Back to GetFilings.com
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, 2001
Commission file number: 0-23809
FIRST SENTINEL BANCORP, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
DELAWARE 22-3566151
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ, 07095
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 15, 2002, as
quoted by the Nasdaq Stock Market, was approximately $353.2 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 15, 2002, there were 43,106,742 shares issued and 30,768,065 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, 2001 (Part II).
II. Portions of the Proxy Statement for the 2002 Annual Meeting of
Stockholders to be held on May 21, 2002 and any adjournment thereof and
which is expected to be filed with the Securities and Exchange Commission
on or about April 22, 2002 (Part III).
1
INDEX
PAGE
PART I
Item 1. Business ................................................. 3
Item 2. Properties ............................................... 31
Item 3. Legal Proceedings ........................................ 32
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 ....... 33
Item 11. Executive Compensation ................................... 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management ........................................... 34
Item 13. Certain Relationships and Related Transactions ........... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .............................................. 34
SIGNATURES .................................................................. 37
2
PART I
ITEM 1. 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. At
December 31, 2001, the Company had consolidated total assets of $2.1 billion and
total stockholders' equity of $230.1 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.
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.
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.
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;
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
3
continues to diversify and expand upon the products and services it offers by
focusing on both lending and deposit services to small and medium-sized retail
businesses. 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, with
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 utilized its
ability to borrow as an alternative means of funding asset growth. The average
balance of borrowings outstanding for the years ended December 31, 2001, 2000
and 1999 was $495.7 million, $503.4 million and $325.5 million, respectively.
The Company will continue to evaluate leveraged growth opportunities as market
conditions allow.
The Company repurchased 1.9 million shares, or $22.2 million, of its
common stock during 2001 as part of its ongoing capital management strategy. At
December 31, 2001, the Company was eligible to repurchase an additional 745,000
shares under a 5% stock repurchase program authorized in June, 2001.
The Company progressed with teller platform automation initiatives in
2001. The initial phases resulted in lower printing costs and a streamlined
transaction process. The Company anticipates that as the system evolves,
realization of further efficiencies and enhanced sales capabilities will be
achieved. In addition, the Company introduced transactional Internet banking in
2001. Supplementing the Company's existing delivery channels, Internet banking
provides customers with on-line access to commercial and retail services. These
services 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. Accordingly, the Company
purchased an existing bank branch facility in Somerset, New Jersey, in December
2001. This new branch location opened in February 2002.
4
MARKET AREA AND COMPETITION
The Company currently operates 23 branch offices in central New Jersey,
18 of which are located in Middlesex County, two in Monmouth County and one in
each of Mercer, Somerset and Union Counties. 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. Relatively low unemployment levels and favorable
interest rates have contributed to the appreciation in New Jersey's real estate
market in recent years. Whether such 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,
---------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
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) ................. $1,220,059 $ 89,678 7.35% $1,121,386 $ 84,174 7.51% $ 934,991 $ 68,656 7.34%
Investment and mortgage-
backed securities
available for sale (2) ....... 735,600 43,907 5.97 818,035 52,615 6.43 904,744 54,732 6.05
--------------------- --------------------- ---------------------
Total interest-earning
assets ................... 1,955,659 133,585 6.83 1,939,421 136,789 7.05 1,839,735 123,388 6.71
Non-interest earning assets ...... 63,937 20,695 46,536
---------- ---------- ----------
Total assets ............... $2,019,596 $1,960,116 $1,886,271
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
NOW and money market
accounts ..................... $ 381,613 9,654 2.53 $ 354,135 9,452 2.67 $ 347,325 9,395 2.70
Savings accounts ............... 168,520 3,790 2.25 166,127 3,744 2.25 170,907 3,931 2.30
Certificate accounts ........... 660,120 33,764 5.11 646,791 34,783 5.38 686,754 33,900 4.94
Borrowed funds ................. 495,674 27,476 5.54 503,372 30,893 6.14 325,501 17,780 5.46
-------------------- --------------------- ---------------------
Total interest-bearing
liabilities .............. 1,705,927 74,684 4.38 1,670,425 78,872 4.72 1,530,487 65,006 4.25
Non-interest bearing deposits .... 53,394 48,582 44,755
Other liabilities ................ 31,941 15,253 15,004
---------- ---------- ----------
Total liabilities .......... 1,791,262 1,734,260 1,590,246
---------- ---------- ----------
Stockholders' equity ............. 228,334 225,856 296,025
---------- ---------- ----------
Total liabilities and
stockholders' equity...... $2,019,596 $1,960,116 $1,886,271
========== ========== ==========
Net interest income/interest
rate spread(3).................... $58,901 2.45% $57,917 2.33% $58,382 2.46%
============== ============== ==============
Net interest-earning assets/net
interest margin (4)............... $249,732 3.01% $268,996 2.99% $309,248 3.17%
========== ============== ========== ====== ========== =======
Ratio of interest-earning
assets to interest-bearing
liabilities ...................... 1.15 X 1.16 x 1.20 x
========== ========== ==========
(1) Loans receivable, net includes non-accrual loans.
(2) Includes federal funds sold and 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, 2001 Year Ended December 31, 2000
Compared to Year Ended Compared to Year Ended
December 31, 2000 December 31, 1999
----------------------------- -------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------- --------------------
Volume Rate Net Volume Rate Net
------- ------- ------- -------- ------- --------
INTEREST-EARNING ASSETS:
Loans receivable, net .............. $ 7,320 $(1,816) $ 5,504 $ 13,903 $ 1,615 $ 15,518
Investment and mortgage-backed
securities and loans available
for sale ......................... (5,093) (3,615) (8,708) (5,433) 3,316 (2,117)
------- ------- ------- -------- ------- --------
Total .............................. 2,227 (5,431) (3,204) 8,470 4,931 13,401
------- ------- ------- -------- ------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and money market demand ...... 713 (511) 202 169 (112) 57
Savings .......................... 46 -- 46 (105) (82) (187)
Certificates of deposit .......... 720 (1,739) (1,019) (2,039) 2,922 883
Borrowed funds ..................... (463) (2,954) (3,417) 10,680 2,433 13,113
------- ------- ------- -------- ------- --------
Total .............................. 1,016 (5,204) (4,188) 8,705 5,161 13,866
======= ======= ======= ======== ======= ========
Change in net interest income ........ $ 1,211 $ (227) $ 984 $ (235) $ (230) $ (465)
======= ======= ======= ======== ======= ========
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, 2001, the Company's loan
portfolio totaled $1.2 billion, of which $858.0 million, or 68.4% were
one-to-four family residential mortgage loans. At that date, the Company's loan
portfolio also included $113.0 million of home equity loans and lines of credit
generally secured by second liens on one-to-four family residential properties,
$71.6 million of net construction loans, $167.8 million of commercial real
estate loans, and $23.4 million of multi-family residential mortgage loans,
which represented 9.0%, 5.7%, 13.4% and 1.8%, respectively, of total loans
receivable. Of the mortgage loan portfolio outstanding at December 31, 2001,
46.5% were fixed-rate loans and 53.5% were adjustable-rate mortgage ("ARM")
loans. Other loans held by the Company, which consist of loans on deposit
accounts, commercial, personal, and automobile loans, totaled $21.3 million, or
1.7% of total loans outstanding at December 31, 2001. The Company anticipates
continued growth in construction, commercial 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. In order to manage interest rate risk and diversify credit risk,
however, the Company periodically sells 30-year, fixed-rate conforming loans to
the Federal Home Loan Mortgage Corporation ("Freddie Mac" or "FHLMC"), FHLB-NY
and institutional investors and generally retains servicing rights. All such
loans are sold without recourse. At December 31, 2001, the Company's servicing
portfolio totaled $96.1 million. The Company had $5.5 million in loans held for
sale at December 31, 2001.
The Company also invests in mortgage-backed securities and other
mortgage-backed products such as collateralized mortgage obligations ("CMOs").
At December 31, 2001, mortgage-backed securities, including CMOs, were $642.7
million, or 30.0% of total assets, of which 64.5% 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, 2001, 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,
--------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ------------------ ------------------ ---------------- ----------------
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 ......... $ 857,973 68.37% $ 879,578 73.59% $ 774,858 75.52% $657,284 76.10% $566,625 78.25%
Home equity ................ 112,958 9.00 114,152 9.55 98,324 9.58 82,672 9.57 56,533 7.81
Construction (2) ........... 71,590 5.70 41,291 3.45 26,890 2.62 23,349 2.70 17,827 2.46
Commercial real estate ..... 167,806 13.37 131,072 10.97 96,821 9.44 65,069 7.53 54,926 7.58
Multi-family ............... 23,396 1.86 13,079 1.09 12,499 1.22 17,589 2.04 21,292 2.94
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total mortgage loans ..... 1,233,723 98.30 1,179,172 98.65 1,009,392 98.38 845,963 97.94 717,203 99.04
Other loans ................... 21,347 1.70 16,121 1.35 16,638 1.62 17,817 2.06 6,954 0.96
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total loans receivable ... 1,255,070 100.00% 1,195,293 100.00% 1,026,030 100.00% 863,780 100.00% 724,157 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan fees
(costs) and (premiums)
and discounts ............... (641) (1,850) (1,090) (422) (107)
Allowance for loan losses ..... 12,932 12,341 11,004 9,505 8,454
---------- ---------- ---------- -------- --------
Total loans receivable,
net .................... $1,242,779 $1,184,802 $1,016,116 $854,697 $715,810
========== ========== ========== ======== ========
Mortgage loans:
ARM ........................ $ 660,047 53.50% $ 664,164 56.32% $ 531,859 52.69% $439,234 51.92% $421,642 58.79%
Fixed-rate ................. 573,676 46.50 515,008 43.68 477,533 47.31 406,729 48.08 295,561 41.21
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total mortgage loans ..... $1,233,723 100.00% $1,179,172 100.00% $1,009,392 100.00% $845,963 100.00% $717,203 100.00%
========== ===== ========== ===== ========== ===== ======== ===== ======== ======
Mortgage-backed securities :
CMOs ....................... $ 137,528 21.77% $ 201,802 44.79% $ 273,511 46.85% $209,468 32.00% $ 90,247 15.95%
FHLMC ...................... 296,710 46.97 159,755 35.45 166,992 28.60 235,415 35.97 253,029 44.72
GNMA ....................... 44,951 7.11 29,409 6.53 57,489 9.85 71,347 10.90 113,179 20.00
FNMA ....................... 152,603 24.15 59,628 13.23 85,828 14.70 138,286 21.13 109,415 19.33
---------- ------ ---------- ------ ---------- ------ -------- ------ -------- ------
Total mortgage-backed
securities ............. 631,792 100.00% 450,594 100.00% 583,820 100.00% 654,516 100.00% 565,870 100.00%
====== ====== ====== ====== ======
Net premiums .................. 6,198 1,951 2,748 3,639 2,704
Net unrealized gain (loss)
on mortgage-backed
securities available
for sale .................... 4,726 (5,523) (11,409) 3,726 1,876
---------- ---------- ---------- -------- --------
Mortgage-backed securities,
net ......................... $ 642,716 $ 447,022 $ 575,159 $661,881 $570,450
========== ========== ========== ======== ========
- ----------
(1) Includes $5.5 million and $277,000 in mortgage loans held for sale at
December 31, 2001 and 2000, respectively. No loans were classified as held
for sale at December 31, 1999, 1998 or 1997.
(2) Net of loans in process of $65.1 million, $19.2 million, $28.0 million,
$41.8 million, and $27.5 million at December 31, 2001, 2000, 1999, 1998,
and 1997, 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, 2001. 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, 2001
---------------------------------------------
One Year After
One Year To Five Five
or Less Years Years Total
-------- -------- -------- ----------
Mortgage loans:
One-to-four family ......... $ 99,786 $287,777 $470,410 $ 857,973
Home equity ................ 33,572 23,269 56,117 112,958
Construction (1) ........... 71,590 -- -- 71,590
Commercial real estate ..... 26,461 41,602 99,743 167,806
Multi-family ............... 188 15,835 7,373 23,396
-------- -------- -------- ----------
Total mortgage loans ..... 231,597 368,483 633,643 1,233,723
Other loans .................. 14,749 3,725 2,873 21,347
-------- -------- -------- ----------
Total loans .............. $246,346 $372,208 $636,516 1,255,070
======== ======== ========
Net deferred loan costs and unearned premiums .................... 641
Allowance for loan losses ........................................ (12,932)
----------
Loans receivable, net ............................................ $1,242,779
==========
(1) Excludes loans in process of $65.1 million.
The following table sets forth at December 31, 2001, the dollar amount of
loans contractually due or repricing after December 31, 2002, and whether such
loans have fixed interest rates or adjustable interest rates (in thousands):
Due or repricing after
December 31, 2002
----------------------------------
Fixed Adjustable Total
-------- ---------- ----------
Mortgage loans:
One-to-four family ..................... $352,708 $405,479 $ 758,187
Home equity ............................ 71,530 7,856 79,386
Commercial real estate ................. 77,709 63,636 141,345
Multi-family ........................... 6,179 17,029 23,208
Other loans .............................. 4,272 2,326 6,598
-------- -------- ----------
Total loans receivable ................... 512,398 496,326 1,008,724
Mortgage-backed securities
(at amortized cost) .................... 227,207 165,754 392,961
-------- -------- ----------
Total loans receivable and mortgage-
backed securities ...................... $739,605 $662,080 $1,401,685
======== ======== ==========
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
10
customers, members of the local community, and referrals from attorneys,
established builders, and realtors within the Company's market area. In
addition, one-to-four family residential mortgage loans are also originated in
the Company's market area through loan originators who are employees of the
Company and are compensated on a 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, 2001, 68.4% 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 terms 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. The Company also 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 $1,000,000. The Company offers residential mortgage loans
with origination fees ranging from 0.00% to 3.00%.
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 100%. The Company obtains private
mortgage insurance for some of these types of loans, depending on the
underwriting and first lien position. The Company also offers "Helping Hand"
home equity loans for low income borrowers, with maximum terms of ten years,
with loan-to-value ratios of up to 100% and a maximum loan amount of $20,000.
Generally, the Company's minimum equity loan is $10,000 and the maximum equity
loan is $500,000. As of December 31, 2001, the Company had $71.8 million in
fixed-rate home equity loans outstanding.
The Company also offers a variable rate, home equity line of credit,
which is 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
.25%. 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. These loans
also have a 6.0% lifetime cap. The Company offers a fixed 6-month introductory
rate on both home equity line of credit products. The introductory rate is
currently 4.74%. The Company offers an additional credit line product that
allows for a loan-to-value ratio of up
11
to 100%. The rates charged on these loans vary between the prime rate plus 1.0%
to the prime rate plus 1.25%. The Company's home equity lines of credit
outstanding at December 31, 2001 totaled $41.2 million, with additional
available credit lines of $56.5 million.
CONSTRUCTION LENDING. At December 31, 2001, construction loans totaled
$71.6 million, or 5.7% of the Company's total loans outstanding. Available
credit lines totaled $65.1 million at December 31, 2001. The current policy of
the Company is to charge interest rates that float at margins of up to 1.5%
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 $155,000 to $12.0 million. At December 31, 2001, the Company
had 51 construction loans, 17 of which had principal outstanding of $1.0 million
or more, with the largest outstanding loan balance being $11.7 million. At
December 31, 2001, 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 12-month to
18-month terms with up to four six-month options to extend the original term.
Typically, additional loan origination fees are charged for each extension
granted however, these fees have been waived occasionally. 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. See "Asset Quality" for further discussion.
COMMERCIAL REAL ESTATE. At December 31, 2001, the Company had 150 loans
secured by commercial real estate, totaling $167.8 million, or 13.4% of the
Company's total loan portfolio. Commercial real estate loans are generally
originated in amounts up to 70% of the appraised value of the mortgaged
property. The Company's commercial real estate loans are permanent loans secured
by improved property such as office buildings, retail stores, small shopping
centers, medical offices, small industrial facilities, warehouses, storage
facilities and other non-residential buildings. The largest commercial real
estate loan at December 31, 2001 had an outstanding balance of $14.9 million and
was secured by several self-storage facilities. Substantially 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 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
a $20.0 million maximum for any individual commercial real estate loan.
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, 2001, $23.4 million, or
1.8%, of the Company's total loan portfolio consisted of multi-
12
family residential loans. At December 31, 2001, the Company had three
multi-family loans 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, boat, motorcycle and motor home loans and loans secured by
savings accounts. At December 31, 2001, $21.3 million, or 1.7%, 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 outside 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
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, 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 $96.1 million and $75.8 million of mortgage loans for
others at December 31, 2001 and 2000, respectively. The Company received
$193,000 and $177,000 in servicing fees for the years ended December 31, 2001
and 2000, 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, 2001, $5.5 million of mortgage loans were classified as held for sale.
Mortgage loans sold totaled $46.6 and $9.8 million for the years ended December
31, 2001 and 2000, respectively. Periodically, the Company may also purchase
mortgage loans. The Company purchased $19.1 and $87.8 million in mortgage loans
from third-party correspondents for the years ended December 31, 2001 and 2000,
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 purchase 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 real estate owned ("REO"). At December 31,
2001, REO totaled $42,000 and consisted of one property. 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, 2001, 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
$130,000.
(Dollars in thousands)
At December 31,
------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Non-accrual mortgage loans ......... $1,787 $2,334 $2,311 $2,647 $4,457
Non-accrual other loans ............ -- 15 45 93 --
------ ------ ------ ------ ------
Total non-accrual loans ........ 1,787 2,349 2,356 2,740 4,457
Loans 90 days or more delinquent
and still accruing ............... 62 40 326 1,525 1,596
------ ------ ------ ------ ------
Total non-performing loans ..... 1,849 2,389 2,682 4,265 6,053
Restructured loans ................. -- -- -- -- 2,103
Total real estate owned, net of
related allowance for loss ....... 42 257 466 1,453 1,516
------ ------ ------ ------ ------
Total non-performing assets ........ $1,891 $2,646 $3,148 $5,718 $9,672
====== ====== ====== ====== ======
Non-performing loans to total
loans receivable, net ............ 0.15% 0.20% 0.26% 0.50% 0.85%
Total non-performing assets
to total assets .................. 0.09% 0.13% 0.17% 0.31% 0.61%
CLASSIFICATION OF ASSETS. The Company 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 Company 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 $9.0 and $5.4 million at December
31, 2001 and 2000, respectively. At December 31, 2001, $1.4 million of
classified loans were secured by residential properties. The majority of the
remaining $7.6 million in classified loans were secured primarily by commercial
real estate. As of December 31, 2001, the Company's largest classified loan had
a balance of $3.7 million and was secured by seven retail (appliance sales)
stores, providing an estimated loan-to-value ratio of approximately 65%. This
loan was current at December 31, 2001 and continued to accrue interest at the
contractual rate, however the assets of the business are being liquidated and
the borrower has sought bankruptcy protection. Of the seven properties securing
this loan, four were vacant at December 31, 2001. The Company had two additional
significant commercial real estate loans that were classified at December 31,
2001. Approximately $1.9 million was secured by an office building with a
loan-to-value
14
ratio of approximately 85%. This loan was paying in accordance with contractual
terms and remained on accrual status at December 31, 2001. Approximately
$740,000 was secured by a self-storage facility with a loan-to-value ratio of
approximately 88%. This loan was also paying in accordance with contractual
terms and continued to accrue interest at December 31, 2001.
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 $650,000 and $1.4 million in provisions for loan
losses for the years ended December 31, 2001 and 2000, 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, 2001, the total allowance was $12.9 million, which amounted to 1.03% of
loans receivable, net of unearned and deferred fees, and 6.8 times
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,
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Balance at beginning
of period .................. $12,341 $11,004 $ 9,505 $ 8,454 $ 7,781
Provision for loan losses .... 650 1,441 1,650 1,469 1,200
Charge-offs (domestic):
Real estate - mortgage ..... (71) (97) (151) (594) (510)
Installment loans to
individuals ................ -- (7) -- (2) (17)
Recoveries (domestic):
Real estate - mortgage ..... 12 -- -- 28 --
Allowance activity of
Pulse during conforming
period, net ................ -- -- -- 150 --
------- ------- ------- ------- -------
Balance at end of period ..... $12,932 $12,341 $11,004 $ 9,505 $ 8,454
======= ======= ======= ======= =======
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,
-------------------------------------------------------------------------
2001 2000
----------------------------------- ---------------------------------
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 ..................... $ 4,579 35.41% 68.37% $ 4,831 39.15% 73.59%
Home equity loans ...................... 1,270 9.82 9.00 1,243 10.07 9.55
Construction ........................... 2,209 17.09 5.70 1,275 10.33 3.45
Commercial real estate ................. 3,674 28.41 13.37 2,637 21.37 10.97
Multi-family ........................... 351 2.71 1.86 197 1.60 1.09
------- ------ ------ ------- ------ ------
Total mortgage loans ................. 12,083 93.44 98.30 10,183 82.51 98.65
Other .................................. 849 6.56 1.70 587 4.76 1.35
Unallocated ............................ -- -- -- 1,571 12.73 --
------- ------ ------ ------- ------ ------
Total allowance for loan losses ...... $12,932 100.00% 100.00% $12,341 100.00% 100.00%
======= ====== ====== ======= ====== ======
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------ -----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- ----- ------ --------- -----
One-to-four family ......... $ 4,667 42.41% 75.52% $4,027 42.37% 76.10% $3,867 45.75% 78.25%
Home equity loans .......... 1,086 9.87 9.58 1,090 11.47 9.57 458 5.42 7.81
Construction ............... 1,573 14.29 2.62 1,223 12.87 2.70 894 10.57 2.46
Commercial real estate ..... 2,630 23.90 9.44 1,963 20.65 7.53 1,877 22.20 7.58
Multi-family ............... 250 2.27 1.22 522 5.49 2.04 777 9.19 2.94
------- ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans ..... 10,206 92.74 98.38 8,825 92.85 97.94 7,873 93.13 99.04
Other ...................... 541 4.92 1.62 486 5.11 2.06 258 3.05 0.96
Unallocated ................ 257 2.34 -- 194 2.04 -- 323 3.82 --
------- ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses ............ $11,004 100.00% 100.00% $9,505 100.00% 100.00% $8,454 100.00% 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 mortgage-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, 2001, mortgage-backed securities, net, totaled $642.7 million, or
30.0% 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 6.38%. Fixed coupon
rates ranged from 6.00% to 9.50% for GNMA, 6.00% to 9.00% for Freddie Mac, 5.75%
to 7.00% for FNMA fixed-rate securities and 5.50% to 7.25% for fixed-rate CMOs.
Adjustable-rate coupon ranges were as follows: 5.50% to 7.25% for GNMA ARM
mortgage-backed securities; 5.22% to 8.46% for Freddie Mac ARM mortgage-backed
securities; 6.19% to 8.19% for FNMA ARM mortgage-backed securities; and 4.35% to
6.25% for adjustable-rate CMOs.
Included in the total mortgage-backed securities portfolio are CMOs,
which had a market value of $137.1 million at December 31, 2001. 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 flows 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,
2001, was 5.7 years. The stated weighted average contractual maturity of the
Company's CMOs at December 31, 2001, was 21.8 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, 2001, 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 ......................... 4,752 4,876
Five years through ten years ........................ 57,500 57,456
Greater than ten years .............................. 575,738 580,384
-------- --------
$637,990 $642,716
======== ========
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,
2001, the market value of investment securities available for sale was $108.0
million, with an amortized cost basis of $109.4 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 9.8 years. A 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, 2001, $41.3 million, or 38.3% 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,
-------------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
Investment securities available for sale:
U.S. Government and agency
obligations ................................ $ 26,999 $ 27,014 $151,753 $149,149 $155,173 $146,810
State and political obligations ................ 14,029 14,029 12,813 12,451 16,976 15,706
Corporate obligations .......................... 60,330 59,357 67,267 62,880 45,917 40,424
Equity securities .............................. 8,051 7,588 10,817 10,490 11,149 10,650
-------- -------- -------- -------- -------- --------
Total investment securities
available for sale ....................... $109,409 $107,988 $242,650 $234,970 $229,215 $213,590
======== ======== ======== ======== ======== ========
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, 2001. Investments in equity
securities, which have no contractual maturities, are excluded from this table.
(Dollars in thousands)
At December 31, 2001
----------------------------------------------------------------------------------------------------------
More than More than
One Year Five Years More than
One Year or Less to Five Years to Ten Years Ten Years Total
---------------- --------------- ---------------- ---------------- --------------------------------------
Amor- Weighted Amor- Weighted Amor- Weighted Amor- Weighted Average Amor- Weighted
tized Average tized Average tized Average tized Average Maturity tized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield in Years Cost Value Yield
------- -------- ------ -------- ------ -------- ------- -------- -------- -------- --------- ---------
Investment securities
available for sale:
U.S. Government
and agency
obligations ....... $ -- --% $12,999 5.16% $14,000 6.12% $ -- --% 5.49 $ 26,999 $ 27,014 5.66%
State and political
obligations ....... 2,507 5.13 3,443 5.52 3,697 6.25 4,381 6.88 6.84 14,028 14,029 6.07
Corporate obligations -- -- 20,760 7.18 14,000 7.28 25,571 6.79 14.37 60,331 59,357 7.04
------ ---- ------- ---- ------- ---- ------- ---- ----- -------- -------- ----
Total investment
securities available
for sale ........... $2,507 5.13% $37,202 6.32% $31,697 6.65% $29,952 6.80% 10.96 $101,358 $100,400 6.54%
====== ==== ======= ==== ======= ==== ======= ==== ===== ======== ======== ====
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 advances
from the FHLB-NY, reverse repurchase agreements and other borrowed funds.
Further, the Company may access additional liquidity through the capital
markets, as in the trust preferred securities offering completed in November
2001.
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, 2001, $130.7 million, or 9.9%, of the Company's deposit balance
consisted of IRAs. Also at that date, $200.3 million, or 15.2%, 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, 2001, certificate accounts in amounts of $100,000 or more
mature as follows (in thousands):
Amount
-------
Maturity period
Three months or less ............. $36,422
Over 3 through 6 months .......... 20,457
Over 6 through 12 months ......... 11,593
Over 12 months ................... 16,256
-------
Total ..................... $84,728
=======
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,
----------------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ------- ---------- ------- ---------- -------
Non-interest bearing deposits ......... $ 53,394 --% $ 48,582 --% $ 44,755 --%
NOW and money market accounts ......... 381,613 2.53 354,135 2.67 347,325 2.70
Savings accounts ...................... 168,520 2.25 166,127 2.25 170,907 2.30
---------- ------- ---------- ------- ---------- -------
Sub-total .......................... 603,527 2.23 568,844 2.32 562,987 2.36
Certificate accounts .................. 660,120 5.11 646,791 5.38 686,754 4.94
---------- ------- ---------- ------- ---------- -------
Total average deposits ............. $1,263,647 3.73% $1,215,635 3.95% $1,249,741 3.78%
========== ======= ========== ======= ========== =======
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, 2001, the
Company's FHLB-NY advances totaled $165.8 million, representing 8.8% of total
liabilities.
21
During 2001, 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, 2001 was $380.0 million, representing 20.2% 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,
----------------------------------
2001 2000 1999
-------- -------- --------
FHLB-NY advances:
Average balance outstanding ............ $128,492 $ 99,102 $ 70,914
Maximum amount outstanding at
any month-end during the period ...... 165,814 140,200 139,250
Balance outstanding at end of period ... 165,814 80,955 107,000
Weighted average interest rate
during the period .................... 5.44% 6.11% 5.43%
Weighted average interest rate
at end of period ..................... 4.76% 6.21% 5.88%
Other borrowings:
Average balance outstanding ............ $367,182 $404,270 $254,587
Maximum amount outstanding at
any month-end during the period ...... 425,000 440,000 315,000
Balance outstanding at end of period ... 380,000 425,000 315,000
Weighted average interest rate
during the period .................... 5.59% 6.14% 5.47%
Weighted average interest rate
at end of period ..................... 5.29% 6.16% 5.58%
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, 2001,
FSB Financial Corp. had net income of $230,000.
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 $34.1 million for the year ended December 31, 2001.
FIRST SENTINEL CAPITAL TRUST I AND FIRST SENTINEL CAPITAL TRUST II. These
subsidiaries are special purpose business trusts established for the issuance of
$25.0 million in preferred capital securities. Each is a wholly-owned subsidiary
of the Company.
In addition, the Company has three wholly-owned subsidiaries which were
inactive in 2001.
PERSONNEL
As of December 31, 2001, the Company had 277 full-time employees and 43
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, 2001, the Bank has a base year reserve subject to recapture equal
to $831,000. 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,
2001 and 2000, 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,
2001 and 2000, 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 also 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)
certain 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) on a
monthly basis 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,
2001, the Bank maintained 87.3% 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, 2001, thereby
qualifying under the QTL test.
The Gramm-Leach Bliley Act ("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
24
companies in existence or with applications filed with the OTS on or before May
4, 1999, such as the Company, 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.
Upon any non-supervisory acquisition by the Company of another savings
institution or savings bank that meets the QTL test and is deemed to be a
savings institution by the OTS, the Company would become a multiple savings and
loan holding company (if the acquired institution is held as a separate
subsidiary) and would be subject to extensive limitations on the types of
business activities in which it could engage. The HOLA limits the activities of
a multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to
the prior approval of the OTS, and certain activities authorized by OTS
regulation, and no multiple savings and loan holding company may acquire more
than 5% the voting stock of a company engaged in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in
a multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
NEW JERSEY 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 is subject to
examination by the Commissioner. The Commissioner regulates, among other things,
the Bank's internal business procedures as well as its deposits, lending and
investment activities. The Commissioner must approve changes to the Bank's
Certificate of Incorporation, establishment or relocation of branch offices,
mergers and the issuance of additional stock.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
FEDERAL BANKING REGULATION
CAPITAL REQUIREMENTS. FDIC regulations require SAIF-insured banks, such
as the Bank, to maintain minimum levels of capital. The FDIC regulations define
two Tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common stockholders' equity
(excluding the net unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses
25
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 cannot 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 FDIC adopted a regulation effective April 1, 2002, that established
minimum regulatory capital requirements for equity investments in nonfinancial
companies. The regulation applies a series of marginal capital charges that
range from 8% to 25% depending upon 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. 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 permissible
amount specified by the New Jersey Banking Act. Section 24 also provides an
exception for majority
26
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 written agreement,
order or directive by the OTS to meet a specific capital level. As of December
31, 2001, 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. The
assessment rates for our SAIF-assessable deposits are zero basis points. If the
FDIC determines that assessment rates should be increased, institutions in all
risk categories could be affected. The FDIC has exercised this authority several
times in the past and could raise insurance assessment rates in the future. The
FDIC has recently alerted insured institutions to the possibility of higher
deposit insurance premiums in the second half of 2002. The FDIC stated that the
higher premiums, if necessary, would likely affect only institutions with BIF
insured deposits and that the amount of any increase would not exceed 5 basis
points. Any increase in deposit insurance premiums could have an adverse effect
upon the earnings of First Sentinel. However, the recent advisory statement from
the FDIC, if acted upon, is not expected to have a material adverse effect on
our earnings.
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. The
Bank's total expense in 2001 for the assessment for deposit insurance and the
FICO payments was $235,000.
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.
27
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final rule
establishes deadlines for the submission and review of such safety and soundness
compliance plans.
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 branch relocations, 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, effective April 1, 2001, the FDIC adopted regulations implementing the
requirements under Gramm-Leach that insured depository institutions publicly
disclose certain agreements that are in fulfillment of the CRA. The Bank has 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
December 31, 2001. Pursuant to Gramm-Leach, the foregoing minimum share
ownership requirements will be replaced by regulations to be promulgated by the
FHFB. Gramm-Leach specifically
28
provides that the minimum requirements in existence immediately prior to the
adoption of Gramm-Leach shall remain in effect until such regulations are
adopted. First Sentinel is in compliance with these requirements.
INSURANCE ACTIVITIES. In October, 2001, the federal banking agencies
adopted regulations prohibiting 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 insurance
product or annuity from an entity that is not affiliated with the depository
institution. The regulations also require prior disclosure of this prohibition
to potential insurance product or annuity customers. Management does not believe
that these regulations will have a material impact on the Company's operations.
PRIVACY STANDARDS. Effective July 1, 2001, financial institutions,
including First Sentinel, became subject to FDIC regulations implementing the
privacy protection provisions of Gramm-Leach. These 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. The implementation of these regulations did not
have a material adverse effect on the Company's 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.
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;
29
(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.
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 $41.3 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement was
3%; and for accounts aggregating greater than $41.3 million, the reserve
requirement was $1.2 million plus 10% (subject to adjustment by the Federal
Reserve Board) against that portion of total transaction accounts in excess of
$41.3 million. The first $5.7 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.
THE USA PATRIOT ACT
In response to the events of September 11th, President George W. Bush
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers,
30
increased information sharing, and broadened anti-money laundering requirements.
By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act
takes measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents
and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal policies,
procedures, and controls, (ii) specific designation of an anti-money laundering
compliance officer, (iii) ongoing employee training programs, and (iv) an
independent audit function to test the anti-money laundering program. Rules
promulgated under this Section are due by April 24, 2002.
Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations by
October 26, 2002 that provide for minimum standards with respect to customer
identification at the time new accounts are opened.
Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or correspondent
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States) to
establish appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering. Rules promulgated under this Section are due by April 24, 2002, to
be effective by July 23, 2002.
Effective December 25, 2001, financial institutions are prohibited from
establishing, maintaining, administering or managing correspondent accounts for
foreign shell banks (foreign banks that do not have a physical presence in any
country), and will be subject to certain recordkeeping obligations with respect
to correspondent accounts of foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications.
Financial institutions must report coin or currency transactions in
excess of $10,000 received in a non-financial trade or business.
ITEM 2. PROPERTIES
The Company conducts its business through its main office and 22 full
service branch offices, all located in central New Jersey. The following table
sets forth certain information concerning the main office and each branch office
of the Company at December 31, 2001. The aggregate net book value of the
Company's premises and equipment was $16.0 million at December 31, 2001.
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
31
Location Date Leased or Acquired Leased or Owned
-------- ----------------------- ---------------
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
371 Spotswood - Englishtown Road 5/98 Owned
Spotswood, NJ 08884
325 Amboy Avenue 1/70 Owned
Woodbridge, NJ 07095
780 Easton Avenue 12/01 Owned
Somerset, NJ 08873
(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.
32
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, 2001.
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 35 of the 2001 Annual Report to Stockholders is
incorporated herein by reference. At December 31, 2001, 30,940,117 shares of the
Company's outstanding common stock was held of record by approximately 2,828
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 2001 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 15 of the 2001 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 15 of the 2001 Annual Report to Stockholders and 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 2001 Annual Report to Stockholders
on pages 10 through 34 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 will be included under the caption
"Information With Respect to Nominees, Continuing Directors and Executive
Officers" in the Company's proxy statement for the 2002 Annual Meeting of
Stockholders ("2002 Proxy Statement") to be filed with the Securities and
Exchange Commission on or about April 22, 2002, and are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The disclosures required by Item 11 will be included under the captions
"Directors' Compensation" and "Executive Compensation" (excluding the
Compensation Committee Report) in the 2002 Proxy Statement to be filed with the
Securities and Exchange Commission on or about April 22, 2002, and are
incorporated herein by reference.
33
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 the 2002 Proxy Statement
to be filed with the Securities and Exchange Commission on or about April 22,
2002 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 will be included under the caption
"Transactions With Certain Related Persons" in the 2002 Proxy Statement to be
filed with the Securities and Exchange Commission on or about April 22, 2002,
and are incorporated herein by reference.
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, 2001, included in the Annual Report, listed below, are
incorporated herein by reference.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31,
2001 AND 2000 (ANNUAL REPORT - PAGE 16).
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER
31, 2001, 2000 AND 1999 (ANNUAL REPORT - PAGE 17).
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000, AND 1999 (ANNUAL REPORT - PAGE
18).
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND 1999 (ANNUAL REPORT - PAGE 19).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ANNUAL REPORT -
PAGES 20 THROUGH 33).
INDEPENDENT AUDITORS' REPORT (ANNUAL REPORT - PAGE 34).
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. a
3.2 Bylaws of First Sentinel Bancorp, Inc. a
4.0 Stock Certificate of First Sentinel
Bancorp, Inc. b
4.1 Certificate of Designations,
Preferences and Rights of Series A
Junior Participating Preferred Stock c
==============================================================
34
==============================================================
Exhibit
Number Description Reference
--------------------------------------------------------------
4.2 Rights Agreement by and between First
Sentinel Bancorp, Inc. and Registrar
and Transfer Company, as Rights Agent c
4.3 Form of Right Certificate c
10.1 First Sentinel Bancorp, Inc. 1996
Omnibus Incentive Plan b
10.2 First Sentinel Bancorp, Inc. Amended
and Restated 1998 Stock-based
Incentive Plan d
10.3 First Sentinel Bancorp, Inc. 1986
Acquisition Stock Option Plan e
10.4 First Sentinel Bancorp, Inc. 1993
Acquisition Stock Option Plan e
10.5 First Sentinel Bancorp, Inc. 1997
Acquisition Stock Option Plan e
10.6 First Savings Bank Deferred Fee Plan f
10.7 First Savings Bank, SLA Supplemental
Executive Retirement Plan b
10.8 First Savings Bank Supplemental
Executive Retirement Plan II f
10.9 First Savings Bank Non-Employee
Director Retirement Plan f
10.10 Form of Employment Agreements between
First Sentinel Bancorp, Inc. and
(i) John P. Mulkerin and
(ii) Christopher Martin f
10.11 Form of Employment Agreements between
First Savings Bank and (i) John P.
Mulkerin and (ii) Christopher Martin f
10.12 Form of Two-year Change in Control
Agreement between First Savings Bank
and certain executive officers f
10.13 Form of Three-year Change in Control
Agreement between First Savings Bank
and certain executive officers f
10.14 First Savings Bank, SLA Employee
Severance Compensation Plan b
11.0 Computation of per share earnings g
13.0 Portions of the 2001 Annual Report to Filed
Stockholders herein
21.0 Subsidiaries of Registrant
incorporated by reference herein
to Part I - Subsidiaries
23.0 Consent of KPMG LLP Filed
herein
--------------------------------------------------------------
a 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.
b 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.
c Previously filed and incorporated herein by reference to the Exhibits to
the Registration Statement on Form 8-A (File No. 000-23809) of First
Sentinel Bancorp, Inc. dated December 20, 2001.
d 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.
e 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.
f Previously filed and incorporated herein by reference to the December 31,
2000 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. (File No.
000-23809) dated March 30, 2001.
g Filed herein as a component of Exhibit 13.0, under Footnote One of the
Notes to Consolidated Financial Statements.
35
(b) Reports on Form 8-K.
On December 4, 2001, the Company filed a report on Form 8-K pursuant to
Items 5 and 7 regarding the sale of $25.0 million of trust preferred
securities.
On December 20, 2001, the Company filed a report on Form 8-K pursuant
to Items 5 and 7 regarding senior officer appointments.
On December 20, 2001, the Company filed a report on Form 8-K pursuant
to Items 5 and 7 regarding the adoption of a stockholder rights plan.
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: April 1, 2002 FIRST SENTINEL BANCORP, INC.
JOHN P. MULKERIN
----------------
John P. Mulkerin
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
PHILIP T. RUEGGER, JR. Chairman of the Board April 1, 2002
- ---------------------------
Philip T. Ruegger, Jr.
JOHN P. MULKERIN President, Chief Executive April 1, 2002
- --------------------------- Officer and Director
John P. Mulkerin
CHRISTOPHER P. MARTIN Executive Vice President, April 1, 2002
- --------------------------- Chief Operating Officer
Christopher P. Martin and Director
THOMAS M. LYONS Senior Vice President, April 1, 2002
- --------------------------- Chief Financial Officer
Thomas M. Lyons
JOSEPH CHADWICK Director April 1, 2002
- ---------------------------
Joseph Chadwick
GEORGE T. HORNYAK, JR. Director April 1, 2002
- ---------------------------
George T. Hornyak, Jr.
KEITH H. McLAUGHLIN Director April 1, 2002
- ---------------------------
Keith H. McLaughlin
JEFFRIES SHEIN Director April 1, 2002
- ---------------------------
Jeffries Shein
WALTER K. TIMPSON Director April 1, 2002
- ---------------------------
Walter K. Timpson
37