UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31,June 30, 1998
[_][ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to
_____________---------- ---------
Commission file number 0-27428
OCEAN FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Delaware 22-3412577
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(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
975 Hooper Avenue, Toms River, NJ 08753
---------------------------------------- -----------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 240-4500
-----------------------
------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
----- -----
As of May 12,August 6, 1998, there were 7,767,06715,384,134 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
OCEAN FINANCIAL CORP.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
- ------- ---------------------
PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
as of March 31,June 30, 1998 (unaudited) and December 31, 1997 11997.........1
Consolidated Statements of Income for the three and six
months ended March 31,June 30, 1998 and 1997 (unaudited)...... 2...............2
Consolidated Statements of Cash Flows for the threesix
months ended March 31,June 30, 1998 and 1997 (unaudited)...... 3...............3
Notes to Unaudited Consolidated Financial Statements.. 5Statements..........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.................... 7Operations...........................7
Item 3. Quantitative and Qualitative Disclosure about Market Risk....10
Part II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings..................................... 10Proceedings............................................11
Item 2. Changes in Securities................................. 10Securities........................................11
Item 3. Default Upon Senior Securities........................ 10Securities...............................11
Item 4. Submission of Matters to a Vote of Security Holders... 10Holders..........11
Item 5. Other Information..................................... 10Information............................................11
Item 6. Exhibits and Reports on Form 8-K...................... 10
Signatures....................................................... 128-K.............................11
Signatures .............................................................12
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
March 31 December 31,
1998 1997
--------- ------------
(Unaudited)
ASSETS
- ------
Cash and due from banks $ 2,543 $ 2,225
Investment securities available for sale 173,536 207,357
Federal Home Loan Bank of New York stock, at cost 15,043 14,980
Mortgage-backed securities available for sale 448,690 457,148
Loans receivable, net 823,603 783,695
Mortgage loans held for sale 4,284 -
Interest and dividends receivable 10,865 11,064
Real estate owned, net 1,111 1,198
Premises and equipment, net 14,512 14,279
Other assets 24,298 19,001
---------- ----------
Total assets $1,518,485June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
- ------
Cash and due from banks $ 3,896 $ 2,225
Federal funds sold 18,900 -
---------- ----------
Cash and cash equivalents 22,796 2,225
Investment securities available for sale 183,799 207,357
Federal Home Loan Bank of New York
stock, at cost 15,043 14,980
Mortgage-backed securities available for
sale 392,335 457,148
Loans receivable, net 870,450 783,695
Mortgage loans held for sale 3,009 -
Interest and dividends receivable 10,593 11,064
Real estate owned, net 432 1,198
Premises and equipment, net 14,480 14,279
Other assets 25,327 19,001
---------- ----------
Total assets $1,538,264 $1,510,947
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $1,013,192 $ 976,764
Federal Home Loan Bank borrowings - 20,400
Securities sold under agreements to repurchase 300,026 288,200
Advances by borrowers for taxes and insurance 5,525 4,773
Other liabilities 8,662 5,266
---------- ----------
Total liabilities 1,327,405 1,295,403
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares
issued - -
Common stock, $.01 par value, 55,000,000
shares authorized, 18,118,248 shares
issued and 15,534,134 and 15,705,720 shares
outstanding at June 30, 1998 and December
31, 1997, respectively 181 181
Additional paid-in capital 177,936 177,223
Retained earnings-substantially restricted 101,001 97,487
Accumulated other comprehensive income 1,769 989
Less: Unallocated common stock held by
Employee Stock Ownership Plan (18,420) (10,903)
Unearned Incentive Awards (6,930) (7,897)
Treasury Stock at cost (2,584,114
and 2,412,528 shares at June 30,
1998 and December 31, 1997,
respectively) (44,678) (41,536)
---------- ----------
Total stockholders' equity 210,859 215,544
---------- ----------
Total liabilities and stockholders'
equity $1,538,264 $1,510,947
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 987,180 $ 976,764
Federal Home Loan Bank borrowings 13,600 20,400
Securities sold under agreements to repurchase 288,886 288,200
Advances by borrowers for taxes and insurance 4,962 4,773
Other liabilities 7,909 5,266
---------- ----------
Total liabilities 1,302,537 1,295,403
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, no shares issued - -
Common stock, $.01 par value, 55,000,000
shares authorized, 18,118,248 shares issued
and 15,534,134 and 15,705,720 shares
outstanding at March 31, 1998 and December 31,
1997, respectively 181 181
Additional paid-in capital 177,621 177,223
Retained earnings-substantially restricted 99,534 97,487
Accumulated other comprehensive income 1,265 989
Less: Unallocated common stock held by
Employee Stock Ownership Plan (10,562) (10,903)
Unearned Incentive Awards (7,413) (7,897)
Treasury Stock at cost (2,584,114 and
2,412,528 shares at March 31, 1998 and
December 31, 1997, respectively) (44,678) (41,536)
---------- ----------
Total stockholders' equity 215,948 215,544
---------- ----------
Total liabilities and stockholders'
equity $1,518,485 $1,510,947
========== ==========
See accompanying notes to unaudited consolidated financial statements.
Note: Shares and related amounts for prior periods have been adjusted for the
two-for-one stock split effected in the form of a 100% stock dividend
payablepaid on May 15,
1998 to common stockholders of record as of May 4, 1998.
1
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share amounts)
For the three months For the six months
ended March 31,
--------------------June 30, ended June 30,
---------------------- ---------------------
1998 1997 -------- --------1998 1997
--------- ----------- --------- ----------
(Unaudited) (Unaudited)
Interest income:
Loans $15,773 $13,594$16,643 $14,097 $32,416 $27,691
Mortgage-backed securities 7,040 5,7306,293 6,680 13,333 12,410
Investment securities and
other 3,413 3,221
-------- --------3,283 3,533 6,697 6,754
------- ------- ------- -------
Total interest income 26,226 22,545
-------- --------26,219 24,310 52,446 46,855
------- ------- ------- -------
Interest expense:
Deposits 10,745 10,29510,930 10,605 21,675 20,900
Borrowed funds 4,401 1,738
-------- --------4,380 2,905 8,781 4,643
------- ------- ------- -------
Total interest expense 15,146 12,033
-------- --------15,310 13,510 30,456 25,543
------- ------- ------- -------
Net interest income 11,080 10,51210,909 10,800 21,990 21,312
Provision for loan losses 225 225 -------- --------450 450
------- ------- ------- -------
Net interest income after
provision for loan losses 10,855 10,287
-------- --------10,684 10,575 21,540 20,862
------- ------- ------- -------
Other income:
Fees and service charges 533 502508 448 1,041 950
Net gain (loss) on sales of
loans available for sale 3164 0 167 (1)
Net (cost of) income from other real
estate operations (49) 5189 2 140 6
Other 134 80
-------- --------192 125 326 207
------- ------- ------- -------
Total other income 621 586
-------- --------1,053 575 1,674 1,162
------- ------- ------- -------
Operating expenses:
Compensation and employee
benefits 3,504 3,3043,779 3,494 7,283 6,798
Occupancy 446 499472 467 918 966
Equipment 313 313355 358 668 670
Marketing 323 121428 282 752 403
Federal deposit insurance 217 88208 434 297
Data processing 313 378314 292 627 670
General and administrative 865 757
-------- --------1,108 744 1,973 1,502
------- ------- ------- -------
Total operating expenses 5,981 5,460
-------- --------6,673 5,845 12,655 11,306
------- ------- ------- -------
Income before provision
for income taxes 5,495 5,4135,064 5,305 10,559 10,718
Provision for income taxes 1,986 2,024
-------- --------1,862 1,889 3,848 3,913
------- ------- ------- -------
Net income $ 3,5093,202 $ 3,389
======== ========3,416 $ 6,711 $ 6,805
======= ======= ======= =======
Basic earnings per share $ .250.23 $ .205
======== ========.22 $ .48 $ .42
======= ======= ======= =======
Diluted earnings per share $ .245.23 $ .205
======== ========.21 $ .47 $ .42
======= ======= ======= =======
Average basic shares outstanding 13,972 16,488
======== ========13,757 15,796 13,864 16,142
======= ======= ======= =======
Average diluted shares
outstanding 14,326 16,542
======== ========14,177 15,949 14,246 16,246
======= ======= ======= =======
See accompanying notes to unaudited consolidated financial statements.
Note: Earnings per share and shares outstanding for prior periods have been
adjusted for the two-
for-onetwo-for-one stock split effected in the form of a 100%
stock dividend payablepaid on May 15, 1998 to common stockholders of record as of May 4, 1998.
2
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the threesix months
ended March 31,
--------------------June 30,
---------------------------
1998 1997
-------- --------------------- ------------
(Unaudited)
Cash flows from operating activities:
Net income $ 3,5096,711 $ 3,389
-------- --------6,805
------------ ------------
Adjustments to reconcile net income to net cash
(used in)
provided by operating activities:
Depreciation and amortization of premises
and equipment 344 317713 661
Amortization of Incentive Awards 484 306967 807
Amortization of ESOP 341 357683 714
ESOP adjustment 270 165585 355
Tax benefit of stock plans 128 -
Amortization of servicing asset 74 42167 89
Net premium amortization in excess of discount
accretion on securities 837 9871,755 1,931
Net accretion of deferred fees and discounts
in excess of premium amortization on loans (143) (86)(261) (183)
Provision for loan losses 225 225450 450
Net gain on sales of real estate owned (3) (46)(78) (129)
Net (gain) loss on sales of loans available
for sale (3)(167) 1
Proceeds from sales of mortgage loans held for
sale 99912,989 703
Mortgage loans originated for sale (5,292)(16,124) -
Decrease (increase) in interest and dividends
receivable 199 (1,054)471 (2,042)
Increase in other assets (5,392) (413)(5,629) (537)
Increase in other liabilities 2,643 1,270
-------- --------3,396 137
------------ ------------
Total adjustments (4,417) 2,774
-------- --------45 2,957
------------ ------------
Net cash (used in) provided by operating activities (908) 6,163
-------- --------6,756 9,762
------------ ------------
Cash flows from investing activities:
Net increase in loans receivable (40,216) (20,662)(87,408) (48,250)
Purchase of investment securities available for
sale (16,000) (25,000)(81,691) (49,984)
Purchase of mortgage-backed securities available
for sale (40,567) (88,753)(151,199)
Proceeds from maturities of investment securities
available for sale 50,000 5,250105,025 15,270
Principal payments on mortgage-backed securities
available for sale 48,447 47,239105,087 88,396
Purchases of Federal Home Loan Bank of New York
stock (63) (1,935)(3,054)
Proceeds from sales of real estate owned 316 6281,308 1,255
Purchases of premises and equipment (577) (1,039)
-------- --------(914) (1,296)
------------ ------------
Net cash provided by (used in) investing
activities 1,340 (84,272)
-------- --------777 (148,862)
------------ ------------
Continued
3
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
For the threesix months
ended March 31,
---------------------------June 30,
----------------------
1998 1997
------ ----------------- ---------
(Unaudited)
Cash flows from financing activities:
Acquisition of deposits $ 10,732 -
Deposit premium (1,030) -
Increase in deposits $10,416 10,93125,696 26,074
Decrease in Federal Home Loan Bank borrowings (6,800) (5,300)(20,400) (3,500)
Increase in securities sold under agreements
to repurchase 686 72,49011,826 138,090
Increase in advances by borrowers for taxes and
insurance 189 403752 851
Dividends paid (1,463)(3,196) (1,689)
Purchase of Incentive Award stock - (10,176)
Purchase of ESOP shares (8,200) -
Purchase of treasury stock (3,142) -
------- -------(14,270)
---------- --------
Net cash (used in) provided by financing activities (114) 78,524
------- -------13,038 135,380
---------- --------
Net increase (decrease) in cash and due from banks 318 415cash
equivalents 20,571 (3,720)
Cash and due from bankscash equivalents at beginning of period 2,225 5,372
------- ----------------- --------
Cash and due from bankscash equivalents at end of period $ 2,54322,796 $ 5,787
======= =======1,652
========== ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $14,999 $11,812$ 30,090 $ 25,136
Income taxes 10 3,711
Noncash investing activities:
Transfer of loans receivable to real estate owned 226 411464 839
Mortgage loans securitized into mortgage-backed
securities 1,00513,073 -
======= ================= ========
See accompanying notes to unaudited consolidated financial statements.
4
OCEAN FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
Note 1. Basis of Presentation
- -----------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Ocean Financial Corp. (the "Company") and its wholly-owned
subsidiary, Ocean Federal Savings Bank (the "Bank") and its wholly-owned
subsidiaries, Ocean Federal Realty Inc. and Ocean Investment Services, Inc.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. The results of operations for the three and six months ended
March
31,June 30, 1998 are not necessarily indicative of the results of operations that
may be expected for all of 1998.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report to Stockholders on Form 10-K for the year ended
December 31, 1997.
Note 2. Earnings per Share
- ---------------------------
Amounts per common share for prior periods have been adjusted for the two-for-onetwo-for-
one stock split effected in the form of a 100% stock dividend declared by the
Company's Board of Directors on April 22, 1998 and payablepaid on May 15, 1998 to common stockholders
of record as of May 4, 1998.
The following reconciles shares outstanding for basic and diluted earnings per
share for the three and six months ended March 31,June 30, 1998 and 1997
Three months ended March 31Six months ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
-------- -------- ------- -------
Weighted average shares issued net
of Treasury shares 15,636 18,11815,534 17,644 15,584 17,881
Less: Unallocated ESOP shares (1,070) (1,212)(1,231) (1,177) (1,150) (1,195)
Unallocated incentive
award shares (594) (418)(546) (671) (570) (544)
------ -------------- ------ ------
Average basic shares outstanding 13,972 16,48813,757 15,796 13,864 16,142
Add: Effect of dilutive securities:
Stock options 216 28283 73 248 51
Incentive awards 138 26137 80 134 53
------ -------------- ------ ------
Average diluted shares outstanding 14,326 16,54214,177 15,949 14,246 16,246
====== ============== ====== ======
Note 3. Impact of Recent Accounting Pronouncements
- --------------------------------------------------
Effective January 1, 1998, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. Under SFAS 130,
comprehensive income is divided into net income and other comprehensive income.
Other comprehensive income includes items previously recorded directly in
equity, such as unrealized gains or losses on securities available for sale.
Comparative financial statements provided for earlier periods have been
reclassified to conform with the provisions of this Statement.
SFAS 130 requires total comprehensive income and its components to be displayed
on the face of a financial statement for annual financial statements. For
interim financial statements, SFAS 130 requires only total comprehensive income
to be reported and allows such disclosure to be presented in the notes to the
interim financial statements.
5
For the three month periods ended March 31,June 30, 1998 and 1997 total comprehensive
income amounted to $3,665,000$3,706,000 and $3,350,000,$3,515,000, respectively. For the six month
periods ended June 30, 1998 and 1997, total comprehensive income amounted to
$7,491,000 and $6,865,000, respectively.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" (SFAS 132). SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information about changes in the benefit
obligations and fair value of plan assets that will facilitate financial
analysis, and eliminates certain required disclosures of previous accounting
pronouncements. SFAS 132 is effective for fiscal years beginning after December
15, 1997. Earlier application is encouraged. Restatement of disclosures for
earlier periods provided for comparative purposes is required unless the
information is not readily available. ASAs SFAS 132 affects disclosure
requirements, it is not expected to have an impact on the financial statements
of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities.
SFAS No. 133 supersedes the disclosure requirements in SFAS No. 80, 105 and 119.
This statement is effective for periods after June 15, 1999. The adoption of
SFAS No. 133 is not expected to have a material impact on the financial position
or results of operations of the Company.
Note 4. Loans Receivable, Net
- -----------------------------
Loans receivable, net at March 31,June 30, 1998 and December 31, 1997 consisted of the
following (in thousands):
March 31,June 30, 1998 December 31, 1997
----------------------------- -----------------
(Unaudited)
Real estate:
One- to four-family $746,891$785,101 $711,548
Commercial real estate, multi-
family and land 30,18834,956 25,699
Construction 8,4808,245 8,748
Consumer 48,34750,553 45,417
Commercial 4,7795,307 2,904
-------- --------
Total loans 838,685884,162 794,316
Less:
Loans in process 2,7022,810 2,867
Deferred fees 1,270849 1,133
Unearned discounts 9 9
Allowance for loan losses 6,8177,035 6,612
-------- --------
Total loans, net 827,887873,459 783,695
Less: mortgage loans held for sale 4,2843,009 -
-------- --------
Loans receivable, net $823,603$870,450 $783,695
======== ========
Note 5. Deposits
- ----------------
The major types of deposits at March 31,June 30, 1998 and December 31, 1997 were as
follows (in thousands):
March 31,June 30, 1998 December 31, 1997
--------------------------- -----------------
Type of Account (Unaudited)
- ---------------
Non-interest bearing $ 16,40519,789 $ 13,149
NOW 80,12084,727 77,994
Money market deposit 69,48272,157 67,979
Savings 164,781166,956 163,202
Time deposits 656,392669,563 654,440
---------- --------
--------
$987,180$1,013,192 $976,764
================== ========
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets at March 31,June 30, 1998 were $1.518$1.538 billion, an increase of $7.5$27.3 million,
compared to $1.511 billion at December 31, 1997.
Investment securities available for sale decreased by $33.8$23.6 million, to a
balance of $173.5$183.8 million at March 31,June 30, 1998, compared to a balance of $207.4
million at December 31, 1997, and mortgage-backed securities available for sale
decreased by $8.5$64.8 million, to $448.7$392.3 million at March 31,June 30, 1998, from $457.1
million at December 31, 1997. The investment and mortgage-backed securities
available for sale portfolios decreased in order to fund growth in the Bank's
loans receivable. Loans receivable, net, increased by $39.9$86.8 million, or 5.1%11.1%,
to a balance of $823.6$870.5 million at March 31,June 30, 1998, compared to a balance of $783.7
million at December 31, 1997. The increase was largely attributable to robust
residential loan growth (including mortgage refinance activity) in the Bank's
market area, as well as commercial lending (including commercial real estate)
initiatives which accounted for $6.4$11.7 million of this growth. Included in the
residential loan growth is $16.3$39.5 million of 30 year fixed rate mortgage loans
which the Bank retained in portfolio.portfolio, while $13.1 million of 30-year fixed rate
mortgage loans were sold. In the past, the Bank has often sold most of this
product into the secondary market. TheOf the loans retained, the Bank intends to fund $15.0funded $29.2
million of
these loans with repurchase agreements with an approximate termterms of three to seven
years,
thus mitigating part of the interest rate risk associated with retaining these
mortgages.
Total deposits at March 31,June 30, 1998 were $987.2 million,$1.013 billion, an increase of $10.4$36.4
million, compared to $976.8 million at December 31, 1997. On June 29, 1998, the
Company completed the purchase of $10.7 million in deposit balances from Summit
Bank's Whiting, New Jersey branch, for a deposit premium of $1.0 million.
Stockholders' equity at March 31,June 30, 1998 was $216.0$210.9 million, compared to $215.5
million at December 31, 1997. The Company repurchased 85,793171,586 shares of common
stock during the first quarter for $ 3.1 million, completing the 5% repurchase
program announced in October 1997. Additionally, during the second quarter of
1998, the Company loaned $8.2 million to the Bank's Employee Stock Ownership
Plan ("ESOP" or the "Plan") which enabled the ESOP trustee to purchase 422,500
shares of common stock. After the initial 12 year ESOP term expires in year
2008, these shares will begin to be allocated to employees covered by the Plan
at which time they will be expensed by the Company.
Results of Operations
General
Net income increaseddecreased to $3.5$3.2 million for the three months ended March 31,June 30, 1998 as
compared to net income of $3.4 million for the three months ended March 31,
1997June 30, 1997.
For the six months ended June 30, 1998 net income decreased to $6.7 million from
$6.8 million for the six months ended June 30, 1997.
Interest Income
Interest income for the three months ended March 31,June 30, 1998 was $26.2 million,
compared to $22.5$24.3 million for the three months ended March 31,June 30, 1997, an increase
of $3.7$1.9 million, or 16.3%7.9%. For the six months ended June 30, 1998, interest
income was $52.4 million compared to $46.9 million for the same period in 1997,
an increase of $5.6 million or 11.9%. The increaseincreases in interest income waswere the
result of an
increaseincreases in the average balance of loans receivable which increased
by $113.0$143.6 million and $128.4 million for the three and six months ended March 31,June 30,
1998, respectively, as compared to the same prior year period. Also,periods. For the average size ofthree
months ended June 30, 1998, the investmentyield on earning assets remained constant at
7.12%, as compared to the same period in 1997 as declines in yields for loans
and investments and mortgage-backed securities available for sale portfolios increased duewere offset by a shift in the
asset mix from lower yielding securities to higher yielding loans receivable.
For the investment of
funds received from increased wholesale borrowings. The increase insix months ended June 30, 1998, interest income was further augmented by an
increase in the yield on average interest earning assets, which improved to
7.20%7.16% on average in the first quartersix months of 1998, from 7.02%7.07% on average in the
first quartersix months of 1997. Increased yields on mortgage-backed securities and a
change in the mix of earning assets to whole loans accounted for the increased
yield.
Interest Expense
Interest expense for the three months ended March 31,June 30, 1998 was $15.1$15.3 million,
compared to $12.0$13.5 million for the three months ended March 31,June 30, 1997, an increase
of $3.1$1.8 million, or 25.9%13.3%. For the six months ended June 30, 1998 interest
expense was $30.5 million compared to $25.5 million for the same period in 1997,
an increase of $4.9 million or 19.2%. The increaseincreases in interest expense waswere
primarily the result of an increase in the average outstanding balance of total
borrowings (Federal Home Loan Bank and securities sold under agreements to
repurchase) which increased by $178.2$97.3 million and $137.5 million for the three
and six months ended March 31,June 30, 1998, respectively, as compared to the same prior
year periodperiods and a smaller average increase in deposits. The increase in
wholesale borrowings was part of a leverage strategy adopted in late 1996 to
improve returns on invested capital. TheProceeds from the borrowings were invested
in mortgage loans and investment
7
and mortgage-backed securities. The average cost of interest bearing
liabilities increased to 4.79%4.78% for both the three and six months ended March
31,June 30,
1998, as compared to 4.55%4.71% and 4.64%, respectively, for the same prior year
periodperiods, due to a greater percentage increase in higher cost wholesale funding
over retail deposit funding.
Provision for Loan Losses
For the three and six months ended March 31,June 30, 1998, the Company's provision for
loan losses was $225,000 and $450,000, respectively, unchanged from the same
prior year period.periods. The Company's non-performing assets declined by $1.6$1.8
million at March 31,June 30, 1998 as compared to March 31,June 30, 1997 allowing for stable
provisions despite loan growth.
7
Other Income
Other income was $621,000increased to $1.1 million and $1.7 million for the three and six
months ended March 31,June 30, 1998, respectively, compared to $586,000$575,000 and $1.2 million
for the same prior year period. Other incomeperiods. The increases were primarily due to $164,000
in gains recognized in the second quarter of 1998 on the sale of 30 year fixed
rate mortgage loans, which the Company periodically sells to manage interest
rate risk. Additionally, deposit related fees (part of fees and service
charges) increased $54,000by $121,000 and $198,000 for the three and six months ended
March 31,June 30, 1998, respectively, as compared to the same prior year periodperiods, due to
a risegrowth in earnings from corporate owned life insurance ascommercial account services and retail core account balances. The
growth in these balances
increasedfees was partly offset by reductions in loan servicing fees due
to $17.8 million at March 31, 1998 as compared to $8.0 million at
March 31, 1997.prepayments of the loans underlying the servicing portfolio.
Operating Expenses
Operating expenses were $6.0$6.7 million and $12.7 million for the three and six
months ended March 31,June 30, 1998, an increaserepresenting increases of $521,000$828,000 and $1.3 million
compared to the same prior year period.periods. The increase
was primarilyincreases were partly due to
higher non-cash charges of $267,000 relating to the Employee Stock Ownership Plan and
expenses associated with the stock awards granted to directors and officers
under the 1997 Incentive Plan effective
February 4, 1997.Plan. These non-cash charges increased by $93,000 and
$361,000 for the three and six months ended, June 30, 1998, respectively, over
the same prior year periods. Additionally, marketing expense increased by
$202,000$146,000 and $349,000 as the Bank aggressively promoted its new retail checking
products. The Bank also opened its eleventh branch office in early April of
1998.
Provision for Income Taxes
Income tax expense was $2.0$1.9 million and $3.8 million for the three and six
months ended March 31,June 30, 1998, respectively, compared to $1.9 million and 1997.$3.9
million for the three and six months ended June 30, 1997, respectively. The
effective tax rate however, declined to 36.1%was relatively stable at 36.4% for the threesix months ended March 31,June
30, 1998 from 37.4%as compared to 36.5% for the same prior year period due to
reduced state taxes and higher amounts of non taxable income from corporate
owned life insurance.period.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans, FHLB and other borrowings and, to a lesser extent, investment
maturities and proceeds from the sale of loans. While scheduled amortization of
loans areis a predictable sourcessource 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 March 31,June 30, 1998, the Company had $13.6 million ofno outstanding overnight borrowings from the
FHLB, representing a decrease from $20.4 million at December 31, 1997. The
Company utilizes the overnight line from time to time to fund short-term
liquidity needs. The Company also borrowed $288.9$300.0 million at March
31,June 30, 1998
through securities sold under agreements to repurchase, an increase from $288.2
million at December 31, 1997. These borrowings were used to fund a wholesale
leverage strategy designed to improve returns on invested capital.
The Company's cash needs for the threesix months ended March 31,June 30, 1998, were
principally provided by maturities of investment securities available for sale,
principal payments on loans and mortgage-backed securities and increased
deposits.deposits, including a deposit acquisition. The cash provided was principally
used for investing activities, which included the purchase of investment and
mortgage-backed securities and the origination of loans. For the threesix months
ended March 31,June 30, 1997, the cash needs of the Company were primarily satisfied by
principal payments on loans and mortgage-backed securities, FHLB borrowingssecurities sold
under agreements to repurchase and increased deposits. The cash was principally
utilized for loan originations and purchases of investment and mortgage-backed
securities.
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
8
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 March 31,June 30, 1998 and December
31, 1997, the Bank's liquidity ratios were 7.5%6.2% and 9.8%, respectively, both in
excess of the minimum regulatory requirement.
At March 31,June 30, 1998, the Bank exceeded all of its regulatory capital requirements
with tangible capital of $184.2$178.5 million, or 12.3%11.7%, of total adjusted assets,
which is above the required level of $22.6$23.0 million or 1.5%; core capital of
$184.2$178.5 million or 12.3%11.7% of total adjusted assets, which is above the required
level of $45.1$46.0 million, or 3.0%; and risk-based capital of $190.8$185.4 million, or
29.5%26.6% of risk-weighted assets, which is above the required level of $51.8$55.8
million or 8.0%. The Bank is considered a "well capitalized" institution under
the Office of Thrift Supervision's prompt corrective action regulations.
8
Non-Performing Assets
The following table sets forth information regarding the Company's nonperforming
assets consisting of non-accrual loans and Real Estate Owned (REO). The Company
had no troubled-debt restructured loans within the meaning of SFAS 15 at March
31,June
30, 1998 or December 31, 1997. It is the policy of the Company to cease
accruing interest on loans 90 days or more past due or in the process of
foreclosure.
March 31,June 30, December 31,
1998 1997
------------ ----------------------- -------------
(Dollars in thousands)
(Unaudited)
Non-accrual loans:
Real estate:
One-to four-family $ 5,578 $ 5,062$5,301 $5,062
Commercial real estate,
multi-family and land 495354 382
Consumer 15172 110
------- ------------- ------
Total 6,2245,727 5,554
REO, net 1,111432 1,198
------- ------------- ------
Total non-performing assets $ 7,335 $ 6,752
======= =======$6,159 $6,752
====== ======
Non-performing loans as a percent of total
loans receivable .74%.65% .70%
Non-performing assets as a percent of total
assets .48%.40% .45%
Allowance for loan losses as a percent of
total loans receivable .81%.80% .83%
Allowance for loan losses as percent of
total non-performing loans 109.53%122.84% 119.03%
Impact of Year 2000
The Company is conducting a comprehensive review of its computer systems and
third party vendors to identify the systems that could be affected by the "Year
2000" issue. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the Year 2000. This could result in
system failure or miscalculations. The Company is devoting the necessary
internal and external resources in the development of an implementation plan to
address Year 2000. Management anticipates that all Year 2000 initiatives and
testing will be completed in a timely manner and will meet all regulatory
milestones. Expenditures in future years are not expected to have a material
impact on the company.
Private Securities Litigation Reform Act Safe Harbor Statement
In addition to historical information, this quarterly report may include certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal and state tax authorities, changes in interest rates, deposit flows, the
cost of funds, demand for loan products, demand for financial services,
competition, changes in the quality or composition of the Bank's loan and
investment portfolios, changes in accounting principles, policies or guidelines,
and other economic,
9
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices. Further description of the
risks and uncertainties to the business are included in Item 1, Business, of the
Company's 1997 Form 10-K.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company's interest rate sensitivity is monitored by management through the
use of an interest rate risk (IRR) model. Based on internal IRR modeling,
management does not believe that there has been a material change in the
Company's interest rate sensitivity from December 31, 1997 to June 30, 1998.
All methods used to measure interest rate sensitivity involve the use of
assumptions, which may tend to oversimplify the manner in which actual yields
and costs respond to changes in market interest rates. The Company's interest
rate sensitivity should be reviewed in conjunction with the financial statements
and notes thereto contained in the Company's Annual Report for the fiscal year
ended December 31, 1997.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a
material nature at the present time. From time to time, the
Company is a party to routine legal proceedings within the
normal course of business. Such routine legal proceedings in
the aggregate are believed by management to be immaterial to
the Company's financial condition or results of operations.
Item 2. Changes in Securities
---------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
The annual meeting of stockholders was held on April 23, 1998. The
following directors were elected for terms of three years: Michael E.
Barrett, Donald E. McLaughlin and James T. Snyder. The following
proposals were voted on by the stockholders:
Withheld/ Broker
Proposal For Abstain Non-Votes
-------- --- ------- ---------
1) Election of Directors:
Michael E. Barrett 6,393,380 42,632 0
Donald E. McLaughlin 6,400,127 35,885 0
James T. Snyder 6,399,952 36,060 0
Withheld/ Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
2) Ratification of the Amended
and Restated Ocean Financial
Corp. 1997 Incentive Plan 5,945,540 440,408 50,064 0
3) Ratification of KPMG Peat
Marwick LLP as independent
auditors for the Company for
the year ending December 31,
1998. 6,370,224 49,928 15,860 0
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
3.1 Certificate of Incorporation of Ocean Financial Corp.*
3.2 Bylaws of Ocean Financial Corp.*
4.0 Stock Certificate of Ocean Financial Corp.*
11 Computation of earnings per share
10
27 Financial Data Schedule (filed herewith)
b) There were no reports on Form 8-K filed during the
three months ended March 31,June 30, 1998.
* Incorporated herein by reference into this document from the Exhibits to Form
S-1, Registration Statement, filed on December 7, 1995, as amended,
Registration No. 33-80123.
-11-11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Ocean Financial Corp.
----------------------------------------------------------------------
Registrant
DATE: May 12,August 10, 1998 /s/ John R. Garbarino
---------------------------------------------------------------------------
John R. Garbarino
Chairman of the Board, President
and Chief Executive Officer
DATE: May 12,August 10, 1998 /s/ Michael Fitzpatrick
----------------------------------------------------------------------------
Michael Fitzpatrick
Executive Vice President and
Chief Financial Officer
12