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OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act Of 1934
For the fiscal year ended December 31, 1998
Commission file number: 000-23809
FIRST SENTINEL BANCORP, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 22-3566151
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 Woodbridge Center Drive, Woodbridge, NJ, 07095
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(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) had been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
issuer, based on the closing price of its Common Stock on March 16, 1999, as
quoted by the Nasdaq Stock Market, was approximately $275.0 million. Solely for
the purposes of this calculation, the shares held by directors and officers of
the registrant are deemed to be shares held by affiliates.
As of March 16, 1999, there were 43,107,075 shares issued and 41,694,782 shares
outstanding of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
I. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 (Part II).
II. Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
(Part III).
1
INDEX
PAGE
----
PART I
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 31
Item 3. Legal Proceedings....................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders..................... 33
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .. 33
Item 6. Selected Financial Data................................................. 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............ 34
Item 8. Financial Statements and Supplementary Data ............................ 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 34
Item 11. Executive Compensation.................................................. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ......... 34
Item 13. Certain Relationships and Related Transactions.......................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and reports on Form 8-K ........ 35
SIGNATURES 37
2
PART I
Item 1. Description of Business
- -------------------------------
First Sentinel Bancorp, Inc.
First Sentinel Bancorp, Inc. ("First Sentinel" or the "Company") is a
Delaware corporation organized by First Savings Bank, SLA ("First Savings" or
the "Bank") for the purpose of holding all of the capital stock of the Company
and facilitating the Conversion and Reorganization of the Bank, which was
completed on April 8, 1998, (as further described below). At December 31, 1998,
the Company had consolidated total assets of $1.9 billion and total equity of
$299.8 million. The Company is a savings and loan holding company subject to
regulation by the Office of Thrift Supervision ("OTS") and the Securities and
Exchange Commission. The Company realized net proceeds of $162.2 million from
the Conversion and Reorganization, and transferred to the Bank 50% of these
net proceeds. Funds retained by the Company have been used for general business
activities, including cash dividends to shareholders, a loan to the Company's
ESOP, the purchase of treasury stock and other investments.
The Company's executive offices are located at 1000 Woodbridge Center
Drive, Woodbridge, New Jersey 07095. The Company's telephone number is (732)
726-9700.
Reorganization and Acquisition
On April 8, 1998, the Bank and its mutual holding company, First
Savings Bancshares, MHC, completed a conversion and reorganization into the
stock holding company structure, forming First as the new stock holding company
and issuing shares of First Sentinel Common Stock in the process (the
"Conversion and Reorganization"). As part of the Conversion and Reorganization,
the Company sold 16,550,374 shares of Common Stock in a Subscription and
Community Offering for gross proceeds of $165.6 million. Concurrently, the
Company issued 14,820,016 shares of Common Stock in exchange for shares of First
Savings Bank, SLA common stock on a 3.9133-for-1 basis (the Conversion Exchange
Ratio") in an exchange offering. All per share and earnings per share data have
been restated for the 3.9133 Conversion Exchange Ratio.
On December 18, 1998, the Company acquired Pulse Bancorp, Inc.
("Pulse"). Each share of Pulse was converted into 3.764 shares of the Company's
common stock. A total of 12,066,631 shares were issued, including 800,000
treasury stock shares, to complete the transaction. The acquisition has been
accounted for under the pooling-of-interests method of accounting and
accordingly, the Company's consolidated financial statements include the
accounts and activity of Pulse for all periods presented.
First Savings Bank, SLA
First Savings is a New Jersey-chartered capital stock savings and loan
association headquartered in Woodbridge, New Jersey. First Savings has operated
in its present market area since 1901. Until 1992, the Bank operated in the
mutual form of organization. On July 10, 1992, the Bank reorganized to become a
majority owned subsidiary of a federally-chartered mutual holding company. As
detailed above, on April 8, 1998, the Bank became a wholly owned subsidiary of
the Company.
The Bank's executive offices are located at 1000 Woodbridge Center Drive,
Woodbridge, New Jersey 07095. Its telephone number is (732) 726-9700.
3
Business Strategy
In addition to historical information, the Form 10-K includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local taxing authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
The Company's business strategy is to preserve asset quality, to maintain a
strong capital position by continuing to emphasize single-family lending and to
seek controlled growth. The Company's strategy emphasizes customer service and
convenience, and the Company attributes the loyalty of its customer base to its
commitment to maintaining customer satisfaction. The Company attempts to set
itself apart from its competitors by providing the type of personalized service
not generally available from larger banks while offering a greater variety of
products and services than is typically available from smaller, local depository
institutions.
The Company's principal business historically has been, and, to a large
degree, continues to be, attracting retail deposits from the general public and
investing those deposits, together with funds generated from operations and
borrowings, primarily in single-family residential mortgage loans, real estate
construction loans, commercial real estate loans, home equity loans and lines of
credit and multi-family residential mortgage loans. The Company maintains a
significant portfolio of mortgage-backed securities and also invests in U.S.
Government, federal agency and corporate debt securities and other marketable
securities. The Company's revenues are derived principally from interest on its
loan and mortgage-backed securities portfolios and interest and dividends on its
investment securities. The Company's primary sources of funds are deposits,
proceeds from principal and interest payments on loans and mortgage-backed
securities; sales of loans, mortgage-backed securities and investments available
for sale; maturities of investment securities and short-term investments; and,
to an increasing extent, advances from the Federal Home Loan Bank of New York
("FHLB-NY"), reverse repurchase agreements and other borrowed funds.
In an effort to enhance its long-term profitability and increase its market
share, the Company began, in 1997, to expand its traditional thrift lending and
securities investment strategy. In this regard, the Company has begun to
diversify and expand upon the products and services it offers by focusing on
small and medium-sized retail businesses as both lending and deposit customers
by increasing its emphasis on the origination of commercial real estate,
construction and commercial loans, as well as increasing the marketing of its
business checking accounts and other business-related services. To develop
full-service relationships with commercial customers, the Company has introduced
merchant services, such as merchant credit card processing, overdraft sweep
accounts and express teller services. The Company has hired additional lending
personnel with expertise in commercial real estate lending to facilitate growth
in this area. It is also the Company's intention to increase lending volumes
through the use of third-party correspondent lending, without compromising
credit quality, as the correspondents selected must use the Company's
underwriting guidelines and approved appraisers.
As part of the Company's asset/liability management strategy, and as a
means of enhancing profitability, the Company also invests in securities. More
recently, the Company has begun to increase its borrowings as a means of funding
asset growth. The average balance of borrowings outstanding for the years ended
December 31, 1998, 1997 and 1996 were $217.1 million, $177.8 million and $78.2
million, respectively. To the extent the Company continues to increase its
utilization of borrowings, it may incur an increase in the average cost of
funds, and a corresponding decrease in its net interest margin.
The Company is in the process of redesigning its retail delivery system to
facilitate the transition from deposit gathering to active sales promotion and
tracking. The Company has also invested in a Marketing Customer Information File
marketing system to provide better target marketing and enhance product and
customer profitability levels. This strategy is intended to enable the Company
to reach new and existing customers with
4
products and services which match their profile, and result in more effective
use of the Company's marketing resources. The desired results of the revamping
of the retail branch network are to attract low-cost deposit accounts, primarily
non-interest bearing checking, and also to maintain its current core customers
by enhancing existing services to become more efficient.
The Company has, and will continue to, actively pursue retail expansion in
contiguous markets, as evidenced by the acquisition of Pulse and previous branch
purchase transactions. The Company has recently opened new branches in Highland
Park and East Brunswick, and will also open a branch in Spotswood in the second
quarter of 1999. All three of these branches are located in Middlesex County.
The Company intends to actively seek additional expansion opportunities in the
areas surrounding its current branch locations. The Company, however, currently
does not have any pending agreements or understandings regarding acquisitions of
any specific financial institutions or branch offices.
The Company focuses its attention on quality service, but also monitors its
operating expenses to maintain its profitability. As products and services are
added, the Company develops break-even levels and budgetary constraints to make
sure the service or product offered is enhancing returns and meeting growth
targets. The Company regularly reviews its retail operations to verify that they
maintain lending and retail deposit growth initiatives and retention targets. As
a result of this review, the Company sold its Eatontown branch, with deposits of
$25.2 million, to a commercial bank in February 1998. The Company determined
that this branch had not performed to the Company's targeted retail lending and
cost of funds levels.
Market Area and Competition
The Company has 22 branch offices in central New Jersey, 18 of which are
located in Middlesex County, two in Monmouth county, one in Mercer County and
one in Union County. The Company's deposit gathering base is concentrated in the
communities surrounding its offices. The majority of the Company's loan
originations are derived from north and central New Jersey, which is a part of
the New York City metropolitan area and which has historically benefited from
having a large number of corporate headquarters and a concentration of financial
services-related industries. The area also has a well-educated employment base
and a large number of industrial, service and high-technology businesses. In the
late 1980's and early 1990's, however, due in part to the effects of a prolonged
decline in the national and regional economy, layoffs in the financial services
industry and corporate relocations, the New York/New Jersey metropolitan area
experienced reduced levels of employment. These events, in conjunction with a
surplus of available commercial and residential properties, resulted in an
overall decline during this period in the underlying values of properties
located in New Jersey. However, New Jersey's real estate market has stabilized
and appreciated in recent years. Whether such stabilization and appreciation
will continue is dependent, in large part, upon the general economic condition
of both New Jersey and the United States and other factors beyond the Company's
control and, therefore, cannot be estimated.
The Company faces significant competition both in making loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Company, and all of which are
competitors of the Company to varying degrees. The Company's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from commercial
banks, savings banks savings and loan associations and credit unions. The
Company faces additional competition for deposits from short-term money market
funds, other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.
5
Average Balance Sheet. The following table sets forth certain information
relating to the Company's average balance sheet and reflects the average yield
on assets and average cost of liabilities for the periods indicated and the
average yields earned and rates paid. Such yields and costs are derived by
dividing annualized income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances.
For the Year Ended December 31,
-----------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------- ------------------------------------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans, net (1)................................. $792,168 $61,431 7.75 % $679,692 $54,635 8.04 %
Mortgage-backed securities, net................ 205,995 13,774 6.69 407,971 27,607 6.77
Investment securities.......................... 140,953 9,032 6.41 173,335 11,942 6.89
Investment and mortgage-backed
securities available for sale (2)(3)......... 554,241 34,936 6.30 236,173 15,057 6.38
Total interest-earning assets............... 1,693,357 119,173 7.04 1,497,171 109,241 7.30
------------------------ ---------------------
Non-interest earning assets...................... 51,271 55,423
------------- ----------
Total assets................................ $1,744,628 $1,552,594
============= ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and Money market accounts................ $308,609 9,008 2.92 $281,007 8,315 2.96
Savings accounts............................. 177,282 4,431 2.50 184,423 4,819 2.61
Certificate accounts......................... 719,602 39,429 5.48 722,534 39,685 5.49
Borrowed funds............................... 217,131 12,518 5.77 177,797 10,739 6.04
Total interest-bearing liabilities.......... 1,422,624 65,386 4.60 1,365,761 63,558 4.65
------------------------ --------------------
Non-interest bearing deposits.................... 35,297 26,234
Other liabilities................................ 23,817 22,996
------------- ---------
Total liabilities........................... 1,481,738 1,414,991
------------- ---------
Stockholders' equity............................. 262,890 137,603
------------- ---------
Total liabilities and
stockholders' equity...................... $1,744,628 $1,552,594
============= ==========
Net interest income/interest rate spread (4)........ $53,787 2.44 % $45,683 2.65 %
=================== ===================
Net interest-earning assets/net interest
margin (5)....................................... $270,733 3.18 % $131,410 3.05 %
============= ========== ========== =========
Ratio of interest-earning assets
to interest-bearing liabilities.................. 1.19 x 1.10 x
============= ==========
For the Year Ended December 31,
---------------------------------
1996
---------------------------------
Average Average
Balance Interest Yield/Cost
---------------------------------
Assets:
Interest-earning assets:
Loans, net (1)................................. $623,524 $50,457 8.09 %
Mortgage-backed securities, net................ 446,448 29,732 6.66
Investment securities.......................... 129,809 8,891 6.85
Investment and mortgage-backed
securities available for sale (2)(3)......... 190,721 11,692 6.13
Total interest-earning assets............... 1,390,502 100,772 7.25
---------------------
Non-interest earning assets...................... 46,059
----------
Total assets................................ $1,436,561
==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and Money market accounts................ $268,557 7,977 2.97
Savings accounts............................. 198,292 5,136 2.59
Certificate accounts......................... 718,755 38,586 5.37
Borrowed funds............................... 78,192 4,698 6.01
Total interest-bearing liabilities.......... 1,263,796 56,397 4.46
---------------------
Non-interest bearing deposits.................... 23,861
Other liabilities................................ 16,670
----------
Total liabilities........................... 1,304,327
----------
Stockholders' equity............................. 132,234
----------
Total liabilities and
stockholders' equity....................... $1,436,561
==========
Net interest income/interest rate spread(4)......... $44,375 2.79 %
====================
Net interest-earning assets/net interest
margin (5)....................................... $126,706 3.19 %
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities.................. 1.10 x
=========
(1) Loans receivable, net includes non-accrual loans.
(2) Average assets available for sale are calculated using the average market
value for such assets.
(3) Includes federal funds sold and FHLB-NY stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
6
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing volume or amount of these assets and liabilities. The following table
represents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
the Company's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (change in rate multiplied by prior
volume), and (iii) the net change. Changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to the
volume and the change due to rate.
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, 1997 December 31, 1996
--------------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------- -------------------
Volume Rate Net Volume Rate Net
--------- ---------- --------- --------- ---------- --------
(In thousands)
Interest-earning assets:
Loans receivable, net............... $8,816 $(2,020) $6,796 $4,493 $(315) $4,178
Mortgage-backed securities, net.... (13,511) (322) (13,833) (2,607) 482 (2,125)
Investment securities.............. (2,120) (790) (2,910) 512 326 838
Investment and mortgage-backed
securities and loans available
for sale........................ 20,046 (167) 19,879 5,312 266 5,578
---------- ----------- --------- --------- ---------- --------
Total............................ 13,231 (3,299) 9,932 7,758 711 8,469
---------- ----------- --------- --------- ---------- --------
Interest-bearing liabilities:
Deposits:
NOW and money market accounts.... 806 (113) 693 365 (27) 338
Passbook and statement savings... (186) (202) (388) (357) 40 (317)
Certificates accounts ........... (177) (79) (256) 209 890 1,099
Borrowed funds .................. 2,279 (500) 1,779 6,018 23 6,041
---------- ----------- --------- --------- ---------- --------
Total............................ 2,722 (894) 1,828 6,235 926 7,161
---------- ----------- --------- --------- ---------- --------
Net change in interest income......... $10,509 $(2,405) $8,104 $1,523 $(215) $1,308
========== =========== ========= ========= ========== ========
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Compositions. The Company's
loan portfolio consists primarily of conventional first mortgage loans secured
by one- to four-family residences and, to a lesser extent, multi-family
residences and commercial real estate. At December 31, 1998, the Company's loan
portfolio totaled $854.7 million, of which $657.3 million, or 76.9% were one- to
four-family residential mortgage loans. At that date, the Company's loan
portfolio also included $57.1 million of home equity loans and lines of credit
generally secured by second liens on one- to four-family residential properties,
$23.3 million of net construction loans, $65.1 million of commercial real estate
loans, and $17.6 million of multi-family residential mortgage loans, which
represented 6.6%, 2.7%, 7.5% and 2.0%, respectively, of total loans receivable.
Of the mortgage loan portfolio outstanding at that date, 48.0% were fixed-rate
loans and 52.0% were ARM loans. Other loans held by the Company, which consist
of loans on deposit accounts, commercial business, personal, automobile and
credit card loans, totaled $43.4 million, or 5.0% of total loans outstanding at
December 31, 1998. The Company anticipates growth in commercial real estate
loans, both in amount and as a percentage of total loans receivable, in the
foreseeable future.
7
The majority of the loans originated by the Company are held for investment.
However, the Company sells 30 year, fixed-rate, conforming loans to the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and institutional investors from
time to time, and retains servicing rights. All loans are sold without recourse.
At December 31, 1998, the Company's servicing portfolio was $87.6 million.
The Company also invests in mortgage-backed securities and other mortgage-backed
products such as collateralized mortgage obligations ("CMOs"). At December 31,
1998, mortgage-backed securities, including CMOs, aggregated $661.9 million, or
35.7% of total assets, of which 54.0% were secured by ARM loans. The majority of
the Company's mortgage-backed securities are insured or guaranteed by Freddie
Mac, the Government National Mortgage Association ("GNMA"), or Fannie Mae
("FNMA"). CMOs totaled $210.0 million, or 31.7% of the Company's total
mortgage-backed securities portfolio at December 31, 1998, the majority of which
were backed or guaranteed by federal agencies. At December 31, 1998, the Company
had no mortgage-backed securities held for investment. All mortgage-backed
securities were classified as available for sale at that date. The Company will
classify all mortgage-backed security purchases as available for sale through at
least April, 2000. The actual maturity of a mortgage-backed security varies,
depending on when the underlying mortgages are repaid or prepaid. Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
affecting its yield to maturity and the related market value of the
mortgage-backed security. The actual prepayments of the underlying mortgages
depend on many factors, including the type of mortgages, the coupon rates, the
age of the mortgages, the geographical location of the underlying real estate
collateralizing the mortgages, levels of market interest rates, and general
economic conditions.
8
The following table sets forth the composition of the Company's loan and
mortgage-backed securities portfolio in dollar amounts and as a percentage of
the portfolio at the dates indicated.
At December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ---------- ----------- ---------- ------------ ---------
(Dollars in thousands)
Mortgage loans(1):
One-to-four family......................... $657,284 76.09% $566,625 78.25% $493,973 75.67%
Home equity loans.......................... 57,084 6.61 56,533 7.81 52,684 8.07
Construction (2)........................... 23,349 2.70 17,827 2.46 12,996 1.99
Commercial real estate..................... 65,069 7.53 54,926 7.58 51,091 7.83
Multi-family .............................. 17,589 2.04 21,292 2.94 36,066 5.53
A.I.D. (3) ................................ - - - - - -
----------- ---------- ----------- ---------- ------------ ---------
Total mortgage loans..................... 820,375 94.97 717,203 99.04 646,810 99.09
Other loans................................... 43,405 5.03 6,954 0.96 5,956 0.91
----------- ---------- ----------- ---------- ------------ ---------
Total loans receivable ................. 863,780 100.00% 724,157 100.00% 652,766 100.00%
========== ========== =========
Less:
Net deferred loan fees (costs) and
(premiums) and discounts................... (422) (107) 524
Allowance for loan losses..................... 9,505 8,454 7,781
----------- ----------- ------------
Total loans receivable, net.............. $854,697 $715,810 $644,461
=========== =========== ============
Mortgage loans:
ARM........................................ $426,268 51.96% $421,642 58.79% $364,906 56.42%
Fixed-rate................................. 394,107 48.04 295,561 41.21 281,904 43.58
----------- ---------- ----------- ---------- ------------ ---------
Total mortgage loans..................... $820,375 100.00% $717,203 100.00% $646,810 100.00%
=========== ========== =========== ========== ============ =========
Mortgage-backed securities (4):
CMOs....................................... $209,468 32.00% $90,247 15.95% $76,493 13.31%
FHLMC...................................... 235,415 35.97 253,029 44.72 287,368 50.02
GNMA....................................... 71,347 10.90 113,179 20.00 134,877 23.47
FNMA....................................... 138,286 21.13 109,415 19.33 75,821 13.20
----------- ---------- ----------- ---------- ------------ ---------
Total mortgage-backed securities......... 654,516 100.00% 565,870 100.00% 574,559 100.00%
========== ========== =========
Net premiums.................................. 3,639 2,704 2,433
Net unrealized gain (loss) on mortgage-
backed securities available for sale ...... 3,726 1,876 535
----------- ----------- ------------
Net mortgage-backed securities................ $661,881 $570,450 $577,527
=========== =========== ============
At December 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
Percent Percent
Amount of Total Amount of Total
----------- ---------- ----------- ----------
Mortgage loans(1):
One-to-four family......................... $448,844 74.65% $421,216 74.36%
Home equity loans.......................... 43,853 7.29 41,638 7.35
Construction (2)........................... 7,705 1.28 3,177 0.56
Commercial real estate..................... 52,788 8.78 50,801 8.97
Multi-family............................... 42,597 7.08 45,065 7.95
A.I.D. (3)................................. 165 0.03 178 0.03
----------- ---------- ----------- ----------
Total mortgage loans..................... 595,952 99.11 562,075 99.22
Other loans................................... 5,350 0.89 4,447 0.78
----------- ---------- ----------- ----------
Total loans receivable................... 601,302 100.00% 566,522 100.00%
========== ==========
Less:
Net deferred loan fees (costs) and
(premiums) and discounts................... 995 1,383
Allowance for loan losses..................... 7,851 9,114
----------- -----------
Total loans receivable, net.............. $592,456 $556,025
=========== ===========
Mortgage loans:
ARM........................................ $321,264 53.91% $286,088 50.90%
Fixed-rate................................. 274,688 46.09 275,987 49.10
----------- ---------- ----------- ----------
Total mortgage loans..................... $595,952 100.00% $562,075 100.00%
=========== ========== =========== ==========
Mortgage-backed securities (4):
CMOs....................................... $103,368 18.78% $120,591 24.61%
FHLMC...................................... 291,141 52.88 231,096 47.17
GNMA....................................... 123,853 22.50 104,389 21.31
FNMA....................................... 32,172 5.84 33,878 6.91
----------- ---------- ----------- ----------
Total mortgage-backed securities......... 550,534 100.00% 489,954 100.00%
========== ==========
Net premiums.................................. 1,676 1,187
Net unrealized gain (loss) on mortgage-
backed securities available for sale ...... 241 (1,511)
----------- -----------
Net mortgage-backed securities................ $552,451 $489,630
=========== ===========
------------------
(1) Includes $287,000, $424,000 and $148,000 in mortgage loans available for
sale at December 31, 1996, 1995 and 1994, respectively. No loans were
classified as available for sale at December 31, 1998 or 1997.
(2) Net of loans in process of $41.8 million, $27.5 million, $12.3 million,
$3.8 million, and $3.9 million at December 31, 1998, 1997, 1996, 1995 and
1994, respectively.
(3) Agency for International Development. Represented a participation interest
in a $15.0 million aggregate loan to the Korea National Housing
Corporation, a government-sponsored housing development project.
(4) Includes $661.9 million, $200.5 million, $161.1 million, $89.3 million and
$24.4 million in mortgage-backed securities available for sale at fair
value at December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
9
Loan Maturity and Repricing. The following table shows the maturity or period to
repricing of the Company's loan portfolio at December 31, 1998. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal amortization.
At December 31, 1998
-------------------------------------------------------------------------------
One Year Three Five Years Ten Years Twenty
One Year to Three Years to to Ten to Twenty Years or
or Less Years Five Years Years Years More Total
---------- ----------- ---------- ----------- ----------- ---------- -----------
(In thousands)
Mortgage loans:
One- to four- family....... $103,308 $ 98,814 $116,217 $125,936 $160,676 $52,333 $657,284
Home equity loans.......... 17,320 1,428 8,586 12,268 17,405 77 57,084
Construction (1)........... 23,349 - - - - - 23,349
Commercial real estate .... 4,641 18,098 7,595 4,747 21,433 8,555 65,069
Multi-family............... 2,605 6,973 2,568 3,186 1,598 659 17,589
---------- ----------- ---------------------- ----------- ---------- -----------
Total mortgage loans..... 151,223 125,313 134,966 146,137 201,112 61,624 820,375
Other loans.................. 25,384 4,353 3,206 4,035 6,403 24 43,405
---------- ----------- ---------------------- ----------- ---------- -----------
Total loans.............. $176,607 $129,666 $138,172 $150,172 $207,515 $61,648 863,780
========== =========== =========== ========== =========== ==========
Net deferred loan costs and unearned premiums ............................................... 422
Allowance for loan losses ................................................................... (9,505)
-----------
Loans receivable, net ....................................................................... $854,697
===========
- -------------------
(1) Net of loans in process of $41.8 million.
The following table sets forth at December 31, 1998 the dollar amount of loans
contractually due or repricing after December 31, 1999, and whether such loans
have fixed interest rates or adjustable interest rates.
Due or reprice after December 31, 1999
--------------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Mortgage loans
One- to four-family ............. $ 289,627 $ 264,349 $ 553,976
Equity loans .................... 39,692 72 39,764
Commercial real estate .......... 6,512 53,916 60,428
Multi-family .................... 7,688 7,296 14,984
Other loans ........................ 18,021 -- 18,021
----------------------------------------
Total loans receivable ............. 361,540 325,633 687,173
Mortgage-backed securities (1) ..... 300,278 158,666 458,944
----------------------------------------
Total loans receivable and mortgage-
backed securities .............. $ 661,818 $ 484,299 $1,146,117
========================================
- ----------------
(1) Includes $458.9 million in mortgage-backed securities available for sale,
at amortized cost.
One- to Four-Family Mortgage Loans. The Company offers fixed- and adjustable-
rate first mortgage loans secured by one- to four-family residences in New
Jersey. Typically, such residences are single family homes that serve as the
primary residence of the owner. Loan originations are generally obtained from
existing or past customers, members of the local community, and referrals from
attorneys, established builders, and realtors within the Company's market area.
In addition, one- to four-family residential mortgage loans are also originated
in the
10
Company's market area through loan originators who are employees of the Company
and are compensated on a commission basis. Originated mortgage loans in the
Company's portfolio include due-on-sale clauses which provide the Company with
the contractual right to deem the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Company's
consent.
At December 31, 1998, 76.1% of total loans receivable consisted of one- to
four-family residential loans. The Company offers ARM loans with initial fixed
rate terms of either one, three, five, seven or ten years. After the initial
fixed-rate term, the loan then converts into a one-year ARM. The Company's ARM
loans may carry an initial interest rate which is less than the fully-indexed
rate for the loan. The initial discounted rate is determined by the Company in
accordance with market and competitive factors. The majority of the Company's
ARM loans adjust by a maximum of 2.00% per year, with a lifetime cap on
increases of up to 6.00%. ARM loans are originated for a term of up to 30 years.
In the past, the Company offered three year ARM loans that reset every three
years at a margin over the three year U.S. Treasury Index. Interest rates
charged on fixed-rate loans are competitively priced based on market conditions
and the Company's cost of funds. The Company's fixed-rate mortgage loans
currently are made for terms of 10 through 30 years. In previous years, the
Company offered balloon mortgages of five and seven years.
Generally, ARM loans pose credit risks different than risks inherent in
fixed-rate loans, primarily because as interest rates rise, the payments of the
borrower rise, thereby increasing the potential for delinquency and default. At
the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. In order to minimize risks, borrowers of
one-year ARM loans are qualified at the starting interest rate plus 2.00% or the
fully-indexed rate, whichever is lower. The Company does not originate ARM loans
which provide for negative amortization. At present, the Company offers Limited
Documentation loans that do not require income verification but do require full
asset verification.
The Company generally originates one- to four-family residential mortgage loans
in amounts up to 95% of the appraised value or selling price of the mortgaged
property, whichever is lower. The Company requires private mortgage insurance
for all loans originated with loan-to-value ratios exceeding 80%. Generally, the
minimum one- to four-family loan amount is $25,000, and the maximum loan amount
is $500,000. The Company typically charges an origination fee of up to 3.00% on
one- to four-family residential loans.
Home Equity Loans and Lines of Credit. The Company originates home equity loans
secured by one- to four-family residences. These loans generally are originated
as fixed-rate loans with terms from five to 15 years. Home equity loans are
primarily made on owner-occupied, one- to four-family residences and primarily
to the Company's first mortgage customers. These loans are generally subject to
a 80% loan-to-value limitation, including any other outstanding mortgages or
liens where the first mortgage lien is held by the Company, and 75% on all other
loans. The Company currently offers home equity loans for qualified borrowers
with a loan-to-value ratio of up to 90%. The Company obtains private mortgage
insurance for some of these types of loans, depending on the underwriting and
first lien position. The Company is currently offering "Helping Hand" home
equity loans for low income borrowers, with maximum terms of five years, with
loan-to-value ratios of up to 90% and a maximum loan amount of $10,000.
Generally, the Company's minimum equity loan is $5,000 and the maximum equity
loan is $200,000. As of December 31, 1998, the Company had $39.8 million in
fixed-rate home equity loans outstanding.
The Company also offers a variable rate home equity line of credit which extends
a credit line based on the applicant's income and equity in the home. Generally,
the credit line, when combined with the balance of the first mortgage lien, may
not exceed 80% of the appraised value of the property at the time of the loan
commitment where the first mortgage lien is held by the Company, and 75% on all
other loans. Home equity lines of credit are secured by a mortgage on the
underlying real estate. The Company presently charges no origination fees for
these loans. A borrower is required to make monthly payments of principal and
interest, at a minimum of $100.00 plus interest, based upon a 20 year
amortization period. Generally, the interest rate charged is the prime rate of
interest (as published in The Wall Street Journal) (the "prime rate") plus up to
0.5%. The loans have a 6.0% lifetime cap on the amount the interest rate may
increase. During 1997, the Company introduced a credit line product which is
based on a 15 year amortization and the interest rate charged is the prime rate
of interest. These loans also have a 6.0% lifetime cap. The Company offers a
fixed 12 month introductory rate on both home equity line of credit products.
11
The introductory rate is currently 5.99%. The Company offers an additional
credit line product that allows for a loan-to-value ratio of up to 90%. The
rates charged on these loans vary between the prime rate plus 1.0% to the prime
rate plus 1.5%. The Company, through Pulse, offered an additional credit line
product. This product generally featured a 6.99% introductory rate which was
fixed for three years. After this period, the rate adjusts to the prime rate.
Borrowers are required to make monthly payments of principal and interest, at a
minimum of $50.00 plus interest, based upon a 20 year amortization period. The
Company's home equity lines of credit outstanding at December 31, 1998 totaled
$17.3 million, with additional available credit lines of $37.3 million.
Construction Lending. At December 31, 1998, construction loans totaled $23.3
million, or 2.7%, of the Company's total loans outstanding. Construction loans,
in the form of lines of credit, are primarily made to developers known by the
Company. Available credit lines totaled $41.8 million at December 31, 1998. The
current policy of the Company is to charge interest rates on its construction
loans which float at margins of up to 2.0% above the prime rate. The Company's
construction loans improve the interest rate sensitivity of its interest-earning
assets. The Company's construction loans typically have original principal
balances that are larger than its one- to four-family mortgage loans, with the
majority of the loans ranging from available lines of credit of $125,000 to $6.0
million. At December 31, 1998, the Company had 25 construction loans, eleven of
which had a principal balance outstanding of $1.0 million or more, with the
largest loan balance being $3.0 million. At December 31, 1998, all of the
Company's construction lending portfolio consisted of loans secured by property
located in the State of New Jersey, for the purpose of constructing one- to
four-family homes.
The Company will originate construction loans on unimproved land in amounts up
to 60% of the lower of the appraised value or the cost of the land. The Company
also originates loans for site improvements and construction costs in amounts up
to 75% of actual costs or sales price where contracts for sale have been
executed. Generally, construction loans are offered for one year terms with up
to four six-month options to extend the original term. Typically, additional
loan origination fees are charged for each extension granted, although in some
cases these fees have been waived. The Company requires an appraisal of the
property, credit reports, and financial statements on all principals and
guarantors, among other items, on all construction loans.
Construction lending, by its nature, entails additional risks as compared with
one- to four-family mortgage lending, attributable primarily to the fact that
funds are advanced upon the security of the project under construction prior to
its completion. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of the
ultimate project and the ability of the borrower or guarantor to repay the loan.
Because of these factors, the analysis of prospective construction loan projects
requires an expertise that is different in significant respects from that which
is required for residential mortgage lending. The Company addresses these risks
through its underwriting procedures. At December 31, 1998, none of the Company's
construction loans were classified as substandard. See "Delinquencies and
Classified Assets" for further discussion.
Commercial Real Estate. At December 31, 1998, the Company had 65 loans secured
by commercial real estate, totaling $65.1 million, or 7.5%, of the Company's
total loan portfolio. Commercial real estate loans are generally originated in
amounts up to 70% of the appraised value of the mortgaged property. The
Company's commercial real estate loans are permanent loans secured by improved
property such as office buildings, retail stores, small shopping centers,
medical offices, small industrial facilities, warehouses, storage facilities and
other non-residential buildings. The largest commercial real estate loan at
December 31, 1998 was a participation loan originated in 1995 on a medical arts
building with a balance of $3.7 million at that date. All commercial real estate
loans in the Company's portfolio are secured by properties located within New
Jersey.
The Company's commercial real estate loans are generally made for terms of up to
15 years. These loans typically are based upon a payout over a period of 10 to
25 years. To originate commercial real estate loans, the Company requires a
security interest in personal property, standby assignment of rents and leases
and some level of personal guarantees, if possible. The Company has established
$20.0 million as its maximum commercial real estate loan amount. The Company's
loan to one borrower limit at December 31, 1998, was approximately $33.2
million.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
12
dependent on successful operation or management of the properties, repayment of
such loans may be subject, to a greater extent, to adverse conditions in the
real estate market or the economy. The Company seeks to minimize these risks by
limiting the number of such loans, lending only to established customers and
borrowers otherwise known or recommended to the Company, generally restricting
such loans to New Jersey, and obtaining personal guarantees, if possible.
Multi-Family Mortgage Loans. The Company originates multi-family mortgage loans
in its primary lending area. As of December 31, 1998, $17.6 million, or 2.0%, of
the Company's total loan portfolio consisted of multi-family residential loans.
A significant portion of the Company's multi-family loan portfolio is comprised
of loans on garden apartments and participations in senior citizen homes with
the Thrift Institutions Community Investment Corp ("TICIC"). The largest
multi-family loan at December 31, 1998, had an outstanding balance of $1.9
million. The second largest multi-family loan at that date had an outstanding
balance of $1.4 million. Large multi-family loans, such as these two loans, are
originated on the basis of the Company's underwriting standards for commercial
real estate loans. The Company also participates with other savings institutions
to provide financing for projects within the state of New Jersey via the TICIC.
The Company has four participation loans outstanding with the TICIC at
December 31, 1998, totaling $2.2 million, which are secured by four senior
citizen complexes.
Other Lending. The Company also offers other loans, primarily business,
commercial, personal and automobile loans and loans secured by savings accounts.
At December 31, 1998, $43.4 million, or 5.0%, of the loan portfolio consisted of
such other loans.
Loan Approval Authority and Underwriting. All loans secured by real estate must
have the approval or ratification of the members of the Loan Committee, which
consists of at least two directors and at least two officers engaged in the
lending area. The Loan Committee meets at least monthly to review and ratify
management's approval of loans made within the scope of its authority since the
last committee meeting, and to approve mortgage loans made in the excess of
$750,000, but not greater than $1.0 million. Real estate loans in excess of $1.0
million require prior Board approval. Prior Board approval is also required for
the origination of consumer and business loans in excess of $100,000 for
unsecured loans, and $500,000 for secured loans.
One- to four-family residential mortgage loans are generally underwritten
according to Freddie Mac guidelines, except as to loan amount and certain
documentation. For all loans originated by the Company, upon receipt of a
completed loan application from a prospective borrower, a credit report is then
requested, income, assets and certain other information are verified and, if
necessary, additional financial information is requested. An appraisal of the
real estate intended to secure the proposed loan is required, which is currently
performed by appraisers designated and approved by the Board of Directors. It is
the Company's policy to obtain appropriate insurance protections, including
title and flood insurance, on all real estate first mortgage loans. Borrowers
must also obtain hazard insurance prior to closing. Borrowers generally are
required to advance funds for certain items such as real estate taxes, flood
insurance and private mortgage insurance, when applicable.
Loan Servicing. The Company generally retains the servicing rights on loans it
has sold. The Company receives fees for these servicing activities, which
include collecting and remitting loan payments, inspecting the properties and
making certain insurance and tax payments on behalf of the borrowers. The
Company was servicing $87.6 million and $93.7 million of mortgage loans for
others at December 31, 1998 and 1997, respectively. The Company received
$237,000 and $288,000 in servicing fees for the years ended December 31, 1998
and 1997, respectively.
Loan Purchases and Sales. The Company is a Freddie Mac qualified servicer in
good standing, and may sell any of its conforming loans originated, subject to
Freddie Mac requirements, and retain the servicing rights. As a part of its
asset/liability management, the Company will sell loans, on occasion, in order
to reduce or minimize potential interest rate and credit risk. To account for
such sales, the Company has established an available for sale category and
carries loans available for sale at the lower of cost or market. As of December
31, 1998, the Company did not have any mortgage loans classified as available
for sale. Mortgage loans sold totaled $14.5 million and $5.0 million for the
years ended December 31, 1998 and 1997, respectively. From time to time, the
Company may also purchase mortgage loans in order to maintain stable interest
income, if and when management believes it is prudent to do so. The Company
purchased $26.8 million and $19.8 million in mortgage loans from third-party
correspondents for the
13
years ended December 31, 1998 and 1997, respectively. The Company underwrote the
loans and verified documentation prior to purchase and has representations and
warranties for a one year period, including repayment of remaining purchased
premiums if a loan prepays within the first 12 months.
14
Delinquencies and Classified Assets
Delinquent Loans. In the late 1980s and early 1990s, the Company experienced an
increase in loans delinquent 90 days or more. The increase occurred primarily
with single family residential loans, which the Company attributes, in large
part, to the decline in economic conditions in the Northeast, the weakness of
the New Jersey real estate market and the national recession. Since 1992,
delinquent loans have decreased, due to an improving economy and continued
stabilization of, and recent appreciation in, the New Jersey real estate market.
The aggregate principal balances of one- to four-family loans delinquent 90 days
or more had declined to $4.1 million at December 31, 1998, from $5.3 million at
December 31, 1997. At December 31, 1998, one- to four-family loans delinquent 90
days or more consisted of 44 loans. There can be no assurances, however, that
such declines will continue, or that increases will not occur.
At December 31, 1998, 1997 and 1996, delinquencies in the Company's loan
portfolio were as follows:
1998 1997
---------------------------------------- ----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- ------------------- -------------------- -------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
--------- ---------- --------- --------- --------- ---------- --------- ---------
(Dollars in thousands)
One- to four-family ......... 12 $ 924 44 $4,137 31 $2,982 65 $5,291
Home equity loans ........... -- -- 2 35 1 23 5 108
Multi-family loans .......... -- -- -- -- -- -- 1 654
------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans .... 12 924 46 4,172 32 3,005 71 6,053
Other loans ................. 3 2 1 93 -- -- -- --
====== ------ ====== ------ ====== ------ ====== ------
Total loans ............. 15 $ 926 47 $4,265 32 $3,005 71 $6,053
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total
loans receivable, net (1) 0.11% 0.50% 0.42% 0.85%
====== ====== ====== ======
1996
----------------------------------------
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Number Principal
of Loans Balance Loans Balance
--------- ---------- --------- ---------
One- to four-family ......... 37 $3,138 74 $5,887
Home equity loans ........... 4 143 3 102
Multi-family loans .......... -- -- 1 654
------ ------ ------ ------
Total mortgage loans .... 41 3,281 78 6,643
Other loans ................. -- -- 2 4
====== ------ ====== ------
Total loans ............. 41 $3,281 80 $6,647
====== ====== ====== ======
Delinquent loans to total
loans receivable, net (1) 0.51% 1.03%
====== ======
- ----------------
(1) Total loans receivable, net includes loans available for sale.
15
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more, and REO. At December 31, 1998, REO totaled $1.5
million and consisted of 13 properties. It is the policy of the Company to cease
accruing interest on loans 90 days or more past due with loan-to-value ratios in
excess of 55% and to charge off all accrued interest. For the year ended
December 31, 1998, the amount of additional interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $311,000.
At December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ --------
(Dollars in thousands)
Non-accrual mortgage loans ......... $ 2,647 $ 4,457 $ 5,715 $ 7,302 $ 9,627
Non-accrual other loans ............ 93 -- 4 464 624
------- ------- ------- ------- -------
Total non-accrual loans ...... 2,740 4,457 5,719 7,766 10,251
Loans 90 days or more delinquent
and still accruing .............. 1,525 1,596 928 1,555 1,339
------- ------- ------- ------- -------
Total non-performing loans .. 4,265 6,053 6,647 9,321 11,590
Restructured loans ................. -- 2,103 2,135 4,167 4,200
Total real estate owned, net of
related allowance for loss.. 1,453 1,516 3,750 5,759 4,914
------- ------- ------- ------- -------
Total non-performing assets ........ $ 5,718 $ 9,672 $12,532 $19,247 $20,704
======= ======= ======= ======= =======
Non-performing loans to total loans
receivable, net ............ 0.50% 0.85% 1.03% 1.57% 2.08%
Total non-performing assets to total
assets ..................... 0.31% 0.61% 0.84% 1.38% 1.66%
Classification of Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the Company will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets that do not expose the savings
institution to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. Loans designated as special mention
are generally loans that, while current in required payment, have exhibited some
potential weaknesses that, if not corrected, could increase the level of risk in
the future. Pursuant to the Company's internal guidelines, all loans 90 days
past due are classified substandard, doubtful, or loss.
16
The following table sets forth the aggregate amount of the Company's special
mention and classified assets at the dates indicated.
At December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Special mention ............. $ -- $ 698 $ 659
Classified Assets:
Substandard assets .......... 6,820 10,814 15,582
Doubtful assets ............. 6 41 167
------- ------- -------
Total special mention and
classified assets .... $ 6,826 $11,553 $16,408
======= ======= =======
As of December 31, 1998, the Company's largest special mention or classified
asset had a balance of $2.1 million.
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the adequacy of
the allowance, including an assessment of known and inherent risks in its loan
portfolio, review of individual loans for adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and consideration of current economic conditions. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers the fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses and
valuation of real estate owned. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
The Company provided $1.5 million and $1.2 million in provision for loan losses
for the years ended December 31, 1998 and 1997, respectively. The increase in
the provision for loan losses was the result of management's asset
classification review and continued growth in loans receivable. The Company
believes that the allowance for loan losses is adequate. At December 31, 1998,
the total allowance was $9.5 million, which amounted to 1.1% of loans
receivable, net and 166.2% of non-performing assets. The Company will continue
to monitor the level of its allowance for loan losses in order to maintain it at
a level which management considers adequate to provide for probable loan losses.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
For the Years Ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ------------ ------------
(In thousands)
Balance at beginning of period .... $ 8,454 $ 7,781 $ 7,851 $ 9,114 $ 10,386
Provision for loan losses ......... 1,469 1,200 550 310 2,950
Charge-offs ....................... (596) (527) (730) (1,809) (4,258)
Recoveries ........................ 28 -- 110 236 36
Allowance activity of Pulse
during conforming period, net .. 150 -- -- -- --
-------- -------- -------- -------- --------
Balance at end of period .......... $ 9,505 $ 8,454 $ 7,781 $ 7,851 $ 9,114
========= ======== ======== ======== ========
17
The following tables set forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
At December 31,
-------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance to Each Allowance to Each
Total Category to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
---------- -------------- ----------- ------- ------------ -----------
(Dollars in thousands)
One- to four-family ...... $4,027 42.37% 76.09% $3,867 45.75% 78.25%
Home equity loans ........ 393 4.13 6.61 458 5.42 7.81
Construction ............. 1,223 12.87 2.70 894 10.57 2.46
Commercial real estate ... 1,963 20.65 7.53 1,877 22.20 7.58
Multi-family ............. 522 5.49 2.04 777 9.19 2.94
------ ------ ------ ------ ------ ------
Total mortgage loans ... 8,128 85.51 94.97 7,873 93.13 99.04
Other .................... 1,183 12.45 5.03 258 3.05 0.96
Unallocated .............. 194 2.04 -- 323 3.82 --
------ ------ ------ ------ ------ ------
Total allowance for loan
losses ............... $9,505 100.00% 100.00% $8,454 100.00% 100.00%
====== ====== ====== ====== ====== ======
At December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans Percent of Loans
Percent of in Each Percent of in Each of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
-------- ----------- -------- -------- ----------- ---------- -------- ----------- ---------
(Dollars in thousands)
One- to four-family ........... $4,035 51.85% 75.67% $4,067 51.81% 74.65% $5,092 55.87% 74.36%
Home equity loans ............. 437 5.62 8.07 348 4.43 7.29 301 3.30 7.35
Construction .................. 577 7.42 1.99 301 3.83 1.28 181 1.99 0.56
Commercial real estate......... 1,714 22.03 7.83 1,766 22.49 8.78 1,666 18.28 8.97
Multi-family .................. 787 10.11 5.53 883 11.25 7.08 1,174 12.88 7.95
A.I.D ......................... -- -- -- -- -- 0.03 -- -- 0.03
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage Loans ...... 7,550 97.03 99.09 7,365 93.81 99.11 8,414 92.32 99.22
Other ......................... 187 2.40 0.91 196 2.50 0.89 222 2.44 0.78
Unallocated ................... 44 0.57 -- 290 3.69 -- 478 5.24 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses .............. $7,781 100.00% 100.00% $7,851 100.00% 100.00% $9,114 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
Mortgage-backed Securities
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which, in general, are passed from the mortgage originators, through
intermediaries that pool and repackage the participation interest in the form of
securities, to investors such as the Company. Such intermediaries may be private
issuers, or agencies of the U.S. Government, including Freddie Mac, FNMA and
GNMA, that guarantee the payment of principal and interest to investors.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a specified range and have varying maturities.
The underlying pool of mortgages can be composed of either fixed-rate or ARM
loans. Mortgage-backed securities
18
are generally referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages (e.g., fixed-rate or adjustable-rate) as well as
prepayment, default and other risks associated with the underlying mortgages
(see "Lending Activities") are passed on to the certificate holder. The life of
a mortgage-backed pass-through security is equal to the life of the underlying
mortgage(s).
The actual maturity of a mortgage-backed security varies, depending on when the
mortgagors repay or prepay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the security, thereby affecting its
yield to maturity and the related market value of the mortgage-backed security.
The yield is based upon the interest income and the amortization of the premium
or discount related to the mortgage-backed security. Premiums and discounts are
amortized over the anticipated life of the loans. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield calculation of the mortgage-backed security, and
these assumptions are reviewed periodically to reflect the actual prepayment.
The actual prepayments of the underlying mortgages depend on many factors,
including the type of mortgages, the coupon rates, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages, general levels of market interest rates, and general economic
conditions. GNMA mortgage-backed securities that are backed by assumable Federal
Housing Authority ("FHA") or Veterans Administration ("VA") loans generally have
a longer life than conventional non-assumable loans underlying Freddie Mac and
FNMA mortgages-backed securities. The difference between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates is an
important determinant in the rate of prepayments. During periods of falling
mortgage interest rates, prepayments generally increase, as opposed to periods
of increasing interest rates whereby prepayments generally decrease. If the
interest rate of underlying mortgages significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages. Prepayment
experience is more difficult to estimate for adjustable-rate mortgage-backed
securities, both convertible and non-convertible. The interest rate environment
during 1998 was a primary factor in high level of prepayments experienced in
1998.
The Company has significant investments in mortgage-backed securities and has
utilized such investments to complement its mortgage lending activities. At
December 31, 1998, mortgage-backed securities, net, totaled $661.9 million, or
35.7% of total assets. All such securities were classified as available for sale
and carried at market value. The Company invests in a large variety of
mortgage-backed securities, including ARM, balloon and fixed-rate
mortgage-backed securities, the majority of which are directly insured or
guaranteed by Freddie Mac, GNMA and FNMA. At such date, the mortgage-backed
securities portfolio had a weighted average interest rate of 6.58%. Fixed coupon
rates ranged from 7.50% to 9.00% for GNMA, 6.00% to 9.00% for Freddie Mac, 6.00%
to 9.50% for FNMA fixed-rate securities and 5.50% to 7.50% for fixed-rate CMOs.
Variable rate coupon ranges were as follows: 6.88% to 7.38% for GNMA ARM
mortgage-backed securities; 5.93% to 7.75% for Freddie Mac ARM mortgage-backed
securities; 5.85% to 7.63% for FNMA ARM mortgage-backed securities; and 4.47% to
6.76% for adjustable rate CMOs.
Included in the total mortgage-backed securities portfolio are CMOs which had a
market value of $210.0 million at December 31, 1998. The Company generally
purchases short-term, straight sequential or planned amortization class ("PAC")
CMOs. CMOs are securities created by segregating or portioning cash flows from
mortgage pass-through securities or from pools of mortgage loans. CMOs provide a
broad range of mortgage investment vehicles by tailoring cash flows from
mortgages to meet the varied risk and return preferences of investors. These
securities enable the issuer to "carve up" the cash flow from the underlying
securities and thereby create multiple classes of securities with different
maturity and risk characteristics. The CMOs and other mortgage-backed securities
in which the Company invests may have a multi-class structure ("Multi-Class
Mortgage Securities"). Multi-Class Mortgage Securities issued by private issuers
may be collateralized by pass-through securities guaranteed by GNMA or issued by
FNMA or Freddie Mac, or they may be collateralized by whole loans or
pass-through mortgage-backed securities of private issuers. Each class has a
specified maturity or final distribution date. In one structure, payments of
principal, including any principal prepayments, on the collateral are applied to
the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
until all classes having an earlier stated maturity or final distribution date
have been paid in full. In other structures, certain classes may pay
concurrently, or one or more classes may have a priority with respect to
19
payments on the underlying collateral up to a specified amount. The Company's
funds have not and will not be invested in any class with residual
characteristics. The weighted average life of CMOs at December 31, 1998, was
3.11 years. The stated weighted average contractual maturity of the Company's
CMOs, at December 31, 1998, was 22.8 years.
The Company only purchases CMOs and mortgage-backed securities that are rated
"AA" or higher at the time of purchase. Prior to purchasing CMOs, each security
is tested for Federal Financial Institutions Examination Council ("FFIEC")
qualification. FFIEC qualification is no longer a regulatory requirement,
however, the Company continues to adhere to these requirements as part of its
investment policy. A large percentage of the fixed-rate CMOs purchased have
projected average durations of three years or less using current market
prepayment assumptions prevalent at the time of purchase and projected average
durations that do not exceed nine years in the event of a 300 basis point
increase in market rates of interest. The Company receives a detailed analysis
from the broker/dealer or from the Bloomberg System on each security.
Management believes that the Company is currently in full compliance with OTS
guidelines governing securities, including Thrift Bulletin ("TB") 52, which
became effective February 10, 1992. Among other things, TB 52 sets forth certain
guidelines with respect to depository institutions' investments in certain
"high-risk mortgage securities" that are not suitable investments. "High-risk
mortgage securities" are defined as any mortgage derivative product that at the
time of purchase, or at any subsequent date, meets any of the following three
tests: (i) the expected remaining weighted average life (i.e., the expected time
until repayment of principal on a mortgage-backed security) of the security
exceeds 10 years; (ii) the expected remaining weighted average life of the
security extends by more than four years in the event of an immediate and
sustained parallel shift in the yield curve of plus 300 basis points; (iii) the
expected remaining weighted average life of the security shortens by more than
six years in the event of an immediate and sustained parallel shift in the yield
curve of negative 300 basis points; or (iv) the estimated change in the price of
the security is more than 17% in the event of an immediate and sustained
paralleled shift in the yield curve of plus or minus 300 basis points.
Additionally, floating-rate tranches that are tied to a conventional widely-used
index are subject to reflecting the impact on lifetime caps and floors.
High-risk mortgage securities may be purchased only in limited circumstances,
and if held in portfolio, must be reported as either trading securities or as
available for sale securities. As of December 31, 1998, the Company had no
securities that qualified as "high risk" mortgage securities under TB 52,
subsequent to their acquisition.
The amortized cost and market value of mortgage-backed securities held to
maturity at December 31, 1998 and 1997, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities due to borrowers
having the right to call or prepay obligations, with or without penalties.
1998 1997
-------------------------- -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ -----------
(In thousands)
Mortgage-backed securities held to maturity due in:
Less than one year ............................................... $ -- $ -- $ 9,909 $ 9,989
One year through five years ...................................... -- -- 21,742 21,725
Five years through ten years ..................................... -- -- 34,204 34,585
Greater than ten years ........................................... -- -- 304,065 308,030
-------- -------- -------- --------
$ -- $ -- $369,920 $374,329
======== ======== ======== ========
Mortgage-backed securities available for sale due in:
Less than one year ............................................... $ 9,376 $ 9,482 $ -- $ --
One year through five years ...................................... 14,299 14,453 1,377 1,362
Five years through ten years ..................................... 55,889 56,468 27,560 27,793
Greater than ten years ........................................... 578,591 581,478 169,717 171,375
-------- -------- -------- --------
$658,155 $661,881 $198,654 $200,530
======== ======== ======== ========
20
Investment Activities
The Investment Policy of the Company, which is established by the Board of
Directors and reviewed by the Investment Committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk and to complement the
Company's lending activities. The Policy currently provides for held to
maturity, available for sale and trading portfolios, although all securities are
currently classified as available for sale and all purchases through April,
2000, at least, will be classified as such.
New Jersey state-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and loans on federal funds. Subject to various restrictions,
state-chartered savings institutions may also invest a portion of their assets
in commercial paper, corporate debt securities and asset-backed securities.
Investments Available for Sale. The Company maintains a portfolio of investments
available for sale to minimize interest rate and market value risk. These
investments, designated as available for sale at purchase, are marked to market
in accordance with Statement of Financial Accounting Standard No. 115. The
Company's Investment Policy designates what type of securities may be contained
in the available for sale portfolio. This portfolio of available for sale
investments is reviewed and priced at least monthly. As of December 31, 1998,
the market value of investment securities available for sale was $242.2 million,
with an amortized cost basis of $242.0 million, and was composed of U.S.
Treasury and agencies securities, state and political obligations, corporate
debt obligations and equity securities. The available for sale portfolio,
excluding equity securities, had a weighted average contractual maturity of 7.8
years. A substantial portion of the investment portfolio is comprised of
callable agency notes, which have a variety of call options available to the
issuer at predetermined dates. The investment portfolio's yield is enhanced by
the addition of callable agency notes, due to the issuer's flexibility in
repricing their funding source, while creating reinvestment risk to the Company.
At December 31, 1998, $171.8 million, or 70.9% of the total investment portfolio
was callable.
Investment Portfolio. The following table sets forth certain information
regarding the carrying and market values of the Company's investment portfolio
at the dates indicated, in thousands:
At December 31,
------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ----------- ----------- ---------- ----------- -----------
Investment securities held to maturity:
U.S. Government and agency
obligations ..................... $ -- $ -- $124,920 $124,847 $143,904 $141,550
State and political obligations...... -- -- 2,663 2,690 600 622
-------- -------- -------- -------- -------- --------
Total investment securities
held to maturity .............. $ -- $ -- $127,583 $127,537 $144,504 $142,172
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency
obligations ..................... $197,635 $198,531 $ 72,798 $ 72,934 $ 52,778 $ 51,891
State and political obligations...... 6,900 6,972 -- -- -- --
Corporate obligations ............... 13,414 13,275 4,698 4,685 2,000 1,995
Equity securities ................... 24,071 23,419 800 824 -- --
-------- -------- -------- -------- -------- --------
Total investment securities
available for sale ............ $242,020 $242,197 $ 78,296 $ 78,443 $ 54,778 $ 53,886
======== ======== ======== ======== ======== ========
Other income-earning investments:
Federal Funds sold .................. $ 14,800 $ 14,800 $ 17,975 $ 17,975 $ 2,350 $ 2,350
FHLB-NY stock ....................... 12,852 12,852 10,820 10,820 9,971 9,971
-------- -------- -------- -------- -------- --------
Total other income-earning
investments ................... 27,652 $ 27,652 $ 28,795 $ 28,795 $ 12,321 $ 12,321
======== ======== ======== ======== ======== ========
21
The table below sets forth certain information regarding the contractual
maturities, amortized costs, market values, and weighted average yields for the
Company's investment portfolio at December 31, 1998. Investments in equity
securities, which have no contractual maturities, are excluded from this table.
At December 31, 1998
---------------------------------------------------------------------------------------
More than One More than Five More than Ten
One Year or Less Year to Five Years Years to Ten Years Years
-------------------- -------------------- -------------------- -------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
Investment securities available for sale:
U.S. Government and agency
obligations ........................ $ 5,000 5.41% $66,969 6.07% $105,160 6.69% $ 20,506 7.06%
State and political obligations ....... 90 6.04 4,084 5.29 767 6.20 1,959 6.52
Corporate obligations ................. -- -- 2,000 5.63 -- -- 11,414 6.90
-------- ---- ------- ---- -------- ---- -------- ----
Total investment securities
available for sale ................. $ 5,090 5.42% $73,053 6.02% $105,927 6.68% $ 33,879 6.98%
======== ==== ======= ==== ======== ==== ======== ====
Other income-earning investments:
Federal funds sold .................... $ 14,800 4.00% $ -- --% $ -- --% $ -- --%
FHLB-NY stock (1) ..................... 12,852 7.00 -- -- -- -- -- --
-------- ---- ------- ---- -------- ---- -------- ----
Total other income-earning
investments ........................ $ 27,652 5.39% $ -- --% $ -- -% $ -- --%
======== ==== ======= ==== ======== ==== ======== ====
At December 31, 1998
------------------------------------------
Total
-------------------- --------------------
Average Weighted
Life in Amortized Market Average
Years Cost Value Yield
--------- --------- --------- ---------
(Dollars in thousands)
Investment securities available for sale:
U.S. Government and agency
obligations ........................ 6.98 $197,635 $198,531 6.46%
State and political obligations ...... 7.21 6,900 6,972 5.79
Corporate obligations ................ 24.90 13,414 13,275 6.71
-------- -------- -------- ----
Total investment securities
available for sale ................. 7.82 $217,949 $218,778 6.47%
======== ======== ======== ====
Other income-earning investments:
Federal funds sold ................... -- $ 14,800 $ 14,800 4.00%
FHLB-NY stock (1) .................... -- 12,852 12,852 7.00
-------- -------- -------- ----
Total other income-earning
investments ........................ -- $ 27,652 $ 27,652 5.39%
======== ======== ======== ====
- -----------------------------------------
(1) FHLB-NY stock does not have a stated maturity.
22
Sources of Funds
General. The Company's primary source of funds are deposits; proceeds from
principal and interest payments on loans and mortgage-backed securities; sales
of loans, mortgage-backed securities and investments available for sale;
maturities of investment securities and short-term investments; and, to an
increasing extent, advances from the FHLB-NY, reverse repurchase agreements and
other borrowed funds.
Deposits. The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits principally consist of
fixed-term certificates, passbook savings, money market, Individual Retirement
Accounts ("IRAs") and Negotiable Order of Withdrawal ("NOW") accounts. The flow
of deposits is significantly influenced by general economic conditions, changes
in money market and prevailing interest rates and competition. The Company's
deposits are typically obtained from the areas in which its offices are located.
The Company relies primarily on customer service and long-standing relationships
to attract and retain these deposits. At December 31, 1998, $140.5 million of
the Company's deposit balance consisted of IRAs. Also at that date, $117.4
million, or 9.3%, of the Company's deposit balance consisted of deposit accounts
with a balance greater than $100,000. The Company does not currently accept
brokered deposits.
The Company seeks to maintain a high level of stable core deposits by providing
convenient and high quality service through its extended branch network. To
further this objective, the Company acquired six branch offices in 1991 for a
deposit premium of $509,000. As of December 31, 1998, the Company continued to
operate four of the offices, and transferred the deposits of the other two
offices into existing First Savings branches. In February 1998, the Company sold
its Eatontown branch, with deposits of $25.2 million, to another financial
institution. The Eatontown branch was one of the six branches acquired in 1991.
The Company acquired two additional branches in 1995 with deposits of
approximately $112.8 million for a premium of $12.6 million. The Company's
strategy was to strengthen its market share within Middlesex County, and to
provide better service to the communities within which these branches reside.
For the year ended December 31, 1998, excluding the effects of the sale of the
Eatontown branch, deposits increased $66.0 million, or 5.4%.
At December 31, 1998, the Company had $117.4 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Amount
--------------------
(In thousands)
Maturity period
---------------
Three months or less ................................. $ 73,108
Over 3 through 6 months .............................. 16,219
Over 6 through 12 months ............................. 13,335
Over 12 months ....................................... 14,707
--------
Total ......................................... $117,369
========
The following table sets forth the distribution of the Company's average
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented, dollars in thousands.
For the Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- ------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ---------- ------------ ----------- ------------ -----------
Non-interest bearing deposits .. $ 35,297 -% $ 26,234 -% $ 23,861 -%
NOW and Money market accounts .. 308,609 2.92 281,007 2.96 268,557 2.97
Savings accounts ............... 177,282 2.50 184,423 2.61 198,292 2.59
---------- ------ ---------- ------ ---------- ------
Sub-total ................... 521,188 2.58 491,664 2.67 490,710 2.67
Certificate accounts ........... 719,602 5.48 722,534 5.49 718,755 5.37
---------- ------ ---------- ------ ---------- ------
Total average deposits ...... $1,240,790 4.26% $1,214,198 4.35% $1,209,465 4.27%
========== ====== ========== ====== ========== ======
23
Borrowings
The Company's policy has been to utilize borrowings as an alternate and/or less
costly source of funds. The Company obtains advances from the FHLB-NY, which are
collateralized by the capital stock of the FHLB-NY held by the Company, and
certain mortgage loan and mortgage-backed securities of the Company. The Company
also borrows funds via reverse repurchase agreements with the FHLB-NY and
primary broker/dealers. Advances from the FHLB-NY are made pursuant to several
different credit programs, each of which has its own interest rate and maturity.
The maximum amount that the FHLB-NY will advance to member institutions,
including the Bank, for purposes other than withdrawals, fluctuates from time to
time in accordance with the policies of the FHLB-NY and the OTS. The maximum
amount of FHLB-NY advances permitted to a member institution generally is
reduced by borrowings from any other source. At December 31, 1998, the Company's
FHLB-NY advances totaled $38.0 million, representing 2.4% of total liabilities.
During 1998, the Company continued to borrow funds from the FHLB-NY and primary
broker/dealers. The borrowings are collateralized by designated mortgage-backed
and investment securities. The total of these borrowings at December 31, 1998
was $226.7 million, representing 14.6% of total liabilities.
The Company also has an available overnight line-of-credit with the FHLB-NY for
a maximum of $50.0 million. The Company may continue to increase borrowings in
the future to fund asset growth. To the extent it does so, the Company may
experience an increase in its cost of funds.
The following table sets forth certain information regarding the Company's
borrowed funds on the dates indicated:
At or For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------ ------------
(Dollars in thousands)
FHLB-NY advances:
Average balance outstanding .......................... $ 24,072 $ 33,308 $ 21,846
Maximum amount outstanding at any month-end
during the period ............................... 50,800 40,000 30,000
Balance outstanding at end of period ................. 38,000 23,000 30,000
Weighted average interest rate during the period ..... 5.80% 6.20% 6.13%
Weighted average interest rate at end of period ...... 5.61% 6.28% 6.06%
Other borrowings
Average balance outstanding .......................... $193,059 $144,489 $ 56,346
Maximum amount outstanding at any month-end
during the period ............................... 236,175 174,669 122,544
Balance outstanding at end of period ................. 226,675 163,665 122,915
Weighted average interest rate during the period ..... 5.76% 5.97% 5.94%
Weighted average interest rate at end of period ...... 5.51% 5.92% 5.89%
Total borrowings:
Average balance outstanding .......................... $217,131 $177,797 $ 78,192
Maximum amount outstanding at any month-end
during the period ............................... 319,975 200,240 153,190
Balance outstanding at end of period ................. 264,675 186,665 152,915
Weighted average interest rate during the period ..... 5.77% 6.04% 6.01%
Weighted average interest rate at end of period ...... 5.52% 5.97% 5.93%
24
Subsidiary Activities
FSB Financial Corp. FSB Financial Corp. is a wholly owned subsidiary of the Bank
and provides a line of fixed and variable rate annuity products, along with
mutual funds and term life insurance. For the year ended December 31, 1998, FSB
Financial Corp. had net income of $189,000.
1000 Woodbridge Center Drive, Inc. 1000 Woodbridge Center Drive, Inc. is a
wholly owned subsidiary of the Bank. 1000 Woodbridge Center Drive, Inc. is a
real estate investment trust and the majority of the Bank's mortgage loan
portfolio is held by this subsidiary. 1000 Woodbridge Center Drive, Inc. had net
income of $17.7 million for the year ended December 31, 1998.
Pulse Investment, Inc. Pulse Investment, Inc. is a wholly-owned subsidiary of
the Company. This subsidiary was inactive in 1998.
Pulse Insurance Services, Inc. Pulse Insurance Services, Inc. is a wholly-owned
subsidiary of the Company. This subsidiary was inactive in 1998.
Pulse Real Estate, Inc. Pulse Real Estate, Inc. is a wholly-owned subsidiary of
the Company. This subsidiary was inactive in 1998.
Personnel
As of December 31, 1998, the Company had 264 full-time employees and 38
part-time employees. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a consolidated basis.
The Company and the Bank will report their income on a calendar year basis using
the accrual method of accounting and will be subject to federal income taxation
in the same manner as other corporations with some exceptions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company or the
Bank. The Bank was last audited by the IRS in 1984 and the Company and the Bank
have not been audited by the New Jersey Division of Taxation ("DOT") in the past
five years.
Bad Debt Reserve. In August 1996, the provisions repealing the current thrift
bad debt rules were passed by Congress as part of "The Small Business Job
Protection Act of 1996." The new rules eliminate the 8% of taxable income method
for deducting additions to the tax bad debt reserves for all thrifts for tax
years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their bad debt reserves added
since the base year (last taxable year beginning before January 1, 1988). As of
December 31, 1998, the Bank has a base year reserve subject to recapture equal
to $12.7 million. The Bank has previously recorded a deferred tax liability
equal to the bad debt recapture and as such, the new rules will have no effect
on net income or federal income tax expense. Retained earnings at December 31,
1998 and 1997, includes approximately $18.1 million for which no provision for
income tax has been made. This amount represents an allocation of income to bad
debt deductions for tax purposes only. Events that would result in taxation of
these reserves include failure to qualify as a bank for tax purposes,
distributions in complete or partial liquidation, stock redemptions, excess
distributions to shareholders or a change in Federal tax law. At December 31,
1998 and 1997, the Company had an unrecognized tax liability of $6.5 million
with respect to this reserve. However, dividends paid out of the Bank's current
or accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's bad
debt reserve. Thus, any dividends to the Company that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used
25
would be includable in gross income for federal income tax purposes, assuming a
35% corporate income tax rate (exclusive of state and local taxes). The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended
(the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers of
which the Company currently has none. AMTI is increased by an amount equal to
75% of the amount by which the Company's adjusted current earnings exceeds its
AMTI (determined without regard to this preference and prior to reduction for
net operating losses). The Company does not expect to be subject to the AMTI.
Dividends Received Deduction and Other Matters. The Company may exclude from
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations,
except that if the Company or the Bank own more than 20% but less than 80% of
the stock of the corporation distributing the dividend, in which case 80% of any
dividends received may be deducted.
State and Local Taxation
State of New Jersey. The Bank files a New Jersey income tax return. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.
The Company is required to file a New Jersey income tax return because it is
doing business in New Jersey. For New Jersey tax purposes, regular corporations
are presently taxed at a rate equal to 9% of taxable income. For this purpose,
"taxable income" generally means Federal taxable income subject to certain
adjustments (including addition of interest income on state and municipal
obligations). The Company is not currently under audit with respect to its New
Jersey income tax returns.
Delaware Taxation. As a Delaware holding company not earning income in Delaware,
the Company is exempt from Delaware corporate income tax but is required to file
an annual report with, and pay an annual franchise tax to, the State of
Delaware.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI
Act").
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the Federal
Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The Bank is a
member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts
are insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The OTS and/or the FDIC
conduct periodic examinations to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in
26
such regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation, and no multiple savings and loan
holding company may acquire more than 5% the voting stock of a company engaged
in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
Core capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities that are
not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-
27
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital
regulation based on the risks the OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed earlier
under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest
rate risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. That dollar amount is deducted from an institution's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings institution with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The
Director of the OTS may waive or defer a savings institution's interest rate
risk component on a case-by-case basis. For the present time, the OTS has
deferred implementation of the interest rate risk component. At December 31,
1998, the Bank met each of its capital requirements.
The following table presents the Bank's capital position at December
31, 1998.
(Dollars in thousands)
Actual Required Excess Actual Required
Amount Amount Amount Percent Percent
----------- --------------- ------------ ---------- -----------
Tangible $221,184 $27,298 $193,886 12.15% 1.50%
Core (Leverage) 221,184 54,597 166,587 12.15 3.00
Risk-based 229,901 55,738 174,163 33.00 8.00
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
that has a total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
28
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During 1998, FICO payments
for SAIF members approximated 6.10 basis points, while Bank Insurance Fund
("BIF" -- the deposit insurance fund that covers most commercial bank deposits)
members paid 1.22 basis points. By law, there will be equal sharing of FICO
payments between the members of both insurance funds on the earlier of January
1, 2000 or the date the two insurance funds are merged.
The Bank's assessment rating for the year ended December 31, 1998
required no payments for SAIF assessments. The Bank was subject to the 6.10
basis point payment toward the FICO bonds. These payments totaled $759,000 in
1998. A significant increase in SAIF insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of the Bank.
Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided
that BIF and SAIF would merge by January 1, 1999, if there were no savings
associations in existence on that date. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The Bank is unable to predict
whether such legislation would be enacted or the extent to which the legislation
would restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. At
December 31, 1998, the Bank's limit on loans to one borrower was $33.2 million.
At December 31, 1998, the Bank's largest aggregate outstanding balance of loans
to one borrower was $9.6 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1998, the Bank maintained 75.3% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year
29
or (ii) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its regulatory requirements or the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. At December 31, 1998, the Bank was
classified as a Tier 1 Bank.
The OTS has adopted new capital distribution regulations which will
become effective on April 1, 1999. Under the new regulations, an application to
and the prior approval of the Office of Thrift supervision will be required
before an institution makes a capital distribution if (1) the institution does
not meet certain criteria for "expedited treatment" for applications under the
regulations, (2) the total capital distributions by the institution for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, (3) the institution would be
undercapitalized following the distribution or (4) the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution may still need to give advance
notice to the OTS of the capital distribution.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank's average liquidity ratio for the year
ended December 31, 1998 was 40.23%, which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended December 31, 1998 totaled $219,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that certain transactions with affiliates, including loans
and asset purchases, be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and
30
Soundness ("Guidelines") to implement these safety and soundness standards. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$46.5 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $46.5
million, the reserve requirement was $1.395 million plus 10% (subject to
adjustment by the Federal Reserve Board) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
New Jersey Law
The Commissioner regulates, among other things, the Bank's internal
business procedures as well as its deposits, lending and investment activities.
The Commissioner must approve changes to the Bank's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of First Savings. Certain of the areas regulated by the
Commissioner are not subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced
distinctions between commercial banks and SAIF-insured savings institutions in
New Jersey with respect to lending and investment authority, as well as interest
rate limitations. As federal law has expanded the authority of federally
chartered savings institutions to engage in activities previously reserved for
commercial banks, New Jersey legislation and regulations ("parity legislation")
have given New Jersey chartered savings institutions, such as the Bank, the
powers of federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
Item 2. Properties
- -------------------
The Company conducts its business through its main office and 22 full service
branch offices, all located in central New Jersey. The following table sets
forth certain information concerning the main office and each branch office of
the Company at December 31, 1998. The aggregate net book value of the Company's
premises and equipment was $16.5 million at December 31, 1998.
31
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------- --------------------------
Main Office:
339 State Street 4/29 Owned
Perth Amboy, NJ 08861(1)
Corporate Headquarters: 5/94 Owned
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
Branch Offices:
213 Summerhill Road 8/97 Leased
East Brunswick, NJ 08816
158 Wyckoff Road 7/93 Leased
Eatontown, NJ 07724 (2)
980 Amboy Avenue 6/74 Owned
Edison, NJ 08837
2100 Oak Tree Road 4/84 Owned
Edison, NJ 08820
206 South Avenue 9/91 Owned
Fanwood, NJ 07023
Lafayette Road & Ford Avenue 4/84 Leased
Fords, NJ 08863
Rt. 35 & Bethany Road 1/91 Leased
Hazlet, NJ 07730
301-303 Raritan Avenue 5/98 Owned
Highland Park, NJ 08904
101 New Brunswick Avenue 6/76 Leased
Hopelawn, NJ 08861
1220 Green Street 11/84 Owned
Iselin, NJ 08830
1225 Brunswick Avenue 5/92 Owned
Lawrenceville, NJ 08648 (2)
599 Middlesex Avenue 1/95 Leased
Metuchen, NJ 08840 (2)
1580 Rt. 35 South 4/95 Leased
Middletown, NJ 07748
97 North Main Street 1/95 Owned
Milltown, NJ 08850 (2)
Prospect Plains and Applegarth Roads 7/76 Owned
Monroe Township, NJ 08512
Rt. 9 & Ticetown Road 6/79 Leased
Old Bridge, NJ 08857
100 Stelton Road 9/91 Leased
Piscataway, NJ 08854
Washington Avenue & Davis Lane 7/71 Owned
South Amboy, NJ 08879
6 Jackson Street 8/65 Owned
South River, NJ 08882
32
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------- --------------------------
371 Spotswood Englishtown Road 5/98 Owned
Spotswood, NJ 08884
325 Amboy Avenue 1/70 Owned
Woodbridge, NJ 07095
Rt. 1 & St. Georges Avenue 6/80 Leased
Woodbridge, NJ 07095
(1) Includes an adjacent administrative building.
(2) Acquired/leased in conjunction with the purchase of deposits.
Item 3. Legal Proceedings
The Company is involved in various legal actions arising in the normal
course of its business. In the opinion of management, the resolution of these
legal actions is not expected to have a material adverse effect on the Company's
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders was held on December 16, 1998. The
following proposals were voted on by the stockholders:
1. To approve and adopt the Agreement and Plan of Merger, dated as
of July 9, 1998 between First Sentinel Bancorp, Inc. and Pulse
Bancorp, Inc.
FOR AGAINST ABSTAIN
--- ------- -------
20,169,423 3,105,113 79,368
2. To approve and adopt First Sentinel Bancorp, Inc.'s 1998
Stock-Based Incentive Plan.
FOR AGAINST ABSTAIN
--- ------- -------
18,135,274 5,107,563 416,151
3. To approve and adopt an amendment to the First Source Bancorp,
Inc. Certificate of Incorporation to change the name of the
Company to First Sentinel Bancorp, Inc.
FOR AGAINST ABSTAIN
--- ------- -------
25,348,633 2,797,033 230,042
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information contained on the inside back cover under the section
captioned "Market Information for Common Stock" in the 1998 Annual Report to
Stockholders is incorporated herein by reference. At December 31, 1998,
42,675,397 shares of the Company's outstanding common stock was held of record
by approximately 3,403 persons or entities, not including the number of persons
or entities holding stock in nominee or stock name through various brokers or
banks.
Item 6. Selected Financial Data
The information contained in the section captioned "Consolidated
Financial Highlights" on page 1 of the 1998 Annual Report to Stockholders is
incorporated herein by reference.
33
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Comparison of Operating
Results" on pages 7 through 17 of the 1998 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Disclosure relating to market risk is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," on
pages 15 through 17 of the 1998 Annual Report to Stockholders is incorporated
herein by reference.
Item 8. Financial Statements
The Company's consolidated financial statements, together with the
report thereon by KPMG LLP, are found in the 1998 Annual Report to Stockholders
on pages 18 through 45 and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act of the Registrant
The disclosures required by Item 10 are included under the caption
"Information With Respect to Nominees, Continuing Directors and Executive
Officers" on pages 4-18 of the Company's proxy statement for the 1999 Annual
Meeting of Stockholders dated March 31, 1999 ("1999 Proxy Statement"), and are
incorporated herein by reference.
Item 11. Executive Compensation
The disclosures required by Item 11 are included under the captions
"Directors' Compensation" and "Executive Compensation" on pages 9-10 and pages
15-21 (excluding the Executive Compensation Committee Report and the Stock
Performance Graph) of the 1999 Proxy Statement dated March 31, 1999, and are
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of First Sentinel Common Stock
Disclosure relating to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to pages 3-6 of the 1999
Proxy Statement under the captions "Security Ownership of Certain Beneficial
Owners" and "Information With Respect to Nominees, Continuing Directors and
Executive Officers."
Item 13. Certain Relationships and Related Transactions
The disclosures required by Item 13 are included under the caption
"Transactions With Certain Related Persons" on page 21 of the 1999 Proxy
Statement dated March 31, 1999, and are incorporated herein by reference.
34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements.
The Consolidated Financial Statements and Independent Auditors' Report for the
year ended December 31, 1998, included in the Annual Report, listed below, are
incorporated herein by reference.
Consolidated Statements of Financial Condition at December 31,
1998 and 1997 (Annual Report - Page 18).
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996 (Annual Report Page 19).
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997, and 1996 (Annual Report - Page
20).
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 (Annual Report - Page 21).
Notes to Consolidated Financial Statements (Annual Report -
Page 22 through 44).
Independent Auditors' Report (Annual Report - Page 45).
The remaining information appearing in the Annual Report of
Stockholders is not deemed to be filed as part of this report,
except as provided herein.
(2) Financial Statement Schedules.
All schedules have been omitted because the required
information is either inapplicable or included in the Notes to
Consolidated Financial Statements.
(3) Exhibits
The following exhibits are filed as part of this report.
==================================================================================================
Exhibit
Number Description Reference
------------ --------------------------------------------------------------------- ---------------
2.1 Agreement and Plan of Merger, dated July 9, 1998, by and between
First Sentinel Bancorp, Inc. (formerly First Source Bancorp, Inc.)
and Pulse Bancorp, Inc. *
2.2 Stock Option Agreement, dated as of July 9, 1998, by and between
First Sentinel Bancorp, Inc. (formerly First Source Bancorp, Inc.)
and Pulse Bancorp, Inc. *
3.1 Certificate of Incorporation of First Sentinel Bancorp, Inc. Filed herein
3.2 Bylaws of First Sentinel Bancorp, Inc. Filed herein
4.0 Stock Certificate of First Sentinel Bancorp, Inc. **
10.1 First Sentinel Bancorp, Inc. 1992 Stock Option Plan for Outside
Directors **
10.2 First Sentinel Bancorp, Inc. 1996 Omnibus Incentive Plan **
10.3 First Savings Bank, SLA Employee Stock Ownership Plan **
10.4 First Savings Bank, SLA Directors' Deferred Fee Stock Unit Plan **
10.5 First Savings Bank, SLA Supplemental Executive Retirement Plan **
10.6 First Savings Bank, SLA Supplemental Executive Retirement Plan II **
10.7 First Savings Bank, SLA Director Retirement Plan **
==================================================================================================
35
==================================================================================================
Exhibit
Number Description Reference
------------ --------------------------------------------------------------------- ---------------
10.8 Form of Employment Agreement between First Sentinel Bancorp,
Inc. and certain executive officers, including John P. Mulkerin and
Christopher Martin **
10.9 Employment Agreements between First Savings Bank, SLA and certain
executive officers, including John P. Mulkerin and Christopher
Martin **
10.10 Form of Change in Control Agreement between First Savings Bank, SLA
and certain executive officers **
10.11 First Savings Bank, SLA Employee Severance Compensation Plan **
11.0 Computation of per share earnings Filed herein
13.0 Portions of the 1998 Annual Report to Stockholders Filed herein
21.0 Subsidiaries of Registrant incorporated by reference herein to Part
I - Subsidiaries
23.0 Consent of KPMG LLP Filed herein
27.0 Financial Data Schedule Filed herein
==================================================================================================
* Previously filed and incorporated herein by reference to the Exhibits
to the Registration Statement on Form S-4 (File No. 333-63601) of First
Sentinel Bancorp, Inc. (formerly known as First Source Bancorp, Inc.)
dated November 3, 1998, and all amendments thereto.
** Previously filed and incorporated herein by reference to the Exhibits
to the Registration Statement on Form S-1 (File No. 333-42757) of First
Sentinel Bancorp, Inc. (formerly known as First Source Bancorp, Inc.)
dated December 19, 1997, and all amendments thereto.
(b) Reports on Form 8-K.
None.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1999 FIRST SENTINEL BANCORP, INC.
/s/John P. Mulkerin
--------------------------
John P. Mulkerin
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John P. Mulkerin President, Chief Executive March 30, 1999
- -------------------------- Officer and Director
John P. Mulkerin
/s/ Harry F. Burke Director March 30, 1999
- --------------------------
Harry F. Burke
/s/ Jeffries Shein Director March 30, 1999
- --------------------------
Jeffries Shein
/s/ Donald T. Akey, M.D. Director March 30, 1999
- --------------------------
Donald T. Akey, M.D.
/s/ Keith H. McLaughlin Director March 30, 1999
- --------------------------
Keith H. McLaughlin
/s/ Philip T. Ruegger, Jr. Director March 30, 1999
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Philip T. Ruegger, Jr.
/s/ Joseph Chadwick Director March 30, 1999
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Joseph Chadwick
/s/ George T. Hornyak, Jr. Director March 30, 1999
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George T. Hornyak, Jr.
/s/ Walter K. Timpson Chairman of the Board March 30, 1999
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Walter K. Timpson
/s/ Christopher P. Martin Executive Vice President, March 30, 1999
- -------------------------- Chief Operating and Financial
Christopher P. Martin Officer and Director
37