46.8 million, or 3.0%; and risk-based capital of $175.1
million, or 22.8% of risk-weighted assets, which is above the required level of
$61.5 million or 8.0%. The Bank is considered a "well capitalized" institution
under the Office of Thrift Supervision's prompt corrective action regulations.
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 was developed following guidelines set forth by the Federal Financial
Institutions Examination Council. These guidelines mandate that the Year 2000
project address five specific phases: awareness, assessment, renovation,
validation (testing), and implementation. During the first quarter of 1998, the
Bank completed the awareness and assessment phases by identifying all
potentially impacted systems and vendors. During the fourth quarter of
Ocean Financial Corp. . OCFC . 19
<PAGE>
1998, vendors were carefully monitored to ensure that Year 2000 compliant
software and hardware was delivered on schedule to meet testing time frames. As
a result, the renovation phase was substantially complete at December 31, 1998.
In September 1998 BISYS, the Bank's data processing agent and the primary
provider of mission critical services, delivered remediated software and
provided a testing facility for Year 2000 validation purposes. In conjunction
with BISYS, scheduled testing commenced in November 1998 and is expected to
continue through March of 1999. During that time, all mission critical systems
and functions that BISYS provides will be tested by Company personnel to ensure
compliance. A formal reporting structure between BISYS and the Company has been
designed to ensure the timely correction of any issues found during testing. In
the event that the validation process proves existing services to be
non-compliant, a contingency agreement with BISYS allows the Company the option
to convert to a fully compliant system by the end of 1999. All other primary
service providers have completed the Year 2000 reprogramming. Testing with these
vendors is underway and is also expected to be completed by March 1999.
The Company has completed inventories of all mission critical functions, funds
takers and funds providers, and is making every effort to ensure compliance in
each of these areas. In the case of failure caused by a Year 2000 problem, the
Bank has documented contingency plans that will be initiated to resolve mission
critical issues.
The Company has established a formal process for measuring potential credit risk
associated with the Year 2000. Major customers in the Residential and Commercial
Loan portfolios have been assessed to determine an appropriate risk rating and
the Company is monitoring the progress of these borrowers towards Year 2000
compliance on an ongoing basis.
Expenses related to the Bank's Year 2000 effort in 1998 totaled $327,000. This
expense consists of $102,000 in costs associated with the renovation of
software, hardware purchases and consulting charges and $225,000 representing an
estimate of the direct cost for compensation and fringe benefits of internal
employees working on the Year 2000 project. The Bank expects to spend an
additional $400,000 to $600,000 in 1999. This figure represents costs associated
with initiating customer awareness programs, testing, implementation and
consulting expenses and includes $125,000 to $175,000 for the direct cost of
internal employees. Estimated expenses and completion dates associated with this
project are based upon all known facts and available resources. The Company
expects 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 estimates include, but are not limited to, expenses associated with
obtaining qualified personnel, ability to correctly identify and renovate all
functions related to the Year 2000 and other similar items.
The Company believes that it is taking all reasonable steps to prepare for the
Year 2000, especially in the case of mission critical functions. However,
management cannot make representations that all systems and especially those of
significant third parties will be Year 2000 compliant or that they will not be
adversely affected by Year 2000 issues.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS 131). SFAS 131 establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected financial information about operating segments in interim
financial reports to shareholders. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. Based upon the current
operations of the Company and established reporting mechanisms, the Company does
not have separate reportable operating segments and, therefore, the adoption of
SFAS 131 did not have an impact on the company's financial disclosures.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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 fiscal years beginning 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 FASB issued SFAS 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.
Private Securities Litigation Reform Act
Safe Harbor Statement
In addition to historical information, this annual 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 1998 Form 10-K.
20 . Ocean Financial Corp. . OCFC
<PAGE>
Consolidated Statements of Financial Conditions
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998 and 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C>
Assets
- ------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 10,295 $ 2,225
- ------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale (notes 4, 11 and 15) 137,405 207,357
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank of New York stock, at cost (note 15) 16,800 14,980
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities available for sale (notes 5, 11 and 15) 381,840 457,148
- ------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net (notes 6 and 15) 941,011 783,695
- ------------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale 25,140 --
- ------------------------------------------------------------------------------------------------------------------------------
Interest and dividends receivable (note 7) 9,820 11,064
- ------------------------------------------------------------------------------------------------------------------------------
Real estate owned, net (note 9) 43 1,198
- ------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 8) 13,947 14,279
- ------------------------------------------------------------------------------------------------------------------------------
Other assets (note 12) 25,443 19,001
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,561,744 $ 1,510,947
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------
Deposits (note 10) $ 1,035,251 $ 976,764
- ------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank borrowings (note 15) 30,000 20,400
- ------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase (note 11) 282,108 288,200
- ------------------------------------------------------------------------------------------------------------------------------
Advances by borrowers for taxes and insurance 5,096 4,773
- ------------------------------------------------------------------------------------------------------------------------------
Other liabilities (notes 12 and 13) 11,549 5,266
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,364,004 1,295,403
- ------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (notes 2, 3, 12, 13 and 14):
- ------------------------------------------------------------------------------------------------------------------------------
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 14,629,776 and 15,705,720 shares outstanding at December 31, 1998 and 1997, respectively 181 181
- ------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 178,309 177,223
- ------------------------------------------------------------------------------------------------------------------------------
Retained earnings-substantially restricted 103,982 97,487
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive (loss) income (1,226) 989
- ------------------------------------------------------------------------------------------------------------------------------
Less: Unallocated common stock held by
- ------------------------------------------------------------------------------------------------------------------------------
Employee Stock Ownership Plan (17,376) (10,903)
- ------------------------------------------------------------------------------------------------------------------------------
Unearned Incentive Awards (5,963) (7,897)
- ------------------------------------------------------------------------------------------------------------------------------
Treasury stock, 3,488,472 and 2,412,528 shares
at December 31, 1998 and 1997, respectively (60,167) (41,536)
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 197,740 215,544
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 15)
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,561,744 $ 1,510,947
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Ocean Financial Corp. . OCFC . 21
<PAGE>
Consolidated Statements of Income
and Comprehensive Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,1998, 1997 and 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Interest income:
- -------------------------------------------------------------------------------------------------------------
Loans $ 67,038 $ 57,540 $ 50,324
- -------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 25,669 26,907 19,413
- -------------------------------------------------------------------------------------------------------------
Investment securities and other 12,850 14,209 10,499
- -------------------------------------------------------------------------------------------------------------
Total interest income 105,557 98,656 80,236
- -------------------------------------------------------------------------------------------------------------
Interest expense:
- -------------------------------------------------------------------------------------------------------------
Deposits (note 10) 43,804 42,960 40,989
- -------------------------------------------------------------------------------------------------------------
Borrowed funds 17,595 12,648 2,868
- -------------------------------------------------------------------------------------------------------------
Total interest expense 61,399 55,608 43,857
- -------------------------------------------------------------------------------------------------------------
Net interest income 44,158 43,048 36,379
- -------------------------------------------------------------------------------------------------------------
Provision for loan losses (note 6) 900 900 700
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 43,258 42,148 35,679
- -------------------------------------------------------------------------------------------------------------
Other income:
- -------------------------------------------------------------------------------------------------------------
Fees and service charges 2,087 1,905 1,819
- -------------------------------------------------------------------------------------------------------------
Net (loss) gain on sales of loans and securities available for sale
(note 5) (622) (132) 278
- -------------------------------------------------------------------------------------------------------------
Net income from other real estate operations 209 223 355
- -------------------------------------------------------------------------------------------------------------
Other 737 513 429
- -------------------------------------------------------------------------------------------------------------
Total other income 2,411 2,509 2,881
- -------------------------------------------------------------------------------------------------------------
Operating expenses:
- -------------------------------------------------------------------------------------------------------------
Compensation and employee benefits (notes 13 and 14) 14,604 13,969 10,296
- -------------------------------------------------------------------------------------------------------------
Occupancy (note 15) 1,936 1,919 1,882
- -------------------------------------------------------------------------------------------------------------
Equipment 1,362 1,288 862
- -------------------------------------------------------------------------------------------------------------
Marketing 1,427 750 818
- -------------------------------------------------------------------------------------------------------------
Federal deposit insurance (note 18) 865 719 8,051
- -------------------------------------------------------------------------------------------------------------
Data processing 1,278 1,243 941
- -------------------------------------------------------------------------------------------------------------
General and administrative 3,985 3,257 2,937
- -------------------------------------------------------------------------------------------------------------
Charitable donation (notes 2 and 12) -- -- 13,419
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 25,457 23,145 39,206
- -------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 20,212 21,512 (646)
- -------------------------------------------------------------------------------------------------------------
Provision for income taxes (note 12) 7,240 7,687 1,083
- -------------------------------------------------------------------------------------------------------------
Net income (loss) 12,972 13,825 (1,729)
- -------------------------------------------------------------------------------------------------------------
Other Comprehensive Income:
- -------------------------------------------------------------------------------------------------------------
Unrealized (loss) gain on securities available for sale
arising during period (4,370) 1,952 (3,762)
- -------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included in net income 850 142 --
- -------------------------------------------------------------------------------------------------------------
Unrealized (loss) gain on securities available for sale (3,520) 2,094 (3,762)
- -------------------------------------------------------------------------------------------------------------
Income tax (benefit) expense (1,305) 770 (1,357)
- -------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (2,215) 1,324 (2,405)
- -------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 10,757 $ 15,149 $ (4,134)
- -------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ .97 $ .90 $ (.39)
- -------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ .95 $ .88 $ (.39)
- -------------------------------------------------------------------------------------------------------------
Average basic shares outstanding (note 1) 13,335 15,344 16,860
- -------------------------------------------------------------------------------------------------------------
Average diluted shares outstanding (note 1) 13,677 15,638 16,860
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Earnings (loss) per share and shares outstanding for 1996 cover the period from
July 2, 1996 (date of conversion) to December 31, 1996
See accompanying notes to consolidated financial statements.
22 . Ocean Financial Corp. . OCFC
<PAGE>
Consolidated Statements of Changes in
Stockholders' Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Employee
Other Stock
Additional Compre- Owner- Unearned
Common Paid-In Retained hensive ship Incentive Treasury
For The Years Ended 31, 1998, 1997 and 1996 Stock Capital Earnings (Loss)Income Plan Awards Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ -- $ 90,281 $ 2,070 $ -- $ -- $ -- $ 92,351
- ------------------------------------------------------------------------------------------------------------------------------------
Sale of 16,776,156 shares of common stock
in conversion 168 163,216 (84) -- -- -- -- 163,300
- ------------------------------------------------------------------------------------------------------------------------------------
Donation of 1,342,092 shares of common stock
to the Ocean Federal Foundation at par value 13 13,414 (6) -- -- -- -- 13,421
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition of 1,342,092 shares of stock by ESOP -- -- -- -- (13,421) -- -- (13,421)
- ------------------------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock -- -- -- -- 1,090 -- -- 1,090
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- 182 -- -- -- -- -- 182
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- (1,729) -- -- -- -- (1,729)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax,
unrealized loss on securities
available for sale -- -- -- (2,405) -- -- -- (2,405)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 181 176,812 88,462 (335) (12,331) -- -- 252,789
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition of 671,046 shares of common stock
for Incentive Awards -- (506) -- -- -- (9,670) -- (10,176)
- ------------------------------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- -- -- -- -- 1,773 -- 1,773
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase 2,412,528 shares of common stock -- -- -- -- -- -- (41,536) (41,536)
- ------------------------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock -- -- -- -- 1,428 -- -- 1,428
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- 917 -- -- -- -- 917
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividend - $.30 per share -- -- (4,800) -- -- -- -- (4,800)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 13,825 -- -- -- -- 13,825
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax,
unrealized gain on securities
available for sale -- -- -- 1,324 -- -- -- 1,324
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 181 177,223 97,487 989 (10,903) (7,897) (41,536) 215,544
- ------------------------------------------------------------------------------------------------------------------------------------
Earned Incentive Awards - -- -- -- -- 1,934 1,934
- ------------------------------------------------------------------------------------------------------------------------------------
Tax benefit of stock plans -- 463 -- -- -- -- -- 463
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase 1,078,292 shares of common stock -- -- -- -- -- -- (18,672) (18,672)
- ------------------------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock -- -- -- -- 1,727 -- -- 1,727
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- 623 -- -- -- -- 623
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividend - $.46 per share -- -- (6,470) -- -- -- -- (6,470)
- ------------------------------------------------------------------------------------------------------------------------------------
Acquisition of 422,500 shares of
common stock by ESOP -- -- -- -- (8,200) -- -- (8,200)
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options - 2,348 shares -- -- (7) -- -- -- 41 34
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 12,972 -- -- -- -- 12,972
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income net of tax,
unrealized loss on securities
available for sale -- -- -- (2,215) -- -- -- (2,215)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 181 $178,309 $103,982 $ (1,226) $(17,376) $ (5,963) $(60,167) $ 197,740
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Ocean Financial Corp. . OCFC . 23
<PAGE>
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ 12,972 $ 13,825 $ (1,729)
- --------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
- --------------------------------------------------------------------------------------------------------------
Donation of 1,342,092 shares of common stock to the
Ocean Federal Foundation -- -- 13,419
- --------------------------------------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment 1,472 1,354 760
- --------------------------------------------------------------------------------------------------------------
Amortization of Incentive Awards 1,934 1,773 --
- --------------------------------------------------------------------------------------------------------------
Amortization of ESOP 1,727 1,428 1,090
- --------------------------------------------------------------------------------------------------------------
ESOP adjustment 623 917 182
- --------------------------------------------------------------------------------------------------------------
Tax benefit of stock plans 463 -- --
- --------------------------------------------------------------------------------------------------------------
Amortization of servicing asset 572 197 204
- --------------------------------------------------------------------------------------------------------------
Amortization of deposit premium 52 -- --
- --------------------------------------------------------------------------------------------------------------
Net premium amortization in excess of discount
accretion on securities 3,190 3,498 1,761
- --------------------------------------------------------------------------------------------------------------
Net accretion of deferred fees and discounts in excess of
premium amortization on loans (533) (382) (487)
- --------------------------------------------------------------------------------------------------------------
Provision for loan losses 900 900 700
- --------------------------------------------------------------------------------------------------------------
Deferred taxes 1,749 529 (3,263)
- --------------------------------------------------------------------------------------------------------------
Net gain on sales of real estate owned (173) (457) (507)
- --------------------------------------------------------------------------------------------------------------
Net loss (gain) on sales of loans and securities
available for sale 622 132 (278)
- --------------------------------------------------------------------------------------------------------------
Proceeds from sales of mortgage loans held for sale 16,301 2,705 24,173
- --------------------------------------------------------------------------------------------------------------
Mortgage loans originated for sale (41,604) (2,008) (23,453)
- --------------------------------------------------------------------------------------------------------------
Decrease (increase) in interest and dividends receivable 1,244 (1,307) (2,277)
- --------------------------------------------------------------------------------------------------------------
Increase in other assets (6,092) (4,865) (830)
- --------------------------------------------------------------------------------------------------------------
Increase in other liabilities 6,283 874 577
- --------------------------------------------------------------------------------------------------------------
Total adjustments (11,270) 5,288 11,771
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,702 19,113 10,042
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
- --------------------------------------------------------------------------------------------------------------
Net increase in loans receivable (129,468) (107,948) (68,429)
- --------------------------------------------------------------------------------------------------------------
Loans purchased (29,207) -- --
- --------------------------------------------------------------------------------------------------------------
Proceeds from sales of mortgage-backed securities available for sale 47,974 19,006 --
- --------------------------------------------------------------------------------------------------------------
Purchase of investment securities available for sale (128,751) (51,154) (105,006)
- --------------------------------------------------------------------------------------------------------------
Purchase of mortgage-backed securities available for sale (181,095) (248,917) (251,004)
- --------------------------------------------------------------------------------------------------------------
Proceeds from maturities of investment securities available for sale 195,216 20,300 43,858
- --------------------------------------------------------------------------------------------------------------
Principal payments on mortgage-backed securities available for sale 204,359 164,291 117,048
- --------------------------------------------------------------------------------------------------------------
Purchases of Federal Home Loan Bank of New York stock (1,820) (6,523) (734)
- --------------------------------------------------------------------------------------------------------------
Proceeds from sales of real estate owned 2,320 3,277 2,503
- --------------------------------------------------------------------------------------------------------------
Purchases of premises and equipment (1,140) (1,533) (7,219)
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,612) (209,201) (268,983)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
- --------------------------------------------------------------------------------------------------------------
Acquisition of deposits 10,732 -- --
- --------------------------------------------------------------------------------------------------------------
Deposit premium (1,030) -- --
- --------------------------------------------------------------------------------------------------------------
Increase in deposits 47,755 42,034 8,172
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in Federal Home Loan Bank borrowings 9,600 11,600 (1,600)
- --------------------------------------------------------------------------------------------------------------
(Decrease) increase in securities sold under agreements to repurchase (6,092) 188,878 99,322
- --------------------------------------------------------------------------------------------------------------
Increase in advances by borrowers for taxes and insurance 323 941 511
- --------------------------------------------------------------------------------------------------------------
Net proceeds of common stock issuance -- -- 149,886
- --------------------------------------------------------------------------------------------------------------
Purchase of Incentive Award shares -- (10,176) --
- --------------------------------------------------------------------------------------------------------------
Exercise of stock options 34 -- --
- --------------------------------------------------------------------------------------------------------------
Dividends paid (6,470) (4,800) --
- --------------------------------------------------------------------------------------------------------------
Purchase of ESOP shares (8,200) -- --
- --------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (18,672) (41,536) --
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,980 186,941 256,291
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 8,070 (3,147) (2,650)
- --------------------------------------------------------------------------------------------------------------
Cash and due from banks at beginning of year 2,225 5,372 8,022
- --------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 10,295 $ 2,225 $ 5,372
- --------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
- --------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
- --------------------------------------------------------------------------------------------------------------
Interest $ 60,658 $ 54,863 $ 43,624
- --------------------------------------------------------------------------------------------------------------
Income taxes 30 7,246 4,231
- --------------------------------------------------------------------------------------------------------------
Non cash investing activities:
- --------------------------------------------------------------------------------------------------------------
Transfer of loans receivable to real estate owned 992 2,463 2,184
- --------------------------------------------------------------------------------------------------------------
Mortgage loans securitized into mortgage-backed securities $ 16,082 $ 2,025 $ 23,392
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
24 . Ocean Financial Corp. . OCFC
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
As more fully described in note 2, Ocean Federal Savings Bank (the "Bank")
converted from a mutual savings bank to a capital stock savings bank on July 2,
1996. As part of the conversion, Ocean Financial Corp. (the "Company") was
formed, acquired all of the Bank's conversion stock, and issued its common stock
in a subscription offering. The acquisition of the Bank's conversion stock was
accounted for similar to a pooling of interests and, therefore, the financial
condition and results of operations of the Bank prior to July 2, 1996 became the
financial condition and results of operations of the Company.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Ocean Federal Savings Bank, and its wholly-owned
subsidiaries, Ocean Federal Realty, Inc. and Ocean Investment Services Corp. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain amounts previously reported have been reclassified to conform to the
current year's presentation.
Business
The Bank provides a range of banking services to customers through a network of
branches in Ocean and Middlesex counties in New Jersey. The Bank is subject to
competition from other financial institutions; it is also subject to the
regulations of certain regulatory agencies and undergoes periodic examinations
by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated statement of financial condition and revenues and expenses for the
period then ended. Actual results could differ significantly from those
estimates and assumptions.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
settlement of loans. In connection with the determination of the allowances for
loan losses and Real Estate Owned (REO), management obtains independent
appraisals for significant properties.
Cash Equivalents
Cash equivalents consist of interest-bearing deposits in other financial
institutions and loans of Federal funds. For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
Investment and Mortgage-Backed Securities
Investment and mortgage-backed securities identified as held to maturity are
carried at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income using a method
which approximates a level yield over the estimated average life of the security
and adjusted, in the case of mortgage-backed securities, for actual prepayments.
Management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Company has the ability at the
time of purchase to hold securities until maturity, they are classified as held
to maturity.
Debt securities not intended to be held to maturity are classified as available
for sale. Securities available for sale include securities that management
intends to use as part of its asset/liability management strategy. Such
securities are carried at fair value and unrealized gains and losses, net of
related tax effect, are excluded from earnings, but are included as a separate
component of stockholders' equity. Gains or losses on the sale of such
securities are included in other income using the specific identification
method.
Loans Receivable
Loans receivable, other than loans held for sale, are stated at unpaid principal
balance, plus unamortized premiums less unearned discounts, net of deferred loan
origination and commitment fees, and the allowance for loan losses. Discounts
and premiums are recognized in income using the level-yield method over the
estimated lives of the loans.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized in interest income using the
level-yield method over the contractual life of the specifically identified
loans, adjusted for actual prepayments.
Loans in which interest is more than 90 days past due, including impaired loans,
and other loans in the process of foreclosure are placed on nonaccrual status.
Interest income previously accrued on these loans, but not yet received, is
reversed in the current period. Any interest subsequently collected is credited
to income in the period of recovery. A loan is returned to accrual status when
all amounts due have been received and the remaining principal balance is deemed
collectible.
A loan is considered impaired when it is deemed probable that the Company will
not collect all amounts due according to the contractual terms of the loan
agreement. The Company has defined the population of impaired loans to be all
non-accrual commercial real estate, multi-family and land loans. Impaired loans
are individually assessed to determine that the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
installment loans, are specifically excluded from the impaired loan portfolio.
Mortgage Loans Held for Sale
The Company may periodically sell all or part of its conforming loan
originations. Mortgage loans intended for sale are carried at the lower of
unpaid principal balance, net, or market value on an aggregate basis.
Allowance for Loan Losses
The adequacy of the allowance for loan losses is based on management's
evaluation of the Company's past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and current economic
conditions. Additions to the allowance arise from charges to operations through
the provision for loan losses or from the recovery of amounts previously charged
off. The allowance is reduced by loan charge-offs. Loans are charged-off when
management believes such loans are uncollectible.
Management believes that the allowance for losses on loans is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in the Company's market area. In addition, various regulatory
agencies, as an integral part of their routine examination process, periodically
review the Bank's allowance for losses on loans. Such agencies may require the
Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
Ocean Financial Corp. . OCFC . 25
<PAGE>
- --------------------------------------------------------------------------------
Real Estate Owned
Real estate owned is carried at the lower of cost or fair value, less estimated
costs to sell. When a property is acquired, the excess of the loan balance over
fair value is charged to the allowance for loan losses. A reserve for real
estate owned has been established to provide for subsequent declines in the fair
values of properties. Real estate owned is carried net of the related reserve.
Operating results from real estate owned, including rental income, operating
expenses, and gains and losses realized from the sales of real estate owned are
recorded as incurred.
Premises and Equipment
Land is carried at cost and premises and equipment, including leasehold
improvements, are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets or leases. Repair and maintenance items
are expensed and improvements are capitalized. Gains and losses on dispositions
are reflected in current operations.
Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Pension Plan
Pension plan costs for 1997 and 1996 are charged to expense based on the
actuarial computation of current and future benefits for employees. The Plan was
terminated on July 22, 1998 and all vested benefits were paid to participants.
Stock Based Compensation
The Company accounts for stock based compensation using the intrinsic value
method under Accounting Principles Board No. 25 and accordingly has recognized
no compensation expense under this method. The fair value pro forma disclosures
required by Statement of Financial Accounting Standards No. 123 are included in
note 14 -- Incentive Plan.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which 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 in
equity, such as unrealized gains or losses on securities available for sale.
Comparative financial statements provided for earlier periods have been
reclassified to conform with the provisions of this Statement.
Stock Dividend
Shares and related share amounts for prior periods have been adjusted for the
2-for-1 stock split effected in the form of a 100% stock dividend paid on
May 15, 1998.
Contributions
Contributions made are recognized as expenses in the period made and as
decreases of assets or increases of liabilities depending on the form of the
benefits given. Contributions made are measured at the fair values of the asset
given or, if made in the form of a settlement or cancellation of a donee's
liabilities, at the fair value of the liabilities canceled.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Diluted earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of shares of common stock outstanding plus potential common
stock, utilizing the treasury stock method. All share amounts exclude
unallocated shares of stock held by the Employee Stock Ownership Plan (ESOP).
Loss per share for 1996 was computed on net loss and average shares outstanding
for the period from July 2, 1996 (conversion date) through December 31, 1996.
The following reconciles shares outstanding for basic and diluted earnings per
share for the years ended December 31, 1998 and 1997 and for the period from
July 2, 1996 to December 31, 1996 (in thousands):
For the
period from
July 2, 1996
to December
Year Ended December 31, 1998 1997 31, 1996
- --------------------------------------------------------------------------------
Weighted average shares net of Treasury shares 15,174 17,112 18,118
- --------------------------------------------------------------------------------
Less: Unallocated ESOP shares (1,281) (1,160) (1,258)
- --------------------------------------------------------------------------------
Unallocated incentive award shares (558) (608) --
- --------------------------------------------------------------------------------
Average basic shares outstanding 13,335 15,344 16,860
- --------------------------------------------------------------------------------
Add: Effect of dilutive securities:
- --------------------------------------------------------------------------------
Stock options 171 144 --
- --------------------------------------------------------------------------------
Incentive awards 171 150 --
- --------------------------------------------------------------------------------
Average diluted shares outstanding 13,677 15,638 16,860
- --------------------------------------------------------------------------------
(2) Stock Form of Ownership
On August 17, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank with the concurrent formation of a
holding company. As part of the conversion, the Company was incorporated under
Delaware law on November 21, 1995. The Company completed its initial public
offering on July 2, 1996 with the issuance of 16,776,156 shares of common stock
to the Bank's eligible depositors and the Bank's Employee Stock Ownership Plan
(the "ESOP"), resulting in proceeds of $163.3 million (net of $4.5 million in
costs). The Company retained $81.6 million of the net proceeds and used the
remaining net proceeds to purchase all of the outstanding stock of the Bank.
Concurrent with the close of the conversion, an additional 1,342,092 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 contribution of $13.4 million was
reflected as a current expense 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.
At the time of the conversion, the Bank established a liquidation account with a
balance equal to its retained earnings at March 31, 1996. The balance in the
liquidation account at December 31, 1998 was approximately $22.9 million. The
liquidation account will be maintained for the benefit of eligible account
holders
26 . Ocean Financial Corp. . OCFC
<PAGE>
- --------------------------------------------------------------------------------
who continue to maintain their accounts at the Bank after the conversion. The
liquidation account will be reduced annually to the extent that the eligible
account holders have reduced their qualifying deposits as of each anniversary
date. Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, the
amount required for the liquidation account, or if such declaration and payment
would otherwise violate regulatory requirements.
(3) Regulatory Matters
Office of Thrift Supervision (OTS) regulations require savings institutions to
maintain minimum levels of regulatory capital. Under the regulations in effect
at December 31, 1998, the Bank was required to maintain a minimum ratio of
tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier 1
(core) capital to total adjusted assets of 3.0%; and a minimum ratio of total
(core and supplementary) capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally an
institution is considered well-capitalized if it has a Tier 1 ratio of at least
6.0%; and a total risk-based capital ratio of at least 10.0%. At December 31,
1998 and 1997 the Bank was considered well-capitalized.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1998 and 1997, compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a well-capitalized
institution (in thousands).
To be well
For capitalized
capital under prompt
adequacy corrective
Actual purposes action
- --------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
As of December 31, 1998:
- --------------------------------------------------------------------------------
Tangible capital $167,881 10.8% $ 23,371 1.5% $ -- -%
- --------------------------------------------------------------------------------
Core capital 167,881 10.8 46,742 3.0 77,903 5.0
- --------------------------------------------------------------------------------
Tier 1 risk-based
capital 167,881 21.8 30,757 4.0 46,135 6.0
- --------------------------------------------------------------------------------
Risk-based capital 175,113 22.8 61,514 8.0 76,892 10.0
- --------------------------------------------------------------------------------
As of December 31, 1997:
- --------------------------------------------------------------------------------
Tangible capital $178,592 11.9% $ 22,491 1.5% $ -- -%
- --------------------------------------------------------------------------------
Core capital 178,592 11.9 44,982 3.0 74,969 5.0
- --------------------------------------------------------------------------------
Tier 1 risk-based
capital 178,592 28.8 24,763 4.0 37,144 6.0
- --------------------------------------------------------------------------------
Risk-based capital 184,970 29.9 49,525 8.0 61,906 10.0
- --------------------------------------------------------------------------------
OTS regulations impose limitations upon all capital distributions by savings
institutions, like the Bank, such as dividends and payments to repurchase or
otherwise acquire shares. Based on these limitations, approximately $107,054,000
of the Bank's capital is unavailable for distribution to the Company.
(4) Investment Securities Available for Sale
The amortized cost and estimated market value of investment securities available
for sale at December 31, 1998 and December 31, 1997 are as follows (in
thousands):
December 31, 1998
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------
United States
Government and
agency obligations $ 59,983 $ 404 $ - $ 60,387
- --------------------------------------------------------------------------------
State and municipal
obligations 1,946 7 (18) 1,935
- --------------------------------------------------------------------------------
Corporates 74,976 - (2,727) 72,249
- --------------------------------------------------------------------------------
Equity investments 3,226 - (392) 2,834
- --------------------------------------------------------------------------------
$140,131 $ 411 $ (3,137) $137,405
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------
United States
Government and
agency obligations $204,992 $948 $(292) $ 205,648
- --------------------------------------------------------------------------------
State and municipal
obligations 393 7 - 400
- --------------------------------------------------------------------------------
Equity investments 1,170 139 - 1,309
- --------------------------------------------------------------------------------
$ 206,555 $1,094 $(292) $ 207,357
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of investment securities available
for sale, excluding equity investments, at December 31, 1998 by contractual
maturity, are shown below (in thousands). Actual maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. At December 31, 1998,
investment securities available for sale with an amortized cost and estimated
market value of $136,706,000 and $134,365,000, respectively, were callable prior
to the maturity date.
December 31, 1998
- --------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------
Due after one year through five years $ 35,182 $ 35,456
- --------------------------------------------------------------------------------
Due after five years through ten years 26,747 26,866
- --------------------------------------------------------------------------------
Due after 10 years 74,976 72,249
- --------------------------------------------------------------------------------
$136,905 $134,571
- --------------------------------------------------------------------------------
Ocean Financial Corp. . OCFC . 27
<PAGE>
- --------------------------------------------------------------------------------
(5) Mortgage-Backed Securities Available for Sale
The amortized cost and estimated market value of mortgage-backed securities
available for sale at December 31, 1998 and December 31, 1997 are as follows (in
thousands):
December 31, 1998
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------
FHLMC $106,762 $ 621 $(217) $107,166
- --------------------------------------------------------------------------------
FNMA 74,027 515 (108) 74,434
- --------------------------------------------------------------------------------
GNMA 63,041 81 (49) 63,073
- --------------------------------------------------------------------------------
Collaterized mortgage
obligations 137,230 178 (241) 137,167
- --------------------------------------------------------------------------------
$381,060 $1,395 $(615) $381,840
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- --------------------------------------------------------------------------------
FHLMC $ 245,414 $ 1,549 $(1,404) $ 245,559
- --------------------------------------------------------------------------------
FNMA 109,873 719 (601) 109,991
- --------------------------------------------------------------------------------
GNMA 97,714 465 (7) 98,172
- --------------------------------------------------------------------------------
Collaterized mortgage
obligations 3,378 48 - 3,426
- --------------------------------------------------------------------------------
$ 456,379 $ 2,781 $(2,012) $ 457,148
- --------------------------------------------------------------------------------
Gross losses on the sale of mortgage-backed securities available for sale of
$850,000 and $142,000 were realized in 1998 and 1997, respectively.
Collateralized mortgage obligations issued by FHLMC, FNMA and private interests
amounted to $15,705,000, $9,699,000 and $111,763,000, respectively, at December
31, 1998 and $2,274,000, $519,000 and $633,000, respectively, at December 31,
1997. The privately issued CMOs have generally been underwritten by large
investment banking firms with the timely payment of principal and interest on
these securities supported (credit enhanced) in varying degrees by either
insurance issued by a financial guarantee insurer, letters of credit or
subordination techniques. Substantially all such securities are triple "A"
rated by one or more of the nationally recognized securities rating agencies.
The privately-issued CMOs are subject to certain credit-related risks normally
not associated with U.S. Government Agency CMOs. Among such risks is the limited
loss protection generally provided by the various forms of credit enhancements
as losses in excess of certain levels are not protected. Furthermore, the credit
enhancement itself is subject to the credit worthiness of the enhancer. Thus, in
the event a credit enhancer does not fulfill its obligations, the CMO holder
could be subject to risk of loss similar to a purchaser of a whole loan pool.
Management believes that the credit enhancements are adequete to protect the
Company from losses and has, therefore, not provided an allowance for losses on
it's privately-issued CMOs.
The contractual maturities of mortgage-backed securities available for sale
generally exceed 20 years; however, the effective lives are expected to be
shorter due to anticipated prepayments.
(6) Loans Receivable, Net
A summary of loans receivable at December 31, 1998 and 1997 follows (in
thousands):
December 31, 1998 1997
Real estate mortgage:
- --------------------------------------------------------------------------------
One to four-family $ 844,129 $ 710,880
- --------------------------------------------------------------------------------
Commercial real estate, multi-family and land 42,008 25,699
- --------------------------------------------------------------------------------
FHA insured & VA guaranteed 500 668
- --------------------------------------------------------------------------------
886,637 737,247
- --------------------------------------------------------------------------------
Real estate construction 6,108 8,748
- --------------------------------------------------------------------------------
Consumer 51,785 45,417
- --------------------------------------------------------------------------------
Commercial 6,483 2,904
- --------------------------------------------------------------------------------
Total loans 951,013 794,316
- --------------------------------------------------------------------------------
Loans in process (1,996) (2,867)
- --------------------------------------------------------------------------------
Deferred fees (608) (1,133)
- --------------------------------------------------------------------------------
Unearned premium (discount) 62 (9)
- --------------------------------------------------------------------------------
Allowance for loan losses (7,460) (6,612)
- --------------------------------------------------------------------------------
(10,002) (10,621)
- --------------------------------------------------------------------------------
$ 941,011 $ 783,695
- --------------------------------------------------------------------------------
At December 31, 1998, 1997 and 1996, loans in the amount of $5,424,000,
$5,554,000 and $7,697,000, respectively, were three or more months delinquent or
in the process of foreclosure and the Company was not accruing interest income.
If these loans had continued to realize interest in accordance with their
contractual terms, approximately $270,000, $278,000 and $345,000 of additional
interest income would have been recognized for the years ended December 31,
1998, 1997 and 1996, respectively. The Company was not committed to lend
additional funds on any nonaccrual loans at December 31, 1998.
An analysis of the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 is as follows (in thousands):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 6,612 $ 6,021 $ 6,001
- --------------------------------------------------------------------------------
Provision charged to operations 900 900 700
- --------------------------------------------------------------------------------
Charge-offs (65) (337) (692)
- --------------------------------------------------------------------------------
Recoveries 13 28 12
- --------------------------------------------------------------------------------
Balance at end of year $ 7,460 $ 6,612 $ 6,021
- --------------------------------------------------------------------------------
At December 31, 1998, 1997 and 1996, the Company serviced loans for others in
the amount of $132,334,000, $144,230,000 and $152,717,000, respectively.
(7) Interest and Dividends Receivable
A summary of interest and dividends receivable at December 31, 1998 and 1997
follows (in thousands):
December 31, 1998 1997
- --------------------------------------------------------------------------------
Loans $ 4,644 $ 4,018
- --------------------------------------------------------------------------------
Investment securities 2,279 3,190
- --------------------------------------------------------------------------------
Mortgage-backed securities 2,897 3,856
- --------------------------------------------------------------------------------
$ 9,820 $11,064
- --------------------------------------------------------------------------------
28 . Ocean Financial Corp. . OCFC
<PAGE>
- --------------------------------------------------------------------------------
(8) Premises and Equipment, Net
Premises and equipment at December 31, 1998 and 1997 are summarized as follows
(in thousands):
December 31, 1998 1997
- --------------------------------------------------------------------------------
Land $ 3,195 $ 3,195
- --------------------------------------------------------------------------------
Buildings and improvements 11,038 10,922
- --------------------------------------------------------------------------------
Leasehold improvements 1,090 1,322
- --------------------------------------------------------------------------------
Furniture and equipment 6,532 5,613
- --------------------------------------------------------------------------------
Automobiles 144 150
- --------------------------------------------------------------------------------
Construction in progress 2 181
- --------------------------------------------------------------------------------
Total 22,001 21,383
- --------------------------------------------------------------------------------
Accumulated depreciation and amortization (8,054) (7,104)
- --------------------------------------------------------------------------------
$13,947 $ 14,279
- --------------------------------------------------------------------------------
(9) Real Estate Owned, Net
An analysis of the allowance for losses on real estate owned for the years ended
December 31, 1998, 1997 and 1996 is as follows (in thousands):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Balance at beginning of year $ 367 $ 402 $ 411
- --------------------------------------------------------------------------------
Losses charged off (31) (35) (9)
- --------------------------------------------------------------------------------
Balance at end of year $ 336 $ 367 $ 402
- --------------------------------------------------------------------------------
(10) Deposits
Deposits, including accrued interest payable of $238,000 and $175,000 at
December 31, 1998 and 1997, respectively, are summarized as follows (in
thousands):
December 31, 1998 1997
- --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Cost Amount Cost
- --------------------------------------------------------------------------------
Non-interest bearing accounts $ 22,154 - % $ 13,149 - %
- --------------------------------------------------------------------------------
NOW accounts 106,363 1.59 77,994 1.84
- --------------------------------------------------------------------------------
Money market deposit accounts 77,690 2.59 67,979 2.90
- --------------------------------------------------------------------------------
Savings accounts 172,036 2.03 163,202 2.28
- --------------------------------------------------------------------------------
Time deposits 657,008 5.35 654,440 5.69
- --------------------------------------------------------------------------------
$1,035,251 4.08% $976,764 4.52%
- --------------------------------------------------------------------------------
Included in time deposits at December 31, 1998 and 1997, respectively, is
$67,045,000 and $59,504,000 in deposits of $100,000 and over.
Time deposits at December 31, 1998 mature as follows (in thousands):
December 31, 1998
- ------------------------------------
1999 $450,709
- ------------------------------------
2000 119,432
- ------------------------------------
2001 50,672
- ------------------------------------
2002 22,668
- ------------------------------------
2003 7,018
- ------------------------------------
Thereafter 6,509
- ------------------------------------
$657,008
- ------------------------------------
Interest expense on deposits for the years ended December 31, 1998, 1997 and
1996 was as follows (in thousands):
Year ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
NOW accounts $ 1,517 $ 1,388 $ 1,371
- --------------------------------------------------------------------------------
Money market deposit accounts 2,026 2,028 1,994
- --------------------------------------------------------------------------------
Savings accounts 3,442 3,877 4,069
- --------------------------------------------------------------------------------
Time deposits 36,819 35,667 33,555
- --------------------------------------------------------------------------------
$43,804 $42,960 $40,989
- --------------------------------------------------------------------------------
(11) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase are as follows (in thousands):
1998 1997 1996
- --------------------------------------------------------------------------------
Balance at December 31 $282,108 $288,200 $ 99,322
- --------------------------------------------------------------------------------
Average Balance 282,590 209,089 9,803
- --------------------------------------------------------------------------------
Maximum amount outstanding
at any month end 302,736 294,826 99,322
- --------------------------------------------------------------------------------
Average interest rate:
During the year 5.85% 5.85% 5.81%
- --------------------------------------------------------------------------------
At December 31 5.33 6.01 5.69
- --------------------------------------------------------------------------------
At December 31, 1998, securities sold under agreements to repurchase matured as
follows: $117,108,000 in 1999; $30,000,000 in 2002; $40,000,000 in 2003;
$35,000,000 in 2004; $25,000,000 in 2005; and $35,000,000 in 2008. At December
31, 1998, $165,000,000 of the securities sold under agreements to repurchase
were callable prior to the maturity date. Securities sold under agreements to
repurchase are collateralized by U.S. Government agency and mortgage-backed
securities with an amortized cost and a market value of $291,552,000 and
$292,936,000, respectively, at December 31, 1998 and $301,117,000 and
$301,231,000, respectively, at December 31, 1997. The securities underlying the
agreements are not under the Company's control.
(12) Income Taxes
Legislation was enacted in August 1996 which repealed for tax purposes the
percentage of taxable income bad debt reserve method. As a result, the Company
must instead use the direct charge-off method to compute its bad debt deduction.
The legislation also requires the Company to recapture its post-1987 additions
to the tax bad debt reserve of $2,333,000. The Company has accrued for this
liability in the consolidated financial statements.
Retained earnings at December 31, 1998 includes approximately $10,750,000 for
which no provision for income tax has been made. This amount represents an
allocation of income to bad debt deductions for tax purposes only. Events that
would result in taxation of these reserves include failure to qualify as a bank
for tax purposes, distributions in complete or partial liquidation, stock
redemptions and excess distributions to shareholders. At December 31, 1998 the
Company had an unrecognized deferred tax liability of $3,870,000 with respect to
this reserve.
Ocean Financial Corp. . OCFC . 29
<PAGE>
- --------------------------------------------------------------------------------
The provision for income taxes for the years ended December 31, 1998, 1997 and
1996 consists of the following (in thousands):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $ 5,460 $ 6,921 $ 4,001
- --------------------------------------------------------------------------------
State 31 237 345
- --------------------------------------------------------------------------------
Total Current 5,491 7,158 4,346
- --------------------------------------------------------------------------------
Deferred:
Federal 1,746 584 (2,992)
- --------------------------------------------------------------------------------
State 3 (55) (271)
- --------------------------------------------------------------------------------
Total Deferred 1,749 529 (3,263)
- --------------------------------------------------------------------------------
$ 7,240 $ 7,687 $ 1,083
- --------------------------------------------------------------------------------
A reconciliation between the provision for income taxes and the expected amount
computed by multiplying income before provision for income taxes times the
applicable statutory Federal income tax rate for the years ended December 31,
1998, 1997 and 1996 is as follows (in thousands):
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Income (loss) before provision
for income taxes $ 20,212 $ 21,512 $ (646)
- --------------------------------------------------------------------------------
Applicable statutory
Federal income tax rate 35.0% 35.0% 35.0%
- --------------------------------------------------------------------------------
Computed "expected"
Federal income tax expense
(benefit) $ 7,074 $ 7,529 $ (226)
- --------------------------------------------------------------------------------
Increase(decrease) in Federal income
tax expense resulting from:
Valuation allowance -- -- 1,166
- --------------------------------------------------------------------------------
ESOP adjustment 218 316 62
- --------------------------------------------------------------------------------
State income taxes net of
Federal benefit 22 119 49
- --------------------------------------------------------------------------------
Other items, net (74) (277) 32
- --------------------------------------------------------------------------------
$ 7,240 $ 7,687 $ 1,083
- --------------------------------------------------------------------------------
Effective tax rate 35.8% 35.7% N/A
- --------------------------------------------------------------------------------
Included in other assets at December 31, 1998 and 1997 is a net deferred tax
asset of $3,750,000 and $4,194,000, respectively. In addition, included in other
liabilities at December 31, 1998 and 1997 is a current tax payable of $5,387,000
and $491,000, respectively.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below (in thousands).
December 31, 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan and real estate
owned losses per books $ 2,913 $ 2,601
- --------------------------------------------------------------------------------
Reserve for uncollected interest 110 113
- --------------------------------------------------------------------------------
Deferred compensation 409 331
- --------------------------------------------------------------------------------
Accrued pension expense 3 194
- --------------------------------------------------------------------------------
Premises and equipment,
differences in depreciation 244 286
- --------------------------------------------------------------------------------
Other reserves 199 173
- --------------------------------------------------------------------------------
Stock awards 677 652
- --------------------------------------------------------------------------------
Charitable donation 3,003 3,599
- --------------------------------------------------------------------------------
Unrealized loss on securities available for sale 727 --
- --------------------------------------------------------------------------------
Other 97 8
- --------------------------------------------------------------------------------
Total gross deferred tax assets 8,382 7,957
- --------------------------------------------------------------------------------
Less valuation allowance (1,166) (1,166)
- --------------------------------------------------------------------------------
Deferred tax assets, net 7,216 6,791
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Allowance for loan and real estate
owned losses for tax purposes (726) (858)
- --------------------------------------------------------------------------------
Unrealized gain on securities available for sale -- (578)
- --------------------------------------------------------------------------------
Excess servicing on sale of mortgage loans (130) (94)
- --------------------------------------------------------------------------------
Investments, discount accretion (20) (26)
- --------------------------------------------------------------------------------
Deferred loan and commitment fees (648) (371)
- --------------------------------------------------------------------------------
Undistributed income of real estate
investment trust subsidiary (1,942) (670)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,466) (2,597)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 3,750 $ 4,194
- --------------------------------------------------------------------------------
As disclosed in footnote 2, the Company, as part of the conversion, recorded a
charitable donation expense of $13,419,000. Under the Internal Revenue Code,
charitable donations are tax deductible subject to a limitation based on 10% of
the Company's annual taxable income. The Company, however, is able to carry
forward any unused portion of the deduction for five years following the year in
which the contribution is made. Based on the Company's estimate of taxable
income for 1996 and the carry forward period, $3,419,000 of the charitable
donation expense was considered non-tax deductible as it was unlikely that the
Company would realize sufficient earnings over the six year period to take the
full deduction. As a result, the Company has established a deferred tax
valuation allowance of $1,166,000 relating to the nondeductible expense.
The Company has determined that it is not required to establish a valuation
reserve for the remaining deferred tax asset account since it is "more likely
than not" that the remaining deferred tax assets will be realized through future
reversals of existing taxable temporary differences, future taxable income and
tax planning strategies. The conclusion that it is "more likely than not" that
the remaining deferred tax assets will be realized is based on the history of
earnings and the prospects for continued growth. Management will continue to
review the tax criteria related to the recognition of deferred tax assets.
30 . Ocean Financial Corp. . OCFC
<PAGE>
- --------------------------------------------------------------------------------
(13) Employee Benefit Plans
Employee Stock Ownership Plan
As part of the conversion, the Bank established an ESOP to provide retirement
benefits for eligible employees. All full-time employees are eligible to
participate in the ESOP after they attain age 21 and complete one year of
service during which they work at least 1,000 hours. Beginning April 1, 1997,
ESOP shares are first allocated to employees who also participate in the Bank's
Incentive Savings (401K) Plan in an amount equal to 50% of the first 6% of the
employee's contribution. During 1998 and 1997, 9,188 and 6,690 shares,
respectively, were either released or committed to be released under this
formula. The remaining ESOP shares are allocated among participants on the basis
of compensation earned during the year. Employees are fully vested in their ESOP
account after the completion of five years of credited service or completely if
service was terminated due to death, retirement, disability, or change in
control of the Company. ESOP participants are entitled to receive distributions
from the ESOP account only upon termination of service, which includes
retirement and death.
The ESOP originally borrowed $13,421,000 from the Company to purchase 1,342,092
shares of common stock issued in the conversion. On May 12, 1998, the initial
loan agreement was amended to allow the ESOP to borrow an additional $8,200,000
in order to fund the purchase of 422,500 shares of common stock. At the same
time the term of the loan was extended from the initial twelve years to thirty
years. The amended loan is to be repaid from discretionary contributions by the
Bank to the ESOP trust. The Bank intends to make contributions to the ESOP in
amounts at least equal to the principal and interest requirement of the debt,
assuming a fixed interest rate of 8.25%. The Bank's obligation to make such
contributions is reduced to the extent of any dividends paid by the Company on
unallocated shares and any investment earnings realized on such dividends. As of
December 31, 1998 and 1997, contributions to the ESOP, which were used to fund
principal and interest payments on the ESOP debt, totaled $3,111,000 and
$2,133,000, respectively. During 1998 and 1997, $601,000 and $368,000,
respectively, of dividends paid on unallocated ESOP shares were used for debt
service. At December 31, 1998 and 1997, the loan had an outstanding balance of
$17,615,000 and $11,184,000, respectively, and the ESOP had unallocated shares
of 1,373,814 and 1,087,884, respectively. At December 31, 1998, the unallocated
shares had a fair value of $22,840,000. The unamortized balance of the ESOP is
shown as unallocated common stock held by the ESOP and is reflected as a
reduction of stockholders' equity.
For the years ended December 31, 1998 and 1997, the Bank recorded compensation
expense related to the ESOP of $2,350,000 and $2,345,000, respectively,
including $623,000 and $917,000, respectively, representing adjustments to
expense to reflect the increase in the average fair value of allocated shares in
excess of cost. As of December 31, 1998, 261,109 shares had been allocated to
participants and 129,669 shares were committed to be released.
Pension Plan
Effective June 7, 1996, the Company froze benefit accruals under a qualified
noncontributory defined benefit pension plan (the "Plan") and subsequently
terminated the Plan on July 22, 1998. As a result of these actions, the Company
recognized a curtailment gain in 1996 of $24,000 and a termination loss in 1998
of $7,000.
The following table sets forth the Plan's latest available funded status and
amounts recognized at December 31, 1997 in the Company's consolidated statements
of financial condition (in thousands):
1997
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations
- - accumulated benefit obligation:
- --------------------------------------------------------------------------------
Vested $(1,625)
- --------------------------------------------------------------------------------
Non-vested (106)
- --------------------------------------------------------------------------------
Projected benefit obligation for service
rendered to date (1,731)
- --------------------------------------------------------------------------------
Plan assets at fair value, primarily a group
annuity contract 1,456
- --------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (275)
- --------------------------------------------------------------------------------
Unrecognized net loss 120
- --------------------------------------------------------------------------------
Unrecognized net transition asset (311)
- --------------------------------------------------------------------------------
Accrued pension cost (included in other liabilities) $ (466)
- --------------------------------------------------------------------------------
The components of net pension expense for the years ended December 31, 1997 and
1996 are as follows (in thousands):
1997 1996
- --------------------------------------------------------------------------------
Service cost - benefits earned during the year $-- $ 98
- --------------------------------------------------------------------------------
Interest cost on projected benefit obligation 113 136
- --------------------------------------------------------------------------------
Actual return on plan assets (81) (89)
- --------------------------------------------------------------------------------
Net amortization and deferral (39) (42)
- --------------------------------------------------------------------------------
Net pension (benefit) expense $ (7) $ 103
- --------------------------------------------------------------------------------
Assumptions used to develop the
net periodic pension cost are:
- --------------------------------------------------------------------------------
Discount rate 6.51% 6.51%
- --------------------------------------------------------------------------------
Expected long-term rate of return on assets 6.75 6.75
- --------------------------------------------------------------------------------
Rate of increase in compensation level N/A 5.00
- --------------------------------------------------------------------------------
The Bank also maintains an incentive savings plan for eligible employees. An
employee may make contributions to the plan of 1% to 15% of his or her
compensation. Prior to July 1, 1996, the Bank contributed 75% of the first 6% of
the employee's contribution to the employee's account. From to July 1, 1996
through March 31, 1997, the Bank contributed 50% of the first 6% of the
employees contribution to the employee's account. Effective March 31, 1997, the
Bank eliminated their matching obligation under this plan. The Bank's
contributions under this plan were $53,000 and $161,000 for the years ended
December 31, 1997 and 1996, respectively.
(14) Incentive Plan
On February 4, 1997, a special meeting of the Company's shareholders ratified
the Ocean Financial Corp. 1997 Incentive Plan (the "Incentive Plan"). The
Incentive Plan authorizes the granting of options to purchase Common Stock,
option-related awards and awards of Common Stock. The purpose of the Incentive
Plan is to attract and retain qualified personnel in key positions, provide
officers, employees and non-employee directors ("Outside Directors") with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company, promote the attention of management to other stockholder's
concerns and reward employees for outstanding performance. All officers, other
employees and Outside Directors of the Company and its affiliates are eligible
to receive awards under the Incentive Plan.
Ocean Financial Corp. . OCFC . 31
<PAGE>
- --------------------------------------------------------------------------------
During 1997, the Company acquired 671,046 shares in the open market at a cost of
$10,176,000. At December 31, 1998, 647,758 of these shares have been awarded to
officers and directors. Such amounts represent deferred compensation and have
been accounted for as a reduction of stockholders' equity. Awards vest at the
rate of 20% per year except that the Company has determined that certain awards
are also contingent upon attainment of certain performance goals by the Company,
which performance goals would be established by a committee of outside directors
("Committee"). The first and second annual installments will vest on the first
and second anniversary dates of the date of grant. Vesting of 25% of the third
annual installment, and 50% of each of the fourth and fifth annual installments,
will be subject to the attainment of performance goals established by the
Committee. The performance goals may be set by the Committee on an individual
basis, for all Stock Awards made during a given period of time, or for all Stock
Awards for indefinite periods. No Stock Award that is subject to a performance
goal is to be distributed to an employee until the Committee confirms that the
underlying performance goal has been achieved. No Stock Award that is subject to
a performance goal is to be distributed to an Outside Director until an
independent third party confirms that the underlying performance goal has been
achieved. The Company recorded compensation expense relating to stock awards of
$1,934,000 and $1,773,000 for the years ended December 31, 1998 and 1997,
respectively.
Under the Incentive Plan, the Company is authorized to issue up to 1,677,614
shares, subject to option. All options expire 10 years from the date of grant
and vest at the rate of 20% per year.
The company accounts for stock option awards using the intrinsic value method
and has recognized no compensation expense in 1998 and 1997. SFAS 123 permits
the use of the intrinsic value method; however, requires the Company to disclose
the pro forma net income and earnings per share as if the stock based
compensation had been accounted for using the fair value method. Had the
compensation costs for the Company's stock option plan been determined based on
the fair value method, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands except
per share data):
1998 1997
- --------------------------------------------------------------------------------
Net income:
- --------------------------------------------------------------------------------
As reported $ 12,972 $ 13,825
- --------------------------------------------------------------------------------
Pro forma 12,059 13,000
- --------------------------------------------------------------------------------
Basic earnings per share:
- --------------------------------------------------------------------------------
As reported $ .97 $ .90
- --------------------------------------------------------------------------------
Pro forma .90 .85
- --------------------------------------------------------------------------------
Diluted earnings per share:
- --------------------------------------------------------------------------------
As reported $ .95 $ .88
- --------------------------------------------------------------------------------
Pro forma .88 .83
- --------------------------------------------------------------------------------
Weighted average fair value of an option
share granted during the year $ 4.35 $ 4.08
- --------------------------------------------------------------------------------
The fair value of stock options granted by the Company was estimated through the
use of the Black-Scholes option pricing model applying the following
assumptions:
1998 1997
- --------------------------------------------------------------------------------
Risk-free interest rate 5.21% 6.25%
- --------------------------------------------------------------------------------
Expected option life 6 years 6 years
- --------------------------------------------------------------------------------
Expected volatility 25% 25%
- --------------------------------------------------------------------------------
Expected dividend yield 2.75% 2.50%
- --------------------------------------------------------------------------------
A summary of option activity for the years ended December 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------
Weighted Weighted
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 1,567,402 $ 14.46 -- --
- ---------------------------------------------------------------------------------------------
Granted 112,402 17.23 1,621,758 $ 14.45
- ---------------------------------------------------------------------------------------------
Exercised (2,348) 14.41 -- --
- ---------------------------------------------------------------------------------------------
Forfeited (34,629) 14.41 (54,356) 14.41
- ---------------------------------------------------------------------------------------------
Outstanding at
end of year 1,642,827 $ 14.67 1,567,402 $ 14.46
- ---------------------------------------------------------------------------------------------
At December 31, 1998 1997
- ---------------------------------------------------------------------------------------------
Options exercisable 310,527 None
- ---------------------------------------------------------------------------------------------
Range of exercise prices $13.94 -- $19.88 $14.41 -- $18.56
- ---------------------------------------------------------------------------------------------
Weighted average
remaining contractual life 8.2 years 9.1 years
- ---------------------------------------------------------------------------------------------
</TABLE>
(15) Commitments, Contingencies and Concentrations of Credit Risk
The Company, in the normal course of business, is party to financial instruments
and commitments which involve, to varying degrees, elements of risk in excess of
the amounts recognized in the consolidated financial statements. These financial
instruments and commitments include unused consumer lines of credit and
commitments to extend credit.
At December 31, 1998, the following commitments and contingent liabilities
existed which are not reflected in the accompanying consolidated financial
statements (in thousands):
December 31, 1998
- --------------------------------------------------------------------------------
Unused consumer and construction loan
lines of credit (primarily floating- rate) $16,363
- --------------------------------------------------------------------------------
Unused commercial loan lines of credit
(primarily floating rate) 3,864
- --------------------------------------------------------------------------------
Other commitments to extend credit:
- --------------------------------------------------------------------------------
Fixed Rate 34,938
- --------------------------------------------------------------------------------
Adjustable Rate 11,808
- --------------------------------------------------------------------------------
Floating Rate 560
- --------------------------------------------------------------------------------
The Company's fixed-rate loan commitments expire within 90 days of issuance and
carried interest rates ranging from 6.00% to 7.00% at December 31, 1998.
The Company's maximum exposure to credit losses in the event of nonperformance
by the other party to these financial instruments and commitments is represented
by the contractual amounts. The Company uses the same credit policies in
granting commitments and conditional obligations as it does for financial
instruments recorded in the consolidated statements of financial condition.
These commitments and obligations do not necessarily represent future cash flow
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's assessment of risk. The unused consumer and construction
loan lines of credit are collateralized by mortgages on real estate.
32 . Ocean Financial Corp. . OCFC
<PAGE>
- --------------------------------------------------------------------------------
The Bank has an available overnight line of credit with the Federal Home Loan
Bank of New York ("FHLB") for $50,000,000 which expires November 20, 1999. The
Bank also has available from the FHLB, a one-month overnight repricing line of
credit for $50,000,000 which expires November 20, 1999. When utilized, both
lines carry a floating interest rate of 1/8% over the current Federal funds rate
and are secured by the Bank's mortgage loans, mortgage-backed securities, U.S.
Government agency obligations and FHLB stock. As a member of the FHLB of New
York, the Company is required to maintain a minimum investment in the capital
stock of the Federal Home Loan Bank of New York, at cost, in an amount not less
than 1% of its outstanding home loans (including mortgage-backed securities) or
5% of its outstanding notes payable to the FHLB.
At December 31, 1998, the Company is obligated under noncancellable operating
leases for premises and equipment. Rental expense under these leases aggregated
approximately $573,000, $515,000 and $822,000 for the years ended December 31,
1998, 1997 and 1996 respectively.
The projected minimum rental commitments as of December 31, 1998 are as follows
(in thousands):
December 31 December 31, 1998
- -------------------------------------------------
1999 $504
- -------------------------------------------------
2000 453
- -------------------------------------------------
2001 377
- -------------------------------------------------
2002 353
- -------------------------------------------------
2003 279
- -------------------------------------------------
Thereafter 3,368
- -------------------------------------------------
$ 5,334
- -------------------------------------------------
The Company grants one to four-family first mortgage real estate loans and
multi-family first mortgage real estate loans to borrowers primarily located in
Ocean, Middlesex and Monmouth Counties, New Jersey. Its borrowers' abilities to
repay their obligations are dependent upon various factors including the
borrowers' income and net worth, cash flows generated by the underlying
collateral, value of the underlying collateral and priority of the Company's
lien on the property. Such factors are dependent upon various economic
conditions and individual circumstances beyond the Company's control; the
Company is, therefore, subject to risk of loss.
The Company believes its lending policies and procedures adequately minimize the
potential exposure to such risks and that adequate provisions for loan losses
are provided for all known and inherent risks. Collateral and/or guarantees are
required for all loans.
Contingencies
The Company is a defendant in certain claims and legal actions arising in the
ordinary course of business. Management and its legal counsel are of the opinion
that the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
(16) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods and assumptions are set forth below for the Company's financial
instruments.
Cash and due from banks
For cash and due from banks, the carrying amount approximates fair value.
Investments and Mortgage-backed securities
The fair value of investment and mortgage-backed securities is estimated based
on bid quotations received from securities dealers, if available. If a quoted
market price was not available, fair value was estimated using quoted market
prices of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
Federal Home Loan Bank of New York stock
The fair value for Federal Home Loan Bank of New York Stock is its carrying
value since this is the amount for which it could be redeemed. There is no
active market for this stock and the Company is required to maintain a minimum
balance based upon the unpaid principal of home mortgage loans and
mortgage-backed securities.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as residential mortgage,
construction, land, consumer and commercial. Each loan category is further
segmented into fixed and adjustable rate interest terms and by performing and
non-performing categories.
Fair value of performing loans was estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics, if applicable.
Fair value for significant non-performing loans is based on recent external
appraisals of collateral securing such loans, adjusted for the timing of
anticipated cash flows.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing
demand deposits, savings, and NOW and money market accounts, is equal to the
amount payable on demand. The fair value of certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank borrowings
Federal Home Loan Bank borrowings are short-term in nature and the carrying
amount approximates fair value.
Securities sold under agreements to repurchase
Fair value estimates are based on discounting contractual cash flows using rates
which approximate the rates offered for borrowings of similar remaining
maturities.
Commitments to extend credit, and to purchase or sell securities
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
Ocean Financial Corp. . OCFC . 33
<PAGE>
- --------------------------------------------------------------------------------
The estimated fair values of the Bank's financial instruments as of December 31,
1998 and 1997 are presented in the following tables (in thousands). Since the
fair value of off-balance sheet commitments approximate book value, these
disclosures are not included.
Book Fair
December 31, 1998 Value Value
- -----------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 10,295 $ 10,295
- -----------------------------------------------------------------------------
Investment securities available for sale 137,405 137,405
- -----------------------------------------------------------------------------
Mortgage-backed securities available for sale 381,840 381,840
- -----------------------------------------------------------------------------
Federal Home Loan Bank of New York stock 16,800 16,800
- -----------------------------------------------------------------------------
Loans receivable and mortgage loans held for sale 966,151 982,009
- -----------------------------------------------------------------------------
Financial Liabilities:
Deposits 1,035,251 1,042,528
- -----------------------------------------------------------------------------
Federal Home Loan Bank borrowings 30,000 30,000
- -----------------------------------------------------------------------------
Securities sold under agreements to repurchase $ 282,108 281,437
- -----------------------------------------------------------------------------
Book Fair
December 31, 1997 Value Value
- -----------------------------------------------------------------------------
Financial Assets:
Cash and due from banks $ 2,225 $ 2,225
- -----------------------------------------------------------------------------
Investment securities available for sale 207,357 207,357
- -----------------------------------------------------------------------------
Mortgage-backed securities available for sale 457,148 457,148
- -----------------------------------------------------------------------------
Federal Home Loan Bank of New York stock 14,980 14,980
- -----------------------------------------------------------------------------
Loans receivable and mortgage loans held for sale 783,695 807,651
- -----------------------------------------------------------------------------
Financial Liabilities:
Deposits 976,764 978,631
- -----------------------------------------------------------------------------
Federal Home Loan Bank borrowings 20,400 20,400
- -----------------------------------------------------------------------------
Securities sold under agreements to repurchase $288,200 $288,547
- -----------------------------------------------------------------------------
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include the mortgage banking operation, deferred tax assets, and
premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
(17) Parent-Only Financial Information
The following condensed statements of financial condition at December 31, 1998
and 1997 and condensed statements of operations and cash flows for the years
ended December 31, 1998 and 1997 and for the period from July 2, 1996 (date of
conversion) to December 31, 1996 for Ocean Financial Corp. (parent company only)
reflects the Company's investment in its wholly-owned subsidiary, the Bank,
using the equity method of accounting. The Company had no results of operations
prior to July 2, 1996.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 1997
- --------------------------------------------------------------------------------
(in thousands)
Assets
Cash and due from banks $ 7 $ 7
- --------------------------------------------------------------------------------
Advances to subsidiary Bank 7,639 9,931
- --------------------------------------------------------------------------------
Investment securities 2,834 10,780
- --------------------------------------------------------------------------------
ESOP loan receivable 17,615 11,184
- --------------------------------------------------------------------------------
Investment in subsidiary Bank 167,885 181,470
- --------------------------------------------------------------------------------
Other assets 2,143 3,320
- --------------------------------------------------------------------------------
Total Assets $198,123 $216,692
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Taxes payable $ 383 $ 1,148
- --------------------------------------------------------------------------------
Stockholders' Equity 197,740 215,544
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $198,123 $216,692
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS
For the
period from
July 2, 1996
to December
Year ended December 31, 1998 1997 31, 1996
- --------------------------------------------------------------------------------
(in thousands)
Dividend income -
Subsidiary Bank $ 18,000 $ -- $ --
- --------------------------------------------------------------------------------
Interest income -
Investment securities 354 2,889 --
- --------------------------------------------------------------------------------
Interest income -
Advances to subsidiary Bank 234 132 1,840
- --------------------------------------------------------------------------------
Interest income -
ESOP loan receivable 1,342 1,015 547
- --------------------------------------------------------------------------------
Total dividend and interest income 19,930 4,036 2,387
- --------------------------------------------------------------------------------
Other income -- 2 --
- --------------------------------------------------------------------------------
Charitable donation -- -- 13,419
- --------------------------------------------------------------------------------
Other operating expenses 421 383 152
- --------------------------------------------------------------------------------
Income (loss) before income taxes
and equity in (distribution in
excess of) undistributed earnings
of subsidiary Bank 19,509 3,655 (11,184)
- --------------------------------------------------------------------------------
Provision (benefit) for income taxes 562 1,233 (2,755)
- --------------------------------------------------------------------------------
Income (loss) before equity in
(distribution in excess of)
undistributed earnings of
subsidiary Bank 18,947 2,422 (8,429)
- --------------------------------------------------------------------------------
Equity in (distribution in excess of)
undistributed earnings
of subsidiary Bank (5,975) 11,403 1,817
- --------------------------------------------------------------------------------
Net income (loss) $ 12,972 $ 13,825 $ (6,612)
- --------------------------------------------------------------------------------
34 . Ocean Financial Corp. . OCFC
<PAGE>
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
For the
period from
July 2, 1996 to
December
Year ended December 31, 1998 1997 31, 1996
- --------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 12,972 $ 13,825 $ (6,612)
- --------------------------------------------------------------------------------
Donation of 1,342,092 shares of common
stock to the Ocean Federal Foundation -- -- 13,419
- --------------------------------------------------------------------------------
Decrease (increase) in advances to
subsidiary Bank 2,292 61,622 (71,553)
- --------------------------------------------------------------------------------
Equity in (distribution in excess of)
undistributed earnings
of subsidiary Bank 5,975 (11,403) (1,817)
- --------------------------------------------------------------------------------
Decrease (increase) in other assets 1,177 289 (3,470)
- --------------------------------------------------------------------------------
(Decrease) increase in taxes payable (765) 458 690
- --------------------------------------------------------------------------------
Reduction in Incentive Awards 1,934 1,773 --
- --------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 23,585 66,564 (69,343)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investment securities (2,046) (71,170) --
- --------------------------------------------------------------------------------
Sale of investment securities 10,000 60,000 --
- --------------------------------------------------------------------------------
Funding of ESOP loan receivable,
net of repayments (6,431) 1,118 (12,302)
- --------------------------------------------------------------------------------
Payments for investments in
subsidiary Bank -- -- (81,650)
- --------------------------------------------------------------------------------
Net cash provided by
(used in) investing activities 1,523 (10,052) (93,952)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds of common stock issuance -- -- 163,302
- --------------------------------------------------------------------------------
Dividends paid (6,470) (4,800) --
- --------------------------------------------------------------------------------
Purchase of Incentive Award shares -- (10,176) --
- --------------------------------------------------------------------------------
Purchase of treasury stock (18,672) (41,536) --
- --------------------------------------------------------------------------------
Exercise of stock options 34 -- --
- --------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (25,108) (56,512) 163,302
- --------------------------------------------------------------------------------
Net increase in cash and
due from banks -- -- 7
- --------------------------------------------------------------------------------
Cash and due from banks at
beginning of period 7 7 --
- --------------------------------------------------------------------------------
Cash and due from banks at end of period $ 7 $ 7 $ 7
- --------------------------------------------------------------------------------
(18) Recapitalization of Savings Association
Insurance Fund (SAIF)
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Saving Association Insurance Fund
(SAIF) member institutions, including the Bank, to recapitalize the SAIF and
spread the obligations for payment of Financing Corporation (FICO) bonds across
all SAIF and Bank Insurance Fund (BIF) members. The Federal Deposit Insurance
Corporation (FDIC) special assessment amounted to 65.7 basis points on SAIF
assessable deposits held as of March 31, 1995. The Company incurred a charge of
$5,720,000 before taxes as a result of the FDIC special assessment. This
legislation eliminated the substantial disparity between the amount that BIF and
SAIF member institutions had been paying for deposit insurance premiums.
Effective January 1, 1997, BIF members paid a portion of the FICO payment equal
to 1.3 basis points on BIF-insured deposits compared to 6.5 basis points on
SAIF-insured deposits, and will pay a pro rata share of the FICO payment on the
earlier of January 1, 2000, or the date upon which the last savings association
ceases to exist. The legislation also requires BIF and SAIF to be merged by
January 1, 1999, provided that subsequent legislation is adopted to eliminate
the savings association charter and no savings associations remain as of that
time.
Beginning January 1, 1997 SAIF assessment rates ranged from 0 to 27 basis points
based upon an institutions risk classification and capital group. Based upon its
current classification the rate applicable to the Bank is 0.
Ocean Financial Corp. . OCFC . 35
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
Ocean Financial Corp:
We have audited the consolidated statements of financial condition of Ocean
Financial Corp. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ocean Financial
Corp. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Short Hills, New Jersey
January 21, 1999
36 . Ocean Financial Corp. . OCFC
<PAGE>
Selected Consolidated Quarterly Financial Data
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended Dec. 31 Sept. 30 June 30 March 31
- ------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
- ------------------------------------------------------------------------------------------------
Interest income $ 26,618 $ 26,494 $ 26,219 $ 26,226
- ------------------------------------------------------------------------------------------------
Interest expense 15,283 15,660 15,310 15,146
- ------------------------------------------------------------------------------------------------
Net interest income 11,335 10,834 10,909 11,080
- ------------------------------------------------------------------------------------------------
Provision for loan losses 225 225 225 225
- ------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 11,110 10,609 10,684 10,855
- ------------------------------------------------------------------------------------------------
Other income (loss) (139) 876 1,053 621
- ------------------------------------------------------------------------------------------------
Operating expenses 6,499 6,304 6,673 5,981
- ------------------------------------------------------------------------------------------------
Income before provision for income taxes 4,472 5,181 5,064 5,495
- ------------------------------------------------------------------------------------------------
Provision for income taxes 1,547 1,845 1,862 1,986
- ------------------------------------------------------------------------------------------------
Net income $ 2,925 $ 3,336 $ 3,202 $ 3,509
- ------------------------------------------------------------------------------------------------
Basic earnings per share $ .23 $ .25 $ .23 $ .26
- ------------------------------------------------------------------------------------------------
Diluted earnings per share $ .23 $ .25 $ .23 $ .24
- ------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------
Interest income $ 26,233 $ 25,568 $ 24,310 $ 22,545
- ------------------------------------------------------------------------------------------------
Interest expense 15,407 14,658 13,510 12,033
- ------------------------------------------------------------------------------------------------
Net interest income 10,826 10,910 10,800 10,512
- ------------------------------------------------------------------------------------------------
Provision for loan losses 225 225 225 225
- ------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 10,601 10,685 10,575 10,287
- ------------------------------------------------------------------------------------------------
Other income 776 572 575 586
- ------------------------------------------------------------------------------------------------
Operating expenses 6,116 5,724 5,845 5,460
- ------------------------------------------------------------------------------------------------
Income before provision for income taxes 5,261 5,533 5,305 5,413
- ------------------------------------------------------------------------------------------------
Provision for income taxes 1,781 1,993 1,889 2,024
- ------------------------------------------------------------------------------------------------
Net income $ 3,480 $ 3,540 $ 3,416 $ 3,389
- ------------------------------------------------------------------------------------------------
Basic earnings per share $ .24 $ .24 $ .22 $ .20
- ------------------------------------------------------------------------------------------------
Diluted earnings per share $ .24 $ .23 $ .21 $ .20
- ------------------------------------------------------------------------------------------------
</TABLE>
Ocean Financial Corp. . OCFC . 37
<PAGE>
Ocean Financial Corp.
Ocean Federal Savings Bank
- --------------------------------------------------------------------------------
Ocean Financial Corp.
Ocean Federal Savings Bank
BOARD OF DIRECTORS
Michael E. Barrett
Executive Vice President
Ocean Federal Savings Bank
Thomas F. Curtin
Partner
The Foristall Company.
Carl Feltz, Jr.
Principal
Feltz Associates
John R. Garbarino
President and Chairman of the Board
Robert E. Knemoller
Retired, Executive Officer
Ocean Federal Savings Bank
Donald E. McLaughlin
Owner
Donald E. McLaughlin, CPA, P.C.
Diane F. Rhine
Owner
Citta & Cobb, Inc.
Frederick E. Schlosser
Retired
Steinbach & Co.
James T. Snyder
Retired
Proprietor, Wallach's Inc.
Roy M. Hyde
Director Emeritus
OCEAN FINANCIAL CORP.
EXECUTIVE OFFICERS
John R. Garbarino
President and Chairman of the Board
Michael J. Fitzpatrick
Executive Vice President
and Chief Financial Officer
John K. Kelly
Senior Vice President
and Corporate Secretary
Ocean Federal Savings Bank
CORPORATE OFFICERS
John R. Garbarino
President and Chief Executive Officer
Michael E. Barrett
Executive Vice President
Residential Loan Division
Michael J. Fitzpatrick
Executive Vice President and
Chief Financial Officer
Karl E. Reinheimer
Executive Vice President and
Chief Operating Officer
John K. Kelly
Senior Vice President and
General Counsel
Barbara A. Reitmeyer
Corporate Secretary
SENIOR VICE PRESIDENTS
James J. Flynn
Mortgage Lending
William J. Ruckert, III
Commercial Lending
Kirby H. Wood
Retail Banking
Stephen J. Wilson
Retail Banking
VICE PRESIDENTS
Philip J. Bailey
Deposit Services
M. Eileen Bergin
Legal
Jennifer Bizub
Human Resources
Victoria J. Bonavito
Branch Administration
Owen J. Bonner
Loan Review and
Quality Control
William J. Glinski
Treasurer
Jill Apito Hewitt
Marketing
Mary C. Huff
Commercial Lending
Percy Keynton
Internal Audit
Frank J. Recca
Loan Servicing
Kevin B. Runyon
Information Technology
John Van Eenennaam
Controller
Barbara Yack
Branch Administration
Ocean Federal Savings Bank
ASSISTANT VICE PRESIDENTS
Elizabeth M. Alexander
Douglas A. Blyth
Christine B. Boldt
Patricia A. Broadfoot
Lorraine L. Campanile
Sharon L. Danielson
Judith A. DiLauro
Edward R. Fryer
Michael L. Frankovich
Pauline A. Higgins
Sharon Labash
Jeanette M. Loftus
Lilia C. Madero
Karen A. Olsen
Marvin L. Penn
Lynn Rhoads
Catherine R. Rollo
Doreen L. Rowe
M. Jane Ruhnke
George E. Ryll
Adrienne L. Sanchez
Frank A. Scarpone
Matthew J. Schwing
Patricia M. Siciliano
Lorraine P. Smith
Peggy S. Staab
Michael T. Stocko
Nancy Uffer
Lois A. Velardo
ASSISTANT SECRETARY
Geraldine J. LaBrutto
38 . Ocean Financial Corp. . OCFC
<PAGE>
Banking Offices
- ---------------
BERKELEY
Holiday City Plaza
(732)341-4100
Lois A. Velardo
Manager
Holiday City Plaza III
(732)914-0137
Lorraine P. Smith
Manager
BRICK
Main Office
321 Chambers Bridge Road
(732)477-5151
Douglas A. Blyth
Manager
70 Brick Boulevard
(732)477-3800
Patricia M. Siciliano
Manager
CONCORDIA
Concordia Shopping Mall
(609)395-7080
Lorraine L. Campanile
Manager
LACEY
900 Lacey Road
(609)242-1800
Jeanette M. Loftus
Manager
POINT PLEASANT BEACH
701 Arnold Avenue
(732)892-8500
Sharon Labash
Manager
POINT PLEASANT BORO
2400 Bridge Avenue
(732)899-2800
Frank A. Scarpone
Manager
TOMS RIVER
975 Hooper Avenue
(732)244-8989
Lilia C. Madero
Manager
The Shoppes at Lake Ridge
147 Route 70, Suite 1
(732)363-2727
Judith A. DiLauro
Manager
WHITING
Whiting Shopping Center
(732)849-0500
Catherine R. Rollo
Manager
Shareholder Information
- -----------------------
ADMINISTRATIVE OFFICES
975 Hooper Avenue
Toms River, NJ 08754-2009
(732)240-4500
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders will be held on April 22, 1999 at 10 a.m. at
the Crystal Point Yacht Club at 3900 River Road at the intersection of State
Highway 70, Point Pleasant, New Jersey.
INVESTOR RELATIONS
Copies of the Company's earnings releases and financial publications, including
the annual report on Form 10-K (without exhibits) filed with the Securities and
Exchange Commission are available without charge by contacting:
Sally Dennis
Ocean Financial Corp.
975 Hooper Avenue
Toms River, New Jersey 08754-2009
(732)240-4500, ext. 7516
STOCK TRANSFER AGENT AND REGISTRAR
Shareholders wishing to change the name, address or ownership of stock, to
report lost certificates or to consolidate accounts are asked to contact the
Company's stock registrar and transfer agent directly:
American Stock Transfer and Trust Co.
Shareholder Relations Department
40 Wall Street, 46th Floor
New York, NY 10005
(800)937-5449
INDEPENDENT AUDITORS
KPMG LLP
150 John F. Kennedy Parkway
Short Hills, NJ 07078
SECURITIES COUNSEL
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, NW
Washington, DC 20016
Market Information for Common Stock
- -----------------------------------
Ocean Financial Corp.'s common stock is traded on the Nasdaq National Market
under the symbol OCFC. The stock is customarily listed as OCEANFIN in the Asbury
Park Press and the Ocean County Observer. Shares of the common stock were made
available to qualified subscribers at $10.00 per share during the initial
offering. The table below shows the reported high and low sales prices of the
common stock during the periods indicated in 1998 and 1997. Share prices 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.
1998
- -------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------
High 19 20 19 9/16 16 5/8
Low 16 5/8 18 1/4 13 7/8 12
1997
- -------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------
High 16 1/4 17 13/16 18 1/4 19 3/8
Low 12 11/16 13 7/16 16 1/8 17 1/16
As of December 31, 1998, the Company had approximately 6,000 shareholders of
record, including the number of persons or entities holding stock in nominee or
street name through various brokers and banks.
Ocean Financial Corp. . OCFC . 39
<PAGE>
Ocean Financial Corp.
975 Hooper Avenue
Toms River, NJ 08754-2009
(732) 240-4500
NASDAQ . OCFC
Member FDIC . Equal Housing Lender [LOGO] . Equal Opportunity Lender
