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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No.: 000-23809
FIRST SENTINEL BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 22-3566151
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ 07095
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
NOT APPLICABLE
Former Name, Address, and Fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 1, 2002
- ------------------------ ----------------------------------------
Common Stock 30,005,723 shares
FIRST SENTINEL BANCORP, INC.
INDEX TO FORM 10-Q
Page #
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of June 30, 2002
and December 31, 2001 3
Consolidated Statements of Income for the three and six months
ended June 30, 2002 and 2001 4
Consolidated Statements of Stockholders' Equity for the six months
ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II. OTHER INFORMATION. 17
SIGNATURES 19
2
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data) (Unaudited)
June 30, December 31,
2002 2001
----------- -----------
ASSETS
Cash and due from banks ......................................................... $ 25,848 $ 33,875
Federal funds sold .............................................................. 26,675 20,000
----------- -----------
Total cash and cash equivalents ............................................ 52,523 53,875
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost ..................... 20,888 20,541
Investment securities available for sale ........................................ 125,432 107,988
Mortgage-backed securities available for sale ................................... 730,809 642,716
Loans held for sale, net ........................................................ 372 5,467
Loans receivable, net ........................................................... 1,264,369 1,237,312
Interest and dividends receivable ............................................... 12,780 12,039
Premises and equipment, net ..................................................... 15,777 16,014
Core deposit intangibles ........................................................ 4,988 5,411
Other assets .................................................................... 28,739 37,556
----------- -----------
Total assets ............................................................... $ 2,256,677 $ 2,138,919
=========== ===========
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ........................................................................ $ 1,375,278 $ 1,315,264
Borrowed funds .................................................................. 597,740 545,814
Advances by borrowers for taxes and insurance ................................... 10,830 9,735
Other liabilities ............................................................... 13,517 12,979
----------- -----------
Total liabilities ........................................................... 1,997,365 1,883,792
----------- -----------
Company-obligated mandatorily redeemable preferred capital securities of a
subsidiary trust holding solely junior subordinated debentures of the Company 25,000 25,000
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock; authorized 10,000,000 shares; none issued and outstanding ...... -- --
Common Stock, $.01 par value, 85,000,000 shares authorized;
43,106,742 and 30,200,723 shares issued and outstanding at 6/30/02 and
43,106,742 and 30,940,117 shares issued and outstanding at 12/31/01 ........ 430 430
Paid-in capital ................................................................. 202,294 201,858
Retained earnings ............................................................... 155,092 148,463
Accumulated other comprehensive income .......................................... 8,345 2,178
Treasury stock (12,819,375 and 12,088,836 shares at 6/30/02 and 12/31/01,
respectively) .............................................................. (120,516) (110,571)
Common stock acquired by the Employee Stock Ownership Plan (ESOP) ............... (9,862) (10,321)
Common stock acquired by the Recognition and Retention Plan (RRP) ............... (1,471) (1,910)
----------- -----------
Total stockholders' equity ................................................. 234,312 230,127
----------- -----------
Total liabilities and stockholders' equity ................................. $ 2,256,677 $ 2,138,919
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
3
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data) (Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans ................................................ $ 21,518 $ 22,470 $ 42,913 $ 44,932
Investment and mortgage-backed securities
available for sale ................................. 11,214 10,832 20,935 22,640
------------ ------------ ------------ ------------
Total interest income ............................. 32,732 33,302 63,848 67,572
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits:
NOW and money market demand ......................... 2,086 2,462 4,181 4,784
Savings ............................................. 932 936 1,770 1,829
Certificates of deposit ............................. 5,330 8,891 11,404 18,056
------------ ------------ ------------ ------------
Total interest expense - deposits ................. 8,348 12,289 17,355 24,669
Borrowed funds ........................................ 7,520 6,193 14,596 13,638
------------ ------------ ------------ ------------
Total interest expense ............................ 15,868 18,482 31,951 38,307
------------ ------------ ------------ ------------
Net interest income ............................... 16,864 14,820 31,897 29,265
Provision for loan losses .............................. 1,105 150 1,205 350
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 15,759 14,670 30,692 28,915
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Fees and service charges ............................. 859 626 2,099 1,263
Net (loss) gain on sales of loans and securities
available for sale ................................. (1,587) 219 (1,471) 478
Income on Bank Owned Life Insurance (BOLI) ........... 404 70 819 70
Other income ......................................... 199 106 378 213
------------ ------------ ------------ ------------
Total non-interest income ......................... (125) 1,021 1,825 2,024
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and benefits ............................ 4,163 3,796 8,127 7,664
Occupancy ............................................ 545 560 1,103 1,139
Equipment ............................................ 401 413 839 853
Advertising .......................................... 358 352 533 649
Federal deposit insurance ............................ 59 57 118 117
Amortization of core deposit intangibles ............. 211 212 423 424
Distributions on preferred capital securities ........ 491 -- 989 --
General and administrative ........................... 1,100 1,119 2,234 2,203
------------ ------------ ------------ ------------
Total non-interest expense ........................ 7,328 6,509 14,366 13,049
------------ ------------ ------------ ------------
Income before income tax expense .................. 8,306 9,182 18,151 17,890
Income tax expense ..................................... 2,746 2,956 5,990 5,748
------------ ------------ ------------ ------------
Net income ........................................ $ 5,560 $ 6,226 $ 12,161 $ 12,142
============ ============ ============ ============
Basic earnings per share ............................... $ 0.19 $ 0.20 $ 0.42 $ 0.39
============ ============ ============ ============
Weighted average shares outstanding - Basic ............ 28,908,094 30,491,412 29,182,305 30,799,334
============ ============ ============ ============
Basic earnings per share ............................... $ 0.19 $ 0.20 $ 0.41 $ 0.39
============ ============ ============ ============
Weighted average shares outstanding - Diluted .......... 29,780,484 31,129,560 29,988,103 31,433,921
============ ============ ============ ============
See accompanying notes to the unaudited consolidated financial statements.
4
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands) (Unaudited)
Accumulated
Other Common Common Total
Compre- Stock Stock Stock-
Common Paid In Retained hensive Treasury Acquired Acquired holders'
Stock Capital Earnings Income(Loss) Stock by ESOP by RRP Equity
---------------------------------------------------------------------------------------
Balance at December 31, 2000 ....... $430 $201,264 $132,537 $(8,534) $(89,508) $(11,238) $(2,788) $222,163
Net income for the six months
ended June 30, 2001 ............. -- -- 12,142 -- -- -- -- 12,142
Cash dividends declared ($0.15) .... -- -- (4,865) -- -- -- -- (4,865)
Net change in unrealized gain/(loss)
on securities available for sale -- -- -- 8,917 -- -- -- 8,917
Purchases of treasury stock ........ -- -- -- -- (17,378) -- -- (17,378)
Exercise of stock options .......... -- -- (227) -- 1,144 -- -- 917
Tax benefit on stock options and RRP -- 150 -- -- -- -- -- 150
Purchase and retirement of common
stock ........................... -- (56) -- -- -- -- -- (56)
Amortization of RRP ................ -- -- -- -- -- -- 439 439
ESOP expense ....................... -- 156 -- -- -- 458 -- 614
---------------------------------------------------------------------------------------
Balance at June 30, 2001 ........... $430 $201,514 $139,587 $ 383 $(105,742) $(10,780) $(2,349) $223,043
=======================================================================================
Balance at December 31, 2001 ....... $430 $201,858 $148,463 $2,178 $(110,571) $(10,321) $(1,910) $230,127
Net income for the six months
ended June 30, 2002 ............. -- -- 12,161 -- -- -- -- 12,161
Cash dividends declared ($0.17) .... -- -- (5,193) -- -- -- -- (5,193)
Net change in unrealized gain/(loss)
on securities available for sale -- -- -- 6,167 -- -- -- 6,167
Purchases of treasury stock ........ -- -- -- -- (10,461) -- -- (10,461)
Exercise of stock options .......... -- -- (339) -- 516 -- -- 177
Tax benefit on stock options and RRP -- 326 -- -- -- -- -- 326
Purchase and retirement of common
stock ........................... -- (108) -- -- -- -- -- (108)
Amortization of RRP ................ -- -- -- -- -- -- 439 439
ESOP expense ....................... -- 218 -- -- -- 459 -- 677
---------------------------------------------------------------------------------------
Balance at June 30, 2002 ........... $430 $202,294 $155,092 $8,345 $(120,516) $ (9,862) $(1,471) $234,312
=======================================================================================
See accompanying notes to the unaudited consolidated financial statements.
5
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
Six months ended
June 30,
-------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income ..................................................................... $ 12,161 $ 12,142
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation of premises and equipment ......................................... 706 661
Amortization of core deposit intangibles ....................................... 423 424
ESOP expense ................................................................... 677 614
Amortization of RRP ............................................................ 439 439
Net amortization of premiums and accretion of discounts and deferred fees ...... 1,631 1,130
Provision for loan losses ...................................................... 1,205 350
Loans originated for sale ...................................................... (11,938) (26,960)
Proceeds from sales of mortgage loans held for sale ............................ 17,074 24,707
Net loss (gain) on sales of loans and securities available for sale ............ 1,471 (478)
Net loss (gain) on sales of real estate owned .................................. 10 (42)
Net loss on sales of premises and equipment .................................... -- 105
(Increase) decrease in interest and dividends receivable ....................... (741) 1,065
Tax benefit on stock options and RRP ........................................... 326 150
Increase (decrease) in other liabilities ....................................... 538 (879)
Decrease in other assets ....................................................... 5,447 856
--------- ---------
Net cash provided by operating activities ................................ 29,429 14,284
--------- ---------
Cash flows from investing activities:
Proceeds from sales/calls/maturities of investment securities available for sale 19,308 126,170
Purchases of investment securities available for sale .......................... (36,752) (34,193)
Purchase of FHLB-NY stock ...................................................... (347) (774)
Proceeds from sales of mortgage-backed securities available for sale ........... 87,897 165,426
Principal payments on mortgage-backed securities ............................... 118,097 52,269
Purchases of mortgage-backed securities available for sale ..................... (288,572) (299,997)
Principal repayments on loans .................................................. 322,618 177,280
Origination of loans ........................................................... (330,728) (198,041)
Purchases of mortgage loans .................................................... (19,315) (6,975)
Purchase of BOLI ............................................................... -- (25,000)
Proceeds from sale of real estate owned ........................................ 32 73
Proceeds from sales of premises and equipment .................................. -- 183
Purchases of premises and equipment ............................................ (469) (465)
--------- ---------
Net cash used in investing activities ................................... (128,231) (44,044)
--------- ---------
Cash flows from financing activities:
Purchase of treasury stock ..................................................... (10,461) (17,378)
Purchase and retirement of common stock ........................................ (108) (56)
Stock options exercised ........................................................ 177 917
Cash dividends paid ............................................................ (5,193) (4,865)
Net increase in deposits ....................................................... 60,014 49,468
Net increase in short-term borrowed funds ...................................... -- 37,450
Proceeds from borrowed funds ................................................... 67,000 210,000
Repayment of borrowed funds ................................................... (15,074) (250,069)
Net increase in advances by borrowers for taxes and insurance .................. 1,095 1,252
--------- ---------
Net cash provided by financing activities ............................. 97,450 26,719
--------- ---------
Net decrease in cash and cash equivalents ............................. (1,352) (3,041)
Cash and cash equivalents at beginning of period .................................. 53,875 35,119
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 52,523 $ 32,078
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 31,362 $ 39,292
Income taxes ............................................................... 3,142 3,351
Non cash investing and financing activities for the period:
Transfer of loans to real estate owned .................................... $ -- $ 305
See accompanying notes to the unaudited consolidated financial statements.
6
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and in conformity with the
instructions to Form 10-Q and Article 10 of Regulation S-X for First Sentinel
Bancorp, Inc. ("First Sentinel" or the "Company") and its wholly-owned
subsidiaries, First Savings Bank, ("First Savings" or the "Bank") Pulse
Investment, Inc., Pulse Insurance Services, Inc. and Pulse Real Estate, Inc.,
and the Bank's wholly-owned subsidiaries, FSB Financial LLC, and 1000 Woodbridge
Center Drive, Inc.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial condition, results
of operations, and changes in cash flows have been made at and for the three and
six months ended June 30, 2002 and 2001. The results of operations for the three
and six months ended June 30, 2002, are not necessarily indicative of results
that may be expected for the entire fiscal year ending December 31, 2002. These
interim financial statements should be read in conjunction with the December 31,
2001 Annual Report to Stockholders.
(2) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the daily
average number of common shares outstanding during the period. Potential
dilutive common shares are not included in the calculation.
Diluted earnings per share is computed similarly to basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if all potential dilutive common
shares were issued utilizing the treasury stock method.
Calculation of Basic and Diluted Earnings Per Share
- --------------------------------------------------------
(dollars in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 5,560 $ 6,226 $ 12,161 $ 12,142
=========== =========== =========== ===========
Basic weighted-average common shares
outstanding 28,908,094 30,491,412 29,182,305 30,799,334
Plus: Dilutive stock options and awards 872,390 638,148 805,798 634,587
----------- ----------- ----------- -----------
Diluted weighted-average common
shares outstanding 29,780,484 31,129,560 29,988,103 31,433,921
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.19 $ 0.20 $ 0.42 $ 0.39
=========== =========== =========== ===========
Diluted $ 0.19 $ 0.20 $ 0.41 $ 0.39
=========== =========== =========== ===========
(3) DIVIDENDS
Based upon current operating results, the Company declared cash dividends of
$0.095 per share on May 1, 2002, payable May 31, 2002, to stockholders of record
on May 17, 2002.
7
(4) COMMITMENTS AND CONTINGENCIES
At June 30, 2002, the Company had the following commitments: (i) to originate
loans of $49.7 million; (ii) unused home equity lines of credit of $63.2
million; (iii) unused commercial lines of credit of $15.9 million; (iv) unused
construction lines of credit of $56.8 million; and (v) letters of credit
outstanding totaling $2.0 million. Further, certificates of deposits, which are
scheduled to mature and/or rollover in one year or less, totaled $471.2 million
at June 30, 2002.
(5) ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses (in
thousands):
Six months ended June 30,
-------------------------
2002 2001
-------- --------
Balance at beginning of period $ 12,932 $ 12,341
Provision charged to operations 1,205 350
Charge offs, net of recoveries (1,390) (6)
-------- --------
Balance at end of period $ 12,747 $ 12,685
======== ========
(6) COMPREHENSIVE INCOME
Total comprehensive income, consisting of net income and the net change in
unrealized gain/(loss) on securities available for sale, was $12.4 million and
$7.2 million for the three months ended June 30, 2002 and 2001, respectively.
For the six months ended June 30, 2002 and 2001, comprehensive income totaled
$18.3 million and $21.1 million, respectively.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In July, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The Statement is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of this Statement is
not expected to have a significant impact on the Company's financial statements.
In April, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
The Statement, among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishments of Debt." Under SFAS No. 4, gains and losses from
the extinguishment of debt were required to be classified as an extraordinary
item, if material. Under SFAS No. 145, gains or losses from the extinguishment
of debt are to be classified as a component of operating income, rather than an
extraordinary item. SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002, with early adoption of the provisions related to the rescission of
SFAS No. 4 encouraged. Upon adoption, companies must reclassify prior period
amounts previously classified as an extraordinary item. Management does not
anticipate that the initial adoption of SFAS No. 145 will have a significant
impact on the Company's consolidated financial statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." While SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," it retains many of the fundamental provisions of that
Statement. The Statement is effective for fiscal years beginning after December
15, 2001. The initial adoption of SFAS No. 144 did not have a significant impact
on the Company's consolidated financial statements.
8
In August, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 requires an enterprise to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets. The Company is required to adopt the provisions of SFAS No. 143 for
fiscal years beginning after June 15, 2002. The Company does not anticipate that
SFAS No. 143 will significantly impact the Company's consolidated financial
statements.
On July 20, 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and periodically reviewed for impairment.
The Company adopted the provisions of SFAS No. 142 on January 1, 2002. The
Company currently has no recorded goodwill and the adoption of SFAS No. 142 did
not significantly impact the Company's accounting for currently recorded
intangible assets, primarily core deposit intangibles. At June 30, 2002, the
Company had gross core deposit intangibles totaling $12.6 million with
accumulated amortization of $7.6 million. Amortization of core deposit
intangibles for the three and six months ended June 30, 2002 was $211,000 and
$423,000, respectively. Annual amortization for the year ended December 31,
2002, and for each of the subsequent five years is projected to approximate
$847,000 per year.
9
FIRST SENTINEL BANCORP, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL.
Statements contained in this report that are not historical fact are
forward-looking statements, as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such statements may be characterized as
management's intentions, hopes, beliefs, expectations or predictions of the
future. It is important to note that such forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected in such forward-looking statements. Factors that could
cause future results to vary materially from current expectations include, but
are not limited to, changes in interest rates, economic conditions, deposit and
loan growth, real estate values, loan loss provisions, competition, customer
retention, changes in accounting principles, policies or guidelines and
legislative and regulatory changes.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES.
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," as well as disclosures found elsewhere in this Form 10-Q, are based
upon the Company's consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. Note 1 to the Company's Audited Consolidated
Financial Statements for the year ended December 31, 2001 included in our Annual
Report on Form 10-K for the year ended December 31, 2001, as supplemented by the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and
this report, contains a summary of the Company's significant accounting
policies. Management believes the Company's policy with respect to the
methodology for the determination of the allowance for loan losses involves a
higher degree of complexity and requires management to make difficult and
subjective judgments which often require assumptions or estimates about highly
uncertain matters. Changes in these judgments, assumptions or estimates could
materially impact results of operations. This critical policy and its
application is periodically reviewed with the Audit Committee and the Board of
Directors.
The allowance for loan losses is based upon management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, giving consideration to the size and composition of the loan
portfolio, actual loan loss experience, level of delinquencies, detailed
analysis of individual loans for which full collectibility may not be assured,
the existence and estimated net realizable value of any underlying collateral
and guarantees securing the loans, and current economic and market conditions.
Although management uses the best information available, the level of the
allowance for loan losses remains an estimate which is subject to significant
judgment and short-term change. Various regulatory agencies, as an integral part
of their examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to make additional provisions
for loan losses based upon information available to them at the time of their
examination. Furthermore, the majority of the Company's loans are secured by
real estate in the State of New Jersey. Accordingly, the collectibility of a
substantial portion of the carrying value of the Company's loan portfolio is
susceptible to changes in local market conditions and may be adversely affected
should real estate values decline or the Central New Jersey area experience an
adverse economic shock. Future adjustments to the allowance for loan losses may
be necessary due to economic, operating, regulatory and other conditions beyond
the Company's control.
ASSETS. Total assets grew to $2.3 billion at June 30, 2002, an increase of
$117.8 million, or 5.5%, from December 31, 2001. The change in assets consisted
primarily of increases in investment and mortgage-backed securities ("MBS")
available for sale and loans receivable, partially offset by a decrease in other
assets.
10
Net loans, including loans held for sale, totaled $1.3 billion at June 30, 2002,
an increase of $22.0 million, or 1.8%, from December 31, 2001. Of the total loan
portfolio at June 30, 2002, 1-4 family mortgage loans comprised 69.8%, home
equity loans represented 8.9%, commercial real estate, multi-family and
construction loans comprised 20.0%, and other consumer loans accounted for 1.3%.
Total loan originations for the six months ended June 30, 2002, were $342.7
million, compared to $225.0 million for the same period in 2001. Fixed-rate, 1-4
family first mortgage loan originations totaled $82.5 million, or 24.1% of
production, while adjustable-rate, 1-4 family first mortgage loans accounted for
$111.1 million, or 32.4%, of total originations for the first six months of
2002. Also during the first six months of 2002, consumer loan originations,
including home equity loans and credit lines, totaled $56.0 million, or 16.3% of
total originations. During the same period, construction lending totaled $50.3
million, or 14.7% of total originations, while commercial real estate,
commercial and multi-family loan originations totaled $42.7 million, or 12.5%.
In addition, the Company purchased $19.3 million of primarily adjustable-rate,
single-family first mortgage loans through correspondents during the six months
ended June 30, 2002. Purchased loans are re-underwritten by the Bank and are
extended at rates higher than those currently offered by the Bank.
Repayment of principal on loans totaled $322.6 million for the six months ended
June 30, 2002, compared to $177.3 million for the same period in 2001. In
addition, the Company sold $17.0 million of primarily fixed-rate, 1-4 family
mortgage loans during the first half of 2002 as part of its on-going interest
rate risk management process. While management intends to continue to actively
seek to originate loans, the future levels of loan originations and repayments
will be significantly influenced by external interest rates, competition and
other economic factors outside of the control of the Bank.
MBS available for sale increased $88.1 million, or 13.7%, to $730.8 million at
June 30, 2002, from $642.7 million at December 31, 2001. The increase was
primarily due to purchases of $288.6 million exceeding sales and principal
repayments of $87.9 million and $118.1 million, respectively, for the six month
period ended June 30, 2002. Purchases consisted primarily of MBS issued by U.S.
government-sponsored agencies. At June 30, 2002, approximately 64% of the
Company's MBS had adjustable rates.
Investment securities available for sale increased $17.4 million, or 16.2%, to
$125.4 million as of June 30, 2002, from $108.0 million at December 31, 2001.
For the six months ended June 30, 2002, purchases of investment securities
available for sale totaled $36.8 million, while sales, calls and maturities
totaled $19.3 million. Purchases consisted primarily of debt securities issued
by U.S. corporations and government-sponsored agencies. At June 30, 2002, U.S.
government and agency obligations totaled $52.5 million, or 41.8%, of investment
securities available for sale, while state and political obligations contributed
another $14.1 million, or 11.3%. Corporate obligations represented $57.2
million, or 45.6%, and equity securities accounted for the remaining $1.6
million, or 1.3%, of investment securities available for sale at June 30, 2002.
With the exception of WorldCom, Inc. bonds which have been written down to a
carrying value of $300,000 and placed on non-accrual, all corporate obligations
held at June 30, 2002, are investment grade with the largest exposure to any
single creditor totaling $4.2 million.
Other assets decreased $8.8 million to $28.7 million at June 30, 2002, from
$37.6 million at December 31, 2001. The decrease was primarily attributable to
the receipt in 2002 of incomes taxes receivable which were outstanding at
December 31, 2001.
LIABILITIES. Total deposits increased $60.0 million, or 4.6%, to $1.4 billion at
June 30, 2002. This growth took place in core deposits, consisting of checking,
savings and money market accounts. Core deposits grew by $89.0 million to $749.8
million, and accounted for 54.5% of total deposits at June 30, 2002. This
compares with a core/total deposits ratio of 50.3% at December 31, 2001 and
47.8% at June 30, 2001. Certificates of deposit decreased by $29.0 million, or
4.4%, compared with year-end 2001, with decreases occurring primarily in
one-year and shorter maturity categories.
Borrowed funds increased $51.9 million, or 9.5%, to $597.7 million at June 30,
2002, from $545.8 million at December 31, 2001, in order to fund MBS purchases
and take advantage of historically low interest rates on longer-term borrowings.
Advances by borrowers for taxes and insurance increased $1.1 million, or
11
11.3%, to $10.8 million at June 30, 2002, from $9.7 million at December 31,
2001, primarily as a result of growth in the Company's residential mortgage loan
portfolio.
CAPITAL. The Company's stockholders' equity increased $4.2 million, or 1.8%, to
$234.3 million at June 30, 2002, from $230.1 million at December 31, 2001. The
increase in equity was a result of net income of $12.2 million for the six
months ended June 30, 2002, an increase in net unrealized gains on securities
available for sale of $6.2 million, the amortization of stock-based compensation
and benefit plans and related tax benefits of $1.4 million and proceeds from the
exercise of stock options totaling $177,000. This increase was partially offset
by the repurchase of $10.6 million of the Company's common stock and cash
dividends declared of $5.2 million. In May 2002, the Company announced the
commencement of a 5% stock repurchase program. The Company repurchased 42,000
shares and 787,856 shares, respectively, during the three and six months ended
June 30, 2002, at an average cost per share of $14.12 and $13.29, respectively.
Stated and tangible book value per share at June 30, 2002, were $7.76 and $7.59,
respectively.
The Federal Deposit Insurance Corporation requires that the Bank meet minimum
leverage, Tier 1 and Total Risk-based Capital requirements. At June 30, 2002,
the Bank exceeded all regulatory capital requirements, as follows (dollars in
thousands):
Required Actual
---------------------- ---------------------- Excess of Actual
% of % of Over Regulatory
Amount Assets Amount Assets Requirements
----------- ---------- ----------- ---------- ----------------
Leverage Capital $89,046 4.00% $198,693 8.93% $109,647
Risk-based Capital:
Tier 1 44,155 4.00% 198,693 18.00% 154,538
Total 88,310 8.00% 211,440 19.15% 123,130
LIQUIDITY AND CAPITAL RESOURCES. 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 securities and
investments available for sale; maturities or calls of investment securities and
short-term investments; and advances from the FHLB-NY and other borrowed funds.
While maturities and scheduled amortization of loans and mortgage-backed
securities are a predictable source of funds, deposit cash flows and mortgage
prepayments are greatly influenced by general interest rates, competition, and
economic conditions.
The most significant sources of funds for the first six months of 2002 were
principal repayments and prepayments of loans and mortgage-backed securities,
totaling $322.6 million and $118.1 million, respectively. Other significant
sources of funds for the six months ended June 30, 2002, were proceeds from
sales of MBS available for sale totaling $88.0 million, deposit growth of $60.0
million, a net increase in borrowings of $51.9 million, sales, calls and
maturities of investment securities available for sale of $19.3 million, and
proceeds from the sales of mortgage loans totaling $17.1 million. If necessary,
the Company has additional borrowing capacity with FHLB-NY, including an
available overnight line of credit of up to $50.0 million. At June 30, 2002, the
Company had unpledged investment securities and MBS available for sale with a
market value of $399.9 million.
The primary investing activities of the Company for the first six months of 2002
were the origination of loans totaling $342.7 million, purchases of
mortgage-backed securities available for sale totaling $288.6 million, and
purchases of investment securities available for sale totaling $36.8 million.
Other significant uses of funds during the six months ended June 30, 2002, were
$19.3 million in purchases of mortgage loans, $10.6 million in repurchases of
the Company's common stock and $5.2 million in cash dividends paid.
12
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
AND 2001.
RESULTS OF OPERATIONS. Net income for the three and six months ended June 30,
2002, totaled $5.6 million and $12.2 million, respectively, versus net income of
$6.2 million and $12.1 million, respectively for the comparable 2001 periods.
For the quarter ended June 30, 2002, basic and diluted earnings per share were
$0.19 compared with second quarter 2001 basic and diluted earnings per share of
$0.20. For the six months ended June 30, 2002, basic and diluted earnings per
share were $0.42 and $0.41, respectively, compared with basic and diluted
earnings per share of $0.39 for the first six months of 2001.
Second quarter 2002 earnings were adversely affected by two unforeseen events,
both of which were apparently precipitated by alleged acts of fraud and/or
misrepresentation. As previously reported on Form 8-K, the Company recorded an
impairment charge totaling $1.2 million, or $.04 per diluted share, net of tax,
related to WorldCom, Inc. corporate bonds. In addition, the Company recorded a
$1.1 million provision to the allowance for loan losses, the majority of which
was due to a $1.4 million writedown of a $6.9 million participation loan to an
insurance premium financing company. This loan, which is the only of its kind
within the loan portfolio, was placed on non-accrual status during the quarter.
Annualized return on average equity was 9.60% and 10.51% for the three and six
months ended June 30, 2002, respectively, compared with 11.01% and 10.72% for
the comparable 2001 periods. Annualized return on average assets was 0.99% and
1.10% for the three and six months ended June 30, 2002, respectively, compared
with 1.27% and 1.24% for the three and six months ended June 30, 2001,
respectively.
INTEREST INCOME. Interest income decreased by $570,000, or 1.7%, and by $3.7
million, or 5.5%, for the three and six months ended June 30, 2002,
respectively, from the same periods in 2001.
Interest on loans decreased $952,000 and $2.0 million, or 4.2% and 4.5%,
respectively, to $21.5 million and $42.9 million for the three and six months
ended June 30, 2002, compared to $22.5 million and $44.9 million for the same
periods in 2001. The average balance of the loan portfolio for the three month
period ended June 30, 2002, increased $67.7 million to $1.3 billion from 2001,
while the average yield on the portfolio decreased to 6.72% for the three months
ended June 30, 2002, from 7.41% for the same period in 2001. The average balance
of the loan portfolio for the six month period ended June 30, 2002, increased
$69.0 million to $1.3 billion from 2001, while the average yield on the
portfolio decreased to 6.75% for the six months ended June 30, 2002, from 7.47%
for the same period in 2001.
Interest on securities increased $382,000, or 3.5% and decreased $1.7 million,
or 7.5%, to $11.2 million and $20.9 million for the three and six months ended
June 30, 2002, as compared to $10.8 million and $22.6 million for the same
periods in 2001. The average balance of the investment, FHLB stock and MBS
available for sale portfolios totaled $895.5 million, with an annualized yield
of 5.01% for the three months ended June 30, 2002, compared with an average
balance of $683.8 million with an annualized yield of 6.34% for the three months
ended June 30, 2001. The average balance of the investment, FHLB stock and MBS
available for sale portfolios totaled $864.3 million, with an annualized yield
of 4.84% for the six months ended June 30, 2002, compared with an average
balance of $710.8 million with an annualized yield of 6.37% for the six months
ended June 30, 2001.
INTEREST EXPENSE. Interest expense decreased $2.6 million to $15.9 million for
the three months ended June 30, 2002, compared to $18.5 million for the same
period in 2001. For the six months ended June 30, 2002, interest expense
decreased $6.4 million to $32.0 million versus $38.3 million for the comparable
2001 period.
Interest expense on deposits decreased $3.9 million and $7.3 million, or 32.1%
and 30.0%, respectively, to $8.3 million and $17.4 million for the three and six
months ended June 30, 2002, compared to $12.3 million and $24.7 million for the
same periods in 2001. The decrease was primarily attributable to reduced
interest paid on certificates of deposit. The average balance of certificates of
deposit declined by $29.1 million, or 4.4%, to $633.2 million for the three
months ended June 30, 2002, compared with the same period in 2001,
13
while the average rate paid on certificates decreased 200 basis points to 3.37%.
The average balance of certificates of deposit declined by $18.1 million, or
2.7%, to $640.5 million for the six months ended June 30, 2002, compared with
the same period in 2001, while the average rate paid on certificates decreased
192 basis points to 3.56%. The average balance of core deposits, consisting of
checking, savings and money market accounts, totaled $737.4 million and $711.0
million for the three and six months ended June 30, 2002, respectively, compared
to $586.9 and $575.3 million for the same respective periods in 2001. Within
these core accounts, non-interest bearing deposits averaged $68.1 million and
$64.3 million for the respective three and six month periods ended June 30,
2002, up from $52.2 million and $50.7 million for the comparable 2001 periods.
Interest on borrowed funds for the three and six months ended June 30, 2002,
increased $1.3 million and $958,000, or 21.4% and 7.0%, respectively, to $7.5
million and $14.6 million, compared to $6.2 million and $13.6 million for the
same respective periods in 2001. The average balance of borrowed funds for the
three months ended June 30, 2002, increased to $596.5 million, from $446.1
million for the same period in 2001. The average interest rate paid on borrowed
funds was 5.04% for the three months ended June 30, 2002, compared with 5.55%
for the same period in 2001. The average balance of borrowed funds for the six
months ended June 30, 2002, increased to $576.5 million, from $473.6 million for
the same period in 2001. The average interest rate paid on borrowed funds was
5.06% for the six months ended June 30, 2002, compared with 5.76% for the same
period in 2001.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses increased $2.0 million and $2.6 million, or 13.8% and
9.0%, respectively, to $16.9 million and $31.9 million for the three and six
months ended June 30, 2002, compared to $14.8 million and $29.3 million for the
same periods in 2001. The increase was due to the changes in interest income and
interest expense described previously.
The interest rate spread increased 15 basis points to 2.67% for the three months
ended June 30, 2002, compared with 2.52% for the same period in 2001. For the
three months ended June 30, the average earning asset yield was 6.02% for 2002,
and 7.02% for 2001, while the average cost of interest-bearing liabilities
declined to 3.34% for 2002, from 4.50% for 2001. For the six months ended June
30, 2002, the interest rate spread increased 11 basis points to 2.55% compared
with 2.44% for the same period in 2001. The average earning asset yield was
5.98% for the first half of 2002, compared with 7.06% for the first six months
of 2001, while the average cost of interest-bearing liabilities was 3.43% and
4.62% for the same respective periods.
The net interest margin was 3.10% and 2.99% for the three and six months ended
June 30, 2002, respectively, compared with 3.12% and 3.06% for the three and six
months ended June 30, 2001, respectively.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three and six
months ended June 30, 2002, increased $955,000 and $855,000, respectively, to
$1.1 million and $1.2 million, compared to $150,000 and $350,000 for the same
periods in 2001. Total non-performing assets increased to $7.8 million at June
30, 2002, from $1.9 million at December 31, 2001 and $2.8 million at June 30,
2001. The increase in non-performing assets and the provision for loan losses
was primarily due to a $6.9 million participation loan to an insurance premium
financing company placed in default during the second quarter. The Company
recorded a $1.4 million charge against the allowance for loan losses relating to
this loan. The remaining $5.6 million balance on the partially charged-off
participation loan was included in non-accrual loans at June 30, 2002. Based
upon information currently available, the Company expects the remaining balance
to be repaid during the third quarter. Provisions for loan losses are made based
on management's evaluation of risks inherent in the loan portfolio, giving
consideration to on-going credit evaluations and changes in the balance and
composition of the loan portfolio. The allowance for loan losses as a percentage
of total loans was 1.00% at June 30, 2002 and 1.03% at December 31, 2001. In
management's opinion, the allowance for loan losses, totaling $12.7 million at
June 30, 2002, adequately addresses the risks inherent in the portfolio.
Management will continue to review the need for additions to its allowance for
loan losses based upon its quarterly review of the loan portfolio, the level of
delinquencies, and general market and economic conditions.
14
The following table sets forth ratios regarding non-accrual loans and
investments, and loans which are 90 days or more delinquent, but on which the
Company is accruing interest at the dates indicated. The Company discontinues
accruing interest on delinquent loans when collection of interest is considered
doubtful, generally when 90 days or more delinquent and when loan-to-value
ratios exceed 55%, at which time all accrued but uncollected interest is
reversed.
(dollars in thousands) June 30, Mar. 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
--------------------------------------------------
Non-accrual mortgage loans .................... $1,875 $1,681 $1,787 $1,904 $1,828
Non-accrual other loans ....................... 5,552 -- -- -- --
--------------------------------------------------
Total non-accrual loans .................... 7,427 1,681 1,787 1,904 1,828
Loans 90 days or more delinquent and
still accruing ........................... 80 256 62 263 413
Restructured loans ............................ -- -- -- -- --
--------------------------------------------------
Total non-performing loans .................... 7,507 1,937 1,849 2,167 2,241
Non-accrual investments (WorldCom, Inc. .......
corporate bonds) ......................... 300 -- -- -- --
Total foreclosed real estate, net of related
allowance ................................ -- 42 42 79 531
--------------------------------------------------
Total non-performing assets ................... $7,807 $1,979 $1,891 $2,246 $2,772
==================================================
Non-performing loans to loans receivable, net . 0.59% 0.15% 0.15% 0.18% 0.18%
Non-performing assets to total assets ......... 0.35% 0.09% 0.09% 0.11% 0.14%
NON-INTEREST INCOME. Non-interest income decreased $1.1 million to a loss of
$125,000 for the three months ended June 30, 2002, compared to income of $1.0
million for the same period in 2001. For the six months ended June 30, 2002,
non-interest income totaled $1.8 million compared to $2.0 million for the same
period in 2001. The decrease was attributable to a $1.8 million pre-tax
impairment charge recorded on WorldCom, Inc. corporate bonds, resulting in
losses on sales of loans and securities of $1.6 million and $1.5 million for the
three and six months ended June 30, 2002, respectively, compared with net gains
of $219,000 and $478,000 for the respective 2001 periods. Partially offsetting
the WorldCom writedown, the Company recorded increased income on BOLI purchased
in June 2001, which totaled $404,000 and $819,000 for the three and six months
ended June 30, 2002, compared with $70,000 for each of the same periods in 2001.
In addition, fee income increased by $233,000 and $836,000 for the three and six
months ended June 30, 2002, respectively, compared with the same periods in
2001. During the first quarter of 2002, the Company received approximately
$600,000 in prepayment penalty income upon the early termination of a $14.9
million commercial real estate loan.
NON-INTEREST EXPENSE. Non-interest expense for the three and six months ended
June 30, 2002, increased $819,000 and $1.3 million, or 12.6% and 10.1%,
respectively, to $7.3 million and $14.4 million, compared to $6.5 million and
$13.0 million for the same periods in 2001. The increase was primarily
attributable to the distributions on preferred capital securities issued in
November 2001, totaling $491,000 and $989,000 for the three and six months ended
June 30, 2002, respectively.
In addition, compensation and benefits increased $367,000 and $463,000, or 9.7%
and 6.0%, respectively, to $4.2 million and $8.1 million for the three and six
months ended June 30, 2002, primarily as a result of increased healthcare and
other benefit costs.
For the six months ended June 30, 2002, these increases were partially offset by
reduced advertising costs attributable to certain non-recurring expenses related
to the Company's 100th Anniversary Celebration which were recognized in the
first quarter of 2001.
The Company's annualized non-interest expense, excluding amortization of core
deposit intangibles and distributions on preferred capital securities, divided
by average assets was 1.18% for the three and six months ended June 30, 2002,
compared to 1.28% for both the three and six months ended June 30, 2001. The
Company's efficiency ratio, calculated as non-interest expense (excluding
distributions on preferred capital securities) divided by the sum of net
interest income plus non-interest income, excluding net gains or
15
losses on the sale of loans and securities, was 37.3% and 38.0% for the three
and six months ended June 30, 2002, respectively, compared with 41.7% and 42.4%
for the comparable 2001 periods.
STATE TAX LEGISLATION. On July 2, 2002, the State of New Jersey passed the
Business Tax Reform Act, which is retroactive to January 1, 2002. The Company
expects this legislation to contribute to an increase in its annual effective
tax rate to 34.3% for 2002, compared to its 2001 effective tax rate of 31.2%.
The Company anticipates making an adjustment to income tax expense in the third
quarter of 2002.
16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the end of the
preceding fiscal year to the date of the most recent interim financial
statements (June 30, 2002).
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
There are various claims and lawsuits in which the Registrant is
periodically involved incidental to the Registrant's business. In the
opinion of management, no material loss is expected from any of such
pending claims and lawsuits.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on May 21, 2002. The
following proposals were voted on by the stockholders:
Withhold/ Broker
For Against Abstain Non-Votes
--- ------- --------- ---------
1. Election of directors
Joseph Chadwick 24,459,858 -- 190,683 --
Walter K. Timpson 24,441,894 -- 208,647 --
2. The ratification of KPMG
LLP as the independent
auditors of the Company for
the year ended December 31,
2002. 24,360,355 249,002 41,184 --
Item 5. OTHER INFORMATION.
None.
17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a.) Exhibits
------------------ ------------------------------------------------------------ -------------
Exhibit
Number Description Reference
------------------ ------------------------------------------------------------ -------------
3.1 Certificate of Incorporation of First Sentinel Bancorp, Inc. *
3.2 Bylaws of First Sentinel Bancorp, Inc. *
4 Stock certificate of First Sentinel Bancorp, Inc. *
10 First Savings Bank Non-Employee Director Retirement Plan Filed herein
11 Statement re: Computation of Ratios Page 7
99 Statements furnished pursuant to Section 906 of the Filed herein
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
------------------ ------------------------------------------------------------ -------------
b.) Reports on Form 8 - K
On May 21, 2002, the Company filed a report on Form 8-K pursuant to Item
5, in connection with its receipt of notification from the lead lender
of expected default on the Company's $6.9 million participation interest
in a loan.
* - Incorporated herein by reference into this document from the Registration
Statement on Form S-1 and exhibits thereto of First Sentinel Bancorp, Inc.
(formerly First Source Bancorp, Inc.), and any amendments or supplements
thereto filed with the SEC on December 19, 1997 and amended on February 9,
1998, SEC File No. 333-42757.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SENTINEL BANCORP, INC.
Date: August 14, 2002 By: /s/ JOHN P. MULKERIN
--------------------
John P. Mulkerin
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ THOMAS M. LYONS
-------------------
Thomas M. Lyons
Senior Vice President and Chief Financial
Officer
19