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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, 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 NOVEMBER 1, 2003
- ---------------------------------- ---------------------------------------
Common Stock 27,651,463 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, 2003 and
December 31, 2002 3
Consolidated Statements of Income for the three and nine months ended September
30, 2003 and 2002 4
Consolidated Statements of Stockholders' Equity for the nine months ended
September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the nine months ended September 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)
September 30, December 31,
2003 2002
---------------- --------------
ASSETS
Cash and due from banks ............................................................ $ 22,472 $ 21,695
Federal funds sold ................................................................. 33,400 44,250
---------------- --------------
Total cash and cash equivalents ............................................... 55,872 65,945
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost ........................ 21,328 20,835
Investment securities available for sale ........................................... 123,019 114,219
Mortgage-backed securities available for sale ...................................... 781,703 790,562
Loans held for sale, net ........................................................... 2,093 563
Loans receivable, net .............................................................. 1,200,280 1,200,647
Interest and dividends receivable .................................................. 9,655 11,055
Premises and equipment, net ........................................................ 16,063 15,882
Core deposit intangibles ........................................................... 3,939 4,568
Other assets ....................................................................... 31,178 32,758
---------------- --------------
Total assets .................................................................. $ 2,245,130 $ 2,257,034
================ ==============
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ........................................................................... $ 1,386,215 $ 1,387,986
Borrowed funds ..................................................................... 591,542 596,663
Advances by borrowers for taxes and insurance ...................................... 9,065 9,615
Other liabilities .................................................................. 16,045 16,570
---------------- --------------
Total liabilities .............................................................. 2,002,867 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 27,650,963 shares issued and outstanding at 9/30/03 and
43,106,742 and 28,422,028 shares issued and outstanding at 12/31/02 ........... 430 430
Paid-in capital .................................................................... 204,014 203,229
Retained earnings .................................................................. 173,436 163,681
Accumulated other comprehensive income ............................................. 5,041 9,776
Treasury stock (15,331,125 and 14,586,591 shares at 9/30/03 and 12/31/02,
respectively) .................................................................. (156,627) (145,480)
Common stock acquired by the Employee Stock Ownership Plan (ESOP) .................. (8,715) (9,404)
Common stock acquired by the Recognition and Retention Plan (RRP) .................. (316) (1,032)
---------------- --------------
Total stockholders' equity .................................................... 217,263 221,200
---------------- --------------
Total liabilities and stockholders' equity .................................... $ 2,245,130 $ 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 Nine months ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans ......................................................... $ 17,805 $ 21,302 $ 55,651 $ 64,215
Investment and mortgage-backed securities
available for sale .......................................... 8,618 10,784 27,110 31,719
------------ ------------ ------------ ------------
Total interest income ..................................... 26,423 32,086 82,761 95,934
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits:
NOW and money market demand ................................. 1,079 1,918 3,543 6,099
Savings ..................................................... 475 952 1,803 2,722
Certificates of deposit ..................................... 3,465 5,050 11,472 16,454
------------ ------------ ------------ ------------
Total interest expense - deposits ......................... 5,019 7,920 16,818 25,275
Borrowed funds ................................................ 6,944 7,691 21,907 22,287
------------ ------------ ------------ ------------
Total interest expense .................................... 11,963 15,611 38,725 47,562
------------ ------------ ------------ ------------
Net interest income ....................................... 14,460 16,475 44,036 48,372
Provision for loan losses ..................................... -- 105 -- 1,310
------------ ------------ ------------ ------------
Net interest income after provision for loan losses ....... 14,460 16,370 44,036 47,062
------------ ------------ ------------ ------------
NON-INTEREST INCOME:
Fees and service charges ...................................... 1,141 992 3,171 3,091
Net gain (loss) on sales of loans and securities
available for sale .......................................... 276 1,349 1,802 (122)
Income on Bank Owned Life Insurance (BOLI) .................... 412 338 1,195 1,157
Other, net .................................................... 39 158 472 536
------------ ------------ ------------ ------------
Total non-interest income ..................................... 1,868 2,837 6,640 4,662
------------ ------------ ------------ ------------
NON-INTEREST EXPENSE:
Compensation and benefits ..................................... 4,188 4,281 12,908 12,408
Occupancy ..................................................... 596 592 1,829 1,695
Equipment ..................................................... 390 451 1,227 1,290
Advertising ................................................... 134 221 672 754
Federal deposit insurance ..................................... 57 58 171 176
Amortization of core deposit intangibles ...................... 210 210 629 633
Distributions on preferred capital securities ................. 464 495 1,408 1,484
General and administrative .................................... 1,099 1,151 3,413 3,385
------------ ------------ ------------ ------------
Total non-interest expense ................................. 7,138 7,459 22,257 21,825
------------ ------------ ------------ ------------
Income before income tax expense ........................... 9,190 11,748 28,419 29,899
Income tax expense .............................................. 2,983 4,270 9,466 10,260
------------ ------------ ------------ ------------
Net income ................................................. $ 6,207 $ 7,478 $ 18,953 $ 19,639
============ ============ ============ ============
Basic earnings per share ........................................ $ 0.23 $ 0.26 $ 0.71 $ 0.68
============ ============ ============ ============
Weighted average shares outstanding - Basic ..................... 26,602,051 28,447,507 26,679,996 28,934,681
============ ============ ============ ============
Diluted earnings per share ...................................... $ 0.23 $ 0.26 $ 0.69 $ 0.66
============ ============ ============ ============
Weighted average shares outstanding - Diluted ................... 27,358,536 29,185,437 27,410,031 29,717,856
============ ============ ============ ============
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 nine months
ended September 30, 2002 ........... -- -- 19,639 -- -- -- -- 19,639
Cash dividends declared ($0.265) ...... -- -- (7,993) -- -- -- -- (7,993)
Net change in unrealized gain/(loss)
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
==========================================================================================
Balance at December 31, 2002 .......... $430 $203,229 $163,681 $9,776 $(145,480) $(9,404) $(1,032) $221,200
Net income for the nine months
ended September 30, 2003 ........... -- -- 18,953 -- -- -- -- 18,953
Cash dividends declared ($0.315) ...... -- -- (8,345) -- -- -- -- (8,345)
Net change in unrealized gain/(loss)
on securities available for sale ... -- -- -- (4,735) -- -- -- (4,735)
Purchases of treasury stock ........... -- -- -- -- (12,429) -- -- (12,429)
Exercise of stock options.............. -- (63) (853) -- 1,282 -- -- 366
Tax benefit on stock options and RRP .. -- 460 -- -- -- -- -- 460
Purchase and retirement of common
stock............................... -- (177) -- -- -- -- -- (177)
Amortization of RRP ................... -- 51 -- -- -- -- 716 767
ESOP expense........................... -- 514 -- -- -- 689 -- 1,203
------------------------------------------------------------------------------------------
Balance at September 30, 2003.......... $430 $204,014 $173,436 $5,041 $(156,627) $(8,715) $(316) $217,263
==========================================================================================
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,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 18,953 $ 19,639
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation of premises and equipment......................................................... 1,059 1,066
Amortization of core deposit intangibles....................................................... 629 633
ESOP expense .................................................................................. 1,203 1,018
Amortization of RRP ........................................................................... 767 659
Net amortization of premiums and accretion of discounts and deferred fees.... ................. 5,413 2,815
Provision for loan losses ..................................................................... - 1,310
Loans originated for sale ..................................................................... (48,512) (15,782)
Proceeds from sales of mortgage loans held for sale ........................................... 47,056 19,327
Net (gain) loss on sales of loans and securities available for sale............................ (1,802) 122
Net (gain) loss on sales of real estate owned.................................................. (79) 10
Income on BOLI................................................................................. (1,195) (1,157)
Decrease in interest and dividends receivable.................................................. 1,400 767
Tax benefit on stock options and RRP........................................................... 460 331
Increase in other liabilities.................................................................. 2,010 6,626
Decrease in other assets ...................................................................... 2,703 3,267
------------ ------------
Net cash provided by operating activities ............................................... 30,065 40,651
------------ ------------
Cash flows from investing activities:
Proceeds from sales/calls/maturities of investment securities available for sale .............. 59,687 44,779
Purchases of investment securities available for sale ......................................... (67,709) (54,051)
Purchase of FHLB-NY stock ..................................................................... (493) (595)
Proceeds from sales of mortgage-backed securities available for sale .......................... 127,442 152,433
Principal payments on mortgage-backed securities .............................................. 335,451 181,962
Purchases of mortgage-backed securities available for sale .................................... (466,367) (419,561)
Principal repayments on loans ................................................................. 553,152 472,697
Origination of loans .......................................................................... (530,934) (446,978)
Purchases of mortgage loans ................................................................... (21,335) (26,483)
Proceeds from sale of real estate owned ....................................................... 235 129
Purchases of premises and equipment ........................................................... (1,240) (636)
------------ ------------
Net cash used in investing activities .................................................. (12,111) (96,304)
------------ ------------
Cash flows from financing activities:
Purchase of treasury stock .................................................................... (12,429) (26,028)
Purchase and retirement of common stock ....................................................... (177) (108)
Stock options exercised ....................................................................... 366 223
Cash dividends paid ........................................................................... (8,345) (7,993)
Net (decrease) increase in deposits ........................................................... (1,771) 61,803
Proceeds from borrowed funds .................................................................. 55,000 117,000
Repayment of borrowed funds .................................................................. (60,121) (61,112)
Net (decrease) increase in advances by borrowers for taxes and insurance.... .................. (550) 181
------------ ------------
Net cash (used in) provided by financing activities .................................. (28,027) 83,966
------------ ------------
Net (decrease) increase in cash and cash equivalents ................................. (10,073) 28,313
Cash and cash equivalents at beginning of period ................................................. 65,945 53,875
------------ ------------
Cash and cash equivalents at end of period ....................................................... $ 55,872 $ 82,188
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................................................. $ 39,541 $ 47,505
Income taxes .............................................................................. 5,300 3,147
Non cash investing and financing activities for the period:
Transfer of loans to real estate owned ................................................... $ 84 $ 197
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
nine months ended September 30, 2003 and 2002. The results of operations for the
three and nine months ended September 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 Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net income, as reported $ 6,207 $ 7,478 $ 18,953 $ 19,639
Add:
Stock-based employee compensation
expense included in reported net
income, net of related tax effects
(RRP awards) 166 143 499 428
Deduct:
Total stock-based employee
compensation expense determined
under fair value based method for all
options and RRP awards, net of
related tax effects 173 332 517 996
-------------- -------------- -------------- --------------
Pro forma net income $ 6,200 $ 7,289 $ 18,935 $ 19,071
============== ============== ============== ==============
Net income per common share:
Basic - as reported $ 0.23 $ 0.26 $ 0.71 $ 0.68
============== ============== ============== ==============
Basic - pro forma $ 0.23 $ 0.26 $ 0.71 $ 0.66
============== ============== ============== ==============
Diluted - as reported $ 0.23 $ 0.26 $ 0.69 $ 0.66
============== ============== ============== ==============
Diluted - pro forma $ 0.23 $ 0.25 $ 0.69 $ 0.64
============== ============== ============== ==============
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 Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net income $ 6,207 $ 7,478 $ 18,953 $ 19,639
============== ============== ============== ==============
Basic weighted-average common shares
outstanding 26,602,051 28,447,507 26,679,996 28,934,681
Plus: Dilutive stock options and awards 756,485 737,930 730,035 783,175
-------------- -------------- -------------- --------------
Diluted weighted-average common
shares outstanding 27,358,536 29,185,437 27,410,031 29,717,856
============== ============== ============== ==============
Net income per common share:
Basic $ 0.23 $ 0.26 $ 0.71 $ 0.68
============== ============== ============== ==============
Diluted $ 0.23 $ 0.26 $ 0.69 $ 0.66
============== ============== ============== ==============
(2) DIVIDENDS
Based upon current operating results, the Company declared a cash dividend of
$0.105 per share on July 23, 2003, payable August 29, 2003, to stockholders of
record on August 15, 2003.
(3) COMMITMENTS AND CONTINGENCIES
At September 30, 2003, the Company had the following commitments: (i) to
originate loans of $150.1 million; (ii) unused home equity lines of credit of
$74.2 million; (iii) unused commercial lines of credit of $14.7 million; (iv)
unused construction lines of credit of $87.1 million; and (v) letters of credit
outstanding totaling $1.5 million. Further, certificates of deposits which are
scheduled to mature and/or rollover in one year or less, totaled $409.1 million
at September 30, 2003.
(4) ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses (in
thousands):
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2003 2002
-------------- -------------
Balance at beginning of period $ 12,830 $ 12,932
Provision charged to operations -- 1,310
Charge-offs, net of recoveries (46) (1,405)
------------- -------------
Balance at end of period $ 12,784 $ 12,837
============= =============
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 $2.0 million and
$8.3 million for the three months ended September 30, 2003 and 2002,
respectively. For the nine months ended September 30, 2003 and 2002,
comprehensive income totaled $14.2 million and $26.7 million, respectively.
(6) RECENT ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board ("FASB") Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," was issued in January 2003. FIN
46 applies immediately to enterprises that hold a variable interest in variable
interest entities created after January 31, 2003. It applies in the first fiscal
year or interim period beginning after June 15, 2003 to enterprises that hold a
variable interest in variable interest entities created before February 1, 2003.
FIN 46 applies to public enterprises as of the beginning of the applicable
interim or annual period, and it applies to nonpublic enterprises no later than
the end of the applicable annual period. FIN 46 may be applied prospectively
with a cumulative-effect adjustment as of the date on which it is first applied
or by restating previously issued financial statements for one or more years
with a cumulative-effect adjustment as of the beginning of the first year
restated. FIN 46 provides guidance on the identification of entities controlled
through means other than voting rights. FIN 46 specifies how a business
enterprise should evaluate its interest in a variable interest entity to
determine whether to consolidate that entity. A variable interest entity must be
consolidated by its primary beneficiary if the entity does not effectively
disperse risks among the parties involved.
On October 9, 2003, the effective date was deferred until the end of the first
interim or annual period ending after December 15, 2003, for certain interests
held by a public entity in certain variable interest entities or potential
variable interest entities created before February 1, 2003. The adoption of FIN
46 is not expected to have a significant effect on the Company's consolidated
financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 established
standards for how entities classify and measure certain financial instruments
with characteristics of both liabilities and equity. The provisions of SFAS No.
150 were effective for financial instruments entered into or modified after May
31, 2003, and otherwise were effective at the beginning of the first interim
period beginning after June 15, 2003. In the Company's earnings release issued
October 22, 2003, the "Preferred capital securities" were reported as a
liability in the Company's consolidated statements of financial condition, and
the distributions on these trust preferred securities on and after July 1, 2003,
were included as interest expense in accordance with the provisions of SFAS No.
150 in effect at that date. Subsequent to the earnings release, but prior to the
filing of these financial statements, the FASB voted to defer indefinitely the
provisions of SFAS No. 150 with respect to the financial reporting for trust
preferred securities. Accordingly $464,000 of distributions on preferred capital
securities for the three months ended September 30, 2003, which were classified
as interest expense in the October 22, 2003, earnings release have been reported
in these financial statements as non-interest expense. Also, these trust
preferred securities are reported in the mezzanine (between liabilities and
equity) in the accompanying consolidated statements of financial condition. This
reporting is consistent with the Company's previous quarterly and annual
financial reporting.
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. AND SUBSIDIARIES
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, projections 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
Operations," 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 Reports on Form 10-Q for the quarters ended March 31, 2003,
June 30, 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 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 decreased $11.9 million from December 31, 2002, to $2.2
billion at September 30, 2003. The change in assets consisted primarily of
decreases in federal funds sold and mortgage-backed securities ("MBS") available
for sale, partially offset by increases in investment securities available for
sale and loans held for sale.
Federal funds sold decreased $10.9 million to $33.4 million at September 30,
2003, from $44.3 million at December 31, 2002, as balances were deployed into
higher-yielding assets and used to reduce outstanding borrowings.
MBS available for sale decreased $8.9 million to $781.7 million at September 30,
2003, from $790.6 million at December 31, 2002. For the nine months ended
September 30, 2003, purchases of MBS available for sale totaled $466.4 million,
while principal repayments totaled $335.5 million and sales totaled $126.1
million. During the nine
10
months ended September 30, 2003, the Company experienced high levels of
principal repayments on MBS, reflecting the historically low interest rate
environment and resultant strong mortgage loan refinance activity. Prepayment
levels are expected to decline during the fourth quarter of 2003, as longer-term
interest rates have risen and refinance activity has slowed.
Investment securities available for sale increased $8.8 million, or 7.7%, to
$123.0 million as of September 30, 2003, from $114.2 million at December 31,
2002. For the nine months ended September 30, 2003, purchases of investment
securities available for sale totaled $67.7 million, while sales, calls and
maturities totaled $59.3 million. Purchases consisted primarily of debt
securities issued by U.S. corporations and government-sponsored agencies. At
September 30, 2003, U.S. government and agency obligations totaled $78.2
million, or 63.6%, of investment securities available for sale, while state and
municipal obligations accounted for another $13.7 million, or 11.1%. Corporate
obligations represented $27.6 million, or 22.4%, and equity securities accounted
for the remaining $3.5 million, or 2.9%, of investment securities available for
sale at September 30, 2003. All corporate obligations held at September 30,
2003, are investment grade with the largest exposure to any single creditor
totaling $3.0 million.
Net loans, including loans held for sale, increased $1.2 million from December
31, 2002, to $1.2 billion at September 30, 2003. Of the total loan portfolio at
September 30, 2003, 1-4 family mortgage loans comprised 65.0%, home equity loans
represented 9.2%, commercial real estate, multi-family and construction loans
comprised 24.8%, and other consumer loans accounted for 1.0%.
Total loan originations for the nine months ended September 30, 2003, were
$579.4 million, compared to $462.8 million for the same period in 2002.
Fixed-rate, 1-4 family first mortgage loan originations totaled $209.7 million,
or 36.2% of production, while adjustable-rate, 1-4 family first mortgage loans
accounted for $108.4 million, or 18.7%, of total originations for the first nine
months of 2003. Also during the first nine months of 2003, consumer loan
originations, consisting primarily of home equity loans and credit lines,
totaled $129.9 million, or 22.4% of total originations. During the same period,
construction lending totaled $98.7 million, or 17.0% of total originations,
while commercial real estate, commercial and multi-family loan originations
totaled $32.9 million, or 5.7%. In addition, the Company purchased $21.3 million
of primarily adjustable-rate, single-family first mortgage loans through
correspondents during the nine months ended September 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 $553.2 million for the nine months ended
September 30, 2003, compared to $472.7 million for the same period in 2002. In
addition, the Company sold $47.0 million of primarily 30-year, fixed-rate, 1-4
family mortgage loans during the first nine months 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. At September 30, 2003, the loan pipeline, consisting of loan
applications in the process of approval, totaled $150.1 million, including $46.7
million of accepted construction and non-residential loan commitments.
LIABILITIES. Total deposits decreased $1.8 million from December 31, 2002, to
$1.4 billion at September 30, 2003. Core deposits, consisting of checking,
savings and money market accounts, grew by $46.1 million, or 5.9%, to $831.4
million, and accounted for 60.0% of total deposits at September 30, 2003. This
compares with a core to total deposits ratio of 56.6% at December 31, 2002 and
55.1% at September 30, 2002. Certificates of deposit decreased by $47.9 million,
or 7.9%, compared with year-end 2002, with decreases occurring primarily in
one-year and shorter maturity categories.
Borrowed funds decreased by $5.1 million, or 0.9%, to $591.5 million at
September 30, 2003, from $596.7 million at December 31, 2002.
CAPITAL. The Company's stockholders' equity decreased $3.9 million, or 1.8%, to
$217.3 million at September 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 $8.3 million and a decrease
in net unrealized gains on securities available for sale of $4.7 million,
partially offset by net income of $19.0 million for the nine months ended
September 30, 2003, the amortization of stock-based compensation and benefit
plans and related tax benefits of $2.4 million, and proceeds from the exercise
of stock options totaling $366,000. In February 2003, the Company authorized a
5% stock repurchase program. The Company repurchased 871,000 shares during the
nine
11
months ended September 30, 2003, at an average cost per share of $14.26. There
were no share repurchases in the quarter ended September 30, 2003. Stated and
tangible book value per share at September 30, 2003, were $7.86 and $7.71,
respectively.
The Federal Deposit Insurance Corporation requires that the Bank meet minimum
leverage, Tier 1 and Total Risk-based Capital requirements. At September 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 $89,543 4.00% $198,201 8.85% $108,658
Risk-based Capital:
Tier 1 44,357 4.00 198,201 17.87 153,844
Total 88,714 8.00 210,985 19.03 122,271
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 nine months of 2003 were
principal repayments and prepayments of loans and MBS totaling $553.2 million
and $335.5 million, respectively. Other significant sources of funds for the
nine months ended September 30, 2003, were proceeds from sales of MBS available
for sale totaling $127.4 million, sales, calls and maturities of investment
securities available for sale of $59.7 million, proceeds from the sales of
mortgage loans totaling $47.1 million and new borrowings of $55.0 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,
2003, the Company had unpledged investment securities and MBS available for sale
with a market value of $410.3 million.
The Company's primary uses of funds for the first nine months of 2003 were the
origination of loans totaling $579.4 million, purchases of MBS available for
sale totaling $466.4 million, purchases of investment securities available for
sale totaling $67.7 million and repayments of borrowings totaling $60.1 million.
Other significant uses of funds during the nine months ended September 30, 2003,
were $21.3 million in purchases of mortgage loans, $12.6 million in repurchases
of the Company's common stock and $8.3 million in cash dividends paid.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 2003 AND 2002.
RESULTS OF OPERATIONS. Net income for the three and nine months ended September
30, 2003, totaled $6.2 million and $19.0 million, respectively, versus net
income of $7.5 million and $19.6 million, for the comparable 2002 periods. This
represented decreases of $1.3 million, or 17.0% and $686,000, or 3.5%,
respectively, for the three and nine months ended September 30, 2003, compared
with 2002. For the quarter ended September 30, 2003, basic and diluted earnings
per share were $0.23, representing decreases of 11.2% and 11.5% over third
quarter 2002 basic and diluted earnings per share of $0.26. For the nine months
ended September 30, 2003, basic and diluted earnings per share were $0.71 and
$0.69, respectively, representing increases of 4.7% and 4.6% over basic and
diluted earnings per share of $0.68 and $0.66, respectively, for the first nine
months of 2002.
Annualized return on average equity was 11.54% and 11.66% for the three and nine
months ended September 30, 2003, respectively, compared with 13.01% and 11.34%
for the comparable 2002 periods. Annualized return on average assets was 1.11%
and 1.12% for the three and nine months ended September 30, 2003, respectively,
compared with 1.33% and 1.18% for the three and nine months ended September 30,
2002, respectively.
12
CONSOLIDATED AVERAGE STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
2003 2002
--------------------------------------- ------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
--------------------------------------- ------------------------------------------
ASSETS
Interest-earning assets:
Federal funds sold .................... $ 30,079 $ 72 0.96% $ 63,510 $ 271 1.71%
Investment securities available for
sale (1)............................. 139,706 1,616 4.63 135,742 1,692 4.99
Mortgage-backed securities available
for sale............................. 755,581 6,930 3.67 698,613 8,821 5.05
---------- ------- ---------- -------
Total investments ................... 925,366 8,618 3.73 897,865 10,784 4.80
---------- ------- ---------- -------
Mortgage loans......................... 1,108,842 16,128 5.82 1,143,387 19,284 6.75
Home equity loans...................... 60,802 982 6.46 68,032 1,246 7.33
Home equity lines of credit............ 49,320 533 4.32 44,162 575 5.21
Other loans............................ 10,916 162 5.94 15,004 197 5.25
---------- ------- ---------- -------
Total loans ......................... 1,229,880 17,805 5.79 1,270,585 21,302 6.71
---------- ------- ---------- -------
Total interest-earning assets.......... 2,155,246 26,423 4.90% 2,168,450 32,086 5.92%
------- ---- ------- ----
Non-interest earning assets ........... 86,205 80,644
---------- ----------
Total assets $2,241,451 $2,249,094
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW and money market accounts ......... $ 528,522 $ 1,079 0.82% $ 474,220 $ 1,918 1.62%
Savings accounts ...................... 224,665 475 0.85 205,308 952 1.85
Certificates of deposit ............... 562,432 3,465 2.46 622,209 5,050 3.25
---------- ------- ---------- -------
Total interest-bearing deposits ..... 1,315,619 5,019 1.53 1,301,737 7,920 2.43
Borrowed funds ........................ 583,146 6,944 4.76 601,758 7,691 5.11
---------- ------- ---------- -------
Total interest-bearing liabilities..... 1,898,765 11,963 2.52 1,903,495 15,611 3.28
------- ---- ------- ----
Non-interest bearing deposits ......... 76,263 69,186
Other liabilities ..................... 51,297 46,456
---------- ----------
Total liabilities ................ 2,026,325 2,019,137
Stockholders' equity .................. 215,126 229,957
---------- ----------
Total liabilities and stockholders'
equity ....................... $2,241,451 $2,249,094
========== ==========
Net interest income/interest rate spread . $14,460 2.38% $16,475 2.64%
======= ==== ======= ====
Net interest-earning assets/net interest
margin................................. $ 256,481 2.68% $ 264,955 3.04%
========== ==== ========== ====
Ratio of interest-earning assets
to interest-bearing liabilities ....... 1.14 X 1.14 X
========== ==========
(1) Includes FHLB-NY stock.
13
CONSOLIDATED AVERAGE STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------------
2003 2002
--------------------------------------- ------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
--------------------------------------- ------------------------------------------
ASSETS
Interest-earning assets:
Federal funds sold $ 37,705 $ 318 1.12% $ 61,104 $ 780 1.70%
Investment securities available for
sale (1)............................. 135,828 4,851 4.76 139,926 5,568 5.31
Mortgage-backed securities available
for sale............................. 760,239 21,941 3.85 674,433 25,371 5.02
---------- ------- ---------- -------
Total investments 933,772 27,110 3.87 875,463 31,719 4.83
---------- ------- ---------- -------
Mortgage loans......................... 1,107,076 50,358 6.06 1,140,913 57,783 6.75
Home equity loans...................... 62,016 3,102 6.67 70,172 3,849 7.31
Home equity lines of credit............ 48,574 1,645 4.52 42,166 1,681 5.32
Other loans............................ 13,170 546 5.53 17,752 902 6.77
---------- ------- ---------- -------
Total loans 1,230,836 55,651 6.03 1,271,003 64,215 6.74
---------- ------- ---------- -------
Total interest-earning assets.......... 2,164,608 82,761 5.10% 2,146,466 95,934 5.96%
------- ---- ------- ----
Non-interest earning assets 93,937 72,352
---------- ----------
Total assets $2,258,545 $2,218,818
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
NOW and money market accounts ......... $ 510,196 $ 3,543 0.93% $ 460,318 $ 6,099 1.77%
Savings accounts ...................... 228,385 1,803 1.05 197,346 2,722 1.84
Certificates of deposit ............... 579,024 11,472 2.64 634,429 16,454 3.46
---------- ------- ---------- -------
Total interest-bearing deposits ..... 1,317,605 16,818 1.70 1,292,093 25,275 2.61
Borrowed funds ........................ 598,842 21,907 4.88 584,928 22,287 5.08
---------- ------- ---------- -------
Total interest-bearing liabilities..... 1,916,447 38,725 2.69 1,877,021 47,562 3.38
------- ---- ------- ----
Non-interest bearing deposits ......... 75,359 65,910
Other liabilities ..................... 50,051 44,962
---------- ----------
Total liabilities ................ 2,041,857 1,987,893
Stockholders' equity .................. 216,688 230,925
---------- ----------
Total liabilities and stockholders'
equity ....................... $2,258,545 $2,218,818
========== ==========
Net interest income/interest rate spread . $44,036 2.41% $48,372 2.58%
======= ==== ======= ====
Net interest-earning assets/net interest
margin................................. $ 248,161 2.71% $ 269,445 3.00%
========== ==== ========== ====
Ratio of interest-earning assets
to interest-bearing liabilities ....... 1.13 X 1.14 X
========== ==========
(1) Includes FHLB-NY stock.
14
INTEREST INCOME. Interest income decreased $5.7 million, or 17.7%, and $13.2
million, or 13.7%, to $26.4 million and $82.8 million for the three and nine
months ended September 30, 2003, respectively, from $32.1 million and $95.9
million for 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 $3.5 million, or 16.4%, and $8.6 million, or 13.3%,
to $17.8 million and $55.7 million for the three and nine months ended September
30, 2003, respectively, compared to $21.3 million and $64.2 million for the same
periods in 2002. The average balance of the loan portfolio for the three month
period ended September 30, 2003, decreased $40.7 million to $1.2 billion from
the same period in 2002, while the average yield on the portfolio decreased to
5.79% for the three months ended September 30, 2003, from 6.71% for the same
period in 2002. The average balance of the loan portfolio for the nine month
period ended September 30, 2003, decreased $40.2 million to $1.2 billion from
the same period in 2002, while the average yield on the portfolio decreased to
6.03% for the nine months ended September 30, 2003, from 6.74% for the same
period in 2002.
Interest on securities decreased $2.2 million, or 20.1% and $4.6 million, or
14.5%, to $8.6 million and $27.1 million for the three and nine months ended
September 30, 2003, compared to $10.8 million and $31.7 million for the same
periods in 2002. The average balance of the investment, FHLB stock and MBS
available for sale portfolios totaled $925.4 million, with an annualized yield
of 3.73% for the three months ended September 30, 2003, compared with an average
balance of $897.9 million with an annualized yield of 4.80% for the three months
ended September 30, 2002. For the first nine months of 2003, the average balance
of the investment, FHLB stock and MBS available for sale portfolios totaled
$933.8 million, with an annualized yield of 3.87%, compared to an average
balance of $875.5 million with an annualized yield of 4.83% for the nine months
ended September 30, 2002. Income for the quarter ended September 30, 2003,
included the regular quarterly dividend from the FHLB-NY in the amount of
$277,000. The FHLB-NY has informed shareholders that it will suspend the fourth
quarter 2003 dividend payment.
INTEREST EXPENSE. Interest expense decreased $3.6 million, or 23.4%, to $12.0
million for the three months ended September 30, 2003, compared to $15.6 million
for the same period in 2002. For the nine months ended September 30, 2003,
interest expense decreased $8.8 million, or 18.6%, to $38.7 million versus $47.6
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 $2.9 million, or 36.6%, to $5.0 million
for the three months ended September 30, 2003, compared to $7.9 million for the
same period in 2002. The average balance of interest-bearing core deposits
increased $73.7 million, or 10.8%, for the quarter ended September 30, 2003,
compared with the same period in 2002, while the average rate paid on these
deposits decreased 86 basis points to 0.83%. Average non-interest bearing
deposits grew $7.1 million, or 10.2%, to $76.3 million for the third quarter of
2003 compared with 2002. The average balance of certificates of deposit declined
$59.8 million, or 9.6%, for the three months ended September 30, 2003, compared
with the same period in 2002, while the average rate paid on certificates
decreased 79 basis points to 2.46%.
For the first nine months of 2003, interest expense on deposits decreased $8.5
million, or 33.5%, to $16.8 million, compared to $25.3 million for the same
period in 2002. For the year-to-date, the average balance of interest-bearing
core deposits increased $80.9 million, or 12.3%, compared with the same period
in 2002, while the average rate paid on these deposits decreased 82 basis points
to 0.97%. Average non-interest bearing deposits grew $9.4 million, or 14.3%, to
$75.4 million for the first nine months of 2003 compared with the same period in
2002. The average balance of certificates of deposit declined $55.4 million, or
8.7%, for the nine months ended September 30, 2003, compared with the same
period in 2002, while the average rate paid on certificates decreased 82 basis
points to 2.64%. Interest rates paid on new and renewing certificates of deposit
are projected to continue to reprice downward throughout the fourth quarter of
2003 and to stabilize somewhat thereafter.
Interest on borrowed funds for the three and nine months ended September 30,
2003, decreased $747,000 and $380,000, respectively, to $6.9 million and $21.9
million, compared to $7.7 million and $22.3 million for the same respective
periods in 2002. The average balance of borrowed funds for the three months
ended September 30, 2003, decreased to $583.1 million, from $601.8 million for
the same period in 2002. The average interest rate paid on
15
borrowed funds was 4.76% for the three months ended September 30, 2003, compared
with 5.11% for the same period in 2002. The average balance of borrowed funds
for the nine months ended September 30, 2003, increased to $598.8 million, from
$584.9 million for the same period in 2002. The average interest rate paid on
borrowed funds was 4.88% for the nine months ended September 30, 2003, compared
with 5.08% for the same period in 2002. During the first half of 2003, the
Company modified $75 million in borrowings with the FHLB-NY, extending terms and
reducing the interest rates. The Company had $71.0 million in borrowings with a
weighted average interest rate of 4.10% scheduled to mature in the subsequent
twelve months at September 30, 2003. The Company expects that these borrowings
will favorably reprice based on current market conditions.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses decreased $2.0 million and $4.3 million, or 12.2% and
9.0%, respectively, to $14.4 million and $44.0 million for the three and nine
months ended September 30, 2003, compared to $16.5 million and $48.4 million for
the same periods in 2002. The decrease was due to the changes in interest income
and interest expense described previously.
The interest rate spread decreased 26 basis points to 2.38% for the three months
ended September 30, 2003, compared with 2.64% for the same period in 2002. For
the three months ended September 30, the average earning asset yield declined to
4.90% for 2003, from 5.92% for 2002, while the average cost of interest-bearing
liabilities declined to 2.52% for 2003, from 3.28% for 2002. For the nine months
ended September 30, 2003, the interest rate spread decreased 17 basis points to
2.41% compared with 2.58% for the same period in 2002. The average earning asset
yield was 5.10% for the first nine months of 2003, compared with 5.96% for the
first nine months of 2002, while the average cost of interest-bearing
liabilities fell to 2.69% from 3.38% for the same respective periods.
The net interest margin declined 36 basis points to 2.68% for the third quarter
of 2003, from 3.04% for the quarter ended September 30, 2002, and was unchanged
from 2.68% for the second quarter of 2003. For the year-to-date, net interest
margin declined 29 basis points to 2.71%, compared with 3.00% for the nine
months ended September 30, 2002. The Company believes the net interest margin
has stabilized. Based on the reduction in mortgage refinance applications
received since August, such cash inflows and related deferred expense
recognition and premium amortization are expected to slow in the fourth quarter
of 2003.
PROVISION FOR LOAN LOSSES. The Company did not record a provision for loan
losses during the three and nine months ended September 30, 2003, compared to
$105,000 and $1.3 million for the same periods in 2002, as a result of a static
loan portfolio size and improvements in asset quality. Total non-performing
assets decreased to $911,000 at September 30, 2003, from $1.8 million at
December 31, 2002 and $3.1 million at September 30, 2002. The allowance for loan
losses as a percentage of total loans was 1.05% at September 30, 2003 and 1.06%
at December 31, 2002. In management's opinion, the allowance for loan losses,
totaling $12.8 million at September 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.
16
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
2003 2003 2003 2002 2002
------------------------------------------------------
Non-accrual mortgage loans ......................... $841 $1,291 $1,082 $1,511 $2,297
Non-accrual other loans ............................ 6 6 43 30 --
------------------------------------------------------
Total non-accrual loans ......................... 847 1,297 1,125 1,541 2,297
Loans 90 days or more delinquent and
still accruing ................................ 64 64 294 223 440
------------------------------------------------------
Total non-performing loans ......................... 911 1,361 1,419 1,764 2,737
Non-accrual investments (WorldCom, Inc.
corporate bonds) .............................. -- -- -- -- 300
Total foreclosed real estate, net of related
allowance...................................... -- 50 -- 72 100
------------------------------------------------------
Total non-performing assets ........................ $911 $1,411 $1,419 $1,836 $3,137
======================================================
Non-performing loans to loans receivable, net ...... 0.07% 0.11% 0.12% 0.15% 0.22%
Non-performing assets to total assets .............. 0.04% 0.06% 0.06% 0.08% 0.14%
NON-INTEREST INCOME. Non-interest income decreased $969,000, to $1.9 million,
for the three months ended September 30, 2003, compared to the same period in
2002. For the nine months ended September 30, 2003, non-interest income
increased $2.0 million, to $6.6 million, compared to the same period in 2002.
Net gains on sales of loans and securities totaling $276,000 and $1.8 million
were realized during the three and nine months ended September 30, 2003,
respectively, compared with a net gain of $1.3 million and a net loss of
$122,000, respectively, for the comparable 2002 periods. In the third quarter of
2002 and in the first half of 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. Prior year results were also impacted by
a $1.8 million pre-tax impairment charge recorded on WorldCom, Inc. corporate
bonds in the second quarter of 2002.
In addition, fee and service charge income increased $149,000 and $80,000 for
the three and nine months ended September 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 and service charge levels implemented
in July of 2002, as well as prepayment fees received upon the early termination
of certain commercial real estate loans.
NON-INTEREST EXPENSE. Non-interest expense for the three and nine months ended
September 30, 2003, decreased $321,000, or 4.3% and increased $432,000, or 2.0%,
to $7.1 million and $22.3 million, respectively, compared to the same periods in
2002. The decrease for the quarter was primarily attributable to reductions in
advertising and compensation and benefits expense.
For the nine months ended September 30, 2003, the increase was primarily due to
an increase in compensation and benefits expense resulting from increased
healthcare, pension and ESOP costs. Effective August 1, 2003, the Company
adopted changes to its pension plan which reduced the retirement benefit and
closed the plan to new participants hired on or after that date. As a result of
this amendment, pension expense for the second half of 2003 is expected to
decline by $236,000 compared with the first half of the year.
INCOME TAXES. The Company's effective tax rate declined to 32.5% and 33.3% for
the three and nine months ended September 30, 2003, respectively, compared with
36.3% and 34.3% for the same periods in 2002. Third quarter 2002 taxes reflected
the impact of New Jersey's Business Tax Reform Act, which passed on July 2,
2002, retroactive to January 1, 2002.
17
BRANCH SALE. On September 4, 2003, the Bank announced that it had signed an
agreement to sell its Lawrenceville, NJ branch to Yardville National Bank
("Yardville"). Under the terms of the agreement, Yardville will assume
approximately $40.0 million in deposit liabilities from the Bank. The Company
estimates that the transaction will result in the recognition of a pre-tax gain
of approximately $2.5 million, or approximately $0.06 per share, net of related
taxes, during the fourth quarter of 2003.
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, 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 September 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.
None.
Item 5. OTHER INFORMATION.
None.
18
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. (a)
Inc.
3.2 Bylaws of First Sentinel Bancorp, Inc. (b)
4 Stock certificate of First Sentinel Bancorp, Inc. (a)
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.
b.) REPORTS ON FORM 8 - K
On July 23, 2003, the Company furnished a Current Report on Form 8-K
reporting its earnings for the three and six months ended June 30, 2003.
On September 12, 2003, the Company filed a Current Report on Form 8-K
announcing that its subsidiary, First Savings Bank, had agreed to sell
its Lawrenceville, NJ branch to Yardville National Bank, a subsidiary of
Yardville National Bancorp.
19
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, 2003 By: /S/ CHRISTOPHER MARTIN
----------------------
Christopher Martin
President and Chief Executive Officer
Date: November 14, 2003 By: /S/ THOMAS M. LYONS
-------------------
Thomas M. Lyons
Executive Vice President and
Chief Financial Officer
20