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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, 2003
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 _____ .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
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, 2003
- -------------------------- -----------------------------
Common Stock 27,647,213 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, 2003 and December 31, 2002 3
Consolidated Statements of Income for the three and six months
ended June 30, 2003 and 2002 4
Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 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 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION 18
SIGNATURES 20
2
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data) (Unaudited)
June 30, December 31,
2003 2002
----------- -----------
ASSETS
Cash and due from banks ......................................................... $ 30,055 $ 21,695
Federal funds sold .............................................................. 30,300 44,250
----------- -----------
Total cash and cash equivalents ............................................ 60,355 65,945
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost ..................... 21,829 20,835
Investment securities available for sale ........................................ 120,980 114,219
Mortgage-backed securities available for sale ................................... 791,102 790,562
Loans held for sale, net ........................................................ 7,957 563
Loans receivable, net ........................................................... 1,206,704 1,200,647
Interest and dividends receivable ............................................... 10,301 11,055
Premises and equipment, net ..................................................... 16,077 15,882
Core deposit intangibles ........................................................ 4,149 4,568
Other assets .................................................................... 31,112 32,758
----------- -----------
Total assets ............................................................... $ 2,270,566 $ 2,257,034
=========== ===========
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ........................................................................ $ 1,401,422 $ 1,387,986
Borrowed funds .................................................................. 601,583 596,663
Advances by borrowers for taxes and insurance ................................... 10,141 9,615
Other liabilities ............................................................... 15,602 16,570
----------- -----------
Total liabilities ........................................................... 2,028,748 2,010,834
----------- -----------
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 27,619,653 shares issued and outstanding at 6/30/03 and
43,106,742 and 28,422,028 shares issued and outstanding at 12/31/02 ........ 430 430
Paid-in capital ................................................................. 203,768 203,229
Retained earnings ............................................................... 169,729 163,681
Accumulated other comprehensive income .......................................... 9,066 9,776
Treasury stock (15,362,435 and 14,586,591 shares at 6/30/03 and 12/31/02,
respectively) ............................................................... (156,676) (145,480)
Common stock acquired by the Employee Stock Ownership Plan (ESOP) ............... (8,945) (9,404)
Common stock acquired by the Recognition and Retention Plan (RRP) ............... (554) (1,032)
----------- -----------
Total stockholders' equity ................................................. 216,818 221,200
----------- -----------
Total liabilities and stockholders' equity ................................. $ 2,270,566 $ 2,257,034
=========== ===========
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,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans ................................................ $ 18,653 $ 21,518 $ 37,846 $ 42,913
Investment and mortgage-backed securities
available for sale ................................. 8,904 11,214 18,492 20,935
------------ ------------ ------------ ------------
Total interest income ............................. 27,557 32,732 56,338 63,848
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits:
NOW and money market demand ......................... 1,128 2,086 2,464 4,181
Savings ............................................. 606 932 1,328 1,770
Certificates of deposit ............................. 3,827 5,330 8,007 11,404
------------ ------------ ------------ ------------
Total interest expense - deposits ................. 5,561 8,348 11,799 17,355
Borrowed funds ........................................ 7,431 7,520 14,963 14,596
------------ ------------ ------------ ------------
Total interest expense ............................ 12,992 15,868 26,762 31,951
------------ ------------ ------------ ------------
Net interest income ............................... 14,565 16,864 29,576 31,897
Provision for loan losses .............................. -- 1,105 -- 1,205
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 14,565 15,759 29,576 30,692
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Fees and service charges ............................. 1,142 859 2,030 2,099
Net gain (loss) on sales of loans and securities
available for sale ................................. 633 (1,587) 1,526 (1,471)
Income on Bank Owned Life Insurance (BOLI) ........... 385 404 783 819
Other, net ........................................... 189 199 433 378
------------ ------------ ------------ ------------
Total non-interest income ......................... 2,349 (125) 4,772 1,825
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and benefits ............................ 4,409 4,163 8,720 8,127
Occupancy ............................................ 587 545 1,233 1,103
Equipment ............................................ 409 401 837 839
Advertising .......................................... 283 358 538 533
Federal deposit insurance ............................ 56 59 114 118
Amortization of core deposit intangibles ............. 209 211 419 423
Distributions on preferred capital securities ........ 472 491 944 989
General and administrative ........................... 1,143 1,100 2,314 2,234
------------ ------------ ------------ ------------
Total non-interest expense ........................ 7,568 7,328 15,119 14,366
------------ ------------ ------------ ------------
Income before income tax expense .................. 9,346 8,306 19,229 18,151
Income tax expense ..................................... 3,150 2,746 6,483 5,990
------------ ------------ ------------ ------------
Net income ........................................ $ 6,196 $ 5,560 $ 12,746 $ 12,161
============ ============ ============ ============
Basic earnings per share ............................... $ 0.23 $ 0.19 $ 0.48 $ 0.42
============ ============ ============ ============
Weighted average shares outstanding - Basic ............ 26,496,125 28,908,094 26,719,615 29,182,305
============ ============ ============ ============
Diluted earnings per share ............................. $ 0.23 $ 0.19 $ 0.46 $ 0.41
============ ============ ============ ============
Weighted average shares outstanding - Diluted .......... 27,223,296 29,780,484 27,436,425 29,988,103
============ ============ ============ ============
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 Stock by ESOP by RRP Equity
----- -------- -------- ----------- --------- -------- -------- --------
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
===== ======== ======== ======= ========= ======== ======= ========
Balance at December 31, 2002 ....... $ 430 $203,229 $163,681 $ 9,776 $(145,480) $ (9,404) $(1,032) $221,200
Net income for the six months
ended June 30, 2003 ............. -- -- 12,746 -- -- -- -- 12,746
Cash dividends declared ($0.21) .... -- -- (5,850) -- -- -- -- (5,850)
Net change in unrealized gain/(loss)
on securities available for sale -- -- -- (710) -- -- -- (710)
Purchases of treasury stock ........ -- -- -- -- (12,429) -- -- (12,429)
Exercise of stock options .......... -- (67) (848) -- 1,233 -- -- 318
Tax benefit on stock options and RRP -- 457 -- -- -- -- -- 457
Purchase and retirement of common
stock ........................... -- (177) -- -- -- -- -- (177)
Amortization of RRP ................ -- 34 -- -- -- -- 478 512
ESOP expense ....................... -- 292 -- -- -- 459 -- 751
----- -------- -------- ------- --------- -------- ------- --------
Balance at June 30, 2003 ........... $ 430 $203,768 $169,729 $ 9,066 $(156,676) $ (8,945) $ (554) $216,818
===== ======== ======== ======= ========= ======== ======= ========
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,
-----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income ..................................................................... $ 12,746 $ 12,161
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation of premises and equipment ......................................... 713 706
Amortization of core deposit intangibles ....................................... 419 423
ESOP expense ................................................................... 751 677
Amortization of RRP ............................................................ 512 439
Net amortization of premiums and accretion of discounts and deferred fees ...... 3,427 1,631
Provision for loan losses ...................................................... -- 1,205
Loans originated for sale ...................................................... (34,814) (11,938)
Proceeds from sales of mortgage loans held for sale ............................ 27,477 17,074
Net (gain) loss on sales of loans and securities available for sale ............ (1,526) 1,471
Net (gain) loss on sales of real estate owned .................................. (81) 10
Income on BOLI ................................................................. (783) (819)
Decrease (increase) in interest and dividends receivable ....................... 754 (741)
Tax benefit on stock options and RRP ........................................... 457 326
(Decrease) increase in other liabilities ....................................... (615) 538
Decrease in other assets ....................................................... 2,357 6,266
--------- ---------
Net cash provided by operating activities ................................ 11,794 29,429
--------- ---------
Cash flows from investing activities:
Proceeds from sales/calls/maturities of investment securities available for sale 38,339 19,308
Purchases of investment securities available for sale .......................... (43,564) (36,752)
Purchase of FHLB-NY stock ...................................................... (994) (347)
Proceeds from sales of mortgage-backed securities available for sale ........... 94,612 87,897
Principal payments on mortgage-backed securities ............................... 202,089 118,097
Purchases of mortgage-backed securities available for sale ..................... (302,474) (288,572)
Principal repayments on loans .................................................. 342,039 322,618
Origination of loans ........................................................... (332,118) (330,728)
Purchases of mortgage loans .................................................... (15,353) (19,315)
Proceeds from sale of real estate owned ........................................ 204 32
Purchases of premises and equipment ............................................ (908) (469)
--------- ---------
Net cash used in investing activities ................................... (18,128) (128,231)
--------- ---------
Cash flows from financing activities:
Purchase of treasury stock ..................................................... (12,429) (10,461)
Purchase and retirement of common stock ........................................ (177) (108)
Stock options exercised ........................................................ 318 177
Cash dividends paid ............................................................ (5,850) (5,193)
Net increase in deposits ....................................................... 13,436 60,014
Net increase in short-term borrowed funds ...................................... -- --
Proceeds from borrowed funds ................................................... 25,000 67,000
Repayment of borrowed funds ................................................... (20,080) (15,074)
Net increase in advances by borrowers for taxes and insurance .................. 526 1,095
--------- ---------
Net cash provided by financing activities ............................. 744 97,450
--------- ---------
Net decrease in cash and cash equivalents ............................. (5,590) (1,352)
Cash and cash equivalents at beginning of period .................................. 65,945 53,875
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 60,355 $ 52,523
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 27,100 $ 31,362
Income taxes ............................................................... 5,300 3,142
Non cash investing and financing activities for the period:
Transfer of loans to real estate owned .................................... $ 51 $ --
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. Certain disclosures have been omitted or condensed pursuant
to such rules. These interim financial statements should be read in conjunction
with the December 31, 2002 Annual Report to Stockholders.
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, 2003 and 2002. The results of operations for the three
and six months ended June 30, 2003, are not necessarily indicative of results
that may be expected for the entire fiscal year ending December 31, 2003.
STOCK-BASED COMPENSATION
The Company applies the "intrinsic value based method" as described in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation. No employee compensation cost for stock options is reflected in
net income, as all options granted under the Company's stock option plans had
exercise prices greater than or equal to the market value of the underlying
common stock on the date of grant. Stock awarded to employees under the
Company's Recognition and Retention Plan is expensed by the Company over the
awards' vesting period based upon the fair market value of the stock on the date
of the grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions for stock-based compensation pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation," amended by SFAS No. 148, "Accounting for Stock-based Compensation
- - Transition and Disclosures" (in thousands, except per share data):
Three months ended June 30, Six months ended June 30,
-------------------------- ------------------------
2003 2002 2003 2002
---------- ----------- ---------- ----------
Net income, as reported $ 6,196 $ 5,560 $ 12,746 $ 12,161
Add:
Stock-based employee compensation
expense included in reported net
income, net of related tax effects
(RRP awards) 178 142 333 285
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method
for all options and RRP awards,
net of related tax effects 182 332 344 664
---------- ----------- ---------- ----------
Pro forma net income 6,192 5,370 12,735 11,782
========== =========== ========== ==========
Net income per common share:
Basic - as reported $ 0.23 $ 0.19 $ 0.48 $ 0.42
========== =========== ========== ==========
Basic - pro forma $ 0.23 $ 0.19 $ 0.48 $ 0.40
========== =========== ========== ==========
Diluted - as reported $ 0.23 $ 0.19 $ 0.46 $ 0.41
========== =========== ========== ==========
Diluted - proforma $ 0.23 $ 0.18 $ 0.46 $ 0.39
========== =========== ========== ==========
7
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 June 30, Six months ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income $ 6,196 $ 5,560 $ 12,746 $ 12,161
=========== =========== =========== ===========
Basic weighted-average common shares
outstanding 26,496,125 28,908,094 26,719,615 29,182,305
Plus: Dilutive stock options and awards 727,171 872,390 716,810 805,798
----------- ----------- ----------- -----------
Diluted weighted-average common
shares outstanding 27,223,296 29,780,484 27,436,425 29,988,103
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.23 $ 0.19 $ 0.48 $ 0.42
=========== =========== =========== ===========
Diluted $ 0.23 $ 0.19 $ 0.46 $ 0.41
=========== =========== =========== ===========
(2) DIVIDENDS
Based upon current operating results, the Company declared a cash dividend of
$0.105 per share on April 28, 2003, payable May 30, 2003, to stockholders of
record on May 16, 2003.
(3) COMMITMENTS AND CONTINGENCIES
At June 30, 2003, the Company had the following commitments: (i) to originate
loans of $121.6 million; (ii) unused home equity lines of credit of $71.0
million; (iii) unused commercial lines of credit of $16.5 million; (iv) unused
construction lines of credit of $87.7 million; and (v) letters of credit
outstanding totaling $1.6 million. Further, certificates of deposits which are
scheduled to mature and/or rollover in one year or less, totaled $419.8 million
at June 30, 2003.
(4) ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses (in
thousands):
Six months ended June 30,
-----------------------
2003 2002
-------- --------
Balance at beginning of period $ 12,830 $ 12,932
Provision charged to operations -- 1,205
Charge offs, net of recoveries (37) (1,390)
-------- --------
Balance at end of period $ 12,793 $ 12,747
======== ========
8
(5) COMPREHENSIVE INCOME
Total comprehensive income, consisting of net income and the net change in
unrealized gain/(loss) on securities available for sale, was $4.0 million and
$12.4 million for the three months ended June 30, 2003 and 2002, respectively.
For the six months ended June 30, 2003 and 2002, comprehensive income totaled
$12.0 million and $18.3 million, respectively.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," was issued in May 2003. SFAS No. 150 requires instruments within its
scope to be classified as a liability (or, in some cases, as an asset). SFAS No.
150 is generally effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003 (i.e. July 1, 2003 for calendar
year entities). The adoption of SFAS No. 150 on July 1, 2003 resulted in the
reclassification of $25 million in Company-obligated mandatorily redeemable
preferred capital securities to interest-bearing liabilities and the
reclassification of related costs to interest expense from non-interest expense.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities," was issued on April 30, 2003. The Statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. This
Statement is effective for contracts entered into or modified after June 30,
2003. The adoption of SFAS No. 149 did not have a significant effect on the
Company's consolidated financial statements.
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, 2002 included in our Annual
Report on Form 10-K for the year ended December 31, 2002, as supplemented by the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 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 provision 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 fair 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 $13.5 million from December 31, 2002, to $2.3 billion
at June 30, 2003. The change in assets consisted primarily of increases in loans
and investment securities available for sale, partially offset by a decrease in
cash and cash equivalents.
Net loans, including loans held for sale, totaled $1.2 billion at June 30, 2003,
an increase of $13.5 million, or 1.1%, from December 31, 2002. Of the total loan
portfolio at June 30, 2003, 1-4 family mortgage loans comprised 66.0%, home
equity loans represented 9.0%, commercial real estate, multi-family and
construction loans comprised 24.3%, and other consumer loans accounted for 0.7%.
10
Total loan originations for the six months ended June 30, 2003, were $366.9
million, compared to $342.7 million for the same period in 2002. Fixed-rate, 1-4
family first mortgage loan originations totaled $129.0 million, or 35.2% of
production, while adjustable-rate, 1-4 family first mortgage loans accounted for
$58.1 million, or 15.9%, of total originations for the first six months of 2003.
Also during the first six months of 2003, consumer loan originations, consisting
primarily of home equity loans and credit lines, totaled $88.9 million, or 24.2%
of total originations. During the same period, construction lending totaled
$72.7 million, or 19.8% of total originations, while commercial real estate,
commercial and multi-family loan originations totaled $18.2 million, or 5.0%. In
addition, the Company purchased $15.4 million of primarily adjustable-rate,
single-family first mortgage loans through correspondents during the six months
ended June 30, 2003. 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 $342.0 million for the six months ended
June 30, 2003, compared to $322.6 million for the same period in 2002. In
addition, the Company sold $27.4 million of primarily 30-year, fixed-rate, 1-4
family mortgage loans during the first half of 2003 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 Company.
Investment securities available for sale increased $6.8 million, or 5.9%, to
$121.0 million as of June 30, 2003, from $114.2 million at December 31, 2002.
For the six months ended June 30, 2003, purchases of investment securities
available for sale totaled $43.6 million, while sales, calls and maturities
totaled $38.0 million. Purchases consisted primarily of debt securities issued
by U.S. corporations and government-sponsored agencies. At June 30, 2003, U.S.
government and agency obligations totaled $75.7 million, or 62.6%, of investment
securities available for sale, while state and municipal obligations accounted
for another $13.9 million, or 11.5%. Corporate obligations represented $28.3
million, or 23.4%, and equity securities accounted for the remaining $3.1
million, or 2.5%, of investment securities available for sale at June 30, 2003.
All corporate obligations held at June 30, 2003, are investment grade with the
largest exposure to any single creditor totaling $3.4 million.
Cash and cash equivalents decreased $5.6 million to $60.4 million at June 30,
2003, from $65.9 million at December 31, 2002, as funds were deployed in the
aforementioned earning asset growth.
LIABILITIES. Total deposits increased $13.4 million, or 1.0%, from December 31,
2002, to $1.4 billion at June 30, 2003. Core deposits, consisting of checking,
savings and money market accounts, grew by $44.3 million, or 5.6%, to $829.5
million, and accounted for 59.2% of total deposits at June 30, 2003. This
compares with a core/total deposits ratio of 56.6% at December 31, 2002 and
54.5% at June 30, 2002. Certificates of deposit decreased by $30.8 million, or
5.1%, compared with year-end 2002, with decreases occurring primarily in
one-year and shorter maturity categories.
Borrowed funds increased by $4.9 million, or 0.8%, to $601.6 million at June 30,
2003, from $596.7 million at December 31, 2002.
CAPITAL. The Company's stockholders' equity decreased $4.4 million, or 2.0%, to
$216.8 million at June 30, 2003, from $221.2 million at December 31, 2002. The
decrease in equity was a result of the repurchase of $12.6 million of the
Company's common stock, cash dividends declared of $5.9 million and a decrease
in net unrealized gains on securities available for sale of $710,000, partially
offset by net income of $12.7 million for the six months ended June 30, 2003,
the amortization of stock-based compensation and benefit plans and related tax
benefits of $1.7 million, and proceeds from the exercise of stock options
totaling $318,000. In February 2003, the Company authorized a 5% stock
repurchase program. The Company repurchased 5,000 shares and 871,000 shares,
respectively, during the three and six months ended June 30, 2003, at an average
cost per share of $15.30 and $14.26, respectively. Stated and tangible book
value per share at June 30, 2003, were $7.84 and $7.69, respectively.
11
The Federal Deposit Insurance Corporation requires that the Bank meet minimum
leverage, Tier 1 and Total Risk-based Capital requirements. At June 30, 2003,
the Bank exceeded all regulatory capital requirements, as follows (dollars in
thousands):
Required Actual Excess of Actual
----------------- ----------------- Over Regulatory
Amount Ratio Amount Ratio Requirements
-------- ----- -------- ----- ----------------
Leverage Capital $ 91,088 4.00% $190,631 8.37% $ 99,543
Risk-based Capital:
Tier 1 43,668 4.00% 190,631 17.46% 146,963
Total 87,336 8.00% 203,424 18.63% 116,088
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 ("MBS"); sales of loans, MBS 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 MBS 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 2003 were
principal repayments and prepayments of loans and MBS totaling $342.0 million
and $202.1 million, respectively. Other significant sources of funds for the six
months ended June 30, 2003, were proceeds from sales of MBS available for sale
totaling $94.6 million, sales, calls and maturities of investment securities
available for sale of $38.3 million, proceeds from the sales of mortgage loans
totaling $27.5 million and net deposit growth of $13.4 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, 2003, the
Company had unpledged investment securities and MBS available for sale with a
market value of $429.9 million.
The primary investing activities of the Company for the first six months of 2003
were the origination of loans totaling $366.9 million, purchases of MBS
available for sale totaling $302.5 million, and purchases of investment
securities available for sale totaling $43.6 million. Other significant uses of
funds during the six months ended June 30, 2003, were $15.4 million in purchases
of mortgage loans, $12.6 million in repurchases of the Company's common stock
and $5.9 million in cash dividends paid.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
AND 2002.
RESULTS OF OPERATIONS. Net income for the three and six months ended June 30,
2003, totaled $6.2 million and $12.7 million, respectively, versus net income of
$5.6 million and $12.2 million, for the comparable 2002 periods. This
represented increases of $636,000, or 11.4% and $585,000, or 4.8%, respectively,
for the three and six months ended June 30, 2003, compared with 2002. For the
quarter ended June 30, 2003, basic and diluted earnings per share were $0.23,
representing increases of 21.6% and 21.9% over second quarter 2002 basic and
diluted earnings per share of $0.19. For the six months ended June 30, 2003,
basic and diluted earnings per share were $0.48 and $0.46, respectively,
representing increases of 14.5% and 14.6% over basic and diluted earnings per
share of $0.42 and $0.41, respectively, for the first six months of 2002.
Annualized return on average equity was 11.46% and 11.72% for the three and six
months ended June 30, 2003, respectively, compared with 9.60% and 10.51% for the
comparable 2002 periods. Annualized return on average assets was 1.09% and 1.12%
for the three and six months ended June 30, 2003, respectively, compared with
0.99% and 1.10% for the three and six months ended June 30, 2002, respectively.
Prior year results were adversely affected by two events precipitated by alleged
acts of fraud and/or misrepresentation. In June 2002, 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
12
losses in the second quarter of 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. Both of these items were fully resolved in 2002.
CONSOLIDATED AVERAGE STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
Three Months Ended June 30,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Interest-earning assets:
Federal funds sold ..................... $ 48,682 $ 145 1.19% $ 65,440 $ 280 1.71%
Investment securities available for
sale (1) ............................. 136,160 1,591 4.67 146,419 1,945 5.31
Mortgage-backed securities available
for sale ............................. 753,728 7,168 3.80 683,610 8,989 5.26
---------- ---------- ---------- ----------
Total investments .................... 938,570 8,904 3.79 895,469 11,214 5.01
Mortgage loans ......................... 1,108,597 16,878 6.09 1,150,478 19,340 6.72
Home equity loans ...................... 62,354 1,047 6.72 70,602 1,291 7.31
Home equity lines of credit ............ 48,124 549 4.56 41,732 560 5.37
Other loans ............................ 13,537 179 5.29 18,339 327 7.13
---------- ---------- ---------- ----------
Total loans .......................... 1,232,612 18,653 6.05 1,281,151 21,518 6.72
---------- ---------- ---------- ----------
Total interest-earning assets ........... 2,171,182 27,557 5.08% 2,176,620 32,732 6.01%
---------- ---- ---------- ----
Non-interest earning assets ............. 102,679 62,023
---------- ----------
Total assets ...................... $2,273,861 $2,238,643
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW and money market accounts .......... $ 510,958 $ 1,128 0.88% $ 467,196 $ 2,086 1.79%
Savings accounts ....................... 234,916 606 1.03 202,113 932 1.84
Certificates of deposit ................ 579,438 3,827 2.64 633,188 5,330 3.37
---------- ---------- ---------- ----------
Total interest-bearing deposits ...... 1,325,312 5,561 1.68 1,302,497 8,348 2.56
Borrowed funds ......................... 611,707 7,431 4.86 596,457 7,520 5.04
---------- ---------- ---------- ----------
Total interest-bearing liabilities ...... 1,937,019 12,992 2.68 1,898,954 15,868 3.34
---------- ---- ---------- ----
Non-interest bearing deposits ........... 76,732 68,059
Other liabilities ....................... 43,906 39,901
---------- ----------
Total liabilities ................. 2,057,657 2,006,914
Stockholders' equity .................... 216,204 231,729
---------- ----------
Total liabilities and stockholders'
equity ........................ $2,273,861 $2,238,643
========== ---------- ---- ========== ---------- ----
Net interest income/interest rate spread .. $ 14,565 2.40% $ 16,864 2.67%
========== ==== ========== ====
Net interest-earning assets/net interest
margin ................................. $ 234,163 2.68% $ 277,666 3.10%
========== ==== ========== ====
Ratio of interest-earning assets
to interest-bearing liabilities ........ 1.12X 1.15X
========== ==========
(1) Includes FHLB-NY stock.
13
CONSOLIDATED AVERAGE STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
Six Months Ended June 30,
-------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
---------- ---------- ---------- ---------- ---------- ----------
ASSETS
Interest-earning assets:
Federal funds sold ..................... $ 41,518 $ 246 1.19% $ 59,901 $ 509 1.70%
Investment securities available for
sale (1) ............................. 133,889 3,235 4.83 142,018 3,876 5.46
Mortgage-backed securities available
for sale ............................. 762,568 15,011 3.94 662,343 16,550 5.00
---------- ---------- ---------- ----------
Total investments .................... 937,975 18,492 3.94 864,262 20,935 4.84
Mortgage loans ......................... 1,106,193 34,230 6.19 1,139,676 38,499 6.76
Home equity loans ...................... 62,623 2,120 6.77 71,242 2,603 7.31
Home equity lines of credit ............ 48,201 1,112 4.61 41,168 1,106 5.37
Other loans ............................ 14,297 384 5.37 19,126 705 7.37
---------- ---------- ---------- ----------
Total loans .......................... 1,231,314 37,846 6.15 1,271,212 42,913 6.75
---------- ---------- ---------- ----------
Total interest-earning assets ........... 2,169,289 56,338 5.19% 2,135,474 63,848 5.98%
---------- ---- ---------- ----
Non-interest earning assets ............. 97,803 68,206
---------- ----------
Total assets ...................... $2,267,092 $2,203,680
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW and money market accounts .......... $ 501,033 $ 2,464 0.98% $ 453,367 $ 4,181 1.84%
Savings accounts ....................... 230,245 1,328 1.15 193,365 1,770 1.83
Certificates of deposit ................ 587,320 8,007 2.73 640,539 11,404 3.56
---------- ---------- ---------- ----------
Total interest-bearing deposits ...... 1,318,598 11,799 1.79 1,287,271 17,355 2.70
Borrowed funds ......................... 606,690 14,963 4.93 576,513 14,596 5.06
---------- ---------- ---------- ----------
Total interest-bearing liabilities ...... 1,925,288 26,762 2.78 1,863,784 31,951 3.43
---------- ---- ---------- ----
Non-interest bearing deposits ........... 74,907 64,272
Other liabilities ....................... 49,428 44,215
---------- -----------
Total liabilities ................. 2,049,623 1,972,271
Stockholders' equity .................... 217,469 231,409
---------- -----------
Total liabilities and stockholders'
equity ........................ $2,267,092 $2,203,680
========== ---------- ---- ====== ==== ---------- ----
Net interest income/interest rate spread .. $ 29,576 2.41% $ 31,897 2.55%
========== ==== ========== ====
Net interest-earning assets/net interest
margin ................................. $ 244,001 2.73% $ 271,690 2.99%
========== ==== ========== ====
Ratio of interest-earning assets
to interest-bearing liabilities ........ 1.13X 1.15X
========== ==========
(1) Includes FHLB-NY stock.
14
INTEREST INCOME. Interest income decreased $5.2 million, or 15.8%, and $7.5
million, or 11.8%, for the three and six months ended June 30, 2003,
respectively, from the same periods in 2002. The decline in interest income was
primarily attributable to the historically low interest rate environment
experienced over the past year.
Interest on loans decreased $2.9 million, or 13.3%, and $5.1 million, or 11.8%,
to $18.7 million and $37.8 million for the three and six months ended June 30,
2003, respectively, compared to $21.5 million and $42.9 million for the same
periods in 2002. The average balance of the loan portfolio for the three month
period ended June 30, 2003, decreased $48.5 million to $1.2 billion from 2002,
while the average yield on the portfolio decreased to 6.05% for the three months
ended June 30, 2003, from 6.72% for the same period in 2002. The average balance
of the loan portfolio for the six month period ended June 30, 2003, decreased
$39.9 million to $1.2 billion from 2002, while the average yield on the
portfolio decreased to 6.15% for the six months ended June 30, 2003, from 6.75%
for the same period in 2002.
Interest on securities decreased $2.3 million, or 20.6% and $2.4 million, or
11.7%, to $8.9 million and $18.5 million for the three and six months ended June
30, 2003, compared to $11.2 million and $20.9 million for the same periods in
2002. The average balance of the investment, FHLB stock and MBS available for
sale portfolios totaled $938.6 million, with an annualized yield of 3.79% for
the three months ended June 30, 2003, compared with an average balance of $895.5
million with an annualized yield of 5.01% for the three months ended June 30,
2002. For the first half of 2003, the average balance of the investment, FHLB
stock and MBS available for sale portfolios totaled $938.0 million, with an
annualized yield of 3.94%, compared to an average balance of $864.3 million with
an annualized yield of 4.84% for the six months ended June 30, 2002. The Company
has adopted what it believes is a prudent strategy in the current low interest
rate environment of reducing the duration of the securities portfolio while
carefully managing the risk of extending maturities should rates begin to rise.
INTEREST EXPENSE. Interest expense decreased $2.9 million, or 18.1%, to $13.0
million for the three months ended June 30, 2003, compared to $15.9 million for
the same period in 2002. For the six months ended June 30, 2003, interest
expense decreased $5.2 million, or 16.2%, to $26.8 million versus $32.0 million
for the comparable 2002 period. The decrease in interest expense was primarily
attributable to reductions in rates paid on time and core deposits, as well as
growth in lower-costing core accounts and managed run-off in higher costing
certificates of deposit.
Interest expense on deposits decreased $2.8 million, or 33.4%, to $5.6 million
for the three months ended June 30, 2003, compared to $8.3 million for the same
period in 2002. The average balance of interest-bearing core deposits increased
$76.6 million, or 11.4%, for the quarter ended June 30, 2003, compared with the
same period in 2002, while the average rate paid on these deposits decreased 87
basis points to 0.93%. Average non-interest bearing deposits grew $8.7 million,
or 12.7%, to $76.7 million for the second quarter of 2003 compared with 2002.
The average balance of certificates of deposit declined $53.8 million, or 8.5%,
for the three months ended June 30, 2003, compared with the same period in 2002,
while the average rate paid on certificates decreased 73 basis points to 2.64%.
For the first half of 2003, interest expense on deposits decreased $5.6 million,
or 32.0%, to $11.8 million, compared to $17.4 million for the same period in
2002. For the year-to-date, the average balance of interest-bearing core
deposits increased $84.5 million, or 13.1%, compared with the same period in
2002, while the average rate paid on these deposits decreased 80 basis points to
1.04%. Average non-interest bearing deposits grew $10.6 million, or 16.5%, to
$74.9 million for the first half of 2003 compared with the same period in 2002.
The average balance of certificates of deposit declined $53.2 million, or 8.3%,
for the six months ended June 30, 2003, compared with the same period in 2002,
while the average rate paid on certificates decreased 83 basis points to 2.73%.
Interest on borrowed funds for the three and six months ended June 30, 2003,
decreased $89,000 and increased $367,000, respectively, to $7.4 million and
$15.0 million, compared to $7.5 million and $14.6 million for the same
respective periods in 2002. The average balance of borrowed funds for the three
months ended June 30, 2003, increased to $611.7 million, from $596.5 million for
the same period in 2002. The average interest rate paid on borrowed funds was
4.86% for the three months ended June 30, 2003, compared with 5.04% for the same
period in 2002. The average balance of borrowed funds for the six months ended
June 30, 2003, increased to $606.7 million, from $576.5 million for the same
period in 2002. The average interest rate paid on borrowed funds was 4.93% for
the six months ended June 30, 2003, compared with 5.06% for the same period in
2002. During the three and six months ended June 30, 2003, the Company modified
$25 million and $75 million, respectively, in borrowings with the FHLB-NY,
extending terms and reducing the interest rates. At June 30, 2003, the Company
had an additional $50 million in borrowings with a weighted average interest
rate of 4.77% scheduled to mature in 2003.
15
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses decreased $2.3 million, or 13.6% and 7.3%,
respectively, to $14.6 million and $29.6 million for the three and six months
ended June 30, 2003, compared to $16.9 million and $31.9 million for the same
periods in 2002. The increase was due to the changes in interest income and
interest expense described previously.
The interest rate spread decreased 27 basis points to 2.40% for the three months
ended June 30, 2003, compared with 2.67% for the same period in 2002. For the
three months ended June 30, the average earning asset yield declined to 5.08%
for 2003, from 6.01% for 2002, while the average cost of interest-bearing
liabilities declined to 2.68% for 2003, from 3.34% for 2002. For the six months
ended June 30, 2003, the interest rate spread decreased 14 basis points to 2.41%
compared with 2.55% for the same period in 2002. The average earning asset yield
was 5.19% for the first half of 2003, compared with 5.98% for the first six
months of 2002, while the average cost of interest-bearing liabilities fell to
2.78% from 3.43% for the same respective periods.
The net interest margin declined 42 basis points to 2.68% for the second quarter
of 2003, from 3.10% for the quarter ended June 30, 2002, and nine basis points
sequentially, from 2.77% for the first quarter of 2003. For the year-to-date,
net interest margin declined 26 basis points to 2.73%, compared with 2.99% for
the six months ended June 30, 2002.
PROVISION FOR LOAN LOSSES. The Company did not record a provision for loan
losses during the three and six months ended June 30, 2003, compared to $1.1
million and $1.2 million for the same periods in 2002, as a result of a
reduction in loan portfolio size and improvements in asset quality. Total
non-performing assets decreased to $1.4 million at June 30, 2003, from $1.8
million at December 31, 2002 and $7.8 million at June 30, 2002. The allowance
for loan losses as a percentage of total loans was 1.04% at June 30, 2003 and
December 31, 2002. In management's opinion, the allowance for loan losses,
totaling $12.8 million at June 30, 2003, 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) June 30, Mar. 31, Dec. 31, Sept. 30, June 30,
2003 2003 2002 2002 2002
------- ------- ------- -------- -------
Non-accrual mortgage loans .................. $1,291 $1,082 $1,511 $2,297 $1,875
Non-accrual other loans ..................... 6 43 30 -- 5,552
------ ------ ------ ------ ------
Total non-accrual loans .................. 1,297 1,125 1,541 2,297 7,427
Loans 90 days or more delinquent and
still accruing ......................... 64 294 223 440 80
------ ------ ------ ------ ------
Total non-performing loans .................. 1,361 1,419 1,764 2,737 7,507
Non-accrual investments (WorldCom, Inc.
corporate bonds) ....................... -- -- -- 300 300
Total foreclosed real estate, net of related
allowance .............................. 50 -- 72 100 --
------ ------ ------ ------ ------
Total non-performing assets ................. $1,411 $1,419 $1,836 $3,137 $7,807
====== ====== ====== ====== ======
Non-performing loans to loans receivable, net 0.11% 0.12% 0.15% 0.22% 0.59%
Non-performing assets to total assets ....... 0.06% 0.06% 0.08% 0.14% 0.35%
NON-INTEREST INCOME. Non-interest income increased $2.5 million, to $2.3
million, for the three months ended June 30, 2003, compared to the same period
in 2002. For the six months ended June 30, 2003, non-interest income increased
$2.9 million, to $4.8 million, compared to the same period in 2002. Net gains on
sales of loans and securities totaling $633,000 and $1.5 million were realized
during the three and six months ended June 30, 2003, respectively, compared with
net losses of $1.6 million and $1.5 million, respectively, for the comparable
2002 periods. In 2003, the Company recognized gains on the sales of
higher-coupon MBS that demonstrated a significant propensity to prepay, as well
as several corporate debt obligations that had attained their price target.
Prior year results included a $1.8 million pre-tax impairment charge recorded on
WorldCom, Inc. corporate bonds.
16
In addition, fee and service charge income increased $283,000 and decreased
$69,000 for the three and six months ended June 30, 2003, respectively, compared
with the same periods in 2002. Current year fee and service charge income
benefited from core deposit growth and increased fee levels implemented in July
of 2002. Prior year income included approximately $600,000 in prepayment fee
income attributable to a single large commercial real estate loan earned during
the first quarter of 2002.
NON-INTEREST EXPENSE. Non-interest expense for the three and six months ended
June 30, 2003, increased $240,000 and $753,000, or 3.3% and 5.2%, respectively,
to $7.6 million and $15.1 million, compared to $7.3 million and $14.4 million
for the same periods in 2002. The increase was primarily attributable to
compensation and benefits expense, which increased $246,000 and $593,000, or
5.9% and 7.3%, respectively, to $4.4 million and $8.7 million for the three and
six months ended June 30, 2003, primarily as a result of increased healthcare,
pension and ESOP costs. Effective August 1, 2003, the Company has adopted
changes to its pension plan which will reduce the retirement benefit and close
the plan to new participants hired on or after that date. As a result of this
amendment, pension expense for the remainder of 2003 is projected to decline by
$236,000 compared with the first half of the year.
17
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, 2003).
Item 4. CONTROLS AND PROCEDURES.
a.) Evaluation of disclosure controls and procedures.
-------------------------------------------------
Christopher Martin, 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-15(e) under the Securities
Exchange Act of 1934, as amended) as of June 30, 2003. 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 submits under
the Exchange Act is recorded, processed, summarized and reported as
and when required.
b.) Changes in internal controls.
-----------------------------
There were no changes in the Company's internal control over
financial reporting that occurred during the period covered by this
report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
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 April 28, 2003. The
following proposals were voted on by the stockholders:
Withhold/
For Against Abstain
--- ------- ---------
1. Election of directors
Christopher Martin 22,198,062 -- 187,269
Keith H. McLaughlin 22,200,779 -- 184,552
Philip T. Ruegger, Jr. 22,198,537 -- 186,794
2. The approval of the First
Sentinel Bancorp, Inc.
2003 Key Employee Equity
Compensation Plan 21,201,276 1,090,242 93,813
3. The ratification of KPMG
LLP as the independent
auditors of the Company
for the year ended
December 31, 2003. 22,089,797 270,679 24,855
18
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, (a)
Inc.
3.2 Bylaws of First Sentinel Bancorp, Inc. (b)
4 Stock certificate of First Sentinel Bancorp, Inc. (a)
10 First Sentinel Bancorp, Inc. 2003 Key Employee Equity (c)
Compensation Plan
11 Statement re: Computation of Ratios Page 8
31.1 Certification of Chief Executive Officer Filed herein
31.2 Certification of Chief Financial Officer Filed herein
32.1 Statement of Chief Executive Officer furnished pursuant to Furnished
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. herein
Section 1350*
32.2 Statement of Chief Financial Officer furnished pursuant to Furnished
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. herein
Section 1350*
----------------------------------------------------------------------------------------
* Pursuant to SEC rules, this exhibit will not be deemed filed for purposes of
Section 18 of the Exchange Act or otherwise be subject to the liability of that
section.
(a) Previously filed and incorporated herein by reference to 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.
(b) Previously filed and incorporated herein by reference to the December 31,
2002 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. filed with
the SEC on March 31, 2003, SEC File No. 000-23809.
(c) Previously filed and incorporated herein by reference to the Proxy
Statement for the 2003 Annual Meeting of Stockholders of First Sentinel
Bancorp, Inc. filed with the SEC on March 28, 2003, SEC File No. 000-23809.
b.) Reports on Form 8 - K
---------------------
On April 25, 2003, the Company furnished a Current Report on Form 8-K
reporting its earnings for the three months ended March 31, 2003.
On April 28, 2003, the Company filed a Current Report on Form 8-K
including the text of a financial presentation regarding the state of
the Company made at the April 28, 2003, Annual Meeting of
Stockholders.
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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, 2003 By: /s/ CHRISTOPHER MARTIN
----------------------
Christopher Martin
President and Chief Executive Officer
Date: August 14, 2003 By: /s/ THOMAS M. LYONS
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Thomas M. Lyons
Executive Vice President and
Chief Financial Officer
20