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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act Of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission file number: 000-23809
FIRST SENTINEL BANCORP, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
DELAWARE 22-3566151
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ, 07095
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
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
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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) had 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 a definitive proxy or information
statements incorporated by reference in part III of this form 10-K or any
amendment to this form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
issuer, based on the closing price of its Common Stock on March 17, 2000, as
quoted by the Nasdaq Stock Market, was approximately $253.6 million. Solely for
the purposes of this calculation, the shares held by directors and officers of
the registrant are deemed to be shares held by affiliates.
As of March 17, 2000, there were 43,106,742 shares issued and 36,063,045 shares
outstanding of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
I. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1999 (Part II).
II. Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
(Part III).
1
INDEX
PAGE
----
PART I
Item 1. Business .............................................. 3
Item 2. Properties ............................................ 28
Item 3. Legal Proceedings ..................................... 30
Item 4. Submission of Matters to a Vote of Security Holders ... 30
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................... 30
Item 6. Selected Financial Data ............................... 30
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 30
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ..................................... 30
Item 8. Financial Statements and Supplementary Data ........... 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................ 30
PART III
Item 10. Directors and Executive Officers of the Registrant .... 31
Item 11. Executive Compensation ................................ 31
Item 12. Security Ownership of Certain
Beneficial Owners and Management ...................... 31
Item 13. Certain Relationships and Related Transactions ........ 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................... 32
SIGNATURES 34
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
FIRST SENTINEL BANCORP, INC.
First Sentinel Bancorp, Inc. ("First Sentinel" or the "Company") is a
Delaware corporation organized by First Savings Bank ("First Savings" or the
"Bank") for the purpose of holding all of the capital stock of the Company and
facilitating the Conversion and Reorganization of the Bank, which was completed
on April 8, 1998, (as further described below). At December 31, 1999, the
Company had consolidated total assets of $1.9 billion and total equity of $244.6
million. The Company is a unitary thrift holding company subject to regulation
by the Office of Thrift Supervision ("OTS") and the Securities and Exchange
Commission ("SEC").
The Company's executive offices are located at 1000 Woodbridge Center
Drive, Woodbridge, New Jersey 07095. The Company's telephone number is (732)
726-9700.
REORGANIZATION AND ACQUISITION
On April 8, 1998, the Bank and its mutual holding company, First Savings
Bancshares, MHC, completed a conversion and reorganization into the stock
holding company structure, forming First Sentinel as the new stock holding
company and issuing shares of First Sentinel Common Stock in the process (the
"Conversion and Reorganization"). As part of the Conversion and Reorganization,
the Company sold 16,550,374 shares of Common Stock in a Subscription and
Community Offering for gross proceeds of $165.6 million. Concurrently, the
Company issued 14,820,016 shares of Common Stock in exchange for shares of First
Savings Bank, SLA common stock on a 3.9133-for-1 basis (the "Conversion Exchange
Ratio") in an exchange offering. All per share and earnings per share data have
been restated for the 3.9133 Conversion Exchange Ratio.
On December 18, 1998, the Company acquired Pulse Bancorp, Inc. ("Pulse").
Each share of Pulse was converted into 3.764 shares of the Company's common
stock. A total of 12,066,631 shares were issued, including 800,000 treasury
stock shares, to complete the transaction. The acquisition has been accounted
for under the pooling-of-interests method of accounting and accordingly, the
Company's consolidated financial statements include the accounts and activity of
Pulse for all periods presented. Prior to the combination, Pulse's fiscal year
ended on September 30. In recording the transaction, Pulse's results of
operations for fiscal years ended September 30, 1998 and 1997 and financial
condition as of September 30, 1997 were combined with the Company's calendar
years. Pulse's results of operations through December 31, 1998 were included as
an adjustment in the consolidated statements of stockholders' equity. As part of
the merger, Pulse adopted the Company's reporting period, and an $828,000
reduction was made to stockholders' equity to include Pulse's operations for the
three months ended December 31, 1998.
FIRST SAVINGS BANK
First Savings is a New Jersey-chartered capital stock savings bank
headquartered in Woodbridge, New Jersey. First Savings has operated in its
present market area since 1901. Until 1992, the Bank operated in the mutual form
of organization. On July 10, 1992, the Bank reorganized to become a majority
owned subsidiary of a federally-chartered mutual holding company. As detailed
above, on April 8, 1998, the Bank became a wholly owned subsidiary of the
Company.
The Bank's executive offices are located at 1000 Woodbridge Center Drive,
Woodbridge, New Jersey 07095. The Bank's telephone number is (732) 726-9700.
3
BUSINESS STRATEGY
Statements contained in this report that are not historical fact are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements may be characterized as
management's intentions, hopes, beliefs, expectations or predictions of the
future. It is important to note that such forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected in such forward-looking statements. Factors that could
cause future results to vary materially from current expectations include, but
are not limited to, changes in interest rates, competition by larger financial
institutions, deposit and loan growth, changes in the quality or composition of
the Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, legislative and regulatory changes, changes in the
economy generally and changes in business conditions in the New Jersey market.
The Company's objectives are to enhance shareholder value by profitably
meeting the needs of our customers and seeking controlled growth, while
preserving asset quality and maintaining a strong capital position. The
Company's strategy emphasizes customer service and convenience, and the Company
attributes the loyalty of its customer base to its commitment to maintaining
customer satisfaction. The Company attempts to set itself apart from its
competitors by providing the type of personalized service not generally
available from larger banks while offering a greater variety of products and
services than is typically available from smaller, local depository
institutions.
The Company's principal business is attracting retail deposits from the
general public and investing those deposits, together with funds generated from
operations and borrowings, primarily in single-family residential mortgage
loans, real estate construction loans, commercial real estate loans, home equity
loans and lines of credit and multi-family residential mortgage loans. The
Company maintains a significant portfolio of mortgage-backed securities and also
invests in U.S. Government, Federal agency and corporate debt securities and
other marketable securities. The Company's revenues are derived principally from
interest on its loan and mortgage-backed securities portfolios and interest and
dividends on its investment securities. The Company's primary sources of funds
are deposits, proceeds from principal and interest payments on loans and
mortgage-backed securities; sales of loans, mortgage-backed and investment
securities available for sale; maturities of investment securities and
short-term investments; and, to an increasing extent, advances from the Federal
Home Loan Bank of New York ("FHLB-NY"), reverse repurchase agreements and other
borrowed funds.
In an effort to enhance its long-term profitability and increase its market
share, the Company has endeavored to expand its traditional thrift lending and
securities investment strategy. Toward this end, the Bank continues to diversify
and expand upon the products and services it offers by focusing on small and
medium-sized retail businesses as both lending and deposit customers. The Bank
has increased its emphasis on the origination of commercial real estate,
construction and commercial loans, as well as the marketing of its business
checking accounts and other business-related services. To develop full-service
relationships with commercial customers, the Bank provides merchant services,
such as merchant credit card processing, overdraft sweep accounts, express
teller services and escrow management. The Bank has hired, and intends to
continue hiring, additional personnel with expertise in commercial lending to
facilitate growth in this area. The Bank has also increased loan volumes through
the use of third-party correspondent lending. Purchased loans are
re-underwritten by the Bank and are extended under the same terms and conditions
as the Bank's direct loan originations. Third-party correspondent lending is
expected to continue to play a role in the future operations of the Bank.
As part of the Company's asset/liability management strategy, and as a
means of enhancing profitability, the Company also invests in investment and
mortgage-backed securities. In recent years, the Company has begun to increase
its borrowings as a means of funding asset growth. The average balance of
borrowings outstanding for the years ended December 31, 1999, 1998 and 1997 were
$325.5 million, $217.1 million and $177.8 million, respectively. Additional
leveraged growth is anticipated as market conditions allow.
The Company repurchased $48.0 million of its common stock during 1999 as
part of its ongoing capital management strategy. The Company intends to
repurchase an additional 10% of its outstanding common stock in 2000.
4
The Company will be upgrading branch operations in 2000. The Company is
currently interviewing vendors and evaluating hardware and software solutions to
facilitate teller platform automation, including document preparation and online
signature verification. These upgrades are intended to provide front-line
personnel with interactive sales tools, enhance customer service, streamline the
account opening process, reduce printing costs and provide improved security and
research capabilities. In addition, the Company plans to introduce transactional
internet banking in 2000. Supplementing the Company's existing delivery
channels, internet banking will provide customers with on-line access to
commercial and retail services. These services are expected to include on-line
loan applications, funds transfers, electronic bill payment and the receipt of
on-line statements.
The Company will continue to actively pursue retail expansion in contiguous
markets, having opened its twenty-third branch and successfully completed the
integration of the former Pulse branches in 1999. The Company intends to
actively seek additional expansion opportunities in the areas surrounding its
current branch locations. The Company, however, currently does not have any
pending agreements or understandings regarding acquisitions of any specific
financial institutions or branch offices.
MARKET AREA AND COMPETITION
The Company has 23 branch offices in central New Jersey, 19 of which are
located in Middlesex County, two in Monmouth county, one in Mercer County and
one in Union County. The Company's deposit gathering base is concentrated in the
communities surrounding its offices. The majority of the Company's loan
originations are derived from northern and central New Jersey, which is a part
of the New York City metropolitan area and which has historically benefited from
having a large number of corporate headquarters and a concentration of financial
services-related industries. The area also has a well-educated employment base
and a large number of industrial, service and high-technology businesses.
Prolonged expansion in the national and regional economies, low unemployment
levels and favorable interest rates have contributed to the stabilization and
appreciation in New Jersey's real estate market in recent years. Whether such
stabilization and appreciation will continue is dependent, in large part, upon
the general economic condition of both New Jersey and the United States and
other factors beyond the Company's control and, therefore, cannot be estimated.
The Company 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 Company, and all of which are
competitors of the Company to varying degrees. The Company's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations and credit unions. The
Company faces additional competition for deposits from short-term money market
funds, other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.
5
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Company's average balance sheet and reflects the average yield
on assets and average cost of liabilities for the periods indicated. Average
balances are derived from month-end balances.
(Dollars in thousands)
For the Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------------------------- ---------------------------- -----------------------------
ASSETS:
Interest-earning assets:
Loans, net (1) .................... $ 934,991 $68,656 7.34% $ 792,168 $61,431 7.75% $ 679,692 $54,635 8.04%
Mortgage-backed securities, net ... -- -- -- 205,995 13,774 6.69 407,971 27,607 6.77
Investment securities ............. -- -- -- 140,953 9,032 6.41 173,335 11,942 6.89
Investment and mortgage-backed
Securities available
for sale (2)(3) ............... 893,097 54,732 6.13 554,241 34,936 6.30 236,173 15,057 6.38
-------------------- -------------------- --------------------
Total interest-earning
assets ...................... 1,828,088 123,388 6.75 1,693,357 119,173 7.04 1,497,171 109,241 7.30
Non-interest earning assets ......... 58,183 51,271 55,423
---------- ---------- ----------
Total assets $1,886,271 $1,744,628 $1,552,594
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW and Money market accounts ... $ 347,325 9,395 2.70 $ 308,609 9,008 2.92 $ 281,007 8,315 2.96
Savings accounts ................ 170,907 3,931 2.30 177,282 4,431 2.50 184,423 4,819 2.61
Certificate accounts ............ 686,754 33,900 4.94 719,602 39,429 5.48 722,534 39,685 5.49
Borrowed funds .................. 325,501 17,780 5.46 217,131 12,518 5.77 177,797 10,739 6.04
-------------------- -------------------- --------------------
Total interest-bearing
liabilities ................. 1,530,487 65,006 4.25 1,422,624 65,386 4.60 1,365,761 63,558 4.65
Non-interest bearing deposits ....... 44,755 35,297 26,234
Other liabilities ................... 15,004 23,817 22,996
---------- ---------- ----------
Total liabilities ............. 1,590,246 1,481,738 1,414,991
---------- ---------- ----------
Stockholders' equity ................ 296,025 262,890 137,603
---------- ---------- ----------
Total liabilities and
stockholders' equity ........ $1,886,271 $1,744,628 $1,552,594
========== ========== ==========
Net interest income/interest
rate spread (4) ..................... $58,382 2.50% $53,787 2.44% $45,683 2.65%
============== ============== ==============
Net interest-earning assets/net
interest margin (5) ................. $ 297,601 3.19% $ 270,733 3.18% $ 131,410 3.05%
======= ========== ====== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities ..... 1.19 x 1.19 x 1.10 x
========== ========= ==========
(1) Loans receivable, net includes non-accrual loans.
(2) Average assets available for sale are calculated using the average market
value for such assets.
(3) Includes federal funds sold and FHLB-NY stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
6
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing volume or amount of these assets and liabilities. The following table
represents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
the Company's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (change in rate multiplied by prior
volume), and (iii) the net change. Changes attributable to the combined impact
of volume and rate have been allocated proportionately to the change due to
volume and the change due to rate.
(Dollars in thousands)
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 December 31, 1997
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
INTEREST-EARNING ASSETS:
Loans receivable, net ........................ $10,608 $ (3,383) $ 7,225 $ 8,816 $(2,020) $ 6,796
Mortgage-backed securities, net .............. (6,887) (6,887) (13,774) (13,511) (322) (13,833)
Investment securities ........................ (4,516) (4,516) (9,032) (2,120) (790) (2,910)
Investment and mortgage-backed
securities and loans available
for sale .................................. 20,764 (968) 19,796 20,046 (167) 19,879
------- ------- ------- ------- ------- -------
Total ........................................ 19,969 (15,754) 4,215 13,231 (3,299) 9,932
------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and money market accounts .............. 1,090 (703) 387 806 (113) 693
Passbook and statement savings ............. (155) (345) (500) (186) (202) (388)
Certificates accounts ...................... (1,750) (3,779) (5,529) (177) (79) (256)
Borrowed funds ............................... 5,966 (704) 5,262 2,279 (500) 1,779
------- ------- ------- ------- ------- -------
Total ........................................ 5,151 (5,531) (380) 2,722 (894) 1,828
------- ------- ------- ------- ------- -------
Net change in interest income .................. $14,818 $(10,223) $ 4,595 $10,509 $(2,405) $ 8,104
======= ======== ======= ======= ======= =======
7
LENDING ACTIVITIES
LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO COMPOSITIONS. The Company's
loan portfolio consists primarily of conventional first mortgage loans secured
by one-to-four family residences and, to a lesser extent, multi-family
residences and commercial real estate. At December 31, 1999, the Company's loan
portfolio totaled $1.0 billion, of which $774.9 million, or 75.5% were one- to
four-family residential mortgage loans. At that date, the Company's loan
portfolio also included $98.3 million of home equity loans and lines of credit
generally secured by second liens on one-to-four family residential properties,
$26.9 million of net construction loans, $96.8 million of commercial real estate
loans, and $12.5 million of multi-family residential mortgage loans, which
represented 9.6%, 2.6%, 9.4% and 1.2%, respectively, of total loans receivable.
Of the mortgage loan portfolio outstanding at December 31, 1999, 47.3% were
fixed-rate loans and 52.7% were ARM loans. Other loans held by the Company,
which consist of loans on deposit accounts, commercial business, personal,
automobile and credit card loans, totaled $16.6 million, or 1.6% of total loans
outstanding at December 31, 1999. The Company anticipates growth in commercial
business and commercial real estate loans, both in amount and as a percentage of
total loans receivable, in the foreseeable future.
The majority of the loans originated by the Company are held for investment.
However, the Company sells 30 year, fixed-rate, conforming loans to the Federal
Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC") and institutional
investors from time to time, and retains servicing rights. All loans are sold
without recourse. At December 31, 1999, the Company's servicing portfolio
totaled $81.9 million.
The Company also invests in mortgage-backed securities and other mortgage-backed
products such as collateralized mortgage obligations ("CMOs"). At December 31,
1999, mortgage-backed securities, including CMOs, aggregated $575.2 million, or
30.2% of total assets, of which 50.2% were secured by ARM loans. The majority of
the Company's mortgage-backed securities are insured or guaranteed by Freddie
Mac, the Government National Mortgage Association ("GNMA"), or Fannie Mae
("FNMA"). At December 31, 1999, the Company had no mortgage-backed securities
held for investment. All mortgage-backed securities were classified as available
for sale at that date. The Company expects classify all mortgage-backed security
purchases as available for sale in the foreseeable future. Mortgage-backed
securities available for sale are held for an indefinite period of time and may
be sold in response to changing market and interest rate conditions, or to
provide liquidity to fund activities such as common stock repurchases or loan
originations.
8
The following table sets forth the composition of the Company's loan and
mortgage-backed securities portfolio in dollar amounts and as a percentage of
the portfolio at the dates indicated (dollars in thousands):
At December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Mortgage loans(1):
One-to-four family .............. $ 774,858 75.52 $657,284 76.10% $566,625 78.25% $493,973 75.67% $448,844 74.65%
Home equity loans ............... 98,324 9.58 82,672 9.57 56,533 7.81 52,684 8.07 43,853 7.29
Construction (2) ................ 26,890 2.62 23,349 2.70 17,827 2.46 12,996 1.99 7,705 1.28
Commercial real estate .......... 96,821 9.44 65,069 7.53 54,926 7.58 51,091 7.83 52,788 8.78
Multi-family .................... 12,499 1.22 17,589 2.04 21,292 2.94 36,066 5.53 42,597 7.08
A.I.D. (3) ...................... -- -- -- -- -- -- -- -- 165 0.03
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans .......... 1,009,392 98.38 845,963 97.94 717,203 99.04 646,810 99.09 595,952 99.11
Other loans ....................... 16,638 1.62 17,817 2.06 6,954 0.96 5,956 0.91 5,350 0.89
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable ........ 1,026,030 100.00% 863,780 100.00% 724,157 100.00% 652,766 100.00% 601,302 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan fees
(costs) and (premiums)
and discounts ................... (1,090) (422) (107) 524 995
Allowance for loan losses ......... 11,004 9,505 8,454 7,781 7,851
---------- -------- -------- -------- --------
Total loans receivable, net ... $1,016,116 $854,697 $715,810 $644,461 $592,456
========== ======== ======== ======== ========
Mortgage loans:
ARM ............................. $ 531,859 52.69% $439,234 51.92% $421,642 58.79% $364,906 56.42% $321,264 53.91%
Fixed-rate ...................... 477,533 47.31 406,729 48.08 295,561 41.21 281,904 43.58 274,688 46.09
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans .......... $1,009,392 100.00% $845,963 100.00% $717,203 100.00% $646,810 100.00% $595,952 100.00%
========== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage-backed securities (4):
CMOs ............................ $ 273,511 46.85% $209,468 32.00% $ 90,247 15.95% $ 76,493 13.31% $103,368 18.78%
FHLMC ........................... 166,992 28.60 235,415 35.97 253,029 44.72 287,368 50.02 291,141 52.88
GNMA ............................ 57,489 9.85 71,347 10.90 113,179 20.00 134,877 23.47 123,853 22.50
FNMA ............................ 85,828 14.70 138,286 21.13 109,415 19.33 75,821 13.20 32,172 5.84
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities .................. 583,820 100.00% 654,516 100.00% 565,870 100.00% 574,559 100.00% 550,534 100.00%
====== ====== ====== ====== ======
Net premiums ...................... 2,748 3,639 2,704 2,433 1,676
Net unrealized gain (loss) on
mortgage-backed securities
available for sale ........... (11,409) 3,726 1,876 535 241
---------- -------- -------- -------- --------
Net mortgage-backed
securities ................... $ 575,159 $661,881 $570,450 $577,527 $552,451
========== ======== ======== ======== ========
- ----------
(1) Includes $287,000 and $424,000 in mortgage loans available for sale at
December 31, 1996 and 1995, respectively. No loans were classified as
available for sale at December 31, 1999, 1998 or 1997.
(2) Net of loans in process of $28.0 million, $41.8 million, $27.5 million,
$12.3 million, and $3.8 million at December 31, 1999, 1998, 1997, 1996 and
1995, respectively.
(3) Agency for International Development. Represented a participation interest
in a $15.0 million aggregate loan to the Korea National Housing
Corporation, a government-sponsored housing development project.
(4) Includes $575.2 million, $661.9 million, $200.5 million, $161.1 million and
$89.3 million in mortgage-backed securities available for sale at fair
value at December 31, 1999, 1998, 1997, 1996 and 1995, respectively.
9
LOAN MATURITY AND REPRICING. The following table shows the maturity or period to
repricing of the Company's loan portfolio at December 31, 1999. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal amortization.
(Dollars in thousands)
At December 31, 1999
--------------------------------------------
One Year
One Year to Five After
or Less Years Five Years Total
-------- -------- -------- ----------
Mortgage loans:
One-to-four family ......... $ 98,009 $245,796 $431,053 $ 774,858
Home equity loans .......... 27,287 22,835 48,202 98,324
Construction (1) ........... 26,890 -- -- 26,890
Commercial real estate ..... 11,678 16,450 68,693 96,821
Multi-family ............... 266 7,422 4,811 12,499
-------- -------- -------- ----------
Total mortgage loans ..... 164,130 292,503 552,759 1,009,392
Other loans .................. 9,754 5,592 1,292 16,638
-------- -------- -------- ----------
Total loans .............. $173,884 $298,095 $554,051 1,026,030
======== ======== ========
Net deferred loan costs and unearned premiums .................... 1,090
Allowance for loan losses ........................................ (11,004)
----------
Loans receivable, net ............................................ $1,016,116
==========
(1) Excludes loans in process of $28.0 million.
The following table sets forth at December 31, 1999, the dollar amount of loans
contractually due or repricing after December 31, 2000, and whether such loans
have fixed interest rates or adjustable interest rates (dollars in thousands):
Due or repricing after
December 31, 2000
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- -------- ----------
Mortgage loans:
One-to-four family .................... $327,916 $348,933 $ 676,849
Equity loans .......................... 63,424 7,613 71,037
Commercial real estate ................ 74,290 10,853 85,143
Multi-family .......................... 6,454 5,779 12,233
Other loans .............................. 5,567 1,317 6,884
-------- -------- ----------
Total loans receivable ................... 477,651 374,495 852,146
Mortgage-backed securities
(at amortized cost) ................... 293,370 118,495 411,865
-------- -------- ----------
Total loans receivable and mortgage-
backed securities .................... $771,021 $492,990 $1,264,011
======== ======== ==========
ONE-TO-FOUR FAMILY MORTGAGE LOANS. The Company offers fixed and adjustable-rate
first mortgage loans secured by one-to-four family residences in New Jersey.
Typically, such residences are single family homes that serve as the primary
residence of the owner. Loan originations are generally obtained from existing
or past customers, members of the local community, and referrals from attorneys,
established builders, and realtors within the Company's market area. In
addition, one-to-four family residential mortgage loans are also originated in
the Company's market area through loan originators who are employees of the
Company and are compensated on a
10
commission basis. Originated mortgage loans in the Company's portfolio include
due-on-sale clauses which provide the Company with the contractual right to deem
the loan immediately due and payable in the event that the borrower transfers
ownership of the property without the Company's consent.
At December 31, 1999, 75.5% of total loans receivable consisted of one-to-four
family residential loans. The Company offers ARM loans with initial fixed rate
terms of either one, three, five, seven or ten years. After the initial
fixed-rate term, the loan then converts into a one-year ARM. The Company's ARM
loans may carry an initial interest rate which is less than the fully-indexed
rate for the loan. The initial discounted rate is determined by the Company in
accordance with market and competitive factors. The majority of the Company's
ARM loans adjust by a maximum of 2.00% per year, with a lifetime cap on
increases of up to 6.00%. ARM loans are originated for a term of up to 30 years.
Interest rates charged on fixed-rate loans are competitively priced based on
market conditions and the Company's cost of funds. The Company's fixed-rate
mortgage loans currently are made for terms of 10 through 30 years.
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 are qualified at the starting interest rate plus 2.00% or the
fully-indexed rate, whichever is lower. The Company does not originate ARM loans
which provide for negative amortization. At present, the Company offers Limited
Documentation loans that do not require income verification but do require full
asset verification.
The Company generally originates one-to-four family residential mortgage loans
in amounts up to 95% of the appraised value or selling price of the mortgaged
property, whichever is lower. The Company requires private mortgage insurance
for all loans originated with loan-to-value ratios exceeding 80%. Generally, the
minimum one-to-four family loan amount is $25,000, and the maximum loan amount
is $500,000. The Company typically charges an origination fee of up to 3.00% on
one-to-four family residential loans.
HOME EQUITY LOANS AND LINES OF CREDIT. The Company originates home equity loans
secured by one-to-four family residences. These loans generally are originated
as fixed-rate loans with terms from five to 15 years. Home equity loans are
primarily made on owner-occupied, one-to-four family residences and to the
Company's first mortgage customers. These loans are generally subject to a 80%
loan-to-value limitation, including any other outstanding mortgages or liens
where the first mortgage lien is held by the Company, and 75% on all other
loans. In addition, the Company currently offers home equity loans for qualified
borrowers with a loan-to-value ratio of up to 90%. The Company obtains private
mortgage insurance for some of these types of loans, depending on the
underwriting and first lien position. The Company is currently offering "Helping
Hand" home equity loans for low income borrowers, with maximum terms of five
years, with loan-to-value ratios of up to 90% and a maximum loan amount of
$10,000. Generally, the Company's minimum equity loan is $5,000 and the maximum
equity loan is $200,000. As of December 31, 1999, the Company had $63.5 million
in fixed-rate home equity loans outstanding.
The Company 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 where the first mortgage lien is held by the Company, and 75% on all
other loans. Home equity lines of credit are secured by a mortgage on the
underlying real estate. The Company presently charges no origination fees for
these loans. A borrower is required to make monthly payments of principal and
interest, at a minimum of $100.00 plus interest, based upon a 20 year
amortization period. Generally, the interest rate charged is the prime rate of
interest (as published in THE WALL STREET JOURNAL) (the "prime rate") plus up to
0.5%. The loans have a 6.0% lifetime cap on the amount the interest rate may
increase. The Company also offers a credit line product which is based on a 15
year amortization and the interest rate charged is the prime rate of interest.
These loans also have a 6.0% lifetime cap. The Company offers a fixed 12 month
introductory rate on both home equity line of credit products. The introductory
rate is currently 6.99%. The Company offers an additional credit line product
that allows for a loan-to-value ratio of up to 90%. The rates charged on these
loans vary between the prime rate plus 1.0% to the prime rate plus 1.5%. The
Company's home equity lines of credit outstanding at December 31, 1999 totaled
$34.8 million, with additional available credit lines of $45.4 million.
11
CONSTRUCTION LENDING. At December 31, 1999, construction loans totaled $26.9
million, or 2.6% of the Company's total loans outstanding. Available credit
lines totaled $28.0 million at December 31, 1999. The current policy of the
Company is to charge interest rates on its construction loans which float at
margins of up to 2.0% above the prime rate. The Company's construction loans
typically have original principal balances that are larger than its one- to
four-family mortgage loans, with the majority of the loans ranging from
available lines of credit of $125,000 to $6.0 million. At December 31, 1999, the
Company had 31 construction loans, 10 of which had principal outstanding of $1.0
million or more, with the largest outstanding loan balance being $3.8 million.
At December 31, 1999, all of the Company's construction lending portfolio
consisted of loans secured by property located in the State of New Jersey,
primarily for the purpose of constructing one-to-four family homes.
The Company will originate construction loans on unimproved land in amounts up
to 70% of the lower of the appraised value or the cost of the land. The Company
also originates loans for site improvements and construction costs in amounts up
to 75% of actual costs or sales price where contracts for sale have been
executed. Generally, construction loans are offered for one year terms with up
to four six-month options to extend the original term. Typically, additional
loan origination fees are charged for each extension granted, although in some
cases these fees have been waived. The Company requires an appraisal of the
property, credit reports, and financial statements on all principals and
guarantors, among other items, on all construction loans.
Construction lending, by its nature, entails additional risks as compared with
one-to-four family mortgage lending, attributable primarily to the fact that
funds are advanced upon the security of the project under construction prior to
its completion. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of the
ultimate project and the ability of the borrower or guarantor to repay the loan.
Because of these factors, the analysis of prospective construction loan projects
requires an expertise that is different in significant respects from that which
is required for residential mortgage lending. The Company addresses these risks
through its underwriting procedures. At December 31, 1999, none of the Company's
construction loans were classified as substandard.
See "Assets Quality" for further discussion.
COMMERCIAL REAL ESTATE. At December 31, 1999, the Company had 121 loans secured
by commercial real estate, totaling $96.8 million, or 9.4% of the Company's
total loan portfolio. Commercial real estate loans are generally originated in
amounts up to 70% of the appraised value of the mortgaged property. The
Company's commercial real estate loans are permanent loans secured by improved
property such as office buildings, retail stores, small shopping centers,
medical offices, small industrial facilities, warehouses, storage facilities and
other non-residential buildings. The largest commercial real estate loan at
December 31, 1999 was a participation loan originated in 1999 on a hotel
building with a balance of $5.5 million. All commercial real estate loans in the
Company's portfolio are secured by properties located within New Jersey.
The Company's commercial real estate loans are generally made for terms of up to
15 years. These loans typically are based upon a payout over a period of 10 to
25 years. To originate commercial real estate loans, the Company requires a
security interest in personal property, standby assignment of rents and leases
and some level of personal guarantees, if possible. The Company has established
$20.0 million as its maximum commercial real estate loan amount.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate 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 Company seeks to minimize these risks by
limiting the number of such loans, lending only to established customers and
borrowers otherwise known or recommended to the Company, generally restricting
such loans to New Jersey, and obtaining personal guarantees, if possible.
MULTI-FAMILY MORTGAGE LOANS. The Company originates multi-family mortgage loans
in its primary lending area. As of December 31, 1999, $12.5 million, or 1.2%, of
the Company's total loan portfolio consisted of multi-family residential loans.
At December 31, 1999, the Company had three multi-family loans with outstanding
balances in
12
excess of $1.0 million. Large multi-family loans such as these are originated on
the basis of the Company's underwriting standards for commercial real estate
loans.
OTHER LENDING. The Company also offers other loans, primarily business,
commercial, personal and automobile loans and loans secured by savings accounts.
At December 31, 1999, $16.6 million, or 1.6%, of the loan portfolio consisted of
such other loans.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. All loans secured by real estate must
have the approval or ratification of the members of the Loan Committee, which
consists of at least two directors and at least two officers engaged in the
lending area. The Loan Committee meets at least monthly to review and ratify
management's approval of loans made within the scope of its authority since the
last committee meeting, and to approve mortgage loans made in excess of
$750,000, but not greater than $1.0 million. Real estate loans in excess of $1.0
million require prior Board approval. Prior Board approval is also required for
the origination of consumer and business loans in excess of $100,000 for
unsecured loans, and $500,000 for secured loans.
One-to-four family residential mortgage loans are generally underwritten
according to Freddie Mac guidelines, except as to loan amount and certain
documentation. For all loans originated by the Company, upon receipt of a
completed loan application from a prospective borrower, a credit report is then
requested, income, assets and certain other information are verified and, if
necessary, additional financial information is requested. An appraisal of the
real estate intended to secure the proposed loan is required, which is currently
performed by appraisers designated and approved by the Board of Directors. It is
the Company's policy to obtain appropriate insurance protections, including
title and flood insurance, on all real estate first mortgage loans. Borrowers
must also obtain hazard insurance prior to closing. Borrowers generally are
required to advance funds for certain items such as real estate taxes, flood
insurance and private mortgage insurance, when applicable.
LOAN SERVICING. The Company generally retains the servicing rights on loans it
has sold. The Company receives fees for these servicing activities, which
include collecting and remitting loan payments, inspecting the properties and
making certain insurance and tax payments on behalf of the borrowers. The
Company was servicing $81.9 million and $87.6 million of mortgage loans for
others at December 31, 1999 and 1998, respectively. The Company received
$202,000 and $237,000 in servicing fees for the years ended December 31, 1999
and 1998, respectively.
LOAN PURCHASES AND SALES. The Company is a Freddie Mac qualified servicer in
good standing, and may sell any of its conforming loans originated, subject to
Freddie Mac requirements, and retain the servicing rights. As a part of its
asset/liability management, the Company will sell loans, on occasion, in order
to reduce or minimize potential interest rate and credit risk. As of December
31, 1999, the Company did not have any mortgage loans classified as available
for sale. Mortgage loans sold totaled $7.2 million and $14.5 million for the
years ended December 31, 1999 and 1998, respectively. From time to time, the
Company may also purchase mortgage loans. The Company purchased $57.5 million
and $26.8 million in mortgage loans from third-party correspondents for the
years ended December 31, 1999 and 1998, respectively. The Company underwrote the
loans and verified documentation prior to purchase and has representations and
warranties for a one year period, including repayment of remaining purchased
premiums if a loan prepays within the first 12 months.
13
ASSET QUALITY
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more, and REO. At December 31, 1999, REO totaled $466,000
and consisted of 7 properties. It is the policy of the Company to cease accruing
interest on loans 90 days or more past due with loan-to-value ratios in excess
of 55% and to reverse all previously accrued interest. For the year ended
December 31, 1999, the amount of additional interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $197,000.
(Dollars in thousands)
At December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------- -------
Non-accrual mortgage loans ...... $2,311 $2,647 $4,457 $ 5,715 $ 7,302
Non-accrual other loans ......... 45 93 -- 4 464
------ ------ ------ ------- -------
Total non-accrual loans ...... 2,356 2,740 4,457 5,719 7,766
Loans 90 days or more
delinquent and still
accruing ....................... 326 1,525 1,596 928 1,555
------ ------ ------ ------- -------
Total non-performing
loans ....................... 2,682 4,265 6,053 6,647 9,321
Restructured loans .............. -- -- 2,103 2,135 4,167
Total real estate owned,
net of related allowance
for loss ...................... 466 1,453 1,516 3,750 5,759
------ ------ ------ ------- -------
Total non-performing assets ..... $3,148 $5,718 $9,672 $12,532 $19,247
====== ====== ====== ======= =======
Non-performing loans to total
loans receivable, net .......... 0.26% 0.50% 0.85% 1.03% 1.57%
Total non-performing assets
to total assets ................ 0.17% 0.31% 0.61% 0.84% 1.38%
CLASSIFICATION OF ASSETS. The Bank classifies loans and other assets such as
debt and equity securities considered to be of lesser quality as "substandard,"
"doubtful," or "loss" assets. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the Company will sustain "some
loss" if the deficiencies are not corrected. Assets classified as "doubtful"
have all of the weaknesses inherent in those classified "substandard," with the
added characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management. Loans
designated as special mention are generally loans that, while current in
required payment, have exhibited some potential weaknesses that, if not
corrected, could increase the level of risk in the future. Pursuant to the
Company's internal guidelines, all loans 90 days past due are classified
substandard, doubtful, or loss. The Company's classified assets totaled $7.1
million and $6.8 million at December 31, 1999 and 1998, respectively. At
December 31, 1999, $2.5 million of classified loans were secured by residential
properties. The remaining $4.6 million in classified loans were secured by
commercial real estate. In early 2000, the Bank received full repayment on a
$1.3 million commercial loan classified at December 31, 1999. As of December 31,
1999, the Company's largest classified loan had a balance of $2.0 million and
was secured by an occupied office building.
14
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the adequacy of
the allowance, including an assessment of known and inherent risks in its loan
portfolio, review of individual loans for adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and consideration of current economic conditions. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers the fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses and
valuation of real estate owned. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
The Company recorded $1.7 million and $1.5 million in provisions for loan losses
for the years ended December 31, 1999 and 1998, respectively. The increase in
the provision for loan losses was the result of management's asset
classification review and continued growth in loans receivable. The Company
believes that the allowance for loan losses is adequate. At December 31, 1999,
the total allowance was $11.0 million, which amounted to 1.1% of loans
receivable, net and 349.6% of non-performing assets. The Company will continue
to monitor the level of its allowance for loan losses in order to maintain it at
a level which management considers adequate to provide for probable loan losses.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated (in thousands):
For the Years Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
Balance at beginning
of period ................. $ 9,505 $ 8,454 $ 7,781 $ 7,851 $ 9,114
Provision for loan losses ... 1,650 1,469 1,200 550 310
Charge-offs ................. (151) (596) (527) (730) (1,809)
Recoveries .................. -- 28 -- 110 236
Allowance activity of
Pulse during conforming
period, net ............... -- 150 -- -- --
-------- ------- ------- ------- -------
Balance at end of period .... $ 11,004 $ 9,505 $ 8,454 $ 7,781 $ 7,851
======== ======= ======= ======= =======
15
The following tables set forth the Company's percentage of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated (dollars in
thousands):
At December 31,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------------- --------------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance to Each Allowance to Each
Total Category to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
------ --------- ----------- ------ --------- -----------
One- to four-family ....................... $ 4,667 42.41% 75.52% $4,027 42.37% 76.10%
Home equity loans ......................... 1,086 9.87 9.58 1,090 11.47 9.57
Construction .............................. 1,573 14.29 2.62 1,223 12.87 2.70
Commercial real estate .................... 2,630 23.90 9.44 1,963 20.65 7.53
Multi-family .............................. 250 2.27 1.22 522 5.49 2.04
------- ------ ------ ------ ------ ------
Total mortgage loans .................... 10,206 92.74 98.38 8,825 92.85 97.94
Other ..................................... 541 4.92 1.62 486 5.11 2.06
Unallocated ............................... 257 2.34 -- 194 2.04 --
======= ====== ====== ====== ====== ======
Total allowance for loan losses ......... $11,004 100.00% 100.00% $9,505 100.00% 100.00%
======= ====== ====== ====== ====== ======
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Percent
of
Loans Percent Percent
in Each Percent of Loans Percent of Loans
Percent of Category of in Each of in Each
Allowance to Allowance Category Allowance Category
to Total Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ ------ ------ ------ ------ ------ ------ ------ ------
One- to four-family ................ $3,867 45.75% 78.25% $4,035 51.85% 75.67% $4,067 51.81% 74.65%
Home equity loans .................. 458 5.42 7.81 437 5.62 8.07 348 4.43 7.29
Construction ....................... 894 10.57 2.46 577 7.42 1.99 301 3.83 1.28
Commercial real estate ............. 1,877 22.20 7.58 1,714 22.03 7.83 1,766 22.49 8.78
Multi-family ....................... 777 9.19 2.94 787 10.11 5.53 883 11.25 7.08
A.I.D .............................. -- -- -- -- -- -- -- -- 0.03
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans ............. 7,873 93.13 99.04 7,550 97.03 99.09 7,365 93.81 99.11
Other .............................. 258 3.05 0.96 187 2.40 0.91 196 2.50 0.89
Unallocated ........................ 323 3.82 -- 44 0.57 -- 290 3.69 --
====== ====== ====== ====== ====== ====== ====== ====== ======
Total allowance for loan losses .. $8,454 100.00% 100.00% $7,781 100.00% 100.00% $7,851 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
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 interest in the form of
securities, to investors such as the Company. Such intermediaries may be private
issuers, or agencies of the U.S. Government, including Freddie Mac, 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 specified range and have varying maturities.
The underlying pool of mortgages can be composed of either fixed-rate or ARM
loans. Mortgage-backed securities
16
are generally referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages (e.g., fixed-rate or adjustable-rate) as well as
prepayment, default and other risks associated with the underlying mortgages
(see "Lending Activities") are passed on to the certificate holder. The life of
a mortgage-backed pass-through security is equal to the life of the underlying
mortgage(s).
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 yield is based upon the interest income and the amortization or accretion of
the premium or discount related to the mortgage-backed security. Premiums and
discounts are amortized or accreted over the anticipated life of the loans. The
prepayment assumptions used to determine the amortization or accretion period
for premiums and discounts can significantly affect the yield calculation of the
mortgage-backed security, and these assumptions are reviewed periodically to
reflect the actual prepayment. The actual 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 Veterans Administration ("VA")
loans generally have a longer life than conventional non-assumable loans
underlying Freddie Mac and FNMA mortgages-backed securities. The difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates is an important determinant in the rate of prepayments.
During periods of falling mortgage interest rates, prepayments generally
increase, as opposed to periods of increasing interest rates whereby prepayments
generally decrease. If the interest rate of underlying mortgages significantly
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages. Prepayment experience is more difficult to estimate for
adjustable-rate mortgage-backed securities, both convertible and
non-convertible.
The Company has significant investments in mortgage-backed securities and has
utilized such investments to complement its mortgage lending activities. At
December 31, 1999, mortgage-backed securities, net, totaled $575.2 million, or
30.2% of total assets. All such securities were classified as available for sale
and carried at market value. The Company 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 Freddie Mac, GNMA and FNMA. At such date, the mortgage-backed
securities portfolio had a weighted average interest rate of 6.52%. Fixed coupon
rates ranged from 7.50% to 10.00% for GNMA, 6.00% to 9.50% for Freddie Mac,
5.50% to 8.00% for FNMA fixed-rate securities and 5.50% to 7.00% for fixed-rate
CMOs. Adjustable-rate coupon ranges were as follows: 6.13% to 6.75% for GNMA ARM
mortgage-backed securities; 5.75% to 7.75% for Freddie Mac ARM mortgage-backed
securities; 5.81% to 7.77% for FNMA ARM mortgage-backed securities; and 5.47% to
7.70% for adjustable-rate CMOs.
Included in the total mortgage-backed securities portfolio are CMOs which had a
market value of $264.9 million at December 31, 1999. The Company generally
purchases short-term, straight sequential or planned amortization class ("PAC")
CMOs. CMOs are securities created by segregating or portioning cash flows from
mortgage pass-through securities or from pools of mortgage loans. CMOs provide a
broad range of mortgage investment vehicles by tailoring cash flows from
mortgages to meet the varied risk and return preferences of investors. These
securities enable the issuer to "carve up" the cash flow from the underlying
securities and thereby create multiple classes of securities with different
maturity and risk characteristics. The CMOs and other mortgage-backed securities
in which the Company invests may have a multi-class structure ("Multi-Class
Mortgage Securities"). Multi-Class Mortgage Securities issued by private issuers
may be collateralized by pass-through securities guaranteed by GNMA or issued by
FNMA or Freddie Mac, or they may be collateralized by whole loans or
pass-through mortgage-backed securities of private issuers. Each class has a
specified maturity or final distribution date. In one structure, payments of
principal, including any principal prepayments, on the collateral are applied to
the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
until all classes having an earlier stated maturity or final distribution date
have been paid in full. In other structures, certain classes may pay
concurrently, or one or more classes may have a priority with respect to
payments on the underlying collateral up to a specified amount. The Company's
funds have not and will not be invested in any class with residual
characteristics. The weighted average life of CMOs at December 31, 1999, was
17
4.91 years. The stated weighted average contractual maturity of the Company's
CMOs, at December 31, 1999, was 19.5 years.
The Company only purchases CMOs and mortgage-backed securities that are rated
"AA" or higher at the time of purchase. Prior to purchasing CMOs and
periodically throughout their lives, individual securities are reviewed for
suitability with respect to projected weighted average lives and price
sensitivity. A large percentage of the fixed-rate CMOs purchased have projected
average durations of three years or less using current market prepayment
assumptions prevalent at the time of purchase and projected average durations
that do not exceed nine years in the event of a 300 basis point increase in
market rates of interest. The Company receives a detailed analysis from the
broker/dealer or from the Bloomberg System on each security.
The amortized cost and market value of mortgage-backed securities at December
31, 1999, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities due to prepayments (dollars in thousands):
AMORTIZED MARKET
COST VALUE
-------- --------
Mortgage-backed securities available for sale due in:
Less than one year ............................... $ 2,179 $ 2,101
One year through five years ...................... 12,193 12,047
Five years through ten years ..................... 38,973 38,207
Greater than ten years ........................... 533,223 522,804
-------- --------
$586,568 $575,159
======== ========
INVESTMENT ACTIVITIES
The Investment Policy of the Company, which is established by the Board of
Directors and reviewed by the Investment Committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk and to complement the
Company's lending activities. The Policy currently provides for held to
maturity, available for sale and trading portfolios, although all securities are
currently classified as available for sale and all purchases through April,
2000, at least, will be classified as such.
New Jersey state-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and loans on federal funds. Subject to various restrictions,
state-chartered savings institutions may also invest a portion of their assets
in commercial paper, corporate debt securities and asset-backed securities.
INVESTMENTS AVAILABLE FOR SALE. The Company maintains a portfolio of investments
available for sale to minimize interest rate and market value risk. These
investments, designated as available for sale at purchase, are marked to market
in accordance with Statement of Financial Accounting Standard No. 115. The
Company's Investment Policy designates what type of securities may be contained
in the available for sale portfolio. This portfolio of available for sale
investments is reviewed and priced at least monthly. As of December 31, 1999,
the market value of investment securities available for sale was $213.6 million,
with an amortized cost basis of $229.2 million, and was composed of U.S.
Treasury and agencies securities, state and political obligations, corporate
debt obligations and equity securities. The available for sale portfolio,
excluding equity securities, had a weighted average contractual maturity of 12.4
years. A substantial portion of the investment portfolio is comprised of
callable agency notes, which have a variety of call options available to the
issuer at predetermined dates. The investment portfolio's yield is enhanced by
the addition of callable agency notes, due to the issuer's flexibility in
repricing their funding source, while creating reinvestment risk to the Company.
At December 31, 1999, $155.6 million, or 72.8% of the total investment portfolio
was callable.
18
INVESTMENT PORTFOLIO. The following table sets forth certain information
regarding the carrying and market values of the Company's investment portfolio
at the dates indicated, (in thousands):
At December 31,
------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- --------- -------- -------- --------
Investment securities held to maturity:
U.S. Government and agency obligations ............. $ -- $ -- $ -- $ -- $124,920 $124,847
State and political obligations .................... -- -- -- -- 2,663 2,690
-------- -------- -------- -------- -------- --------
Total investment securities
held to maturity ............................. $ -- $ -- $ -- $ -- $127,583 $127,537
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency obligations ............. $155,173 $146,810 $197,635 $198,531 $ 72,798 $ 72,934
State and political obligations .................... 16,976 15,706 6,900 6,972 -- --
Corporate obligations .............................. 45,917 40,424 13,414 13,275 4,698 4,685
Equity securities .................................. 11,149 10,650 24,071 23,419 800 824
-------- -------- -------- -------- -------- --------
Total investment securities
available for sale ........................... $229,215 $213,590 $242,020 $242,197 $ 78,296 $ 78,443
======== ======== ======== ======== ======== ========
19
The table below sets forth certain information regarding the contractual
maturities, amortized costs, market values, and weighted average yields for the
Company's investment portfolio at December 31, 1999. Investments in equity
securities, which have no contractual maturities, are excluded from this table.
(Dollars in thousands)
At December 31, 1999
----------------------------------------------------------------------------------------------------
More than More than
One Year Five Years More than
One Year or Less to Five Years to Ten Years Ten Years Total
---------------- --------------- --------------- -------------- ---------------------------------
Average
Amor- Weighted Amor- Weighted Amor- Weighted Amor- Weighted Life Amor- Weighted
tized Average tized Average tized Average tized Average in tized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Years Cost Value Yield
------ -------- ----- -------- ----- -------- ----- -------- ----- ----- ------ --------
Investment securities
available for sale:
U.S. Government and
agency obligations ....... $10,000 5.74% $38,980 6.00% $73,586 6.47% $32,607 6.93% 8.48 $155,173 $146,810 6.40%
State and political
obligations .............. 160 6.39 3,611 6.56 6,468 8.73 6,737 6.91 8.64 16,976 15,706 7.33
Corporate obligations ..... 302 5.96 2,000 5.63 9,928 6.89 33,687 7.24 26.98 45,917 40,424 7.08
------- ---- ------- ---- ------- ---- ------- ---- ----- -------- -------- ----
Total investment
securities available
for sale ................. $10,462 5.76% $44,591 6.03% $89,982 6.68% $73,031 7.07% 12.39 $218,066 $202,940 6.62%
======= ==== ======= ==== ======= ==== ======= ==== ===== ======== ======== ====
20
SOURCES OF FUNDS
GENERAL. The Company's primary source of funds are deposits; proceeds from
principal and interest payments on loans and mortgage-backed securities; sales
of loans, mortgage-backed securities and investments available for sale;
maturities of investment securities and short-term investments; and, to an
increasing extent, advances from the FHLB-NY, reverse repurchase agreements and
other borrowed funds.
DEPOSITS. The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits principally consist of
fixed-term fixed-rate certificates, passbook and statement savings, money
market, Individual Retirement Accounts ("IRAs") and Negotiable Order of
Withdrawal ("NOW") accounts. The flow of deposits is significantly influenced by
general economic conditions, changes in money market and prevailing interest
rates and competition. The Company's deposits are typically obtained from the
areas in which its offices are located. The Company relies primarily on customer
service and long-standing relationships to attract and retain these deposits. At
December 31, 1999, $116.9 million of the Company's deposit balance consisted of
IRAs. Also at that date, $92.6 million, or 7.6%, of the Company's deposit
balance consisted of deposit accounts with a balance greater than $100,000. The
Company does not currently accept brokered deposits.
At December 31, 1999, certificate accounts in amounts of $100,000 or more mature
as follows (in thousands):
Amount
-------
MATURITY PERIOD
Three months or less ......................... $50,551
Over 3 through 6 months ...................... 14,540
Over 6 through 12 months ..................... 12,193
Over 12 months ............................... 15,308
-------
Total ................................. $92,592
=======
The following table sets forth the distribution of the Company's average
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented (dollars in thousands):
For the Year Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ------- ---------- ------- ---------- -------
Non-interest bearing deposits ............... $ 44,755 --% $ 35,297 --% $ 26,234 --%
NOW and money market accounts ............... 347,325 2.70 308,609 2.92 281,007 2.96
Savings accounts ............................ 170,907 2.30 177,282 2.50 184,423 2.61
---------- ---- ---------- ---- ---------- ----
Sub-total ................................ 562,987 2.36 521,188 2.58 491,664 2.67
Certificate accounts ........................ 686,754 4.94 719,602 5.48 722,534 5.49
---------- ---- ---------- ---- ---------- ----
Total average deposits ................... $1,249,741 3.78% $1,240,790 4.26% $1,214,198 4.35%
========== ==== ========== ==== ========== ====
BORROWINGS
The Company's policy has been to utilize borrowings as an alternate and/or less
costly source of funds. The Company obtains advances from the FHLB-NY, which are
collateralized by the capital stock of the FHLB-NY held by the Company, and
certain mortgage loan and mortgage-backed securities of the Company. The Company
also borrows funds via reverse repurchase agreements with the FHLB-NY and
primary broker/dealers. Advances from the FHLB-NY are made pursuant to several
different credit programs, each of which has its own interest rate and maturity.
The maximum amount that the FHLB-NY will advance to member institutions,
including the Bank, for purposes other than withdrawals, fluctuates from time to
time in accordance with the policies of the FHLB-NY. The maximum amount of
FHLB-NY advances permitted to a member institution generally is reduced by
borrowings from any other source. At December 31, 1999, the Company's FHLB-NY
advances totaled $107.0 million, representing 6.4% of total liabilities.
21
During 1999, the Company continued to borrow funds from the FHLB-NY and primary
broker/dealers. The borrowings are collateralized by designated mortgage-backed
and investment securities. The total of these borrowings at December 31, 1999
was $315.0 million, representing 19.0% of total liabilities.
The Company also has an available overnight line-of-credit with the FHLB-NY for
a maximum of $50.0 million.
The following table sets forth certain information regarding the Company's
borrowed funds on the dates indicated (dollars in thousands):
At or For the Years Ended December 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
FHLB-NY advances:
Average balance outstanding ..... $ 70,914 $ 24,072 $ 33,308
Maximum amount outstanding
at any month-end during
the period .................... 139,250 50,800 40,000
Balance outstanding at end
of period ..................... 107,000 38,000 23,000
Weighted average interest
rate during the period ........ 5.43% 5.80% 6.20%
Weighted average interest
rate at end of period ......... 5.88% 5.36% 6.28%
Other borrowings:
Average balance outstanding ..... $254,587 $192,730 $144,489
Maximum amount outstanding
at any month-end during
the period .................... 315,000 269,175 174,669
Balance outstanding at end
of period ..................... 315,000 226,675 163,665
Weighted average interest
rate during the period ........ 5.47% 5.76% 5.97%
Weighted average interest
rate at end of period ......... 5.58% 5.42% 5.92%
SUBSIDIARY ACTIVITIES
FSB FINANCIAL CORP. FSB Financial Corp. is a wholly owned subsidiary of the Bank
and provides a line of fixed and variable rate annuity products, along with
mutual funds and term life insurance. For the year ended December 31, 1999, FSB
Financial Corp. had net income of $160,000.
1000 WOODBRIDGE CENTER DRIVE, INC. 1000 Woodbridge Center Drive, Inc. is a
wholly owned subsidiary of the Bank. 1000 Woodbridge Center Drive, Inc. is a
real estate investment trust and the majority of the Bank's mortgage loan
portfolio is held by this subsidiary. 1000 Woodbridge Center Drive, Inc. had net
income of $32.2 million for the year ended December 31, 1999.
In addition, the Company has three wholly owned subsidiaries obtained through
the Pulse acquisition which were inactive in 1999.
PERSONNEL
As of December 31, 1999, the Company had 273 full-time employees and 23
part-time employees. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
22
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a consolidated basis.
The Company and the Bank will report their income on a calendar year basis using
the accrual method of accounting and will be subject to federal income taxation
in the same manner as other corporations with some exceptions. 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 Company or the
Bank.
BAD DEBT RESERVE. In August 1996, the provisions repealing the current thrift
bad debt rules were passed by Congress as part of "The Small Business Job
Protection Act of 1996." The new rules eliminated the 8% of taxable income
method for deducting additions to the tax bad debt reserves for all thrifts for
tax years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their bad debt reserves added
since the base year (last taxable year beginning before January 1, 1988). As of
December 31, 1999, the Bank has a base year reserve subject to recapture equal
to $2.5 million. The Bank has previously recorded a deferred tax liability for
the tax effect of the bad debt recapture and as such, the new rules have no
effect on net income or federal income tax expense. Retained earnings at
December 31, 1999 and 1998, includes approximately $18.1 million for which no
provision for income tax has been made. This amount represents an allocation of
income to bad debt deductions for tax purposes only. Events that would result in
taxation of these reserves include failure to qualify as a bank for tax
purposes, distributions in complete or partial liquidation, stock redemptions,
excess distributions to shareholders or a change in Federal tax law. At December
31, 1999 and 1998, the Company had an unrecognized tax liability of $6.5 million
with respect to this reserve. However, dividends paid out of the Bank's current
or accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's bad
debt reserve. Thus, any dividends to the Company that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank. The amount of additional
taxable income created from an Excess Distribution 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," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 35% corporate income
tax rate (exclusive of state and local taxes). The Bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserve.
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%. Only 90% of AMTI can be offset by net operating loss carryovers of
which the Company currently has none. AMTI is increased by an amount equal to
75% of the amount by which the Company's adjusted current earnings exceeds its
AMTI (determined without regard to this preference and prior to reduction for
net operating losses). The Company does not expect to be subject to the
alternative minimum tax.
STATE AND LOCAL TAXATION
STATE OF NEW JERSEY. The Bank files a New Jersey income tax return. 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 the
addition of net interest income on state and municipal obligations).
The Company is required to file a New Jersey income tax return because it is
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).
DELAWARE TAXATION. As a Delaware holding company not earning income in Delaware,
the Company is exempt 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.
23
REGULATION AND SUPERVISION
GENERAL
The Company, as holding company for the Bank, is required to file certain
reports with, and otherwise comply with the rules and regulations of the Office
of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended (the
"HOLA"). In addition, the activities of savings institutions, such as the Bank,
are governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act").
As a New Jersey chartered savings bank, the Bank is subject to extensive
regulation, examination and supervision by the Commissioner of the New Jersey
Department of Banking and Insurance (the "Commissioner") as its chartering
agency, and by the Federal Deposit Insurance Corporation ("FDIC"), as the
deposit insurer. The Bank's deposit accounts are insured up to applicable limits
by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank
must file reports with the Commissioner 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 depository institutions and opening or acquiring branch offices. The
Commissioner and the FDIC conduct periodic examinations to assess the Bank's
compliance with various regulatory requirements.
The regulation and supervision of the Company and the Bank 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
Commissioner, the FDIC, the OTS 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.
HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL") to elect to be treated as a savings association for
purposes of the savings and loan holding company provisions of the HOLA. Such
election would result in its holding company being regulated as a savings and
loan holding company by the OTS, rather than as a bank holding company by the
Federal Reserve Board. The Bank made such election and received approval from
the OTS to become a savings and loan holding company. The Company is regulated
as a nondiversified unitary savings and loan holding company within the meaning
of the HOLA. As a unitary savings and loan holding company, the Company
generally is not restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
Upon any non-supervisory acquisition by the Company of another savings
institution or savings bank that meets the QTL 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 be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to
the prior approval of the OTS, and certain activities authorized by OTS
regulation, and no multiple savings and loan holding company may acquire more
than 5% the voting stock of a company engaged in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or 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 must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving 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
24
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.
NEW JERSEY REGULATION. Under the New Jersey Banking Act, a company owning
or controlling a savings bank is regulated as a bank holding company. The New
Jersey Banking Act defines the terms "company" and "bank holding company" as
such terms are defined under the BHC Act. Each bank holding company controlling
a New Jersey chartered bank or savings bank must file certain reports with the
Commissioner and is subject to examination by the Commissioner. The Commissioner
regulates, among other things, the Bank's internal business procedures as well
as its deposits, lending and investment activities. The Commissioner must
approve changes to the Bank's Certificate of Incorporation, establishment or
relocation of branch offices, mergers and the issuance of additional stock.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
FEDERAL BANKING REGULATION
CAPITAL REQUIREMENTS. FDIC regulations require SAIF-insured banks, such as
the Bank, to maintain minimum levels of capital. The FDIC regulations define two
Tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common stockholders' equity
(excluding the net unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses includible in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be
included in total capital can not exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 3.0% plus an additional cushion of at least 100 to 200 basis
points; as a result, the minimum leverage capital ratio for such banks consists
of a ratio of Tier 1 capital to total assets of not less than 4 percent. The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital regulations to provide that the minimum leverage capital ratio
for a depository institution that has not been assigned the highest composite
rating of 1 under the Uniform Financial Institutions Rating System will be 4%,
unless a higher leverage capital ratio is warranted by particular circumstances
or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2
capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital
25
for interest rate risk on a case-by-case basis, with consideration of both
quantitative and qualitative factors. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies also
issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
PROMPT CORRECTIVE ACTION. Under the FDIC prompt corrective action
regulations, the FDIC 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 total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% 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 banking regulator 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
FDIC 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 the institution depending upon its category,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The FDIC 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. Deposits of the Bank are presently insured
by SAIF. The FDIC maintains a risk-based assessment system by which institutions
are assigned to one of three categories based on their capitalization and one of
three subcategories based on examination ratings and other supervisory
information. An institution's assessment rate depends upon the categories to
which it is assigned. Assessment rates for SAIF member institutions are
determined semiannually by the FDIC and currently range from zero basis points
for the healthiest institutions to 27 basis points for the riskiest.
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.
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1999, the Bank maintained 83.9% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered "qualified thrift investments."
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. 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 appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans.
26
RECENT DEVELOPMENTS. On November 12, 1999, the Gramm-Leach-Bliley Financial
Modernization Act of 1999 became law. The Modernization Act contains new
financial privacy provisions will generally prohibit financial institutions,
including the Company and the Bank, from disclosing nonpublic personal financial
information to third parties unless customers have the opportunity to "opt out"
of the disclosure. The Modernization Act also allows, among other things, for
bank holding companies meeting certain management, capital and CRA standards to
engage in a substantially broader range of nonbanking activities than were
previously permissible, including insurance underwriting and making merchant
banking investments in commercial and financial companies. The Modernization Act
further allows insurers and other financial services companies to acquire banks;
removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
Because the Modernization Act permits banks, securities firms and insurers
to combine and to offer a wide variety of financial products and services, many
of these resulting companies will be larger and have more resources than the
Company. Should these companies choose to compete directly with the Company in
its target markets, the Company's results of operations could be adversely
impacted.
NEW JERSEY BANKING REGULATION
ACTIVITY POWERS. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the New Jersey
Banking Act and its related regulations. Under these laws and regulations,
savings banks, including First Place Savings, generally may invest in:
(1) real estate mortgages;
(2) consumer and commercial loans;
(3) specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
(4) certain types of corporate equity securities; and
(5) certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the New Jersey Banking Act. Such
investments must comply with a number of limitations on the individual and
aggregate amounts of the investments. A savings bank may also exercise trust
powers upon approval of the Department. New Jersey savings banks may also
exercise any power authorized for federally chartered savings banks unless the
Department determines otherwise. The exercise of these lending, investment and
activity powers are limited by federal law and the related regulations.
LOANS-TO-ONE-BORROWER LIMITATIONS. With certain specified exceptions, a New
Jersey chartered savings bank may not make loans or extend credit to a single
borrower and to entities related to the borrower in an aggregate amount that
would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of the New Jersey Banking Act. The Bank currently complies with
applicable loans-to-one-borrower limitations.
DIVIDENDS. Under the New Jersey Banking Act, a stock savings bank may
declare and pay a dividend on its capital stock only to the extent that the
payment of the dividend would not impair the capital stock of the savings bank.
In addition, a stock savings bank may not pay a dividend if the surplus of the
savings bank would, after the payment of the dividend, be reduced unless after
such reduction the surplus was 50% or more of the bank's capital stock.
MINIMUM CAPITAL REQUIREMENTS. Regulations of the Department impose on New
Jersey chartered depository institutions, including the Bank, minimum capital
requirements similar to those imposed by the FDIC.
EXAMINATION AND ENFORCEMENT. The New Jersey Department of Banking and
Insurance may examine the Bank whenever it deems an examination advisable. The
Commissioner will examine the Bank at least every two years. The Department may
order any savings bank to discontinue any violation of law or unsafe or unsound
business practice and may direct any director, officer, attorney or employee of
a savings bank engaged in an
27
objectionable activity, after the Department has ordered the activity to be
terminated, to show cause at a hearing before the Department why such person
should not be removed.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$44.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $44.3
million, the reserve requirement was $1,329 million plus 10% (subject to
adjustment by the Federal Reserve Board) against that portion of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements.
ITEM 2. PROPERTIES
The Company conducts its business through its main office and 22 full service
branch offices, all located in central New Jersey. The following table sets
forth certain information concerning the main office and each branch office of
the Company at December 31, 1999. The aggregate net book value of the Company's
premises and equipment was $16.5 million at December 31, 1999.
28
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------ ---------------
MAIN OFFICE:
339 State Street 4/29 Owned
Perth Amboy, NJ 08861(1)
CORPORATE HEADQUARTERS: 5/94 Owned
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
BRANCH OFFICES:
213 Summerhill Road 8/97 Leased
East Brunswick, NJ 08816
980 Amboy Avenue 6/74 Owned
Edison, NJ 08837
2100 Oak Tree Road 4/84 Owned
Edison, NJ 08820
206 South Avenue 9/91 Owned
Fanwood, NJ 07023
33 Lafayette Road 4/84 Leased
Fords, NJ 08863
Rt. 35 & Bethany Road 1/91 Leased
Hazlet, NJ 07730
301 Raritan Avenue 5/98 Owned
Highland Park, NJ 08904
101 New Brunswick Avenue 6/76 Leased
Hopelawn, NJ 08861
1220 Green Street 11/84 Owned
Iselin, NJ 08830
1225 Brunswick Avenue 5/92 Owned
Lawrenceville, NJ 08648 (2)
599 Middlesex Avenue 1/95 Leased
Metuchen, NJ 08840 (2)
1580 Rt. 35 South 4/95 Leased
Middletown, NJ 07748
97 North Main Street 1/95 Owned
Milltown, NJ 08850 (2)
Prospect Plains and Applegarth Roads 7/76 Owned
Monroe Township, NJ 08512
Rt. 9 & Ticetown Road 6/79 Leased
Old Bridge, NJ 08857
100 Stelton Road 9/91 Leased
Piscataway, NJ 08854
Washington Avenue & Davis Lane 7/71 Owned
South Amboy, NJ 08879
6 Jackson Street 8/65 Owned
South River, NJ 08882
29
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------ ---------------
371 Spotswood - Englishtown Road 5/98 Owned
Spotswood, NJ 08884
325 Amboy Avenue 1/70 Owned
Woodbridge, NJ 07095
Rt. 1 & St. Georges Avenue 6/80 Leased
Woodbridge, NJ 07095
(1) Includes an adjacent administrative building.
(2) Acquired/leased in conjunction with the purchase of deposits.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of its business. In the opinion of management, the resolution of these
legal actions is not expected to have a material adverse effect on the Company's
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the section captioned "Market Information
for Common Stock" on page 44 of the 1999 Annual Report to Stockholders is
incorporated herein by reference. At December 31, 1999, 38,443,350 shares of the
Company's outstanding common stock was held of record by approximately 5,395
persons or entities, not including the number of persons or entities holding
stock in nominee or stock name through various brokers or banks. On December 14,
1999, the Company declared a special cash dividend of $.15 per share, payable
January 14, 2000, to stockholders of record as of December 28, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section captioned "Consolidated
Financial Highlights" on page 1 of the 1999 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Comparison of Operating
Results" on pages 9 through 18 of the 1999 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Disclosure relating to market risk is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," on
pages 17 through 18 of the 1999 Annual Report to Stockholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS
The Company's consolidated financial statements, together with the
report thereon by KPMG LLP, are found in the 1999 Annual Report to Stockholders
on pages 19 through 42 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT
The disclosures required by Item 10 are included under the caption
"Information With Respect to Nominees, Continuing Directors and Executive
Officers" on pages 4-7 of the Company's proxy statement for the 2000 Annual
Meeting of Stockholders dated March 24, 2000 ("2000 Proxy Statement"), and are
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The disclosures required by Item 11 are included under the captions
"Directors' Compensation" and "Executive Compensation" on pages 8-9 and pages
13-17 (excluding the Compensation Committee Report) of the 2000 Proxy Statement
dated March 24, 2000, and are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF FIRST SENTINEL COMMON STOCK
Disclosure relating to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to pages 3-5 of the 2000
Proxy Statement under the captions "Security Ownership of Certain Beneficial
Owners" and "Information With Respect to Nominees, Continuing Directors and
Executive Officers."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The disclosures required by Item 13 are included under the caption
"Transactions With Certain Related Persons" on pages 17-18 of the 2000 Proxy
Statement dated March 24, 2000, and are incorporated herein by reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements.
The Consolidated Financial Statements and Independent Auditors' Report for the
year ended December 31, 1999, included in the Annual Report, listed below, are
incorporated herein by reference.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31,
1999 AND 1998 (ANNUAL REPORT - PAGE 19).
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER
31, 1999, 1998 AND 1997 (ANNUAL REPORT PAGE 20).
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998, AND 1997 (ANNUAL REPORT - PAGE
21).
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997 (ANNUAL REPORT - PAGE 22).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ANNUAL REPORT -
PAGES 23 THROUGH 41).
INDEPENDENT AUDITORS' REPORT (ANNUAL REPORT - PAGE 42).
The remaining information appearing in the Annual Report of
Stockholders is not deemed to be filed as part of this report,
except as provided herein.
(2) Financial Statement Schedules.
All schedules have been omitted because the required
information is either inapplicable or included in the Notes to
Consolidated Financial Statements.
(3) Exhibits
The following exhibits are filed as part of this report.
- --------------------------------------------------------------------------------
Exhibit
Number Description Reference
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of First Sentinel
Bancorp, Inc. *
3.2 Bylaws of First Sentinel Bancorp, Inc. *
4.0 Stock Certificate of First Sentinel Bancorp, Inc. **
10.1 First Sentinel Bancorp, Inc. 1996 Omnibus
Incentive Plan **
10.2 First Sentinel Bancorp, Inc. Amended and Restated
1998 Stock-based Incentive Plan ***
10.3 First Sentinel Bancorp, Inc. 1986 Acquisition
Stock Option Plan Filed herein
10.4 First Sentinel Bancorp, Inc. 1993 Acquisition
Stock Option Plan Filed herein
10.5 First Sentinel Bancorp, Inc. 1997 Acquisition
Stock Option Plan Filed herein
10.6 First Savings Bank, SLA Employee Stock Ownership
Plan **
10.7 First Savings Bank, SLA Directors' Deferred Fee
Stock Unit Plan **
10.8 First Savings Bank, SLA Supplemental Executive
Retirement Plan **
10.9 First Savings Bank, SLA Supplemental Executive
Retirement Plan II **
- --------------------------------------------------------------------------------
32
- --------------------------------------------------------------------------------
Exhibit
Number Description Reference
- --------------------------------------------------------------------------------
10.10 First Savings Bank, SLA Director Retirement Plan **
10.11 Form of Employment Agreement between First
Sentinel Bancorp, Inc. and John P. Mulkerin and
Christopher Martin **
10.12 Employment Agreements between First Savings Bank,
SLA and John P. Mulkerin and Christopher Martin **
10.13 Form of Change in Control Agreement between First
Savings Bank, SLA and certain executive officers **
10.14 First Savings Bank, SLA Employee Severance
Compensation Plan **
11.0 Computation of per share earnings ****
13.0 Portions of the 1999 Annual Report to Stockholders Filed herein
21.0 Subsidiaries of Registrant incorporated by
reference herein to Part I - Subsidiaries
23.0 Consent of KPMG LLP Filed herein
27.0 Financial Data Schedule Filed herein
- --------------------------------------------------------------------------------
* Previously filed and incorporated herein by reference to the December 31,
1998 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. (File No.
000-23809) dated March 30, 1999.
** Previously filed and incorporated herein by reference to the Exhibits to
the Registration Statement on Form S-1 (File No. 333-42757) of First
Sentinel Bancorp, Inc. (formerly known as First Source Bancorp, Inc.) dated
December 19, 1997, and all amendments thereto.
*** Previously filed and incorporated herein by reference to the Proxy
Statement for the 1999 Annual Meeting of Stockholders of First Sentinel
Bancorp, Inc. (File No. 000-23809) filed on March 30, 1999.
**** Filed herein as a component of Exhibit 13.0, under footnote one of the
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated December 17, 1999
under Item 5, Other Events, pertaining to the declaration of a special cash
dividend of $.15 per common share.
33
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.
Date: March 30, 2000 FIRST SENTINEL BANCORP, INC.
JOHN P. MULKERIN
-----------------------------
John P. Mulkerin
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
JOHN P. MULKERIN President, Chief Executive March 30, 2000
- --------------------------- Officer and Director
John P. Mulkerin
JEFFRIES SHEIN Director March 30, 2000
- ---------------------------
Jeffries Shein
DONALD T. AKEY, M.D. Director March 30, 2000
- ---------------------------
Donald T. Akey, M.D.
KEITH H. MCLAUGHLIN Director March 30, 2000
- ---------------------------
Keith H. McLaughlin
PHILIP T. RUEGGER, JR. Director March 30, 2000
- ---------------------------
Philip T. Ruegger, Jr.
JOSEPH CHADWICK Director March 30, 2000
- ---------------------------
Joseph Chadwick
GEORGE T. HORNYAK, JR. Director March 30, 2000
- ---------------------------
George T. Hornyak, Jr.
WALTER K. TIMPSON Chairman of the Board March 30, 2000
- ---------------------------
Walter K. Timpson
CHRISTOPHER P. MARTIN Executive Vice President, March 30, 2000
- --------------------------- Chief Operating and Financial
Christopher P. Martin Officer and Director
34