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, 2001 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 $264,782,175.70, based upon the last sales price as quoted
on The Nasdaq Stock Market for March 15, 2002.
The number of shares of Common Stock outstanding as of March 15, 2002 is
9,707,489.
DOCUMENTS INCORPORATED BY REFERENCE
The Annual Report to Stockholders for the year ended December 31, 2001, is
incorporated by reference into Part II of this Form 10-K.
The Proxy Statement for the 2002 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....................................................... 31
Item 3. Legal Proceedings................................................ 32
Item 4. Submission of Matters to a Vote of Security Holders.............. 32
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 33
Item 6. Selected Financial Data.......................................... 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 33
Item 8. Financial Statements and Supplementary Data...................... 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........................... 33
PART III
Item 10 Directors and Executive Officers of the Registrant............... 33
Item 11 Executive Compensation........................................... 33
Item 12 Security Ownership of Certain Beneficial Owners
and Management................................................... 34
Item 13 Certain Relationships and Related Transactions................... 34
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................... 34
SIGNATURES
PART I
Item 1. Business
-----------------
General
OceanFirst Financial Corp. (the "Company") was organized by the Board of
Directors of OceanFirst 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. On August 18,
2000 the Bank acquired Columbia Equities, Ltd. ("Columbia"), a mortgage banking
company based in Westchester County, New York in a transaction accounted for as
a purchase. At December 31, 2001, the Company had consolidated total assets of
$1.8 billion and total stockholders' equity of $146.7 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. As a mortgage
banking subsidiary of the Bank, Columbia originates, sells and services a full
product line of residential mortgage loans. Columbia sells virtually all loan
production into the secondary market, except that the Bank will often purchase
adjustable-rate mortgage loans originated by Columbia for inclusion in its loan
portfolio. The Bank also periodically sells part of its 30-year fixed rate
mortgage loan production primarily due to interest rate risk considerations.
Presently, servicing rights are retained in connection with most loan sales. 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 trust and asset management services and
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 fifteen additional branch offices,
twelve located in Ocean County, two located in Monmouth County and one located
in Middlesex County, 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. Columbia's loan
volume is primarily derived from the tri-state area around New York City.
Columbia conducts business through an administrative and production office in
Valhalla, New York and satellite production offices in Whitestone, New York;
Westport, Connecticut; and Pompton Plains, New Jersey.
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 although the Bank also faces increasing
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, 2001, the Bank had total loans outstanding of $1.350 billion, of
which $1.110 billion or 82.2% of total loans were one- to four-family,
residential mortgage loans. The remainder of the portfolio consisted of $112.3
million of commercial real estate, multi-family and land loans, or 8.3% of total
loans; $9.1 million of real estate construction loans, or .7% of total loans;
$67.0 million of consumer loans, primarily home equity loans and lines of
credit, equaling 5.0% of total loans; and $51.8 million of commercial loans, or
3.8% of total loans. Included in total loans are $37.8 million in loans held for
sale at December 31, 2001. At that same date, 43.8% 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,
-----------------------------------------------------------------------------------------
2001 2000 1999
------------------------ ----------------------------- ------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
---------- ---------- ---------------- --------- --------------- -----------
(Dollars in thousands)
Real estate:
One- to four-family................... $1,110,282 82.22% $ 993,706 83.93% $ 917,481 87.04%
Commercial real estate,
multi-family and land............ 112,318 8.32 89,663 7.57 57,142 5.42
Construction.......................... 9,082 .67 7,973 .67 7,791 .74
Consumer (1)............................ 67,039 4.96 62,923 5.32 56,040 5.32
Commercial loans........................ 51,756 3.83 29,687 2.51 15,569 1.48
---------- ------ ---------- ------ ---------- ------
Total loans.................... 1,350,477 100.00% 1,183,952 100.00% 1,054,023 100.00%
====== ====== ======
Loans in process........................ (2,458) (2,927) (2,790)
Deferred origination costs (fees), net.. 1,048 561 (78)
Unamoritized premium (discount), net.... 1 19 43
Allowance for loan losses............... (10,351) (9,138) (8,223)
---------- ---------- ----------
Total loans, net............... 1,338,717 1,172,467 1,042,975
Less:
Mortgage loans held for sale.......... 37,828 35,588 -
---------- ---------- ----------
Loans receivable, net.......... $1,300,889 $1,136,879 $1,042,975
========== ========== ==========
Total loans:
Adjustable rate....................... $ 591,724 43.82% $ 485,660 41.02% $ 470,238 44.61%
Fixed rate............................ 758,753 56.18 698,292 58.98 583,785 55.39
---------- ------ ---------- ------ ---------- ------
$1,350,477 100.00% $1,183,952 100.00% $1,054,023 100.00%
========== ====== ========== ====== ========== ======
--------------------------------------------------
1998 1997
----------------------- -----------------------
Percent Percent
Amount of Total Amount of Total
---------- ---------- ---------- -----------
Real estate:
One- to four-family................... $869,769 89.10% $711,548 89.57%
Commercial real estate,
multi-family and land............ 42,008 4.30 25,699 3.24
Construction.......................... 6,108 .63 8,748 1.10
Consumer (1)............................ 51,785 5.31 45,417 5.72
Commercial loans........................ 6,483 .66 2,904 .37
-------- ------ --------- -------
Total loans.................... 976,153 100.00% 794,316 100.00%
====== =======
Loans in process........................ (1,996) (2,867)
Deferred origination costs (fees), net.. (608) (1,133)
Unamoritized premium (discount), net.... 62 (9)
Allowance for loan losses............... (7,460) (6,612)
-------- ---------
Total loans, net............... 966,151 783,695
Less:
Mortgage loans held for sale.......... 25,140 -
-------- ---------
Loans receivable, net.......... $941,011 $783,695
======== =========
Total loans:
Adjustable rate....................... $458,809 47.00% $475,533 59.87%
Fixed rate............................ 517,344 53.00 318,783 40.13
-------- ------- -------- -------
$976,153 100.00% $794,316 100.00%
======== ======= ======== =======
_________________________
(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, 2001. There was $37.8 million in loans, held for
sale at December 31, 2001. The table does not include principal repayments.
Principal repayments, including prepayments on total loans was $225.1 million,
$178.9 million and $185.7 million for the years ended December 31, 2001, 2000
and 1999, respectively.
At December 31, 2001
--------------------------------------------------------------------------------------
Commercial
One-to real estate, Total
Four- multi-family Commercial Loans
Family and land Construction Consumer Loans Receivable
------------ ------------ ----------------- ------------ ------------- ----------
(In thousands)
One year or less ......................... $ 34,429 $ 7,007 $9,082 $ 7,114 $25,652 $ 83,284
---------- -------- ------ -------- ------- ----------
After one year:
More than one year to three years ..... 72,530 24,701 - 12,059 16,340 125,630
More than three years to five years ... 77,349 28,163 - 10,590 7,547 123,649
More than five years to ten years ..... 206,803 36,921 - 17,520 2,217 263,461
More than ten years to twenty years ... 384,918 6,809 - 19,756 - 411,483-
More than twenty years ................ 334,253 8,717 - - - 342,970
---------- -------- ------ -------- ------- ----------
Total due after December 31, 2002 ..... 1,075,853 105,311 - 59,925 26,104 1,267,193
---------- -------- ------ -------- ------- ----------
Total amount due ...................... $1,110,282 $112,318 $9,082 $ 67,039 $51,756 1,350,477
========== ======== ====== ======== ======= ==========
Loans in process ...................... (2,458)
Deferred origination costs, net ....... 1,048
Unamortized premium, net .............. 1
Allowance for loan losses ............. (10,351)
----------
Total loans, net ...................... 1,338,717
Less: Mortgage loans held for sale ...... 37,828
----------
Loans receivable, net .................... $1,300,889
==========
4
The following table sets forth at December 31, 2001, the dollar amount of total
loans receivable contractually due after December 31, 2002, and whether such
loans have fixed interest rates or adjustable interest rates.
Due After December 31, 2002
--------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real estate loans:
One- to four-family ............... $630,976 $444,877 $1,075,853
Commercial real estate,
multi-family and land ........... 52,299 53,012 105,311
Consumer ............................... 29,914 30,011 59,925
Commercial loans ....................... 16,909 9,195 26,104
-------- -------- ----------
Total loans receivable .......... $730,098 $537,095 $1,267,193
======== ======== ==========
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 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. Columbia, as a mortgage
banker, sells virtually all loan production except that the Bank will often
purchase adjustable rate mortgage loans originated by Columbia for inclusion in
its loan portfolio. Columbia retains servicing rights for most of the loans
sold. The Bank also periodically sells part of the 30-year, fixed-rate mortgage
loans that it originates. See "- Loan Servicing." At December 31, 2001 there
were $37.8 million in loans categorized as held for sale.
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,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(In thousands)
Total loans:
Beginning balance ................................ $1,183,952 $1,054,023 $ 976,153
---------- ---------- ----------
Loans originated:
One- to four-family ..................... 682,171 295,535 240,873
Commercial real estate,
multi-family and land ............... 36,695 45,189 28,130
Construction ............................ 13,361 8,520 6,552
Consumer ................................ 37,020 29,217 28,516
Commercial .............................. 49,291 27,404 9,780
---------- ---------- ----------
Total loans originated ............ 818,538 405,865 313,851
---------- ---------- ----------
Loans purchased ............................. - 22,271 -
---------- ---------- ----------
Total ............................. 2,002,490 1,482,159 1,290,004
Less:
Principal repayments ........................ 229,637 179,936 185,695
Sales of loans .............................. 421,922 117,503 49,177
Transfer to REO ............................. 454 768 1,109
---------- ---------- ----------
Total loans ................... $1,350,477 $1,183,952 $1,054,023
========== ========== ==========
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
typically generated by 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, 2001, the Bank's total loans outstanding were $1.350 billion, of
which $1.110 billion, or 82.2%, 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 $112,000 at
December 31, 2001. 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, 2001, the Bank had commitments for the origination of
fixed-rate one-to-four family mortgage loans totaling $96.9 million. The normal
terms for such commitments provide for a maximum of 60 days rate lock upon
receipt of a 1.0% refundable deposit 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", or non-conforming loans (i.e.,
loans which are not eligible for purchase by FNMA or FHLMC because of loan size
or credit underwriting criteria). 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
6
by the Bank include due-on-sale clauses which provide the Bank with the
contractual right to declare the loan immediately due and payable in the event
the borrower transfers ownership of the property without 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, 2001 was $112.3 million, or 8.3% of total
loans. The largest commercial real estate loan in the Bank's portfolio at
December 31, 2001 was a performing loan for which the Bank had an outstanding
carrying balance of $5.4 million, net of a $3.4 million participation sold,
secured by a first lien position on an all corporate assets including a first
mortgage on commercial real estate primarily used as a health, fitness and
sports facility and as a private school. The average size of the Bank's
commercial real estate loans at December 31, 2001 was approximately $498,000.
The Bank also originates multi-family mortgage loans and land loans on a limited
and highly selective basis. The Bank's multi-family loans and land loans at
December 31, 2001, totaled $4.9 million and $2.1 million, respectively.
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, 2001, construction loans totaled $9.1
--------------------
million, or .7%, 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 primary residence, while, to a lesser extent, loans
are made to developers known to the Bank in order to build single-family houses
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,
2001, the Bank had 33 construction loans, with the largest loan commitment being
approximately $1.7 million. 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. Once construction is
7
complete, the loans are converted to permanent amortizing loans with maturities
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 based upon a security interest in a project which is not yet
complete. 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 seeks to address these
risks through its underwriting procedures.
Consumer Loans. The Bank also offers consumer loans. At December 31, 2001, the
--------------
Bank's consumer loans totaled $67.0 million, or 5.0% of the Bank's total loan
portfolio. Of that amount, home equity loans comprised $34.1 million, or 50.9%;
home equity lines of credit comprised $31.3 million, or 46.8%; loans on savings
accounts totaled $756,000, or 1.1%; and automobile, student and overdraft line
of credit loans totaled $807,000, or 1.2%.
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 Bank 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 up to 1.25%. The loans have an
18% lifetime cap on interest rate adjustments.
Commercial Lending. At December 31, 2001, commercial loans totaled $51.8
------------------
million, or 3.8% 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 real estate loans and commercial loans (including loans for working
capital; fixed asset purchases; and acquisition, receivable and inventory
financing). 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 monitoring. Commercial business
lending, both secured and unsecured, is generally considered to
8
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, 2001 had an outstanding balance
of $3.1 million, secured by corporate assets and secondary liens on real estate
property. The average size of the Bank's commercial loans at December 31, 2001
was approximately $108,000.
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 $300,700. 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, 2001 amounted to $18.9 million. At December 31, 2001, the
Bank's maximum loan exposure to a single borrower was $10.4 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, 2001, the Bank was servicing $534.1 million of
loans for others. For the years ended December 31, 2001, 2000 and 1999, loan
servicing fees, net of related amortization and write down of the loan servicing
asset, totaled $(838,000), $516,000 and $403,000, 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 was
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 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 the Vice
President of Loan Review 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
9
classifies assets in accordance with certain regulatory guidelines established
by the OTS which are applicable to all savings associations. At December 31,
2001, the Bank had $4.1 million of assets, including all REO, classified as
Substandard, $2.4 million 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 $4.9 million at December 31,
2001. These loans are classified as Special Mention due to past delinquencies or
other identifiable weaknesses. At December 31, 2001, the largest loan
relationship classified as Special Mention was represented by two commercial
mortgages with a total balance of $2.4 million secured by a first mortgage and
assignments of rents on two Ocean County marinas. The largest loan relationship
classified as Substandard was a one-to-four family mortgage loan with a balance
of $313,000.
The Doubtful category consisted of a single commercial loan relationship with an
outstanding balance of $2.4 million which became non-accrual in the first
quarter of 2001. The Bank holds a participation interest in a $125 million
shared national credit on a company headquartered in New Jersey which is secured
by corporate assets and various commercial real estate properties. The Bank does
not participate in any other shared national credits. In March 2002 the credit
deteriorated further as an orderly liquidation of the Company's assets appeared
less likely. As a result, the Bank charged off the entire principal balance of
the loan.
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 2 REO properties at
December 31, 2001. 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, 2001, 2000, 1999, 1998, and 1997, 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
$379,000, $132,000, $52,000, $270,000, and $278,000.
10
December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accrual loans:
Real estate:
One- to four-family ...................... $3,661 $2,594 $2,401 $4,605 $5,062
Commercial real estate,
multi-family and land ................. - - 362 574 382
Construction ............................. - - - - -
Consumer ...................................... 151 147 222 245 110
Commercial loans .............................. 2,368 182 - - -
------ ------ ------ ------ ------
Total .................................. 6,180 2,923 2,985 5,424 5,554
REO, net(1) ................................... 133 157 292 43 1,198
------ ------ ------ ------ ------
Total non-performing assets ................. $6,313 $3,080 $3,277 $5,467 $6,752
====== ====== ====== ====== ======
Allowance for loan losses as a
percent of total loans receivable (2) ...... .77% .77% .78% .76% .83%
Allowance for loan losses as a percent
of total non-performing loans (3) .......... 167.49 312.62 275.48 137.54 119.03
Non-performing loans as a percent of
total loans receivable(2)(3) ............... .46 .25 .28 .56 .70
Non-performing assets
as a percent of total assets(3) ............ .36 .19 .21 .35 .45
________________
(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.
11
The Bank's allowance consists of three elements - a specific allowance, a
general allowance and an unallocated allowance. A specific allowance is
determined for all assets classified as substandard, doubtful or loss where the
value of the underlying collateral can reasonably be evaluated; generally those
loans secured by real estate. The Bank obtains an updated appraisal whenever a
loan secured by real estate becomes 90 days delinquent. The specific allowance
represents the difference between the Bank's recorded investment in the loan and
the fair value of the collateral, less estimated disposal costs. A general
allowance is determined for all other classified and non-classified loans. In
determining the level of the general allowance, the Bank segments the loan
portfolio into various risk tranches based on classification (special mention,
substandard and doubtful); type of loan (mortgage, consumer and commercial);
and, certain underwriting characteristics. An estimated loss factor is then
applied to each risk tranche. The loss factors are determined based upon
historical loan loss experience, current economic conditions, underwriting
standards, internal loan review results and other factors. Finally, an
unallocated allowance is maintained as a hedge against economic uncertainty,
unanticipated deterioration in classified assets and other uncertainties
inherent in the evaluation process.
As of December 31, 2001 and 2000, the Bank's allowance for loan losses was .77%
and .77%, respectively, of total loans. The Bank had non-accrual loans of $6.2
million and $2.9 million at December 31, 2001 and 2000, respectively. The Bank
will continue to monitor and modify its allowances for loan losses as conditions
dictate.
12
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
------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- -------- ------- -------
(Dollars in thousands)
Balance at beginning of year .......................... $ 9,138 $ 8,223 $ 7,460 $ 6,612 $ 6,021
------- ------- -------- ------- -------
Charge-offs:
Real Estate:
One- to four-family .............................. 98 77 114 63 328
Commercial real estate,
multi-family and land ........................ - - 58 - -
Construction ..................................... - - - - -
Consumer ............................................ - 10 37 2 9
Commercial .......................................... - 5 32 - -
------- ------- -------- ------- -------
Total ......................................... 98 92 241 65 337
Recoveries ............................................ 61 22 104 13 28
------- -------- -------- ------- -------
Net charge-offs ..................................... 37 70 137 52 309
------- -------- -------- ------- -------
Provision for loan losses ............................. 1,250 985 900 900 900
------- ------- -------- ------- -------
Balance at end of year ................................ $10,351 $ 9,138 $ 8,223 $ 7,460 $ 6,612
======= ======= ======== ======= =======
Ratio of net charge-offs during the year
to average net loans outstanding during
the year ............................................ .00% .01% .01% .01% .05%
======= ======= ======== ======= =======
13
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,
------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------------
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 $ 2,547 24.60% 82.22% $ 2,831 30.98% 83.93% $2,577 31.34% 87.04%
Commercial real
estate, multi-
family and land 1,867 18.03 8.32 2,018 22.08 7.57 1,352 16.44 5.42
Construction 68 .66 .67 38 .42 .67 38 .46 .74
Consumer 625 6.04 4.96 585 6.40 5.32 543 6.60 5.32
Commercial 2,461 23.78 3.83 1,282 14.03 2.51 622 7.57 1.48
Unallocated 2,783 26.89 - 2,384 26.09 - 3,091 37.59 -
------- ---------- ---------- ------- ------- ------- ------ ---------- ------
Total $10,351 100.00% 100.00% $ 9,138 100.00% 100.00% $8,223 100.00% 100.00%
======= ========== ========== ======= ======= ======= ====== ========== ======
------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------
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 $ 2,824 37.86% 89.10% $2,485 37.58% 89.57%
Commercial real
estate, multi-
family and land 993 13.30 4.30 591 8.94 3.24
Construction 31 .42 .63 44 .67 1.10
Consumer 505 6.77 5.31 471 7.12 5.72
Commercial 220 2.95 .66 58 .88 .37
Unallocated 2,887 38.70 - 2,963 44.81 -
------- ------ -------- ------- ------- --------
Total $ 7,460 100.00% 100.00% $ 6,612 100.00% 100.00%
======= ====== ======== ======= ======= ========
14
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.
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, 2001,
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-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
15
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. 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, 2001,
mortgage-backed securities totaled $233.3 million, or 13.2% of total assets,
including $156.2 million in collateralized mortgage obligations ("CMOs"), all of
which were classified as available for sale. 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.
CMOs issued by FHLMC, FNMA, GNMA and private interests amounted to $45,338,000,
$22,254,000, $24,328,000 and $64,262,000, respectively, at December 31, 2001 and
$39,458,000, $16,303,000, $7,581,000 and $85,067,000, respectively, at December
31, 2000. 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, 2001 the Bank had outstanding privately-issued CMOs from two
issuers, Residential Funding Corp. and Countrywide Home Loans, Inc., each in
excess of ten percent of stockholders' equity. The aggregate book and market
values of privately-issued CMOs issued by Residential Funding Corp. and held by
the Bank totaled $24.1 million and $24.5 million, respectively. The aggregate
book and market values of privately issued CMOs issued by Countrywide Home
Loans, Inc. and held by the Bank totaled $15.9 million and $16.2 million,
respectively.
16
The following table sets forth the Bank's mortgage-backed securities activities
for the periods indicated.
For the Year
Ended December 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Beginning balance .................................... $268,042 $346,182 $ 381,840
Mortgage-backed securities
Purchased ........................................ 49,006 5,059 97,251
Less: Principal repayments ........................ (89,916) (58,901) (120,460)
Mortgage-backed securities sold ............. - (31,915) -
Amortization of premium ..................... (759) (462) (1,145)
Change in net unrealized gain
(loss) on mortgage-backed
securities available for sale .................... 6,929 8,079 (11,304)
-------- -------- ---------
Ending balance ....................................... $233,302 $268,042 $ 346,182
======== ======== =========
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,
----------------------------------------------------------------------------------
2001 2000 1999
------------------------- ----------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- -------- --------- -------- --------- ---------
(In thousands)
Mortgage-backed
securities:
FHLMC .................. $ 29,650 $ 30,383 $ 48,888 $ 48,784 $ 65,111 $ 64,484
FNMA ................... 22,646 23,088 37,172 37,009 48,424 47,852
GNMA ................... 23,229 23,649 34,092 33,840 41,467 40,569
CMOs ................... 153,293 156,182 150,335 148,409 201,704 193,277
----------- -------- --------- -------- -------- ---------
Total mortgage-backed
securities ............. $ 228,818 $233,302 $ 270,487 $268,042 $356,706 $ 346,182
=========== ======== ========= ======== ======== =========
17
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,
--------------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- ---------
(In thousands)
Investment securities:
U.S. Government and
agency obligations ....... $ 1,200 $ 1,198 $ 24,469 $ 24,373 $ 40,964 $ 40,177
State and municipal
obligations .............. 5,561 5,313 5,561 5,156 5,761 5,003
Corporate debt
securities ............... 75,199 68,253 75,124 69,616 75,050 72,567
Equity
investments .............. 3,849 5,253 3,757 4,391 3,668 3,033
--------- -------- --------- --------- --------- ---------
Total investment
securities ............ $ 85,809 $ 80,017 $ 108,911 $ 103,536 $ 125,443 $ 120,780
========= ======== ========= ========= ========= =========
18
The table below sets forth certain information regarding the amortized cost,
weighted average yields and contractual maturities, excluding scheduled
principal amortization, of the Bank's investment and mortgage-backed securities,
excluding equity securities, as of December 31, 2001. 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, 2001
--------------------------------------------------------------------------------------
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 ... $ - $ 1,200 $ - $ -
State and municipal obligations (1) ...... - - - 5,561
Corporate debt securities (2) ............ - - - 75,199
--------- -------- --------- --------
Total investment securities ................ $ - $ 1,200 $ - $ 80,760
========= ======== ========= ========
Weighted average yield ..................... - 2.77% - 3.37%
========= ======== ========= ========
Mortgage-backed securities:
FHLMC .................................... $ 660 $ 15,791 $ 174 $ 13,025
FNMA ..................................... 1,009 10,657 1,240 9,740
GNMA ..................................... - 323 37 22,869
CMOs ..................................... - - - 153,293
--------- -------- --------- --------
Total mortgage-backed securities ........... $ 1,669 $ 26,771 $ 1,451 $198,927
========= ======== ========= ========
Weighted average yield ..................... 5.27% 6.27% 7.27% 6.25%
========= ======== ========= ========
-----------------------------------
Total
-----------------------------------
Amortized Cost Market Value
--------------- ---------------
Investment securities:
U.S. Government and agency obligations . $ 1,200 $ 1,198
State and municipal obligations (1) ..... 5,561 5,313
Corporate debt securities (2) ........... 75,199 68,253
--------- --------
Total investment securities ............... $ 81,960 $ 74,764
========= ========
Weighted average yield .................... 3.36%
=========
Mortgage-backed securities:
FHLMC ................................... $ 29,650 $ 30,383
FNMA .................................... 22,646 23,088
GNMA .................................... 23,229 23,649
CMOs .................................... 153,293 156,182
--------- --------
Total mortgage-backed securities .......... $ 228,818 $233,302
========= ========
Weighted average yield .................... 6.38%
=========
--------------------------
(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.
19
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 money market accounts, savings
accounts, NOW accounts, non-interest bearing accounts and time deposits. For the
year ended December 31, 2001, time deposits constituted 54.0% 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,
-----------------------------------------
2001 2000 1999
---- ---- ----
(In thousands)
Net deposits (withdrawals) ..................... $(34,646) $ 5,294 $(14,480)
Interest credited on deposit accounts .......... 39,501 41,944 36,179
-------- ------- --------
Total increase in deposit accounts ............. $ 4,855 $47,238 $ 21,699
======== ======= ========
At December 31, 2001, the Bank had $82.5 million in time deposits in amounts of
$100,000 or more maturing as follows:
Weighted
Average
Maturity Period Amount Rate
---------------------------------------------- -------- ------------
(Dollars in thousands)
Three months or less ........................... $36,818 3.46%
Over three through six months .................. 11,776 4.16
Over six through 12 months ..................... 16,954 4.20
Over 12 months ................................. 16,950 5.22
-------- ----
Total .......................................... $82,498 4.07
======== ====
20
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,
---------------------------------------------------------------------------------
2001 2000
------------------------------------------------- -------------------------------
Percent of Percent
Total Average Weighted of Total Weighted
Average Balance Deposits Average Average Average Average
Yield Balance Deposits Yield
--------------- ------------- -------- ------- -------- ----------
(Dollars in thousands)
Money market deposit accounts............ $ 73,966 6.61% 1.86% $ 76,570 7.03% 2.58%
Savings accounts......................... 178,335 15.93 1.54 170,604 15.67 2.00
NOW accounts............................. 198,186 17.70 1.60 130,423 11.98 2.83
Non-interest-bearing accounts 64,330 5.74 - 43,177 3.97 -
---------- ------ ---------- ------
Total ................................ 514,817 45.98 1.41 420,774 38.65 2.18
---------- ------ ---------- ------
Time deposits:
Six months or less.................... 112,608 10.06 2.86 91,801 8.43 5.58
Over 6 through 12 months.............. 108,507 9.69 3.17 122,549 11.26 5.69
Over 12 through 24 months............. 139,870 12.49 4.50 201,524 18.51 5.62
Over 24 months........................ 137,360 12.27 5.98 141,097 12.96 6.22
IRA/KEOGH............................. 106,489 9.51 5.04 110,940 10.19 5.87
---------- ------ ---------- ------
Total time deposits................. 604,834 54.02 4.39 667,911 61.35 5.82
---------- ------ ---------- ------
Total average deposits............ $1,119,651 100.00% 2.88% $1,088,685 100.00% 4.31%
========== ====== ==== ========== ====== ====
----------------------------------
1999
----------------------------------
Percent
of Total Weighted
Average Average Average
Balance Deposits Yield
------- -------- --------
Money market deposit accounts............ $ 77,478 7.40% 2.61%
Savings accounts......................... 173,798 16.60 2.03
NOW accounts............................. 111,356 10.63 1.59
Non-interest-bearing accounts............ 26,953 2.58 -
---------- ------
Total................................. 389,585 37.21 1.88
---------- ------
Time deposits:
Six months or less.................... 91,114 8.70 4.54
Over 6 through 12 months.............. 118,907 11.36 4.73
Over 12 through 24 months............. 231,022 22.06 5.04
Over 24 months........................ 109,341 10.44 6.02
IRA/KEOGH............................. 107,152 10.23 5.47
---------- ------
Total time deposits................. 657,536 62.79 5.18
---------- ------
Total average deposits............ $1,047,121 100.00% 3.94%
========== ====== ====
21
Borrowings
----------
From time to time the Bank has obtained term advances from the Federal Home Loan
Bank of New York ("FHLB-NY") as an alternative to retail deposit funds and may
do so in the future as part of its operating strategy. FHLB-NY 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 investment and mortgage-backed securities and
secondarily by the Bank's investment in capital stock of the FHLB-NY. In
addition, the Bank has an available overnight line of credit with the FHLB-NY
for $50.0 million which expires November 25, 2002. The Bank also has available
from the FHLB-NY a one-month, overnight repricing line of credit for $50.0
million which also expires on November 25, 2002. 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 and agency securities and FHLB-NY stock. The maximum amount that the
FHLB-NY will advance to member institutions, including the Bank, fluctuates from
time to time in accordance with the policies of the OTS and the FHLB-NY. At
December 31, 2001, the Bank had $80.0 million in outstanding borrowings against
the FHLB-NY lines of credit and $192.0 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 pledged securities are not under the Bank's control. At December 31, 2001,
the Bank had borrowed $212.3 million through securities sold under agreements to
repurchase. (See note 10 to the consolidated financial statements in the 2001
Annual Report to Stockholders.)
Subsidiary Activities
The Bank owns three subsidiaries - Columbia Equities, Ltd., OceanFirst Services
LLC and OceanFirst REIT Holdings, Inc.
Columbia Equities, Ltd. was acquired by the Bank on August 18, 2000 and operates
as a mortgage banking subsidiary based in Westchester County, New York. Columbia
originates, sells and services a full product line of residential mortgage loans
primarily in New York, New Jersey and Connecticut. Loans are originated through
three retail branches and to a lesser extent, a web site and a network of
independent mortgage brokers. Columbia sells virtually all loan production into
the secondary market or, to a lesser extent, the Bank. Presently, servicing
rights are retained in connection with most loan sales.
OceanFirst Services LLC was originally organized in 1982 under the name Dome
Financial Services, Inc. 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, mutual funds and insurance)
through a third party marketing firm to Bank customers through this subsidiary,
recognizing fee income from such sales.
OceanFirst REIT Holdings, Inc. was established in 2001 and acts as the holding
company for OceanFirst Realty Corp. 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.
22
Personnel
As of December 31, 2001, the Bank had 366 full-time employees and 80 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 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 as defined under
the Gramm-Leach-Bliley Act 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. The Company qualifies for the grandfather provision.
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 Bank 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
23
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.
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.
Acquisition of the Company. Under the Federal Change in Control Act ("CIBCA"), a
--------------------------
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire 10% or more
of the Company's outstanding voting stock, unless the Office of Thrift
Supervision has found that the acquisition will not result in a change of
control of the Company. Under the CIBCA, the Office of Thrift Supervision has 60
days from the filing of a complete notice to act, taking into consideration
certain factors, including the financial and managerial resources of the
acquirer and the anti-trust effects of the acquisition. Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.
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 associations, 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
24
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, 2001, the Bank met
each of its capital requirements.
The following table presents the Bank's capital position at December 31, 2001.
The Bank met each of its capital requirements at that date.
Capital
--------------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
Tangible..................... $ 125,952 $ 26,396 $ 99,556 7.16% 1.50%
Core (Leverage).............. 125,952 52,791 73,161 7.16 3.00
Risk-based................... 136,223 83,894 52,329 12.99 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.
25
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 2001, FICO payments
for SAIF members approximated 1.85 basis points.
The Bank's assessment rate for fiscal 2001 was zero basis points and the premium
paid for this period was $208,000, 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.
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, 2001, the Bank's limit on loans to one borrower was $18.9 million, and the
Bank's largest aggregate outstanding balance of loans to one borrower was $10.4
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, 2001, 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. Under the regulations, 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
26
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Assessments. Savings institutions are required to pay assessments to the OTS to
-----------
fund the agency's operations. The assessments, paid on a semi-annual basis, are
based on the institution's size, supervisory condition and complexity of
operations. The assessments paid by the Bank for the fiscal year ended December
31, 2001 totaled $280,000.
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, except 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.
27
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") System, which
consists of 12 regional FHLBs. Each FHLB provides member institutions with a
central credit facility. The Bank, as a member of the FHLB of New York
("FHLB-NY"), is required to acquire and hold shares of capital stock in that
FHLB 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 borrowings from the FHLB-NY, whichever is greater.
The Bank was in compliance with this requirement with an investment in FHLB-NY
stock at December 31, 2001 of $23.6 million.
The FHLBs are required to provide funds to cover certain obligations on bonds
issued to fund the resolution of insolvent thrifts 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: a 3% reserve
ratio is assessed on net transaction accounts up to and including $41.3 million;
a 10% reserve ratio is applied above $41.3 million. The first $5.7 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The amounts are adjusted
annually. 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 2001 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 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.
28
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.
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
29
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.
New York Taxation. Columbia is subject to New York State income tax at a rate of
-----------------
9.95% (including a commuter transportation surcharge). The tax is measured by
"entire net income" which is Federal taxable income with adjustments.
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.
30
Item 2. Properties
The Bank conducts its business through its administrative office, which includes
a branch office, and 15 other full service offices located in Ocean, Monmouth
and Middlesex Counties and through the administrative and loan production
offices of Columbia. 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 at
Location Owned Acquired Expiration(2) December 31, 2001
-------- ----- -------- ------------- -----------------
(Dollars in thousands)
Administrative Office:
975 Hooper Avenue
Toms River, New Jersey 08754 Owned 1995 -- $8,735
Branch Offices:
Adamston: Leased 1999 07/31/09 271
385 Adamston Road
Brick, New Jersey 08723
Berkeley: Leased 1984 11/30/04 87
Holiday City Plaza
730 Jamaica Boulevard
Toms River, New Jersey 08757
Brick: Owned 1960 -- 1,143
321 Chambers Bridge Road
Brick, New Jersey 08723
Concordia: Leased 1985 07/31/05 63
1 Concordia Shopping Mall
Box 3
Cranbury, New Jersey 08512
Route 37 West: Leased 2001 10/31/05 1,468
55 Bananier Drive
Toms River, New Jersey 08755
Lacey: Leased 1997 01/31/18 216
900 Lacey Road
Forked River, New Jersey 08731
Lake Ridge: Leased 1998 01/31/18 150
147 Route 70, Suite 1
Toms River, New Jersey 08755
Manahawkin
205 Route 72 West Leased 2001 10/31/11 948
Manahawkin, NJ 08050
Pavilion: Leased 1989 09/30/18 349
70 Brick Boulevard
Brick, New Jersey 08723
Point Pleasant Beach: Owned 1937 -- 51
701 Arnold Avenue
Point Pleasant, New Jersey 08742
Point Pleasant Boro: Owned 1971 -- 706
2400 Bridge Avenue
Point Pleasant, New Jersey 08742
31
Original
Year Net Book Value of Property
Leased or Leased or Date of Lease or Leasehold Improvements
Location Owned Acquired Expiration(2) at December 31, 2001
-------- ----- -------- ------------- --------------------
(Dollars in thousands)
Route 88: Leased 2000 03/31/07 720
3100 Route 88
Point Pleasant, New Jersey 08742
Spring Lake Heights: Leased 1999 10/31/09 150
2401 Route 71
Spring Lake Heights, New Jersey 07762
Wall Township: Leased 1999 02/28/10 435
2445 Route 34
Manasquan, New Jersey 08736
Whiting: Leased 1983 10/31/02 47
Whiting Shopping Center
P. O. Box 20
Whiting, New Jersey 08759
Other Properties (1):
730 Brick Boulevard Owned 1986 -- 407
Brick, New Jersey 08723
Columbia Equities, Ltd.:
400 Columbus Avenue Leased 2001 07/01/12 267
Valhalla, New York 10595
141-07 20th Avenue Leased 1999 09/30/02 --
Whitestone, New York 11357
(1) The property was formerly utilized by the Bank, was subsequently subleased
and is now vacant.
(2) 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.
32
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 2001 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 2001 Annual Report to
Stockholders on pages 13 and 14 is incorporated herein by reference.
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
2001 Annual Report to Stockholders on pages 15 through 25 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 2001 Annual Report to Stockholders on
pages 16 through 18.
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 2001 Annual Report to Stockholders on pages 26 through 41 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 18, 2002, at pages 4 through
6.
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 18, 2002, at pages 7 through
8 and pages 12 through 16 (excluding the Executive Compensation Committee Report
and Stock Performance Graph).
33
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 18,
2002, at pages 3 and 5 through 6.
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 18, 2002, at page 16.
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 2001 Annual Report to
Stockholders.
PAGE
Independent Auditors' Report ....................................... 41
Consolidated Statements of Financial Condition at
December 31, 2001 and 2000 ...................................... 26
Consolidated Statements of Income for the
Years Ended December 31, 2001, 2000 and 1999 .................... 27
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2001, 2000 and 1999 ............ 28
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2001, 2000 and 1999 .................... 29
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2001, 2000 and 1999 .................... 30-40
The remaining information appearing in the 2001 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.
34
2.1 Stock Purchase Agreement by and among Richard S. Pardes (the sole
stockholder of Columbia Equities, Ltd.) and Columbia Equities, Ltd.
and OceanFirst Bank as buyer, dated June 27, 2000 (without exhibits)
(2)
3.1 Certificate of Incorporation of OceanFirst Financial Corp. (1)
3.2 Bylaws of OceanFirst Financial Corp.(1)
4.0 Stock Certificate of OceanFirst Financial Corp.(1)
10.1 Form of OceanFirst Bank Employee Stock Ownership Plan (1)
10.1(a) Amendment to OceanFirst Bank Employee Stock Ownership Plan (3)
10.2 OceanFirst Bank Employees' Savings and Profit Sharing Plan (1)
10.3 OceanFirst Bank 1995 Supplemental Executive Retirement Plan (1)
10.4 OceanFirst Bank Deferred Compensation Plan for Directors (1)
10.5 OceanFirst Bank Deferred Compensation Plan for Officers (1)
10.7 OceanFirst Bank Performance Achievement Awards Program (1)
10.8 Amended and Restated OceanFirst Financial Corp. 1997 Incentive Plan
(4)
10.9 Form of Employment Agreement between OceanFirst Bank and certain
executive officers, including Michael J. Fitzpatrick and John R.
Garbarino (1)
10.10 Form of Employment Agreement between OceanFirst Financial Corp. and
certain executive officers, including Michael J. Fitzpatrick and John
R. Garbarino (1)
10.11 Form of Change in Control Agreement between OceanFirst Bank and
certain executive officers, including John K. Kelly, Robert M. Pardes
and Karl E. Reinheimer (1)
10.12 Form of Change in Control Agreement between OceanFirst Financial Corp.
and certain executive officers, including John K. Kelly, Robert M.
Pardes and Karl E. Reinheimer (1)
10.13 2000 Stock Option Plan (5)
10.14 Form of Employment Agreement between Columbia Equities, Ltd. and
Robert M. Pardes (6).
13.0 Portions of 2001 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)
(b) Reports on Form 8-K
None.
__________________________________
(1) Incorporated herein by reference from the Exhibits to Form S-1,
Registration Statement, effective May 13, 1996 as amended,
Registration No. 33-80123.
(2) Incorporated herein by reference from the Exhibits to Form 8-K filed
on June 28, 2000.
(3) Incorporated herein by reference from the Exhibits to Form 10-K filed
on March 25, 1997.
(4) Incorporated herein by reference from Form 14-A Definitive Proxy
Statement filed on March 19, 1998.
(5) Incorporated herein by reference from Form 14-A Definitive Proxy
Statement filed on March 17, 2000.
(6) Incorporated herein by reference from the Exhibits to Form 10-K filed
on March 23, 2001.
35
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 11, 2002
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 11, 2002
----------------------------------------------
John R. Garbarino
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
/s/ Michael J. Fitzpatrick March 11, 2002
----------------------------------------------
Michael J. Fitzpatrick
Executive Vice President and
Chief Financial Officer
(principal accounting and financial officer)
/s/ Thomas F. Curtin March 11, 2002
----------------------------------------------
Thomas F. Curtin
Director
/s/ Carl Feltz, Jr. March 11, 2002
----------------------------------------------
Carl Feltz, Jr.
Director
36
/s/ John W. Chadwick March 11, 2002
----------------------------------------------
John W. Chadwick
Director
/s/ Donald E. McLaughlin March 11, 2002
----------------------------------------------
Donald E. McLaughlin
Director
/s/ Diane F. Rhine March 11, 2002
----------------------------------------------
Diane F. Rhine
Director
/s/ Frederick E. Schlosser March 11, 2002
----------------------------------------------
Frederick E. Schlosser
Director
/s/ James T. Snyder March 11, 2002
----------------------------------------------
James T. Snyder
Director
/s/ John E. Walsh March 11, 2002
----------------------------------------------
John E. Walsh
Director
37