UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27428
OCEAN FINANCIAL CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3412577
- --------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
74 Brick Boulevard, Brick, NJ 08723
- --------------------------------- ------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (908)477-5200
-------------------
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO .
----- -----
As of November 13, 1996, there were 9,059,124 shares of the Registrant's Common
Stock, par value $.01 per share, outstanding.
OCEAN FINANCIAL CORP.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
- --------- --------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1996 (unaudited) and December 31, 1995........ 1
Consolidated Statements of Operations for the three and
nine months ended September 30, 1996 and 1995 (unaudited)......... 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 (unaudited).............. 3
Notes to Unaudited Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation................................ 7
Part II. OTHER INFORMATION
- ---------- -----------------
Item 1. Legal Proceedings................................................. 12
Item 2. Changes in Securities............................................. 12
Item 3. Default Upon Senior Securities.................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............... 12
Item 5. Other Information................................................. 12
Item 6. Exhibits and Reports on Form 8-K.................................. 12
Signatures.................................................................... 13
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
September 30, December 31,
1996 1995
-------------- ------------
(Unaudited)
ASSETS
- ------
Cash and due from banks $ 3,039 $ 8,022
Investment securities available for sale 152,281 114,881
Federal Home Loan Bank of New York
stock, at cost 8,457 7,723
Mortgage-backed securities available for
sale 337,087 265,113
Loans receivable, net 650,350 612,696
Mortgage loans held for sale - 1,894
Interest and dividends receivable 8,968 7,480
Real estate owned, net 1,541 1,367
Premises and equipment, net 12,304 7,641
Excess servicing asset 1,799 1,222
Other assets 14,237 8,406
---------- ----------
Total assets $1,190,063 $1,036,445
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $ 926,271 $ 926,558
Federal Home Loan Bank borrowings 5,400 10,400
Advances by borrowers for taxes
and insurance 3,717 3,321
Other liabilities 7,973 3,815
---------- ----------
Total liabilities 943,361 944,094
---------- ----------
Stockholders' Equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, no shares
issued - -
Common stock, $.01 par value, 55,000,000
shares authorized, 9,059,124 shares
issued and outstanding at September
30, 1996 91 -
Additional paid-in capital 176,694 -
Employee Stock Ownership Plan (12,601) -
Retained earnings-substantially restricted 85,347 90,281
Net unrealized (loss) gain on securities
available for sale, net of tax (2,829) 2,070
---------- ----------
Total stockholders' equity 246,702 92,351
---------- ----------
Total liabilities and stockholders'
equity $1,190,063 $1,036,445
========== ==========
See accompanying notes to unaudited consolidated financial statements.
1
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
For the three months For the nine months
ended September 30, ended September 30,
----------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ----------- -----------
(Unaudited) (Unaudited)
Interest income:
Loans $ 12,667 $12,296 $ 37,211 $36,086
Mortgage-backed securities 4,896 3,379 14,448 10,159
Investment securities 2,779 2,090 7,441 5,888
-------- ------- --------- -------
Total interest income 20,342 17,765 59,100 52,133
-------- ------- --------- -------
Interest expense:
Deposits 10,148 10,360 30,680 29,253
Federal Home Loan Bank borrowings 26 8 2,124 164
Other 4 - 155 -
-------- ------- --------- -------
Total interest expense 10,178 10,368 32,959 29,417
-------- ------- --------- -------
Net interest income 10,164 7,397 26,141 22,716
Provision for loan losses 225 238 475 712
-------- ------- --------- -------
Net interest income after
provision for loan losses 9,939 7,159 25,666 22,004
-------- ------- --------- -------
Other income:
Fees and service charges 444 390 1,384 1,201
Net gain on sales of loans
available for sale 44 44 267 80
Net loss from real estate
owned operations (23) (8) (12) (24)
Other 87 73 355 115
-------- ------- --------- -------
Total other income 552 499 1,994 1,372
-------- ------- --------- -------
Operating expenses:
Compensation and employee benefits 2,537 2,252 7,521 6,463
Occupancy 424 418 1,325 1,296
Equipment 201 235 533 666
Marketing 187 215 514 652
Federal deposit insurance 6,310 551 7,459 1,639
Data processing 209 181 672 550
General and administrative 712 965 2,048 2,120
Charitable donation 13,419 - 13,419 -
-------- ------- --------- -------
Total operating expenses 23,999 4,817 33,491 13,386
-------- ------- --------- -------
Income (loss) before income
taxes (13,508) 2,841 (5,831) 9,990
Provision (benefit) for income taxes (3,690) 1,061 (897) 3,753
-------- ------- --------- -------
Net income (loss) $ (9,818) $ 1,780 $ (4,934) $ 6,237
======== ======= ========= =======
Earnings (loss) per share $(1.17) $ - $ - $ -
======== ======= ========= =======
Weighted average shares outstanding 8,423 - - -
======== ======= ========= =======
See accompanying notes to unaudited consolidated financial statements.
2
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine months
ended September 30,
--------------------------
1996 1995
------------ ----------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (4,934) $ 6,237
------------ --------
Adjustments to reconcile net
income (loss) to net cash provided by operating
activities:
Donation of 671,046 shares of common stock
to the Ocean Federal Foundation 13,419 -
Depreciation and amortization of premises
and equipment 541 624
Amortization of ESOP 885 -
Amortization of excess servicing asset 148 76
Net premium amortization in excess of discount
accretion on mortgage-backed and investment
securities 1,125 403
Net accretion of deferred fees and discounts
in excess of premium amortization on loans (381) (416)
Provision for loan losses 475 712
Provision for deferred taxes (3,700) -
Net gain on sales of real estate owned (136) (207)
Proceeds from sales of real estate owned 1,479 2,296
Net gain on sales of loans available for sale (267) (80)
(Increase) decrease in interest and dividends
receivable (1,488) 195
Decrease (increase) in other assets 695 (3,857)
Increase in other liabilities 4,158 1,288
------------- --------
Total adjustments 16,953 1,034
------------- --------
Net cash provided by operating activities 12,019 7,271
------------- --------
Cash flows from investing activities:
Net increase in loans receivable (39,265) (29,196)
Proceeds from sales of mortgage loans held for sale 24,015 8,234
Mortgage loans originated for sale (22,579) (9,902)
Purchase of investment securities available for sale (75,006) -
Purchase of mortgage-backed securities available for
sale (163,128) -
Proceeds from maturities of investments available for
sale 34,125 -
Principal payments on mortgage-backed securities
available for sale 85,784 -
Purchase of investment securities held to
maturity - (25,000)
Purchase of mortgage-backed securities held to
maturity - (20,435)
Proceeds from maturities of investments held to
maturity - 20,362
Principal payments on mortgage-backed securities
held to maturity - 30,243
Purchases of Federal Home Loan Bank of New York stock (734) (400)
Purchases of premises and equipment (5,204) ( 3,518)
------------- --------
Net cash used in investing activities (161,992) (29,612)
------------- --------
Continued
3
OCEAN FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(in thousands)
For the nine months
ended September 30,
----------------------------
1996 1995
------------ -----------
(Unaudited)
Cash flows from financing activities:
(Decrease) increase in deposits $ (287) $ 37,764
Decrease in Federal Home Loan Bank borrowings ( 5,000) (10,800)
Net proceeds of common stock issuance 149,881 -
Increase in advances by borrowers for taxes and
insurance 396 708
-------- --------
Net cash provided by financing activities 144,990 27,672
-------- --------
Net (decrease) increase in cash and due from banks (4,983) 5,331
Cash and due from banks at beginning of period 8,022 239
-------- --------
Cash and due from banks at end of period $ 3,039 $ 5,570
======== ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 33,090 $ 29,433
Income taxes 4,206 3,915
Noncash investing activities:
Transfer of loans receivable to real estate owned 1,517 2,414
Mortgage loans securitized into mortgage-backed
securities 23,392 6,071
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
OCEAN FINANCIAL CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- -----------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Ocean Financial Corp. (the "Company") and its wholly owned
subsidiary,Ocean Federal Savings Bank (the "Bank") and its inactive wholly-owned
subsidiary, Dome Financial Services, Inc.
The interim consolidated financial statements reflect all normal and recurring
adjustments which are, in the opinion of management, considered necessary for a
fair presentation of the financial condition and results of operations for the
periods presented. The results of operations for the three and nine months
ended September 30, 1996 are not necessarily indicative of the results of
operations that may be expected for all of 1996.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's prospectus, which is a part of the Company's Registration
Statement on Form S-1 (No. 33-80123) as declared effective by the Securities and
Exchange Commission on May 13, 1996.
NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------
In May 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65," which requires that a
mortgage banking enterprise record as a separate asset, rights to service
mortgage loans for others, however those servicing rights are acquired. In
circumstances where mortgage loans are originated, separate asset rights to
service mortgage loans are recorded when the enterprise intends to sell or
securitize such loans and retain servicing. SFAS No. 122 was adopted by the
Company prospectively beginning January 1, 1996. Adoption of this new statement
did not have a material impact on the Company's financial position or results of
operations.
NOTE 3. CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
- -----------------------------------------------------
On August 17, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion, as amended, to convert from a federally chartered mutual savings
bank to a federally chartered capital stock savings bank with the concurrent
formation of a holding company ("the Conversion").
The Conversion was completed on July 2, 1996 with the issuance by the Company of
8,388,078 shares of its common stock in a public offering to the Bank's eligible
depositors and the Bank's employee stock ownership plan (the "ESOP"). The
purchase of 671,046 shares of common stock (8% of the total shares offered) by
the ESOP was funded by a loan of $13.4 million from the Company.
In exchange for 50% of the net conversion proceeds ($81.6 million), the Company
acquired 100% of the stock of the Bank and retained the remaining net conversion
proceeds at the holding company level.
Concurrent with the close of the Conversion, an additional 671,046 shares of
common stock (8% of the offering) were issued and donated by the Company to the
Ocean Federal Foundation (the "Foundation"), a private foundation dedicated to
5
charitable purposes within Ocean County, New Jersey and its neighboring
communities. The fair market value of the contribution of $13.4 million was
reflected as an expense in the Company's third quarter operating results and as
an increase to capital stock and paid in capital for the same amount. The
Company also recorded a related tax benefit of $3.7 million with a corresponding
increase to the Company's deferred tax assets. The net effect of the charitable
donation on the Company's financial condition and results of operations for the
third quarter was a decrease in net income of $9.7 million, an increase in
capital stock and paid in capital of $13.4 million and an increase in deferred
tax assets of $3.7 million. Although the Company and the Bank have received an
opinion of their independent accountants that the Company will be entitled to
the deduction for the charitable contribution, there can be no assurances that
the IRS will recognize the Foundation as a Section 501(c)(3) exempt organization
or that the deduction will be permitted. In such event, the Company's
contribution to the Foundation would be fully expensed, resulting in a further
reduction in earnings of $3.7 million in the year in which the IRS makes such a
determination.
NOTE 4. LOANS RECEIVABLE, NET
- -----------------------------
Loans receivable at September 30, 1996 and December 31, 1995 consisted of the
following (in thousands):
September 30, 1996 December 31, 1995
------------------- -----------------
(Unaudited)
Real estate:
One- to four-family $605,333 $575,010
Commercial real estate, multi-
family and land 15,702 14,939
Construction 9,790 8,153
Consumer 30,842 26,867
-------- --------
Total loans 661,667 624,969
Less:
Undisbursed loan funds 3,843 2,687
Unamortized discounts, net 11 12
Deferred loan fees 1,520 1,679
Allowance for loan losses 5,943 6,001
-------- --------
Total loans, net 650,350 614,590
Less: mortgage loans held for sale - 1,894
-------- --------
Loans receivable, net $650,350 $612,696
======== ========
NOTE 5. DEPOSITS
- ----------------
The major types of deposits at September 30, 1996 and December 31, 1995 were as
follows (in thousands):
September 30, 1996 December 31, 1995
------------------ -----------------
Type of Account (Unaudited)
- ---------------
NOW $ 75,210 $ 75,010
Money Market deposit 69,163 70,556
Savings 172,280 175,777
Time deposits 609,618 605,215
-------- --------
$926,271 $926,558
======== ========
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Total assets at September 30, 1996, were $1.19 billion, an increase of $153.6
million, or 14.8%, compared to $1.04 billion at December 31, 1995. This growth
was funded by $149.9 million in net proceeds from the issuance of common stock
in connection with the Bank's Conversion, which was completed on July 2, 1996.
The Conversion proceeds were primarily used to repay borrowings and purchase
investment and mortgage-backed securities.
Investment securities available-for-sale increased by $37.4 million, to a
balance of $152.3 million at September 30, 1996, compared to a balance of $114.9
million at December 31, 1995, and mortgage-backed securities increased by $72.0
million to $337.1 million at September 30, 1996 from $265.1 million at December
31, 1995. The increase in investment and mortgage-backed securities is due to
the investment of Conversion proceeds. Loans receivable, net, increased by
$37.7 million, or 6.1%, to a balance of $650.4 million at September 30, 1996,
compared to a balance of $612.7 million at December 31, 1995. Premises and
equipment increased by $4.7 million or 61.0%, to $12.3 million at September 30,
1996, from $7.6 million at December 31, 1995, as a result of renovations in
progress to a building purchased by the Bank in July 1995, which is the site of
a new branch office and will be the Bank's new administrative facility. The
renovation is due to be completed and the building occupied in late 1996. Other
assets increased $5.8 million from December 31, 1995 to September 30, 1996,
primarily due to the recognition of deferred tax assets relating to the
charitable donation and the net unrealized loss on securities available for
sale.
Total deposits at September 30, 1996 were $926.3 million, a decrease of
$287,000, compared to $926.6 million at December 31, 1995 primarily due to
deposit withdrawals of $13.5 million to fund stock purchases in the Conversion.
Stockholders' equity at September 30, 1996, was $246.7 million, compared to
$92.4 million at December 31, 1995, an increase of $154.4 million, primarily due
to net Conversion proceeds of $149.9 million.
RESULTS OF OPERATIONS
GENERAL
The Company incurred net losses of $9.8 million and $4.9 million for the three
and nine months ended September 30, 1996, respectively, as compared to net
income of $1.8 million and $6.2 million for the three and nine months ended
September 30, 1995, respectively. The third quarter and year-to-date losses
were effected by the charitable donation to the Ocean Federal Foundation of
671,046 shares of common stock which resulted in expense recognition of $13.4
million ($9.7 million net of tax), the fair market value of the stock at the
time of the donation. (See note 3 to the unaudited consolidated financial
statements.) Operating results for the three and nine months ended September
30,1996 were further reduced by a special one-time assessment imposed on
institutions such as the Bank insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. The special assessment was 65.7 basis points on SAIF
assessable deposits as of March 31, 1995. The Bank's assessment of $5.7 million
($3.7 million net of taxes) was recognized in the third quarter. (See
Recapitalization of SAIF and Its Impact on SAIF Premiums.)
INTEREST INCOME
Interest income for the three months ended September 30, 1996 was $20.3 million,
compared to $17.8 million for the three months ended September 30, 1995, an
increase of $2.6 million, or 14.5%. For the nine months ended September 30,
1996 interest income was $59.1 million compared to $52.1 million for the same
period in 1995, an increase of $7.0 million or 13.4%. The increases in
interest income were the result of increases in the average size of the
investment and mortgage-
7
backed securities available-for-sale portfolios due to the 1996 purchases
relating to the investment of net Conversion proceeds. Many of these purchases
were made early in 1996 as the Bank prefunded expected Conversion proceeds by
increasing FHLB borrowings and investing the borrowed funds in investment and
mortgage-backed securities. The FHLB borrowings were then repaid upon
consummation of the Conversion. Additionally, the average balance of loans
receivable also increased during the third quarter and first nine months of 1996
as compared to the third quarter and first nine months of 1995. The overall
increase in interest-earning assets was partially offset by the effects of a
lower average interest- earning asset yield which decreased to 7.08% for both
the three and nine months ended September 30, 1996, as compared to 7.29% and
7.21% for the three and nine months ended September 30, 1995, respectively.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1996, was $10.2
million, compared to $10.4 million for the three months ended September 30,
1995, a decrease of $190,000, or 1.8%. For the nine months ended September 30,
1996 interest expense was $33.0 million, compared to $29.4 million for the same
period in 1995, an increase of $3.5 million, or 12.0%. The decrease in interest
expense for the third quarter of 1996, as compared to the same period in 1995
was due to a reduction in the average cost of funds from 4.59% to 4.37%, which
was substantially offset by an increase in average deposit balances of $25.5
million. The increase in interest expense for the first nine months of 1996, as
compared to the same period in 1995 was the result of an increase in the average
outstanding balance of both deposits (to $932.9 million for the nine months
ended September 30, 1996, from $889.0 million for the same period in 1995) and
Federal Home Loan Bank borrowings (to $48.3 million for the nine months ended
September 30, 1996, from $3.6 million for the same period in 1995).
PROVISION FOR LOAN LOSSES
For the three months and nine months ended September 30, 1996, the Bank's
provision for loan losses was $225,000 and $475,000, respectively, compared to
$238,000 and $712,000 for same prior year periods. The decreased provisions
were based on management's assessment of the risks inherent in the Bank's loan
portfolio.
OTHER INCOME
Other income increased to $552,000 and $2.0 million for the three months and
nine months ended September 30, 1996, respectively, representing increases of
$53,000 and $622,000, or 10.6% and 45.3%, compared to the same prior year
periods. Income from fees and service charges increased $54,000 and $183,000,
for the three and nine months ended September 30, 1996, respectively, compared
to the same prior year periods due to revisions in the Bank's fee structure.
Income from the net gain on sales of loans available for sale increased $187,000
for the nine months ended September 30, 1996, compared to the same prior year
period. The increase was due to a higher volume of loan sales and the
adoption, effective January 1, 1996, of Statement for Financial Accounting
Standards No. 122 "Accounting for Mortgage Servicing Rights, an amendment of
FASB Statement No. 65," which allowed the Bank to record, as a separate asset,
rights to service mortgage loans for others. The volume of loan sales decreased
significantly in the third quarter of 1996 as higher market interest rates
slowed refinancing activity and the Bank determined to retain in its portfolio a
limited amount of 30-year fixed rate loan production which would have previously
been sold. Other income increased $240,000 for the nine months ended September
30, 1996, compared to the same prior year period due to the recovery of $101,000
from the previous charge-off of a financial asset and due to the recognition of
$177,000 of income in 1996 relating to increases in the cash surrender value of
life insurance policies on Bank officers used to fund benefit plans.
8
OPERATING EXPENSES
Operating expenses were $24.0 million and $33.5 million for the three and nine
months ended September 30, 1996, respectively, representing increases of $19.2
million and $20.1 million compared to the same prior year periods. The
charitable donation to the Ocean Federal Foundation accounted for $13.4 million
of the increase in both periods in 1996. The Bank's share of the special
assessment imposed by the FDIC on SAIF-insured institutions of $5.7 million
accounted for the increase in federal deposit insurance for the three and nine
months ended September 30, 1996, as compared to the same prior year periods.
The increase in compensation and employee benefits expense of $285,000 and $1.1
million for the three and nine months ended September 30, 1996, respectively, as
compared to the same prior year periods was due to the expense associated with
the adoption, effective January 1, 1996, of the Employee Stock Ownership Plan
(ESOP). This expense was partly offset by freezing the future accrual of
benefits under the Bank's defined benefit pension plan. General and
administrative expense amounted to $712,000 and $2.0 million for the three and
nine months ended September 30, 1996, respectively, representing decreases of
$253,000 and $72,000, as compared to the same prior year periods.
PROVISION (BENEFIT) FOR INCOME TAXES
Income tax benefit was $3.7 million and $900,000 for the three and nine months
ended September 30, 1996, respectively, compared to income tax expense of $1.1
million and $3.8 million for the three and nine months ended September 30, 1995,
respectively. The tax benefit in 1996 was due to the pretax losses created by
the charitable donation and the SAIF special assessment.
The Company has been advised by its independent accountants that the Company's
contribution of common stock to the Ocean Federal Foundation is tax deductible,
subject to a limitation based on 10% of the Company's annual taxable income.
The Company, however, is able to carry forward any unused portion of the
deduction for five years following the year in which the contribution is made.
Based on the Company's estimate of annual taxable income for the current year
and for the next successive five years (the carryforward period), the Company
recognized a tax benefit of $3.7 million on the $13.4 million charitable
donation. An additional $1.3 million of tax benefit was unrecognized due to the
limitations imposed by the tax code. (See note 3 to the unaudited consolidated
financial statements.)
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the "Funds Act") which, among other things, imposes a special one-
time assessment on SAIF member institutions, including the Bank, to recapitalize
the SAIF. As required by the Funds Act, the FDIC imposed a special assessment
of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995,
payable November 27, 1996. The special assessment was recognized as an expense
in the third quarter of 1996 and is tax deductible. The Bank took a pretax
charge of $5.7 million as a result of the FDIC special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on
January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of
20% of the rate assessed on SAIF deposits. Based on current estimates by the
FDIC, BIF deposits will be assessed a FICO payment of 1.3 basis points, while
SAIF deposits will pay an estimated 6.4 basis points on the FICO bonds. Full
pro rata sharing of the FICO payments between BIF and SAIF members will occur on
the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The
Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999
provided no savings and loans remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable
9
to that of BIF members. However, SAIF members will continue to make the higher
FICO payments described above. Management cannot predict the level of FDIC
insurance assessments on an on-going basis, whether the Bank charter will be
eliminated or whether the BIF and SAIF will eventually be merged.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans, FHLB borrowings and, to a lesser extent, investment
maturities and proceeds from the sale of loans. While scheduled amortization of
loans are predictable sources of funds, deposit flows and mortgage prepayments
are greatly influenced by general interest rates, economic conditions and
competition. The Company has other sources of liquidity if a need for
additional funds arises, including an overnight line of credit and advances from
the FHLB. At September 30, 1996, the Company had $5.4 million of outstanding
overnight borrowings from the FHLB, representing a decrease from $10.4 million
at December 31, 1995. The Company utilizes the overnight line from time to time
to fund short-term liquidity needs.
The Company's cash needs for the nine months ended September 30, 1996, were
principally provided by net proceeds of common stock issuance, maturities of
investment securities and principal payments on loans and mortgage-backed
securities. The cash provided was principally used for investing activities,
which included the purchase of investment and mortgage-backed securities and the
origination of loans. For the nine months ended September 30, 1995, the cash
needs of the Company were primarily satisfied by growth in the deposit base,
investment maturities and principal payments on loans and mortgage-backed
securities. The cash was principally utilized for loan originations, purchases
of investment and mortgage-backed securities and repayment of FHLB borrowings.
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, accrued interest receivable, certain time deposits, U.S. Treasury and
Government agencies and other securities and obligations generally having
remaining maturities of less than five years. The levels of these assets are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. As of September 30, 1996 and December 31, 1995, the
Bank's liquidity ratios were 18.7% and 17.2%, respectively, both in excess of
the 5% minimum regulatory requirement.
At September 30, 1996, the Bank exceeded all of its regulatory capital
requirements with tangible capital of $163.0 million, or 13.7%, of total
adjusted assets, which is above the required level of $17.9 million or 1.5%;
core capital of $163.0 million or 13.7% of total adjusted assets, which is above
the required level of $35.8 million, or 3.0%; and risk-based capital of $168.5
million, or 33.8% of risk-weighted assets, which is above the required level of
$39.9 million or 8.0%. The Bank is considered a "well capitalized" institution
under the Office of Thrift Supervision's prompt corrective action regulations.
10
NON-PERFORMING ASSETS
The following table sets forth information regarding the Company's nonperforming
assets consisting of non-accrual loans and Real Estate Owned (REO). The Company
had no troubled-debt restructured loans within the meaning of SFAS 15 at
September 30, 1996 or December 31, 1995. It is the policy of the Company to
cease accruing interest on loans 90 days or more past due or in the process of
foreclosure.
September 30 December 31,
1996 1995
------------- -------------
(Dollars in thousands)
Non-accrual loans:
Real estate:
One-to four-family $7,875 $ 8,296
Commercial real estate,
multi-family and land - 154
Construction - -
Consumer 159 221
------ -------
Total 8,034 8,671
REO, net 1,541 1,367
------ -------
Total non-performing assets $9,575 $10,038
====== =======
Allowance for loan losses as a percent of
total loans receivable .91% .97%
Allowance for loan losses as percent of
total non-performing loans 73.97% 69.21%
Non-performing loans as a percent of total
loans receivable 1.22% 1.40%
Non-performing assets as a percent of total
assets .80% .97%
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party
to routine legal proceedings within the normal course of business.
Such routine legal proceedings in the aggregate are believed by
management to be immaterial to the Company's financial condition or
results of operations.
Item 2. Changes in Securities
---------------------
Not Applicable
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
Not Applicable
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
3.1 Certificate of Incorporation of Ocean Financial Corp.*
3.2 Bylaws of Ocean Financial Corp.*
11 Computation of earnings per share
27 Financial Data Schedule (filed herewith)
b) There were no reports on Form 8-K filed during the three months
ended September 30, 1996.
*Incorporated herein by reference into this document from the Exhibits to Form
S-1, Registration Statement, filed on December 7, 1995, as amended, Registration
No. 33-80123.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Ocean Financial Corp.
-------------------------------
Registrant
DATE: November 13, 1996 /s/ John R. Garbarino
-----------------------------------
Chairman of the Board, President
and Chief Executive Officer
DATE: November 13, 1996 /s/ Michael Fitzpatrick
----------------------------------
Executive Vice President and
Chief Financial Officer
13