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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, 2000
Commission file number: 0-23809
FIRST SENTINEL BANCORP, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
DELAWARE 22-3566151
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) 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 16, 2001, as
quoted by the Nasdaq Stock Market, was approximately $317.3 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 16, 2001, there were 43,106,742 shares issued and 32,691,391 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, 2000 (Part II).
II. Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders
(Part III).
1
INDEX
PAGE
----
PART I
Item 1. Business................................................ 3
Item 2. Properties.............................................. 31
Item 3. Legal Proceedings....................................... 33
Item 4. Submission of Matters to a Vote of Security Holders..... 33
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................... 33
Item 6. Selected Financial Data................................. 33
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 33
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ...................................... 33
Item 8. Financial Statements and Supplementary Data ............ 33
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant...... 34
Item 11. Executive Compensation.................................. 34
Item 12. Security Ownership of Certain Beneficial Owners
and Management ......................................... 34
Item 13. Certain Relationships and Related Transactions.......... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ............................................ 35
SIGNATURES 37
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 Bank and
facilitating the Conversion and Reorganization of the Bank, which was completed
on April 8, 1998, (as further described below). At December 31, 2000, the
Company had consolidated total assets of $2.0 billion and total equity of $222.2
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 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 the fiscal year ended September 30, 1998 were combined with the
Company's calendar year. 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. As part of the
acquisition, Pulse Savings Bank, the wholly-owned financial institution
subsidiary of Pulse, was merged with and into First Savings.
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, ECONOMIC CONDITIONS, DEPOSIT AND
LOAN GROWTH, REAL ESTATE VALUES, LOAN LOSS PROVISIONS, COMPETITION, CUSTOMER
RETENTION, CHANGES IN ACCOUNTING PRINCIPLES, POLICIES OR GUIDELINES AND
LEGISLATIVE AND REGULATORY CHANGES.
The Company's objectives are to enhance shareholder value by profitably
meeting the needs of its 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, which is conducted through the Bank, 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 were primarily
one-to-four family adjustable-rate mortgages underwritten internally at higher
rates than those currently offered by the Bank. Third-party correspondent
lending is expected to continue to play a minor 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, 2000, 1999 and 1998 were
$503.4 million, $325.5 million and $217.1 million, respectively. The Company
will continue to evaluate leveraged growth opportunities as market conditions
allow.
The Company repurchased 5.7 million shares, or $48.6 million, of its common
stock during 2000 as part of its ongoing capital management strategy. At
December 31, 2000, the Company was eligible to repurchase an additional 743,000
shares under a 5% stock repurchase program authorized in August, 2000.
4
The Company plans to complete an upgrade of branch operations in 2001.
These upgrades, consisting of teller platform automation, including document
preparation and online signature verification, 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 2001. 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 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 22 branch offices in central New Jersey, 18 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,
-----------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ----------------------------- ---------------------------
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) ..................... $1,121,386 $84,174 7.51% $934,991 $68,656 7.34% $792,168 $61,431 7.75%
Mortgage-backed securities, net .... -- -- -- -- -- -- 205,995 13,774 6.69
Investment securities .............. -- -- -- -- -- -- 140,953 9,032 6.41
Investment and mortgage-backed
securities available
for sale (2)...................... 818,035 52,615 6.43 904,744 54,732 6.05 551,323 34,936 6.34
---------- ------- ---------- ------- ---------- --------
Total interest-earning assets ... 1,939,421 136,789 7.05 1,839,735 123,388 6.71 1,690,439 119,173 7.05
Non-interest earning assets .......... 20,695 46,536 54,189
---------- ---------- ----------
Total assets .................... $1,960,116 $1,886,271 $1,744,628
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW and money market accounts .... $354,135 9,452 2.67 $347,325 9,395 2.70 $308,609 9,008 2.92
Savings accounts ................. 166,127 3,744 2.25 170,907 3,931 2.30 177,282 4,431 2.50
Certificate accounts ............. 646,791 34,783 5.38 686,754 33,900 4.94 719,602 39,429 5.48
Borrowed funds ................... 503,372 30,893 6.14 325,501 17,780 5.46 217,131 12,518 5.77
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities ................... 1,670,425 78,872 4.72 1,530,487 65,006 4.25 1,422,624 65,386 4.60
Non-interest bearing deposits ........ 48,582 44,755 35,297
Other liabilities .................... 15,253 15,004 23,817
---------- ---------- ----------
Total liabilities ............... 1,734,260 1,590,246 1,481,738
---------- ---------- ----------
Stockholders' equity ................. 225,856 296,025 262,890
---------- ---------- ----------
Total liabilities and
stockholders' equity .......... $1,960,116 $1,886,271 $1,744,628
========== ========= ==========
Net interest income/interest
rate spread (3) ...................... $57,917 2.33% $58,382 2.46% $53,787 2.45%
======= ==== ======= ==== ======= ====
Net interest-earning assets/net
interest margin (4) .................. $268,996 2.99% $309,248 3.17% $267,815 3.18%
========== ==== ========== ==== ========== ====
Ratio of interest-earning assets
to interest-bearing liabilities ...... 1.16 x 1.20 x 1.19 x
============ ========== ==========
(1) Loans receivable, net includes non-accrual loans.
(2) Includes federal funds sold and Federal Home Loan Bank of New York
("FHLB-NY") stock. All securities are presented at amortized cost.
(3) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) 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.
(In thousands)
Year Ended December 31, 2000 Year Ended December 31, 1999
Compared to Year Ended Compared to Year Ended
December 31, 1999 December 31, 1998
----------------------------------- ------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------- ----------------------
Volume Rate Net Volume Rate Net
-------- ------- -------- -------- -------- --------
INTEREST-EARNING ASSETS:
Loans receivable, net .............. $13,903 $1,615 $15,518 $10,608 $(3,383) $7,225
Mortgage-backed securities, net .... -- -- -- (6,887) (6,887) (13,774)
Investment securities .............. -- -- -- (4,516) (4,516) (9,032)
Investment and mortgage-backed
securities and loans available
for sale ........................ (5,433) 3,316 (2,117) 21,462 (1,666) 19,796
-------- ------- -------- -------- -------- --------
Total .............................. 8,470 4,931 13,401 20,667 (16,452) 4,215
-------- ------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and money market accounts .... 169 (112) 57 1,090 (703) 387
Passbook and statement savings ... (105) (82) (187) (155) (345) (500)
Certificates accounts ............ (2,039) 2,922 883 (1,750) (3,779) (5,529)
Borrowed funds ..................... 10,680 2,433 13,113 5,966 (704) 5,262
-------- ------- -------- -------- -------- --------
Total .............................. 8,705 5,161 13,866 5,151 (5,531) (380)
-------- ------- -------- -------- -------- --------
Net change in interest income ........ $(235) $(230) $(465) $15,516 $(10,921) $4,595
======== ======= ======== ======== ======== ========
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, 2000, the Company's loan
portfolio totaled $1.2 billion, of which $879.6 million, or 73.6% were
one-to-four family residential mortgage loans. At that date, the Company's loan
portfolio also included $114.2 million of home equity loans and lines of credit
generally secured by second liens on one-to-four family residential properties,
$41.3 million of net construction loans, $131.1 million of commercial real
estate loans, and $13.1 million of multi-family residential mortgage loans,
which represented 9.6%, 3.5%, 11.0% and 1.1%, respectively, of total loans
receivable. Of the mortgage loan portfolio outstanding at December 31, 2000,
43.7% were fixed-rate loans and 56.3% were adjustable-rate mortgage ("ARM")
loans. Other loans held by the Company, which consist of loans on deposit
accounts, commercial business, personal, and automobile loans, totaled $16.1
million, or 1.4% of total loans outstanding at December 31, 2000. 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
such loans are sold without recourse. At December 31, 2000, the Company's
servicing portfolio totaled $75.8 million.
The Company also invests in mortgage-backed securities and other
mortgage-backed products such as collateralized mortgage obligations ("CMOs").
At December 31, 2000, mortgage-backed securities, including CMOs, aggregated
$447.0 million, or 22.7% of total assets, of which 60.6% 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, 2000, all mortgage-backed
securities were classified as available for sale. 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. The Company expects to classify all mortgage-backed security
purchases as available for sale in the foreseeable future
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,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ---------------- ---------------- ----------------
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 ............ $879,578 73.59 $774,858 75.52 $657,284 76.10% $566,625 78.25% $493,973 75.67%
Home equity loans ............. 114,152 9.55 98,324 9.58 82,672 9.57 56,533 7.81 52,684 8.07
Construction (2) .............. 41,291 3.45 26,890 2.62 23,349 2.70 17,827 2.46 12,996 1.99
Commercial real estate ........ 131,072 10.97 96,821 9.44 65,069 7.53 54,926 7.58 51,091 7.83
Multi-family .................. 13,079 1.09 12,499 1.22 17,589 2.04 21,292 2.94 36,066 5.53
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans ........ 1,179,172 98.65 1,009,392 98.38 845,963 97.94 717,203 99.04 646,810 99.09
Other loans ..................... 16,121 1.35 16,638 1.62 17,817 2.06 6,954 0.96 5,956 0.91
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable ...... 1,195,293 100.00% 1,026,030 100.00% 863,780 100.00% 724,157 100.00% 652,766 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan fees (costs)
and (premiums) and discounts .. (1,850) (1,090) (422) (107) 524
Allowance for loan losses ....... 12,341 11,004 9,505 8,454 7,781
---------- ---------- -------- -------- --------
Total loans receivable, net $1,184,802 $1,016,116 $854,697 $715,810 $644,461
========== ========== ======== ======== ========
Mortgage loans:
ARM ........................... $664,164 56.32% $531,859 52.69% $439,234 51.92% $421,642 58.79% $364,906 56.42%
Fixed-rate .................... 515,008 43.68 477,533 47.31 406,729 48.08 295,561 41.21 281,904 43.58
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans ........ $1,179,172 100.00% $1,009,392 100.00% $845,963 100.00% $717,203 100.00% $646,810 100.00%
========== ====== ========== ====== ======== ====== ======== ====== ======== ======
Mortgage-backed securities (3):
CMOs .......................... $201,802 44.79% $273,511 46.85% $209,468 32.00% $90,247 15.95% $76,493 13.31%
FHLMC ......................... 159,755 35.45 166,992 28.60 235,415 35.97 253,029 44.72 287,368 50.02
GNMA .......................... 29,409 6.53 57,489 9.85 71,347 10.90 113,179 20.00 134,877 23.47
FNMA .......................... 59,628 13.23 85,828 14.70 138,286 21.13 109,415 19.33 75,821 13.20
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities ................ 450,594 100.00% 583,820 100.00% 654,516 100.00% 565,870 100.00% 574,559 100.00%
====== ====== ====== ====== ======
Net premiums .................... 1,951 2,748 3,639 2,704 2,433
Net unrealized (loss) gain on
mortgage-Backed securities
available for sale ............ (5,523) (11,409) 3,726 1,876 535
---------- ---------- -------- -------- --------
Mortgage-backed securities,
net ........................... $447,022 $575,159 $661,881 $570,450 $577,527
========== ========== ======== ======== ========
- ------------------
(1) Includes $277,000 and $287,000 in mortgage loans available for sale at
December 31, 2000 and 1996, respectively. No loans were classified as
available for sale at December 31, 1999, 1998 or 1997.
(2) Net of loans in process of $19.2 million, $28.0 million, $41.8 million,
$27.5 million, and $12.3 million at December 31, 2000, 1999, 1998, 1997 and
1996, respectively.
(3) Includes $447.0 million, $575.2 million, $661.9 million, $200.5 million and
$161.9 million in mortgage-backed securities available for sale at fair
value at December 31, 2000, 1999, 1998, 1997 and 1996, 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, 2000. 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.
(In thousands)
At December 31, 2000
-------------------------------------------
One Year
One Year to Five After
or Less Years Five Years Total
-------- -------- ---------- ----------
Mortgage loans:
One-to-four family ............. $98,705 $340,638 $440,235 $879,578
Home equity loans .............. 39,357 18,107 56,688 114,152
Construction (1) ............... 41,291 -- -- 41,291
Commercial real estate ......... 6,842 45,399 78,831 131,072
Multi-family ................... 2,217 8,725 2,137 13,079
-------- -------- -------- ----------
Total mortgage loans ......... 188,412 412,869 577,891 1,179,172
Other loans ...................... 8,265 4,803 3,053 16,121
-------- -------- -------- ----------
Total loans .................. $196,677 $417,672 $580,944 1,195,293
======== ======== ========
Net deferred loan costs and unearned premiums ..................... 1,850
Allowance for loan losses ......................................... (12,341)
----------
Loans receivable, net ............................................. $1,184,802
==========
(1) Excludes loans in process of $19.2 million.
The following table sets forth at December 31, 2000, the dollar amount of
loans contractually due or repricing after December 31, 2001, and whether such
loans have fixed interest rates or adjustable interest rates (in thousands):
Due or repricing
after December 31, 2001
------------------------------------
Fixed Adjustable Total
-------- ---------- ----------
Mortgage loans:
One-to-four family ................... $320,806 $460,067 $780,873
Equity loans ......................... 74,495 300 74,795
Commercial real estate ............... 76,295 47,936 124,231
Multi-family ......................... 1,518 9,343 10,861
Other loans ............................. 6,292 1,564 7,856
-------- -------- ----------
Total loans receivable .................. 479,406 519,210 998,616
Mortgage-backed securities
(at amortized cost) .................. 178,848 230,323 409,171
-------- -------- ----------
Total loans receivable
and mortgage-Backed securities ........ $658,254 $749,533 $1,407,787
======== ======== ==========
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
10
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 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, 2000, 73.6% 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, 2000, the Company had $74.7 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 24-month
introductory rate on both home equity line of credit products. The introductory
rate is currently 7.49%. 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
11
plus 1.5%. The Company's home equity lines of credit outstanding at December 31,
2000 totaled $39.5 million, with additional available credit lines of $50.5
million.
CONSTRUCTION LENDING. At December 31, 2000, construction loans totaled
$41.3 million, or 3.5% of the Company's total loans outstanding. Available
credit lines totaled $19.2 million at December 31, 2000. The current policy of
the Company is to charge interest rates which float at margins of up to 2.0%
above the prime rate on its construction loans. 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 $300,000 to $8.0 million. At December 31, 2000, the Company
had 39 construction loans, 13 of which had principal outstanding of $1.0 million
or more, with the largest outstanding loan balance being $5.8 million. At
December 31, 2000, 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, 2000, none of the Company's
construction loans were classified as substandard. See "Asset Quality" for
further discussion.
COMMERCIAL REAL ESTATE. At December 31, 2000, the Company had 139 loans
secured by commercial real estate, totaling $131.1 million, or 11.0% 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, 2000 was originated in 2000 on a self-storage
facility with a balance of $15.1 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, 2000, $13.1 million, or
1.1%, of the Company's total loan portfolio consisted of multi-
12
family residential loans. At December 31, 2000, the Company had one multi-family
loan with an outstanding balance in 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 commercial,
personal, automobile and boat loans and loans secured by savings accounts. At
December 31, 2000, $16.1 million, or 1.4%, 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 $75.8 million and $81.9 million of mortgage loans for
others at December 31, 2000 and 1999, respectively. The Company received
$177,000 and $202,000 in servicing fees for the years ended December 31, 2000
and 1999, 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, 2000, $277,000 of mortgage loans were classified as available for sale.
Mortgage loans sold totaled $9.8 million and $7.2 million for the years ended
December 31, 2000 and 1999, respectively. From time to time, the Company may
also purchase mortgage loans. The Company purchased $87.8 million and $57.5
million in mortgage loans from third-party correspondents for the years ended
December 31, 2000 and 1999, respectively. The Company underwrote the loans and
verified documentation prior to purchase and received 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, 2000, REO totaled
$257,000 and consisted of two 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, 2000, 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 $193,000.
(Dollars in thousands)
At December 31,
-------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ -------
Non-accrual mortgage loans ....... $2,334 $2,311 $2,647 $4,457 $5,715
Non-accrual other loans .......... 15 45 93 -- 4
------ ------ ------ ------ -------
Total non-accrual loans ...... 2,349 2,356 2,740 4,457 5,719
Loans 90 days or more delinquent
and still accruing ............. 40 326 1,525 1,596 928
------ ------ ------ ------ -------
Total non-performing loans ... 2,389 2,682 4,265 6,053 6,647
Restructured loans ............... -- -- -- 2,103 2,135
Total real estate owned, net of
related allowance for loss ..... 257 466 1,453 1,516 3,750
------ ------ ------ ------ -------
Total non-performing assets ...... $2,646 $3,148 $5,718 $9,672 $12,532
====== ====== ====== ====== =======
Non-performing loans to total
loans receivable, net .......... 0.20% 0.26% 0.50% 0.85% 1.03%
Total non-performing assets to
total assets ................... 0.13% 0.17% 0.31% 0.61% 0.84%
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 $5.4 million and $7.1 million at December 31, 2000 and 1999,
respectively. At December 31, 2000, $2.5 million of classified loans were
secured by residential properties. The remaining $2.9 million in classified
loans were secured by commercial real estate. As of December 31, 2000, the
Company's largest classified loan had a balance of $2.0 million and was secured
by an office building complex.
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 the Bank's 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 $1.4 million and $1.7 million in provisions for loan
losses for the years ended December 31, 2000 and 1999, respectively. The
decrease in the provision for loan losses was the result of management's asset
classification review, partially offset by continued growth in loans receivable.
The Company believes that the allowance for loan losses is adequate. At December
31, 2000, the total allowance was $12.3 million, which amounted to 1.03% of
loans receivable, net and 4.7x 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,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
Balance at beginning
of period ................ $11,004 $9,505 $8,454 $7,781 $7,851
Provision for loan losses .. 1,441 1,650 1,469 1,200 550
Charge-offs (domestic):
Real estate - mortgage ... (97) (151) (594) (510) (729)
Installment loans to
individuals ............ (7) -- (2) (17) (1)
Recoveries (domestic):
Real estate - mortgage ... -- -- 28 -- 110
Allowance activity of
Pulse during conforming
period, net .............. -- -- 150 -- --
-------- -------- ------- ------- -------
Balance at end of period ... $12,341 $11,004 $9,505 $8,454 $7,781
======== ======== ======= ======= =======
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,
-------------------------------------------------------------------------------
2000 1999
------------------------------------ -------------------------------------
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 ............................. $4,831 39.15% 73.59% $4,667 42.41% 75.52%
Home equity loans .............................. 1,243 10.07 9.55 1,086 9.87 9.58
Construction ................................... 1,275 10.33 3.45 1,573 14.29 2.62
Commercial real estate ......................... 2,637 21.37 10.97 2,630 23.90 9.44
Multi-family ................................... 197 1.60 1.09 250 2.27 1.22
------- ------ ------ ------- ------ ------
Total mortgage loans ......................... 10,183 82.51 98.65 10,206 92.74 98.38
Other .......................................... 587 4.76 1.35 541 4.92 1.62
Unallocated .................................... 1,571 12.73 -- 257 2.34 --
------- ------ ------ ------- ------ ------
Total allowance for loan losses .............. $12,341 100.00% 100.00% $11,004 100.00% 100.00%
======= ====== ====== ======= ====== ======
At December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Percent of Category Percent of Category Percent of Category
Allowance to Allowance to Allowance to
to Total Total to Total Total to Total Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- -------- ------ ---------- -------- ------ ---------- --------
One-to-four family ........ $4,027 42.37% 76.10% $3,867 45.75% 78.25% $4,035 51.85% 75.67%
Home equity loans ......... 1,090 11.47 9.57 458 5.42 7.81 437 5.62 8.07
Construction .............. 1,223 12.87 2.70 894 10.57 2.46 577 7.42 1.99
Commercial real Estate .... 1,963 20.65 7.53 1,877 22.20 7.58 1,714 22.03 7.83
Multi-family .............. 522 5.49 2.04 777 9.19 2.94 787 10.11 5.53
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans .... 8,825 92.85 97.94 7,873 93.13 99.04 7,550 97.03 99.09
Other ..................... 486 5.11 2.06 258 3.05 0.96 187 2.40 0.91
Unallocated ............... 194 2.04 -- 323 3.82 -- 44 0.57 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses .......... $9,505 100.00% 100.00% $8,454 100.00% 100.00% $7,781 100.00% 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-
16
backed securities 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, 2000, mortgage-backed securities, net, totaled $447.0 million, or
22.7% 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 6.67%. Fixed coupon
rates ranged from 7.50% to 9.50% for GNMA, 6.00% to 9.00% for Freddie Mac, 5.75%
to 7.00% for FNMA fixed-rate securities and 5.75% to 7.25% for fixed-rate CMOs.
Adjustable-rate coupon ranges were as follows: 6.00% to 7.75% for GNMA ARM
mortgage-backed securities; 5.93% to 8.54% for Freddie Mac ARM mortgage-backed
securities; 5.94% to 8.52% for FNMA ARM mortgage-backed securities; and 6.00% to
7.39% for adjustable-rate CMOs.
Included in the total mortgage-backed securities portfolio are CMOs which
had a market value of $197.4 million at December 31, 2000. The Company generally
purchases short-term, 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
17
with residual characteristics. The weighted average life of CMOs at December 31,
2000, was 4.7 years. The stated weighted average contractual maturity of the
Company's CMOs, at December 31, 2000, was 18.8 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, 2000, by contractual maturity are shown below. Expected maturities
will differ from contractual maturities due to prepayments (in thousands):
AMORTIZED MARKET
COST VALUE
-------- --------
Mortgage-backed securities available for sale due in:
Less than one year ............................... $ -- $ --
One year through five years ...................... 8,037 8,033
Five years through ten years ..................... 31,880 31,455
Greater than ten years ........................... 412,628 407,534
-------- --------
$452,545 $447,022
======== ========
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.
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,
2000, the market value of investment securities available for sale was $235.0
million, with an amortized cost basis of $242.7 million, and was composed of
U.S. Government and Agency 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 10.2 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, 2000, $164.9 million, or 70.2% 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,
-------------------------------------------------------------------------
2000 1999 1998
--------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- --------- -------- --------- --------
Investment securities available for sale:
U.S. Government and agency
Obligations .......................... $151,753 $149,149 $155,173 $146,810 $197,635 $198,531
State and political obligations .......... 12,813 12,451 16,976 15,706 6,900 6,972
Corporate obligations .................... 67,267 62,880 45,917 40,424 13,414 13,275
Equity securities ........................ 10,817 10,490 11,149 10,650 24,071 23,419
-------- -------- -------- -------- -------- --------
Total investment securities
Available for sale ................. $242,650 $234,970 $229,215 $213,590 $242,020 $242,197
======== ======== ======== ======== ======== ========
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, 2000. Investments in equity
securities, which have no contractual maturities, are excluded from this table.
(Dollars in thousands)
At December 31, 2000
--------------------------------------------------------------------------------------
One Year or Less More than One Year More than Five More than Ten
to Five Years Years to Ten Years Years
------------------- -------------------- -------------------- --------------------
Amortized Weighted Amortized Weighted Amortized Weighted Amortized Weighted
Average Average Average Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- --------- --------- --------- --------
Investment securities available for sale:
U.S. Government and agency obligations $6,649 5.44% $59,624 6.17% $55,991 6.76% $29,489 7.25%
State and political obligations ....... 325 6.07 3,071 5.56 4,772 6.03 4,645 5.96
Corporate obligations ................. 95 2.43 16,140 7.50 13,433 7.43 37,599 7.49
------ ----- ------- ----- ------- ----- ------- -----
Total investment securities
available for sale .................. $7,069 5.43% $78,835 6.42% $74,196 6.83% $71,733 7.29%
====== ===== ======= ===== ======= ===== ======= =====
At December 31, 2000
- ------------------------------------------
Total
- ------------------------------------------
Average Weighted
Maturity Amortized Market Average
in Years Cost Value Yield
- --------- --------- --------------------
7.23 $151,753 $149,149 6.57%
8.12 12,813 12,451 5.89
17.29 67,267 62,880 7.47
----- -------- -------- -----
10.17 $231,833 $224,480 6.79%
===== ======== ======== =====
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, 2000, $108.9 million, or 8.9%, of the Company's deposit balance
consisted of IRAs. Also at that date, $155.6 million, or 12.8%, 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, 2000, certificate accounts in amounts of $100,000 or more
mature as follows (in thousands):
Amount
-------
Maturity period
Three months or less ............................. $15,763
Over 3 through 6 months .......................... 22,418
Over 6 through 12 months ......................... 15,889
Over 12 months ................................... 14,949
-------
Total ........................................ $69,019
=======
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,
-----------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------- ------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---------- ---------- ---------- ---------- ----------
Non-interest bearing deposits ...... $ 48,582 --% $ 44,755 --% $ 35,297 --%
NOW and money market accounts ...... 354,135 2.67 347,325 2.70 308,609 2.92
Savings accounts ................... 166,127 2.25 170,907 2.30 177,282 2.50
---------- ---- ---------- ---- ---------- ----
Sub-total ....................... 568,844 2.32 562,987 2.36 521,188 2.58
Certificate accounts ............... 646,791 5.38 686,754 4.94 719,602 5.48
---------- ---- ---------- ---- ---------- ----
Total average deposits .......... $1,215,635 3.95% $1,249,741 3.78% $1,240,790 4.26%
========== ==== ========== ==== ========== ====
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 one-to-four family mortgage loans held by 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, 2000, the Company's FHLB-NY
advances totaled $81.0 million, representing 4.6% of total liabilities.
21
During 2000, the Company continued to borrow funds from the FHLB-NY and
approved primary broker/dealers. The borrowings are collateralized by designated
mortgage-backed and investment securities. The total of these borrowings at
December 31, 2000 was $425.0 million, representing 24.3% 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 Year Ended
December 31,
------------------------------
2000 1999 1998
-------- -------- --------
FHLB-NY advances:
Average balance outstanding ................. $ 99,102 $ 70,914 $ 24,072
Maximum amount outstanding at any month-end
during the period ...................... 140,200 139,250 50,800
Balance outstanding at end of period ........ 80,955 107,000 38,000
Weighted average interest rate during
the period ................................ 6.11% 5.43% 5.80%
Weighted average interest rate at end
of period ................................. 6.21% 5.88% 5.36%
Other borrowings:
Average balance outstanding ................. $404,270 $254,587 $192,730
Maximum amount outstanding at any month-end
during the period ...................... 440,000 315,000 269,175
Balance outstanding at end of period ........ 425,000 315,000 226,675
Weighted average interest rate during
the period ................................ 6.14% 5.47% 5.76%
Weighted average interest rate at end
of period ................................. 6.16% 5.58% 5.42%
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, 2000, FSB
Financial Corp. had net income of $193,000.
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 $33.8 million for the year ended December 31, 2000.
In addition, the Company has three wholly owned subsidiaries obtained
through the Pulse acquisition which were inactive in 2000.
PERSONNEL
As of December 31, 2000, the Company had 272 full-time employees and 39
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, 2000, the Bank has a base year reserve subject to recapture equal
to $1.7 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, 2000 and 1999, 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, 2000 and 1999, 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 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, as amended (the
"FDI Act"). The Company is required to file certain reports with, and otherwise
comply with, the rules and regulations of the Securities and Exchange Commission
under the federal securities laws.
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 through legislation, could have a material
adverse impact on the Company, the Bank and their operations and stockholders.
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 such, the Company is registered with the OTS and is subject to
OTS regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over the Company. 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. 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 securities,
credit card loans, student loans and small business loans) in at least 9 months
out of each 12 month period. If First Savings fails the QTL test, First Sentinel
Bancorp must convert to a bank holding company. Additionally, First Savings must
wait five years before applying to the OTS to regain its status as a "qualified
thrift lender." As of December 31, 2000, the Bank maintained 86.7% of its
portfolio assets in qualified thrift investments and had more than 80% of its
portfolio assets in qualified thrift investments for each of the 12 months
ending December 31, 2000, thereby qualifying under the QTL test.
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
24
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 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.
On October 27, 2000, the OTS proposed regulations that would require
certain holding companies to notify the OTS before engaging in certain debt
transactions, transactions that reduce capital, some asset acquisitions and
other transactions determined by the OTS on a case-by-case basis. The OTS is
also considering codifying its current practice for reviewing the capital
adequacy of savings and loan holding companies and, when necessary, requiring
additional capital on a case-by-case basis. The OTS does not currently impose
separate minimum capital requirements on savings and loan holding companies
equivalent to the requirements currently imposed by the Federal Reserve Board on
bank holding companies.
NEW JERSEY HOLDING COMPANY 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
25
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 4.0%, 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 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.
The federal banking agencies, including the FDIC, have reproposed a rule
after receiving comments that would establish minimum regulatory capital
requirements for equity investments in nonfinancial companies. The proposal
applies a series of marginal capital charges that range from 8% to 25% depending
up the size of the aggregate equity investment portfolio of the banking
organization relative to its Tier 1 capital. The capital charge would be applied
by making a deduction, which would be based on the adjusted carrying value of
the equity investment from the organization's Tier 1 capital. If adopted as
proposed, management does not believe this new capital requirement will have a
material adverse effect upon the Company's operations. However, management will
have to take this requirement into consideration should the Company, at some
point in the future, decide to invest in nonfinancial companies.
ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. Section 24 of the FDI Act,
which was added by the Federal Deposit Insurance Corporation Improvement Act of
1991, generally limits the activities and investments of state-chartered FDIC
insured banks and their subsidiaries to those permissible for federally
chartered national banks and their subsidiaries, unless such activities and
investments are specifically exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if:
o the bank held such types of investments during the 14-month period
from September 30, 1990 through November 26, 1991;
o the state in which the bank is chartered permitted such investments as
of September 30, 1991; and
o the bank notifies the FDIC and obtains approval from the FDIC to make
or retain such investments. Upon receiving such FDIC approval, an
institution's investment in such equity securities will be subject to
an aggregate limit up to the amount of its Tier 1 capital.
First Savings received approval from the FDIC to retain and acquire such
equity investments subject to a maximum permissible investment equal to the
lesser of 100% of First Savings' Tier 1 capital or the maximum
26
permissible amount specified by the New Jersey Banking Act. Section 24 also
provides an exception for majority owned subsidiaries of a bank, but Section 24
limits the activities of such subsidiaries to those permissible for a national
bank under Section 24 of the FDI Act and the FDIC regulations issued pursuant
thereto, or as approved by the FDIC.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 of the
FDIC regulations thereunder, an insured bank must seek approval from the FDIC to
make such investment or engage in such activity. The FDIC will not approve the
activity unless the bank meets its minimum capital requirements and the FDIC
determines that the activity does not present a significant risk to the FDIC
insurance funds.
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.
Under the OTS regulations, generally, a federally chartered savings
association is treated as well capitalized if its total risk-based capital ratio
is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its
leverage ratio is 5% or greater, and it is not subject to any order or directive
by the OTS to meet a specific capital level. As of December 31, 2000, First
Sentinel was considered "well capitalized" by the OTS.
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.
SAIF-assessed deposits are also subject to assessments for payments on the
bonds issued in the late 1980's by the Financing Corporation, or FICO, to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Our
total expense in 2000 for the assessment for deposit insurance and the FICO
payments was $258,000.
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.
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
27
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.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"),
any insured depository institution, including First Savings, has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the FDIC, in
connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for additional branches and acquisitions.
Among other things, current CRA regulations replace the prior process-based
assessment factors with a new evaluation system that would rate an institution
based on its actual performance in meeting community needs. In particular, the
new evaluation system focuses on three tests:
o a lending test, to evaluate the institution's record of making loans
in its service areas;
o an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and
o a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. First Savings has
received a "satisfactory" rating in its most recent CRA examination. In
addition, in May 2000, the OTS proposed regulations implementing the
requirements under the Gramm-Leach Bliley Act ("Gramm-Leach") that insured
depository institutions publicly disclose certain agreements that are in
fulfillment of the CRA. We have no such agreement in place at this time.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB system,
which consists of twelve regional FHLBs, each subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLB provides a
central credit facility primarily for member thrift institutions as well as
other entities involved in home mortgage lending. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLBs. It
makes loans to members (i.e., advances) in accordance with policies and
procedures, including collateral requirements, established by the respective
boards of directors of the FHLBs. These policies and procedures are subject to
the regulation and oversight of the FHFB. All long-term advances are required to
provide funds for residential home financing. The FHFB has also established
standards of community or investment service that members must meet to maintain
access to such long-term advances. The Bank, as a member of the FHLB-NY is
required to purchase and hold shares of capital stock in that FHLB in an amount
at least equal to the greater of (i) 1% of the aggregate principal amount of its
unpaid mortgage loans, home purchase contracts and similar obligations at the
beginning of each year; (ii) 0.3% of its assets; or (iii) 5% (or such greater
fraction as established by the FHLB) of its advances from the FHLB as of
12/31/00. Pursuant to Gramm-Leach, the foregoing minimum share ownership
requirements will be replaced by regulations to be promulgated by the FHFB.
Gramm-Leach specifically provides that the minimum requirements in existence
immediately prior to adoption of Gramm-Leach shall remain in effect until such
regulations are adopted. The Bank is in compliance with these requirements.
INSURANCE ACTIVITIES. In August, 2000, the federal banking agencies
proposed regulations pursuant to Gramm-Leach which would prohibit depository
institutions from conditioning the extension of credit to individuals upon
either the purchase of an insurance product or annuity or an agreement by the
consumer not to purchase an
28
insurance product or annuity from an entity that is not affiliated with the
depository institution. The proposed regulations would also require prior
disclosure of this prohibition to potential insurance product or annuity
customers. Management does not believe that these regulations, if adopted as
proposed, would have a material impact on the Company's operations.
PRIVACY STANDARDS. Pursuant to Gramm-Leach, financial institutions are
required to establish a policy governing the collection, use and protection of
non-public information about their customers and consumers, provide notice of
such policy to consumers and provide a mechanism for consumers to opt out of any
practice of the institution whereby nonpublic personal information would
otherwise be disclosed to unaffiliated third parties. The federal banking
agencies, jointly with the Federal Trade Commission and the Securities and
Exchange Commission, have published final regulations to implement the privacy
standards of Gramm-Leach. The final regulations require First Sentinel and First
Savings to disclose their privacy policy, including identifying with whom they
share "nonpublic personal information," to customers at the time of establishing
the customer relationship and annually thereafter. The regulations also require
First Sentinel and First Savings to provide their customers with initial and
annual notices that accurately reflect its privacy policies and practices. In
addition, First Sentinel and First Savings are required to provide their
customers with the ability to "opt-out" of having First Sentinel and First
Savings share their non-public personal information with unaffiliated third
parties before they can disclose such information, subject to certain
exceptions. Under the regulations, First Sentinel and First Savings will be
required to adopt and implement a privacy policy no later than July 1, 2001, and
are currently in the process of revising their privacy policy to be in full
compliance with the final regulations. First Sentinel and First Savings have not
yet determined the extent to which the privacy standards will affect their
operations.
INTERNET BANKING. Technological developments are dramatically altering the
ways in which most companies, including financial institutions, conduct their
business. The growth of the Internet is prompting banks to reconsider business
strategies and adopt alternative distribution and marketing systems. The federal
bank regulatory agencies have conducted seminars and published materials
targeted to various aspects of internet banking, and have indicated their
intention to reevaluate their regulations to ensure that they encourage banks'
efficiency and competitiveness consistent with safe and sound banking practices.
No assurance can be given that the federal bank regulatory agencies will not
adopt new regulations that will materially affect First Savings' Internet
operations or restrict any such further operations.
TRANSACTIONS WITH AFFILIATES OF FIRST SAVINGS. First Savings is subject to
the affiliate and insider transaction rules set forth in Sections 23A, 23B,
22(g) and 22(h) of the Federal Reserve Act, and the regulations of the FRB
promulgated thereunder. These provisions, among other things, prohibit or limit
a savings banks from extending credit to, or entering into certain transactions
with, its affiliates (which for First Savings would include First Sentinel) and
principal stockholders, directors and executive officers of First Savings.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Provisions of the New Jersey Banking Act impose conditions and limitations
on the liabilities to a savings bank of its directors and executive officers and
of corporations and partnerships controlled by such persons that are comparable
in many respects to the conditions and limitations imposed on the loans and
extensions of credit to insiders and their related interests under federal law
and regulation, as discussed above. The New Jersey Banking Act also provides
that a savings bank that is in compliance with the applicable federal laws and
regulations is deemed to be in compliance with such provisions of the New Jersey
Banking Act.
IMPACT OF ENACTMENT OF THE GRAMM-LEACH BLILEY ACT. On November 12, 1999,
President Clinton signed the Gramm-Leach Bliley Act, which among other things,
establishes a comprehensive framework to permit affiliations among commercial
banks, insurance companies and securities firms. As part of this framework
generally, the new law (1) repeals the historical restrictions and eliminates
many federal and state law barriers to affiliations among banks and securities
firms, insurance companies and other financial service providers, (2) provides a
uniform framework for the activities of banks, savings institutions and their
holding companies and (3) broadens the activities that may be conducted by
subsidiaries of national banks and state banks.
29
Gramm-Leach also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," i.e., unitary savings and loan holding companies in
existence or with applications filed with the OTS on or before May 4, 1999, such
as us, retain their authority under the prior law. All other unitary savings and
loan holding companies are limited to financially related activities permissible
for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also
prohibits non-financial companies from acquiring grandfathered unitary savings
and loan association holding companies.
Bank holding companies are permitted to engage in a wider variety of
financial activities than permitted under the prior law, particularly with
respect to insurance and securities activities. In addition, in a change form
the prior law, bank holding companies are in a position to be owned, controlled
or acquired by any company engaged in financially related activities.
Management does not believe that the new law will have a material adverse
affect upon the Company's operations in the near term. However, to the extent
the new law permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This type of consolidation could result in a growing number of larger financial
institutions that offer a wider variety of financial services than the Company
currently offers and that can aggressively compete in the markets the Company
currently serves.
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 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 on insured state banks.
30
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 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
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $42.8 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement was
3%; and for accounts aggregating greater than $42.8 million, the reserve
requirement was $1,284 million plus 10% (subject to adjustment by the Federal
Reserve Board) against that portion of total transaction accounts in excess of
$42.8 million. The first $5.5 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.
Because required reserves must be maintained in the form of either vault cash, a
non-interest bearing account at a Federal Reserve Bank or a pass-through
accounts as defined by the Federal Reserve Board, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets.
ITEM 2. PROPERTIES
The Company conducts its business through its main office and 21 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, 2000. The aggregate net book value of the Company's
premises and equipment was $16.1 million at December 31, 2000.
31
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
32
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
(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, 2000.
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 32 of the 2000 Annual Report to Stockholders is
incorporated herein by reference. At December 31, 2000, 32,749,994 shares of the
Company's outstanding common stock was held of record by approximately 3,013
persons or entities, not including the number of persons or entities holding
stock in nominee or stock name through various brokers or banks.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section captioned "Consolidated
Financial Highlights" on page 9 of the 2000 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 10 through 14 of the 2000 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 10 through 14 of the 2000 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 2000 Annual Report to Stockholders
on pages 15 through 32 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
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 5-8 of the Company's proxy statement for the 2001 Annual
Meeting of Stockholders dated March 26, 2001 ("2001 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 page 11 and pages
15-21 (excluding the Compensation Committee Report) of the 2001 Proxy Statement
dated March 26, 2001, 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 3-6 of the 2001
Proxy Statement dated March 26, 2001 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 21-22 of the 2001 Proxy
Statement dated March 26, 2001, and are incorporated herein by reference.
34
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, 2000, included in the Annual Report, listed below, are
incorporated herein by reference.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31, 2000
AND 1999 (ANNUAL REPORT - PAGE 15).
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
2000, 1999 AND 1998 (ANNUAL REPORT - PAGE 16).
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999, AND 1998 (ANNUAL REPORT - PAGE 17).
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2000, 1999 AND 1998 (ANNUAL REPORT - PAGE 18).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ANNUAL REPORT - PAGES 19
THROUGH 31).
INDEPENDENT AUDITORS' REPORT (ANNUAL REPORT - PAGE 32).
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 *****
10.4 First Sentinel Bancorp, Inc. 1993 Acquisition
Stock Option Plan *****
10.5 First Sentinel Bancorp, Inc. 1997 Acquisition
Stock Option Plan *****
10.6 First Savings Bank, SLA Employee
Stock Ownership Plan **
10.7 First Savings Bank Deferred Fee Plan Filed herein
10.8 First Savings Bank, SLA Supplemental
Executive Retirement Plan **
10.9 First Savings Bank Supplemental
Executive Retirement Plan II Filed herein
--------- ------------------------------------------------ -----------
35
--------- ------------------------------------------------ -----------
Exhibit
Number Description Reference
--------- ------------------------------------------------ -----------
10.10 First Savings Bank Non-Employee Director
Retirement Plan Filed herein
10.11 Form of Employment Agreements between
First Sentinel Bancorp, Inc. and
(i) John P. Mulkerin and
(ii) Christopher Martin Filed herein
10.12 Form of Employment Agreements between
First Savings Bank and (i) Filed herein
John P. Mulkerin and (ii) Christopher Martin Filed herein
10.13 Form of Two-year Change in Control Agreement
between First Savings Bank and certain
executive officers Filed herein
10.14 Form of Three-year Change in Control Agreement
between First Filed herein Savings Bank and
certain executive officers Filed herein
10.15 First Savings Bank, SLA Employee Severance
Compensation Plan **
11.0 Computation of per share earnings ****
13.0 Portions of the 2000 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
--------- ------------------------------------------------ -----------
* 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.
***** Previously filed and incorporated herein by reference to the December 31,
1999 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. (File No.
000-23809) dated March 30, 2000.
(b) Reports on Form 8-K.
None.
36
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, 2001 FIRST SENTINEL BANCORP, INC.
/s/ 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
- --------- ----- ----
/s/ PHILIP T. RUEGGER, JR. Chairman of the Board March 30, 2001
- ----------------------
Philip T. Ruegger, Jr.
/s/ JOHN P. MULKERIN President, Chief Executive March 30, 2001
- ---------------------- Officer and Director
John P. Mulkerin
/s/ CHRISTOPHER P. MARTIN Executive Vice President, March 30, 2001
- ---------------------- Chief Operating and Financial
Christopher P. Martin Officer and Director
/s/ JOSEPH CHADWICK Director March 30, 2001
- ----------------------
Joseph Chadwick
/s/ GEORGE T. HORNYAK, JR. Director March 30, 2001
- ----------------------
George T. Hornyak, Jr.
/s/ KEITH H. McLAUGHLIN Director March 30, 2001
- ----------------------
Keith H. McLaughlin
/s/ JEFFRIES SHEIN Director March 30, 2001
- ----------------------
Jeffries Shein
/s/ WALTER K. TIMPSON Director March 30, 2001
- ----------------------
Walter K. Timpson
37
Consolidated Financial Highlights
The following selected financial data and selected operating data should be
read in conjunction with the consolidated financial statements of the Company
and accompanying notes thereto, which are presented elsewhere herein.
On December 18, 1998, the Company acquired all of the outstanding shares of
Pulse Bancorp, Inc. ("Pulse"). The acquisition was accounted for using the
pooling-of-interests accounting method and therefore, the financial statements
for the periods prior to the merger have been restated to include the accounts
and activity of Pulse.
December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
SELECTED FINANCIAL DATA:
Total assets $1,968,709 $1,904,696 $1,855,058 $1,575,332 $1,489,615
Loans receivable, net 1,184,802 1,016,116 854,697 715,810 644,462
Investment securities -- -- -- 127,583 144,504
Investment securities available for sale 234,970 213,590 242,197 78,443 53,886
Other interest-earning assets (1) 40,693 37,175 27,652 28,795 12,321
Mortgage-backed securities, net -- -- -- 369,920 416,475
Mortgage-backed securities available for sale 447,022 575,159 661,881 200,530 161,052
Deposits 1,219,336 1,213,724 1,268,119 1,227,304 1,189,176
Borrowed funds 505,955 422,000 264,675 186,665 152,915
Stockholders' equity 222,163 244,580 299,819 144,893 131,322
===================================================================================================================================
Year Ended December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
SELECTED OPERATING DATA:
Interest income $ 136,789 $ 123,388 $ 119,173 $ 109,241 $ 100,772
Interest expense 78,872 65,006 65,386 63,558 56,397
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 57,917 58,382 53,787 45,683 44,375
Provision for loan losses 1,441 1,650 1,469 1,200 550
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 56,476 56,732 52,318 44,483 43,825
Non-interest income (2) 2,269 3,631 4,696 3,383 2,020
Non-interest expense (3) 24,678 24,556 26,577 24,210 32,874
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 34,067 35,807 30,437 23,656 12,971
Income tax expense 11,099 12,155 10,944 8,686 4,768
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,968 $ 23,652 $ 19,493 $ 14,970 $ 8,203
===================================================================================================================================
Basic earnings per share (4) $ 0.69 $ 0.60 $ 0.46 $ 0.35 $ 0.18
===================================================================================================================================
Diluted earnings per share (4) $ 0.68 $ 0.59 $ 0.46 $ 0.35 $ 0.18
===================================================================================================================================
Dividends declared per share, as adjusted (4) $ 0.24 $ 0.37 $ 0.15 $ 0.11 $ 0.08
===================================================================================================================================
At or For the Year Ended December 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Return on average assets (2) (3) 1.17% 1.25% 1.12% 0.96% 0.57%
Return on average stockholders' equity (2) (3) 10.17 7.99 7.41 10.88 5.79
Average stockholders' equity to average assets 11.52 15.69 15.07 8.86 9.86
Stockholders' equity to total assets 11.29 12.84 16.16 9.20 8.82
===================================================================================================================================
(1) Includes federal funds sold and investment in the stock of the Federal Home
Loan Bank of New York ("FHLB-NY").
(2) Includes the effect of the sale of the Eatontown branch that realized a
$1.1 million gain, or $687,000, net of tax in 1998.
(3) Includes the effect of non-recurring items in 1998, 1997 and 1996. The
non-recurring item in 1998 was the $2.1 million, or $1.7 million net of
tax, merger-related charge for the acquisition of Pulse Bancorp. The
non-recurring item in 1997 was an impairment writedown of core deposit
goodwill totaling $1.3 million, or $867,000 net of tax. Non-recurring items
for 1996 included the SAIF assessment of $7.9 million, or $5.1 million net
of tax, a writedown of $334,000 of core deposit goodwill, and a provision
for benefits payable as a result of the passing of the Bank's long-time
President.
(4) Per share data gives effect to all stock dividends and splits and the
exchange of 3.9133 shares of Company Common Stock for each share of Bank
Common Stock in connection with the 1998 conversion and reorganization of
First Savings Bancshares, MHC.
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 9
Management's Discussion and Analysis of Financial
Condition and Comparison of Operating Results
GENERAL
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, economic conditions, deposit and
loan growth, real estate values, loan loss provisions, competition, customer
retention, changes in accounting principles, policies or guidelines and
legislative and regulatory changes.
COMPARISON OF FINANCIAL CONDITION AT
DECEMBER 31, 2000 AND DECEMBER 31, 1999
ASSETS. Total assets increased by $64.0 million, or 3.4%, to $2.0 billion
at December 31, 2000. The change in assets consisted primarily of increases in
loans receivable, investment securities available for sale, and cash and cash
equivalents; partially offset by decreases in mortgage-backed securities ("MBS")
available for sale, and other assets.
Loans receivable, net grew by $168.7 million, or 16.6%, to $1.2 billion at
December 31, 2000, from $1.0 billion at December 31, 1999. Loan originations
totaled $329.2 million for the year ended December 31, 2000, as compared to
$351.5 million for the same period in 1999. The Company experienced a reduction
in loan applications and originations in 2000 compared with 1999, primarily
among one-to-four family and multi-family residential loans, as a result of the
higher interest rate environment and aggressive pricing by the competition.
Mortgage loans purchased totaled $87.8 million in 2000 compared with $57.5
million in 1999. Loans purchased were primarily one-to-four family
adjustable-rate mortgages underwritten internally at higher rates than those
currently offered by the Company. Repayment of principal on loans totaled $237.6
million for 2000, as compared to $237.9 million for 1999. At December 31, 2000,
one-to-four family mortgage loans comprised 73.7% of total loans, while
commercial real estate, multi-family and construction loans comprised 15.4% and
home equity loans accounted for 9.5% of the loan portfolio. Net loans receivable
as a percentage of total assets grew to 60.2% at December 31, 2000 from 53.3% at
December 31, 1999. While management intends to continue to actively seek to
originate loans, the future levels of loan originations and repayments will be
significantly influenced by external interest rates and other economic factors
outside of the control of the Company.
Investment securities available for sale increased $21.4 million, or 10.0%,
to $235.0 million as of December 31, 2000, from $213.6 million at December 31,
1999. For the year 2000, purchases totaled $66.7 million while sales and calls
were $53.0 million. Purchases during 2000 consisted primarily of debt securities
issued by U.S. corporations and government-sponsored agencies.
Cash and cash equivalents increased $4.5 million, or 14.7%, to $35.1
million as of December 31, 2000, from $30.6 million at December 31, 1999.
MBS available for sale decreased $128.1 million, or 22.3%, to $447.0
million at December 31, 2000, from $575.2 million at December 31, 1999. The
decrease was primarily due to sales and principal repayments of $194.8 million
and $91.8 million, respectively, exceeding purchases of $153.9 million for the
year ended December 31, 2000. Net proceeds were used to fund loan growth and
repurchase the Company's stock.
Other assets decreased $3.9 million, or 25.7%, to $11.3 million at December
31, 2000, compared with $15.2 million at December 31, 1999. The decrease was
primarily attributable to a reduction in deferred tax assets caused by the
increase in the market value of the MBS and investment securities available for
sale portfolios.
LIABILITIES. Deposits increased $5.6 million, or 0.5%, to $1.2 billion at
December 31, 2000. Borrowed funds increased $84.0 million, or 19.9%, to $506.0
million at December 31, 2000, from $422.0 million at December 31, 1999. The
increased borrowed funds were used primarily to fund loan originations. The
Company will continue to focus on increasing core deposits as a less costly
means to fund asset generation. For the year ended December 31, 2000, the
average balance of core accounts totaled $568.8 million, or 46.8% of total
deposits.
These increases were partially offset by a reduction in other liabilities
of 24.4% to $12.1 million at December 31, 2000, from $16.0 million at December
31, 1999. This decrease was primarily attributable to the payment in 2000 of a
$5.8 million special cash dividend declared in 1999.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity decreased $22.4
million for the year ended December 31, 2000. The Company repurchased $48.6
million of its common stock during 2000 as part of its ongoing capital
management strategy. Stockholders' equity was further reduced by cash dividends
declared totaling $8.1 million in 2000. These decreases were partially offset by
net income of $23.0 million, a reduction in accumulated other comprehensive loss
of $8.8 million as a result of the increase in market values of investment
securities and MBS available for sale, net of related tax benefit, and
amortization of benefit plans totaling $2.0 million. Book value and tangible
book value per share were $6.78 and $6.59, respectively, at December 31, 2000,
as compared to $6.36 and $6.18, respectively, at December 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
RESULTS OF OPERATIONS. For the year ended December 31, 2000, basic and
diluted earnings per share totaled $0.69 and $0.68, respectively, representing
increases of 14.6% and 15.7%, respectively, over basic and diluted earnings per
share of $0.60 and $0.59, respectively, for the year ended December 31, 1999.
Net income for 2000 totaled $23.0 million, a decrease of $684,000, or 2.9%,
compared with net income of $23.7 million for 1999. Earnings per share increased
despite the reduction in net income,
10 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
as the Company repurchased 5.7 million shares of its common stock at an average
cost of $8.53 per share during 2000. Return on average equity improved to 10.17%
for 2000 from 7.99% for 1999, as the Company continued to leverage its capital
through internal loan growth, share repurchases and cash dividends.
INTEREST INCOME. Interest income increased $13.4 million, or 10.9%, to
$136.8 million for the year ended December 31, 2000, compared to $123.4 million
for 1999. Interest on loans increased $15.5 million, or 22.6%, to $84.2 million
for 2000, as compared to $68.7 million for 1999. The average balance of the loan
portfolio for the year ended December 31, 2000, increased to $1.1 billion, from
$935.0 million for 1999, while the average yield on the portfolio increased to
7.51% for 2000, from 7.34% for 1999.
Interest on investment securities and MBS available for sale decreased $2.1
million, or 3.9%, to $52.6 million for the year ended December 31, 2000, as
compared to $54.7 million for 1999. The average balance of the investment and
MBS portfolios totaled $818.0 million, with an average yield of 6.43% for the
year ended December 31, 2000, while the portfolios' average balance was $904.7
million, with an average yield of 6.05% for the year ended December 31, 1999.
INTEREST EXPENSE. Interest expense increased $13.9 million, or 21.3%, to
$78.9 million for the year ended December 31, 2000, compared to $65.0 million
for 1999. Interest expense on deposits increased $753,000, or 1.6%, to $48.0
million for 2000, as compared to $47.2 million for 1999. The increased interest
expense on deposits was primarily attributable to higher rates paid on
certificates of deposits. The average cost of certificates for 2000 was 5.38%,
as compared to 4.94% for 1999. The average balance of certificates of deposit,
however, decreased to $646.8 million for the year ended December 31, 2000, from
$686.8 million for 1999, as management continued to concentrate its efforts on
increasing the level of core accounts as a percentage of overall deposits. The
increase in the average balance of NOW and money market demand and savings
accounts, along with the increase in the average balance of non-interest-bearing
deposits, reflected this strategy. The average balance of these core accounts
totaled $568.8 million for the year ended December 31, 2000, as compared to
$563.0 million for 1999. Average core deposits to total average deposits
improved to 46.8% for 2000 from 45.0% for 1999. The average interest cost on all
deposits for 2000 was 3.95%, as compared to 3.78% for 1999. Non-interest-bearing
accounts averaged $48.6 million for 2000, up from $44.8 million for 1999.
Interest on borrowed funds for the year ended December 31, 2000, increased
$13.1 million, or 73.8%, to $30.9 million, compared to $17.8 million for 1999.
The increase in the average balance of borrowed funds for 2000 to $503.4
million, from $325.5 million, was attributable to management's continuing
strategy to fund earning asset growth through the use of borrowed funds, where
accretive to earnings. The Company will continue to evaluate leveraged growth
opportunities as market conditions allow. The average interest cost of borrowed
funds was 6.14% for the year ended December 31, 2000, compared with 5.46% for
1999.
NET INTEREST INCOME. Net interest income decreased $465,000, or 0.8%, to
$57.9 million for the year ended December 31, 2000, compared to $58.4 million
for 1999. The decrease was due to the changes in interest income and interest
expense described above. Net interest spread, defined as the difference between
the average yield on average interest-earning assets and average
interest-bearing liabilities, decreased 13 basis points to 2.33% in 2000, from
2.46% in 1999. This decrease was due to an increase in the cost of
interest-bearing liabilities to 4.72% for the year ended December 31, 2000, from
4.25% in 1999, partially offset by an increase in the yield on interest-earning
assets to 7.05%, from 6.71% for the same respective periods. The net interest
margin, defined as net interest income divided by the average total
interest-earning assets, decreased 18 basis points to 2.99% in 2000, compared to
3.17% in 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
$209,000, or 12.7%, to $1.4 million for the year ended December 31, 2000,
compared to $1.7 million for 1999. The provision was based upon management's
review and evaluation of the loan portfolio, level of delinquencies, general
market and economic conditions, and asset classification review. The allowance
for loan losses represented 1.03% of total loans, or 5.17x non-performing loans
at December 31, 2000, compared with 1.07% of total loans, or 4.10x
non-performing loans at December 31, 1999. In management's opinion, the
allowance for loan losses, totaling $12.3 million, is adequate to cover losses
inherent in the portfolio at December 31, 2000.
NON-INTEREST INCOME. Non-interest income, consisting primarily of deposit
product fees, loan servicing fees and gains and losses on loans and securities
sold, decreased $1.4 million, or 37.5%, to $2.3 million for the year ended
December 31, 2000, compared to $3.6 million for 1999. Net losses on loans and
securities available for sale totaled $876,000 for the year ended December 31,
2000, as compared to net gains totaling $684,000 for 1999. The losses were taken
in response to the increase in short-term interest rates during 2000, making
certain fixed-rate loans and securities less profitable while the cost of funds
increased. The Company used the proceeds from the sale of lower-yielding
investments to fund loan growth and the Company's share repurchase program and
repay higher-cost borrowings. Future sales of loans and securities and related
gains and losses are dependent on market conditions, as well as the Company's
liquidity and risk management needs.
Other income, net increased by $296,000, or 65.9%, to $745,000 for 2000,
compared with $449,000 for 1999, primarily as a result of reduced REO expenses
totaling $74,000 in 2000, compared with $381,000 for 1999. Foreclosed assets
totaled $257,000 at December 31, 2000, and consisted of two residential
properties, one of which is under contract for sale.
NON-INTEREST EXPENSE. Non-interest expense increased $122,000, or 0.5%, to
$24.7 million for the year ended December 31, 2000, compared to $24.6 million
for 1999. Compensation and benefits expense increased $987,000, or 7.2%,
primarily as a result of increased healthcare and other benefits expenses. This
increase was partially offset by a $507,000, or 66.3%, reduction in deposit
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 11
insurance costs resulting from a change in the FDIC assessment rate, as well as
reduced supervisory costs resulting from the Bank's conversion to a
state-chartered savings bank in January 2000, and non-recurring acquisition
integration costs recorded in 1999.
Non-interest expense (excluding goodwill amortization) divided by average
assets fell to 1.22% for the year ended December 31, 2000, from 1.26% for the
prior year. The efficiency ratio (non-interest expense divided by the sum of net
interest income plus non-interest income, excluding gains and losses on the sale
of loans and securities) increased slightly to 40.41% for 2000, from 40.04% in
1999. The Company expects non-interest expense to increase moderately in future
periods due to the planned introduction of Internet banking and the
implementation of teller/platform automation in its retail branches in 2001.
COMPARISON OF OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
RESULTS OF OPERATIONS. Net income for the year ended December 31, 1999 was
$23.7 million, or $0.60 basic and $0.59 diluted earnings per share. This
represented an increase of $4.2 million, or 21.3%, over the net income of $19.5
million reported for 1998. Basic and diluted earnings per share in 1998 were
$0.46. Earnings for the year ended December 31, 1998, excluding the one-time
merger-related charge of $1.7 million (net of tax), were $21.2 million, with
basic and diluted earnings per share of $0.51 and $0.50, respectively. In
addition to the one-time merger-related charge, 1998 was also affected by two
other non-recurring items. The Bank realized an after-tax gain of $687,000 on
the sale of deposits and an after-tax charge of $149,000 in conjunction with a
voluntary retirement incentive program. Net income for 1998, excluding these
three items, was $20.7 million, with basic and diluted earnings per share of
$0.49 and $0.48, respectively.
INTEREST INCOME. Interest income increased $4.2 million, or 3.5%, to $123.4
million for the year ended December 31, 1999, compared to $119.2 million for
1998. Interest on loans increased $7.2 million, or 11.8%, to $68.7 million for
1999, as compared to $61.4 million for 1998. The increase was primarily due to
loan originations exceeding principal repayments and sales. The average balance
of the loan portfolio for the year ended December 31, 1999 increased to $935.0
million, from $792.2 million for 1998, while the average yield on the portfolio
decreased to 7.34% for 1999, from 7.75% for 1998. Although interest rates
increased in 1999, the yield on the portfolio declined during the year as the
rates on principal repayments had exceeded the rates on new loan originations.
In addition, a decrease in interest rates in the first quarter of 1999 as
compared with the first quarter of 1998 negatively affected the yield on
adjustable-rate mortgage loans repricing during that time period.
Interest on investment securities and MBS, including those classified as
available for sale, decreased $3.0 million, or 5.2%, to $54.7 million for the
year ended December 31, 1999, compared to $57.7 million for 1998. The average
balance of the investment and MBS portfolios totaled $904.7 million, with an
average yield of 6.05% for the year ended December 31, 1999, while the
portfolios' average balance was $898.2 million with an average yield of 6.43%
for the year ended December 31, 1998. Rates on investment securities were
negatively affected as higher yielding investments were called and rates on
replacement securities were lower than the rates on the securities that were
called. The yield on the MBS portfolio was also negatively affected as higher
rate underlying loans prepaid. Due to market interest rates, new purchases had a
lower yield than the MBS in the portfolio in 1998.
INTEREST EXPENSE. Interest expense decreased $380,000, or 0.5%, to $65.0
million for the year ended December 31, 1999, compared to $65.4 million for
1998. Interest expense on deposits decreased $5.6 million, or 10.7%, to $47.2
million for 1999, compared to $52.9 million for 1998. Management continued to
concentrate its efforts on increasing the level of core accounts as a percentage
of overall deposits. The increase in the average balance of NOW, money market
and savings accounts, along with the increase in the average balance of
non-interest-bearing deposits, reflected this strategy. The average balance of
these core accounts totaled $563.0 million for the year ended December 31, 1999,
compared to $521.2 million for 1998. The outflow of certificate accounts
contributed to a lower cost of funds in 1999. The average interest cost on all
deposits for the year ended December 31, 1999 was 3.78%, compared to 4.26% for
the same period in 1998. Non-interest-bearing accounts averaged $44.8 million
for the year ended December 31, 1999, up from $35.3 million for 1998. The
average balance of certificates of deposit decreased to $686.8 million for the
year ended December 31, 1999, from $719.6 million for 1998, due primarily to the
sale of higher rate deposits in a branch sold in the first quarter of 1998 and
to management's reduction in the interest rates offered to maturing certificate
customers. The average cost of certificates for the year ended December 31, 1999
was 4.94%, as compared to 5.48% for the same period in 1998.
Interest on borrowed funds for the year ended December 31, 1999 increased
$5.3 million, or 42.0%, to $17.8 million, compared to $12.5 million for 1998.
The increase in the average balance of borrowed funds for 1999 to $325.5
million, from $217.1 million, was attributable to management's continuing
strategy to fund earning-asset growth through the use of borrowed funds, where
accretive to earnings, and to use borrowed funds to mitigate the outflow of
certificate of deposit accounts. Offsetting the increase in the average balance
of borrowed funds was the reduced interest cost of 5.46% for the year ended
December 31, 1999, down from 5.77% for 1998.
NET INTEREST INCOME. Net interest income increased $4.6 million, or 8.5%,
to $58.4 million for the year ended December 31, 1999, compared to $53.8 million
for 1998. The increase was due to the changes in interest income and interest
expense described above. Net interest spread increased one basis point to 2.46%
in 1999, from 2.45% in 1998. The cost of interest-bearing liabilities declined
to 4.25% for the year ended December 31, 1999, from 4.60% in 1998. The yield on
interest-earning assets was 6.71% for 1999, compared with 7.05% for 1998. The
net interest margin decreased one basis point to 3.17% in 1999, compared to
3.18% in 1998.
12 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
PROVISION FOR LOAN LOSSES. The provision for loan losses increased
$181,000, or 12.3%, to $1.7 million for the year ended December 31, 1999,
compared to $1.5 million for 1998. The increase in the provision was primarily
due to the net growth and change in composition of the loan portfolio. Net loans
increased $161.4 million for 1999. The provision was based upon management's
review and evaluation of the loan portfolio, level of delinquencies, general
market and economic conditions, and asset classification review.
NON-INTEREST INCOME. Non-interest income decreased $1.1 million, or 22.7%,
to $3.6 million for the year ended December 31, 1999, compared to $4.7 million
for 1998. The primary reason for the overall decrease in non-interest income was
recognition of a $1.1 million non-recurring pretax gain on the sale of deposits
in 1998. Fees and service charges increased $182,000, or 7.9%, to $2.5 million
for the year ended December 31, 1999, compared to $2.3 million for 1998. The
increase was due primarily to fees generated on a higher number of demand
deposit accounts. Net gain on loans and securities available for sale decreased
$26,000, or 3.7%, to $684,000 for the year ended December 31, 1999, as compared
to $710,000 for 1998.
NON-INTEREST EXPENSE. Non-interest expense decreased $2.0 million, or 7.6%,
to $24.6 million for the year ended December 31, 1999, compared to $26.6 million
for 1998. The decrease was mainly attributable to the merger-related charge of
$2.1 million included in general and administrative expenses in 1998. This
charge resulted from the Pulse acquisition and consisted primarily of
professional fees and services. The increase in non-interest expense, excluding
the Pulse charge, was $79,000, or 0.3%. Excluding the 1998 merger-related
charge, non-interest expense (excluding goodwill amortization) divided by
average assets fell to 1.26% for the year ended December 31, 1999, from 1.35%
for 1998. Excluding the 1998 merger-related charge, the efficiency ratio
improved to 40.04% for 1999, from 43.35% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is a measure of its ability to generate sufficient
cash flows to meet all of its current and future financial obligations and
commitments. The Company's primary sources of funds are deposits; proceeds from
principal and interest payments on loans and MBS; sales of loans, MBS and
investments available for sale; maturities of investment securities and
short-term investments; and, to an increasing extent, borrowed funds. While
maturities and scheduled amortization of loans and MBS are a predictable source
of funds, deposit flows and mortgage prepayments are greatly influenced by
interest rates, economic conditions, and competition.
The primary investing activity of the Company is the origination of loans.
During the years ended December 31, 2000, 1999 and 1998, the Company originated
loans in the amounts of $329.2 million, $351.5 million and $347.6 million,
respectively. The Company also purchased loans and mortgage-backed and
investment securities. Purchases of mortgage loans totaled $87.8 million, $57.5
million and $26.8 million in 2000, 1999 and 1998, respectively. Purchases of MBS
totaled $153.9 million, $372.9 million and $398.8 million in 2000, 1999 and
1998, respectively. Purchases of investment securities totaled $66.7 million,
$131.4 million and $312.1 million for the years ended December 31, 2000, 1999
and 1998, respectively. Other investing activities include investment in Federal
Home Loan Bank of New York ("FHLB-NY") stock. The investing activities were
funded primarily by principal repayments on loans and MBS of $329.4 million,
$441.9 million and $445.7 million for the years ended December 31, 2000, 1999
and 1998, respectively. Additionally, proceeds from sales, calls, and maturities
of mortgage-backed and investment securities totaling $247.3 million, $384.9
million and $354.5 million for 2000, 1999 and 1998, respectively, provided
additional liquidity. Liquidity was also provided through the sale of loans
totaling $9.8 million, $7.2 million and $14.5 million for the years ended
December 31, 2000, 1999 and 1998, respectively.
The Company has several other sources of liquidity, including FHLB-NY
advances. At December 31, 2000, such advances totaled $81.0 million, of which
$25.0 million are due in 2001. If necessary, the Company has additional
borrowing capacity with the FHLB-NY, including an available overnight line of
credit of up to $50.0 million. The Company also had other borrowings that
provided additional liquidity, totaling $425.0 million at December 31, 2000,
$200.0 million of which are due in 2001. Other sources of liquidity are
unpledged investment and mortgage-backed securities available for sale, with an
amortized cost totaling $233.3 million at December 31, 2000.
The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 2000, the Company had commitments
to originate and purchase mortgage loans of $100.0 million and commitments to
purchase mortgage-backed and investment securities of $8.9 million. The Company
is obligated to pay $1.8 million under its lease agreements for branch and
administrative facilities, of which $447,000 is due in 2001. Certificates of
deposit which are scheduled to mature in one year or less totaled $516.1 million
at December 31, 2000. Based upon historical experience, management estimates
that a significant portion of such deposits will remain with the Company.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes presented herein have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 13
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, investment and deposit activities. The Company's
profitability is affected by fluctuations in interest rates. A sudden and
substantial change in interest rates may adversely impact the Company's earnings
to the extent that the interest rates borne by assets and liabilities do not
change at the same speed, to the same extent or on the same basis. To that end,
management actively monitors and manages its interest rate risk exposure.
The principal objective of the Company's interest rate risk management is
to evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Company seeks to minimize the
vulnerability of its operations to changes in interest rates. The Company's
Board of Directors reviews the Company's interest rate risk position quarterly.
The Company's Asset/Liability Committee is comprised of the Company's senior
management under the direction of the Board of Directors, with senior management
responsible for reviewing with the Board of Directors its activities and
strategies, the effect of those strategies on the Company's net interest income,
the market value of the portfolio and the effect that changes in interest rates
will have on the Company's portfolio and its exposure limits. In addition, the
Company has established an Asset/Liability Strategy Committee, a subcommittee of
the Asset/Liability Committee, which is charged with establishing and
maintaining a monitoring system for all marketing initiatives, providing
management reports, and formulating and recommending strategies to the
Asset/Liability Committee.
The Company utilizes the following strategies to manage interest rate risk:
(1) emphasizing the origination and retention of fixed-rate mortgage loans
having terms to maturity of not more than 22 years, adjustable-rate loans and
consumer loans consisting primarily of home equity loans and lines of credit;
(2) selling substantially all fixed-rate conforming mortgage loans with terms of
30 years without recourse and on a servicing-retained basis; (3) investing
primarily in adjustable-rate and short average-life MBS, which may generally
bear lower yields as compared to longer-term investments, but which better
position the Company for increases in market interest rates, and holding the
majority of these securities as available for sale and (4) also investing in
U.S. government and agency securities that have call features which,
historically, have significantly decreased the duration of such securities. The
Company currently does not participate in hedging programs, interest rate swaps
or other activities involving the use of off-balance sheet derivative financial
instruments, but may do so in the future to mitigate interest rate risk.
The Company's interest rate sensitivity is monitored by management through
the use of an interest rate risk ("IRR") model which measures IRR by projecting
the change in net interest income ("NII") and the economic value of equity
("EVE") over a range of interest rate scenarios. The EVE is defined as the
current market value of assets, minus the current market value of liabilities,
plus or minus the current value of off-balance sheet items.
The greater the potential change, positive or negative, in NII or EVE, the
more interest rate risk is assumed to exist within the institution. The
following table lists the Company's percentage change in NII and EVE assuming an
immediate change of plus or minus of up to 200 basis points from the level of
interest rates at December 31, 2000 and 1999, as calculated by the Company.
Change in Percentage Change Percentage Change
Interest Rates in NII in EVE
in Basis Points ------------------------------------------------
(Rate Shock) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
+200 -4 -32 -18 -34
+100 -2 -15 -8 -15
Static -- -- -- --
-100 -3 12 -2 17
-200 -9 19 -10 21
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NII and EVE requires the
making of certain assumptions which may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the model presented assumes that the composition of the Company's
interest-sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured, assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities and also does not consider the Company's strategic plans.
Accordingly, although the EVE and NII models provide an indication of the
Company's IRR exposure at a particular point in time, such measurements are not
intended to and do not provide a precise forecast of the effect of changes in
market interest rates on the Company's net interest income and will differ from
actual results.
14 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31, 2000 1999
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(Dollars in thousands, except share amounts)
ASSETS
Cash and due from banks $ 14,069 $ 11,532
Federal funds sold 21,050 19,075
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Total cash and cash equivalents 35,119 30,607
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost 19,643 18,100
Investment securities available for sale 234,970 213,590
Mortgage-backed securities available for sale 447,022 575,159
Loans receivable, net 1,184,802 1,016,116
Interest and dividends receivable 13,481 12,278
Premises and equipment, net 16,092 16,503
Excess of cost over fair value of net assets acquired 6,259 7,106
Other assets 11,321 15,237
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,968,709 $1,904,696
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $1,219,336 $1,213,724
Borrowed funds 505,955 422,000
Advances by borrowers for taxes and insurance 9,154 8,385
Other liabilities 12,101 16,007
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,746,546 1,660,116
- -----------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY
Preferred stock; authorized 10,000,000 shares; issued and outstanding--none -- --
Common stock, $.01 par value, 85,000,000 shares authorized;
43,106,742 and 32,749,994 shares issued and outstanding in 2000 and
43,106,742 and 38,443,350 shares issued and outstanding in 1999 430 431
Paid-in capital 201,264 200,781
Retained earnings 132,537 117,922
Accumulated other comprehensive loss (8,534) (17,302)
Common stock acquired by the Employee Stock Ownership Plan (ESOP) (11,238) (12,156)
Common stock acquired by the Recognition and Retention Plan (RRP) (2,788) (3,867)
Treasury stock (10,288,827 and 4,628,604 common shares in 2000 and 1999, respectively) (89,508) (41,229)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 222,163 244,580
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,968,709 $1,904,696
===================================================================================================================================
See accompanying notes to the consolidated financial statements.
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 15
Consolidated Statements of Income
Year Ended December 31, 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) INTEREST INCOME:
Loans $ 84,174 $ 68,656 $ 61,431
Investment and mortgage-backed securities held to maturity -- -- 22,806
Investment and mortgage-backed securities available for sale 52,615 54,732 34,936
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 136,789 123,388 119,173
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
NOW and money market demand 9,452 9,395 9,008
Savings 3,744 3,931 4,431
Certificates of deposit 34,783 33,900 39,429
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense--deposits 47,979 47,226 52,868
Borrowed funds 30,893 17,780 12,518
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 78,872 65,006 65,386
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 57,917 58,382 53,787
Provision for loan losses 1,441 1,650 1,469
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 56,476 56,732 52,318
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Fees and service charges 2,400 2,498 2,316
Net (loss) gain on sales of loans and securities (876) 684 710
Other, net 745 449 1,670
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,269 3,631 4,696
- -----------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Compensation and benefits 14,685 13,698 13,604
Occupancy 2,312 2,225 2,119
Equipment 1,692 1,672 1,946
Advertising 1,102 1,086 978
Federal deposit insurance premium 258 765 759
Amortization of intangibles 847 850 850
General and administrative 3,782 4,260 6,321
- -----------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 24,678 24,556 26,577
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 34,067 35,807 30,437
Income tax expense 11,099 12,155 10,944
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,968 $ 23,652 $ 19,493
===================================================================================================================================
Basic earnings per share $0.69 $0.60 $0.46
===================================================================================================================================
Diluted earnings per share $0.68 $0.59 $0.46
===================================================================================================================================
Weighted average shares outstanding--Basic 33,436,961 39,464,227 41,983,776
===================================================================================================================================
Weighted average shares outstanding--Diluted 33,755,431 40,207,600 42,694,287
===================================================================================================================================
See accompanying notes to the consolidated financial statements.
16 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Accumulated Common Common Total
Other Stock Stock Stock-
Common Paid-In Retained Comprehensive Acquired Acquired Treasury holders'
Stock Capital Earnings Income (Loss) by ESOP by RRP Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at December 31, 1997 $470 $59,348 $101,186 $1,295 $(546) $(183) $(16,677) $144,893
Comprehensive income:
Net income for the year ended
December 31, 1998 -- -- 19,493 -- -- -- -- 19,493
Other comprehensive income:
Unrealized holding gains arising
during the period (net of tax
of $898) -- -- -- 1,595 -- -- -- 1,595
Reclassification adjustment for
gains in net income (net of tax
of $(221)) -- -- -- (392) -- -- -- (392)
--------
Total comprehensive income 20,696
--------
Cash dividends declared ($0.15 per share) -- -- (7,250) -- -- -- -- (7,250)
Equity adjustment for conforming
of annual reporting periods -- -- (828) -- -- -- -- (828)
Net proceeds from stock offering
and conversion -- 162,232 -- -- -- -- -- 162,232
Adjustment for reorganization
of Mutual Holding Company -- 1,577 -- -- -- -- -- 1,577
Exercise of stock options 11 1,581 -- -- -- -- -- 1,592
Purchase of stock for ESOP -- -- -- -- (13,240) -- -- (13,240)
Purchases of treasury stock -- -- -- -- -- -- (10,728) (10,728)
Retirement of treasury stock (50) (23,691) -- -- -- -- 23,741 --
Amortization of RRP -- -- -- -- -- 104 -- 104
Amortization of ESOP -- 58 -- -- 713 -- -- 771
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 431 201,105 112,601 2,498 (13,073) (79) (3,664) 299,819
Comprehensive income:
Net income for the year ended
December 31, 1999 -- -- 23,652 -- -- -- -- 23,652
Other comprehensive loss:
Unrealized holding losses arising
during the period (net of tax
of $(10,882)) -- -- -- (19,346) -- -- -- (19,346)
Reclassification adjustment for
gains in net income (net of tax
of $(255)) -- -- -- (454) -- -- -- (454)
--------
Total comprehensive income 3,852
--------
Cash dividends declared ($0.37 per share) -- -- (14,392) -- -- -- -- (14,392)
Exercise of stock options -- 6 (3,283) -- -- -- 4,766 1,489
Purchase and retirement of common stock -- (299) -- -- -- -- -- (299)
Purchases of treasury stock -- -- -- -- -- -- (48,035) (48,035)
Transfer of treasury stock to RRP -- -- (656) -- -- (5,048) 5,704 --
Amortization of RRP -- 66 -- -- -- 1,260 -- 1,326
Amortization of ESOP -- (97) -- -- 917 -- -- 820
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 431 200,781 117,922 (17,302) (12,156) (3,867) (41,229) 244,580
Comprehensive income:
Net income for the year ended
December 31, 2000 -- -- 22,968 -- -- -- -- 22,968
Other comprehensive income:
Unrealized holding gains arising
during the period (net of tax
of $4,749) -- -- -- 8,184 -- -- -- 8,184
Reclassification adjustment for
losses in net income (net of tax
of $314) -- -- -- 584 -- -- -- 584
--------
Total comprehensive income 31,736
--------
Cash dividends declared ($0.24 per share) -- -- (8,072) -- -- -- -- (8,072)
Exercise of stock options -- -- (224) -- -- -- 367 143
Tax benefit on stock options -- 655 -- -- -- -- -- 655
Purchase and retirement of common stock (1) (278) -- -- -- -- -- (279)
Purchases of treasury stock -- -- -- -- -- -- (48,646) (48,646)
Amortization of RRP -- 35 -- -- -- 1,079 -- 1,114
Amortization of ESOP -- 71 (57) -- 918 -- -- 932
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $430 $201,264 $132,537 $(8,534) $(11,238) $(2,788) $(89,508) $222,163
==================================================================================================================================
See accompanying notes to the consolidated financial statements.
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 17
Consolidated Statements of Cash Flows
Year Ended December 31, 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,968 $ 23,652 $ 19,493
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment 1,339 1,406 1,240
Amortization of excess of cost over fair value of assets acquired 847 850 850
Amortization of ESOP 932 820 771
Amortization of RRP 1,079 1,260 104
Provision for loan losses 1,441 1,650 1,469
Provision for losses on real estate owned -- 28 122
Net loss (gain) on sales of loans and securities 876 (684) (710)
Loans originated for sale (10,041) (7,259) (14,386)
Proceeds from sales of mortgage loans available for sale 9,786 7,234 14,483
Net gain on sales of real estate owned (14) (1) (153)
Net amortization of premiums and accretion of discounts and deferred fees 387 (168) 1,869
(Increase) decrease in interest and dividends receivable (1,203) 1,278 (1,090)
Tax benefit on stock options 655 -- --
Increase (decrease) in other liabilities 1,901 (5,173) 5,353
(Increase) decrease in other assets (1,356) 2,720 (2,002)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,597 27,613 27,413
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of investment securities available for sale 52,979 144,123 140,727
Proceeds from sales of mortgage-backed securities available for sale 194,330 240,788 78,752
Proceeds from sales of real estate owned 523 2,375 3,443
Purchases of investment securities available for sale (66,684) (131,356) (226,583)
Purchases of mortgage-backed securities available for sale (153,921) (372,883) (393,292)
Purchases of investment securities -- -- (85,501)
Maturities of investment securities -- -- 135,010
Purchases of mortgage-backed securities -- -- (5,541)
Principal payments on mortgage-backed securities 91,839 203,929 229,144
Origination of loans (319,149) (344,286) (333,166)
Purchases of mortgage loans (87,829) (57,459) (26,784)
Principal repayments on loans 237,588 237,927 216,549
Purchase of FHLB-NY stock (1,543) (5,248) (2,032)
Purchases of premises and equipment (928) (1,428) (3,435)
Proceeds from sale of fixed assets -- -- 124
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (52,795) (83,518) (272,585)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock offering -- -- 163,809
Purchase of ESOP shares -- -- (13,240)
Equity adjustment for conforming of annual reporting periods -- -- (828)
Stock options exercised 143 1,489 1,592
Cash dividends paid (13,844) (8,620) (7,250)
Net increase (decrease) in deposits 5,612 (54,395) 40,815
Net (decrease) increase in short-term borrowed funds (10,000) 25,000 --
Proceeds from borrowed funds 521,000 310,000 181,675
Repayment of borrowed funds (427,045) (177,675) (103,665)
Net increase in advances by borrowers for taxes and insurance 769 1,416 720
Purchases of treasury stock (48,646) (48,035) (10,728)
Purchase and retirement of common stock (279) (299) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 27,710 48,881 252,900
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 4,512 (7,024) 7,728
Cash and cash equivalents at beginning of year 30,607 37,631 29,903
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 35,119 $ 30,607 $ 37,631
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 78,096 $ 63,251 $ 64,906
Income taxes 11,360 15,332 8,106
Non cash investing and financing activities for the year:
Transfer of loans to real estate owned 300 1,415 3,349
Transfer of investment and mortgage-backed securities
from held to maturity to available for sale -- -- 361,191
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
18 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies used
in preparation of the accompanying consolidated financial statements of First
Sentinel Bancorp, Inc. and Subsidiaries (the "Company").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements are comprised of the accounts of the
Company and its wholly-owned subsidiary, First Savings Bank (the "Bank") and the
Bank's wholly-owned subsidiaries, FSB Financial Corp. and 1000 Woodbridge Center
Drive, Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles.
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 year ended September 30, 1998 were combined with the
Company's calendar year. 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.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses, management generally obtains independent appraisals for significant
properties.
COMPREHENSIVE INCOME
Comprehensive income is divided into net income and other comprehensive
income. Other comprehensive income includes items recorded directly to equity,
such as unrealized gains and losses on securities available for sale.
Comprehensive income is presented in the consolidated statements of
stockholders' equity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from depository
institutions and federal funds sold. Generally, federal funds sold are sold for
a one-day period.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Management determines the appropriate classification of investment and
mortgage-backed securities as either available for sale, held to maturity, or
trading at the purchase date. Securities available for sale include debt,
mortgage-backed and marketable equity securities that are held for an indefinite
period of time and may be sold in response to changing market and interest rate
conditions. These securities are reported at fair value with unrealized gains
and losses, net of tax, included as a separate component of stockholders'
equity. Upon realization, such gains and losses are included in earnings using
the specific identification method.
Trading account securities are adjusted to market value through earnings.
Gains and losses from adjusting trading account securities to market value and
from the sale of these securities are included in non-interest income.
Investment securities and mortgage-backed securities, other than those
designated as available for sale or trading, are carried at amortized historical
cost and consist of those securities for which there is a positive intent and
ability to hold to maturity. All securities are adjusted for amortization of
premiums and accretion of discounts using the level-yield method over the
estimated lives of the securities.
FEDERAL HOME LOAN BANK OF NEW YORK STOCK
The Bank, as a member of the FHLB-NY, is required to hold shares of capital
stock in the FHLB-NY in an amount equal to 1% of the Bank's outstanding balance
of residential mortgage loans or 5% of its outstanding advances from the
FHLB-NY, whichever is greater.
LOANS RECEIVABLE, NET
Loans receivable, other than loans available for sale, are stated at the
unpaid principal balance, net of premiums, unearned discounts, net deferred loan
origination and commitment fees, and the allowance for loan losses.
Loans are classified as non-accrual when they are past due 90 days or more
as to principal or interest, or where reasonable doubt exists as to timely
collectibility. If, however, a loan meets the above criteria, but a current
appraisal of the property indicates that the total outstanding balance is less
than 55% of the appraised value and in the process of collection, the loan is
not classified as non-accrual. At the time a loan is placed on non-accrual
status, previously accrued and uncollected interest is reversed against interest
income. Interest received on non-accrual loans is generally credited to interest
income for the current period. If principal and interest payments are brought
contractually current and future collectibility is reasonably assured, loans are
returned to accrual status. Discounts are accreted and premiums amortized to
income using the level-yield method over the estimated lives of the loans. Loan
fees and certain direct loan origination costs are deferred, and the net fee or
cost is recognized in interest income using the level-yield
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 19
method over the contractual life of the individual loans, adjusted for actual
prepayments.
The Company has defined the population of impaired loans to be all
non-accrual commercial real estate, multi-family and land loans. Impaired loans
are individually assessed to determine that the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
installment loans, are specifically excluded from the impaired loan portfolio.
Income recognition policies for impaired loans are the same as non-accrual
loans.
Loans available for sale are carried at the lower of cost or market using
the aggregate method. Valuation adjustments, if applicable, are reflected in
current operations. Gains and losses on sales are recorded using the specific
identification method. Management determines the appropriate classification of
loans as either held to maturity or available for sale at origination, in
conjunction with the Company's overall asset/liability management strategy.
The majority of the Company's loans are secured by real estate in the State
of New Jersey. Accordingly, as with most financial institutions in the market
area, the collectibility of a substantial portion of the carrying value of the
Company's loan portfolio and real estate owned is susceptible to changes in
market conditions.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the 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.
Additions to the allowance arise from charges to operations through the
provision for loan losses or from the recovery of amounts previously charged
off. The allowance is reduced by loan charge-offs.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in the Company's market area. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. 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.
REAL ESTATE OWNED, NET
Real estate owned is recorded at the fair value at the date of acquisition,
with a charge to the allowance for loan losses for any excess of cost over fair
value. Subsequently, real estate owned is carried at the lower of cost or fair
value, as determined by current appraisals, less estimated selling costs.
Certain costs incurred in preparing properties for sale are capitalized, while
expenses of holding foreclosed properties are charged to operations as incurred.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired from the
acquisition of deposits is amortized to expense over the expected life of the
acquired deposit base (7 to 15 years) using the straight-line method. Management
periodically reviews the potential impairment of the core deposit intangible
asset on a non-discounted cash flow basis to assess recoverability. If the
estimated future cash flows are projected to be less than the carrying amount,
an impairment write-down, representing the carrying amount of the intangible
asset which exceeds the present value of the estimated expected future cash
flows, would be recorded as a period expense.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are stated at
cost, less accumulated amortization and depreciation. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives, ranging from three years to forty years depending on the asset or
lease. Repair and maintenance items are expensed and improvements are
capitalized. Upon retirement or sale, any gain or loss is recorded to
operations.
INCOME TAXES
The Company accounts for income taxes according to the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates applicable to taxable income for the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
EMPLOYEE BENEFIT PLANS
Pension plan costs, based on actuarial computation of current and future
benefits for employees, are charged to expense and are funded based on the
maximum amount that can be deducted for federal income tax purposes.
The Company accrues the expected cost of providing health care and other
benefits to employees subsequent to their retirement during the estimated
service periods of the employees.
The Company applies the "intrinsic value-based method" as described in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its stock-based
compensation. The Company has provided in the notes to the consolidated
financial statements the pro forma disclosures as if the Company had adopted the
fair value method of accounting for the issuance of stock options. Stock awarded
to employees under the Company's Recognition and Retention plan is expensed by
the Company over the awards' vesting period based upon the fair market value of
the stock on the date of the grant. Stock committed to be released to employees
under the Bank's ESOP plan is expensed at fair market value.
20 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the daily
average number of common shares outstanding during the period. Diluted earnings
per share is computed similarly to basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all potential dilutive common shares were issued
utilizing the treasury stock method. All share amounts exclude unallocated
shares held by the ESOP. All share and per share amounts have been restated for
the Reorganization described in Note 2 to the Consolidated Financial Statements.
(Dollars in thousands, except per share data):
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Net income $ 22,968 $ 23,652 $ 19,493
================================================================================
Basic weighted average common
shares outstanding 33,436,961 39,464,227 41,983,776
Plus:
Dilutive stock options 286,164 384,069 658,941
Dilutive awards 32,306 359,304 51,570
- --------------------------------------------------------------------------------
Diluted weighted average
common shares outstanding 33,755,431 40,207,600 42,694,287
================================================================================
Net income per common share:
Basic $0.69 $0.60 $0.46
Diluted 0.68 0.59 0.46
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 and 1998 amounts to
conform to the 2000 presentation.
(2) REORGANIZATION AND STOCK ISSUANCE
On April 8, 1998, the Company and First Savings Bancshares, MHC, completed
a conversion and reorganization into the stock holding company structure and
also completed the offering of the common stock of First Sentinel Bancorp, Inc.,
the new stock holding company of the Bank. Through a Subscription and Community
Offering, the Company raised $165.6 million in gross proceeds. Shares of First
Savings Bank were converted into shares of First Sentinel Bancorp, Inc. at an
exchange ratio of 3.9133. A total of 16,550,374 shares were sold, and 14,820,016
shares were converted into First Sentinel Bancorp stock. All per share data has
been restated for the 3.9133 conversion ratio.
(3) INVESTMENT SECURITIES
A summary of investment securities at December 31, is as follows (in
thousands):
Gross Gross Estimated
Amortized unrealized unrealized market
2000 cost gains losses value
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
AVAILABLE FOR SALE
U.S. Government and
Agency obligations $151,753 $106 $(2,710) $149,149
State and political obligations 12,813 4 (366) 12,451
Corporate obligations 67,267 356 (4,743) 62,880
Equity securities 10,817 8 (335) 10,490
- --------------------------------------------------------------------------------
Total investment securities
available for sale $242,650 $474 $(8,154) $234,970
===============================================================================
Gross Gross Estimated
Amortized unrealized unrealized market
1999 cost gains losses value
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES
AVAILABLE FOR SALE
U.S. Government and
Agency obligations $155,173 $ -- $(8,363) $146,810
State and political obligations 16,976 -- (1,270) 15,706
Corporate obligations 45,917 -- (5,493) 40,424
Equity securities 11,149 -- (499) 10,650
- --------------------------------------------------------------------------------
Total investment securities
available for sale $229,215 $ -- $(15,625) $213,590
================================================================================
The cost and estimated fair value of debt investment securities at December
31, 2000, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because issuers may have the right to call or
repay obligations at par value without prepayment penalties.
Estimated
Amortized market
cost value
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE
Due in:
Less than one year $ 7,069 $ 7,043
One to five years 78,835 78,554
Five to ten years 74,196 73,503
Greater than ten years 71,733 65,380
- --------------------------------------------------------------------------------
$231,833 $224,480
================================================================================
The realized gross gains and losses from sales are as follows:
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Gross realized gains $ 301 $ 247 $ 348
Gross realized losses (729) (209) (3)
- --------------------------------------------------------------------------------
$(428) $ 38 $ 345
================================================================================
Investment securities with an amortized cost of $122.8 million at December
31, 2000, are pledged as collateral for other borrowings. Pursuant to a
collateral agreement with the FHLB-NY, all otherwise unpledged, qualifying
investment securities, including those available for sale, are pledged to secure
advances from the FHLB-NY (see Note 9).
(4) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at December 31, is as follows (in
thousands):
Gross Gross Estimated
Amortized unrealized unrealized market
2000 cost gains losses value
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
FHLMC $161,038 $388 $ (837) $160,589
GNMA 29,473 228 (91) 29,610
FNMA 60,269 29 (917) 59,381
Collateralized mortgage
obligations 201,765 14 (4,337) 197,442
- --------------------------------------------------------------------------------
Total mortgage-backed
securities available for sale $452,545 $659 $(6,182) $447,022
================================================================================
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 21
Gross Gross Estimated
Amortized unrealized unrealized market
1999 cost gains losses value
- --------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES
AVAILABLE FOR SALE
FHLMC $168,557 $226 $(1,746) $167,037
GNMA 58,018 477 (276) 58,219
FNMA 86,540 47 (1,571) 85,016
Collateralized mortgage
obligations 273,453 276 (8,842) 264,887
- --------------------------------------------------------------------------------
Total mortgage-backed
securities available for sale $586,568 $1,026 $(12,435) $575,159
- --------------------------------------------------------------------------------
Collateralized mortgage obligations ("CMOs") issued by FHLMC, FNMA, GNMA
and private interests amounted to $105.0 million, $23.5 million, $6.3 million
and $62.6 million, respectively, at December 31, 2000, and $158.3 million, $27.2
million, $7.0 million and $72.4 million, respectively, at December 31, 1999. The
privately-issued CMOs have generally been underwritten by large investment
banking firms, with the timely payment of principal and interest on these
securities supported (credit enhanced) in varying degrees by either insurance
issued by a financial guarantee insurer, letters of credit or subordination
techniques. Substantially all such securities are "AAA" rated by one or more of
the nationally recognized securities rating agencies. The privately-issued CMOs
are subject to certain credit-related risks normally not associated with U.S.
Government Agency CMOs. Among such risks is the limited loss protection
generally provided by the various forms of credit enhancements as losses in
excess of certain levels are not protected. Furthermore, the credit enhancement
itself is subject to the credit worthiness of the enhancer. Thus, in the event a
credit enhancer does not fulfill its obligations, the CMO holder could be
subject to risk of loss similar to a purchaser of a whole loan pool. Management
believes that the credit enhancements are adequate to protect the Company from
losses and has, therefore, not provided an allowance for losses on its
privately-issued CMOs.
The realized gross gains and losses from sales are as follows (in
thousands):
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
Gross realized gains $ 558 $ 1,387 $ 338
Gross realized losses (1,028) (716) (70)
- --------------------------------------------------------------------------------
$ (470) $ 671 $ 268
================================================================================
Mortgage-backed securities with an amortized cost of $263,000 at December
31, 2000, were pledged as collateral to secure deposits held for municipalities
within the State of New Jersey. Mortgage-backed securities with an amortized
cost of $333.8 million at December 31, 2000, were pledged as collateral for
other borrowings. Pursuant to a collateral agreement with the FHLB-NY, all
otherwise unpledged, qualifying mortgage-backed securities are pledged to secure
advances from the FHLB-NY (see Note 9). The contractual maturities of
mortgage-backed securities generally exceed ten years, however, the effective
lives are expected to be shorter due to prepayments of the underlying mortgages.
(5) LOANS RECEIVABLE, NET
A summary of loans receivable at December 31, is as follows (in thousands):
2000 1999
- --------------------------------------------------------------------------------
LOANS RECEIVABLE
Real estate mortgages:
One-to-four family $ 879,578 $ 774,858
Multi-family and commercial 144,151 109,320
Home equity 114,152 98,324
- --------------------------------------------------------------------------------
1,137,881 982,502
Real estate construction 60,452 54,889
Consumer 16,121 16,638
- --------------------------------------------------------------------------------
Total loans receivable 1,214,454 1,054,029
Loans in process (19,161) (27,999)
Net unamortized premium and deferred expenses 1,850 1,090
Allowance for loan losses (12,341) (11,004)
- --------------------------------------------------------------------------------
(29,652) (37,913)
- --------------------------------------------------------------------------------
Loans receivable, net $ 1,184,802 $ 1,016,116
================================================================================
Loans receivable included loans held for sale totaling $277,000 at December
31, 2000. There were no loans held for sale at December 31, 1999.
The Company serviced loans for others in the amount of $75.8 million, $81.9
million and $87.6 million at December 31, 2000, 1999 and 1998, respectively.
Related servicing income earned on loans serviced for others totaled $177,000,
$202,000 and $237,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Loans in the amount of $3.3 million and $1.2 million were outstanding to
directors and executive officers of the Company at December 31, 2000 and 1999,
respectively. During 2000, new extensions of credit to directors and executive
officers of the Company totaled $2.6 million and repayments by such persons
totaled $500,000. The loans consist primarily of loans secured by mortgages on
residential properties.
The Company has pledged, under a blanket assignment, its unpledged and
qualifying mortgage portfolio to secure advances from the FHLB-NY (see Note 9).
A summary of non-performing assets at December 31, is as follows (in
thousands):
2000 1999
- --------------------------------------------------------------------------------
Non-accrual loans $2,349 $2,356
Loans 90 days or more delinquent and still accruing 40 326
- --------------------------------------------------------------------------------
Total non-performing loans 2,389 2,682
Real estate owned (included in Other assets) 257 466
- --------------------------------------------------------------------------------
Total non-performing assets $2,646 $3,148
================================================================================
At December 31, 2000 and 1999, the impaired loan portfolio totaled $170,000
and $42,000, respectively, for which general and specific allocations to the
allowance for loan losses of $17,000 and $33,000 were identified at December 31,
2000 and 1999, respectively. The average balance of impaired loans during 2000,
1999 and 1998 was $195,000, $222,000 and $373,000, respectively.
22 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
If interest income on non-accrual and impaired loans had been current in
accordance with their original terms, approximately $193,000, $197,000 and
$311,000 of interest income for the years ended December 31, 2000, 1999 and
1998, respectively, would have been recorded. Interest income recognized on
non-accrual and impaired loans totaled $132,000, $108,000 and $145,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. At December 31,
2000, there were no commitments to lend additional funds to borrowers whose
loans are classified as non-performing.
An analysis of the allowance for loan losses for the years ended December
31, is as follows (in thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Balance at beginning of year $ 11,004 $ 9,505 $ 8,454
Provision charged to operations 1,441 1,650 1,469
- --------------------------------------------------------------------------------
12,445 11,155 9,923
Charge-offs (104) (151) (596)
Recoveries -- -- 28
Allowance activity of Pulse
during conforming period, net -- -- 150
- --------------------------------------------------------------------------------
Balance at end of year $ 12,341 $ 11,004 $ 9,505
================================================================================
(6) INTEREST AND DIVIDENDS RECEIVABLE
A summary of interest and dividends receivable at December 31, is as
follows (in thousands):
2000 1999
- --------------------------------------------------------------------------------
Loans $ 6,351 $ 5,055
Investment securities 3,761 3,260
Mortgage-backed securities 3,369 3,963
- --------------------------------------------------------------------------------
Interest and dividends receivable $13,481 $12,278
================================================================================
(7) PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31, are summarized as follows (in
thousands):
2000 1999
- --------------------------------------------------------------------------------
Land $ 3,870 $ 3,870
Buildings and improvements 14,380 14,227
Leasehold improvements 1,281 1,361
Furnishings, equipment and automobiles 8,424 7,788
Construction in progress 179 67
- --------------------------------------------------------------------------------
28,134 27,313
Accumulated depreciation and amortization (12,042) (10,810)
- --------------------------------------------------------------------------------
Premises and equipment, net $ 16,092 $ 16,503
================================================================================
(8) DEPOSITS
Deposits at December 31, are summarized as follows (dollars in thousands):
2000 1999
------------------------------- -------------------------------
Interest Weighted Interest Weighted
rate average rate average
Amount ranges rate Amount ranges rate
- --------------------------------------------------------------------------------
Non-interest-
bearing
demand $ 51,739 --% --% $ 43,744 --% --%
NOW and
money
market 358,961 1.02-3.18 2.63 354,908 0-3.22 2.63
Savings 159,812 2.15-5.16 2.32 165,593 0-5.16 2.27
Certificates
of deposit 648,824 2.96-7.72 5.72 649,479 2.96-7.72 4.96
- -------------------------- ----------
$1,219,336 0-7.72% 4.12% $1,213,724 0-7.72% 3.73%
================================================================================
The scheduled maturities of certificates of deposit at December 31, 2000
are as follows (in thousands):
One year or less $516,149
After one to two years 80,807
After two to three years 17,046
After three to four years 14,699
After four to five years 9,361
After five years 10,762
- --------------------------------------------------------------------------------
$648,824
================================================================================
Included in deposits at December 31, 2000 and 1999 are $155.6 million and
$154.2 million of deposits of $100,000 and over, and $444,000 and $414,000,
respectively, of accrued interest payable on deposits.
(9) BORROWED FUNDS
FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES
Advances from the FHLB-NY at December 31, are summarized as follows
(dollars in thousands):
2000 1999
-------------------- ---------------------
Weighted Weighted
average average
interest interest
Maturity Amount rate Amount rate
- --------------------------------------------------------------------------------
2000 $ -- --% $ 72,000 6.12%
2001 25,000 6.64 -- --
2002 5,000 6.88 5,000 6.58
2003 15,000 5.68 25,000 5.14
2005 25,000 5.85 -- --
2007 5,955 7.32 -- --
2009 5,000 5.52 5,000 5.52
- ----------------------------------------- ----------
$80,955 6.21% $107,000 5.88%
================================================================================
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 23
The Company has entered into FHLB-NY advances that have call features that
may be exercised by the FHLB-NY, at par, at predetermined dates. Such advances
totaled $30.0 million and $15.0 million at December 31, 2000 and 1999,
respectively. The maximum amount of FHLB-NY advances outstanding at any
month-end during the years ended December 31, 2000 and 1999 was $140.2 million
and $139.3 million, respectively. The average amount of FHLB-NY advances
outstanding during the years ended December 31, 2000 and 1999 was $99.1 million
and $70.9 million, respectively. At December 31, 2000 and 1999, $5.0 million and
$65.0 million, respectively, of FHLB-NY advances had adjustable rates.
Advances from the FHLB-NY are secured by pledges of FHLB-NY stock of $19.6
million and $18.1 million at December 31, 2000 and 1999, respectively, and a
blanket assignment of the Company's unpledged, qualifying mortgage loans,
mortgage-backed securities and investment securities. Such loans and securities
remain under the control of the Company.
The Company has an available overnight line of credit with the FHLB-NY for
a maximum of $50.0 million at December 31, 2000.
OTHER BORROWINGS
The following is a summary of other borrowings at December 31, (dollars in
thousands):
2000 1999
------------------------- -------------------------
Weighted Weighted
average average
Contractual interest interest
Maturity Amount rate Amount rate
- --------------------------------------------------------------------------------
2000 $ -- --% $130,000 5.75%
2001 200,000 6.58 -- --
2002 10,000 5.08 30,000 5.49
2003 -- -- 10,000 4.70
2004 60,000 5.82 60,000 5.82
2005 65,000 6.03 -- --
2008 35,000 5.09 55,000 5.12
2009 30,000 5.64 30,000 5.64
2010 25,000 6.47 -- --
- ----------------------------------------- ----------
$425,000 6.16% $315,000 5.58%
================================================================================
Other borrowings consist of securities sold under agreements to repurchase.
The maximum amount of other borrowings outstanding at any month-end during the
years ended December 31, 2000 and 1999 was $440.0 million and $315.0 million,
respectively. The average amount of other borrowings outstanding during the
years ended December 31, 2000 and 1999 was $404.3 million and $254.6 million,
respectively. Securities underlying other borrowings included mortgage-backed
and investment securities, which had an amortized cost of $456.6 million and
$344.8 million, and market values of $451.5 million and $335.7 million at
December 31, 2000 and 1999, respectively. The securities underlying the other
borrowing agreements are under the Company's control. At December 31, 2000 and
1999, $215.0 million and $180.5 million, respectively, of other borrowings are
callable at par, at defined dates and at the lender's discretion prior to the
contractual maturity of the borrowings.
(10) REGULATORY MATTERS
Subject to applicable law, the Board of Directors of the Bank may provide
for the payment of dividends. New Jersey law provides that no dividend may be
paid unless, after the payment of such dividend, the capital stock of the Bank
will not be impaired and either the Bank will have a statutory surplus of not
less than 50% of its capital stock or the payment of such dividend will not
reduce the statutory surplus of the Bank.
The Bank is subject to various regulatory capital requirements administered
by the federal and state banking agencies. Failure to meet minimum requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized."
Institutions categorized as "undercapitalized" or worse are subject to
certain restrictions on the payment of dividends and management fees,
restrictions on asset growth and executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the institution by the regulatory agencies, including requirements to raise
additional capital, sell assets, or sell the entire institution. Once an
institution becomes "critically undercapitalized" it must generally be placed in
receivership or conservatorship within 90 days. An institution is deemed to be
"critically undercapitalized" if it has a tangible equity ratio, as defined, of
2.0% or less.
To be considered "well capitalized," an institution must generally have a
leverage ratio (Tier 1 capital to average total assets), as defined, of at least
5.0%; a Tier 1 risk-based capital ratio, as defined, of at least 6.0%; and a
total risk-based capital ratio, as defined, of at least 10.0%.
Management believes that, as of December 31, 2000, the Bank met all capital
adequacy requirements to which it was subject. Further, the most recent FDIC
notification categorized the Bank as a well capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
24 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
The following is a summary of the Bank's actual capital amounts and ratios
as of December 31, 2000, compared to the FDIC minimum capital adequacy
requirements and the FDIC requirements for classification as a "well
capitalized" institution (dollars in thousands):
FDIC Requirements
-------------------------------------
Minimum capital For classification
Bank actual adequacy as well capitalized
---------------- --------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
DECEMBER 31, 2000
Leverage (Tier 1)
capital $180,322 9.36% $ 77,025 4.00% $ 96,281 5.00%
Risk-based capital:
Tier 1 180,322 17.91 40,273 4.00 60,409 6.00
Total 192,663 19.14 80,545 8.00 100,682 10.00
The Bank converted its charter from a thrift to a stock savings bank
effective January 28, 2000. Prior to the charter conversion, the Bank was
subject to OTS regulation. Under the OTS regulations in effect at December 31,
1999, the Bank was required to maintain a minimum ratio of tangible capital to
total adjusted assets of 1.5%; a minimum ratio of Tier 1 (core) capital to total
adjusted assets of 3.0%; a minimum ratio of Tier 1 (core) capital to
risk-weighted assets of 4.0%; and a minimum ratio of total (core and
supplementary) capital to risk-weighted assets of 8.0%.
The following is a summary of the Bank's actual capital amounts and ratios
as of December 31, 1999, compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a "well capitalized"
institution (dollars in thousands):
OTS Requirements
-------------------------------------
Minimum capital For classification
Bank actual adequacy as well capitalized
---------------- --------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
December 31, 1999
Tangible capital $194,702 10.25% $28,501 1.50% $ -- --%
Tier 1 (core) capital 194,702 10.25 57,003 3.00 95,005 5.00
Risk-based capital:
Tier 1 194,702 24.14 32,265 4.00 48,398 6.00
Total 204,796 25.39 64,531 8.00 80,663 10.00
(11) INCOME TAXES
Income tax expense applicable to income for the years ended December 31,
consists of the following (in thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
FEDERAL:
Current $ 11,388 $ 13,043 $ 11,273
Deferred (514) (974) (727)
- --------------------------------------------------------------------------------
10,874 12,069 10,546
STATE:
Current 225 17 458
Deferred -- 69 (60)
- --------------------------------------------------------------------------------
225 86 398
- --------------------------------------------------------------------------------
$ 11,099 $ 12,155 $ 10,944
================================================================================
A reconciliation between the effective income tax expense and the amount
computed by multiplying the applicable statutory federal income tax rate for the
years ended December 31, is as follows (in thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Income before income taxes $ 34,067 $ 35,807 $30,437
Applicable statutory federal tax rate 35% 35% 35%
- --------------------------------------------------------------------------------
Computed "expected" federal
income tax expense 11,923 12,532 10,653
Increase in federal income
tax expense resulting from:
State income taxes,
net of federal benefit 146 56 259
Other items, net (970) (433) 32
- --------------------------------------------------------------------------------
$ 11,099 $ 12,155 $10,944
================================================================================
The tax effects of temporary differences that give rise to a significant
portion of deferred tax assets and liabilities at December 31, are as follows
(in thousands):
2000 1999
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Provision for loan losses--book $ 4,319 $ 3,851
Unrealized loss on securities available for sale 4,669 9,732
Postretirement benefits 552 468
Tax depreciation less than book depreciation 132 132
Excess pension expense 624 480
Stock awards 154 162
Excess cost over fair value of net assets acquired 468 465
Other 130 90
- --------------------------------------------------------------------------------
Total deferred tax assets 11,048 15,380
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Provision for loan losses--tax 581 872
Deferred points 742 175
Other 111 170
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,434 1,217
- --------------------------------------------------------------------------------
Net deferred tax asset $ 9,614 $14,163
================================================================================
Retained earnings at December 31, 2000 and 1999 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, 2000 and 1999, the Company had an
unrecognized tax liability of $6.5 million with respect to this reserve.
Included in other comprehensive income is income tax expense (benefit)
attributable to net unrealized gains (losses) on securities available for sale
in the amounts of $5,063,000, $(11,137,000) and $677,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. In addition, income tax benefit
of $655,000, $0 and $0 was recognized in 2000, 1999 and 1998, respectively,
related to the exercise of non-qualified stock options.
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 25
Management has determined that it is more likely than not that it will
realize the deferred tax assets based upon the nature and timing of the items
listed above. There can be no assurances, however, that there will be no
significant differences in the future between taxable income and pretax book
income if circumstances change. In order to fully realize the net deferred tax
asset, the Company will need to generate future taxable income. Management has
projected that the Company will generate sufficient taxable income to utilize
the net deferred tax asset; however, there can be no assurance that such levels
of taxable income will be generated.
(12) EMPLOYEE BENEFIT PLANS
The Company is a participant in the Financial Institutions Retirement Fund,
a multi-employer defined benefit plan. All employees who attain the age of 21
years and complete one year of service are eligible to participate in this plan.
Retirement benefits are based upon a formula utilizing years of service and
average compensation, as defined. Participants are vested 100% upon the
completion of five years of service. Pension expense (benefit) was $160,000,
$(118,000) and $214,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Financial Institutions Retirement Fund does not segregate its assets,
liabilities or costs by participating employer. Therefore, disclosure of the
accumulated benefit obligations, plan assets and the components of annual
pension expense attributable to the Company cannot be ascertained.
The Company has a Supplemental Executive Retirement Plan ("SERP"), which
provides post-employment supplemental retirement benefits to certain officers of
the Company. The SERP is a non-qualified employee benefit plan.
The Company has a non-pension postretirement benefit plan ("Other
Benefits"), which provides certain healthcare benefits to eligible employees.
The plan is unfunded as of December 31, 2000, and the obligation is included in
Other liabilities as an accrued postretirement benefit cost.
The following table shows the change in benefit obligation, the funded
status for the SERP and other benefits, and (accrued cost) prepaid benefit at
December 31, (in thousands):
SERP Other Benefits
------------------- ---------------------
2000 1999 2000 1999
- --------------------------------------------------------------------------------
Benefit obligation at
beginning of year $ 1,061 $ 1,040 $ 1,743 $ 1,646
Service cost 104 92 63 81
Interest cost 85 73 99 115
Actuarial loss (gain) 78 (144) (348) (39)
Benefits paid -- -- (36) (60)
- --------------------------------------------------------------------------------
Benefit obligation at
the end of the year $ 1,328 $ 1,061 $ 1,521 $ 1,743
================================================================================
Funded status $(1,328) $(1,061) $(1,521) $(1,743)
Unrecognized net
actuarial loss (gain) 147 69 (61) 283
- --------------------------------------------------------------------------------
Accrued benefit cost $(1,181) $ (992) $(1,582) $(1,460)
================================================================================
Weighted average
assumptions as
of December 31:
Discount rate 7.50% 8.00% 7.50% 6.75%
Rate of compensation
increase 5.00% 5.00% 5.00% 5.00%
Net periodic cost at December 31, includes the following components (in
thousands):
SERP Other Benefits
---------------------- ------------------------
2000 1999 1998 2000 1999 1998
- --------------------------------------------------------------------------------
Service cost $104 $ 92 $ 80 $ 63 $ 81 $ 59
Interest cost 85 73 60 99 115 87
Amortization of net
actuarial loss (gain) -- 12 9 (4) 26 85
Amortization of prior
service cost -- -- -- -- -- 70
- --------------------------------------------------------------------------------
Net periodic cost $189 $177 $149 $ 158 $222 $301
================================================================================
For measurement purposes, a five percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2000 and all future
years. Assumed health care trend rates have a significant effect on the amounts
reported for the health care plans. A one percentage point change in the assumed
health care cost trend rates would have the following effects (in thousands):
1 Percentage Point
----------------------
Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 41 $ (31)
Effect on other benefits obligation 355 (270)
The Company also maintains an incentive savings plan for eligible
employees. Employees may make contributions to the plan of 2% to 12% of their
compensation. For the first 6% of the employee's contribution, the Company will
contribute 25% of that amount to the employee's account. At the end of the plan
year, the Company may make an additional contribution to the plan. The
contributions under this plan were $89,000, $88,000 and $141,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
RECOGNITION AND RETENTION PLAN
The Company maintains a Recognition and Retention Plan ("RRP") for the
benefit of directors, officers and key employees of the Company. During 1996,
the Board of Directors adopted an Omnibus Incentive Plan and awarded 21,780 RRP
shares following approval by the OTS and stockholders. In 1998, the Board of
Directors and stockholders approved the granting of 662,014 shares as RRP awards
under the 1998 Stock-Based Incentive Plan ("1998 Plan"). As of December 31,
2000, the Company had granted 641,799 RRP shares under the 1998 Plan.
RRP awards are granted in the form of shares of common stock held by the
RRP. All RRP awards granted in 1996 have been paid out at December 31, 2000. RRP
awards granted in 1998 are payable over a five-year period at a rate of 20% per
year, commencing one year from the date of the award grant.
Amortization of the RRP was $1,079,000, $1,260,000 and $104,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. Amortization in 2000
and 1999 included $151,000 and $202,000, respectively, in accelerated expense
due to the deaths of two of the Company's directors.
26 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains an ESOP for eligible employees who have completed a
twelve-month period of employment with the Company. ESOP shares were purchased
in each of the Company's public offerings. Funds for the purchase of additional
shares were borrowed from the Bank's parent, First Sentinel Bancorp. Shares
purchased by the ESOP are held by a trustee for allocation among participants as
the loan is repaid. The Company, at its discretion, contributes funds, in cash,
to pay principal and interest on the ESOP loan. The number of shares of common
stock released each year is proportional to the amount of principal and interest
paid on the ESOP loan for the year. Dividends paid on unallocated ESOP shares
are used to repay the loan. Unallocated ESOP shares are not considered
outstanding for purposes of calculating earnings per share. At December 31,
2000, there were 1,236,266 unallocated ESOP shares with a market value of $14.2
million.
The Company recognizes compensation expense based on the fair value of
shares committed to be released. Compensation expense recognized for 2000, 1999
and 1998 amounted to $932,000, $820,000 and $771,000, respectively. The Company
allocated 100,920, 100,920 and 84,796, shares during 2000, 1999 and 1998,
respectively.
STOCK OPTION PLANS
The Company maintains stock option plans (the "Plans") for the benefit of
directors, officers, and other key employees of the Company. Options granted
under the Plans are exercisable over a period not to exceed ten years from the
date of grant. Under all Plans originated prior to 1998, the exercise price of
each option equals the market price of the Company's stock on the date of grant.
The exercise price for options granted under the 1998 Plan is the greater of the
market price of the Company's stock on the date of grant or $9.00. The following
table summarizes the options granted and exercised under the Plans during the
periods indicated and their respective weighted average exercise price:
2000 1999 1998
------------------- ------------------- -------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
- --------------------------------------------------------------------------------
Outstanding at
beginning
of period 2,297,996 $7.55 2,840,284 $6.55 1,751,298 $3.12
Granted 31,437 9.00 -- -- 1,702,836 8.88
Forfeited (1,000) 9.00 -- -- (43,090) 3.69
Exercised (42,589) 3.35 (542,288) 2.70 (570,760) 2.79
- ------------------------------ ------------- ------------
Outstanding
at end
of period 2,285,844 $7.65 2,297,996 $7.55 2,840,284 $6.55
================================================================================
Options
exercisable
at year-end 1,393,094 1,074,196 1,137,164
================================================================================
The following table summarizes information about the stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------
Weighted
average Weighted Number of Weighted
Range of Number remaining average shares average
exercise of shares contractual exercise exercisable exercise
prices outstanding life in years price at period end price
- --------------------------------------------------------------------------------
$2.341-3.454 139,628 4.1 $3.22 139,628 $3.22
3.587-4.517 412,943 5.8 3.96 412,943 3.96
6.642-9.000 1,733,273 8.0 8.88 840,523 8.76
---------- ----------
$2.341-9.000 2,285,844 7.4 $7.65 1,393,094 $6.78
================================================================================
The Company applies APB Opinion No. 25 in accounting for the Plans.
Consistent with Statement of Financial Accounting Standards ("SFAS") No. 123, if
compensation cost for the Plans was accounted for under the fair value method,
the Company's net income and earnings per share would have been reduced to the
pro forma amounts indicated below (in thousands, except per share data):
2000 1999 1998
- --------------------------------------------------------------------------------
NET INCOME:
As reported $22,968 $23,652 $19,493
Pro forma 22,229 22,920 18,762
EARNINGS PER SHARE:
Basic earnings per share $ 0.69 $ 0.60 $ 0.46
Diluted earnings per share 0.68 0.59 0.46
Pro forma basic earnings per share 0.66 0.58 0.45
Pro forma diluted earnings per share 0.66 0.57 0.45
Weighted average fair value of
options granted during year $ 1.19 $ -- $ 2.21
The fair value of stock options granted by the Company was estimated
through the use of the Black-Scholes option-pricing model that takes into
account the following factors as of the grant dates: the exercise price and
expected life of the option, the market price of the underlying stock at the
grant date and its expected volatility, and the risk-free interest rate for the
expected term of the option. In deriving the fair value of a stock option, the
stock price at the grant date is reduced by the value of the dividends to be
paid during the life of the option. The following assumptions were used for
grants in 2000 and 1998: dividend yield of 2.50% and 2.35%; an expected
volatility of 25% and 20%; and a risk-free interest rate of 6.20% and 5.00%.
There were no grants made in 1999.
(13) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
FINANCIAL TRANSACTIONS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT
The Company, in the normal course of conducting its business, extends
credit to meet the financing needs of its customers through commitments and
letters of credit.
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 27
The following commitments and contingent liabilities existed at December
31, which are not reflected in the accompanying consolidated financial
statements (in thousands):
2000 1999
- --------------------------------------------------------------------------------
Origination of mortgage loans:
Fixed rate $ 9,899 $ 8,904
Variable rate 88,341 95,434
Purchase of mortgage loans--variable rate 1,238 10,770
Undisbursed home equity credit lines 50,427 45,430
Purchase of investment and mortgage-backed securities 8,897 22,046
Undisbursed construction credit lines 19,161 27,999
Undisbursed consumer lines of credit 10,918 11,667
Participations in Thrift Institutions
Community Investment Corp. of NJ 500 1,000
Standby letters of credit 2,296 2,856
================================================================================
These instruments involve elements of credit and interest rate risk in
excess of the amount recognized in the consolidated financial statements. The
Company uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for on-balance-sheet loans.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained is based on management's
credit evaluation of the borrower.
The Company makes one-to-four family first mortgage real estate loans,
multi-family loans, construction loans, and nonresidential first mortgage real
estate loans to borrowers throughout New Jersey. Its borrowers' abilities to
repay their obligations are dependent upon various factors, including the
borrowers' income and net worth, cash flows generated by the underlying
collateral, value of the underlying collateral and priority of the Company's
lien on the property. Such factors are dependent upon various economic
conditions and individual circumstances beyond the Company's control; the
Company is therefore subject to risk of loss. The Company believes its lending
policies and procedures adequately minimize the potential exposure to such risks
and that adequate provisions for loan losses are provided for all known and
inherent risks. Collateral and/or guarantees are required for virtually all
loans.
LEASE OBLIGATIONS
At December 31, 2000, the Company was obligated under noncancellable
operating leases for premises and equipment. Rental expense under these leases
aggregated approximately $523,000, $525,000 and $507,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
The projected minimum rental commitments as of December 31, 2000, are as
follows (in thousands):
2001 $ 447
2002 439
2003 348
2004 313
2005 171
Thereafter 60
- --------------------------------------------------------------------------------
$1,778
================================================================================
CONTINGENCIES
The Company is a defendant in certain claims and legal actions arising in
the ordinary course of business. Management is of the opinion that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition or results of operations.
(14) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25." This interpretation
clarifies certain issues with respect to the application of APB Opinion No. 25,
"Accounting for Stock Issued to Employees." This interpretation results in a
number of changes in the application of APB Opinion No. 25 accounting treatment
to options granted to outside directors for their services as directors. The
provisions of this interpretation were effective July 1, 2000 and apply
prospectively, except for certain modifications to equity awards made after
December 15, 1998. The initial adoption of this interpretation did not have a
significant impact on the Company's financial statements.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an Amendment to FASB
Statement No. 133." SFAS No. 138 amends certain aspects of SFAS No. 133 to
simplify the accounting for derivatives and hedges under SFAS No. 133. SFAS No.
138 is effective upon the Company's adoption of SFAS No. 133 (January 1, 2001).
The initial adoption of SFAS No. 133 and SFAS No. 138 did not have a material
impact on the Company's financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (a
Replacement of FASB Statement No. 125)." SFAS No. 140 supersedes and replaces
the guidance in SFAS No. 125 and, accordingly, provides guidance on the
following topics: securitization transactions involving financial assets; sales
of financial assets such as receivables, loans and securities; factoring
transactions; wash sales; servicing assets and liabilities; collateralized
borrowing arrangements; securities lending transactions; repurchase agreements;
loan collateralized borrowing arrangements; securities lending transactions;
repurchase agreements; loan participations; and extinguishment of liabilities.
While most of the provisions of SFAS No. 140 are effective for transactions
entered into after March 31, 2001, companies with fiscal year ends
28 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
that hold beneficial interests from previous securitizations will be required to
make additional disclosures in their December 31, 2000 financial statements. The
initial adoption of SFAS No. 140 will not have a material impact on the
Company's financial statements.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to
measure the fair value of each class of financial instrument for which it is
practical to estimate that value.
CASH AND CASH EQUIVALENTS
For such short-term investments, the carrying amount was considered to be a
reasonable estimate of fair value.
FEDERAL HOME LOAN BANK OF NY STOCK
Federal Home Loan Bank of NY stock is valued at cost.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
For investment and mortgage-backed securities, fair values were based on
quoted market prices or dealer quotes. If a quoted market price was not
available, fair values were estimated using quoted market prices for similar
securities.
LOANS RECEIVABLE, NET
Fair values were estimated for portfolios of performing and nonperforming
loans with similar financial characteristics. For certain analogous categories
of loans, such as residential mortgages, home equity loans, non-residential
mortgages, and consumer loans, fair value was estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other performing loan types was estimated by
discounting the future cash flows using market discount rates that reflect the
credit, collateral, and interest rate risk inherent in the loan.
DEPOSITS
The fair value of demand deposits, savings deposits and money market
accounts were the amounts payable on demand at December 31, 2000 and 1999. The
fair values of certificates of deposit were based on the discounted value of
contractual cash flows. The discount rate was estimated utilizing the rate
currently offered for deposits of similar remaining maturities.
BORROWINGS
For short-term borrowings, the carrying amount was considered to be a
reasonable estimate of fair value. For long-term borrowings, the fair value was
based upon the discounted value of the cash flows. The discount rates utilized
were based on rates currently available with similar terms and maturities.
OFF-BALANCE SHEET INSTRUMENTS
For commitments to extend credit and letters of credit, the fair value
would approximate fees currently charged to enter into similar agreements.
The estimated fair values of the Company's financial instruments at
December 31, were as follows (in thousands):
2000 1999
---------------------- ----------------------
Book Fair Book Fair
Value Value Value Value
- --------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and cash
equivalents $ 35,119 $ 35,119 $ 30,607 $ 30,607
FHLB-NY stock 19,643 19,643 18,100 18,100
Investment securities
available for sale 234,970 234,970 213,590 213,590
Mortgage-backed
securities available
for sale 447,022 447,022 575,159 575,159
Loans receivable,
net 1,184,802 1,186,987 1,016,116 990,633
FINANCIAL LIABILITIES:
Deposits 1,219,336 1,220,475 1,213,724 1,213,316
Borrowings 505,955 507,218 422,000 415,932
OFF-BALANCE SHEET
INSTRUMENTS:
Loan commitments -- 192 -- 661
Standby letters
of credit -- 23 -- 29
LIMITATIONS
The foregoing fair value estimates were made at December 31, 2000 and 1999,
based on pertinent market data and relevant information on the financial
instrument. These estimates do not include any premium or discount that could
result from an offer to sell, at one time, the Company's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Company's financial instruments, fair value
estimates were necessarily based on judgments with respect to future expected
loss experience, current economic conditions, risk assessments of various
financial instruments involving a myriad of individual borrowers, and other
factors. Given the innately subjective nature of these estimates, the
uncertainties surrounding them and the matters of significant judgment that must
be applied, these fair value estimations cannot be calculated with precision.
Modifications in such assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for on- and
off-balance sheet financial instruments at December 31, 2000 and 1999, no
attempt was made to estimate the value of anticipated future business of the
value of nonfinancial statement assets and liabilities. Other important elements
which are not deemed to be financial assets or liabilities include the value of
the Company's retail branch delivery system, its existing core deposit base,
premises and equipment, and goodwill. Further, certain tax implications related
to the realization of the unrealized gains and losses could have a substantial
impact on these fair value estimates and have not been incorporated into any of
the estimates.
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 29
(16) CONDENSED FINANCIAL STATEMENTS--PARENT COMPANY
The condensed financial statements of First Sentinel Bancorp (parent
company only) are presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, 2000 1999
- --------------------------------------------------------------------------------
(In thousands)
ASSETS
Cash $ 1,667 $ 26,229
Due from subsidiary 3,603 2,300
ESOP loan receivable 12,346 12,156
Investment in subsidiaries 180,447 186,933
Investment securities available for sale 23,713 21,659
Other assets 1,543 2,011
- --------------------------------------------------------------------------------
Total assets $223,319 $251,288
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $-- $ 5,772
Other liabilities 1,156 936
Stockholders' equity 222,163 244,580
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $223,319 $251,288
================================================================================
CONDENSED STATEMENTS OF INCOME
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
(In thousands)
Income
Dividends from subsidiary $ 37,000 $ 49,400 $13,848
Interest and dividends on securities 2,007 1,555 1,767
Net gain on sales of securities 86 179 106
Other income -- -- 1
- --------------------------------------------------------------------------------
Total income 39,093 51,134 15,722
- --------------------------------------------------------------------------------
Expense
Merger expense -- -- 2,128
Other expense 703 1,343 306
- --------------------------------------------------------------------------------
Total expense 703 1,343 2,434
- --------------------------------------------------------------------------------
Income before taxes 38,390 49,791 13,288
Income taxes 878 543 208
- --------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary 37,512 49,248 13,080
(Dividends in excess of earnings) equity
in undistributed income of subsidiary (14,544) (25,596) 6,413
- --------------------------------------------------------------------------------
Net income $ 22,968 $ 23,652 $19,493
================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------
(In thousands)
Operating Activities
Net Income $ 22,968 $ 23,652 $ 19,493
Adjustments to reconcile net income to
net cash provided by operating activities:
Dividends in excess of earnings
(increase in undistributed earnings
of subsidiary) 14,544 25,596 (6,413)
Net gains on sales of investment
securities available for sale (86) (179) (106)
Decrease (increase) in other assets 1,012 852 (543)
(Decrease) increase in other liabilities 75 (678) 1,618
Amortization of ESOP 932 820 771
Amortization of RRP 1,079 1,260 104
- --------------------------------------------------------------------------------
Net cash provided by operating activities 40,524 51,323 14,924
- --------------------------------------------------------------------------------
Investing Activities
Purchase of investment securities (7,814) (20,407) (47,326)
Proceeds from sales and maturities of
investment securities available for sale 6,657 22,280 20,405
(Increase) decrease in due from subsidiary (1,303) (600) 250
Capital contributed to subsidiary Bank -- -- (92,869)
- --------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (2,460) 1,273 (119,540)
- --------------------------------------------------------------------------------
Financing Activities
Cash dividends paid (13,844) (8,620) (7,250)
Net proceeds from stock offering -- -- 163,809
ESOP stock contribution -- -- (13,240)
Equity adjustment for conforming
of annual reporting periods -- -- (828)
Stock options exercised 143 1,489 1,592
Purchase of treasury stock (48,646) (48,035) (10,728)
Purchase and retirement of common stock (279) (299) --
- --------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (62,626) (55,465) 133,355
- --------------------------------------------------------------------------------
Net (decrease) increase in cash (24,562) (2,869) 28,739
Cash at beginning of the year 26,229 29,098 359
- --------------------------------------------------------------------------------
Cash at end of year $ 1,667 $ 26,229 $ 29,098
================================================================================
30 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data (dollars in
thousands, except per share data):
First Second Third Fourth
YEAR ENDED DECEMBER 31, 2000 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest income $32,847 $34,173 $35,145 $34,624
Interest expense 18,229 19,343 20,848 20,452
- --------------------------------------------------------------------------------
Net interest income 14,618 14,830 14,297 14,172
Provision for loan losses 393 393 393 262
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 14,225 14,437 13,904 13,910
Non-interest income 738 701 70 760
Non-interest expense 6,331 6,253 5,795 6,299
- --------------------------------------------------------------------------------
Income before income tax expense 8,632 8,885 8,179 8,371
Income tax expense 2,896 3,089 2,538 2,576
- --------------------------------------------------------------------------------
Net income $ 5,736 $ 5,796 $ 5,641 $ 5,795
================================================================================
Basic earnings per share $0.16 $0.17 $0.17 $0.18
================================================================================
Diluted earnings per share $0.16 $0.17 $0.17 $0.18
================================================================================
First Second Third Fourth
Year Ended December 31, 1999 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest income $29,944 $30,482 $31,087 $31,875
Interest expense 15,912 15,910 16,132 17,052
- --------------------------------------------------------------------------------
Net interest income 14,032 14,572 14,955 14,823
Provision for loan losses 450 450 300 450
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 13,582 14,122 14,655 14,373
Non-interest income 1,047 1,003 846 735
Non-interest expense 6,059 6,306 6,185 6,006
- --------------------------------------------------------------------------------
Income before income tax expense 8,570 8,819 9,316 9,102
Income tax expense 2,959 2,939 3,164 3,093
- --------------------------------------------------------------------------------
Net income $ 5,611 $ 5,880 $ 6,152 $ 6,009
================================================================================
Basic earnings per share $0.14 $0.15 $0.15 $0.16
================================================================================
Diluted earnings per share $0.13 $0.15 $0.15 $0.16
================================================================================
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 31
Independent
Auditors' Report
The Board of Directors and Stockholders
First Sentinel Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of First Sentinel Bancorp, Inc. and Subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Sentinel Bancorp, Inc. and Subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Short Hills, New Jersey
January 19, 2001
Shareholder Information
DIVIDEND REINVESTMENT PLAN
First Sentinel offers its shareholders a convenient plan to increase their
investment in the Company. Shareholders can elect to have their quarterly cash
dividends automatically reinvested in additional shares of common stock at
market price without any commissions or service charges. In the alternative,
shareholders can elect to have their cash dividends automatically deposited in
an account at First Savings Bank. Shareholders may request information about the
plan and an enrollment card by contacting the Company's executive offices at
877-636-BANK.
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
800-368-5948
MARKET MAKERS
Friedman, Billings, Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Va 22209-1722
Janney Montgomery Scott, LLC
1801 Market Street
Philadelphia, PA 19103
Ryan, Beck & Co.
220 South Orange Avenue
Livingston, NJ 07039
Sandler O'Neill & Partners, L.P.
Two World Trade Center, 104th Floor
New York, NY 10048
AUDITORS
KPMG LLP
150 John F. Kennedy Parkway
Short Hills, NJ 07078
COUNSEL
Wilentz Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, NJ 07095
Thacher Proffitt & Wood
Two World Trade Center
New York, NY 10048
INVESTOR RELATIONS
Ann C. Clancy
First Sentinel Bancorp, Inc.
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
732-726-9700
ANNUAL MEETING
First Sentinel's Annual Meeting of Shareholders will be held on Wednesday, April
25, 2001, at 10:00 a.m. at the Sheraton at Woodbridge Place, 515 Route 1 South,
Iselin, New Jersey.
10-K AVAILABILITY
Copies of First Sentinel's Form 10-K for the year ended December 31, 2000, are
available free-of-charge to shareholders upon written request to First Sentinel
Bancorp, Inc., 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095;
Attention: Bonnie Petz.
CONTACTS
Persons seeking general or financial information about First Sentinel should
contact Investor Relations at 732-726-9700 ext. 5514. Shareholders seeking
information regarding stock records, changing the name, address or ownership of
stock or reporting lost certificates should contact the Company's transfer
agent, Registrar and Transfer Company, at 800-368-5948.
MARKET INFORMATION
FOR COMMON STOCK
First Sentinel Bancorp, Inc. common stock trades on the Nasdaq Stock Market
under the symbol "FSLA." Newspaper financial sections list the stock as FSLA or
FSentBc. At December 31, 2000, there were 3,013 holders of record of First
Sentinel's common stock. The following table sets forth the high and low sales
prices per share of the Company's common stock, as reported on the Nasdaq
National Market.
2000 1999
------------------------- ------------------------
Dividends Dividends
High Low Paid High Low Paid
- --------------------------------------------------------------------------------
Fourth Quarter $11.50 $ 8.69 $ .060 $ 9.00 $ 7.75 $ .060
Third Quarter 9.81 8.00 .060 9.50 7.69 .055
Second Quarter 8.63 7.25 .060 8.88 7.00 .055
First Quarter 8.25 7.09 .210* 8.75 7.69 .050
* Includes a special cash dividend of $0.15 paid in January 2000.
32 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES