<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended December 31, 1999
Commission File No.: 0-27428
OceanFirst Financial Corp.
(exact name of registrant as specified in its charter)
DELAWARE 22-3412577
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
975 Hooper Avenue, Toms River, New Jersey 08753
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 240-4500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, i.e., persons other than the directors and executive officers
of the registrant, was $176,646,292, based upon the last sales price as quoted
on The Nasdaq Stock Market for March 20, 2000.
The number of shares of Common Stock outstanding as of March 20, 2000
is 12,088,657.
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Stockholders for the year ended December 31, 1999,
is incorporated by reference into Part II of this Form 10-K.
The Proxy Statement for the 2000 Annual Meeting of Shareholders is
incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 30
Item 3. Legal Proceedings........................................................................... 31
Item 4. Submission of Matters to a Vote of Security Holders......................................... 31
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................................................... 31
Item 6. Selected Financial Data..................................................................... 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................... 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 32
Item 8. Financial Statements and Supplementary Data................................................. 32
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................................................... 32
PART III
Item 10 Directors and Executive Officers of the Registrant.......................................... 32
Item 11 Executive Compensation...................................................................... 32
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................................................. 32
Item 13 Certain Relationships and Related Transactions.............................................. 32
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................................................. 33
</TABLE>
SIGNATURES
<PAGE>
PART I
Item 1. Business
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General
OceanFirst Financial Corp.(formerly Ocean Financial Corp.) (the "Company") was
organized by the Board of Directors of OceanFirst Bank (formerly Ocean Federal
Savings Bank) (the "Bank") for the purpose of acquiring all of the capital stock
of the Bank issued in connection with the Bank's conversion from mutual to stock
form, which was completed on July 2, 1996. At December 31, 1999, the Company had
consolidated total assets of $1.6 billion and total equity of $167.5 million.
The Company was incorporated under Delaware law and is a savings and loan
holding company subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). Currently, the Company does not transact any
material business other than through its subsidiary, the Bank.
The Bank was originally founded as a state-chartered building and loan
association in 1902, and converted to a federal savings and loan association in
1945. The Bank became a federally chartered mutual savings bank in 1989. The
Bank's principal business has been and continues to be attracting retail
deposits from the general public in the communities surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in single-family, owner-occupied
residential mortgage loans within its market area. To a significantly lesser
extent, the Bank invests in commercial real estate, multi-family, construction,
consumer and commercial loans. The Bank also invests in mortgage-backed
securities, securities issued by the U.S. Government and agencies thereof, and
other investments permitted by applicable law and regulations. The Bank may
periodically sell newly originated 30-year, fixed-rate mortgage loans to the
secondary market. Loan sales come from loans held in the Bank's portfolio
designated as being held for sale or originated during the period and being so
designated. The Bank retains all of the servicing rights of loans sold. The
Bank's revenues are derived principally from interest on its loans, and to a
lesser extent, interest on its investment and mortgage-backed securities. The
Bank also receives income from fees and service charges on loan and deposit
products and from the sale of alternative investment products, e.g., mutual
funds, annuities and life insurance. The Bank's primary sources of funds are
deposits, principal and interest payments on loans and mortgage-backed
securities, Federal Home Loan Bank ("FHLB") advances and other borrowings and to
a lesser extent, investment maturities and proceeds from the sale of loans.
In addition to historical information, this Form 10-K 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 detail herein and in the Company's Annual Report to Stockholders.
<PAGE>
Market Area and Competition
The Bank is a community-oriented financial institution, offering a wide variety
of financial services to meet the needs of the communities it serves. The Bank
conducts its business through an administrative and branch office located in
Toms River, Ocean County, New Jersey, and twelve additional branch offices, ten
of which are located in Ocean County and with one branch each located in
Middlesex and Monmouth Counties, New Jersey. The Bank's deposit gathering base
is concentrated in the communities surrounding its offices. While its lending
area extends throughout New Jersey, most of the Bank's mortgage loans are
secured by properties located in Ocean County and Southern Monmouth County.
The Bank is the oldest and largest community-based financial institution
headquartered in Ocean County, New Jersey, which is located along the central
New Jersey shore. Ocean County is among the fastest growing population areas in
New Jersey and has a significant number of retired residents who have
traditionally provided the Bank with a stable source of deposit funds. The
economy in the Bank's primary market area is based upon a mixture of service and
retail trade. Other employment is provided by a variety of wholesale trade,
manufacturing, federal, state and local government, hospitals and utilities. The
area is also home to commuters working in New Jersey suburban areas around New
York and Philadelphia.
The Bank faces significant competition both in making loans and in attracting
deposits. The State of New Jersey has a high density of financial institutions,
many of which are branches of significantly larger institutions which have
greater financial resources than the Bank, all of which are competitors of the
Bank to varying degrees. The Bank's competition for loans comes principally from
commercial banks, savings banks, savings and loan associations, credit unions,
mortgage banking companies and insurance companies. Its most direct competition
for deposits has historically come from commercial banks, savings banks, savings
and loan associations and credit unions. The Bank faces additional competition
for deposits from short-term money market funds, other corporate and government
securities funds and from other financial service institutions such as brokerage
firms and insurance companies.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
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conventional first mortgage loans secured by one- to four-family residences. At
December 31, 1999, the Bank had total loans outstanding of $1.054 billion, of
which $917.5 million or 87.04% of total loans, were one- to four-family,
residential mortgage loans. The remainder of the portfolio consisted of $57.1
million of commercial real estate, multi-family and land loans, or 5.42% of
total loans; $7.8 million of real estate construction loans, or .74% of total
loans; $56.0 million of consumer loans, primarily home equity loans and lines of
credit, equaling 5.32% of total loans; and $15.6 million of commercial loans, or
1.48% of total loans. The Bank had no loans held for sale at December 31, 1999.
At that same date, 44.61% of the Bank's total loans had adjustable interest
rates.
The types of loans that the Bank may originate are subject to federal and state
law and regulations. Interest rates charged by the Bank on loans are affected by
the demand for such loans and the supply of money available for lending purposes
and the rates offered by competitors. These factors are, in turn, affected by,
among other things, economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, and legislative tax policies.
2
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The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------- --------- -------- -------- ------- --------- ------- --------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family............ $ 917,481 87.04% $869,769 89.10% $711,548 89.57% $628,525 91.05% $575,010 92.01%
Commercial real estate,
multi-family and land........ 57,142 5.42 42,008 4.30 25,699 3.24 15,634 2.26 14,939 2.39
Construction................... 7,791 .74 6,108 .63 8,748 1.10 9,287 1.35 8,153 1.30
Consumer (1)..................... 56,040 5.32 51,785 5.31 45,417 5.72 36,860 5.34 26,867 4.30
Commercial loans................. 15,569 1.48 6,483 .66 2,904 .37 - - - -
--------- ------ -------- ------ -------- ------- -------- ------ -------- ------
Total loans................ 1,054,023 100.00% 976,153 100.00% 794,316 100.00% 690,306 100.00% 624,969 100.00%
======= ======= ======= ======= =======
Less:
Undisbursed loan funds......... 2,790 1,996 2,867 3,517 2,687
Unamortized (premium) discount
net (43) (62) 9 11 12
Deferred loan fees............. 78 608 1,133 1,302 1,679
Allowance for loan losses...... 8,223 7,460 6,612 6,021 6,001
--------- -------- -------- -------- --------
Total loans, net........... 1,042,975 966,151 783,695 679,455 614,590
Less:
Mortgage loans held for sale... - 25,140 - 727 1,894
--------- -------- -------- -------- --------
Loans receivable, net........ $1,042,975 $941,011 $783,695 $678,728 $612,696
========== ======== ======== ======== ========
Total loans:
Adjustable rate................ $ 470,238 44.61% $458,809 47.00% $475,533 59.87% $437,706 63.41% $405,485 64.88%
Fixed rate..................... 583,785 55.39 517,344 53.00 318,783 40.13 252,600 36.59 219,484 35.12
--------- ------ -------- ------ -------- ------- -------- ------ -------- ------
$1,054,023 100.00% $976,153 100.00% $794,316 100.00% $690,306 100.00% $624,969 100.00%
========== ====== ======== ======= ======== ====== ======== ======= ======== ======
</TABLE>
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(1) Consists primarily of home equity loans and lines of credit, and to a lesser
extent, loans on savings accounts, automobile and student loans.
3
<PAGE>
Loan Maturity. The following table shows the contractual maturity of the Bank's
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total loans at December 31, 1999. There were no loans held for sale at December
31, 1999. The table does not include principal repayments. Principal repayments,
including prepayments, on total loans was $185.7 million, $182.2 million and
$120.9 million for the years ended December 31, 1999, 1998, and 1997,
respectively.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------
Commercial
One- to real estate,
Four- multi-family
Family and land Construction
------------------ -------------------- ---------------
(In thousands)
<S> <C> <C> <C>
One year or less........................................... $ 28,121 $ 5,965 $7,791
--------- -------- ------
After one year:
More than one year to three years....................... 62,568 8,743 -
More than three years to five years..................... 64,320 14,432 -
More than five years to 10 years........................ 168,012 18,621 -
More than 10 years to 20 years.......................... 300,582 5,354 -
More than 20 years...................................... 293,878 4,027 -
--------- -------- ------
Total due after December 31, 2000....................... 889,360 51,177 -
--------- -------- ------
Total amount due........................................ $ 917,481 $ 57,142 $7,791
========= ======== ======
Less:
Undisbursed loan funds...........................
Unamortized premium, net.........................
Deferred loan fees...............................
Allowance for loan losses........................
Total loans, net........................................
Less: Mortgage loans held for sale........................
Loans receivable, net......................................
<CAPTION>
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Total
Commercial Loans
Consumer Loans Receivable
-------------- ----------------- -------------
<S> <C> <C> <C>
One year or less........................................... $ 6,348 $ 6,799 $ 55,024
-------- -------- ------------
After one year:
More than one year to three years....................... 11,087 2,854 85,252
More than three years to five years..................... 9,937 4,775 93,464
More than five years to 10 years........................ 17,374 1,141 205,148
More than 10 years to 20 years.......................... 11,294 - 317,230
More than 20 years...................................... - - 297,905
-------- -------- ------------
Total due after December 31, 2000....................... 49,692 8,770 998,999
-------- -------- ------------
Total amount due........................................ $ 56,040 $ 15,569 1,054,023
======== ========
Less:
Undisbursed loan funds........................... 2,790
Unamortized premium, net......................... (43)
Deferred loan fees............................... 78
Allowance for loan losses........................ 8,223
------------
Total loans, net........................................ 1,042,975
Less: Mortgage loans held for sale........................ -
------------
Loans receivable, net...................................... $ 1,042,975
============
</TABLE>
4
<PAGE>
The following table sets forth at December 31, 1999, the dollar amount of total
loans receivable contractually due after December 31, 2000, and whether such
loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 2000
--------------------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family.................... $512,743 $376,617 $889,360
Commercial real estate,
multi-family and land............... 23,739 27,438 51,177
Consumer.................................... 24,834 24,858 49,692
Commercial loans............................ 4,487 4,283 8,770
-------- -------- --------
Total loans receivable............... $565,803 $433,196 $998,999
======== ======== ========
</TABLE>
Origination, Sale, Servicing and Purchase of Loans. The Bank's residential
- ---------------------------------------------------
mortgage lending activities are conducted primarily by commissioned loan
representatives in the exclusive employment of the Bank and through the Bank's
branch offices. The Bank originates both adjustable-rate and fixed-rate loans.
The Bank's ability to originate loans is dependent upon the relative customer
demand for fixed-rate or adjustable-rate mortgage loans, which is affected by
the current and expected future level of interest rates. The Bank may
periodically sell part of the 30-year, fixed-rate mortgage loans that it
originates and retain for portfolio ARM loans and shorter term fixed-rate loans
with maturities of 15 years or less. The Bank retains all servicing of the loans
sold. See "- Loan Servicing." At December 31, 1999 there were no loans
categorized as held for sale. In the past, the Bank has also originated loans
through commitments negotiated with correspondent mortgage origination firms.
The following table sets forth the Bank's loan originations, purchases, sales,
principal repayments and loan activity for the periods indicated.
<TABLE>
<CAPTION>
For the Year December 31,
------------------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Total loans:
Beginning balance................................ $ 976,153 $ 794,316 $ 690,306
----------- ---------- ---------
Loans originated:
One- to four-family..................... 240,873 287,842 182,519
Commercial real estate,
multi-family and land............... 28,130 27,354 16,709
Construction............................ 6,552 4,826 4,743
Consumer................................ 28,516 28,203 22,982
Commercial.............................. 9,780 3,981 3,177
----------- ---------- ---------
Total loans originated............ 313,851 352,206 230,130
----------- ---------- ---------
Loans purchased - 29,207 -
----------- ---------- ---------
Total............................. 1,290,004 1,175,729 920,436
Less:
Principal repayments........................ 185,695 182,170 120,905
Sales of loans.............................. 49,177 16,414 2,752
Transfer to REO............................. 1,109 992 2,463
----------- ---------- ---------
Total loans....................... $ 1,054,023 $ 976,153 $ 794,316
=========== ========== =========
</TABLE>
5
<PAGE>
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate and
- ------------------------------------
adjustable-rate mortgage loans secured by one- to four-family residences with
maturities up to 30 years. Substantially all of such loans are secured by
property located in the Bank's primary market area. Loan originations are
generally obtained from commissioned loan representatives and their contacts
with the local real estate industry, members of the local communities and the
Bank's existing or past customers.
At December 31, 1999, the Bank's total loans outstanding were $1.054 billion, of
which $917.5 million, or 87.04%, were one- to four-family residential mortgage
loans, primarily single-family and owner-occupied. To a lesser extent, the Bank
also makes mortgage loans secured by seasonal second homes. The average size of
the Bank's one- to four-family mortgage loan was approximately $94,000 at
December 31, 1999. The Bank currently offers a number of ARM loan programs with
interest rates which adjust every one-, three-, five- or ten-years. The Bank's
ARM loans generally provide for periodic (not less than 2%) and overall (not
more than 6%) caps on the increase or decrease in the interest rate at any
adjustment date and over the life of the loan. The interest rate on these loans
is indexed to the applicable one-, three-, five- or ten-year U.S. Treasury
constant maturity yield, with a repricing margin which ranges generally from
2.75% to 3.25% above the index. The Bank also offers three-, five-,and seven
- -year ARM loans which operate as fixed-rate loans for three, five, or seven
years and then convert to one-year ARM loans for the remainder of the term. The
ARM loans are then indexed to a margin of generally 2.75% to 3.25% above the
one-year U.S. Treasury constant maturity yield.
Generally, ARM loans pose credit risks different than risks inherent in
fixed-rate loans, primarily because as interest rates rise, the payments of the
borrower rise, thereby increasing the potential for delinquency and default. At
the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. In order to minimize risks, borrowers of
one-year ARM loans with a loan-to-value ratio of 75% or less are qualified at
the fully-indexed rate (the applicable U.S. Treasury index plus the margin,
rounded to the nearest one-eighth of one percent), and borrowers of one-year ARM
loans with a loan-to-value ratio over 75% are qualified at the higher of the
fully indexed rate or the initial rate plus the 2% annual interest rate cap. The
Bank does not originate ARM loans which provide for negative amortization.
The Bank's fixed-rate mortgage loans currently are made for terms from 10 to 30
years. At December 31, 1999, the Bank had commitments for the origination of
fixed-rate mortgage loans totaling $17.4 million. The normal terms for such
commitments provide for a maximum of 90 days rate lock upon receipt of a 1.0%
fee charged on the mortgage amount. The Bank may periodically sell part of the
30-year, fixed-rate residential mortgage loans that it originates. The Bank
retains the servicing on all loans sold. The Bank generally retains for its
portfolio shorter term, fixed-rate loans with maturities of 15 years or less,
and certain longer term fixed-rate loans, generally consisting of loans to
facilitate the sale of REO, loans to officers, directors or employees of the
Bank and "jumbo", non-conforming loans as determined by applicable FNMA and
FHLMC guidelines. The Bank may retain all or most of its longer term fixed rate
loans after considering volume and yield and after evaluating interest rate risk
and capital management considerations. The retention of 30-year fixed-rate
mortgage loans may increase the level of interest rate risk carried by the Bank,
as the rates on these loans will not adjust during periods of rising interest
rates and the loans can be subject to substantial increases in prepayments
during periods of falling interest rates.
The Bank's policy is to originate one- to four-family residential mortgage loans
in amounts up to 80% of the lower of the appraised value or the selling price of
the property securing the loan and up to 97% of the appraised value or selling
price if private mortgage insurance is obtained. Mortgage loans originated by
the Bank include due-on-sale clauses which provide the Bank with the contractual
right to deem the loan immediately due and payable in the event the borrower
transfers ownership of the property without
6
<PAGE>
the Bank's consent. Due-on-sale clauses are an important means of adjusting the
rates on the Bank's fixed-rate mortgage loan portfolio and the Bank has
generally exercised its rights under these clauses.
Commercial Real Estate, Multi-Family and Land Lending. The Bank originates
- -----------------------------------------------------
commercial real estate loans that are secured by properties generally used for
business purposes such as small office buildings or retail facilities located in
the Bank's primary market area. The Bank's underwriting procedures provide that
commercial real estate loans may be made in amounts up to 80% of the appraised
value of the property. The Bank currently originates commercial real estate
loans with terms of up to twenty five years with fixed or adjustable rates which
are indexed to a margin above the one-, three-, or five-year U.S. Treasury
constant maturity yield. In reaching its decision on whether to make a
commercial real estate loan, the Bank considers the net operating income of the
property and the borrower's expertise, credit history, profitability and the
term and quantity of leases. The Bank has generally required that the properties
securing commercial real estate loans have debt service coverage ratios of at
least 130%. Generally, properties securing a loan are appraised by an
independent appraiser and title insurance is required on all first mortgage
loans. The Bank typically requires the personal guarantee of the principal
borrowers for all commercial real estate loans. The Bank's commercial real
estate loan portfolio at December 31, 1999 was $52.0 million, or 4.94% of total
loans. The largest commercial real estate loan in the Bank's portfolio at
December 31, 1999 was a performing loan for which the Bank had an outstanding
carrying balance of $2.5 million, which was secured by a first mortgage on an
owner-occupied 38,000 square foot commercial building. The average size of the
Bank's commercial real estate loans at December 31, 1999 was approximately
$314,000.
The Bank originates multi-family mortgage loans generally secured by buildings
with five or more housing units located in the Bank's primary market area. As a
result of market conditions in its primary market area, the Bank currently
originates multi-family loans on a limited and highly selective basis. In
reaching its decision on whether to make a multi-family loan, the Bank considers
the qualifications of the borrower as well as the underlying property. Some of
the factors to be considered are: the net operating income of the mortgaged
premises before debt service and depreciation; the debt service ratio; and the
ratio of loan amount to appraised value. Pursuant to the Bank's current
underwriting policies, a multi-family adjustable-rate mortgage loan may only be
made in an amount up to 75% of the appraised value of the underlying property to
a maximum amount of generally $4 million. In addition, the Bank generally
requires a debt service ratio of 120%. Properties securing a loan are appraised
by an independent appraiser and title insurance is required on all loans. The
Bank's multi-family loan portfolio at December 31, 1999, totaled $5.1 million.
The Bank's largest multi-family loan at December 31, 1999, had an outstanding
balance of $2.1 million and was secured by a 125-unit affordable-housing
apartment complex located in Toms River, New Jersey. To a significantly lesser
extent, the Bank also originates land loans, although no such loans were
outstanding at December 31, 1999.
Loans secured by commercial real estate and multi-family residential properties
are generally larger and involve a greater degree of risk than one- to four-
family residential mortgage loans. Because payments on loans secured by multi-
family properties are often dependent on successful operation or management of
the properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Bank seeks to
minimize these risks through its underwriting policies, which require such loans
to be qualified at origination on the basis of the property's income and debt
coverage ratio.
Construction Lending. At December 31, 1999, construction loans totaled $7.8
- --------------------
million, or .74%, of the Bank's total loans outstanding. The Bank originates
single-family construction loans primarily on a construction/permanent basis
with such loans converting to an amortizing loan following the completion of the
construction phase. Most of the Bank's construction loans are made to
individuals building their
7
<PAGE>
primary residence, while, to a lesser extent, loans are made to developers known
to the Bank in order to build single-family houses under contract for sale,
which loans become due and payable over terms not exceeding 18 months. The
current policy of the Bank is to charge interest rates on its construction loans
which float at margins which are generally .5% to 1.5% above the prime rate (as
published in the Wall Street Journal). The Bank's construction loans increase
the interest rate sensitivity of its earning assets. At December 31, 1999, the
Bank had 35 construction loans, with the largest loan commitment being
approximately $900,000. At December 31, 1999, all of the Bank's construction
lending portfolio consisted of loans secured by property located in the State of
New Jersey, for the purpose of constructing one- to four-family homes. The Bank
may originate construction loans to individuals and contractors on approved
building lots in amounts up to 75% of the appraised value of the land and the
building. The terms to maturity of the Bank's construction/permanent loans are
similar to the Bank's other one- to four-family mortgage products. The Bank
requires an appraisal of the property, credit reports, and financial statements
on all principals and guarantors, among other items, for all construction loans.
Construction lending, by its nature, entails additional risks compared to one-
to four-family mortgage lending, attributable primarily to the fact that funds
are advanced upon the security of the project under construction prior to its
completion. As a result, construction lending often involves the disbursement of
substantial funds with repayment dependent on the success of the ultimate
project and the ability of the borrower or guarantor to repay the loan. Because
of these factors, the analysis of prospective construction loan projects
requires an expertise that is different in significant respects from that which
is required for residential mortgage lending. The Bank has attempted to address
these risks through its underwriting procedures.
Consumer Loans. The Bank also offers consumer loans. At December 31, 1999, the
- --------------
Bank's consumer loans totaled $56.0 million, or 5.32% of the Bank's total loan
portfolio. Of that amount, home equity loans comprised $31.6 million, or 56.4%;
home equity lines of credit comprised $21.8 million, or 38.9%; loans on savings
accounts totaled $928,000, or 1.7%; and automobile, student and overdraft line
of credit loans totaled $1.7 million, or 3.0%.
The Bank originates home equity loans secured by one- to four-family residences.
These loans are originated as either adjustable-rate or fixed-rate loans with
terms ranging from 10 to 20 years. Home equity loans are typically made on
owner-occupied, one- to four-family residences and generally to the Bank's first
mortgage customers. These loans are subject to a 80% loan-to-value limitation,
including any other outstanding mortgages or liens.
The Bank also offers a variable rate home equity line of credit which extends a
credit line based on the applicant's income and equity in the home. Generally,
the credit line, when combined with the balance of the first mortgage lien, may
not exceed 80% of the appraised value of the property at the time of the loan
commitment. Home equity lines of credit are secured by a mortgage on the
underlying real estate. The Bank presently charges no origination fees for these
loans, but may in the future charge origination fees for its home equity lines
of credit. A borrower is required to make monthly payments of principal and
interest, at a minimum of $50, based upon a 10 or 15 year amortization period.
Generally, the adjustable rate of interest charged is the prime rate of interest
(as published in the Wall Street Journal) plus a range of 0.0% to 1.25%. The
loans have an 18% lifetime cap on interest rate adjustments.
8
<PAGE>
Commercial Lending. At December 31, 1999, commercial loans totaled $15.6
- ------------------
million, or 1.48% of the Bank's total loans outstanding. During 1996, a
Commercial Lending group was established within the Bank. The group's primary
function is to service the business communities' banking and financing needs in
the Bank's primary market area. The Commercial Lending group originates both
commercial loans (including loans for working capital; fixed asset purchases;
and acquisition, receivable and inventory financing) and commercial mortgage
loans (including acquisition, construction, expansion and refinancing of owner
occupied and investment properties). Credit facilities such as lines of credit
and term loans will be used to facilitate these requests. In all cases, the Bank
will review and analyze financial history and capacity, collateral value,
strength and character of the principals, and general payment history of the
borrower and principals in coming to a credit decision.
A well-defined credit policy has been approved by the Bank's Board of Directors.
This policy discourages high risk credits, while focusing on quality
underwriting, sound financial strength, and close management and Board
monitoring. Commercial business lending, both secured and unsecured, is
generally considered to involve a higher degree of risk than secured residential
real estate lending. Risk of loss on a commercial business loan is dependent
largely on the borrower's ability to remain financially able to repay the loan
out of ongoing operations. If the Bank's estimate of the borrower's financial
ability is inaccurate, the Bank may be confronted with a loss of principal on
the loan. The Bank's largest commercial loan at December 31, 1999 had an
outstanding balance of $2.5 million and was secured by corporate assets. The
average size of the Bank's commercial loans at December 31, 1999 was
approximately $75,000.
Loan Approval Procedures and Authority. The Board of Directors establishes the
- --------------------------------------
loan approval policies of the Bank. The Board of Directors has authorized the
approval of loans secured by real estate up to $2.0 million and unsecured loans
up to $1.0 million by various employees of the Bank, on a scale which requires
approval by personnel with progressively higher levels of responsibility as the
loan amount increases. A minimum of two employees' signatures are required to
approve residential loans over $240,000. Loans secured by real estate in amounts
over $2.0 million and unsecured loans over $1.0 million require approval by the
Loan Committee of the Board of Directors. Loans in excess of $4.0 million
require approval by the Board of Directors. Pursuant to OTS regulations, loans
to one borrower generally cannot exceed 15% of the Bank's unimpaired capital,
which at December 31, 1999 amounted to $21.2 million. At December 31, 1999, the
Bank's maximum loan exposure to a single borrower was $8.0 million.
Loan Servicing. Loan servicing includes collecting and remitting loan payments,
- --------------
accounting for principal and interest, making inspections as required of
mortgaged premises, contacting delinquent mortgagors, supervising foreclosures
and property dispositions in the event of unremedied defaults, making certain
insurance and tax payments on behalf of the borrowers and generally
administering the loans. The Bank also services mortgage loans for others. All
of the loans currently being serviced for others are loans which have been sold
by the Bank. At December 31, 1999, the Bank was servicing $159.6 million of
loans for others. For the years ended December 31, 1999, 1998 and 1997, loan
servicing fees totaled $403,000, $105,000 and $529,000, respectively.
Delinquencies and Classified Assets. The Board of Directors performs a monthly
- -----------------------------------
review of all delinquent loan totals which includes loans sixty days or more
past due, and the detail of each loan thirty days or more past due that were
originated within the past year. In addition, management prepares a quarterly
list of all classified loans and a narrative report of classified commercial,
commercial real estate, multi-family, land and construction loans. The
procedures taken by the Bank with respect to delinquencies vary depending on the
nature of the loan and period of delinquency. When a borrower fails to make a
required payment on a loan, the Bank takes a number of steps to have the
borrower cure
9
<PAGE>
the delinquency and restore the loan to current status. The Bank generally sends
the borrower a written notice of non-payment after the loan is first past due.
In the event payment is not then received, additional letters and phone calls
generally are made. If the loan is still not brought current and it becomes
necessary for the Bank to take legal action, which typically occurs after a loan
is delinquent at least 90 days or more, the Bank will commence foreclosure
proceedings against any real property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or an
acceptable workout accommodation is not agreed upon before the foreclosure sale,
the real property securing the loan generally is sold at foreclosure.
The Bank's Internal Asset Classification Committee, which is chaired by an
officer who reports directly to the Audit Committee of the Board of Directors,
reviews and classifies the Bank's assets quarterly and reports the results of
its review to the Board of Directors. The Bank classifies assets in accordance
with certain regulatory guidelines established by the OTS which are applicable
to all savings associations. At December 31, 1999, the Bank had $4.4 million of
assets, including all REO, classified as Substandard, $201,000 of assets
classified as Doubtful and no assets classified as Loss. Loans and other assets
may also be placed on a watch list as "Special Mention" assets. Assets which do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention." Special Mention assets totaled
$1.6 million at December 31, 1999, and consisted primarily of loans secured by
single-family, owner-occupied residences. These loans are classified as Special
Mention due to past delinquencies or other identifiable weaknesses. At December
31, 1999, the largest loan classified as Special Mention had a balance of
$160,000 and the largest loan classified as Substandard had a balance of
$908,000. The $908,000 represented the total due from a commercial relationship
consisting of a commercial line of credit for $300,000 and a commercial real
estate loan for $608,000. Both loans were current as to principal and interest
at December 31, 1999, but were classified as substandard due to the borrower's
experience with declining sales. The loans are secured by commercial real estate
and all corporate assets. The second largest loan classified as substandard had
a balance of $235,000.
Non-Accrual Loans and REO
- -------------------------
The following table sets forth information regarding non-accrual loans and REO.
The Bank had no troubled-debt restructured loans and 7 REO properties at
December 31, 1999. It is the policy of the Bank to cease accruing interest on
loans 90 days or more past due or in the process of foreclosure. For the years
ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, the amount of
interest income that would have been recognized on nonaccrual loans if such
loans had continued to perform in accordance with their contractual terms was
$52,000, $270,000, $278,000, $345,000 and $428,000.
10
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate:
One- to four-family...................... $ 2,401 $ 4,605 $ 5,062 $ 7,148 $ 8,296
Commercial real estate,
multi-family and land................... 362 574 382 122 154
Construction............................. - - - 314 -
Consumer...................................... 222 245 110 113 221
------- -------- ------- ------- --------
Total.................................. 2,985 5,424 5,554 7,697 8,671
REO, net(1)..................................... 292 43 1,198 1,555 1,367
------- -------- ------- ------- --------
Total non-performing assets................. $ 3,277 $ 5,467 $ 6,752 $ 9,252 $ 10,038
======= ======== ======= ======= ========
Allowance for loan losses as a
percent of total loans receivable (2)...... .78% .76% .83% .88% .97%
Allowance for loan losses as a percent
of total non-performing loans (3).......... 275.48 137.54 119.03 78.23 69.21
Non-performing loans as a percent of
total loans receivable(2)(3)............... .28 .56 .70 1.12 1.40
Non-performing assets
as a percent of total assets(3)............ .21 .35 .45 .71 .97
</TABLE>
_________________
(1) REO balances are shown net of related loss allowances.
(2) Total loans includes loans receivable and mortgage loans held for sale,
less undisbursed loan funds, deferred loan fees and unamortized premiums
and discounts.
(3) Non-performing assets consist of non-performing loans and REO.
Non-performing loans consist of all loans 90 days or more past due and
other loans in the process of foreclosure.
Allowance for Loan Losses. The allowance for loan losses is established through
- -------------------------
a provision for loan losses based on management's evaluation of the risks
inherent in its loan portfolio and the general economy. The allowance for loan
losses is maintained at an amount management considers sufficient to provide for
estimated losses based on evaluating known and inherent risks in the loan
portfolio based upon management's continuing analysis of the factors underlying
the quality of the loan portfolio. These factors include changes in the size and
composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, detailed analysis of individual loans for which
full collectibility may not be assured, and the determination of the existence
and realizable value of the collateral and guarantees securing the loan.
Additions to the allowance are charged to earnings. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to make additional provisions for loan losses based upon
information available to them at the time of their examination. Although
management uses the best information available, future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions beyond the Company's control. As of December 31, 1999 and 1998, the
Bank's allowance for loan losses was .78% and .76%, respectively, of total
loans. The Bank had non-accrual loans of $3.0 million and $5.4 million at
December 31, 1999 and
11
<PAGE>
1998, respectively. The Bank will continue to monitor and modify its allowances
for loan losses as conditions dictate.
The following table sets forth activity in the Bank's allowance for estimated
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
At or for the Year Ended
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.......................... $ 7,460 $ 6,612 $ 6,021 $ 6,001 $ 5,608
-------- -------- -------- ------- -------
Charge-offs:
Real Estate:
One- to four-family............................ 114 63 328 599 510
Commercial real estate,
multi-family and land...................... 58 - - 30 28
Construction................................... - - - - -
Consumer.......................................... 37 2 9 63 30
Commercial........................................ 32 - - - -
-------- -------- -------- ------- -------
Total....................................... 241 65 337 692 568
Recoveries............................................ 104 13 28 12 11
-------- -------- -------- ------- -------
Net charge-offs................................ 137 52 309 680 557
-------- -------- -------- ------- -------
Provision for loan losses............................. 900 900 900 700 950
-------- -------- -------- ------- -------
Balance at end of year................................ $ 8,223 $ 7,460 $ 6,612 $ 6,021 $ 6,001
======== ======== ======== ======= =======
Ratio of net charge-offs during the year
to average net loans outstanding during
the year............................................ .01% .01% .05% .11% .09%
======== ======== ======== ======= =======
</TABLE>
<PAGE>
The following table sets forth the Bank's percent of allowance for loan losses
to total allowance and the percent of loans to total loans in each of the
categories listed at the dates indicated (Dollars in thousands).
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Loans Loans Amount Loans Loans
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to
four-family $2,577 31.34% 87.04% $2,824 37.86% 89.10% $2,485 37.58% 89.57%
Commercial real
estate, multi-
family and land 1,352 16.44 5.42 993 13.30 4.30 591 8.94 3.24
Construction 38 .46 .74 31 .42 .63 44 .67 1.10
Consumer 543 6.60 5.32 505 6.77 5.31 471 7.12 5.72
Commercial 622 7.57 1.48 220 2.95 .66 58 .88 .37
Unallocated 3,091 37.59 - 2,887 38.70 - 2,963 44.81 -
------ ------- ------- ------ ------- ------- ------ ------- -------
Total $8,223 100.00% 100.00% $7,460 100.00% 100.00% $6,612 100.00% 100.00%
====== ======= ======= ====== ======= ======= ====== ======= =======
<CAPTION>
At December 31,
----------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Loans Loans Amount Loans Loans
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
One- to
four-family $2,659 44.16% 91.05% $2,790 46.49% 92.01%
Commercial real
estate, multi-
family and land 330 5.48 2.26 556 9.27 2.39
Construction 75 1.25 1.35 41 .68 1.30
Consumer 324 5.38 5.34 273 4.55 4.30
Commercial - - - - - -
Unallocated 2,633 43.73 - 2,341 39.01 -
------ ------- ------- ------ ------- -------
Total $6,021 100.00% 100.00% $6,001 100.00% 100.00%
====== ======= ======= ====== ======= =======
</TABLE>
13
<PAGE>
Investment Activities
Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certificates of deposit of insured banks and
savings institutions, bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, federally chartered savings institutions
may also invest their assets in commercial paper, investment-grade corporate
debt securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. See "Regulation and
Supervision - Federal Savings Institution Regulation - Liquidity." Historically,
the Bank has maintained liquid assets above the minimum OTS requirements and at
a level considered to be adequate to meet its normal daily activities.
The investment policy of the Bank as established by the Board of Directors
attempts to provide and maintain liquidity, generate a favorable return on
investments without incurring undue interest rate and credit risk, and
complement the Bank's lending activities. Specifically, the Bank's policies
generally limit investments to government and federal agency-backed securities
and other non-government guaranteed securities, including corporate debt
obligations, that are investment grade. The Bank's policies provide that all
investment purchases must be approved by two officers (either the Vice
President/Treasurer, Executive Vice President/Chief Financial Officer or the
President and Chief Executive Officer) and be ratified by the Board of
Directors.
Investment and mortgage-backed securities identified as held to maturity are
carried at cost, adjusted for amortization of premium and accretion of discount,
which are recognized as adjustments to interest income. Management determines
the appropriate classification of securities at the time of purchase. If
management has the intent and the Bank has the ability at the time of purchase
to hold securities until maturity, they are classified as held to maturity.
Securities to be held for indefinite periods of time and not intended to be held
to maturity are classified as available for sale. Securities available for sale
include securities that management intends to use as part of its asset/liability
management strategy. Such securities are carried at fair value and unrealized
gains and losses, net of related tax effect, are excluded from earnings, but are
included as a separate component of stockholders' equity. At December 31, 1999,
all of the Bank's investment and mortgage-backed securities were classified as
available for sale.
Mortgage-backed Securities. Mortgage-backed securities represent a participation
- --------------------------
interest in a pool of single-family or multi-family mortgages, the principal and
interest payments on which, in general, are passed from the mortgage
originators, through intermediaries that pool and repackage the participation
interests in the form of securities, to investors such as the Bank. Such
intermediaries may be private issuers, or agencies including FHLMC, FNMA and
GNMA that guarantee the payment of principal and interest to investors.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed- or ARM loans.
The actual maturity of a mortgage-backed security varies, depending on when the
mortgagors repay or prepay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the security, thereby affecting its
yield to maturity and the related market value of the mortgage-backed security.
The prepayments of the underlying mortgages depend on many factors, including
the type of mortgages, the coupon rates, the age of mortgages, the geographical
location of the underlying real estate collateralizing the mortgages, general
levels of market interest rates, and general economic conditions. GNMA
mortgage-backed securities that are backed by assumable Federal Housing
Authority ("FHA") or the Department of Veterans Affairs ("VA") loans generally
have a longer life than conventional non-
14
<PAGE>
assumable loans underlying FHLMC and FNMA mortgage-backed securities. During
periods of falling mortgage interest rates, prepayments generally increase, as
opposed to periods of increasing interest rates when prepayments generally
decrease. If the interest rate of underlying mortgages significantly exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages.
Prepayment experience is more difficult to estimate for adjustable-rate
mortgage-backed securities.
The Bank has significant investments in mortgage-backed securities and has
utilized such investments to complement its mortgage lending activities. At
December 31, 1999, mortgage-backed securities totaled $346.2 million, or 21.8%
of total assets, including $193.3 million in collateralized mortgage
obligations, all of which were classified as available for sale. The Bank
invests in a large variety of mortgage-backed securities, including ARM, balloon
and fixed-rate mortgage-backed securities, the majority of which are directly
insured or guaranteed by FHLMC, GNMA and FNMA. At December 31, 1999, the
mortgage-backed securities portfolio had a weighted average interest rate of
6.54%.
The Bank also purchases short-term, straight sequential or planned amortization
class collateralized mortgage obligations ("CMOs"). CMOs are securities created
by segregating or portioning cash flows from mortgage pass-through securities or
from pools of mortgage loans. CMOs provide a broad range of mortgage investment
vehicles by tailoring cash flows from mortgages to meet the varied risk and
return preferences of investors. These securities enable the issuer to "carve
up" the cash flows from the underlying securities and thereby create multiple
classes of securities with different maturity and risk characteristics. The Bank
invests in U.S. Government and agency-backed CMOs and privately issued CMOs, all
of which have agency-backed collateral. Prior to purchasing mortgage-backed
securities, each security is tested for Federal Financial Institutions
Examination Council ("FFIEC") qualification. Generally, the Bank will only
purchase mortgage-backed securities which pass the FFIEC test.
CMOs issued by FHLMC, FNMA, GNMA and private interests amounted to $53,518,000,
$13,064,000, $8,901,000 and $117,794,000, respectively, at December 31, 1999 and
$15,705,000, $9,699,000, $0 and $111,763,000, respectively, at December 31,
1998. 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 creditworthiness of the enhancer. Thus, in
the event a credit enhancer does not fulfill its obligations, the CMO holder
could be subject to risk of loss similar to a purchaser of a whole loan pool.
Management believes that the credit enhancements are adequate to protect the
Company from losses and has, therefore, not provided an allowance for losses on
its privately-issued CMOs.
At December 31, 1999 the Bank had outstanding privately-issued CMOs from three
issuers, Residential Funding Corp., Countrywide Home Loans, Inc., and PNC
Mortgage Securities Corp., each in excess of ten percent of stockholders equity.
The aggregate book and market values of these privately-issued CMOs were $48.2
million and $46.8 million, $21.6 million and $20.6 million, and $20.3 million
and $19.1 million, respectively, at December 31, 1999.
15
<PAGE>
The following table sets forth the Bank's mortgage-backed securities activities
for the periods indicated.
<TABLE>
<CAPTION>
For the Year
Ended December 31,
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
(In thousands)
<S> <C> <C> <C>
Beginning balance......................................... $381,840 $457,148 $395,542
Mortgage-backed securities
purchased........................................... 97,251 181,095 248,917
Less: Principal repayments .......................... (120,460) (204,359) (164,291)
Mortgage-backed securities sold................. - (48,824) (19,149)
Amortization of premium......................... (1,145) (3,230) (3,504)
Change in net unrealized gain
(loss) on mortgage-backed
securities available for sale........................ (11,304) 10 (367)
-------- -------- --------
Ending balance............................................ $346,182 $381,840 $457,148
======== ======== ========
</TABLE>
The following table sets forth certain information regarding the amortized cost
and market value of the Bank's mortgage-backed securities at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ------------ ------------- ------------ ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities:
FHLMC................. $65,111 $ 64,484 $106,762 $107,166 $245,414 $245,559
FNMA.................. 48,424 47,852 74,027 74,434 109,873 109,991
GNMA.................. 41,467 40,569 63,041 63,073 97,714 98,172
CMOs.................. 201,704 193,277 137,230 137,167 3,378 3,426
------- ------- ------- ------- -------- ---------
Total mortgage-backed
securities............ $356,706 $346,182 $381,060 $381,840 $456,379 $457,148
======== ======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
Investment Securities. The following table sets forth certain information
- ---------------------
regarding the amortized cost and market values of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ------------ --------------- ------------ ------------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government and
agency obligations....... $ 40,964 $ 40,177 $ 59,983 $ 60,387 $204,992 $205,648
State and municipal
obligations.............. 5,761 5,003 1,946 1,935 393 400
Corporates............... 75,050 72,567 74,976 72,249 - -
Equity
investments.............. 3,668 3,033 3,226 2,834 1,170 1,309
-------- -------- -------- -------- -------- --------
Total investment
securities............ $125,443 $120,780 $140,131 $137,405 $206,555 $207,357
======== ======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities of the Bank's investment and
mortgage-backed securities, excluding equity securities, as of December 31,
1999. 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.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------------------------
More than One Year More than Five
One Year or Less to Five Years Years to Ten Years More than Ten Years
--------------- ------------------ ------------------ -------------------
Amortized Cost Amortized Cost Amortized Cost Amortized Cost
--------------- ------------------ ------------------ -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency obligations....... $ - $ 30,997 $ 9,967 $ -
State and municipal obligations (1).......... 200 - - 5,561
Corporate debt (2)........................... - - - 75,050
-------- --------- -------- ---------
Total investment securities.................... $ 200 $ 30,997 $ 9,967 $ 80,611
======== ========= ======== =========
Weighted average yield......................... 8.65% 7.00% 6.25% 6.97%
==== ==== ==== ====
Mortgage-backed securities:
FHLMC........................................ $ 3,515 $ 34,629 $ 648 $ 26,319
FNMA......................................... - 18,744 7,899 21,781
GNMA......................................... 46 659 86 40,676
CMOs......................................... 456 202 - 201,046
-------- --------- -------- ---------
Total mortgage-backed securities............... $ 4,017 $ 54,234 $ 8,633 $ 289,822
======== ========= ======== =========
Weighted average yield......................... 6.72% 6.55% 7.01% 6.52%
==== ==== ==== ====
<CAPTION>
-------------------------------
Total
-------------------------------
Amortized Cost Market Value
-------------- -------------
<S> <C> <C>
Investment securities:
U.S. Government and agency obligations... $ 40,964 $ 40,177
State and municipal obligations (1)...... 5,761 5,003
Corporate debt (2)....................... 75,050 72,567
---------- ----------
Total investment securities................ $ 121,775 $ 117,747
========== ==========
Weighted average yield..................... 6.92%
====
Mortgage-backed securities:
FHLMC.................................... $ 65,111 $ 64,484
FNMA..................................... 48,424 47,852
GNMA..................................... 41,467 40,569
CMOs..................................... 201,704 193,277
---------- ----------
Total mortgage-backed securities........... $ 356,706 $ 346,182
========== ==========
Weighted average yield..................... 6.54%
====
</TABLE>
- --------------------------
(1) Tax equivalent yield.
(2) All of the Bank's corporate debt securities carry interest rates which
adjust to a spread over Libor on a quarterly basis.
18
<PAGE>
Sources of Funds
General. Deposits, loan and MBS repayments and prepayments, proceeds from sales
- -------
of loans, investment maturities, cash flows generated from operations and FHLB
advances and other borrowings are the primary sources of the Bank's funds for
use in lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of interest
- --------
rates and terms. The Bank's deposits consist of savings accounts, NOW accounts,
money market accounts, non-interest bearing accounts and time deposits. For the
year ended December 31, 1999, time deposits constituted 62.8% of total average
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The Bank relies on its community banking
focus stressing customer service and long-standing relationships with customers
to attract and retain these deposits; however, market interest rates and rates
offered by competing financial institutions significantly affect the Bank's
ability to attract and retain deposits. The Bank does not use brokers to obtain
deposits.
The following table presents the deposit activity of the Bank for the periods
indicated:
For the Year Ended December 31,
-------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
Net deposits (withdrawals)..................... $(14,480) $ 8,890 2,946
Acquisition of deposits - 10,732 -
Interest credited on deposit accounts.......... 36,179 38,865 39,088
-------- -------- --------
Total increase in deposit accounts............. $ 21,699 $ 58,487 $ 42,034
======== ======== ========
At December 31, 1999, the Bank had $73.4 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Weighted
Average
Maturity Period Amount Rate
----------------------------------------------- ------------ --------
(Dollars in thousands)
Three months or less........................... $19,704 5.06%
Over three through six months.................. 7,798 4.93
Over six through 12 months..................... 23,462 5.35
Over 12 months................................. 22,424 5.95
-------
Total.......................................... $73,388 5.41
======= ====
19
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts for the periods indicated and the weighted average interest rates at
the end of each period, on each category of deposits presented.
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Yield Balance Deposits Yield Balance Deposits Yield
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money market deposit accounts...... $ 77,478 7.40% 2.61% $ 71,800 7.10% 2.59% $ 68,972 7.18% 2.90%
Savings accounts................... 173,798 16.60 2.03 167,058 16.53 2.03 168,733 17.56 2.28
NOW accounts....................... 111,356 10.63 1.59 89,679 8.87 1.59 77,785 8.09 1.84
Non-interest-bearing accounts...... 26,953 2.58 - 18,749 1.86 - 8,115 .84 -
---------- ------- ---------- ------- ---------- -------
Total........................... 389,585 37.21 1.88 347,286 34.36 1.90 323,605 33.67 2.21
---------- ------- ---------- ------- ---------- -------
Time deposits:
Six months or less.............. 91,114 8.70 4.54 87,087 8.62 4.57 78,724 8.19 5.05
Over Six through 12 months...... 118,907 11.36 4.73 135,919 13.44 4.98 146,951 15.29 5.41
Over 12 through 24 months....... 231,022 22.06 5.04 219,706 21.74 5.45 178,440 18.57 5.77
Over 24 months.................. 109,341 10.44 6.02 108,748 10.76 6.07 120,709 12.56 6.10
IRA/KEOGH....................... 107,152 10.23 5.47 112,023 11.08 5.57 112,602 11.72 5.84
---------- ------- ---------- ------- ---------- -------
Total time deposits.......... 657,536 62.79 5.18 663,483 65.64 5.35 637,425 66.33 5.69
---------- ------- ---------- ------- ---------- -------
Total average deposits..... $1,047,121 100.00% 3.94% $1,010,769 100.00% 4.08% $ 961,030 100.00% 4.52%
========== ======= ========== ======= ========== =======
</TABLE>
20
<PAGE>
Borrowings
- ----------
From time to time the Bank has obtained term advances from the FHLB as an
alternative to retail deposit funds and may do so in the future as part of its
operating strategy. FHLB term advances may also be used to acquire certain other
assets as may be deemed appropriate for investment purposes. These term advances
are collateralized primarily by certain of the Bank's mortgage loans and
mortgage-backed securities and secondarily by the Bank's investment in capital
stock of the FHLB. In addition, the Bank has an available overnight line of
credit with the FHLB-NY for $50.0 million which expires November 22, 2000. The
Bank also has available from the FHLB a one-month overnight repricing line of
credit for $50.0 million which also expires on November 22, 2000. When utilized,
both lines carry a floating interest rate of 10 basis points over the current
federal funds rate and are secured by the Bank's mortgage loans, mortgage-backed
securities, U.S. Government securities and FHLB stock. The maximum amount that
the FHLB will advance to member institutions, including the Bank, fluctuates
from time to time in accordance with the policies of the OTS and the FHLB. At
December 31, 1999, the Bank had no outstanding borrowings against the FHLB lines
of credit and $115.0 million under various term advances.
The Bank also borrows funds using securities sold under agreements to
repurchase. Under this form of borrowing specific U.S. Government agency and/or
mortgage-backed securities are pledged as collateral to secure the borrowing.
These securities are not under the Bank's control. At December 31, 1999, the
Bank had borrowed $239.9 million through securities sold under agreements to
repurchase. (See note 9 to the consolidated financial statements in the 1999
Annual Report to Stockholders.)
Subsidiary Activities
The Bank owns two subsidiaries - OceanFirst Service Corp. (formerly Ocean
Investment Services Corp.) and OceanFirst Realty Corp. (formerly Ocean Federal
Realty Inc.).
OceanFirst Service Corp. was originally organized in 1982 to engage in the sale
of all-savers life insurance. Prior to 1998 the subsidiary was inactive,
however, in 1998, the Bank began to sell non-deposit investment products
(annuities and mutual funds) through a third party marketing firm to Bank
customers through this subsidiary, recognizing fee income from such sales.
OceanFirst Realty Corp. was established in 1997 and is intended to qualify as a
real estate investment trust, which may, among other things, be utilized by the
Company to raise capital in the future. Upon formation of OceanFirst Realty
Corp., the Bank transferred $668 million of mortgage loans to this subsidiary.
Personnel
As of December 31, 1999, the Bank had 247 full-time employees and 53 part-time
employees. The employees are not represented by a collective bargaining unit and
the Bank considers its relationship with its employees to be good.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal law to
file reports with, and otherwise comply with, the rules and regulations of the
OTS. The Bank is subject to extensive
21
<PAGE>
regulation, examination and supervision by the OTS, as its primary federal
regulator, and the FDIC, as the deposit insurer. The Bank is a member of the
Federal Home Loan Bank System and, with respect to deposit insurance, of the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company within
the meaning of federal law. Under prior law, a unitary savings and loan holding
company, such as the Company was not generally restricted as to the types of
business activities in which it may engage, provided that the Bank continued to
be a qualified thrift lender. See "Federal Savings Institution Regulation - QTL
Test." The Gramm-Leach-Bliley Act of 1999 provides that no company may acquire
control of a savings association after May 4, 1999 unless it engages only in the
financial activities permitted for financial holding companies under the law or
for multiple savings and loan holding companies as described below. Further, the
Gramm-Leach-Bliley Act specifies that existing savings and loan holding
companies may only engage in such activities. The Gramm-Leach-Bliley Act,
however, grandfathered the unrestricted authority for activities with respect to
unitary savings and loan holding companies existing prior to May 4, 1999, such
as the Company, so long as the Bank continues to comply with the QTL Test. Upon
any non-supervisory acquisition by the Company of another savings institution or
savings bank that meets the qualified thrift lender test and is deemed to be a
savings institution by the OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would generally be limited to activities permissible for bank
holding companies under Section 4(c)(8) of the Association Holding Company Act,
subject to the prior approval of the OTS, and certain activities authorized by
OTS regulation.
A savings and loan holding company is prohibited from, directly or indirectly,
acquiring more than 5% of the voting stock of another savings institution or
savings and loan holding company, without prior written approval of the OTS and
from acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS considers the financial and managerial resources
and future prospects of the company and institution involved, the effect of the
acquisition on the risk to the deposit insurance funds, the convenience and
needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple savings
and loan holding company controlling savings institutions in more than one
state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
22
<PAGE>
Although savings and loan holding companies are not subject to specific capital
requirements or specific restrictions on the payment of dividends or other
capital distributions, federal regulations do prescribe such restrictions on
subsidiary savings institutions as described below. The Bank must notify the OTS
30 days before declaring any dividend to the Company. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are governed
- -------------------
by federal law and regulations. These laws and regulations delineate the nature
and extent of the activities in which federal associations may engage. In
particular, many types of lending authority for federal association, e.g.,
commercial, non-residential real property loans and consumer loans, are limited
to a specified percentage of the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings institutions
- --------------------
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMEL financial institution rating system), and,
together with the risk-based capital standard itself, a 4% Tier 1 risk-based
capital standard. The OTS regulations also require that, in meeting the
tangible, leverage and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities as
principal that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk capital charge. At December 31, 1999, the Bank met
each of its capital requirements.
23
<PAGE>
The following table presents the Bank's capital position at December 31, 1999.
<TABLE>
<CAPTION>
Capital
------------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible................... $149,711 $ 23,950 $125,761 9.38% 1.50%
Core (Leverage)............ 149,711 47,900 101,811 9.38 3.00
Risk-based................. 157,828 66,867 90,961 18.88 8.00
</TABLE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
- -----------------------------------
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC
- -----------------------------
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, institutions are required
to make payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During 1999, FICO payments
for SAIF members approximated 6.1 basis points, while Bank Insurance Fund
("BIF") members paid 1.2 basis points. By law, there is equal sharing of FICO
payments between SAIF and BIF members beginning on January 1, 2000.
The Bank's assessment rate for fiscal 1999 was zero basis points and the premium
paid for this period was $604,000, all of which related to FICO bonds. The FDIC
has authority to increase insurance assessments. A significant increase in SAIF
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank. Management cannot predict what insurance
assessment rates will be in the future.
24
<PAGE>
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
- ---------------------
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At December
31, 1999, the Bank's limit on loans to one borrower was $21.2 million, and the
Bank's largest aggregate outstanding balance of loans to one borrower was $8.0
million.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
- --------
lender test. Under the test, a savings association is required to either qualify
as a "domestic building and loan association" under the Internal Revenue Code or
maintain at least 65% of its "portfolio assets" (total assets less: (1)
specified liquid assets up to 20% of total assets; (2) intangibles, including
goodwill; and (3) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is subject to
certain operating restrictions and may be required to convert to a bank charter.
As of December 31, 1999, the Bank maintained in excess of 100% of its portfolio
assets in qualified thrift investments and, therefore, met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon all
- -----------------------------------
capital distributions by a savings institution, including cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. The rule effective in the first quarter of
1999 established three tiers of institutions based primarily on an institution's
capital level. An institution that exceeded all capital requirements before and
after a proposed capital distribution ("Tier 1 Bank") and had not been advised
by the OTS that it was in need of more than normal supervision, could, after
prior notice but without obtaining approval of the OTS, make capital
distributions during the calendar year equal to the greater of (1) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half the excess capital over its capital requirements at the beginning of
the calendar year or (2) 75% of its net income for the previous four quarters.
Any additional capital distributions required prior regulatory approval.
Effective April 1, 1999, the OTS's capital distribution regulation changed.
Under the new regulation, an application to and the prior approval of the OTS is
required prior to any capital distribution if the institution does not meet the
criteria for "expedited treatment" of applications under OTS regulations (i.e.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution if, like the Bank, it is a subsidiary of a
holding company. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
25
<PAGE>
Liquidity. The Bank is required to maintain an average daily balance of
- ---------
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank's
liquidity ratio for December 31, 1999 was 8.85%, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the OTS to
- -----------
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Bank's latest quarterly thrift
financial report. The assessments paid by the Bank for the fiscal year ended
December 31, 1999 totaled $255,000.
Transactions with Related Parties. The Bank's authority to engage in
- ---------------------------------
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and 10%
shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. The OTS has primary enforcement responsibility over savings
- -----------
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have adopted
- ----------------------------------
Interagency Guidelines prescribing Standards for Safety and Soundness. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that a savings
institution fails to meet any standard prescribed by the guidelines, the OTS may
require the institution to submit an acceptable plan to achieve compliance with
the standard.
26
<PAGE>
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of 12
regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central
credit facility primarily for member institutions. The Bank, as a member of the
Federal Home Loan Bank, is required to acquire and hold shares of capital stock
in that Federal Home Loan Bank in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the Federal Home Loan Bank, whichever is greater. The Bank was in
compliance with this requirement with an investment in Federal Home Loan Bank
stock at December 31, 1999 of $16.8 million.
The Federal Home Loan Banks are required to provide funds for the resolution of
insolvent thrifts in the late 1980s and to contribute funds for affordable
housing programs. These requirements could reduce the amount of dividends that
the Federal Home Loan Banks pay to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on advances to their
members. If dividends were reduced, or interest on future Federal Home Loan Bank
advances increased, the Bank's net interest income would likely also be reduced.
Recent legislation has changed the structure of the Federal Home Loan Banks
funding obligations for insolvent thrifts, revised the capital structure of the
Federal Home Loan Banks and implemented entirely voluntary membership for
Federal Home Loan Banks. Management cannot predict the effect that these changes
may have with respect to its Federal Home Loan Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The regulations generally provide that reserves
be maintained against aggregate transaction accounts as follows: for accounts
aggregating $44.3 million or less (subject to adjustment by the Federal Reserve
Board) the reserve requirement is 3%; and for accounts aggregating greater than
$44.3 million, the reserve requirement is $1.329 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that portion
of total transaction accounts in excess of $44.3 million. The first $5.0 million
of otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank complies with the
foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a calendar year basis
- -------
using the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS in over 10 years.
For its 1999 taxable year, the Bank is subject to a maximum federal income tax
rate of 35.0%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995, thrift
- -----------------
institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be
27
<PAGE>
improved) under (i) the Percentage of Taxable Income Method (the "PTI Method")
or (ii) the Experience Method. The reserve for nonqualifying loans was computed
using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into taxable income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in method of accounting, initiated by
the taxpayer, and having been made with the consent of the IRS. Any Section
481(a) adjustment required to be taken into income with respect to such change
generally will be taken into income ratably over a six-taxable year period,
beginning with the first taxable year beginning after 1995, subject to the
residential loan requirement.
Under the residential loan requirement provision, the recapture required by the
1996 Act will be suspended for each of two successive taxable years, beginning
with the Bank's current taxable year, in which the Bank originates a minimum of
certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding its current
taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank is not
permitted to make additions to its tax bad debt reserves. In addition, the Bank
is required to recapture (i.e., take into taxable income) over a six year period
the excess of the balance of its tax bad debt reserves as of December 31, 1995
over the balance of such reserves as of December 31, 1987. Since the Bank
satisfied the residential loan requirement provision for 1996 and 1997 as
described above, the six year recapture period became effective for the 1998 tax
year. As a result of such recapture, the Bank will incur an additional tax
liability of approximately $2.3 million. The Bank has accrued for this liability
in the consolidated financial statements.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
- -------------
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, if the Bank makes a non-dividend distribution to the
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includable in income
for federal income tax purposes, assuming a 35% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a recapture
of any portion of its bad debt reserves.
28
<PAGE>
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended
- ---------------------------------
(the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20%. The excess of the bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method is treated as a preference item for purposes of computing
the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers of
which the Bank currently has none. AMTI is increased by an amount equal to 75%
of the amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this preference and prior to reduction for net
operating losses). The Bank does not expect to be subject to the AMTI.
Dividends Received Deduction and Other Matters. The Company may exclude from its
- ----------------------------------------------
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
State and Local Taxation
New Jersey Taxation. The Bank files New Jersey income tax returns. For New
- -------------------
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including addition
of interest income on State and municipal obligations).
The Company is required to file a New Jersey income tax return because it will
be doing business in New Jersey. For New Jersey tax purposes, regular
corporations are presently taxed at a rate equal to 9% of taxable income. For
this purpose, "taxable income" generally means Federal taxable income, subject
to certain adjustments (including addition of interest income on state and
municipal obligations). However, if the Company meets certain requirements, it
may be eligible to elect to be taxed as a New Jersey Investment Company at a tax
rate presently equal to 2.25% (25% of 9%) of taxable income.
Delaware Taxation. As a Delaware holding company not earning income in Delaware,
- -----------------
the Company is exempted from Delaware corporate income tax but is required to
file an annual report with and pay an annual franchise tax to the State of
Delaware.
29
<PAGE>
Item 2. Properties
The Bank currently conducts its business through its administrative office,
which includes a branch office, and 12 other full service offices located in
Ocean, Monmouth and Middlesex Counties. The Company believes that the Bank's
current facilities will be adequate to meet the present and immediately
foreseeable needs of the Bank and the Company.
<TABLE>
<CAPTION>
Original
Year Net Book Value of Property
Leased or Leased or Date of Lease or Leasehold Improvements
Location Owned Acquired Expiration(3) at December 31, 1999
-------- ----- -------- ------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Administrative Office:
975 Hooper Avenue
Toms River, New Jersey 08754 Owned 1995 -- $9,520
Branch Offices:
Adamston: Leased 1999 07/31/09 354
385 Adamston Road
Brick, New Jersey 08723
Berkeley: Leased 1984 11/30/04 48
Holiday City Plaza
730 Jamaica Boulevard
Toms River, New Jersey 08757
Brick: Owned 1960 -- 1,178
321 Chambers Bridge Road
Brick, New Jersey 08723
Concordia: Leased 1985 07/31/00 77
1 Concordia Shopping Mall
Box 3
Cranbury, New Jersey 08512
Holiday City South: Leased 1991 05/31/01 47
Holiday Plaza III
604 Mule Road
Toms River, New Jersey 08757
Lacey: Leased 1997 01/31/18 349
900 Lacey Road
Forked River, New Jersey 08731
Lake Ridge: Leased 1998 01/31/18 325
147 Route 70, Suite 1
Toms River, New Jersey 08755
Pavilion: Leased 1989 09/30/18 408
70 Brick Boulevard
Brick, New Jersey 08723
Point Pleasant Beach: Leased 1937 -- 92
701 Arnold Avenue
Point Pleasant, New Jersey 08742
Point Pleasant Boro: Leased 1971 -- 689
2400 Bridge Avenue
Point Pleasant, New Jersey 08742
Spring Lake Heights: Leased 1999 10/31/09 204
2401 Route 71
Spring Lake Heights, New Jersey 07762
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Original
Year Net Book Value of Property
Leased or Leased or Date of Lease or Leasehold Improvements
Location Owned Acquired Expiration(3) at December 31, 1999
-------- ----- -------- ------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Wall Township (2): Leased 1999 2/28/10 53
2445 Route 34
Manasquan, New Jersey 08736
Whiting: Leased 1983 10/31/02 59
Whiting Shopping Center
P. O. Box 20
Whiting, New Jersey 08759
Other Properties (1):
730 Brick Boulevard Owned 1986 -- 429
Brick, New Jersey 08723
</TABLE>
(1) The property was formerly utilized by the Bank, however, the property has
been fully subleased since 1997.
(2) This branch is scheduled to open in the second quarter of 2000.
(3) The Company may also hold options to renew leases for additional terms upon
expiration of the current lease.
Item 3. Legal Proceedings
The Company and the Bank are not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
Such other routine legal proceedings in the aggregate are believed by management
to be immaterial to the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the market for Registrant's common equity and related
stockholder matters appears under "Shareholder Information" on the Inside Back
Cover in the Registrant's 1999 Annual Report to Stockholders and is incorporated
herein by reference.
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Consolidated Financial
and Other Data of the Company" in the Registrant's 1999 Annual Report to
Stockholders on page 9 and 10 and is incorporated herein by reference.
31
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the
Registrant's 1999 Annual Report to Stockholders on pages 11 through 19 and
is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The above captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Management of
Interest Rate Risk" in the Registrant's 1999 Annual Report to Stockholders
on pages 12 and 13.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of OceanFirst Financial Corp. and its
subsidiary, together with the report thereon by KPMG LLP appears in the
Registrant's 1999 Annual Report to Stockholders on pages 20 through 35 and
are incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 19,
2000, at pages 5 through 7.
Item 11. Executive Compensation
The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 19,
2000, at pages 8 through 9 and pages 14 through 18 (excluding the Executive
Compensation Committee Report and Stock Performance Graph).
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on April
19, 2000, at pages 3 through 4 and 6 through 7.
Item 13. Certain Relationships and Related Transactions
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on April 19, 2000, at page
18.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1999 Annual Report to
Stockholders.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report.............................................................. 35
Consolidated Statements of Financial Condition at
December 31, 1999 and 1998............................................................. 20
Consolidated Statements of Income for the
Years Ended December 31, 1999, 1998 and 1997........................................... 21
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997................................... 22
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997........................................... 23
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1999, 1998 and 1997........................................... 24-34
</TABLE>
The remaining information appearing in the 1999 Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements or
the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
33
<PAGE>
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of OceanFirst Financial Corp.*
3.2 Bylaws of OceanFirst Financial Corp.*
4.0 Stock Certificate of OceanFirst Financial Corp.*
10.1 Form of OceanFirst Bank Employee Stock Ownership Plan*
10.1(a) Amendment to OceanFirst Bank Employee Stock
Ownership Plan (filed previously)
10.2 OceanFirst Bank Employees' Savings and Profit Sharing Plan*
10.3 OceanFirst Bank 1995 Supplemental Executive Retirement Plan*
10.4 OceanFirst Bank Deferred Compensation Plan for Directors*
10.5 OceanFirst Bank Deferred Compensation Plan for Officers*
10.6 OceanFirst Bank Long-Term Award Program*
10.7 OceanFirst Bank Performance Achievement Awards Program*
10.8 Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan (filed previously)
10.9 Form of Employment Agreement between OceanFirst Bank and certain executive officers, including
Michael J. Fitzpatrick and John R. Garbarino*
10.10 Form of Employment Agreement between OceanFirst Financial Corp. and certain executive
officers, including Michael J. Fitzpatrick and John R. Garbarino*
10.11 Form of Change in Control Agreement between OceanFirst Bank and certain executive officers,
including Michael E. Barrett, John K. Kelly and Karl E. Reinheimer*
10.12 Form of Change in Control Agreement between OceanFirst Financial Corp. and certain executive
officers, including Michael E. Barrett, John K. Kelly and Karl E. Reinheimer*
13.0 Portions of 1999 Annual Report to Stockholders (filed herewith)
21.0 Subsidiary information is incorporated herein by reference to "Part I - Subsidiaries"
23.0 Consent of KPMG LLP (filed herewith)
27.0 Financial Data Schedule (filed herewith)
</TABLE>
(b) Reports on Form 8-K
None.
----------------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, effective May 13, 1996 as amended,
Registration No. 33-80123.
34
<PAGE>
CONFORMED SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OceanFirst Financial Corp.
By: /s/ John R. Garbarino
----------------------
John R. Garbarino
Chairman of the Board,
President and
Chief Executive Officer and
Director
Date: March 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Name Date
- ---- ----
/s/ John R. Garbarino March 14, 2000
- --------------------------------------
John R. Garbarino
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
/s/ Michael J. Fitzpatrick March 14, 2000
- --------------------------------------
Michael J. Fitzpatrick
Executive Vice President and
Chief Financial Officer
(principal accounting and financial officer)
/s/ Michael E. Barrett March 14, 2000
- --------------------------------------
Michael E. Barrett
Director
/s/ Thomas F. Curtin March 14, 2000
- --------------------------------------
Thomas F. Curtin
Director
35
<PAGE>
/s/ Carl Feltz, Jr. March 14, 2000
- --------------------------------------
Carl Feltz, Jr.
Director
/s/ Robert E. Knemoller March 14, 2000
- --------------------------------------
Robert E. Knemoller
Director
/s/ Donald E. McLaughlin March 14, 2000
- --------------------------------------
Donald E. McLaughlin
Director
/s/ Diane F. Rhine March 14, 2000
- --------------------------------------
Diane F. Rhine
Director
/s/ Frederick E. Schlosser March 14, 2000
- --------------------------------------
Frederick E. Schlosser
Director
/s/ James T. Snyder March 14, 2000
- --------------------------------------
James T. Snyder
Director
36
<PAGE>
EXHIBIT 13
Financial Highlights
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
At or For The Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets $1,590,907 $1,561,744 $1,510,947
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 1,042,975 941,011 783,695
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits 1,056,950 1,035,251 976,764
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 167,530 197,740 215,544
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 48,538 44,158 43,048
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 900 900 900
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 16,347 12,972 13,825
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 1.33 0.95 0.88
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity per common share 13.27 13.52 13.72
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity to total assets at end of year (capital ratio) 10.53% 12.66% 14.27%
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Ratios:
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.04% 0.85% 0.97%
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity 8.90 6.36 6.00
- ------------------------------------------------------------------------------------------------------------------------------------
Average interest rate spread 2.70 2.39 2.39
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.20 2.98 3.12
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses to average assets 1.78 1.66 1.63
- ------------------------------------------------------------------------------------------------------------------------------------
Operating efficiency ratio 51.80 54.67 50.80
- ------------------------------------------------------------------------------------------------------------------------------------
Actual contributions to stockholders' equity and resultant cash earnings data(1):
- ------------------------------------------------------------------------------------------------------------------------------------
Cash earnings $ 19,283 $ 16,009 $ 16,823
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted cash earnings per share 1.57 1.17 1.08
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.23% 1.05% 1.19%
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity 10.50 7.85 7.30
- ------------------------------------------------------------------------------------------------------------------------------------
Operating efficiency ratio 43.94 45.35 41.76
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
OceanFirst Bank, the sole subsidiary of OceanFirst Financial Corp., founded in
1902, is a federally chartered stock savings bank with eleven of thirteen
branches located in Ocean County, New Jersey, and with one branch each in
Middlesex and Monmouth Counties. It is the oldest and largest community-based
financial institution headquartered in Ocean County, New Jersey.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 1
<PAGE>
Letter to our Shareholders
March 2000
"OceanFirst delivered both substantial earnings growth and record-breaking
earnings per share in 1999."
Dear Fellow Shareholders:
The last twelve months of the 20th century proved to be the best year in the
history of OceanFirst Financial Corp. We achieved record-breaking financial
results and we carried out aggressive initiatives to strengthen our position as
the preeminent community provider of financial services. Both accomplishments
served to enhance the value of your investment in our Company, which is what our
corporate mission is all about. Looking ahead, we see exciting opportunities for
further growth in the year 2000.
ADDED VALUE THROUGH
RECORD FINANCIAL PERFORMANCE
OceanFirst delivered both substantial earnings growth and record-breaking
earnings per share in 1999. Net income grew 26.0% over the 1998 level, to $16.3
million. Earnings per share grew at an even faster pace -- 40.0% -- to $1.33 on
a fully diluted basis. Total shareholder return for the year was 7.7%, far
outstripping the negative returns provided by the vast majority of our peers. In
a market largely devoid of good news for this sector's stock prices, OceanFirst
saw its share price rise to $17 5/16 at year-end. This return, in 1999's hostile
market for financial services companies, exemplifies market recognition of our
outstanding financial performance.
The OceanFirst senior management team (from left to right) John K. Kelly,
General Counsel; Michael E. Barrett, Residential Loan Division; Karl E.
Reinheimer, Chief Operating Officer; John R. Garbarino, President and Chief
Executive Officer; and Michael J. Fitzpatrick, Chief Financial Officer.
[Picture Described Above Appears Here]
2 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
We achieved excellent results in other performance measures as well:
o Return on equity and return on average assets grew to 8.90% and 1.04%,
respectively, driven by substantial increases in our average interest rate
spread and net interest margin.
o Core deposits continued to grow as a result of our enormously successful
High Performance Checking program. While much of the industry experienced
shrinking deposit bases, our core deposits grew 5.5%, $21.3 million,
representing over 10,000 new relationships.
o We forged 961 new business deposit relationships in 1999. Through our
commercial lending initiatives, we also established another 165 new
relationships with local businesses, representing $44.8 million in
commitments. These new loans increased the commercial loan portfolio by
49.9%.
o Strong loan growth in all business lines increased our loan-to-deposit
ratio at year-end to 98.7% -- up from 90.9% at the beginning of the year
and 72.6% at the end of 1996.
o Aided by an aggressive share repurchase program, we made significant
progress toward our goal of better leveraging the Company's excess
capital. Our capital ratio ended the year at 10.53%, sharply reduced from
the 20.73% following our 1996 stock offering.
o Overhead expenses remained well controlled, totaling 1.78% of average
assets and contributing to an operating efficiency ratio of 51.80%.
"Strong loan growth in all business lines increased our loan-to-deposit
ratio..."
[Bar Chart Described Below Appears Here]
Loan to Deposit Ratio
1996 1997 1998 1999
72.6% 80.2% 90.9% 98.7%
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 3
<PAGE>
"...our philosophy of exceptional service will build stronger customer
relationships."
ADDED VALUE THROUGH
CORPORATE INITIATIVES
Last year was distinguished not only by financial accomplishments, but also by
an aggressive program to strengthen our position as the preeminent community
bank in our market. The centerpiece of this program was a branding campaign
designed to make the new OceanFirst brand the best known and most respected in
banking throughout the community. Our new name and contemporized image reflect a
wider range of financial products and services, and more effectively communicate
our commitment to being the premier community-focused institution--a financial
organization where people truly come first. As a reflection of this commitment,
we continued last year to both expand our product delivery systems and emphasize
superior personal service. The OceanFirst sales culture is being transformed
from a traditional one based on product sales to a more desirable approach
focused on consultative sales. We believe that listening to our customers,
providing innovative solutions to their financial needs, and consistently
applying our philosophy of exceptional service will build stronger customer
relationships. These strengthened relationships, in turn, will provide the
impetus for increasing shareholder value.
Members of the OceanFirst Financial Corp. Board of Directors shown from left to
right are: John R. Garbarino - Chairman, President and Chief Executive Officer;
Thomas F. Curtin; Carl Feltz Jr.; Diane F. Rhine; Michael E. Barrett; Donald E.
McLaughlin; Frederick E. Schlosser; Robert E. Knemoller; and James T. Snyder
[Picture Described Above Appears Here]
4 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
A number of other developments also contributed to building value in 1999:
o We introduced our Dividend Reinvestment and Discount Stock Purchase Plan.
Under the plan, existing shareholders purchasing additional shares with
reinvested dividends or with voluntary cash payments qualify for a 3%
discount from the then-current market price of OceanFirst Financial Corp.
stock.
o We opened our first Monmouth County branch, in Spring Lake Heights, and
have been quite pleased with the market's reception. Although plans for
our other Monmouth County branch in Wall Township were unfortunately
hampered by shopping center construction delays beyond our control, we are
confident this branch will now open early in 2000. Additionally, during
1999 we added a third location in Bricktown, in Ocean County, to better
serve this growing community.
o We established a fully transactional internet web site at OceanFirst.com
to better meet the needs of both our business and consumer banking
customers. This enhanced delivery system, which puts our Company on the
cutting edge of technology, enables customers to check and transfer
balances, pay their bills, apply for loans, or just browse and learn more
about OceanFirst. Shareholders as well can utilize OceanFirst.com to check
the latest quarterly earnings, review other news releases, or contact
Investor Relations.
[Graphic of OceanFirst Web Page Appears Here ]
[Graphic Appears Here]
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 5
<PAGE>
[Full Page Graphic Appears Here]
6 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
LOOKING AHEAD
In the coming years, we will build on the progress we have made, both as a
98-year-old community bank and as a four-year-old publicly owned financial
services company. There are exciting opportunities for growth ahead, and we
intend to take advantage of them. To that end, we will focus on several key
areas to measure our success in building value for our shareholders:
o EPS Growth of 15%. Consistent growth of this magnitude is central to the
enhancement of shareholder value. We can achieve such growth through the
expansion of real revenue, supplemented by prudent balance sheet leverage
and capital management.
o Additional Capital Leverage of 1% per Year. We will seek additional
leverage of 1% per year in our capital ratio to help support EPS gains of
15%. Prudent balance sheet growth, substantial cash dividend payouts and
aggressive share repurchase programs will be the primary tools used to
reduce the Company's capital ratio to desired levels.
o Noninterest Income Growth of 20%. In broadening our product line, we will
also seek to expand fee-based revenue. This noninterest income growth will
better insulate us against the volatility of net interest income, which
tends to be held hostage by the business cycle. We expect the introduction
of Trust and Asset Management services to generate significant additional
noninterest income beyond that derived from traditional retail banking and
the "Investment Services at OceanFirst" alternative product line.
o Risk Management. Effective management of both credit and interest rate
risk remains vital to a financial institution's long-term viability and
earnings performance. The risk culture at OceanFirst continues to be
conservative: We enforce strict guidelines in both our lending operations
and portfolio management to ensure that risk is always effectively
monitored and controlled.
"...there are exciting opportunities for growth ahead, and we intend to take
advantage of them."
- --------------------------------------------------------------------------------
Earnings Per Share
- --------------------------------------------------------------------------------
[Bar Chart Described Below Appears Here]
1997 1998 1999
$.88 $.95 $1.33
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 7
<PAGE>
"OceanFirst has made a difference in the lives of thousands of its neighbors. We
intend to do no less in the 21st century."
o Community Commitment. As an acknowledged leader in the community for the
past 98 years, OceanFirst has made a difference in the lives of thousands
of its neighbors. We intend to do no less in the 21st century. Since its
establishment in connection with our 1996 public offering, the OceanFirst
Foundation has provided, at no cost to current Company operations, over
$3.7 million to address needs in our community that might not otherwise
have been met. The Foundation will continue to help distinguish OceanFirst
as the community bank where people truly do come first.
As we approach our second century of providing financial services to our
community, we pledge to focus even more sharply on delivering quality financial
products and superior service. Succeeding in that mission, we will provide our
shareholders with the continued opportunity for growth in the value of their
investment.
Thank you for your continued support.
Very truly yours,
/s/ John R. Garbarino
John R. Garbarino
Chairman, President and
Chief Executive Officer
8 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<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, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Selected Financial Condition Data:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $1,590,907 $1,561,744 $1,510,947 $1,303,865 $1,036,445
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale 120,780 137,405 207,357 174,028 114,881
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB-NY stock 16,800 16,800 14,980 8,457 7,723
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities available for sale 346,182 381,840 457,148 395,542 265,113
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 1,042,975 941,011 783,695 678,728 612,696
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale - 25,140 - 727 1,894
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits 1,056,950 1,035,251 976,764 934,730 926,558
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances 115,000 40,000 20,400 8,800 10,400
- ------------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase 239,867 272,108 288,200 99,322 -
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 167,530 197,740 215,544 252,789 92,351
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Year Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands; except per share amounts)
Selected Operating Data:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 107,347 $ 105,557 $ 98,656 $ 80,236 $ 70,210
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 58,809 61,399 55,608 43,857 40,004
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 48,538 44,158 43,048 36,379 30,206
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 900 900 900 700 950
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 47,638 43,258 42,148 35,679 29,256
- ------------------------------------------------------------------------------------------------------------------------------------
Other income 5,226 2,411 2,509 2,881 1,356
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses 27,852 25,457 23,145 39,206 18,006
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision for income taxes 25,012 20,212 21,512 (646) 12,606
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 8,665 7,240 7,687 1,083 4,659
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 16,347 $ 12,972 $ 13,825 $ (1,729) $ 7,947
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ 1.36 $ .97 $ .90 $ (.39) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ 1.33 $ .95 $ .88 $ (.39) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Net income before non-recurring items (2) $ 16,347 $ 12,972 $ 13,825 $ 11,576 $ 7,947
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Earnings (loss) per share for 1996 is for the period from July 2, 1996 (date of
conversion) to December 31, 1996
Selected Consolidated Financial and Other Data (Continued)
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 9
<PAGE>
Selected Consolidated Financial
and Other Data (continued)
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data(1):
- ------------------------------------------------------------------------------------------------------------------------------------
Performance Ratios:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.04% 0.85% 0.97% (.15%) 0.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets, as adjusted(2) 1.04 0.85 0.97 1.00 0.80
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity 8.90 6.36 6.00 (1.03) 9.44
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity, as adjusted(2) 8.90 6.36 6.00 6.91 9.44
- ------------------------------------------------------------------------------------------------------------------------------------
Average stockholders' equity to average assets 11.73 13.33 16.25 14.42 8.51
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity to total assets at end of year 10.53 12.66 14.27 19.39 8.91
- ------------------------------------------------------------------------------------------------------------------------------------
Average interest rate spread(3) 2.70 2.39 2.39 2.61 2.79
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin(4) 3.20 2.98 3.12 3.22 3.13
- ------------------------------------------------------------------------------------------------------------------------------------
Average interest-earning assets to average
interest-bearing liabilities 112.94 114.35 117.95 115.84 107.98
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses to average assets 1.78 1.66 1.63 3.37 1.82
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses to average assets, as adjusted(2) 1.78 1.66 1.63 1.73 1.82
- ------------------------------------------------------------------------------------------------------------------------------------
Operating efficiency ratio(2) 51.80 54.67 50.80 99.86 57.05
- ------------------------------------------------------------------------------------------------------------------------------------
Operating efficiency ratio, as adjusted(2)(5) 51.80 54.67 50.80 51.11 57.05
- ------------------------------------------------------------------------------------------------------------------------------------
Regulatory Capital Ratios (Bank Only):
- ------------------------------------------------------------------------------------------------------------------------------------
Tangible capital 9.38 10.78 11.91 12.69 8.72
- ------------------------------------------------------------------------------------------------------------------------------------
Core capital 9.38 10.78 11.91 12.69 8.72
- ------------------------------------------------------------------------------------------------------------------------------------
Risk-based capital 18.88 22.77 29.88 32.04 21.34
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Quality Ratios:
- ------------------------------------------------------------------------------------------------------------------------------------
Non-performing loans as a percent of total
loans receivable(6)(7) 0.28 0.56 0.70 1.12 1.40
- ------------------------------------------------------------------------------------------------------------------------------------
Non-performing assets as a percent of total assets (7) 0.21 0.35 0.45 0.71 0.97
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of total
loans receivable(6) 0.78 0.76 0.83 0.88 0.97
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percent of total
non-performing loans(7) 275.48 137.54 119.03 78.23 69.21
- ------------------------------------------------------------------------------------------------------------------------------------
Number of full-service customer facilities 13 11 10 9 8
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) With the exception of end of year ratios, all ratios are based on average
daily balances.
(2) Performance ratios are calculated to exclude the effect of non-recurring
charges 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.
10 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
OceanFirst Financial Corp. (formerly Ocean Financial Corp.) (the "Company") was
incorporated on November 21, 1995, and is the holding company for OceanFirst
Bank (formerly 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
OceanFirst Foundation (formerly 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 twelve other
branch offices. Eleven of the thirteen branch offices are located in Ocean
County, New Jersey, with one branch each in Middlesex and Monmouth Counties.
The Company operates as a consumer-oriented federal savings bank, with a focus
on offering traditional savings deposit and loan products to its local
community. With industry consolidation, however, eliminating most competitors
headquartered in Ocean County, 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. 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 and, to a lesser extent, commercial loans to local businesses;
(2) offer superior service and competitive rates to increase the core deposit
base; (3) invest funds in excess of loan demand in mortgage-backed and
investment securities; and (4) control operating expenses.
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 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,
much 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 and added one branch each in 1997 and 1998. In the last half of 1999,
the Company opened two branches - one in Brick Township and the other in Spring
Lake Heights, the Company's first branch in Southern Monmouth County. A second
Monmouth County branch, located in Wall Township, is expected to open in the
second quarter of 2000. The Company is also evaluating additional office sites
within its existing market area.
Management is also seeking to diversify the Company's 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 was expanded to include life insurance. The Company is also
introducing trust and asset management services in early 2000.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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, loan originations, merchant
credit card services, deposit accounts, the sale of alternative investments and
other fees. The Company's operating expenses primarily consist of compensation
and employee benefits,occupancy and equipment, marketing, federal deposit
insurance premiums, and other general and administrative expenses. The Company's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory agencies.
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: (1) 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 and floating-rate and balloon maturity commercial
loans; (2) holding primarily short-term and/or adjustable-rate mortgage-backed
and investment securities; (3) attempting to reduce the overall interest rate
sensitivity of liabilities by emphasizing core and longer-term deposits; and (4)
extending the maturities on wholesale borrowings for up to ten years. The
Company 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. Over the past three years the Company has retained 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 Company currently does not participate in hedging programs, interest rate
swaps or other activities involving the use of off-balance sheet derivative
financial instruments, but may do so in the future to manage interest rate risk.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Accordingly, during a period of rising
interest rates, an institution with a negative gap position 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.
12 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
At December 31, 1999 the Company's one year gap was negative 11.8%. 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
15% and 25% annually. Passbook accounts, negotiable order of withdrawal ("NOW")
and money market accounts were assumed to decay, or run-off, at 2.78% 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.
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 produced by the OTS 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 following table sets forth the Company's NPV and net
interest income as of December 31, 1999, as calculated by the Company (dollars
in thousands). For purposes of this table, prepayment speeds and deposit decay
rates similar to those used in calculating the Company's gap were used.
<TABLE>
<CAPTION>
December 31, 1999
- --------------------------------------------------------------------------------
Change in Net Portfolio Value Net Interest Income
Interest Rates -------------------------------------------------------------
in Basis Points NPV
(Rate Shock) Amount %Change Ratio Amount %Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
300 $119,838 (40.0)% 8.4% $44,212 (9.3)%
- --------------------------------------------------------------------------------
200 151,710 (24.0) 10.3 46,123 (5.3)
- --------------------------------------------------------------------------------
100 179,446 (10.1) 11.8 47,765 (2.0)
- --------------------------------------------------------------------------------
Static 199,646 - 12.8 48,724 -
- --------------------------------------------------------------------------------
(100) 231,252 6.8 13.3 49,251 1.1
- --------------------------------------------------------------------------------
(200) 217,678 9.0 13.4 48,927 1.4
- --------------------------------------------------------------------------------
(300) 216,809 8.6 13.2 47,865 (1.8)
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, the Company's NPV in a static rate environment is
considerably less than the NPV at December 31, 1998, reflecting the Company's
declining capital levels resulting from common stock repurchase programs. Also,
in a shocked interest rate environment, the Company projects a greater percent
change in NPV at December 31, 1999 than was the case at December 31, 1998. The
heightened interest rate sensitivity is primarily due to the generally higher
interest rate environment in effect at December 31, 1999 as compared to December
31, 1998 which reduced anticipated prepayment speeds on mortgage loans and
mortgage-backed securities. Additionally, 30-year fixed-rate mortgage loans
represent a larger share of the Company's mortgage loan portfolio at December
31, 1999 as compared to December 31, 1998. Conversely, in each rate shock
environment, the Company projects a slightly reduced level of interest rate
sensitivity in the net interest income measure at December 31, 1999 as compared
to December 31, 1998.
As is the case with the gap calculation, certain shortcomings are inherent in
the methodology used in the NPV and net interest income IRR measurements. The
model requires the making of certain assumptions which may tend to oversimplify
the manner in which actual yields and costs respond to changes in market
interest rates. First, the model assumes that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured. Second, the model assumes that
a particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Third, the model does not take into account the Company's business
or strategic plans. Accordingly, although the above measurements do provide an
indication of the Company's IRR exposure at a particular point in time, such
measurements are not intended to provide a precise forecast of the effect of
changes in market interest rates on the Company's net interest income and can be
expected to differ from actual results.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 13
<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, 1999 and for each of the years ended December 31, 1999, 1998, and
1997. 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,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
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 $ 4,638 4.88% $ 2,860 $ 103 3.60% $ 5,375 $ 295 5.49%
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities 120,780 6.92 122,848 7,840 6.38 173,158 11,461 6.62
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB stock 16,800 6.75 16,800 1,142 6.80 15,096 1,094 7.25
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 346,182 6.54 375,239 23,622 6.30 423,516 25,669 6.06
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net (1) 1,042,975 7.52 997,772 74,640 7.48 863,172 67,038 7.77
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,531,375 7.23 1,515,519 107,347 7.08 1,480,317 105,557 7.13
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 59,532 50,231 49,428
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,590,907 $1,565,750 $1,529,745
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Equity:
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Money market deposit accounts $ 80,597 2.61% $ 77,478 2,090 2.70% $ 71,800 2,026 2.82%
- ------------------------------------------------------------------------------------------------------------------------------------
Savings accounts 171,064 2.03 173,798 3,518 2.02 167,058 3,442 2.06
- ------------------------------------------------------------------------------------------------------------------------------------
NOW accounts 113,426 1.59 111,356 1,711 1.54 89,679 1,517 1.69
- ------------------------------------------------------------------------------------------------------------------------------------
Time deposits 660,535 5.18 657,536 33,601 5.11 663,483 36,819 5.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total 1,025,622 4.05 1,020,168 40,920 4.01 992,020 43,804 4.42
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances 115,000 5.97 67,857 3,853 5.68 24,113 1,295 5.37
- ------------------------------------------------------------------------------------------------------------------------------------
Securities sold under
agreements to repurchase 239,867 5.66 253,811 14,036 5.53 278,424 16,300 5.85
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,380,489 4.49 1,341,836 58,809 4.38 1,294,557 61,399 4.74
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities 42,888 40,209 31,222
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,423,377 1,382,045 1,325,779
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 167,530 183,705 203,966
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,590,907 $1,565,750 $1,529,745
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 48,538 $44,158
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread (2) 2.74% 2.70% 2.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin (3) 3.18% 3.20% 2.98%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 110.93% 112.94% 114.35%
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------
1997
- ----------------------------------------------------------------------------------
Average
Average Yield/
Balance Interest Cost
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
- ----------------------------------------------------------------------------------
Interest-earning assets:
- ----------------------------------------------------------------------------------
Interest-earning deposits
and short-term investments $ 2,852 $ 155 5.43%
- ----------------------------------------------------------------------------------
Investment securities 196,650 13,302 6.76
- ----------------------------------------------------------------------------------
FHLB stock 11,271 752 6.67
- ----------------------------------------------------------------------------------
Mortgage-backed securities 442,500 26,907 6.08
- ----------------------------------------------------------------------------------
Loans receivable, net (1) 725,866 57,540 7.93
- ----------------------------------------------------------------------------------
Total interest-earning assets 1,379,139 98,656 7.15
- ----------------------------------------------------------------------------------
Non-interest-earning assets 38,829
- ----------------------------------------------------------------------------------
Total assets $1,417,968
- ----------------------------------------------------------------------------------
Liabilities and Equity:
- ----------------------------------------------------------------------------------
Interest-bearing liabilities:
- ----------------------------------------------------------------------------------
Money market deposit accounts $ 68,972 2,028 2.94%
- ----------------------------------------------------------------------------------
Savings accounts 168,733 3,877 2.30
- ----------------------------------------------------------------------------------
NOW accounts 77,785 1,388 1.78
- ----------------------------------------------------------------------------------
Time deposits 637,425 35,667 5.60
- ----------------------------------------------------------------------------------
Total 952,915 42,960 4.51
- ----------------------------------------------------------------------------------
FHLB advances 7,207 414 5.74
- ----------------------------------------------------------------------------------
Securities sold under
agreements to repurchase 209,089 12,234 5.85
- ----------------------------------------------------------------------------------
Total interest-bearing liabilities 1,169,211 55,608 4.76
- ----------------------------------------------------------------------------------
Non-interest-bearing liabilities 18,395
- ----------------------------------------------------------------------------------
Total liabilities 1,187,606
- ----------------------------------------------------------------------------------
Stockholders' equity 230,362
- ----------------------------------------------------------------------------------
Total liabilities and equity $1,417,968
- ----------------------------------------------------------------------------------
Net interest income $43,048
- ----------------------------------------------------------------------------------
Net interest rate spread (2) 2.39%
- ----------------------------------------------------------------------------------
Net interest margin (3) 3.12%
- ----------------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 117.95%
- ----------------------------------------------------------------------------------
</TABLE>
(1) Amount is net of deferred loan fees, undisbursed loan funds, discounts
and premiums and estimated loan loss allowances and includes loans held
for sale and non-performing loans.
(2) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
14 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<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 proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared to Compared to
Year Ended December 31, 1998 Year Ended December 31, 1997
-----------------------------------------------------------------------------------
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 $ (111) $ (81) $ (192) $ 138 $ 2 $ 140
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities (3,219) (402) (3,621) (1,569) (272) (1,841)
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB stock 119 (71) 48 272 70 342
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities (3,028) 981 (2,047) (1,150) (88) (1,238)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net 10,173 (2,571) 7,602 10,681 (1,183) 9,498
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 3,934 (2,144) 1,790 8,372 (1,471) 6,901
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Money market deposit accounts 153 (89) 64 82 (84) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Savings accounts 142 (66) 76 (38) (397) (435)
- ------------------------------------------------------------------------------------------------------------------------------------
NOW accounts 339 (145) 194 202 (73) 129
- ------------------------------------------------------------------------------------------------------------------------------------
Time deposits (327) (2,891) (3,218) 1,469 (317) 1,152
- ------------------------------------------------------------------------------------------------------------------------------------
Total 307 (3,191) (2,884) 1,715 (871) 844
- ------------------------------------------------------------------------------------------------------------------------------------
FHLB advances 2,479 79 2,558 910 (29) 881
- ------------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase (1,399) (865) (2,264) 4,066 -- 4,066
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,387 (3,977) (2,590) 6,691 (900) 5,791
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income $ 2,547 $ 1,833 $ 4,380 $ 1,681 $ (571) $ 1,110
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets at December 31, 1999 were $1.591 billion, an increase of $29.2
million, compared to $1.562 billion at December 31, 1998.
Investment securities available for sale decreased by $16.6 million, to a
balance of $120.8 million at December 31, 1999, compared to a balance of $137.4
million at December 31, 1998, and mortgage-backed securities available for sale
decreased by $35.6 million, to $346.2 million at December 31, 1999, from $381.8
million at December 31, 1998. The investment and mortgage-backed securities
available for sale portfolios decreased in order to partly fund growth in the
Bank's loans receivable. Loans receivable, net, increased by $102.0 million, or
10.8%, to a balance of $1,043.0 million at December 31, 1999, compared to a
balance of $941.0 million at December 31, 1998. The increase was largely
attributable to strong 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 $24.2 million of this
growth. Included in the residential loan growth is $89.4 million of 30-year
fixed-rate mortgage loans which the Bank retained in portfolio, while $49.2
million of 30-year fixed-rate mortgage loans were sold, including $25.1 million
which were held for sale at December 31, 1998. The Bank periodically sells these
loans as part of the management of interest rate risk.
Total deposits at December 31, 1999 were $1.057 billion, an increase of $21.7
million, compared to $1.035 billion at December 31, 1998. Total borrowings,
including Federal Home Loan Bank ("FHLB") advances and securities sold under
agreements to repurchase, increased by $42.8 million to a combined balance of
$354.9 million at December 31, 1999, compared to a combined balance of $312.1
million at December 31, 1998. The borrowings were used to fund loan growth and
the Company's common stock repurchase program. Stockholders' equity at December
31, 1999 was $167.5 million, compared to $197.7 million at December 31, 1998.
The Company repurchased 2.0 million shares of common stock during the year ended
December 31, 1999 for $35.2 million, fully completing the remainder of a 5%
repurchase program announced in November 1998; and a 10% repurchase program
announced in July 1999.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 15
<PAGE>
Results of Operations
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General
Net income increased $3.4 million or 26.0%, to $16.3 million for the year ended
December 31, 1999 as compared to net income of $13.0 million for the year ended
December 31, 1998. Diluted earnings per share increased 40.0%, to $1.33 for the
year ended December 31, 1999, as compared to $.95 for the year ended December
31, 1998. The higher percentage increase in earnings per share is the result of
the Company's repurchase program which reduced the number of shares outstanding
for purposes of calculating earnings per share.
Interest Income
Interest income for the year ended December 31, 1999 was $107.3 million,
compared to $105.6 million for the year ended December 31, 1998, an increase of
$1.7 million. The increase in interest income was due to an increase in average
interest-earning assets and a change in the mix of average-earning assets
towards a higher concentration of loans receivable with a corresponding
reduction of lower yielding investment and mortgage-backed securities. For the
year ended December 31, 1999 loans receivable represented 65.8% of average
interest-earning assets as compared to 58.3% for the same prior year period. The
above factors were partly offset by a decline in the yield on average
interest-earning assets, which declined to 7.08% on average from 7.13% on
average in the same prior year period.
Interest Expense
Interest expense for the year ended December 31, 1999 was $58.8 million,
compared to $61.4 million for the year ended December 31, 1998, a decrease of
$2.6 million, or 4.2%. The decrease in interest expense was primarily the result
of a decrease in the average cost of interest-bearing liabilities, which
declined to 4.38% for the year ended December 31, 1999, as compared to 4.74% for
the same prior year period. The significant decline in funding cost more than
offset an increase in average interest-bearing liabilities, which rose by $47.3
million for the year ended December 31, 1999, as compared to the same prior year
period. The Company's focus on lower cost core deposit growth has contributed to
the decline in interest expense, as core deposits represented 37.2% of average
deposits (including non-interest-earning deposits) for the year ended December
31, 1999, as compared to 34.4% for the same prior year period.
Provision for Loan Losses
For the year ended December 31, 1999, 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 $2.2 million at December 31, 1999, as compared
to December 31, 1998 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 was $5.2 million for the year ended December 31, 1999 as compared
to $2.4 million for the same prior year period. The net gain (loss) on the sale
of loans and securities was a $557,000 gain for the year ended December 31, 1999
as compared to a $622,000 loss for the same prior year period. The loss for the
year ended December 31, 1998 was due to the implementation of a balance sheet
restructuring designed to improve future earnings while mitigating exposure to
prepayment and interest rate risk. In December 1998, the Company purchased $28.9
million of adjustable-rate and short-term fixed-rate whole loans at a nominal
premium. At the same time, the Company sold $48.8 million of adjustable-rate
mortgage-backed securities with high prepayment speeds at a loss of $850,000.
The Company then sold $25.1 million of 30-year fixed-rate loans in January 1999
at a gain of $524,000 to complete the restructuring. For the full year ended
December 31, 1999, the Company sold $49.2 million in 30-year fixed-rate mortgage
loans at a gain of $606,000 as compared to the sale of $16.1 million at a gain
of $228,000 in the same prior year period. The Company periodically sells these
loans to assist in the management of interest rate risk.
16 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
Fees and service charges increased by $1.5 million or 71.0% for the year ended
December 31, 1999 as compared to the same prior year period due to fees
associated with the growth in commercial account services and retail core
account balances as well as the addition of fee income from the sale of
Investment Services at OceanFirst alternative investment products, namely mutual
funds and annuities, introduced late in the second quarter of 1998. This product
category was further expanded in the first quarter of 1999 to include life and
long-term care insurance. The total fees relating to the sale of alternative
investment products amounted to $581,000 for the year ended December 31, 1999,
as compared to $104,000 for the corresponding prior year period.
Operating Expenses
Operating expenses were $27.9 million for the year ended December 31, 1999, an
increase of $2.4 million compared to the same prior year period. The increase
was partly due to nonrecurring direct costs associated with readying the
Company's data processing systems for the year 2000, which amounted to $510,000
for the year ended December 31, 1999, as compared to $102,000 for the same prior
year period. Also contributing to the increase was marketing and other expenses
related to the Bank's branding initiatives; the costs associated with the
opening of the Bank's twelfth and thirteenth branch offices in September and
October 1999; and the introduction of the Company's Trust and Asset Management
business line.
Provision for Income Taxes
Income tax expense was $8.7 million for the year ended December 31, 1999,
compared to $7.2 million for the year ended December 31, 1998. The effective tax
rate declined slightly to 34.6% for the year ended December 31, 1999, as
compared to 35.8% for the same prior year period.
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997
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. The
increase in earnings per share is the result of the Company's repurchase program
and additional purchases by the ESOP, 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 advances 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.
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 the 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.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 17
<PAGE>
Results of Operations
Continued
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.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB advances 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, 1999, the Company had no outstanding overnight borrowings from
the FHLB, representing a decrease from $30.0 million at December 31, 1998. The
Company utilizes the overnight line from time to time to fund short-term
liquidity needs. The Company also borrowed $354.9 million at December 31, 1999
through FHLB advances and securities sold under agreements to repurchase, an
increase from $282.1 million at December 31, 1998. 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, 1999, were principally
provided by proceeds from the sale of mortgage loans held for sale, maturities
of investment securities available for sale, principal payments on loans and
mortgage-backed securities, FHLB advances and increased deposits. The cash was
principally utilized for loan originations, purchases of investment and
mortgage-backed securities and the purchase of treasury stock. For the year
ended December 31, 1998, the cash needs of the Company were primarily satisfied
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 the purchase of investment and mortgage-backed
securities, the origination and purchase of loans 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, 1999 and 1998, the Bank's liquidity ratios were
8.9% and 12.5%, respectively, both in excess of the minimum regulatory
requirement.
At December 31, 1999, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $149.7 million, or 9.4%, of total adjusted
assets, which is above the required level of $23.9 million or 1.5%; core capital
of $149.7 million or 9.4% of total adjusted assets, which is above the required
level of $47.9 million, or 3.0%; and risk-based capital of $157.8 million, or
18.9% of risk-weighted assets, which is above the required level of $66.9
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
Issues surrounding the Year 2000 arose out of the fact that many computer
programs use only two digits to identify a year in the date field. Computer
hardware and software that were not made Year 2000 ready would likely interpret
"00" as year 1900 rather than Year 2000.
Beginning in April 1997 the Company formally began to address the Year 2000
issue. A project plan was constructed to follow the guidelines set forth by the
Federal Financial Institutions Examination Council (FFIEC). The guidelines
mandated that the Year 2000 project address five specific phases: awareness,
assessment, renovation, validation (testing), and implementation. The Company
completed all five phases of the project by June 30, 1999 thereby meeting all
regulatory guidelines.
18 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
During 1998 and 1999 the Company successfully tested all functions provided by
its data processing agent and the primary provider of mission critical systems,
BISYS Incorporated. The Company continued to revalidate BISYS systems and
hardware throughout 1999 and closely monitored BISYS' progress in insuring their
systems functioned correctly into the Year 2000. All other primary service
providers also completed reprogramming and testing of their mission critical
systems and the Company validated those test results.
During the last half of 1999, the Company focused on customer awareness,
contingency planning, and liquidity planning. An extensive customer outreach
program was initiated as the Company disseminated pertinent Year 2000
information through the use of awareness seminars, civic organization
presentations, Y2K hotline updates, Internet web site updates, newspaper
advertising and direct mail communications to Bank customers. The Company's
contingency programs were reviewed and tested prior to year-end and liquidity
plans were completed to ensure that the Company had access to necessary funds to
meet customer's needs.
The Company's operations continued to function through and after the date
change, from December 31, 1999 to January 1, 2000, and throughout January 2000.
The Company has experienced no Year 2000-related customer service disruptions as
customers were able to continue to access their accounts and conduct business
with the Bank. To reassure the Bank's customer base all thirteen Bank branches
were open for business on Saturday and Sunday, January 1 and 2, 2000.
Significant borrowers in the residential and commercial loan portfolios have
been assessed to determine an appropriate risk rating. The Company will continue
to monitor the ability of borrowers to meet their financial obligations into the
Year 2000.
Expenses related to the Company's Year 2000 effort for the year ended December
31, 1999 totaled $740,000. These expenses consist of $510,000 in costs
associated with the renovation of software, hardware and consulting charges and
$230,000 representing an estimate of the direct cost for compensation and fringe
benefits of internal employees working on the Year 2000 project. The 1999
expense exceeded management's estimate at the beginning of the year of $400,000
to $600,000 primarily due to the costs relating to the development, testing and
implementation of contingency plans.
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 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133." This statement amends FASB statement No. 133 by delaying the
effective date one year. SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires recognition of all
derivative instruments as either assets or liabilities in the statement of
financial position and measurement of those instruments at fair value. This
Statement is now effective for all fiscal quarters of fiscal years beginning
after June 15, 2000, on a prospective basis. 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.
Recent legislation
Recent legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and security-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as the
Company, that existed prior to May 4, 1999. The authority for unrestricted
activities, however, would not apply to any company that acquired 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 1999 Form 10-K.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 19
<PAGE>
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 10,007 $ 10,295
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale (notes 3 and 9) 120,780 137,405
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank of New York stock, at cost (note 9) 16,800 16,800
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities available for sale (notes 4 and 9) 346,182 381,840
- ------------------------------------------------------------------------------------------------------------------------------------
Loans receivable, net (notes 5 and 9) 1,042,975 941,011
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale - 25,140
- ------------------------------------------------------------------------------------------------------------------------------------
Interest and dividends receivable (note 6) 8,468 9,820
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate owned, net 292 43
- ------------------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net (note 7) 13,889 13,947
- ------------------------------------------------------------------------------------------------------------------------------------
Other assets (note 10) 31,514 25,443
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,590,907 $1,561,744
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits (note 8) $1,056,950 $1,035,251
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances (note 9) 115,000 40,000
- ------------------------------------------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase (note 9) 239,867 272,108
- ------------------------------------------------------------------------------------------------------------------------------------
Advances by borrowers for taxes and insurance 5,990 5,096
- ------------------------------------------------------------------------------------------------------------------------------------
Other liabilities (note 10) 5,570 11,549
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,423,377 1,364,004
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (notes 2, 10, 11 and 12):
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock, $.01 par value, 55,000,000 shares authorized, 18,118,248 shares
issued and 12,620,923 and 14,629,776 shares outstanding at December 31, 1999
and 1998, respectively 181 181
- ------------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital 178,850 178,309
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings-substantially restricted 113,169 103,982
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss (9,568) (1,226)
- ------------------------------------------------------------------------------------------------------------------------------------
Less: Unallocated common stock held by Employee Stock Ownership Plan (15,727) (17,376)
- ------------------------------------------------------------------------------------------------------------------------------------
Unearned Incentive Awards (4,030) (5,963)
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury stock, 5,497,325 and 3,488,472 shares at December 31, 1999 and
1998, respectively (95,345) (60,167)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 167,530 197,740
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,590,907 $1,561,744
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
Consolidated Statements of Income
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
- ------------------------------------------------------------------------------------------------------------------------------------
Loans $ 74,640 $ 67,038 $57,540
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 23,622 25,669 26,907
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities and other 9,085 12,850 14,209
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 107,347 105,557 98,656
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits (note 8) 40,920 43,804 42,960
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowed funds 17,889 17,595 12,648
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 58,809 61,399 55,608
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 48,538 44,158 43,048
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses (note 5) 900 900 900
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 47,638 43,258 42,148
- ------------------------------------------------------------------------------------------------------------------------------------
Other income:
- ------------------------------------------------------------------------------------------------------------------------------------
Fees and service charges 3,569 2,087 1,905
- ------------------------------------------------------------------------------------------------------------------------------------
Net gain (loss) on sales of loans and securities available for sale
(notes 3 and 4) 557 (622) (132)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income from other real estate operations 148 209 223
- ------------------------------------------------------------------------------------------------------------------------------------
Other 952 737 513
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 5,226 2,411 2,509
- ------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
- ------------------------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits (notes 11 and 12) 15,378 14,604 13,969
- ------------------------------------------------------------------------------------------------------------------------------------
Occupancy (note 13) 2,133 1,936 1,919
- ------------------------------------------------------------------------------------------------------------------------------------
Equipment 1,375 1,362 1,288
- ------------------------------------------------------------------------------------------------------------------------------------
Marketing 1,733 1,427 750
- ------------------------------------------------------------------------------------------------------------------------------------
Federal deposit insurance 859 865 719
- ------------------------------------------------------------------------------------------------------------------------------------
Data processing 1,333 1,278 1,243
- ------------------------------------------------------------------------------------------------------------------------------------
General and administrative 5,041 3,985 3,257
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 27,852 25,457 23,145
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 25,012 20,212 21,512
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes (note 10) 8,665 7,240 7,687
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 16,347 $ 12,972 $13,825
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.36 $ .97 $ .90
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.33 $ .95 $ .88
- ------------------------------------------------------------------------------------------------------------------------------------
Average basic shares outstanding (note 1) 11,990 13,335 15,344
- ------------------------------------------------------------------------------------------------------------------------------------
Average diluted shares outstanding (note 1) 12,299 13,677 15,638
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 21
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Years Ended December 31, 1999, 1998 and 1997 Stock Capital Earnings (Loss)Income
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $181 $176,812 $ 88,462 $ (335)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
- --------------------------------------------------------------------------------------------------------------------------
Net income -- -- 13,825 --
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
- --------------------------------------------------------------------------------------------------------------------------
Unrealized gain on securities (net of tax expense $718) -- -- -- 1,234
- --------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included
in net income (net of tax benefit $52) -- -- -- 90
- --------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Acquisition of 671,046 shares of common stock
for Incentive Awards -- (506) -- --
- --------------------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Purchase 2,412,528 shares of common stock -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- 917 -- --
- --------------------------------------------------------------------------------------------------------------------------
Cash dividend -- $.30 per share -- -- (4,800) --
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 181 177,223 97,487 989
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
- --------------------------------------------------------------------------------------------------------------------------
Net income -- -- 12,972 --
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss:
- --------------------------------------------------------------------------------------------------------------------------
Unrealized loss on securities (net of tax benefit $1,620) -- -- -- (2,750)
- --------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included
in net income (net of tax benefit $315) -- -- -- 535
- --------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Tax benefit of stock plans -- 463 -- --
- --------------------------------------------------------------------------------------------------------------------------
Purchase 1,078,292 shares of common stock -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- 623 -- --
- --------------------------------------------------------------------------------------------------------------------------
Cash dividend -- $.46 per share -- -- (6,470) --
- --------------------------------------------------------------------------------------------------------------------------
Acquisition of 422,500 shares of common stock by ESOP -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Exercise of stock options -- 2,348 shares -- -- (7) --
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 181 178,309 103,982 (1,226)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 16,347 --
- --------------------------------------------------------------------------------------------------------------------------
Other comprehensive loss:
- --------------------------------------------------------------------------------------------------------------------------
Unrealized loss on securities (net of tax benefit $4,917) -- -- -- (8,373)
- --------------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included
in net income (net of tax benefit $18) -- -- -- 31
- --------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Purchase 2,010,061 shares of common stock -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- 541 -- --
- --------------------------------------------------------------------------------------------------------------------------
Cash dividend -- $.57 per share -- -- (7,157) --
- --------------------------------------------------------------------------------------------------------------------------
Exercise of stock options -- 1,208 shares -- -- (3) --
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $181 $178,850 $113,169 $ (9,568)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Employee
Stock Unearned
Ownership Incentive Treasury
Years Ended December 31, 1999, 1998 and 1997 Plan Awards Stock Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ (12,331) $ -- $ -- $252,789
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income:
- ---------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 13,825
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income:
- ---------------------------------------------------------------------------------------------------------------------
Unrealized gain on securities (net of tax expense $718) -- -- -- 1,234
- ---------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included
in net income (net of tax benefit $52) -- -- -- 90
- ---------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 15,149
- ---------------------------------------------------------------------------------------------------------------------
Acquisition of 671,046 shares of common stock
for Incentive Awards -- (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
- ---------------------------------------------------------------------------------------------------------------------
Cash dividend -- $.30 per share -- -- -- (4,800)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 (10,903) (7,897) (41,536) 215,544
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income:
- ---------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 12,972
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive loss:
- ---------------------------------------------------------------------------------------------------------------------
Unrealized loss on securities (net of tax benefit $1,620) -- -- -- (2,750)
- ---------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included
in net income (net of tax benefit $315) -- -- -- 535
- ---------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 10,757
- ---------------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- 1,934 -- 1,934
- ---------------------------------------------------------------------------------------------------------------------
Tax benefit of stock plans -- -- -- 463
- ---------------------------------------------------------------------------------------------------------------------
Purchase 1,078,292 shares of common stock -- -- (18,672) (18,672)
- ---------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock 1,727 -- -- 1,727
- ---------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- -- -- 623
- ---------------------------------------------------------------------------------------------------------------------
Cash dividend -- $.46 per share -- -- -- (6,470)
- ---------------------------------------------------------------------------------------------------------------------
Acquisition of 422,500 shares of common stock by ESOP (8,200) -- -- (8,200)
- ---------------------------------------------------------------------------------------------------------------------
Exercise of stock options -- 2,348 shares -- -- 41 34
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 (17,376) (5,963) (60,167) 197,740
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 16,347
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive loss:
Unrealized loss on securities (net of tax benefit $4,917) -- -- -- (8,373)
- ---------------------------------------------------------------------------------------------------------------------
Reclassification adjustment for losses included
in net income (net of tax benefit $18) -- -- -- 31
- ---------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 8,005
- ---------------------------------------------------------------------------------------------------------------------
Earned Incentive Awards -- 1,933 -- 1,933
- ---------------------------------------------------------------------------------------------------------------------
Purchase 2,010,061 shares of common stock -- -- (35,198) (35,198)
- ---------------------------------------------------------------------------------------------------------------------
Allocation of ESOP stock 1,649 -- -- 1,649
- ---------------------------------------------------------------------------------------------------------------------
ESOP adjustment -- -- -- 541
- ---------------------------------------------------------------------------------------------------------------------
Cash dividend -- $.57 per share -- -- -- (7,157)
- ---------------------------------------------------------------------------------------------------------------------
Exercise of stock options -- 1,208 shares -- -- 20 17
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ (15,727) $ (4,030) $ (95,345) $167,530
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(dollars in thousands)
Years ended December 31, 1999, 1998 and 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,347 $ 12,972 $ 13,825
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment 1,509 1,472 1,354
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of Incentive Awards 1,933 1,934 1,773
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of ESOP 1,649 1,727 1,428
- ------------------------------------------------------------------------------------------------------------------------------------
ESOP adjustment 541 623 917
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of servicing asset 351 572 197
- ------------------------------------------------------------------------------------------------------------------------------------
Amortization of deposit premium 103 52 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net premium amortization in excess of discount accretion on securities 1,044 3,190 3,498
- ------------------------------------------------------------------------------------------------------------------------------------
Net accretion of deferred fees and discounts in excess of premium
amortization on loans (310) (533) (382)
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 900 900 900
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred taxes 757 1,749 529
- ------------------------------------------------------------------------------------------------------------------------------------
Net gain on sales of real estate owned (246) (173) (457)
- ------------------------------------------------------------------------------------------------------------------------------------
Net (gain) loss on sales of loans and securities available for sale (557) 622 132
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of mortgage loans held for sale 48,719 16,301 2,705
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans originated for sale (22,973) (41,212) (2,008)
- ------------------------------------------------------------------------------------------------------------------------------------
Decrease (increase) in interest and dividends receivable 1,352 1,244 (1,307)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in other assets (2,384) (6,484) (4,865)
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in other liabilities (5,979) 6,746 874
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 26,409 (11,270) 5,288
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 42,756 1,702 19,113
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans receivable (103,663) (129,468) (107,948)
- ------------------------------------------------------------------------------------------------------------------------------------
Loans purchased -- (29,207) --
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of investment and mortgage-backed
securities available for sale 121 47,974 19,006
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of investment securities available for sale (15,423) (128,751) (51,154)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of mortgage-backed securities available for sale (97,251) (181,095) (248,917)
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from maturities of investment securities available for sale 30,043 195,216 20,300
- ------------------------------------------------------------------------------------------------------------------------------------
Principal payments on mortgage-backed securities available for sale 120,460 204,359 164,291
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases of Federal Home Loan Bank of New York stock -- (1,820) (6,523)
- ------------------------------------------------------------------------------------------------------------------------------------
Proceeds from sales of real estate owned 1,106 2,320 3,277
- ------------------------------------------------------------------------------------------------------------------------------------
Purchases of premises and equipment (1,451) (1,140) (1,533)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (66,058) (21,612) (209,201)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Acquisition of deposits -- 10,732 --
- ------------------------------------------------------------------------------------------------------------------------------------
Deposit premium -- (1,030) --
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in deposits 21,699 47,755 42,034
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Federal Home Loan Bank advances 75,000 19,600 11,600
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in securities sold under agreements to repurchase (32,241) (16,092) 188,878
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in advances by borrowers for taxes and insurance 894 323 941
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of Incentive Award shares -- -- (10,176)
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of Stock Options 17 34 --
- ------------------------------------------------------------------------------------------------------------------------------------
Dividends paid (7,157) (6,470) (4,800)
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of ESOP shares -- (8,200) --
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock (35,198) (18,672) (41,536)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 23,014 27,980 186,941
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and due from banks (288) 8,070 (3,147)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at beginning of year 10,295 2,225 5,372
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 10,007 $ 10,295 $ 2,225
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
- ------------------------------------------------------------------------------------------------------------------------------------
Interest $ 58,238 $ 60,658 $ 54,863
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes 13,416 30 7,246
- ------------------------------------------------------------------------------------------------------------------------------------
Noncash investing activities:
- ------------------------------------------------------------------------------------------------------------------------------------
Transfer of loans receivable to real estate owned 1,109 992 2,463
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage loans securitized into mortgage-backed securities $ 37,200 $ 16,082 $ 2,025
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 23
<PAGE>
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
OceanFirst Bank (formerly 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, OceanFirst Financial Corp. (formerly 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, OceanFirst Bank, and its wholly-owned subsidiaries,
OceanFirst Realty, Inc. and OceanFirst Service 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, Monmouth and Middlesex counties in New Jersey. The Bank is
subject to competition from other financial institutions; it is also subject to
the regulations of certain regulatory agencies and undergoes periodic
examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
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
The Company classifies all investment and mortgage-backed securities as
available for sale. Securities available for sale include securities that
management intends to use as part of its asset/liability management strategy.
Such securities are carried at fair value and unrealized gains and losses, net
of related tax effect, are excluded from earnings, but are included as a
separate component of stockholders' equity. Gains or losses on the sale of such
securities are included in other income using the specific identification
method.
Loans Receivable
Loans receivable, other than loans held for sale, are stated at unpaid principal
balance, plus unamortized premiums less unearned discounts, net of deferred loan
origination and commitment fees, and 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, land, construction and
commercial loans in excess of $250,000. Impaired loans are individually assessed
to determine that the loan's carrying value is not in excess of the fair value
of the collateral or the present value of the loan's expected future cash flows.
Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and installment loans, are
specifically excluded from the impaired loan portfolio.
Mortgage Loans Held for Sale
The Company 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.
24 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
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.
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 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 12 - Incentive Plan.
Comprehensive Income
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.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding. Diluted earnings per share
is calculated by dividing net income by the weighted average number of shares of
common stock outstanding plus potential common stock, utilizing the treasury
stock method. All share amounts exclude unallocated shares of stock held by the
Employee Stock Ownership Plan (ESOP) and the Incentive Plan.
The following reconciles shares outstanding for basic and diluted earnings per
share for the years ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 13,727 15,174 17,112
- --------------------------------------------------------------------------------
Less: Unallocated ESOP shares (1,309) (1,281) (1,160)
- --------------------------------------------------------------------------------
Unallocated incentive award shares (428) (558) (608)
- --------------------------------------------------------------------------------
Average basic shares outstanding 11,990 13,335 15,344
- --------------------------------------------------------------------------------
Add: Effect of dilutive securities:
- --------------------------------------------------------------------------------
Stock options 148 171 144
- --------------------------------------------------------------------------------
Incentive awards 161 171 150
- --------------------------------------------------------------------------------
Average diluted shares outstanding 12,299 13,677 15,638
- --------------------------------------------------------------------------------
</TABLE>
(2) Regulatory Matters
At the time of the conversion to a federally chartered stock savings bank, the
Bank established a liquidation account with a balance equal to its retained
earnings at March 31, 1996. The balance in the liquidation account at December
31, 1999 was approximately $16.8 million. The liquidation account will be
maintained for the benefit of eligible account holders who continue to maintain
their accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that the eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases will
not restore an eligible account holder's interest in the liquidation account. In
the event of a complete liquidation, each eligible account holder will be
entitled to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts then
held.
Office of Thrift Supervision (OTS) regulations require savings institutions to
maintain minimum levels of regulatory capital. Under the regulations in effect
at December 31, 1999, 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,
1999 and 1998 the Bank was considered well capitalized.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 25
<PAGE>
Notes to Consolidated Financial Statements
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1999 and 1998, compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a well capitalized
institution (in thousands).
<TABLE>
<CAPTION>
To be well
For capitalized
capital under prompt
adequacy corrective
Actual purposes action
- --------------------------------------------------------------------------------
As of December 31, 1999: Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $149,711 9.4% $23,950 1.5% $ -- - %
- --------------------------------------------------------------------------------
Core capital 149,711 9.4 47,900 3.0 79,833 5.0
- --------------------------------------------------------------------------------
Tier 1 risk-based capital 149,711 17.9 33,433 4.0 50,150 6.0
- --------------------------------------------------------------------------------
Risk-based capital 157,828 18.9 66,867 8.0 83,584 10.0
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
</TABLE>
OTS regulations impose limitations upon all capital distributions by savings
institutions, like the Bank, such as dividends and payments to repurchase or
otherwise acquire shares. The Company may not declare or pay cash dividends on
or repurchase any of its shares of common stock if the effect thereof would
cause stockholders' equity to be reduced below applicable regulatory capital
maintenance requirements, the amount required for the liquidation account, or if
such declaration and payment would otherwise violate regulatory requirements.
(3) Investment Securities Available for Sale
The amortized cost and estimated market value of investment securities available
for sale at December 31, 1999 and December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1999 Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States Government
and agency obligations $ 40,964 $ -- $ (787) $40,177
- --------------------------------------------------------------------------------
State and municipal
obligations 5,761 -- (758) 5,003
- --------------------------------------------------------------------------------
Corporates 75,050 -- (2,483) 72,567
- --------------------------------------------------------------------------------
Equity investments 3,668 -- (635) 3,033
- --------------------------------------------------------------------------------
$125,443 $ -- $(4,663) $120,780
- --------------------------------------------------------------------------------
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
Gross losses on the sale of investment securities available for sale of $49,000,
$0 and $0 were realized in 1999, 1998 and 1997, respectively. There were no
gains realized during these periods.
The amortized cost and estimated market value of investment securities available
for sale, excluding equity investments, at December 31, 1999 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, 1999,
investment securities available for sale with an amortized cost and estimated
market value of $120,579,000 and $116,555,000 respectively, were callable prior
to the maturity date.
<TABLE>
<CAPTION>
Estimated
Amortized Market
December 31, 1999 Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Less than one year $ 200 $ 200
- --------------------------------------------------------------------------------
Due after one year through five years 30,997 30,730
- --------------------------------------------------------------------------------
Due after five years through ten years 9,967 9,447
- --------------------------------------------------------------------------------
Due after 10 years 80,611 77,370
- --------------------------------------------------------------------------------
$121,775 $117,747
- --------------------------------------------------------------------------------
</TABLE>
(4) Mortgage-Backed Securities Available for Sale
The amortized cost and estimated market value of mortgage-backed securities
available for sale at December 31, 1999 and December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1999 Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLMC $ 65,111 $ 73 $ (700) $ 64,484
- --------------------------------------------------------------------------------
FNMA 48,424 43 (615) 47,852
- --------------------------------------------------------------------------------
GNMA 41,467 -- (898) 40,569
- --------------------------------------------------------------------------------
Collaterized mortgage obligations 201,704 -- (8,427) 193,277
- --------------------------------------------------------------------------------
$356,706 $ 116 $ (10,640) $ 346,182
- --------------------------------------------------------------------------------
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
Gross losses on the sale of mortgage-backed securities available for sale of $0,
$850,000 and $142,000 were realized in 1999, 1998 and 1997, respectively. There
were no gains realized during these periods.
Collateralized mortgage obligations issued by FHLMC, FNMA, GNMA and private
interests amounted to $53,518,000, $13,064,000, $8,901,000 and $117,794,000,
respectively, at December 31, 1999 and $15,705,000, $9,699,000, $0 and
$111,763,000, respectively, at December 31, 1998. The privately issued CMOs have
generally been underwritten by large investment banking firms with the timely
payment of principal and interest on
26 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
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 creditworthiness of the enhancer. Thus, in
the event a credit enhancer does not fulfill its obligations, the CMO holder
could be subject to risk of loss similar to a purchaser of a whole loan pool.
Management believes that the credit enhancements are adequate to protect the
Company from losses and has, therefore, not provided an allowance for losses on
its 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.
(5) Loans Receivable, Net
A summary of loans receivable at December 31, 1999 and 1998 follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
Real estate mortgage:
- --------------------------------------------------------------------------------
<S> <C> <C>
One to four-family $ 917,024 $ 844,129
- --------------------------------------------------------------------------------
Commercial real estate, multi-family and land 57,142 42,008
- --------------------------------------------------------------------------------
FHA insured & VA guaranteed 457 500
- --------------------------------------------------------------------------------
974,623 886,637
- --------------------------------------------------------------------------------
Real estate construction 7,791 6,108
- --------------------------------------------------------------------------------
Consumer 56,040 51,785
- --------------------------------------------------------------------------------
Commercial 15,569 6,483
- --------------------------------------------------------------------------------
Total loans 1,054,023 951,013
- --------------------------------------------------------------------------------
Loans in process (2,790) (1,996)
- --------------------------------------------------------------------------------
Deferred fees (78) (608)
- --------------------------------------------------------------------------------
Unearned premium 43 62
- --------------------------------------------------------------------------------
Allowance for loan losses (8,223) (7,460)
- --------------------------------------------------------------------------------
(11,048) (10,002)
- --------------------------------------------------------------------------------
$ 1,042,975 $ 941,011
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, 1998 and 1997, loans in the amount of $2,985,000,
$5,424,000 and $5,554,000, 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 $52,000, $270,000 and $278,000 of additional
interest income would have been recognized for the years ended December 31,
1999, 1998 and 1997, respectively. The Company was not committed to lend
additional funds on any nonaccrual loans at December 31, 1999. The Company had
no impaired loans at December 31, 1999 and 1998.
An analysis of the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 7,460 $ 6,612 $ 6,021
- --------------------------------------------------------------------------------
Provision charged to operations 900 900 900
- --------------------------------------------------------------------------------
Charge-offs (241) (65) (337)
- --------------------------------------------------------------------------------
Recoveries 104 13 28
- --------------------------------------------------------------------------------
Balance at end of year $ 8,223 $ 7,460 $ 6,612
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, 1998 and 1997, the Company serviced loans for others in
the amount of $159,553,000, $132,334,000, and $144,230,000, respectively.
(6) Interest and Dividends Receivable
A summary of interest and dividends receivable at December 31, 1999 and 1998
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans $4,881 $4,644
- --------------------------------------------------------------------------------
Investment securities 1,487 2,279
- --------------------------------------------------------------------------------
Mortgage-backed securities 2,100 2,897
- --------------------------------------------------------------------------------
$8,468 $9,820
- --------------------------------------------------------------------------------
</TABLE>
(7) Premises and Equipment, Net
Premises and equipment at December 31, 1999 and 1998 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,195 $ 3,195
- --------------------------------------------------------------------------------
Buildings and improvements 11,167 11,038
- --------------------------------------------------------------------------------
Leasehold improvements 1,266 1,090
- --------------------------------------------------------------------------------
Furniture and equipment 7,559 6,532
- --------------------------------------------------------------------------------
Automobiles 148 144
- --------------------------------------------------------------------------------
Construction in progress 8 2
- --------------------------------------------------------------------------------
Total 23,343 22,001
- --------------------------------------------------------------------------------
Accumulated depreciation and amortization (9,454) (8,054)
- --------------------------------------------------------------------------------
$ 13,889 $ 13,947
- --------------------------------------------------------------------------------
</TABLE>
(8) Deposits
Deposits, including accrued interest payable of $266,000 and $238,000 at
December 31, 1999 and 1998, respectively, are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Cost Amount Cost
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest bearing account $ 31,328 --% $ 22,154 -- %
- --------------------------------------------------------------------------------
NOW accounts 113,426 1.59 106,363 1.59
- --------------------------------------------------------------------------------
Money market deposit account 80,597 2.61 77,690 2.59
- --------------------------------------------------------------------------------
Savings accounts 171,064 2.03 172,036 2.03
- --------------------------------------------------------------------------------
Time deposits 660,535 5.18 657,008 5.35
- --------------------------------------------------------------------------------
$1,056,950 3.94% $1,035,251 4.08%
- --------------------------------------------------------------------------------
</TABLE>
Included in time deposits at December 31, 1999 and 1998, respectively, is
$73,388,000 and $67,045,000 in deposits of $100,000 and over.
Time deposits at December 31, 1999 mature as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
- --------------------------------------------------------------------------------
<S> <C>
2000 $444,871
- --------------------------------------------------------------------------------
2001 151,283
- --------------------------------------------------------------------------------
2002 39,087
- --------------------------------------------------------------------------------
2003 15,048
- --------------------------------------------------------------------------------
2004 7,349
- --------------------------------------------------------------------------------
Thereafter 2,897
- --------------------------------------------------------------------------------
$660,535
- --------------------------------------------------------------------------------
</TABLE>
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 27
<PAGE>
Notes to Consolidated Financial Statements
Interest expense on deposits for the years ended December 31, 1999, 1998 and
1997 was as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 1,711 $ 1,517 $ 1,388
- --------------------------------------------------------------------------------
Money market deposit accounts 2,090 2,026 2,028
- --------------------------------------------------------------------------------
Savings accounts 3,518 3,442 3,877
- --------------------------------------------------------------------------------
Time deposits 33,601 36,819 35,667
- --------------------------------------------------------------------------------
$40,920 $43,804 $42,960
- --------------------------------------------------------------------------------
</TABLE>
(9) Borrowed Funds
Borrowed funds are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Bank
advances $115,000 5.97% $ 40,000 5.25%
- --------------------------------------------------------------------------------
Securities sold under
agreements to repurchase 239,867 5.66 272,108 5.52
- --------------------------------------------------------------------------------
$354,867 5.76% $312,108 5.49%
- --------------------------------------------------------------------------------
</TABLE>
Information concerning Federal Home Loan Bank ("FHLB") advances and securities
sold under agreements to repurchase ("reverse repurchase agreements") is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Reverse
FHLB Repurchase
Advances Agreements
- --------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Balance $ 67,857 $ 24,113 $253,811 $278,424
- --------------------------------------------------------------------------------
Maximum amount outstanding
at any month end 115,000 87,000 272,740 300,026
- --------------------------------------------------------------------------------
Average interest rate for the year 5.68% 5.37% 5.53% 5.85%
- --------------------------------------------------------------------------------
U.S. Government agencies and mortgage-backed securities pledged as
collateral under reverse repurchase agreements at December 31
- --------------------------------------------------------------------------------
Amortized cost -- -- $281,331 $291,552
- --------------------------------------------------------------------------------
Estimated market value -- -- 273,815 292,936
- --------------------------------------------------------------------------------
</TABLE>
The securities collateralizing the reverse repurchase agreements are not under
the Company's control, as they are delivered to the lender with whom each
transaction is executed. The lender, who may sell, loan or otherwise dispose of
such securities to other parties in the normal course of their operations, agree
to resell to the Company substantially the same securities at the maturities of
the agreement.
<PAGE>
FHLB advances and reverse repurchase agreements have contractual maturities at
December 31, 1999 as follows (in thousands):
<TABLE>
<CAPTION>
Reverse
FHLB Repurchase
Year ended December 31 advances Agreements
- --------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 95,000 $ 46,867
- --------------------------------------------------------------------------------
2001 - 8,000
- --------------------------------------------------------------------------------
2002 - 30,000
- --------------------------------------------------------------------------------
2003 - 40,000
- --------------------------------------------------------------------------------
2004 10,000 45,000
- --------------------------------------------------------------------------------
Thereafter 10,000 70,000
- --------------------------------------------------------------------------------
$ 115,000 $239,867
- --------------------------------------------------------------------------------
Amount callable by lender prior to the maturity date $ 15,000 $185,000
- --------------------------------------------------------------------------------
</TABLE>
The Bank has an available overnight line of credit with the FHLB for $50,000,000
which expires November 22, 2000. The Bank also has available from the FHLB, a
one-month overnight repricing line of credit for $50,000,000 which expires
November 22, 2000. When utilized, both lines carry a floating interest rate of
10 basis points over the current Federal funds rate. All FHLB advances,
including the lines of credit, are secured by the Bank's mortgage loans,
mortgaged-backed securities, U. S. Government agency obligations and FHLB stock.
As a member of the FHLB of New York, the Company is required to maintain a
minimum investment in the capital stock of the Federal Home Loan Bank of New
York, at cost, in an amount not less than 1% of its outstanding home loans
(including mortgage-backed securities) or 5% of its outstanding notes payable to
the FHLB.
(10) Income Taxes
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 which amounted to $1,555,000 and $1,944,000 at
December 31, 1999 and 1998, respectively. The Company has accrued for this
liability in the consolidated financial statements.
Retained earnings at December 31, 1999 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, 1999 the
Company had an unrecognized deferred tax liability of $3,870,000 with respect to
this reserve.
28 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
The provision for income taxes for the years ended December 31, 1999, 1998 and
1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $7,870 $5,460 $6,921
- --------------------------------------------------------------------------------
State 38 31 237
- --------------------------------------------------------------------------------
Total Current 7,908 5,491 7,158
- --------------------------------------------------------------------------------
Deferred:
- --------------------------------------------------------------------------------
Federal 757 1,746 584
- --------------------------------------------------------------------------------
State - 3 (55)
- --------------------------------------------------------------------------------
Total Deferred 757 1,749 529
- --------------------------------------------------------------------------------
$8,665 $7,240 $7,687
- --------------------------------------------------------------------------------
</TABLE>
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,
1999, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before provision
for income taxes $25,012 $ 20,212 $ 21,512
- --------------------------------------------------------------------------------
Applicable statutory
Federal income tax rate 35.0% 35.0% 35.0%
- --------------------------------------------------------------------------------
Computed "expected" Federal
income tax expense $ 8,754 $ 7,074 $ 7,529
- --------------------------------------------------------------------------------
Increase(decrease) in Federal income
tax expense resulting from:
- --------------------------------------------------------------------------------
ESOP adjustment 189 218 316
- --------------------------------------------------------------------------------
State income taxes net of
Federal benefit 24 22 119
- --------------------------------------------------------------------------------
Other items, net (302) (74) (277)
- --------------------------------------------------------------------------------
$ 8,665 $ 7,240 $ 7,687
- --------------------------------------------------------------------------------
Effective tax rate 34.6% 35.8% 35.7%
- --------------------------------------------------------------------------------
</TABLE>
Included in other assets at December 31, 1999 and 1998 is a net deferred tax
asset of $8,097,000 and $3,908,000, respectively. In addition, included in other
liabilities at December 31, 1999 and 1998 is a current tax payable of $37,000
and $5,545,000, 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, 1999 and
1998 are presented below (in thousands).
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
- --------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan and real estate
owned losses per books $ 3,159 $ 2,913
- --------------------------------------------------------------------------------
Reserve for uncollected interest 82 110
- --------------------------------------------------------------------------------
Deferred compensation 318 351
- --------------------------------------------------------------------------------
Premises and equipment,
differences in depreciation 303 244
- --------------------------------------------------------------------------------
Other reserves 199 199
- --------------------------------------------------------------------------------
Stock awards 712 677
- --------------------------------------------------------------------------------
ESOP 62 100
- --------------------------------------------------------------------------------
Charitable donation 2,051 2,978
- --------------------------------------------------------------------------------
Unrealized loss on securities
available for sale 5,673 727
- --------------------------------------------------------------------------------
Other 92 87
- --------------------------------------------------------------------------------
Total gross deferred tax assets 12,651 8,386
- --------------------------------------------------------------------------------
Less valuation allowance (1,166) (1,166)
- --------------------------------------------------------------------------------
Deferred tax assets, net 11,485 7,220
- --------------------------------------------------------------------------------
Deferred tax liabilities:
- --------------------------------------------------------------------------------
Allowance for loan and real estate
owned losses for tax purposes (581) (726)
- --------------------------------------------------------------------------------
Excess servicing on sale of
mortgage loans (231) (130)
- --------------------------------------------------------------------------------
Investments, discount accretion (58) (20)
- --------------------------------------------------------------------------------
Deferred loan and commitment fees (833) (648)
- --------------------------------------------------------------------------------
Undistributed income of real estate
investment trust subsidiary (1,685) (1,788)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (3,388) (3,312)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 8,097 $ 3,908
- --------------------------------------------------------------------------------
</TABLE>
The Company, as part of the conversion, recorded a charitable donation expense
of $13,419,000 in 1996. 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.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 29
<PAGE>
Notes to Consolidated Financial Statements
(11) Employee Benefit Plans
Employee Stock Ownership Plan
As part of the conversion, the Bank established an Employee Stock Ownership Plan
("ESOP") to provide retirement benefits for eligible employees. All full-time
employees are eligible to participate in the ESOP after they attain age 21 and
complete one year of service during which they work at least 1,000 hours.
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 1999, 1998 and 1997,
11,544, 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, 1999 and 1998, contributions to
the ESOP, which were used to fund principal and interest payments on the ESOP
debt, totaled $2,970,000 and $3,111,000, respectively. During 1999 and 1998,
$781,000 and $601,000, respectively, of dividends paid on unallocated ESOP
shares were used for debt service. At December 31, 1999 and 1998, the loan had
an outstanding balance of $16,098,000 and $17,615,000, respectively, and the
ESOP had unallocated shares of 1,243,418 and 1,373,814, respectively. At
December 31, 1999, the unallocated shares had a fair value of $21,527,000. 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, 1999, 1998 and 1997, the Bank recorded
compensation expense related to the ESOP of $2,190,000, $2,350,000 and
$2,345,000, respectively, including $541,000, $623,000 and $917,000,
respectively, representing additional compensation expense to reflect the
increase in the average fair value of committed to be released and allocated
shares in excess of the Bank's cost. As of December 31, 1999, 399,789 shares had
been allocated to participants and 121,385 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 components of net pension benefit for the year ended December 31, 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
1997
- --------------------------------------------------------------------------------
<S> <C>
Service cost - benefits earned during the year $ --
- --------------------------------------------------------------------------------
Interest cost on projected benefit obligation 113
- --------------------------------------------------------------------------------
Actual return on plan assets (81)
- --------------------------------------------------------------------------------
Net amortization and deferral (39)
- --------------------------------------------------------------------------------
Net pension benefit $ (7)
- --------------------------------------------------------------------------------
Assumptions used to develop the net periodic pension cost are:
- --------------------------------------------------------------------------------
Discount rate 6.51%
- --------------------------------------------------------------------------------
Expected long-term rate of return on assets 6.75
- --------------------------------------------------------------------------------
Rate of increase in compensation level N/A
- --------------------------------------------------------------------------------
</TABLE>
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. From January 1, 1997 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 was $53,000 for the year
ended December 31, 1997.
(12) Incentive Plan
On February 4, 1997, a special meeting of the Company's shareholders ratified
the OceanFirst Financial Corp. 1997 Incentive Plan which was subsequently
amended on February 18, 1998. The Amended and Restated OceanFirst Financial
Corp. 1997 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.
During 1997, the Company acquired 671,046 shares in the open market at a cost of
$10,176,000. At December 31, 1999, 652,116 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").
30 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
The first and second annual installments vested 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 Committee established certain levels of earnings per share growth
as the performance goal for 1999. As a result of the Company attaining the
earnings per share growth specified by the Committee, all of the shares in the
third annual installment will vest on February 4, 2000. The Company recorded
compensation expense relating to stock awards of $1,933,000, $1,934,000 and
$1,773,000 for the years ended December 31, 1999, 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 generally 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 1999, 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):
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
Net income:
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported $ 16,347 $ 12,972 $ 13,825
- --------------------------------------------------------------------------------
Pro forma 15,343 12,059 13,000
- --------------------------------------------------------------------------------
Basic earnings per share:
- --------------------------------------------------------------------------------
As reported $ 1.36 $ .97 $ .90
- --------------------------------------------------------------------------------
Pro forma 1.28 .90 .85
- --------------------------------------------------------------------------------
Diluted earnings per share:
- --------------------------------------------------------------------------------
As reported $ 1.33 $ .95 $ .88
- --------------------------------------------------------------------------------
Pro forma 1.25 .88 .83
- --------------------------------------------------------------------------------
Weighted average fair value of an
option share granted during the year $ 4.02 $ 4.35 $ 4.08
- --------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.76% 5.21% 6.25%
- --------------------------------------------------------------------------------
Expected option life 6 years 6 years 6 years
- --------------------------------------------------------------------------------
Expected volatility 25% 25% 25%
- --------------------------------------------------------------------------------
Expected dividend yield 3.20% 2.75% 2.50%
- --------------------------------------------------------------------------------
</TABLE>
A summary of option activity for the years ended December 31, 1999, 1998 and
1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,642,827 $ 14.67 1,567,402 $ 14.46 -- $ --
- ------------------------------------------------------------------------------------------------------------
Granted 58,287 16.26 112,402 17.23 1,621,758 14.45
- ------------------------------------------------------------------------------------------------------------
Exercised (1,208) 14.41 (2,348) 14.41 -- --
- ------------------------------------------------------------------------------------------------------------
Forfeited (25,903) 15.33 (34,629) 14.41 (54,356) 14.41
- ------------------------------------------------------------------------------------------------------------
Outstanding at
end of year 1,674,003 $ 14.72 1,642,827 $ 14.67 1,567,402 $ 14.46
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options exercisible 626,761 310,527 None
- -------------------------------------------------------------------------------------------------------
Range of exercise prices $13.94 - $19.88 $13.94 - $19.88 $14.41- $18.56
- -------------------------------------------------------------------------------------------------------
Weighted average
remaining contractual life 7.2 years 8.2 years 9.1 years
- -------------------------------------------------------------------------------------------------------
</TABLE>
(13) Commitments, Contingencies and Concentrations of Credit Risk
The Company, in the normal course of business, is party to financial instruments
and commitments which involve, to varying degrees, elements of risk in excess of
the amounts recognized in the consolidated financial statements. These financial
instruments and commitments include unused consumer lines of credit and
commitments to extend credit.
At December 31, 1999, the following commitments and contingent liabilities
existed which are not reflected in the accompanying consolidated financial
statements (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
- --------------------------------------------------------------------------------
<S> <C>
Unused consumer and construction loan
lines of credit (primarily floating-rate) $15,673
--------------------------------------------------------------------------------
Unused commercial loan lines of credit (primarily
floating-rate) 17,684
- ---------------------------------------------------------------------------------
Other commitments to extend credit:
- --------------------------------------------------------------------------------
Fixed-Rate 18,112
- ---------------------------------------------------------------------------------
Adjustable-Rate 18,228
- ---------------------------------------------------------------------------------
Floating-Rate 1,817
- ---------------------------------------------------------------------------------
</TABLE>
The Company's fixed-rate loan commitments expire within 90 days of issuance and
carried interest rates ranging from 6.875% to 9.50% at December 31, 1999.
The Company's maximum exposure to credit losses in the event of nonperformance
by the other party to these financial instruments and commitments is represented
by the contractual amounts. The Company uses the same credit policies in
granting commitments and conditional obligations as it does for financial
instruments recorded in the consolidated statements of financial condition.
These commitments and obligations do not necessarily represent future cash flow
requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's assessment of risk. Substantially all of the unused
consumer and construction loan lines of credit are collateralized by mortgages
on real estate.
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 31
<PAGE>
Notes to Consolidated Financial Statements
At December 31, 1999, the Company is obligated under noncancellable operating
leases for premises and equipment. Rental expense under these leases aggregated
approximately $604,000, $573,000 and $515,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
The projected minimum rental commitments as of December 31, 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended December 31
- --------------------------------------------------------------------------------
<S> <C>
2000 $ 600
- --------------------------------------------------------------------------------
2001 535
- --------------------------------------------------------------------------------
2002 512
- --------------------------------------------------------------------------------
2003 448
- --------------------------------------------------------------------------------
2004 452
- --------------------------------------------------------------------------------
Thereafter 3,268
- --------------------------------------------------------------------------------
$5,815
- --------------------------------------------------------------------------------
</TABLE>
The Company grants one to four-family first mortgage real estate loans and
multifamily first mortgage real estate loans to borrowers primarily located in
Ocean, Middlesex and Monmouth Counties, New Jersey. Its borrowers' abilities to
repay their obligations are dependent upon various factors including the
borrowers' income and net worth, cash flows generated by the underlying
collateral, value of the underlying collateral and priority of the Company's
lien on the property. Such factors are dependent upon various economic
conditions and individual circumstances beyond the Company's control; the
Company is, therefore, subject to risk of loss.
The Company believes its lending policies and procedures adequately minimize the
potential exposure to such risks and that adequate provisions for loan losses
are provided for all known and inherent risks. Collateral and/or guarantees are
required for all loans.
Contingencies
The Company is a defendant in certain claims and legal actions arising in the
ordinary course of business. Management and its legal counsel are of the opinion
that the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liquidity.
(14) Fair Value of Financial Instruments
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
nonperforming 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 nonperforming 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 are, by definition,
equal to the amount payable on demand. The related insensitivity of the majority
of these deposits to interest rate changes creates a significant inherent value
which is not reflected in the fair value reported. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
Borrowed Funds
Fair value estimates are based on discounting contractual cash flows using rates
which approximate the rates offered for borrowings of similar remaining
maturities.
Commitments to extend credit, and to purchase or sell securities
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
32 | OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT
<PAGE>
The estimated fair values of the Bank's financial instruments as of December 31,
1999 and 1998 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.
<TABLE>
<CAPTION>
Book Fair
December 31, 1999 Value Value
- --------------------------------------------------------------------------------
Financial Assets:
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 10,007 $ 10,007
- --------------------------------------------------------------------------------
Investment securities available for sale 120,780 120,780
- --------------------------------------------------------------------------------
Mortgage-backed securities available for sale 346,182 346,182
- --------------------------------------------------------------------------------
Federal Home Loan Bank of New York stock 16,800 16,800
- --------------------------------------------------------------------------------
Loans receivable and mortgage loans held for sale 1,042,975 1,032,824
- --------------------------------------------------------------------------------
Financial Liabilities:
- --------------------------------------------------------------------------------
Deposits 1,056,950 1,053,965
- --------------------------------------------------------------------------------
Borrowed funds $ 354,867 $ 348,041
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Borrowed funds $ 312,108 $ 311,437
- --------------------------------------------------------------------------------
</TABLE>
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered financial assets or
liabilities include the mortgage banking operation, deferred tax assets, and
premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
(15) Parent-Only Financial Information
The following condensed statements of financial condition at December 31, 1999
and 1998 and condensed statements of operations and cash flows for the years
ended December 31, 1999, 1998 and 1997 for OceanFirst Financial Corp. (parent
company only) reflects the Company's investment in its wholly-owned subsidiary,
the Bank, using the equity method of accounting.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 7 $ 7
- --------------------------------------------------------------------------------
Advances to subsidiary Bank 5,872 7,639
- --------------------------------------------------------------------------------
Investment securities 3,033 2,834
- --------------------------------------------------------------------------------
ESOP loan receivable 16,098 17,615
- --------------------------------------------------------------------------------
Investment in subsidiary Bank 141,422 167,885
- --------------------------------------------------------------------------------
Other assets 1,155 2,143
- --------------------------------------------------------------------------------
Total Assets $167,587 $198,123
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- --------------------------------------------------------------------------------
Taxes payable $ 57 $ 383
- --------------------------------------------------------------------------------
Stockholders' Equity 167,530 197,740
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $167,587 $198,123
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend income - Subsidiary Bank $ 36,500 $ 18,000 $ --
- --------------------------------------------------------------------------------
Interest income - Investment securities 29 354 2,889
- --------------------------------------------------------------------------------
Interest income - Advances to
subsidiary Bank 210 234 132
- --------------------------------------------------------------------------------
Interest income - ESOP loan receivable 1,453 1,342 1,015
- --------------------------------------------------------------------------------
Total dividend and interest income 38,192 19,930 4,036
- --------------------------------------------------------------------------------
Loss on sale of securities available for sale 49 -- --
- --------------------------------------------------------------------------------
Other income -- -- 2
- --------------------------------------------------------------------------------
Other operating expenses 1,186 421 383
- --------------------------------------------------------------------------------
Income before income taxes and equity in
(distributions in excess of) undistributed
earnings of subsidiary Bank 36,957 19,509 3,655
- --------------------------------------------------------------------------------
Provision for income taxes 150 562 1,233
- --------------------------------------------------------------------------------
Income before equity in (distributions
in excess of) undistributed earnings of
subsidiary Bank 36,807 18,947 2,422
- --------------------------------------------------------------------------------
Equity in (distributions in excess of)
undistributed earnings of subsidiary Bank (20,460) (5,975) 11,403
- --------------------------------------------------------------------------------
Net income $ 16,347 $ 12,972 $ 13,825
- --------------------------------------------------------------------------------
</TABLE>
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 33
<PAGE>
Notes to Consolidated Financial Statements
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Cash flows from operating activities:
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 16,347 $ 12,972 $13,825
- --------------------------------------------------------------------------------
Decrease in advances to subsidiary Bank 1,767 2,292 61,622
- --------------------------------------------------------------------------------
(Equity in) distributions in excess of
undistributed earnings of subsidiary Bank 20,460 5,975 (11,403)
- --------------------------------------------------------------------------------
Loss on sale of securities available for sale 49 -- --
- --------------------------------------------------------------------------------
Deferred taxes 1,081 1,177 289
- --------------------------------------------------------------------------------
(Decrease) increase in taxes payable (326) (765) 458
- --------------------------------------------------------------------------------
Reduction in Incentive Awards 1,933 1,934 1,773
- --------------------------------------------------------------------------------
Net cash provided by operating activities 41,311 23,585 66,564
- --------------------------------------------------------------------------------
Cash flows from investing activities:
- --------------------------------------------------------------------------------
Purchase of investment securities (611) (2,046) (71,170)
- --------------------------------------------------------------------------------
Sale of investment securities 121 10,000 60,000
- --------------------------------------------------------------------------------
Funding of ESOP loan receivable,
net of repayments 1,517 (6,431) 1,118
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 1,027 1,523 (10,052)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
- --------------------------------------------------------------------------------
Dividends paid (7,157) (6,470) (4,800)
- --------------------------------------------------------------------------------
Purchase of Incentive Award shares -- -- (10,176)
- --------------------------------------------------------------------------------
Purchase of treasury stock (35,198) (18,672) (41,536)
- --------------------------------------------------------------------------------
Exercise of stock options 17 34 --
- --------------------------------------------------------------------------------
Net cash used in financing activities (42,338) (25,108) (56,512)
- --------------------------------------------------------------------------------
Net increase in cash and due from banks -- -- --
- --------------------------------------------------------------------------------
Cash and due from banks at
beginning of year 7 7 7
- --------------------------------------------------------------------------------
Cash and due from banks at end of year $ 7 $ 7 $ 7
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(Unaudited)
Quarter ended Dec. 31 Sept. 30 June 30 March 31
- --------------------------------------------------------------------------------
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 27,643 $ 27,111 $ 26,573 $ 26,020
- --------------------------------------------------------------------------------
Interest expense 15,193 14,774 14,538 14,304
- --------------------------------------------------------------------------------
Net interest income 12,450 12,337 12,035 11,716
- --------------------------------------------------------------------------------
Provision for loan losses 225 225 225 225
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 12,225 12,112 11,810 11,491
- --------------------------------------------------------------------------------
Other income 1,364 1,264 1,053 1,545
- --------------------------------------------------------------------------------
Operating expenses 7,775 6,835 6,650 6,592
- --------------------------------------------------------------------------------
Income before provision
for income taxes 5,814 6,541 6,213 6,444
- --------------------------------------------------------------------------------
Provision for income taxes 1,771 2,364 2,224 2,306
- --------------------------------------------------------------------------------
Net income $ 4,043 $ 4,177 $ 3,989 $ 4,138
- --------------------------------------------------------------------------------
Basic earnings per share $ .36 $ .35 $ .32 $ .33
- --------------------------------------------------------------------------------
Diluted earnings per share $ .35 $ .34 $ .32 $ .33
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
</TABLE>
34 | OCEANFIRST FINANCIAL CORP. (OCFC) > 1999 ANNUAL REPORT
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
OceanFirst Financial Corp:
We have audited the consolidated statements of financial condition of OceanFirst
Financial Corp. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999.
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 OceanFirst Financial
Corp. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Short Hills, New Jersey
January 20, 2000
OCEANFIRST FINANCIAL CORP. (OCFC) 1999 ANNUAL REPORT | 35
<PAGE>
Exhibit 23
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
The Board of Directors
Ocean Financial Corp.:
We consent to incorporation by reference in the registration statement (No.
33-34143) on Form S-8, pertaining to the OceanFirst Financial Corp. 1997
Incentive Plan, and to the registration statement (No. 33-34145), on Form S-8,
pertaining to the Retirement Plan for OceanFirst Bank, of OceanFirst Financial
Corp., of our report dated January 20, 2000, relating to the consolidated
statements of financial condition of OceanFirst Financial Corp. and subsidiary
as of December 31, 1999 and 1998 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1999, which report is incorporated by
reference in the December 31, 1999 Annual Report on Form 10-K of OceanFirst
Financial Corp.
KPMG LLP
Short Hills, New Jersey
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,007
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 466,962
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,042,975
<ALLOWANCE> 8,223
<TOTAL-ASSETS> 1,590,907
<DEPOSITS> 1,056,950
<SHORT-TERM> 354,867
<LIABILITIES-OTHER> 11,560
<LONG-TERM> 0
0
0
<COMMON> 181
<OTHER-SE> 167,349
<TOTAL-LIABILITIES-AND-EQUITY> 1,590,907
<INTEREST-LOAN> 74,640
<INTEREST-INVEST> 32,707
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 107,347
<INTEREST-DEPOSIT> 40,920
<INTEREST-EXPENSE> 58,809
<INTEREST-INCOME-NET> 48,538
<LOAN-LOSSES> 900
<SECURITIES-GAINS> (49)
<EXPENSE-OTHER> 27,852
<INCOME-PRETAX> 25,012
<INCOME-PRE-EXTRAORDINARY> 25,012
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,347
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 7.08
<LOANS-NON> 2,985
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,460
<CHARGE-OFFS> 241
<RECOVERIES> 104
<ALLOWANCE-CLOSE> 8,223
<ALLOWANCE-DOMESTIC> 5,132
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,091
</TABLE>
