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.
INDEX
PAGE
PART I
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
SIGNATURES
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.
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
- --------------------------
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
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.
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)
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%
========== ====== ======== ======= ======== ====== ======== ======= ======== ======
- -------------------------
(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
Loan Maturity. The following table shows the contractual maturity of the Bank's
- -------------
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.
At December 31, 1999
-------------------------------------------------------
Commercial
One- to real estate,
Four- multi-family
Family and land Construction
------------------ -------------------- ---------------
(In thousands)
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......................................
-------------------------------------------------
Total
Commercial Loans
Consumer Loans Receivable
-------------- ----------------- -------------
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
============
4
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.
Due After December 31, 2000
--------------------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
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
======== ======== ========
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.
For the Year December 31,
------------------------------------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
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
=========== ========== =========
5
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
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
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
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
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
December 31,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ----- ---- ----
(Dollars in Thousands)
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
_________________
(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
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.
At or for the Year Ended
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(Dollars in thousands)
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%
======== ======== ======== ======= =======
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).
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
--------------------------------------------------------------------------------------------------------------
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%
====== ======= ======= ====== ======= ======= ====== ======= =======
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
----------------------------------------------------------------------
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%
====== ======= ======= ====== ======= =======
13
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
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
The following table sets forth the Bank's mortgage-backed securities activities
for the periods indicated.
For the Year
Ended December 31,
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
(In thousands)
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
======== ======== ========
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.
At December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ------------ ------------- ------------ ------------- ------------
(In thousands)
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
======== ======== ======== ======== ======== ========
16
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.
At December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ------------ --------------- ------------ ------------- ------------
(In thousands)
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
======== ======== ======== ======== ======== ========
17
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.
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)
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%
==== ==== ==== ====
-------------------------------
Total
-------------------------------
Amortized Cost Market Value
-------------- -------------
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%
====
- --------------------------
(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
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
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.
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)
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%
========== ======= ========== ======= ========== =======
20
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
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
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
The following table presents the Bank's capital position at December 31, 1999.
Capital
------------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ --------- --------
(Dollars in thousands)
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
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
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
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
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
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
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
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.
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)
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
30
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)
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
(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
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
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.
PAGE
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
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
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)
(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
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
/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