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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............................... SEPTEMBER 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 NOVEMBER 1, 2002
- ------------------------------------- -------------------------------------
Common Stock 29,014,576 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
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income for the three and nine
months ended September 30, 2002 and 2001 4
Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the nine
months ended September 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
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION 17
SIGNATURES 19
CERTIFICATIONS 20
2
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data) (Unaudited)
September 30, December 31,
2002 2001
---------- ----------
ASSETS
Cash and due from banks ............................................................ $ 26,338 $ 33,875
Federal funds sold ................................................................. 55,850 20,000
---------- ----------
Total cash and cash equivalents .................................................. 82,188 53,875
Federal Home Loan Bank of New York (FHLB-NY)
stock, at cost ................................................................... 21,136 20,541
Investment securities available for sale ........................................... 118,208 107,988
Mortgage-backed securities available for sale ...................................... 734,249 642,716
Loans held for sale, net ........................................................... 1,963 5,467
Loans receivable, net .............................................................. 1,237,109 1,237,312
Interest and dividends receivable .................................................. 11,272 12,039
Premises and equipment, net ........................................................ 15,584 16,014
Core deposit intangibles ........................................................... 4,778 5,411
Other assets ....................................................................... 31,705 37,556
---------- ----------
Total assets ..................................................................... $2,258,192 $2,138,919
========== ==========
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ........................................................................... $1,377,067 $1,315,264
Borrowed funds ..................................................................... 601,702 545,814
Advances by borrowers for taxes and insurance ...................................... 9,916 9,735
Other liabilities .................................................................. 19,605 12,979
---------- ----------
Total liabilities ................................................................ 2,008,290 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
29,099,576 shares issued and outstanding at 9/30/02 and
43,106,742 and 30,940,117 shares issued and outstanding at 12/31/01 .............. 430 430
Paid-in capital .................................................................... 202,411 201,858
Retained earnings .................................................................. 159,696 148,463
Accumulated other comprehensive income ............................................. 9,212 2,178
Treasury stock (13,920,522 and 12,088,836 shares at 9/30/02 and 12/31/01,
respectively) .................................................................... (135,963) (110,571)
Common stock acquired by the Employee Stock Ownership Plan (ESOP) .................. (9,633) (10,321)
Common stock acquired by the Recognition and Retention Plan (RRP) .................. (1,251) (1,910)
---------- ----------
Total stockholders' equity ....................................................... 224,902 230,127
---------- ----------
Total liabilities and stockholders' equity ....................................... $2,258,192 $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 Nine months ended
September 30, September 30,
-------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
INTEREST INCOME:
Loans ................................................ $ 21,302 $ 22,518 $ 64,215 $ 67,450
Investment and mortgage-backed securities
available for sale ................................. 10,784 10,802 31,719 33,442
----------- ----------- ----------- -----------
Total interest income ............................. 32,086 33,320 95,934 100,892
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits:
NOW and money market demand ......................... 1,918 2,644 6,099 7,428
Savings ............................................. 952 994 2,722 2,823
Certificates of deposit ............................. 5,050 8,264 16,454 26,320
----------- ----------- ----------- -----------
Total interest expense - deposits ................. 7,920 11,902 25,275 36,571
Borrowed funds ........................................ 7,691 6,856 22,287 20,494
----------- ----------- ----------- -----------
Total interest expense ............................ 15,611 18,758 47,562 57,065
----------- ----------- ----------- -----------
Net interest income ............................... 16,475 14,562 48,372 43,827
Provision for loan losses .............................. 105 150 1,310 500
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 16,370 14,412 47,062 43,327
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Fees and service charges ............................. 992 598 3,091 1,861
Net gain (loss) on sales of loans and securities
available for sale ................................. 1,349 147 (122) 625
Income on Bank Owned Life Insurance (BOLI) ........... 338 373 1,157 443
Other income ......................................... 158 261 536 474
----------- ----------- ----------- -----------
Total non-interest income ......................... 2,837 1,379 4,662 3,403
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Compensation and benefits ............................ 4,281 3,819 12,408 11,483
Occupancy ............................................ 592 562 1,695 1,701
Equipment ............................................ 451 404 1,290 1,257
Advertising .......................................... 221 208 754 857
Federal deposit insurance ............................ 58 59 176 176
Amortization of core deposit intangibles ............. 210 211 633 635
Distributions on preferred capital securities ........ 495 -- 1,484 --
General and administrative ........................... 1,151 1,004 3,385 3,207
----------- ----------- ----------- -----------
Total non-interest expense ........................ 7,459 6,267 21,825 19,316
----------- ----------- ----------- -----------
Income before income tax expense .................. 11,748 9,524 29,899 27,414
Income tax expense ..................................... 4,270 2,955 10,260 8,703
----------- ----------- ----------- -----------
Net income ........................................ $ 7,478 $ 6,569 $ 19,639 $ 18,711
=========== =========== =========== ===========
Basic earnings per share ............................... $ 0.26 $ 0.22 $ 0.68 $ 0.61
=========== =========== =========== ===========
Weighted average shares outstanding - Basic ............ 28,447,507 29,843,217 28,934,681 30,477,126
=========== =========== =========== ===========
Diluted earnings per share ............................. 0.26 $ 0.21 0.66 $ 0.60
=========== =========== =========== ===========
Weighted average shares outstanding - Diluted .......... 29,185,437 30,591,551 29,717,856 31,149,629
=========== =========== =========== ===========
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 nine months
ended September 30, 2001 ............. -- -- 18,711 -- -- -- -- 18,711
Cash dividends declared ($0.225) ........ -- -- (7,215) -- -- -- -- (7,215)
Net change in unrealized gain/(loss)
on securities available for sale ..... -- -- -- 13,751 -- -- -- 13,751
Purchases of treasury stock ............. -- -- -- -- (18,324) -- -- (18,324)
Exercise of stock options ............... -- -- (232) -- 1,153 -- -- 921
Tax benefit on stock options and RRP .... -- 150 -- -- -- -- -- 150
Purchase and retirement of common
stock ................................ -- (56) -- -- -- -- -- (56)
Amortization of RRP ..................... -- -- -- -- -- -- 659 659
ESOP expense ............................ -- 223 -- -- -- 688 -- 911
------------------------------------------------------------------------------------------
Balance at September 30, 2001 ........... $430 $201,581 $143,801 $5,217 $(106,679) $(10,550) $(2,129) $ 231,671
=========================================================================================
Balance at December 31, 2001 ............ $430 $201,858 $148,463 $2,178 $(110,571) $(10,321) $(1,910) $230,127
Net income for the nine months
ended September 30, 2002 ............. -- -- 19,639 -- -- -- -- 19,639
Cash dividends declared ($0.265) ........ -- -- (7,993) -- -- -- -- (7,993)
Net change in unrealized gain
on securities available for sale ..... -- -- -- 7,034 -- -- -- 7,034
Purchases of treasury stock ............. -- -- -- -- (26,028) -- -- (26,028)
Exercise of stock options ............... -- -- (413) -- 636 -- -- 223
Tax benefit on stock options and RRP .... -- 331 -- -- -- -- -- 331
Purchase and retirement of common
stock ................................ -- (108) -- -- -- -- -- (108)
Amortization of RRP ..................... -- -- -- -- -- -- 659 659
ESOP expense ............................ -- 330 -- -- -- 688 -- 1,018
------------------------------------------------------------------------------------------
Balance at September 30, 2002 ........... $430 $202,411 $159,696 $9,212 $(135,963) $ (9,633) $(1,251) $224,902
==========================================================================================
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)
Nine months ended
September 30,
-----------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income .......................................................................... $ 19,639 $ 18,711
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation of premises and equipment .............................................. 1,066 974
Amortization of core deposit intangibles ............................................ 633 635
ESOP expense ........................................................................ 1,018 911
Amortization of RRP ................................................................. 659 659
Net amortization of premiums and accretion of discounts and deferred fees ........... 2,815 1,437
Provision for loan losses ........................................................... 1,310 500
Loans originated for sale ........................................................... (15,782) (38,693)
Proceeds from sales of mortgage loans held for sale ................................. 19,327 37,787
Net loss (gain) on sales of loans and securities available for sale ................. 122 (625)
Net loss (gain) on sales of real estate owned ....................................... 10 (85)
Net loss on sales of premises and equipment ......................................... -- 102
Decrease in interest and dividends receivable ....................................... 767 1,813
Tax benefit on stock options and RRP ................................................ (331) (150)
Increase in other liabilities ....................................................... 7,288 241
Decrease in other assets ............................................................ 2,110 1,908
--------- ---------
Net cash provided by operating activities ..................................... 40,651 26,125
--------- ---------
Cash flows from investing activities:
Proceeds from sales/calls/maturities of investment securities available for sale .... 44,779 179,940
Purchases of investment securities available for sale ............................... (54,051) (43,326)
Purchase of FHLB-NY stock ........................................................... (595) (774)
Proceeds from sales of mortgage-backed securities available for sale ................ 152,433 202,623
Principal payments on mortgage-backed securities .................................... 181,962 96,900
Purchases of mortgage-backed securities available for sale .......................... (419,561) (427,431)
Principal repayments on loans ....................................................... 472,697 278,717
Origination of loans ................................................................ (446,978) (299,926)
Purchases of mortgage loans ......................................................... (26,483) (14,153)
Purchase of BOLI .................................................................... -- (25,000)
Proceeds from sale of real estate owned ............................................. 129 565
Proceeds from sales of premises and equipment ....................................... -- 186
Purchases of premises and equipment ................................................. (636) (645)
--------- ---------
Net cash used in investing activities ........................................ (96,304) (52,324)
--------- ---------
Cash flows from financing activities:
Purchase of treasury stock .......................................................... (26,028) (18,324)
Purchase and retirement of common stock ............................................. (108) (56)
Stock options exercised ............................................................. 223 921
Cash dividends paid ................................................................. (7,993) (7,215)
Net increase in deposits ............................................................ 61,803 75,612
Net increase in short-term borrowed funds ........................................... -- --
Proceeds from borrowed funds ........................................................ 117,000 285,000
Repayment of borrowed funds ......................................................... (61,112) (275,104)
Net increase in advances by borrowers for taxes and insurance ....................... 181 896
--------- ---------
Net cash provided by financing activities .................................. 83,966 61,730
--------- ---------
Net increase in cash and cash equivalents .................................. 28,313 35,531
Cash and cash equivalents at beginning of period ....................................... 53,875 35,119
--------- ---------
Cash and cash equivalents at end of period ............................................. $ 82,188 $ 70,650
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................................................ $ 47,505 $ 58,035
Income taxes .................................................................... 3,147 6,107
Non cash investing and financing activities for the period:
Transfer of loans to real estate owned ......................................... $ 197 $ 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
nine months ended September 30, 2002 and 2001. The results of operations for the
three and nine months ended September 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 Nine months ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 7,478 $ 6,569 $ 19,639 $ 18,711
=========== =========== =========== ===========
Basic weighted-average common shares
outstanding 28,447,507 29,843,217 28,934,681 30,477,126
Plus: Dilutive stock options and awards 737,930 748,334 783,175 672,503
----------- ----------- ----------- -----------
Diluted weighted-average common
shares outstanding 29,185,437 30,591,551 29,717,856 31,149,629
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.26 $ 0.22 $ 0.68 $ 0.61
=========== =========== =========== ===========
Diluted $ 0.26 $ 0.21 $ 0.66 $ 0.60
=========== =========== =========== ===========
(3) DIVIDENDS
Based upon current operating results, the Company declared cash dividends of
$0.095 per share on July 24, 2002, payable August 30, 2002, to stockholders of
record on August 16, 2002.
7
(4) COMMITMENTS AND CONTINGENCIES
At September 30, 2002, the Company had the following commitments: (i) to
originate loans of $100.9 million; (ii) unused home equity lines of credit of
$65.0 million; (iii) unused commercial lines of credit of $14.7 million; (iv)
unused construction lines of credit of $61.6 million; and (v) letters of credit
outstanding totaling $1.9 million. Further, certificates of deposits, which are
scheduled to mature and/or rollover in one year or less, totaled $465.5 million
at September 30, 2002.
(5) ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses (in
thousands):
Nine months ended
September 30,
-----------------------------
2002 2001
------------ ------------
Balance at beginning of period $ 12,932 $ 12,341
Provision charged to operations 1,310 500
Charge offs, net of recoveries (1,405) (34)
------------ ------------
Balance at end of period $ 12,837 $ 12,807
============ ============
(6) COMPREHENSIVE INCOME
Total comprehensive income, consisting of net income and the net change in
unrealized gain/(loss) on securities available for sale, was $8.3 million and
$11.4 million for the three months ended September 30, 2002 and 2001,
respectively. For the nine months ended September 30, 2002 and 2001,
comprehensive income totaled $26.7 million and $32.5 million, respectively.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In October, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of
Certain Financial Institutions - an amendment to FASB Statements No. 72 and 144
and FASB Interpretation No. 9." This Statement removes acquisitions of financial
institutions from the scope of both SFAS No. 72 and Interpretation No. 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." The provisions of SFAS No. 147 that relate to the application of the
purchase method of accounting apply to all acquisitions of financial
institutions, except transactions between two or more mutual enterprises.
SFAS No. 147 clarifies that a branch acquisition that meets the definition of a
business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of SFAS No. 147 are
effective October 1, 2002. The Company has previously purchased deposits of
another financial institution and recorded a core deposit intangible. This
Statement will have no effect on the accounting or amortization of the recorded
intangible asset.
In July, 2002, the FASB issued 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 initial adoption of this Statement is not expected to
have a significant impact on the Company's financial statements.
8
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.
In October, 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.
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.
In July, 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 September 30, 2002,
the Company had gross core deposit intangibles totaling $12.6 million with
accumulated amortization of $7.8 million. Amortization of core deposit
intangibles for the three and nine months ended September 30, 2002 was $210,000
and $633,000, respectively. Annual amortization for the year ended December 31,
2002, and for each of the subsequent five years is projected to approximate
$845,000 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
Reports on Form 10-Q for the quarters ended March 31, 2002, June 30, 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 September 30, 2002, an increase of
$119.3 million, or 5.6%, from December 31, 2001. The change in assets consisted
primarily of increases in investment and mortgage-backed securities ("MBS")
available for sale and cash and cash equivalents, partially offset by decreases
in loans held for sale and other assets.
MBS available for sale increased $91.5 million, or 14.2%, to $734.2 million at
September 30, 2002, from $642.7 million at December 31, 2001. The increase was
primarily due to purchases of $419.6 million exceeding sales and principal
repayments of $150.4 million and $182.0 million, respectively, for the nine
month period ended September 30, 2002. Purchases consisted primarily of MBS
issued by U.S.
10
government-sponsored agencies. At September 30, 2002, approximately 66% of the
Company's MBS had adjustable rates.
Investment securities available for sale increased $10.2 million, or 9.5%, to
$118.2 million as of September 30, 2002, from $108.0 million at December 31,
2001. For the nine months ended September 30, 2002, purchases of investment
securities available for sale totaled $54.1 million, while sales, calls and
maturities totaled $47.0 million. Purchases consisted primarily of debt
securities issued by U.S. corporations and government-sponsored agencies. At
September 30, 2002, U.S. government and agency obligations totaled $58.5
million, or 49.5%, of investment securities available for sale, while state and
political obligations contributed another $12.6 million, or 10.7%. Corporate
obligations represented $44.6 million, or 37.7%, and equity securities accounted
for the remaining $2.5 million, or 2.1%, of investment securities available for
sale at September 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 September 30, 2002, are
investment grade with the largest exposure to any single creditor totaling $4.9
million.
Cash and cash equivalents increased $28.3 million, or 52.6%, to $82.2 million at
September 30, 2002, from $53.9 million at December 31, 2001, as a result of the
rapid rate of prepayments on loans and MBS attributable to the historically low
interest rate environment. The Company's intent is to prudently deploy
investable funds in a manner which does not expose it to significant interest
rate risk.
Net loans, including loans held for sale, totaled $1.2 billion at September 30,
2002, a decrease of $3.7 million, or 0.3%, from December 31, 2001. Of the total
loan portfolio at September 30, 2002, 1-4 family mortgage loans comprised 69.3%,
home equity loans represented 9.0%, commercial real estate, multi-family and
construction loans comprised 20.7%, and other consumer loans accounted for 1.0%.
Total loan originations for the nine months ended September 30, 2002, were
$462.8 million, compared to $338.6 million for the same period in 2001.
Fixed-rate, 1-4 family first mortgage loan originations totaled $105.3 million,
or 22.8% of production, while adjustable-rate, 1-4 family first mortgage loans
accounted for $139.9 million, or 30.2%, of total originations for the first nine
months of 2002. Also during the first nine months of 2002, consumer loan
originations, including home equity loans and credit lines, totaled $89.1
million, or 19.3% of total originations. During the same period, construction
lending totaled $74.7 million, or 16.2% of total originations, while commercial
real estate, commercial and multi-family loan originations totaled $53.7
million, or 11.6%. In addition, the Company purchased $26.5 million of primarily
adjustable-rate, single-family first mortgage loans through correspondents
during the nine months ended September 30, 2002. Purchased loans are
re-underwritten by the Company and are extended at rates higher than those
currently offered by the Company.
Repayment of principal on loans totaled $472.7 million for the nine months ended
September 30, 2002, compared to $278.7 million for the same period in 2001. In
addition, the Company sold $19.3 million of primarily fixed-rate, 1-4 family
mortgage loans during the first nine months 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 Company's control.
Other assets decreased $5.9 million to $31.7 million at September 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 $61.8 million, or 4.7%, to $1.4 billion at
September 30, 2002. Core deposits, consisting of checking, savings and money
market accounts, grew by $97.6 million, or 14.8%, to $758.4 million, and
accounted for 55.1% of total deposits at September 30, 2002. This compares with
a core/total deposits ratio of 50.3% at December 31, 2001, and 48.7% at
September 30, 2001. Certificates of deposit decreased by $35.8 million, or 5.5%,
compared with year-end 2001, with decreases occurring primarily in one-year and
shorter maturity categories.
11
Borrowed funds increased a net of $55.9 million, or 10.2%, to $601.7 million at
September 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.
Other liabilities increased $6.6 million, or 51.1%, to $19.6 million at
September 30, 2002, from $13.0 million at December 31, 2001, primarily as a
result of increased income tax accruals caused by an increase in the New Jersey
Savings Institution tax rate and the timing of required estimated income tax
payments.
CAPITAL. The Company's stockholders' equity decreased $5.2 million, or 2.3%, to
$224.9 million at September 30, 2002, from $230.1 million at December 31, 2001.
The decrease in equity was a result of the repurchase of $26.1 million of the
Company's common stock and cash dividends declared of $8.0 million. In May 2002,
the Company announced the commencement of a 5% stock repurchase program. The
Company repurchased 1.1 million shares and 1.9 million shares, respectively,
during the three and nine months ended September 30, 2002, at an average cost
per share of $13.98 and $13.70, respectively. Stated and tangible book value per
share at September 30, 2002, were $7.73 and $7.56, respectively. The decrease
resulting from stock repurchases and dividend payments was partially offset by
net income of $19.6 million for the nine months ended September 30, 2002, an
increase in net unrealized gains on securities available for sale of $7.0
million, the amortization of stock-based compensation and benefit plans and
related tax benefits of $2.0 million and proceeds from the exercise of stock
options totaling $223,000.
The Federal Deposit Insurance Corporation requires that the Bank meet minimum
leverage, Tier 1 and Total Risk-based Capital requirements. At September 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 $89,724 4.00% $192,802 8.56% $102,358
Risk-based Capital:
Tier 1 43,320 4.00% 192,802 17.74% 148,762
Total 86,639 8.00% 204,919 18.92% 118,280
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 nine months of 2002 were
principal repayments and prepayments of loans and mortgage-backed securities,
totaling $472.7 million and $182.0 million, respectively. Other significant
sources of funds for the nine months ended September 30, 2002, were proceeds
from sales of MBS available for sale totaling $152.4 million, deposit growth of
$61.8 million, a net increase in borrowings of $55.9 million, sales, calls and
maturities of investment securities available for sale of $44.8 million, and
proceeds from the sales of mortgage loans totaling $19.3 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 September 30,
2002, the Company had unpledged investment securities and MBS available for sale
with a market value of $369.7 million.
The primary investing activities of the Company for the first nine months of
2002 were the origination of loans totaling $462.8 million, purchases of
mortgage-backed securities available for sale totaling $419.6 million, and
purchases of investment securities available for sale totaling $54.1 million.
Other significant
12
uses of funds during the nine months ended September 30, 2002, were $26.5
million in purchases of mortgage loans, $26.0 million in repurchases of the
Company's common stock and $8.0 million in cash dividends paid.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2002 AND 2001.
RESULTS OF OPERATIONS. Net income for the three and nine months ended September
30, 2002, totaled $7.5 million and $19.6 million, respectively. This represented
increases of $909,000 and $928,000, or 13.8% and 5.0%, respectively, over net
income of $6.6 million and $18.7 million for the comparable 2001 periods. For
the quarter ended September 30, 2002, basic and diluted earnings per share were
$0.26, representing increases of 19.4% and 19.3%, respectively, over third
quarter 2001 basic and diluted earnings per share of $0.22 and $0.21,
respectively. For the nine months ended September 30, 2002, basic and diluted
earnings per share were $0.68 and $0.66, respectively, representing increases of
10.6% and 10.0%, respectively, over basic and diluted earnings per share of
$0.61 and $0.60, respectively, for the first nine months of 2001.
Annualized return on average equity was 13.01% and 11.34% for the three and nine
months ended September 30, 2002, respectively, compared with 11.50% and 10.98%
for the comparable 2001 periods. Annualized return on average assets was 1.33%
and 1.18% for the three and nine months ended September 30, 2002, respectively,
compared with 1.29% and 1.25% for the three and nine months ended September 30,
2001, respectively.
Earnings for the nine months ended September 30, 2002, were adversely affected
by two second quarter events, both of which were precipitated by alleged acts of
fraud and/or misrepresentation. 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 during the quarter ended June 30,
2002, 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. The
remaining balance on this loan, which was the one only of its kind within the
loan portfolio, was received in settlement of the credit in August, 2002.
INTEREST INCOME. Interest income decreased by $1.2 million, or 3.7%, and by $5.0
million, or 4.9%, for the three and nine months ended September 30, 2002,
respectively, from the same periods in 2001.
Interest on loans decreased $1.2 million and $3.2 million, or 5.4% and 4.8%,
respectively, to $21.3 million and $64.2 million for the three and nine months
ended September 30, 2002, compared to $22.5 million and $67.5 million for the
same periods in 2001. The average balance of the loan portfolio for the three
month period ended September 30, 2002, increased $38.2 million from 2001, to
$1.3 billion, while the average yield on the portfolio decreased to 6.71% for
the three months ended September 30, 2002, from 7.31% for the same period in
2001. The average balance of the loan portfolio for the nine month period ended
September 30, 2002, increased $58.8 million from 2001, to $1.3 billion, while
the average yield on the portfolio decreased to 6.74% for the nine months ended
September 30, 2002, from 7.42% for the same period in 2001.
Interest on securities decreased $18,000 and $1.7 million, or 0.2% and 5.2%,
respectively, to $10.8 million and $31.7 million for the three and nine months
ended September 30, 2002, compared to $10.8 million and $33.4 million for the
same periods in 2001. The average balance of the investment, FHLB-NY stock and
MBS available for sale portfolios totaled $897.9 million, with an annualized
yield of 4.80% for the three months ended September 30, 2002, compared with an
average balance of $738.4 million with an annualized yield of 5.85% for the
three months ended September 30, 2001. The average balance of the investment,
FHLB-NY stock and MBS available for sale portfolios totaled $875.5 million, with
an annualized yield of 4.83% for the nine months ended September 30, 2002,
compared with an average balance of $720.0 million with an annualized yield of
6.19% for the nine months ended September 30, 2001.
13
INTEREST EXPENSE. Interest expense decreased $3.1 million to $15.6 million for
the three months ended September 30, 2002, compared to $18.8 million for the
same period in 2001. For the nine months ended September 30, 2002, interest
expense decreased $9.5 million to $47.6 million versus $57.1 million for the
comparable 2001 period.
For the three months ended September 30, 2002 interest expense on deposits
decreased $4.0 million, or 33.5%, to $7.9 million, compared to $11.9 million for
the same period in 2001. Interest expense on certificates of deposit declined
$3.2 million, or 38.9%, for the third quarter of 2002 compared with 2001. The
average balance of certificates of deposit declined by $40.3 million, or 6.1%,
to $622.2 million for the three months ended September 30, 2002, compared with
the same period in 2001, while the average rate paid on certificates decreased
174 basis points to 3.25%. Interest expense on core deposits decreased $768,000,
or 21.1%, for the quarter ended September 30, 2002, compared with the same
period in 2001. Average interest-bearing core deposits grew $118.5 million, or
21.1%, while the average rate paid on interest-bearing core deposits declined 90
basis points to 1.69%. Average non-interest-bearing deposits grew $15.1 million,
or 28.0%, to $69.2 million for the third quarter of 2002, compared with 2001.
Partially offsetting reduced deposit interest expense, interest paid on
borrowings increased $835,000, or 12.2%, to $7.7 million for the quarter ended
September 30, 2002, compared with 2001. The average balance of borrowed funds
for the three months ended September 30, 2002, increased to $601.8 million, from
$511.2 million for the same period in 2001. The average interest rate paid on
borrowed funds was 5.11% for the three months ended September 30, 2002, compared
with 5.36% for the same period in 2001.
For the nine months ended September 30, 2002, interest expense on deposits
decreased $11.3 million, or 30.9%, to $25.3 million, compared to $36.6 million
for the same period in 2001. Interest expense on certificates of deposit
declined $9.9 million, or 37.5%, for the nine months ended September 30, 2002,
compared with the same period of 2001. The average balance of certificates of
deposit declined by $25.5 million, or 3.9%, to $634.4 million for the nine
months ended September 30, 2002, compared with the same period in 2001, while
the average rate paid on certificates decreased 186 basis points to 3.46%.
Interest expense on core deposits decreased $1.4 million, or 14.0%, for the nine
months ended September 30, 2002, compared with the same period in 2001. Average
interest-bearing core deposits grew $120.9 million, or 22.5%, while the average
rate paid on interest-bearing core deposits declined 76 basis points to 1.79%.
Average non-interest-bearing deposits grew $14.1 million, or 27.2%, to $65.9
million for the first nine months of 2002, compared with the first nine months
of 2001.
Partially offsetting reduced deposit interest expense, interest paid on
borrowings increased $1.8 million, or 8.7%, to $22.3 million for the nine months
ended September 30, 2002, compared to $20.5 million for the same period in 2001.
The average balance of borrowed funds for the nine months ended September 30,
2002, increased to $584.9 million, from $486.1 million for the same period in
2001. The average interest rate paid on borrowed funds was 5.08% for the nine
months ended September 30, 2002, compared with 5.62% for the same period in
2001.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses increased $1.9 million and $4.5 million, or 13.1% and
10.4%, respectively, to $16.5 million and $48.4 million for the three and nine
months ended September 30, 2002, compared to $14.6 million and $43.8 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 20 basis points to 2.64% for the three months
ended September 30, 2002, compared with 2.44% for the same period in 2001. The
average earning asset yield was 5.92% and 6.76% for the three months ended
September 30,2002, and 2001, respectively, while the average cost of
interest-bearing liabilities declined to 3.28% for 2002, from 4.32% for 2001.
For the nine months ended September 30, 2002, the interest rate spread increased
14 basis points to 2.58% compared with 2.44% for the same period in 2001. The
average earning asset yield was 5.96% for the first nine months of 2002,
compared with 6.96% for the first nine months of 2001, while the average cost of
interest-bearing liabilities was 3.38% and 4.52% for the same respective
periods.
14
The net interest margin was 3.04% and 3.00% for the three and nine months ended
September 30, 2002, respectively, compared with 2.96% and 3.02% for the three
and nine months ended September 30, 2001, respectively.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three and nine
months ended September 30, 2002, decreased $45,000 and increased $810,000,
respectively, to $105,000 and $1.3 million, compared to $150,000 and $500,000
for the same periods in 2001. Total non-performing assets totaled $3.1 million
at September 30, 2002, compared with $1.9 million at December 31, 2001 and $2.2
million at September 30, 2001. Included in non-performing loans at September 30,
2002, were $847,000 in four single-family construction mortgages to several
related entities. These projects are substantially complete, have loan-to-value
ratios less than 70% and are backed by personal guarantees. The loans are past
maturity and the Company has initiated foreclosure proceedings. The Company
anticipates full collection of these loans. The increase in the year-to-date
provision for loan losses was primarily due to a $1.4 million charge against the
allowance for loan losses recorded during the second quarter of 2002, relating
to a participation loan to an insurance premium financier. The remaining $5.6
million balance on the partially charged-off participation loan was received in
settlement of the credit in August 2002. 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 1.03% at September 30, 2002 and December 31, 2001. In
management's opinion, the allowance for loan losses, totaling $12.8 million at
September 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.
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) Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
2002 2002 2002 2001 2001
----------------------------------------------------
Non-accrual mortgage loans ...................... $2,297 $1,875 $1,681 $1,787 $1,904
Non-accrual other loans ......................... -- 5,552 -- -- --
----------------------------------------------------
Total non-accrual loans ...................... 2,297 7,427 1,681 1,787 1,904
Loans 90 days or more delinquent and
still accruing ............................... 440 80 256 62 263
Restructured loans .............................. -- -- -- -- --
----------------------------------------------------
Total non-performing loans ...................... 2,737 7,507 1,937 1,849 2,167
Non-accrual investments (WorldCom, Inc. .........
corporate bonds) ............................. 300 300 -- -- --
Total foreclosed real estate, net of related
allowance .................................... 100 -- 42 42 79
----------------------------------------------------
Total non-performing assets ..................... $3,137 $7,807 $1,979 $1,891 $2,246
====================================================
Non-performing loans to loans receivable, net ... 0.22% 0.59% 0.15% 0.15% 0.18%
Non-performing assets to total assets ........... 0.14% 0.35% 0.09% 0.09% 0.11%
NON-INTEREST INCOME. Non-interest income increased $1.5 million to $2.8 million
for the three months ended September 30, 2002, compared to $1.4 million for the
same period in 2001. Net gains on sales of loans and securities increased by
$1.2 million as the Company realized gains on sales of higher-coupon
mortgage-backed securities with undesirable prepayment performance and
projections. Also, fees and service charges increased by $394,000 for the
quarter ended September 30, 2002, versus the comparable 2001 period. The
increase was a result of prepayment penalties on commercial mortgage loans,
growth in the assessable customer base and the implementation of new fee and
service charge levels following a periodic review of current fee structures.
15
For the nine months ended September 30, 2002, non-interest income increased $1.3
million, or 37.0%, to $4.7 million compared to $3.4 million for the same period
in 2001. Fees and service charges increased $1.2 million for the nine months
ended September 30, 2002, and included a $600,000 prepayment penalty realized in
the first quarter on a large commercial mortgage loan. In addition, Bank Owned
Life Insurance purchased in June 2001, contributed $1.2 million to non-interest
income for the nine months ended September 30, 2002, compared with $443,000 for
the same period in 2001. Partially offsetting these increases, the Company
recognized net losses on sales of loans and securities of $122,000 for the nine
months ended September 30, 2002, compared with net gains of $625,000 for the
same period in 2001. Included in the 2002 net securities loss was a $1.8 million
pre-tax impairment charge on WorldCom, Inc. corporate bonds recognized during
the second quarter of 2002.
NON-INTEREST EXPENSE. Non-interest expense for the three and nine months ended
September 30, 2002, increased $1.2 million and $2.5 million, or 19.0% and 13.0%,
respectively, to $7.5 million and $21.8 million, compared to $6.3 million and
$19.3 million for the same periods in 2001. The increase was primarily
attributable to the distributions on preferred capital securities issued in
November 2001, totaling $495,000 and $1.5 million for the three and nine months
ended September 30, 2002, respectively.
In addition, compensation and benefits increased $462,000 and $925,000, or 12.1%
and 8.1%, respectively, to $4.3 million and $12.4 million for the three and nine
months ended September 30, 2002, as a result of normal salary increases, as well
as increased healthcare and other benefit costs, including growth in non-cash
compensation expense associated with the Company's ESOP as a result of stock
price appreciation. For the nine months ended September 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 1.20% and 1.18% for the three and nine months ended
September 30, 2002, respectively, compared to 1.19% and 1.25%, for the three and
nine months ended September 30, 2001, respectively. 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 losses on the sale of loans and securities, was
38.8% and 38.3% for the three and nine months ended September 30, 2002,
respectively, compared with 39.7% and 41.5% 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. This
legislation has resulted in an increase to the Company's effective tax rate to
36.3% for the third quarter of 2002, compared to its 2001 annual effective tax
rate of 31.7%. The Company projects an annual effective tax rate of 34.3% for
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 (September 30, 2002).
Item 4. CONTROLS AND PROCEDURES.
a.) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
John P. Mulkerin, the Company's Chief Executive Officer, and Thomas M.
Lyons, the Company's Chief Financial Officer, conducted an evaluation
of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange
Act of 1934, as amended) as of November 1, 2002. Based upon their
evaluation, they each found the Company's disclosure controls and
procedures were adequate to ensure that information required to be
disclosed in the reports that the Company files and submit under the
Exchange Act is recorded, processed, summarized and reported as and
when required.
b.) CHANGES IN INTERNAL CONTROLS.
There were no significant changes in the Company's disclosure controls
and procedures or internal controls for financial reporting or other
factors that could significantly affect those controls subsequent to
November 1, 2002, and the Company identified no significant
deficiencies or material weaknesses requiring corrective action with
respect to those controls.
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.
None.
Item 5. OTHER INFORMATION.
None.
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. *
11 Statement re: Computation of Ratios Page 7
99 Statements furnished pursuant to Section 906 Filed
of the Sarbanes-Oxley Act of 2002, 18 U.S.C. herein
Section 1350
======================================================================
17
b.) REPORTS ON FORM 8 - K
On September 27, 2002, the Company filed a report on Form 8-K pursuant
to Item 5, in connection with the announcement of President and CEO
John P. Mulkerin's planned retirement effective December 31, 2002, and
the naming of Christopher Martin as successor.
* - 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: November 14, 2002 By: /s/ JOHN P. MULKERIN
--------------------------
John P. Mulkerin
Chief Executive Officer
Date: November 14, 2002 By: /s/ THOMAS M. LYONS
--------------------------
Thomas M. Lyons
Senior Vice President and
Chief Financial Officer
19
CERTIFICATIONS
I, John P. Mulkerin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Sentinel
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the periods in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ John P. Mulkerin
----------------- --------------------
John P. Mulkerin
Chief Executive Officer
20
I, Thomas M. Lyons, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Sentinel
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the periods in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Thomas M. Lyons
----------------- -------------------
Thomas M. Lyons
Chief Financial Officer
21
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------------------------------------------------------
99 Statements furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350