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, 1999
[ ] 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.
----------------------------------------------- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3412577
----------------------------- -------------------------------------- ---------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
975 Hooper Avenue, Toms River, NJ 08753
- ---------------------------------- --------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 240-4500
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- --------------------------------------------------------------------------------
(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 7,August 6, 1999, there were 14,021,90513,879,405 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, 1999 (unaudited) and December 31, 1998... 1
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998 (unaudited)......... 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited)......... 3
Notes to Unaudited Consolidated Financial Statements..... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk 10
Part II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings........................................ 11
Item 2. Changes in Securities.................................... 11
Item 3. Default Upon Senior Securities........................... 11
Item 4. Submission of Matters to a Vote of Security Holders...... 11
Item 5. Other Information........................................ 11
Item 6. Exhibits and Reports on Form 8-K......................... 11
PART I. FINANCIAL INFORMATION
- ------- ---------------------
PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 1999 (unaudited) and December 31, 1998..............1
Consolidated Statements of Income for the three and six
months ended June 30, 1999 and 1998 (unaudited)....................2
Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 and 1998 (unaudited)....................3
Notes to Unaudited Consolidated Financial Statements...............5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................7
Item 3. Quantitative and Qualitative Disclosure about Market Risk.........11
Part II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings.................................................12
Item 2. Changes in Securities.............................................12
Item 3. Default Upon Senior Securities....................................12
Item 4. Submission of Matters to a Vote of Security Holders...............12
Item 5. Other Information.................................................12
Item 6. Exhibits and Reports on Form 8-K..................................12
Signatures ......................................................... 12..................................................................14
OCEAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
March 31,June 30, December 31,
1999 1998
------------- ----------------------- ------------
(Unaudited)
ASSETS
- ------
ASSETS
- ------
Cash and due from banks $ 4,5463,281 $ 10,295
Investment securities available for sale 132,404121,429 137,405
Federal Home Loan Bank of New York
stock, at cost 16,800 16,800
Mortgage-backed securities available for
sale 388,621375,549 381,840
Loans receivable, net 969,335998,108 941,011
Mortgage loans held for sale -10,347 25,140
Interest and dividends receivable 9,4018,908 9,820
Real estate owned, net 30097 43
Premises and equipment, net 13,70213,444 13,947
Other assets 26,47428,688 25,443
---------- --------------------- -----------
Total assets $1,561,583 $1,561,744
========== ==========$ 1,576,651 $ 1,561,744
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $1,034,034 $1,035,251$ 1,044,411 $ 1,035,251
Federal Home Loan Bank borrowings 44,00027,000 30,000
Securities sold under agreements to repurchase 279,408298,070 282,108
Advances by borrowers for taxes and insurance 5,3906,021 5,096
Other liabilities 6,7359,873 11,549
---------- --------------------- -----------
Total liabilities 1,369,5671,385,375 1,364,004
---------- --------------------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares issued - -
Common stock, $.01 par value, 55,000,000 shares authorized,
18,118,248 shares issued and 14,021,905 and 14,629,776 shares outstanding
at March 31,June 30, 1999 and December 31, 1998,
respectively 181 181
Additional paid-in capital 178,484178,686 178,309
Retained earnings-substantially restricted 106,529108,620 103,982
Accumulated other comprehensive loss (1,248)(5,090) (1,226)
Less: Unallocated common stock held by
Employee Stock Ownership Plan (17,050)(16,724) (17,376)
Unearned Incentive Awards (5,478)(4,995) (5,963)
Treasury stock, , (4,096,343 and 3,488,472 shares
at March 31,June 30, 1999 and December 31, 1998, respectively) (69,402) (60,167)
---------- --------------------- -----------
Total stockholders' equity 192,016191,276 197,740
---------- --------------------- -----------
Total liabilities and stockholders'
equity $1,561,583 $1,561,744
========== ==========$ 1,576,651 $ 1,561,744
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
1
OCEAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
For the three months For the six months
ended March 31,June 30, ended June 30,
---------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
Interest income:
Loans $17,907 $15,773$ 18,439 $ 16,643 $ 36,345 $ 32,416
Mortgage-backed securities 5,787 7,0405,967 6,293 11,754 13,333
Investment securities and other 2,326 3,413
------- -------2,167 3,283 4,493 6,697
-------- -------- -------- --------
Total interest income 26,020 26,226
------- -------26,573 26,219 52,592 52,446
-------- -------- -------- --------
Interest expense:
Deposits 10,203 10,74510,930 20,407 21,675
Borrowed funds 4,101 4,401
------- -------4,335 4,380 8,435 8,781
-------- -------- -------- --------
Total interest expense 14,304 15,146
------- -------14,538 15,310 28,842 30,456
-------- -------- -------- --------
Net interest income 11,716 11,08012,035 10,909 23,750 21,990
Provision for loan losses 225 225 ------- -------450 450
-------- -------- -------- --------
Net interest income after provision for loan losses 11,491 10,855
------- -------11,810 10,684 23,300 21,450
-------- -------- -------- --------
Other income:
Fees and service charges 780 533886 508 1,666 1,041
Net (loss) gain on sales of loans and securities available for sale 524 3(57) 164 467 167
Net income from (cost of) other real estate operations 46 (49)31 189 77 140
Other 195 134
------- -------193 192 388 326
-------- -------- -------- --------
Total other income 1,545 621
------- -------1,053 1,053 2,598 1,674
-------- -------- -------- --------
Operating expenses:
Compensation and employee benefits 3,655 3,5043,723 3,779 7,378 7,283
Occupancy 511 446482 472 993 918
Equipment 304 313361 355 665 668
Marketing 407 323415 428 823 752
Federal deposit insurance 220215 217 434 434
Data processing 331 313322 314 653 627
General and administrative 1,164 865
------- -------1,132 1,108 2,296 1,973
-------- -------- -------- --------
Total operating expenses 6,592 5,981
------- -------6,650 6,673 13,242 12,655
-------- -------- -------- --------
Income before provision for income taxes 6,444 5,4956,213 5,064 12,656 10,559
Provision for income taxes 2,306 1,986
------- -------2,224 1,862 4,530 3,848
-------- -------- -------- --------
Net income $ 4,1383,989 $ 3,509
======= =======3,202 $ 8,126 $ 6,711
======== ======== ======== ========
Basic earnings per share $ .33.32 $ .25
======= =======.23 $ .65 $ .48
======== ======== ======== ========
Diluted earnings per share $ .33.32 $ .24
======= =======.23 $ .65 $ .47
======== ======== ======== ========
Average basic shares outstanding 12,556 13,972
======= =======12,278 13,757 12,416 13,864
======== ======== ======== ========
Average diluted shares outstanding 12,698 14,326
======= =======12,481 14,177 12,589 14,246
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
2
OCEAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the threesix months
ended March 31,
----------------------June 30,
-------------------------------
1999 1998
-------------------- ---------
(Unaudited)
Cash flows from operating activities:
Net income $ 4,1388,126 $ 3,509
-------- --------6,711
--------- ---------
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization of premises
and equipment 366 344735 713
Amortization of Incentive Awards 485 484968 967
Amortization of ESOP 326 341652 683
ESOP adjustment 175 270377 585
Tax Benefit of Stock Plans - 128
Amortization of servicing asset 101 74210 167
Amortization of deposit premium 26 --52 -
Net premium amortization in excess of discount
accretion on securities 419 837731 1,755
Net accretion of deferred fees and discounts
in excess of premium amortization on loans (162) (143)(217) (261)
Provision for loan losses 225 225450 450
Net gain on sales of real estate owned (57) (3)(142) (78)
Net gain on sales of loans and securities available for sale (524) (3)(467) (167)
Proceeds from sales of mortgage loans held for sale 26,991 99927,287 12,989
Mortgage loans originated for sale (2,054) (5,292)(12,708) (16,124)
Decrease in interest and dividends receivable 419 199912 471
Increase in other assets (419) (5,392)(508) (5,629)
(Decrease) increase in other liabilities (4,814) 2,643
-------- --------(1,676) 3,396
--------- ---------
Total adjustments 21,503 (4,417)
-------- --------16,656 45
--------- ---------
Net cash provided by (used in) operating activities 25,641 (908)
-------- --------24,782 6,756
--------- ---------
Cash flows from investing activities:
Net increase in loans receivable (28,835) (40,216)(57,956) (87,408)
Purchase of investment securities available for sale (13,815) (16,000)(14,160) (81,691)
Purchase of mortgage-backed securities available for sale (55,000)(80,000) (40,567)
Proceeds from maturities of investment securities
available for sale 20,043 50,00030,163 105,025
Principal payments on mortgage-backed securities
available for sale 46,539 48,44779,351 105,087
Purchases of Federal Home Loan Bank of New York stock - (63)
Proceeds from sales of real estate owned 248 316714 1,308
Purchases of premises and equipment (121) (577)
-------- --------(232) (914)
--------- ---------
Net cash (used in) provided by investing activities (30,941) 1,340
-------- --------(42,120) 777
--------- ---------
Continued
3
OCEAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
For the threesix months
ended March 31,
----------------------June 30,
--------------------------------
1999 1998
---------- ------------------ --------
(Unaudited)
Cash flows from financing activities:
(Decrease) increaseAcquisition of deposits $ - $ 10,732
Deposit premium - (1,030)
Increase in deposits $(1,217) $10,416
Increase (decrease)9,160 25,696
Decrease in Federal Home Loan Bank borrowings 14,000 (6,800)
(Decrease) increase(3,000) (20,400)
Increase in securities sold under agreements
to repurchase (2,700) 68615,962 11,826
Increase in advances by borrowers for taxes and
insurance 294 189925 752
Dividends paid (1,591) (1,463)(3,488) (3,196)
Purchase of ESOP shares - (8,200)
Purchase of treasury stock (9,235) (3,142)
------- --------------- --------
Net cash used inprovided by financing activities (449) (114)
------- -------10,324 13,038
-------- --------
Net (decrease) increase in cash and due from banks (5,749) 318(7,014) 20,571
Cash and due from banks at beginning of period 10,295 2,225
------- --------------- --------
Cash and due from banks at end of period $ 4,5463,281 $ 2,543
======= =======22,796
======== ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $14,466 $14,999$ 28,462 $ 30,090
Income taxes 5,119 -5,123
10
Noncash investing activities:
Transfer of loans receivable to real estate owned 448 226626 464
Mortgage loans securitized into mortgage-backed
securities 27,145 1,005
======= =======27,438 13,073
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
OCEAN FINANCIAL CORP.
---------------------
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, 1999 are not necessarily indicative of the results of operations that
may be expected for all of 1999.
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, 1998.
NOTENote 2. EARNINGS PER SHAREEarnings per Share
- ---------------------------
Amounts per common share for prior periods have been adjusted for the two-for-
one stock split effected in the form of a 100% stock dividend declared by the
Company's Board of Directors on April 22, 1998 and paid on May 15, 1998.
The following reconciles shares outstanding for basic and diluted earnings per
share for the three and six months ended March 31,June 30, 1999 and 19981998:
Three months ended March 31,
------------------Six months ended
June 30, June 30,
------------------------ ------------------------
1999 1998 ---------1999 1998
------- ------- ------- -------
Weighted average shares issued net of Treasury shares 14,371 15,63614,022 15,534 14,196 15,584
Less: Unallocated ESOP shares (1,357) (1,070)(1,325) (1,231) (1,341) (1,150)
Unallocated incentive award shares (458) (594)
------ ------(418) (546) (439) (570)
------- ------- ------- -------
Average basic shares outstanding 12,556 13,97212,279 13,757 12,416 13,864
Add: Effect of dilutive securities:
Stock options 51 216109 283 80 248
Incentive awards 91 138
------ ------93 137 93 134
------- ------- ------- -------
Average diluted shares outstanding 12,698 14,326
====== ======12,481 14,177 12,589 14,246
======= ======= ======= =======
NOTENote 3. COMPREHENSIVE INCOMEComprehensive Income
- -----------------------------
For the three month periods ended March 31,June 30, 1999 and 1998 total comprehensive
income, representing net income plus or minus items previously recorded directly
in equity, such as unrealized gains or losses on securities available for sale
amounted to $4,116,000$147,000 and $3,785,000,$3,706,000, respectively. For the six months ended June
30, 1999 and 1998, total comprehensive income amounted to $4,262,000 and
$7,491,000, respectively.
5
NOTENote 4. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTSImpact of Recent Accounting Pronouncements
- --------------------------------------------------
In October 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 134 "Accounting for
Mortgage-
BackedMortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement amends FASB
Statement 65 "Accounting for Certain Mortgage Banking Activities" to require
that after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998. The adoption of this Statement did not have a
material impact on the financial position or results of operations of the
Company.
NOTENote 5. LOANS RECEIVABLE, NETLoans Receivable, Net
- -----------------------------
Loans receivable, net at March 31,June 30, 1999 and December 31, 1998 consisted of the
following (in thousands):
March 31, 1999 December 31, 1998
--------------- ------------------
(Unaudited)
Real estate:
One- to four-family $866,082 $869,769
Commercial real estate, multi-
family and land 46,364 42,008
Construction 6,645 6,108
Consumer 52,663 51,785
Commercial 7,944 6,483
-------- --------
Total loans 979,698 976,153
Loans in process (2,306) (1,996)
Deferred fees (454) (608)
Unearned premium 57 62
Allowance for loan losses (7,660) (7,460)
-------- --------
Total loans, net 969,335 966,151
Less: mortgage loans held for sale - 25,140
-------- --------
Loans receivable, net $969,335 $941,011
======== ========
NOTEJune 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
Real estate:
One- to four-family $ 897,682 $ 869,769
Commercial real estate, multi-
family and land 49,488 42,008
Construction 7,650 6,108
Consumer 53,265 51,785
Commercial 11,390 6,483
----------- -----------
Total loans 1,019,475 976,153
Loans in process (2,935) (1,996)
Deferred fees (299) (608)
Unearned premium 52 62
Allowance for loan losses (7,838) (7,460)
----------- -----------
Total loans, net 1,008,455 966,151
Less: mortgage loans held for sale 10,347 25,140
----------- -----------
Loans receivable, net $ 998,108 $ 941,011
=========== ===========
Note 6. DEPOSITSDeposits
- ----------------
The major types of deposits at March 31,June 30, 1999 and December 31, 1998 were as
follows (in thousands):
March 31, 1999 December 31, 1998
--------------- -----------------
Type of Account (Unaudited)
- ---------------
Non-interest bearing $ 25,072 $ 22,154
NOW 100,696 106,363
Money market deposit 75,600 77,690
Savings 172,558 172,036
Time deposits 660,108 657,008
---------- ----------
$1,034,034 $1,035,251
========== ==========
June 30, 1999 December 31, 1998
------------- -----------------
Type of Account (Unaudited)
- ---------------
Non-interest bearing $ 25,237 $ 22,154
NOW 105,463 106,363
Money market deposit 77,241 77,690
Savings 174,801 172,036
Time deposits 661,669 657,008
----------- -----------
$ 1,044,411 $ 1,035,251
=========== ===========
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITIONManagement's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
Total assets at March 31,June 30, 1999 were $1.577 billion, an increase of $14.9 million
from $1.562 billion, unchanged frommillion at December 31, 1998.
Loans receivable, net, increased by $28.3$57.1 million, or 3.0%6.1%, to a balance of
$969.3$998.1 million at March 31,June 30, 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 $5.8$12.4 million of this growth. During the quarterfirst half of 1999
the Bank sold $27.1$27.4 million of 30 year fixed rate30-year fixed-rate mortgage loans, $25.1 million
of which waswere held for sale at December 31, 1998. At June 30, 1999, the Bank has
designated $10.3 million of 30-year fixed-rate mortgage loans as held for sale.
The Bank periodically sells these loans as part of the management of interest
rate risk.
Stockholder's equity at March 31,June 30, 1999 was $192.0$191.3 million, compared to $197.7
million at December 31, 1998. The Company repurchased 607,871 shares of common
stock during the quarterfirst half of 1999 for $9.2 million, completing the 5%
repurchase program announced in November 1998. RESULTS OF OPERATIONS
GENERALThe Company recently announced
its intention to repurchase an additional 1,402,190 common shares, or 10% of the
current outstanding common stock.
Results of Operations
General
Net income increased to $4.1$4.0 million for the three months ended March 31,June 30, 1999 as
compared to net income of $3.5$3.2 million for the three months ended March 31,June 30, 1998.
INTEREST INCOMEFor the six months ended June 30, 1999 net income increased to $8.1 million from
$6.7 million for the six months ended June 30, 1998.
Interest Income
Interest income for the three months ended March 31,June 30, 1999 was $26.0$26.6 million,
compared to $26.2 million for the three months ended March 31,June 30, 1998, a decreasean increase
of $206,000.$354,000. For the six months ended June 30, 1999 interest income was $52.6
million, compared to $52.4 million for the same prior year period. The decreaseincreases
in interest income waswere due to a decrease in the yield
on average interest-earning assets, which declined to 7.01% on average in the
first quarter of 1999, from 7.20% on average in the first quarter of 1998. The
decrease in the yield on average interest-earning assets was largely offset by a
$ 27.7 million increaseincreases in average interest-earning assets and
a change in the mix of average-earning assets towards a higher concentration of
loans receivable at the expense of lower yielding investment and mortgage-backed
securities. INTEREST EXPENSEFor the three and six months ended June 30, 1999 loans receivable
represented 65.0% and 64.8%, respectively, of average interest-earning assets as
compared to 57.9% and 56.5%, respectively, for the same prior year periods. The
increases in average interest-earning assets were largely offset by a decline in
the yield on average interest-earning assets, which declined to 7.00% and 7.01%
on average for the three and six months ended June 30, 1999, respectively, from
7.12% and 7.16% on average in the same prior year periods.
Interest Expense
Interest expense for the three months ended March 31,June 30, 1999 was $14.3$14.5 million,
compared to $15.1$15.3 million for the three months ended March 31,June 30, 1998, a decrease
of $842,000,$772,000, or 5.6%5.0%. For the six months ended June 30, 1999 interest expense
was $28.8 million compared to $30.5 million for the same prior year period, a
decrease of $1.6 million or 5.3%. The decreasedecreases in interest expense waswere
primarily the result of a decreasedecreases in the average cost of interest- bearinginterest-bearing
liabilities which declined to 4.38%4.34% and 4.36%, respectively, for the three and
six months ended March 31,June 30, 1999, as compared to 4.78% and 4.79%, respectively,
for the same prior year period.periods. The significant decline in funding costcosts more
than offset an increaseincreases in average interest-bearing deposits which rose to
$1.007 billionby $36.9
million and $41.0 million for the quarter ending March 31,three and six months ended June 30, 1999,
respectively, as compared to the same prior year periods. The Company's focus on
lower cost core deposit growth has contributed to this decline, as core deposits
represented 35.3% and 35.1%, respectively, of average interest-bearing deposits
for the three and six months ended June 30, 1999, as compared to $962.1
million32.9% and
32.7%, respectively, for the same prior year quarter.
PROVISION FOR LOAN LOSSESperiods.
7
Provision for Loan Losses
For the three and six months ended March 31,June 30, 1999, 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 $1.8$1.3 million
at March 31,June 30, 1999 as compared to March 31,June 30, 1998 allowing for stable provisions
despite loan growth.
OTHER INCOMEOther Income
Other income was $1.5$1.1 million for the three months ended March 31,June 30, 1999,
compared to $621,000 forunchanged from the same prior year period. The net gain onFor the sale
of loans amountedsix months ended June 30,
1999 other income increased to $524,000 on $27.1$2.6 million from $1.7 million in loan sales for the three
months ended March 31, 1999 as compared to a gain of $3,000 on $1.0 million in
loan sales for the three months ended March 31, 1998.same prior
year period. Fees and service charges increased by $247,000,$378,000, or 46.3%,74.4% and
$625,000, or 60.0% for the three and six months ended March 31,June 30, 1999,
respectively, as compared to the same prior year periodperiods 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 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. 7
OPERATING EXPENSESThe total fees relating to
the sale of alternative investment products amounted to $174,000 and $289,000
for the three and six months ended June 30, 1999, respectively.
For the quarter, the increase in fees and service charges was offset by
reductions in the net gain on sales of loans and securities and the net income
from other real estate operations. For the six months ended June 30, 1999, the
Company sold $27.4 million in 30-year fixed-rate mortgage loans at a gain of
$516,000 as compared to the sale of $13.1 million at a gain of $167,000 in the
same prior year period.
Operating Expenses
Operating expenses were $6.6$6.7 million and $13.2 million for the three and six
months ended March 31,June 30, 1999, anrespectively, compared to $6.7 million and $12.7
million, respectively, for the same prior year periods. The increase of $611,000for the six
months ended June 30, 1999 as compared to the same prior year period. The increaseperiod was
primarily due to higher marketing and other expenses related to the Bank's branding
initiative as well as the operating costs associated with the eleventh branch
office opened in April 1998 and expenses associated with readying the Bank's
data processing systems for the Year 2000.
PROVISION FOR INCOME TAXESProvision for Income Taxes
Income tax expense was $2.3$2.2 million and $4.5 million for the three and six
months ended March 31,June 30, 1999, respectively, compared to $2.0$1.9 million and $3.8
million, respectively, for the three and six months ended June 30, 1998. The
effective tax rate declined slightly amounting to 35.8% for both the three and
six months ended June 30, 1999, as compared to 36.8% and 36.4%, respectively,
for the same prior year period.
The effective tax rate
was relatively stable amounting to 35.8% for the three months ended March 31,
1999 as compared to 36.1% for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, Federal Home Loan Bank
("FHLB") and other borrowings and, to a lesser extent, investment maturities and
proceeds from the sale of loans. While scheduled amortization of loans is a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Company has other sources of liquidity if a need for additional funds arises,
including an overnight line of credit and advances from the FHLB.
At March 31,June 30, 1999, the Company had $44.0$27.0 million of outstanding overnight
borrowings from the FHLB, representing an increasea 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 $279.4$298.1 million at March 31,June 30,
1999 through securities sold under agreements to repurchase, a slight
decreasean 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.
8
The Company's cash needs for the threesix months ended March 31,June 30, 1999, were primarily
provided by maturities of investment securities available for sale, principal
payments on loans and mortgage-backed securities, FHLB borrowings through securities
sold under agreements to repurchase and proceeds from the sale of mortgage loans
held for sale. The cash was principally utilized for loan originations,
purchases of investment and mortgage-backed securities and the purchase of
treasury stock. For the threesix months ended March 31,June 30, 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
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.
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 March 31,June 30, 1999 and December 31, 1998, the Bank's liquidity
ratios were 12.2%10.3% and 12.5%, respectively, both in excess of the minimum
regulatory requirement.
At March 31,June 30, 1999, the Bank exceeded all of its regulatory capital requirements
with tangible capital of $165.0$169.4 million, or 10.59%10.74%, of total adjusted assets,
which is above the required level of $23.3$23.7 million or 1.5%; core capital of
$165.0$169.4 million or 10.59%10.74% of total adjusted assets, which is above the required
level of $46.7$47.3 million, or 3.0%; and risk-based capital of $172.4$176.9 million, or
22.3%22.2% of risk-weighted assets, which is above the required level of $61.8$63.8
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 ASSETSNon-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, 1999 or December 31, 1998. 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, December 31,
1999 1998
-----------June 30, December 31,
1999 1998
------------- -------------
(dollars in thousands)
(Unaudited)
Non-accrual loans:
Real estate:
One-to four-family $3,957 $4,605
Commercial real estate,
multi-family and land 573 574
Consumer 254 245
------ ------
Total 4,784 5,424
REO, net 97 43
------ ------
Total non-performing assets $4,881 $5,467
====== ======
Non-performing loans as a percent of total
loans receivable .47% .56%
Non-performing assets as a percent of total
assets .31% .35%
Allowance for loan losses as a percent of
total loans receivable .77% .76%
Allowance for loan losses as percent of
total non-performing loans 163.84% 137.54%
9
Impact of Year 2000
Beginning in thousands)
(Unaudited)
Non-accrual loans:
Real estate:
One-to four-family $ 4,242 $ 4,605
Commercial real estate,
multi-family and land 573 574
Consumer 260 245
Commercial 118 -
------- -------
Total 5,193 5,424
REO, net 300 43
------- -------
Total non-performing assets $ 5,493 $ 5,467
======= =======
Non-performing loans as a percent of total
loans receivable .53% .56%
Non-performing assets as a percent of total
assets .35% .35%
Allowance for loan losses as a percent of
total loans receivable .78% .76%
Allowance for loan losses as percent of
total non-performing loans 147.51% 137.54%
IMPACT OF YEAR 2000
Since April 1997 the Company has been executing a formal planformally began to address the Year 2000
issues. Theissue. A project plan was developed followingconstructed to follow the guidelines set forth by the
Federal Financial Institutions Examination Council (FFIEC). The guidelines
mandate that the Year 2000 project address five specific phases: awareness,
assessment, renovation, validation (testing)validation(testing), and implementation. TheAs of June 30,
1999 the Company has substantially completed the first fourall five phases of the project easilythereby meeting all
regulatory guidelines. The Company expects the implementation phase to be
substantially complete by June 30, 1999.
The Company has been working very closely with its data processing agent and the
primary provider of mission critical systems, BisysBISYS Incorporated. ValidationTesting of all
BISYS functions has been successfully completed and reviewed by an independent
third-party. The Company continues to closely monitor BISYS' progress in
addressing the Y2K issue effectively and insuring their systems function
correctly into the Year 2000. All other primary service providers have completed
reprogramming and testing of their mission critical systems began in November 1998 and was conducted in a stand
alonethe Company has
validated those test environment.results. The Company utilized personnelwill continue to solicit information
from key areas throughout
the organizationall of its vendors to perform this testing and used formal sign-off and auditing
procedures to validate the results. This testing was substantially complete at
March 31, 1999. Additionally, testing and reprogramming of all systems supported
by other service providers has been completed. In the case of failure caused by
amonitor their Year 2000 problem, the Bank has documented contingency plans that will be
initiated to resolve mission critical issues.preparations and readiness.
The focus of the Year 2000 project for the remainder of 1999 will be directed
towards customer awareness, and contingency planning, and liquidity planning. The
Company has developed a formal plan to address customer concerns. Educationwill provide customers with up-to-date information regarding Year 2000
efforts through scheduled branch seminars and regular
updatesthe dissemination of the Company's Y2K progress and status are disseminated viaYear 2000
information through a Y2K telephone hot line, anhotline, Internet web site, correspondence (brochures(brochure
and newsletters), customer seminars, and newspaper advertising. Contingency planning
for mission critical functions has been completed and testing of the plans is
expectedThe Company's contingency programs
will continue to be substantially complete by June 30, 1999.reviewed and tested throughout the year. Liquidity plans
have been developedcompleted to ensure that the Company will have access to necessary
funds to meet customer's needs throughout the year.needs.
The Company has established a formal process for measuringcontinues to monitor potential credit risk associated with the Year
2000. Major customersSignificant borrowers in the Residential and Commercial Loan portfolios
have been assessed to determine an appropriate risk rating andrating. On an ongoing basis,
the Company is monitoringwill monitor the progress of these borrowers towards Year 2000
compliance on an ongoing basis.
For the year ended December 31, 1998, expensescompliance.
Expenses related to the Company's Year 2000 effort for the six months ended June
30, 1999 totaled $327,000. This includes $102,000$236,000. These expenses consist of $149,000 in costs
associated with the renovation of software, hardware purchases and consulting charges and
$225,000$87,000 representing an estimate of the direct cost for compensation and fringe
benefits of internal employees working on the Year 2000 project. The CompanyBank
expects to spend an additionalcomplete the Y2K program within the allocated 1999 budget of $400,000
to $600,000, on Y2K related expenses in
9
1999. This figure represents costs associated with initiating customer awareness
programs, testing, implementation and consulting expenses, and includes $125,000including $175,000 to $175,000$225,000 for the direct cost of internal
employees. Estimated expenses and completion dates associated with this project
are based upon all known facts and available resources. The Company expects that
the represented estimates will not change materially, but there can be no
guarantee that the estimates will be achieved. Factors that may influence
changes in estimates include, but are not limited to, expenses associated with
obtaining qualified personnel, ability to correctly identify and renovate all
functions related to the Year 2000 and other similar items.
The Company believes that it is taking all reasonable steps to prepare for the
Year 2000, especially in the case of mission critical functions. However,
management cannot make representations that all systems and especially those of
significant third parties will be Year 2000 compliant or that they will not be
adversely affected by Year 2000 issues.
The above communication is a Year 2000 Readiness Disclosure as defined in the
Year 2000 Information and Readiness Act.
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENTPrivate 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
10
Bank's loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices. Further description of the risks and uncertainties to the
business are included in Item 1, Business, of the Company's 1998 Form 10-K.
ITEMItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKQuantitative 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 materialthe
Company's one year gap at June 30, 1999 was negative 14.4% as compared to
negative 10.6% at December 31, 1998. Additionally, the table below sets forth
the Company's exposure to interest rate risk as measured by the change in the
Company'snet
portfolio value ("NPV") and net interest income under varying rate sensitivity fromshocks as of
June 30, 1999 and December 31, 1998 to March 31, 1999.1998. 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, 1998.
10At June 30, 1999, the generally higher interest rates in effect for fixed rate
mortgage loans reduced prepayment activity in the Company's loans receivable and
mortgage-backed securities portfolios, effectively extending the average lives
of the loans and securities.
11
June 30, 1999 December 31, 1998
-------------------------------------------------------- ----------------------------------------------------
Net Portfolio Value Net Interest Income Net Portfolio Value Net Interest Income
- --------------------------------------------------------------------------- ------------------------- ------------------------
Change in
Interest Rates
in Basis Points NPV NPV
(Rate Shock) Amount % Change Ratio Amount % Change Amount % Change Ratio Amount % Change
- ------------------------------------------------- --------------------- -------------------------------- ----------------------
(dollars in
thousands)
300 $126,756 (42.7)% 8.9% $ 44,762 (11.9)% $170,890 (30.1)% 11.8% $ 43,131 (10.6)%
200 165,991 (24.9) 11.2 47,405 (6.7) 202,431 (17.2) 13.5 45,347 (6.0)
100 196,207 (11.3) 12.9 49,360 (2.8) 225,510 (7.8) 14.7 46,979 (2.7)
Static 221,148 - 14.1 50,786 - 244,538 - 15.5 48,260 -
(100) 240,405 8.7 14.9 51,702 1.8 256,618 4.9 15.9 49,023 1.6
(200) 251,216 13.6 15.3 51,908 2.2 261,974 7.1 15.9 49,392 2.3
(300) 258,201 16.8 15.5 51,825 2.0 264,595 8.2 15.9 49,336 2.2
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 a Vote of Security Holders
---------------------------------------------------
The annual meeting of stockholders was held on April 22, 1999. The
following directors were elected for terms of three years: Thomas F.
Curtin, John R. Garbarino and Frederick E. Schlosser. The following
proposals were voted on by the stockholders:
Withheld/ Broker
Proposal For Abstain Non-Votes
---------- ------- --------- ---------
1) Election of Directors:
Thomas F. Curtin 10,469,106 92,438 0
John R. Garbarino 10,466,069 95,475 0
Frederick E. Schlosser 10,466,906 94,638 0
Withheld/ Broker
For Against Abstain Non-Votes
---------- ------- --------- ---------
2) Ratification of KPMG LLP
as independent auditors for the
Company for the year ending
December 31, 1999. 10,502,662 35,434, 23,448 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.*
27 Financial Data Schedule (filed herewith)
12
b) There were no reports on Form 8-K filed during the three months ended
March 31,June 30, 1999
* 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.
1113
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 13,August 12, 1999 /s/ John R. Garbarino
-----------------------------------------------------------------------------
John R. Garbarino
Chairman of the Board, President
and Chief Executive Officer
DATE: May 13,August 12, 1999 /s/ Michael Fitzpatrick
-----------------------------------------------------------------------------
Michael Fitzpatrick
Executive Vice President and
Chief Financial Officer
1214