<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended.............................. September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File No.: 000-23809
FIRST SOURCE BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 22-3566151
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
1000 Woodbridge Center Drive, Woodbridge, NJ 07095
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
Not Applicable
Former Name, Address, and Fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 6, 1998
- ---------------------------- --------------------------------------------
Common Stock 31,410,866 shares
<PAGE>
FIRST SOURCE BANCORP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page #
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 1998 3
(unaudited) and December 31, 1997 (audited)
Consolidated Statements of Income for the three and nine months ended September 4
30, 1998 and 1997 (unaudited)
Consolidated Statements of Stockholders' Equity for the nine months ended 5
September 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 6
and 1997 (unaudited)
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
PART II. OTHER INFORMATION. 21
SIGNATURES 22
</TABLE>
2
<PAGE>
FIRST SOURCE BANCORP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30 December 31,
1998 1997
------------ ------------
(unaudited) (audited)
<S> <C> <C>
Assets
Cash and due from banks ........................................................ $ 15,263 $ 8,377
Federal funds sold ............................................................. 1,675 6,050
------------ ------------
Total cash and cash equivalents ........................................... 16,938 14,427
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost .................... 8,352 8,045
Investment securities, at amortized cost (estimated fair value of $14,988
at September 30, 1998 and $31,150 at December 31, 1997, respectively) ..... 12,994 31,031
Investment securities available for sale ....................................... 68,594 17,701
Mortgage-backed securities, net (estimated fair value of $210,683
at December 31, 1997) ..................................................... -- 207,157
Mortgage-backed securities available for sale .................................. 437,830 147,137
Loans receivable, net .......................................................... 681,962 588,500
Interest and dividends receivable .............................................. 8,567 7,882
Premises and equipment, net .................................................... 13,957 13,087
Excess of cost over fair value of net assets acquired .......................... 8,168 8,806
Other assets ................................................................... 4,789 5,543
------------ ------------
Total assets .............................................................. $ 1,262,151 $ 1,049,316
============ ============
- ----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits ....................................................................... $ 809,696 $ 816,283
Borrowed funds ................................................................. 173,000 118,990
Advances by borrowers for taxes and insurance .................................. 6,519 5,444
Other liabilities .............................................................. 9,427 6,913
------------ ------------
Total liabilities ............................................................ 998,642 947,630
------------ ------------
Stockholders' Equity
Preferred Stock; authorized 10,000,000 shares; issued and outstanding - none ... -- --
Common Stock, $.01 par value, 85,000,000 shares authorized;
31,838,866 and 31,370,390 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively .................... 318 80
Paid-in capital ................................................................ 207,046 43,302
Retained earnings .............................................................. 66,611 58,509
Accumulated other comprehensive income ......................................... 2,942 524
Less: Unallocated Common Stock acquired by the ESOP ............................ (13,303) (546)
Unearned Common Stock acquired by the Recognition and Retention Plan ..... (105) (183)
------------ ------------
Total stockholders' equity ................................................ 263,509 101,686
------------ ------------
Total liabilities and stockholders' equity ................................ $ 1,262,151 $ 1,049,316
============ ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
FIRST SOURCE BANCORP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans ..................................................... $ 12,781 $ 11,223 $ 36,553 $ 32,216
Mortgage-backed securities ................................ -- 4,099 4,530 12,598
Investment securities ..................................... 521 1,002 2,556 2,993
Investment and mortgage-backed securities and
loans available for sale ................................ 7,493 2,258 16,228 6,829
----------- ----------- ----------- -----------
Total interest income .................................. 20,795 18,582 59,867 54,636
----------- ----------- ----------- -----------
Interest expense:
Deposits:
NOW and money market demand .............................. 334 276 951 811
Savings .................................................. 2,044 1,974 5,973 5,793
Certificates of deposit .................................. 5,992 6,416 18,169 18,863
----------- ----------- ----------- -----------
Total interest expense - deposits ...................... 8,370 8,666 25,093 25,467
Borrowed funds ............................................ 2,159 1,835 5,963 5,124
----------- ----------- ----------- -----------
Total interest expense ................................. 10,529 10,501 31,056 30,591
----------- ----------- ----------- -----------
Net interest income .................................... 10,266 8,081 28,811 24,045
Provision for loan losses.................................. 352 300 1,092 900
----------- ----------- ----------- -----------
Net interest income after provision for loan losses .... 9,914 7,781 27,719 23,145
----------- ----------- ----------- -----------
Other operating income:
Fees and service charges .................................. 493 437 1,463 1,241
Net gain on sales of loans and securities ................. 372 545 521 593
Net gain on sale of deposits .............................. -- -- 1,084 --
Other, net ................................................ 143 153 407 352
----------- ----------- ----------- -----------
Total other operating income ........................... 1,008 1,135 3,475 2,186
----------- ----------- ----------- -----------
Operating expenses:
Compensation and benefits ................................. 2,669 2,635 7,591 7,342
Occupancy ................................................. 436 541 1,271 1,491
Equipment ................................................. 317 443 965 1,103
Advertising ............................................... 118 131 422 439
Federal deposit insurance ................................. 126 128 375 285
Amortization of intangibles ............................... 213 1,508 638 1,932
General and administrative ................................ 879 654 2,307 1,989
----------- ----------- ----------- -----------
Total operating expenses ............................... 4,758 6,040 13,569 14,581
----------- ----------- ----------- -----------
Income before income tax expense ....................... 6,164 2,876 17,625 10,750
Income tax expense .......................................... 1,936 1,071 6,179 3,990
----------- ----------- ----------- -----------
Net income ............................................. $ 4,228 $ 1,805 $ 11,446 $ 6,760
=========== =========== =========== ===========
Basic earnings per share .................................... $ 0.14 $ 0.06 $ 0.38 $ 0.22
=========== =========== =========== ===========
Weighted average shares outstanding ......................... 30,260,078 31,039,017 30,431,160 30,941,071
=========== =========== =========== ===========
Diluted earnings per share .................................. $ 0.14 $ 0.06 $ 0.37 $ 0.22
=========== =========== =========== ===========
Weighted average shares outstanding
including potential common stock ........................ 30,464,871 31,345,039 30,651,705 31,184,720
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
FIRST SOURCE BANCORP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
(Dollars in thousands) (unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Common Common
Compre- Stock Stock Total
Common Paid In Retained hensive Acquired Acquired Stockholders'
Stock Capital Earnings Income by ESOP by RRP Equity
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ....... $ 72 $ 27,427 $ 66,299 $ (3) $ (646) $ (286) $ 92,863
Net income for the nine months
ended September 30, 1997 ........ -- -- 6,760 -- -- -- 6,760
Cash dividends ..................... -- -- (1,189) -- -- -- (1,189)
Net change in unrealized gain/loss
on securities available for sale -- -- -- 196 -- -- 196
Amortization of RRP ................ -- -- -- -- -- 78 78
Principal payments on ESOP loan .... -- -- -- -- 75 -- 75
Exercise of stock options .......... 1 429 -- -- -- -- 430
--------------------------------------------------------------------------------------------
Balance at September 30, 1997 ...... $ 73 $ 27,856 $ 71,870 $ 193 $ (571) $ (208) $ 99,213
============================================================================================
Balance at December 31, 1997 ....... $ 80 $ 43,302 $ 58,509 $ 524 $ (546) $ (183) $ 101,686
Net income for the nine months
ended September 30, 1998 ........ -- -- 11,446 -- -- -- 11,446
Cash dividends ..................... -- -- (3,344) -- -- -- (3,344)
Net change in unrealized gain/loss
on securities available for sale -- -- -- 2,418 -- -- 2,418
Net proceeds from conversion
and stock offering .............. 237 161,995 -- -- -- -- 162,232
Adjustment for reorganization
of Mutual Holding Company ....... -- 1,577 -- -- -- -- 1,577
Purchase of stock for ESOP ......... -- -- -- -- (13,240) -- (13,240)
Exercise of stock options .......... 1 90 -- -- -- -- 91
Amortization of RRP ................ -- -- -- -- -- 78 78
Amortization of ESOP shares ........ -- 82 -- -- 483 -- 565
--------------------------------------------------------------------------------------------
Balance at September 30, 1998 ...... $ 318 $ 207,046 $ 66,611 $ 2,942 $ (13,303) $ (105) $ 263,509
============================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
FIRST SOURCE BANCORP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net income .................................................................. $ 11,446 $ 6,760
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation of premises and equipment ...................................... 783 754
Amortization of excess of cost over fair value of assets acquired ........... 638 1,932
Amortization of ESOP ........................................................ 565 75
Amortization of RRP ......................................................... 78 78
Provision for loan losses ................................................... 1,092 900
Provision for losses on real estate owned ................................... 110 61
Loans originated for sale ................................................... (8,883) (2,750)
Proceeds from sales of mortgage loans available for sale .................... 8,932 3,048
Net gain on sales of assets available for sale or trading ................... (521) (593)
Net gain on sales of real estate owned ...................................... (148) (92)
Investment securities purchased for trading ................................. -- (1,989)
Proceeds from sales of investment securities held for trading ............... -- 1,971
Net accretion of premiums and amortization of discounts ..................... 469 733
Increase in interest and dividends receivable ............................... (685) (304)
Increase (decrease) in other liabilities .................................... 2,514 (413)
Increase in other assets .................................................... (969) (1,127)
--------- ---------
Net cash provided by operating activities ............................. 15,421 9,044
--------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale ............. 34,828 8,149
Proceeds from sales of mortgage-backed securities available for sale ........ 65,067 116,891
Proceeds from sale of real estate owned ..................................... 1,617 1,035
Maturities/calls of investment securities ................................... 20,000 14,000
Origination of loans ........................................................ (244,095) (105,179)
Purchases of investment securities available for sale ....................... (85,245) (11,000)
Purchases of mortgage-backed securities available for sale .................. (248,443) (129,974)
Purchases of investment securities .......................................... (1,880) (15,998)
Purchases of mortgage loans ................................................. (1,998) (4,665)
Purchases of mortgage-backed securities ..................................... (4,534) (30,689)
Purchases of premises and equipment ......................................... (1,777) (3,681)
Purchase of FHLB-NY stock ................................................... (307) (617)
Principal repayments on loans ............................................... 150,529 50,446
Principal payments on mortgage-backed securities ............................ 107,390 66,292
Sales of fixed assets ....................................................... 124 --
--------- ---------
Net cash used in investing activities ................................ (208,724) (44,990)
--------- ---------
Cash flows from financing activities:
Net proceeds from Mutual Holding Company reorganization and stock offering .. 163,809 --
Cost of stock contributed to ESOP ........................................... (13,240) --
Stock options exercised ..................................................... 91 430
Cash dividends paid ......................................................... (3,344) (1,189)
Net (decrease) increase in deposits ......................................... (6,587) 14,854
Net increase in borrowed funds .............................................. 54,010 35,825
Net increase in advances by borrowers for taxes and insurance ............... 1,075 782
--------- ---------
Net cash provided by financing activities .......................... 195,814 50,702
--------- ---------
Net increase in cash and cash equivalents .......................... 2,511 14,756
Cash and cash equivalents at beginning of period ............................... 14,427 9,042
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 16,938 $ 23,798
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 31,002 $ 30,196
Income taxes ............................................................ $ 5,017 $ 3,851
Non cash investing and financing activities for the period:
Transfer of mortgage-backed securities to mortgage-backed securities
available for sale ................................................... $ 181,811 --
Transfer of loans to real estate owned ................................. $ 1,216 $ 885
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
FIRST SOURCE BANCORP, INC. and SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
(1) Conversion and Reorganization
On April 9, 1998, First Savings Bank, SLA (the "Bank"), and its mutual holding
company, First Savings Bancshares, MHC, completed a conversion and
reorganization into the stock holding company structure. The new stock holding
company for the Bank is First Source Bancorp, Inc. (the "Company"). Through a
Subscription and Community Offering, the Company sold 16,550,374 shares of
common stock and raised net proceeds totaling $162.2 million. In accordance with
the Plan of Conversion and Reorganization, each share of common stock of the
Bank held by public shareholders was exchanged for 3.9133 shares of common stock
of the Company.
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in conformity with the instructions to Form 10-Q and
Article 10 of Regulation S-X for First Source Bancorp, Inc. and its wholly-owned
subsidiary, First Savings Bank, SLA and the Bank's wholly-owned subsidiaries,
FSB Financial Corp., and 1000 Woodbridge Center Drive, Inc.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial condition, results
of operations, and changes in cash flows have been made at and for the three and
nine months ended September 30, 1998 and 1997. The results of operations for the
three and nine months ended September 30, 1998, are not necessarily indicative
of results that may be expected for the entire fiscal year ending December 31,
1998. These interim financial statements should be read in conjunction with the
December 31, 1997 financial statements.
(3) Earnings Per Share
Basic earnings per share is calculated by dividing net income by the daily
average number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similar to that of basic earnings per
share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if all potential
dilutive common shares were issued.
As a result of the conversion and reorganization, all prior "per share"
calculations, including earnings per share, were restated to give effect to the
conversion exchange ratio of 3.9133.
<TABLE>
<CAPTION>
(dollars in thousands, except Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------- ---------------------------
per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $4,228 $1,805 $11,446 $6,760
============================================================
Basic weighted-average common 30,260,078 31,039,017 30,431,160 30,941,071
shares outstanding
Plus: Dilutive stock options and awards 204,793 306,022 220,545 243,649
------------------------------------------------------------
Diluted weighted-average common
shares outstanding 30,464,871 31,345,039 30,651,705 31,184,720
============================================================
Net income per common share:
Basic $0.14 $0.06 $0.38 $0.22
Diluted 0.14 0.06 0.37 0.22
============================================================
</TABLE>
7
<PAGE>
(4) Dividends
Based upon current operating results, the Bank declared cash dividends of:
$0.030 per share on January 28, 1998, payable February 27, 1998, to stockholders
of record on February 13, 1998; $0.030 per share on April 22, 1998, payable May
29, 1998, to stockholders of record on May 15, 1998; and $0.045 per share on
July 22, 1998, payable August 31, 1998, to shareholders of record on August 14,
1998.
(5) Commitments and Contingencies
At September 30, 1998, the Company had the following commitments: (i) to
originate loans of $51.4 million; (ii) to purchase mortgage loans of $790,000;
(iii) to sell mortgage loans of $2.7 million; (iv) to purchase mortgage-backed
securities of $23.0 million; (v) unused equity lines of credit of $17.9 million;
(vi) unused commercial lines of credit of $12.5 million; (vii) unused
construction lines of credit of $32.7 million; and (viii) letters of credit
outstanding totaling $2.1 million. Further, certificates of deposits, which are
scheduled to mature and/or rollover in one year or less, totaled $335.6 million
at September 30, 1998.
(6) Allowance for Loan Losses
The following table presents the activity in the allowance for loan losses.
For the nine months ended September 30,
---------------------------------------
1998 1997
----- ----
(unaudited) (in thousands)
Balance at beginning of period $6,097 $5,322
Provision charged to operations 1,092 900
Recoveries 27 --
Loans charged - off (152) (240)
----------------- -----------------
Balance at end of period $7,064 $5,982
================= =================
(7) Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
Under SFAS 130, comprehensive income is divided into net income and other
comprehensive income. Other comprehensive income includes items previously
recorded directly in equity, such as unrealized gains or losses on securities
available for sale. Comparative financial statements provided for earlier
periods are required to be reclassified to reflect application of the provisions
of SFAS 130.
SFAS 130 requires total comprehensive income and its components to be displayed
on the face of a financial statement for annual financial statements. For
interim financial statements, SFAS 130 requires only total comprehensive income
to be reported and allows such disclosure to be presented in the notes to the
interim financial statements. Total comprehensive income for the applicable
periods is shown below.
8
<PAGE>
Total
Comprehensive
Income
------
(in thousands)
For the quarter ended:
----------------------
September 30, 1998...................... $5,284
September 30, 1997...................... 1,934
For the nine months ended:
--------------------------
September 30, 1998..................... 13,864
September 30, 1997..................... 6,956
(8) Recent Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 supersedes the disclosure
requirements of SFAS No. 80, 105 and 119. This statement is effective for
periods after September 15, 1999. The adoption of SFAS No. 133 is not expected
to have a material impact on the financial position or results of operations of
the Company.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement amends FASB Statement 65
"Accounting for Certain Mortgage Banking Activities," to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. The adoption of this Statement is not expected to have
a material impact on the financial position or results of operations of the
Company.
9
<PAGE>
FIRST SOURCE BANCORP, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General.
Statements made in this filing about management's intentions, hopes, beliefs,
expectations or predictions of the future are forward-looking statements. It is
important to note that actual results could differ materially from those
projected in such forward-looking statements. Factors that could cause future
results to vary materially from current expectations include, but are not
limited to, changes in interest rates, competition by larger financial
institutions, legislation and regulatory changes, changes in the economy
generally and changes in business conditions in the New Jersey market.
Year 2000 Compliance Issues. The Company has adopted a Year 2000 Compliance Plan
and established a Year 2000 Compliance Committee, which includes members of
senior management from all operating areas. The objectives of the plan and the
committee are to ensure that the Company will be prepared for the new
millennium. As recommended by the Federal Financial Institutions Examination
Council, the Year 2000 Compliance Plan encompasses the following phases:
Awareness, Assessment, Renovation, Validation and Implementation. These phases
will enable the Company to identify risks, develop an action plan, perform
adequate testing and complete certification that its processing systems will be
Year 2000 ready. Execution of the plan is on-going. The Company is currently in
Phase 3--Renovation, which includes code enhancements, program changes, hardware
and software upgrades, and system replacements, if necessary. The primary
operating software for the Company is obtained and maintained by an external
provider of software. The Company has maintained ongoing contact with this
vendor regarding their Year 2000 state of readiness. In August, 1998, the
Company received written notification from the vendor that their software was
Year 2000 ready and that a software upgrade will be sent to all users so that
the necessary fixes to the software are made to the users' systems. The Company
has received this software upgrade and will complete the installation onto their
system by November 30, 1998. At that point, testing of the software by the
Company will begin. The Company has also performed minor modifications to the
software obtained from the external vendor. It is the Company's sole
responsibility to ensure that any modifications to the software are Year 2000
ready. This operation is in process. A consultant has been engaged to assist in
the documentation and detail review of the modifications to the software. The
Company has contacted all other material vendors and suppliers regarding their
Year 2000 state of readiness. Each of these third parties has delivered written
assurance to the Company that they are, or expect to be, Year 2000 compliant in
time. The Company has internally imposed various deadlines for vendors or
suppliers to be Year 2000 ready, depending on the importance of the vendor or
supplier to the Company's operations. These dates range from March 1, 1999 to
September 30, 1999. The Company will switch to an alternate provider of the
goods or services if the vendor or supplier is not Year 2000 ready by the
internal deadline. In no cases are these deadlines prior to the date the vendor
or supplier has indicated they expect to be Year 2000 ready. The Company is in
the process of contacting all material customers regarding their Year 2000 state
of readiness.
The Company has begun writing the tests necessary to test all systems for their
Year 2000 readiness. An additional consultant has been engaged to review the
Company's progress toward meeting the requirements established by federal
regulators for achieving Year 2000 readiness. This consultant will also assist
in the review of test procedures and results. The Renovation Phase is targeted
for completion by March 31, 1999. The Validation Phase involves testing of
changes to hardware and software, accompanied by monitoring and testing with
vendors. The Validation Phase is targeted for completion by September 30, 1999.
The Implementation Phase is to certify that systems are Year 2000 ready, along
with assurances that any new systems are compliant on a going-forward basis. The
Implementation Phase is targeted for completion by September 30, 1999.
10
<PAGE>
While the Company has not determined the final cost of compliance, it currently
anticipates such costs to be immaterial to the financial position or results of
operations of the Company. The costs identified directly with Year 2000
readiness are associated with the engagement of the consultants previously
discussed. The total cost for these services in 1998 is estimated to be
approximately $125,000 of which $75,000 has been incurred and expensed. An
additional $150,000 in expenses are expected in 1999. Costs will also be
incurred due the replacement of non-compliant teller hardware and Automated
Teller Machines (ATMs). However, the Company planned on replacing these items
and did not accelerate replacement due to Year 2000 issues. No assurances can be
given that the Year 2000 Compliance Plan will be completed successfully by the
year 2000, in which event the Company could incur significant costs. The
Compliance Committee is in the process of developing Year 2000 contingency
plans.
Conversion and Reorganization. On April 9, 1998, First Savings Bank, SLA, and
its former mutual holding company, First Savings Bancshares, MHC, completed a
conversion and reorganization into the stock holding company structure. First
Source Bancorp, Inc. ("First Source") became active as the stock holding company
for First Savings Bank, SLA, and exchanged 3.9133 shares of First Source Common
Stock for each publicly held share of First Savings Bank, SLA. As part of the
conversion and reorganization, a Subscription and Community Offering raised
$162.2 million in additional capital. Historical information presented through
April 8, 1998, represents the results for First Savings Bank, SLA and
subsidiaries. Previously reported "per share" results have been restated to give
effect to the conversion exchange ratio.
Merger with Pulse Bancorp, Inc. On July 9, 1998, First Source announced the
execution of a definitive agreement for Pulse Bancorp, Inc. ("Pulse") to merge
with and into First Source. Pulse is a thrift holding company whose subsidiary
bank operates five branch offices in Middlesex and Mercer counties with a sixth
branch expected to open in early 1999. Assuming the receipt of all regulatory
and shareholder approvals, it is expected that First Source will issue
approximately 10.0 million shares of its common stock for all of the outstanding
shares of Pulse in a tax-free exchange accounted for as a pooling of interests.
The transaction is expected to close during the fourth quarter of 1998. On a pro
forma basis, First Source will have total assets of approximately $1.7 billion,
total stockholders' equity of approximately $299.1 million and operate through
23 branch offices in Middlesex, Monmouth, Mercer and Union counties, New Jersey.
Assets. Total assets increased by $212.8 million, or 20.3%, to $1.3 billion at
September 30, 1998, from $1.0 billion at December 31, 1997. Cash and cash
equivalents increased $2.5 million to $16.9 million as of September 30, 1998,
from $14.4 million at December 31, 1997. Investment securities decreased $18.0
million, or 58.1%, to $13.0 million as of September 30, 1998. Investment
securities available for sale increased $50.9 million, or 287.5%, to $68.6
million as of September 30, 1998. Nearly 98% of the investment securities
purchased during the nine months ended September 30, 1998, were classified as
available for sale. Management anticipates that the majority of investment
security purchases will be classified as available for sale for the foreseeable
future. The overall increase in the combined investment security captions was
due to the partial deployment of funds received from the stock offering. Net
loans increased $93.5 million, or 15.9%, to $682.0 million as of September 30,
1998, from $588.5 million at December 31, 1997. The increase was due primarily
to loan originations exceeding loan amortization and prepayments. Mortgage loan
originations for the nine months ended September 30, 1998, were $166.4 million.
Loan types comprising the majority of the activity were single-family 15- and
30-year fixed-rate loans and 5- and 7-year adjustable rate mortgages ("ARMs").
Mortgage loan closings for the nine months ended September 30, 1997, totaled
$87.9 million. In addition, construction lending on 1-4 family developments or
projects totaled $35.7 million for the nine months ended September 30, 1998.
Consumer loan closing volume was $50.9 million for the nine months ended
September 30, 1998, as compared to $13.7 million for the comparable 1997 period.
Repayment of principal on loans totaled $150.5 million for the nine months ended
September 30, 1998 as compared to $50.4 million for the same period in 1997.
Management has emphasized the origination of loans in an effort to increase
loans as a percentage of assets. While management intends to continue to
aggressively market loans, the future levels of loan originations and repayments
will be significantly influenced by external interest rates. On April 30, 1998,
the Company reclassified the balance of its mortgage-backed security ("MBS")
portfolio to MBS available for sale. The amount of this transfer was $181.2
million. The primary reason for the reclassification was
11
<PAGE>
to give management the flexibility to reposition the balance sheet using these
securities in response to changes in market interest rates, changes in
prepayment risks and the availability and yield on alternative investments. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
securities that may be sold under such circumstances should be classified as
available for sale. Due to this transfer, the Company must classify all security
purchases through April 30, 2000 as available for sale. MBS available for sale,
excluding the effects of the transfer, increased $108.9 million, or 74.0%,
during the nine months ended September 30, 1998. The increase was primarily due
to purchases of $248.4 million exceeding sales and principal repayments of
$142.7 million. This significant excess of purchases over sales and principal
repayments was due, in part, to the partial deployment of funds received from
the stock offering accompanied by purchases being funded by borrowings.
Management expects to continue to fund MBS available for sale purchases in this
manner, where accretive to earnings. A portion of the purchases were also funded
through principal repayments from the MBS portfolio. The MBS portfolio decreased
$25.3 million, or 12.2%, between December 31, 1997, and the transfer date. The
decrease was primarily due to principal repayments of $29.7 million exceeding
purchases of $4.5 million.
Liabilities. Deposits decreased $6.6 million, or 0.8%, to $809.7 million at
September 30, 1998, from $816.3 million at December 31, 1997. Deposit balances
were affected by the sale of the Eatontown branch office to another financial
institution in February (total effect of $25.2 million) and the funds withdrawn
by customers to purchase First Source stock in the Subscription and Community
Offering (total effect of $18.7 million). Excluding these two events, deposit
balances would have increased $37.4 million, or 4.6%. Borrowed funds increased
$54.0 million, or 45.4%, to $173.0 million at September 30, 1998, from $119.0
million at December 31, 1997. The increased borrowed funds were used primarily
to fund the purchase of MBS available for sale detailed above. Advances by
borrowers for taxes and insurance increased $1.1 million, or 19.7%, to $6.5
million at September 30, 1998, from $5.4 million at December 31, 1997, primarily
due to the increase in the residential loan portfolio. Other liabilities
increased $2.5 million, or 36.4%, to $9.4 million at September 30, 1998, from
$6.9 million at December 31, 1997, primarily due to increases in income taxes
payable.
Capital. The Company's stockholders' equity increased $161.8 million to $263.5
million at September 30, 1998. The capital accounts were significantly affected
by the conversion and reorganization. Through the Subscription and Community
Offering, 16,550,374 shares of common stock were sold and net proceeds totaling
$162.2 million were raised. These net proceeds increased common stock by
$237,000 and paid-in capital by $162.0 million. The reorganization of First
Savings Bancshares, MHC, also affected paid-in capital as the MHC's capital of
$1.6 million was effectively transferred to the paid-in capital of First Source.
Common stock acquired by the ESOP increased $12.8 million during the period
(effectively reducing capital) as $13.2 million of stock was purchased by the
ESOP as part of the Subscription and Community Offering. Accumulated other
comprehensive income increased $2.4 million to $2.9 million at September 30,
1998. This increase was due to the increase in the market value of securities
available for sale and the transfer of $181.8 million of MBS to available for
sale. Book value and tangible book value per share were $8.28 and $8.02 at
September 30, 1998, as compared to $3.17 and $2.88 at September 30, 1997,
respectively.
The Office of Thrift Supervision ("OTS") requires that the Bank meet minimum
tangible, core and risk-based capital requirements. At September 30, 1998, the
Bank exceeded all regulatory capital requirements, as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Required Actual
------------------- -------------------- Excess of Actual
% of % of over Regulatory
Amount Assets Amount Assets Requirements
------------------- -------------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible Capital $18,476 1.50% $172,929 14.04% $154,453
Core Capital 36,952 3.00% 172,929 14.04% 135,977
Risk-based Capital 42,051 8.00% 179,503 34.15% 137,452
</TABLE>
Liquidity and Capital Resources. The Company's primary sources of funds are
deposits; proceeds from principal and interest payments on loans and
mortgage-backed securities; sales of loans, mortgage-backed securities and
investments available for sale; maturities of investment securities and
short-term investments; and, to an increasing extent, advances from the FHLB-NY
and other borrowed funds. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds, deposit cash
flows and mortgage prepayments are greatly influenced by general interest rates,
competition, and economic conditions.
Although not a primary source of funds, significant funds were received in 1998
from the stock offering. Net proceeds from the offering totaled $162.2 million.
The most significant primary source of funds for the first nine months of 1998
were principal repayment and prepayment of mortgage loans, totaling $150.5
million, and mortgage-backed securities, totaling $107.4 million. Other
significant sources of funds for the nine months ended September 30, 1998, were
sales of MBS available for sale totaling $65.1 million, sales and calls of
investment securities totaling $54.8 million and borrowed funds totaling $54.0
million.
The primary investing activities of the Bank for the first nine months of 1998
were the origination of loans totaling $253.0 million, purchases of
mortgage-backed securities available for sale totaling $248.4 million, and the
purchases of investment securities available for sale totaling $85.2 million.
The Bank is required to maintain an average daily balance of liquid assets as
defined by OTS regulations. This ratio is based upon a percentage of deposits
and short-term borrowings. The required minimum ratio is currently 4.00%. The
Bank's liquidity ratio at September 30, 1998, was 42.2%. The definition of
assets considered liquid was recently redefined by the OTS. As of September 30,
1998, assets qualifying for liquidity purposes totaled $359.6 million.
Comparison of Operating Results for the Nine Months Ended September 30, 1998 and
1997.
Results of Operations. Earnings for the nine months ended September 30, 1998,
totaled $11.4 million, with basic and diluted earnings per share of $0.38 and
$0.37, respectively. This represents an increase of $4.7 million, or 69.3%, over
the net income of $6.8 million, or $0.22 basic and diluted earnings per share,
reported for the comparable 1997 period. The increase in net income was
partially due to the net proceeds from the stock offering. These proceeds
allowed the Company to increase interest earning assets without a corresponding
increase in interest bearing liabilities. In addition, earnings for the nine
months ended September 30, 1997, were reduced as the Company recognized an
impairment writedown of the core deposit intangible resulting in a pre-tax
charge of $1.3 million. Earnings for the nine months ended September 30, 1998,
were enhanced by a $687,000 gain, net of taxes, on the sale of a branch office
located in Eatontown, NJ, to another financial institution. Earnings for the
1998 period, excluding the effect of this transaction, would have been $10.8
million, with basic and diluted earnings per share of $0.35.
Interest Income. Interest income increased by $5.2 million, or 9.6%, to $59.9
million for the nine months ended September 30, 1998. The changes by category
are primarily due to changes in the average balance and yield within each
category. This information is presented below.
13
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) For the nine months ended September 30,
-------------------------------------------
Average Interest Average
Caption Balance Income Yield
------- ----------- ----------- -----------
<S> <C> <C> <C>
Loans - 1998 $ 628,385 $ 36,553 7.76 %
Loans - 1997 540,782 32,216 7.94
----------- ----------- -----------
CHANGE 87,603 4,337 (0.18)
----------- ----------- -----------
Mortgage-backed securities - 1998 87,590 4,530 6.90
Mortgage-backed securities - 1997 243,273 12,598 6.90
----------- ----------- -----------
CHANGE (155,683) (8,068) (0.00)
----------- ----------- -----------
Investment securities - 1998 54,060 2,556 6.30
Investment securities - 1997 58,399 2,993 6.83
----------- ----------- -----------
CHANGE (4,339) (437) (0.53)
----------- ----------- -----------
Investment and mortgage-backed securities 357,855 16,228 6.05
and loans available for sale - 1998
Investment and mortgage-backed securities
and loans available for sale - 1997 144,510 6,829 6.30
----------- ----------- -----------
CHANGE 213,345 9,399 (0.25)
----------- ----------- -----------
Total - 1998 1,127,890 59,867 7.08
Total - 1997 986,964 54,636 7.38
=========== =========== ===========
CHANGE $ 140,926 $ 5,231 (0.30)%
=========== =========== ===========
</TABLE>
The following discussion concerns the comparison of the average balance and
yield for the nine months ended September 30, 1998, to the nine months ended
September 30, 1997. The average loan balance increased due to loan originations
of $253.0 million exceeding principal repayments and sales of $159.5 million.
The decrease in interest rates, particularly long-term rates, affected the yield
on the portfolio. The weighted average rate on mortgage loan originations was
6.84% while the weighted average rate on mortgage prepayments was 7.76%. In
addition, the decrease in interest rates negatively affected the repricing of
ARM loans as these loans reprice based on external indices. The decrease in the
average balance of the MBS portfolio was due to the transfer of $181.8 million
from MBS to MBS available for sale on April 30, 1998. Rates on investment
securities were negatively affected as higher yielding investments were called
and rates on replacement securities were lower than the rates on the securities
that were called. In addition, the average balance of investment securities had
a higher proportion of fed funds sold in 1998. These fed fund investments
primarily consisted of net proceeds from the stock offering which were invested
in fed funds until they were used for other investments. Fed fund investments
mature the following business day and have a lower yield than other investment
alternatives. The increase in the average balance of investments available for
sale was due to the transfer of $181.8 million of MBS previously discussed and
the classification of all 1998 MBS purchases and virtually all 1998 investment
security purchases as available for sale. The level of such purchases was high
as the funds from the conversion were deployed in addition to an increase in
purchases funded through borrowings. The yield on this portfolio was also
negatively affected as higher yielding instruments prepaid or were called. Due
to market interest rates, new purchases and replacement securities had a lower
yield than the components of the portfolio in 1997. In addition, the high level
of prepayments caused an acceleration of premium amortization on MBS available
for sale, effectively reducing the yield on the portfolio. The changes to the
average balance and yield of total interest income were due to the changes
above. Growth in interest-earning assets and total interest income is expected
to continue. Yields on the portfolio will continue to be affected by external
rates.
Interest Expense. Interest expense increased $465,000, or 1.5%, to $31.1 million
for the nine months ended September 30, 1998, compared to $30.6 million for the
same period in 1997. The changes by
14
<PAGE>
category are primarily due to changes in the average balance and yield within
each category. This information is presented below.
For the nine months ended
(dollars in thousands) September 30,
-------------------------------------
Average Interest Average
Caption Balance Expense Cost
------- --------- --------- ---------
NOW and money market demand - 1998 $ 98,896 $ 951 1.28 %
NOW and money market demand - 1997 85,623 811 1.26
--------- --------- ---------
CHANGE 13,273 140 0.02
--------- --------- ---------
Savings accounts - 1998 240,032 5,973 3.32
Savings accounts - 1997 235,469 5,793 3.28
--------- --------- ---------
CHANGE 4,563 180 0.04
--------- --------- ---------
Certificates of deposit - 1998 442,610 18,169 5.47
Certificates of deposit - 1997 463,939 18,863 5.42
--------- --------- ---------
CHANGE (21,329) (694) 0.05
--------- --------- ---------
Non-interest bearing deposits - 1998 29,567
Non-interest bearing deposits - 1997 21,109
---------
CHANGE 8,458
---------
Total deposits - 1998 811,105 25,093 4.12
Total deposits - 1997 806,140 25,467 4.21
--------- --------- ---------
CHANGE 4,965 (374) (0.09)
--------- --------- ---------
Borrowed funds - 1998 136,106 5,963 5.84
Borrowed funds - 1997 110,954 5,124 6.16
--------- --------- ---------
CHANGE 25,152 839 (0.32)
--------- --------- ---------
Total - 1998 947,211 31,056 4.37
Total - 1997 917,094 30,591 4.45
========= ========= =========
CHANGE $ 30,117 $ 465 (0.08)%
========= ========= =========
The following discussion concerns the comparison of the average balance and cost
of deposits and borrowings for the nine months ended September 30, 1998, to the
nine months ended September 30, 1997. The average balance of total deposits was
reduced in 1998 due to the sale of the Eatontown branch office in February,
1998, and the withdrawal of funds by customers to purchase stock in the
Subscription and Community Offering in April, 1998. Management has concentrated
on increasing the level of core accounts and decreasing certificate accounts as
a percentage of overall deposits. The increase in the average balance of NOW and
money market demand accounts reflects this strategy. The slight increase in the
cost was due to growth in the money market demand accounts, which bear a higher
cost than NOW accounts. The increase in the average balance of savings was
primarily due to growth in money market savings accounts, which also caused an
increase in the overall cost of savings accounts. The average balance of
certificates of deposit decreased 4.6% with a five basis point increase in cost.
Although external rates decreased over the period, competition from other
financial institutions kept rates on certificates of deposit comparably high.
The Company elected to offer certificate rates that were competitive but lower
than certain area competition. This decision caused a mild outflow of funds and
prevented a further increase in the overall cost of certificates. The average
balance of non-interest bearing deposits increased as management concentrated on
attracting business checking accounts. The increase in the average balance of
this category along with an overall shift to less costly deposits combined to
reduce the overall cost of deposits by nine basis points. Management will
continue to focus on attracting low cost deposits. Management believes that
growth at the Bank's newer offices in Woodbridge and Highland Park should
15
<PAGE>
assist in increasing deposit balances in the future. Management will also
attempt to reduce the cost of deposits by reducing the interest rates on various
programs. This strategy may be discontinued if a significant outflow of deposit
funds occurs. Any significant deposit outflows would be replaced by borrowings.
The increase in the average balance of borrowed funds was attributable to
management's continuing strategy to fund the purchase of investment and
mortgage-backed securities through the use of borrowed funds, where accretive to
earnings. This strategy is expected to continue and borrowings can be expected
to continue to increase as a percentage of total liabilities. The decrease in
cost of borrowings is due to decreased interest rates.
Net Interest Income Before Provision for Loan Losses. Net interest income before
provision for loan losses increased $4.8 million, or 19.8%, to $28.8 million for
the nine months ended September 30, 1998, compared to $24.0 million for the same
period in 1997. The increase was due to the changes in interest income and
interest expense described above. The net interest margin increased to 3.41% for
the nine months ended September 30, 1998, from 3.25% for the same period in
1997. This increase was primarily attributable to the net proceeds received from
the stock offering enabling the Company to increase interest-earning assets
without a corresponding increase in interest-bearing liabilities. The interest
rate spread decreased to 2.56% for the nine months ended September 30, 1998,
from 2.83% for the same period in 1997. This decrease was primarily attributable
to decreased external rates, a flattening yield curve and a high volume of
prepayments.
Provision for Loan Losses. The provision for loan losses increased $192,000, or
21.3%, to $1.1 million for the nine months ended September 30, 1998, compared to
$900,000 for the same period in 1997. The increase in the provision was due to
the increase in the balance of the loan portfolio and its composition. Net loans
increased $114.8 million between September 30, 1998 and September 30, 1997, and
the balances of construction and commercial real estate loans also increased. In
management's opinion, the allowance for loan losses, totaling $7.1 million, is
adequate to cover losses inherent in the portfolio. The amount of the provision
is based on management's evaluation of the risk inherent in the loan portfolio.
Management will continue to review the need for additions to its allowance for
loan losses based upon its quarterly review of the loan portfolio, the level of
delinquencies, and general market and economic conditions.
The following table sets forth ratios regarding nonaccrual loans, and loans
which are 90 days or more delinquent, but on which the Company is accruing
interest at the dates indicated. The Company discontinues accruing interest on
delinquent loans when collection of interest in considered doubtful, generally
90 days or more delinquent, and when, or combined with, loan-to-value ratios
exceed 55%, at which time all accrued but uncollected interest is reversed.
Total foreclosed real estate ("REO"), net, decreased $363,000 during the nine
month period ended September 30, 1998. At September 30, 1998, REO consisted of
13 residential properties totaling $1.0 million. Six of these properties, with a
carrying value of $496,000, were under contract for sale at September 30, 1998.
During the nine month period ended September 30, 1998, sixteen properties had
been acquired and sixteen properties had been disposed. Management continues to
pursue the sale of REO properties in an expedient manner.
<TABLE>
<CAPTION>
(dollars in thousands) Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans .................... $2,361 $2,259 $2,911 $3,706 $3,547
Non-accrual other loans ....................... 93 118 38 29 14
---------------------------------------------------
Total non-accrual loans .................... 2,454 2,377 2,949 3,735 3,561
---------------------------------------------------
Loans 90 days or more delinquent and still
accruing ...................................... 186 134 407 597 379
---------------------------------------------------
Total non-performing loans .................... 2,640 2,511 3,356 4,332 3,940
Total foreclosed real estate, net of related
allowance ..................................... 1,017 1,542 2,005 1,380 1,398
---------------------------------------------------
Total non-performing assets ................... $3,657 $4,053 $5,361 $5,712 $5,338
===================================================
Non-performing loans to loans receivable, net . 0.39% 0.39% 0.55% 0.74% 0.69%
Non-performing assets to total assets ......... 0.29% 0.33% 0.46% 0.54% 0.51%
</TABLE>
16
<PAGE>
Other Operating Income. The changes to other operating income are detailed
below.
<TABLE>
<CAPTION>
(dollars in thousands) Nine Months Ended Sept. 30,
--------------------------- Increase
1998 1997 (Decrease) Change
------- ------- ------- -------
<S> <C> <C> <C> <C>
Other operating income:
Fees and service charges $ 1,463 $ 1,241 $ 222 17.89%
Net gain on sales of loans and
securities 521 593 (72) (12.14)
Net gain on sale of deposits 1,084 -- 1,084 n/a
Other, net 407 352 55 15.63
------- ------- -------
Total other operating income $ 3,475 $ 2,186 $ 1,289 58.97%
======= ======= ======= =======
</TABLE>
The increase in fees and service charges was attributable to the increased loan
volume and also due to fees from an increased number of checking accounts. The
decrease in net gain on sales was due to unusually high activity that occurred
in the third quarter of 1997, which resulted in a $545,000 gain in that time
period. Securities sold in 1998 primarily consisted of sales of MBS available
for sale which, management believed, contained exceptionally high prepayment
risk. The volume of future sales and gains and losses on such sales are subject
to significant fluctuation. The net gain on sale of deposits was the gain
resulting from the sale of the Eatontown Branch office to another financial
institution in February, 1998.
Operating Expenses. The changes to other operating expenses are detailed below.
<TABLE>
<CAPTION>
(dollars in thousands) Nine Months Ended Sept. 30,
--------------------------- Increase
1998 1997 (Decrease) Change
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating expenses:
Compensation and benefits $ 7,591 $ 7,342 $ 249 3.39%
Occupancy 1,271 1,491 (220) (14.76)
Equipment 965 1,103 (138) (12.51)
Advertising 422 439 (17) (3.87)
Federal deposit insurance 375 285 90 31.58
Amortization of intangibles 638 1,932 (1,294) (66.98)
General and administrative 2,307 1,989 318 15.99
------- ------- -------
Total operating expenses $13,569 $14,581 $(1,012) (6.94)%
======= ======= ======= =======
</TABLE>
The increase in compensation and benefits was primarily due to the increased
expenses associated with the cost of the ESOP, the compensation cost associated
with two new branch offices and a cost of living salary increase. These
increases were partially mitigated as the 1997 period included costs for
contributions to benefit plans that were not required in 1998. Occupancy expense
decreased due to the decreased cost of operations of the new corporate center,
versus the three separate administration centers in operation in 1997. The 1997
period was also slightly inflated as it included costs of the move to the new
corporate center. Federal deposit insurance premiums increased in 1998 due to a
one-time credit recognized in 1997. Amortization of intangibles decreased due an
impairment writedown of the core deposit intangible totaling $1.3 million
recognized as of September 30, 1997, regarding deposits acquired from the
Resolution Trust Company in 1995. Only scheduled amortization of intangibles was
required in 1998.
Comparison of Operating Results for the Three Months Ended September 30, 1998
and 1997.
The comparison of operating results for the three months ended September 30,
1998 and 1997 should be read in conjunction with the comparison of operating
results for the nine months ended September 30, 1998 and 1997. Many of the
discussion items applicable to changes for the three month period were
previously described in the discussion for the nine month period. Such items
will be referenced to the nine month comparison and will not be detailed in this
section.
17
<PAGE>
Results of Operations. Earnings for the three months ended September 30, 1998,
totaled $4.2 million, with basic and diluted earnings per share of $0.14. This
represented an increase of $2.4 million, or 134.2%, over the net income of $1.8
million, or $0.06 basic and diluted earnings per share, reported for the
comparable 1997 period. The increase in net income was partially due to the net
proceeds from the stock offering. These proceeds allowed the Company to increase
interest earning assets without a corresponding increase in interest bearing
liabilities. In addition, earnings for the three months ended September 30,
1997, were reduced as the Company recognized an impairment writedown of the core
deposit intangible resulting in a pre-tax charge of $1.3 million.
Interest Income. Interest income increased by $2.2 million, or 11.9%, to $20.8
million for the three months ended September 30, 1998. The changes by category
are primarily due to changes in the average balance and yield within each
category. This information is presented below.
<TABLE>
<CAPTION>
(dollars in thousands) For the three months ended September 30,
-------------------------------------------
Average Interest Average
Caption Balance Income Yield
------- ------- ------ -----
<S> <C> <C> <C>
Loans - 1998 $ 667,640 $ 12,781 7.66 %
Loans - 1997 573,406 11,223 7.83
----------- ----------- -----------
CHANGE 94,234 1,558 (0.17)
----------- ----------- -----------
Mortgage-backed securities - 1998 -- -- --
Mortgage-backed securities - 1997 235,261 4,099 6.97
----------- ----------- -----------
CHANGE (235,261) (4,099) --
----------- ----------- -----------
Investment securities - 1998 32,301 521 6.45
Investment securities - 1997 59,629 1,002 6.72
----------- ----------- -----------
CHANGE (27,328) (481) (0.27)
----------- ----------- -----------
Investment and mortgage-backed securities and
loans available for sale - 1998 497,770 7,493 6.02
Investment and mortgage-backed securities and
loans available for sale - 1997 138,058 2,258 6.54
----------- ----------- -----------
CHANGE 359,712 5,235 (0.52)
----------- ----------- -----------
Total - 1998 1,197,711 20,795 6.94
Total - 1997 1,006,354 18,582 7.39
----------- ----------- -----------
CHANGE $ 191,357 $ 2,213 (0.45)%
=========== =========== ===========
</TABLE>
The following discussion concerns the comparison of the average balance and
yield for the three months ended September 30, 1998, to the three months ended
September 30, 1997. All factors described in the comparable comparison for the
nine month period are also applicable to this quarterly comparison, except as
follows. The average loan balance increased due to loan originations of $85.4
million exceeding principal repayments and sales of $53.4 million. The decrease
in the average balance of investment securities between the nine and three month
periods ended September 30, 1998, is due to the high balance of fed funds
maintained by the Company after receiving the net proceeds from the stock
offering. The decreased investment in fed funds for the quarter ended September
30, 1998, also increased the overall yield on the investment security portfolio
as federal funds generally earn a lower rate of interest than other investment
alternatives. The decreased yield on the investments available for sale
portfolio was more pronounced in the three month period as the accelerated
premium amortization, required due the high level of prepayments, primarily
affected this quarter.
Interest Expense. Interest expense increased $28,000, or 0.3%, to $10.5 million
for the three months ended September 30, 1998 and 1997. The changes by category
are primarily due to changes in the average balance and yield within each
category. This information is presented below.
18
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) For the three months ended
September 30,
-------------------------------------
Average Interest Average
Caption Balance Expense Cost
------- --------- --------- ---------
<S> <C> <C> <C>
NOW and money market demand - 1998 $ 107,066 $ 334 1.25 %
NOW and money market demand - 1997 81,169 276 1.36
--------- --------- ---------
CHANGE 25,897 58 (0.11)
--------- --------- ---------
Savings accounts - 1998 237,775 2,044 3.44
Savings accounts - 1997 246,343 1,974 3.21
--------- --------- ---------
CHANGE (8,568) 70 0.23
--------- --------- ---------
Certificates of deposit - 1998 435,825 5,992 5.50
Certificates of deposit - 1997 465,469 6,416 5.51
--------- --------- ---------
CHANGE (29,644) (424) (0.01)
--------- --------- ---------
Non-interest bearing deposits - 1998 30,859
Non-interest bearing deposits - 1997 18,011
---------
CHANGE 12,848
---------
Total deposits - 1998 811,525 8,370 4.13
Total deposits - 1997 810,992 8,666 4.27
--------- --------- ---------
CHANGE 533 (296) (0.14)
--------- --------- ---------
Borrowed funds - 1998 149,707 2,159 5.77
Borrowed funds - 1997 114,392 1,835 6.42
--------- --------- ---------
CHANGE 35,315 324 (0.65)
--------- --------- ---------
Total - 1998 961,232 10,529 4.38
Total - 1997 925,384 10,501 4.54
--------- --------- ---------
CHANGE $ 35,848 $ 28 (0.16)%
========= ========= =========
</TABLE>
The following discussion concerns the comparison of the average balance and cost
of interest bearing liabilities for the three months ended September 30, 1998,
to the three months ended September 30, 1997. All factors described in the
comparison for the nine month period are also applicable to this quarterly
comparison, except as follows. The increase in the average balance of NOW and
money market accounts was more pronounced in the quarter. The decrease in the
cost of the portfolio was due to a reduction in the interest rate paid on many
interest-bearing NOW accounts. The increase in the average cost of savings
accounts is due a higher percentage of depositors maintaining accounts in higher
yielding money market accounts. The slight decrease in the cost of certificates
of deposit was due to the Company's decision to offer certificate rates that
were competitive but lower than certain area competition, which had a greater
impact in the quarterly period. The increase in the average balance, and
decrease in cost, of borrowings continued and amplified the results of the nine
month period comparison. The utilization of borrowings to purchase MBS available
for sale, and decrease in external rates, were more pronounced in the quarterly
period.
Net Interest Income Before Provision for Loan Losses. Net interest income before
provision for loan losses increased $2.2 million, or 27.0%, to $10.3 million for
the three months ended September 30, 1998, compared to $8.1 million for the same
period in 1997. The increase was due to the changes in interest income and
interest expense described above. The net interest margin increased to 3.43% for
the three months ended September 30, 1998, from 3.21% for the same period in
1997. This increase was primarily attributable to the net proceeds received from
the stock offering enabling the Company to increase interest-earning assets
without a corresponding increase in interest-bearing liabilities. The interest
rate spread
<PAGE>
decreased to 2.42% for the three months ended September 30, 1998, from 2.76% for
the same period in 1997. This decrease was primarily attributable to decreased
external rates, a flattening yield curve and a high volume of prepayments.
Provision for Loan Losses. The provision for loan losses increased $52,000, or
17.3%, to $352,000 for the three months ended September 30, 1998, compared to
$300,000 for the same period in 1997. See additional discussion in the
comparison of the nine month periods. Total foreclosed REO decreased $525,000
during the three month period ended September 30, 1998. Two properties were
acquired and five properties were disposed of during the quarter ended September
30, 1998.
Other Operating Income. The changes to other operating income are detailed
below.
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended Sept. 30,
---------------------------- Increase
1998 1997 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Other operating income:
Fees and service charges $ 493 $ 437 $ 56 12.81%
Net gain on sales of loans and 372 545 (173) (31.74)
securities
Other, net 143 153 (10) (6.54)
------ ------ ------
Total other operating income $1,008 $1,135 $ (127) (11.19)%
====== ====== ====== ======
</TABLE>
See discussion of changes in the nine month comparison.
Operating Expenses. The changes to other operating expenses are detailed below.
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended Sept. 30,
---------------------------- Increase
1998 1997 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Operating expenses:
Compensation and benefits $ 2,669 $ 2,635 $ 34 1.29%
Occupancy 436 541 (105) (19.41)
Equipment 317 443 (126) (28.44)
Advertising 118 131 (13) (9.92)
Federal deposit insurance 126 128 (2) (1.56)
Amortization of intangibles 213 1,508 (1,295) (85.88)
General and administrative 879 654 225 34.40
------- ------- -------
Total operating expenses $ 4,758 $ 6,040 $(1,282) (21.23)%
======= ======= ======= =======
</TABLE>
The primary reason for the decrease in operating expenses was an impairment
writedown of the core deposit intangible totaling $1.3 million recognized as of
September 30, 1997. Without the effect of this transaction, total operating
expenses would have increased $14,000, or 0.3%, for the three months ended
September 30, 1998, as compared to the three months ended September 30, 1997.
The decrease in equipment expense was due to the write-off of certain equipment
considered to be obsolete in the 1997 period. The increase in general and
administrative expenses was due to an increase in consulting fees. See
discussion of other changes in the nine month comparison.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the end of the
preceding fiscal year to the date of the most recent interim balance sheet
(September 30, 1998).
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are various claims and lawsuits in which the Registrant is
periodically involved incidental to the Registrant's business. In the
opinion of management, no material loss is expected from any of such
pending claims and lawsuits.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.
Annual meeting results were reported previously on Form 10-Q dated
March 31, 1998.
Item 5. Other Information.
The Registrant received approval from the Office of Thrift Supervision
("OTS") to repurchase shares of First Source common stock in the open
market. The volume of these repurchases will be limited due to the
pending acquisition of Pulse Bancorp, Inc. The repurchases began on
October 26, 1998.
Item 6. Exhibits and Reports on Form 8-K.
a.) Exhibits
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Exhibit
Number Description Reference
------------------------------------------------------------------------------------
<S> <C> <C>
2 Agreement and Plan of Merger with Pulse Bancorp, Inc. *
3.1 Certificate of Incorporation of First Source Bancorp, Inc. **
3.2 Bylaws of First Source Bancorp, Inc. **
4 Stock certificate of First Source Bancorp, Inc. **
11 Statement re: Computation of Ratios page 7
------------------------------------------------------------------------------------
</TABLE>
* - Incorporated herein by reference into this document from the
current report on Form 8-K and exhibits thereto of First Source
Bancorp, Inc. filed with the Securities and Exchange Commission ("SEC")
on July 17, 1998.
** - Incorporated herein by reference into this document from the
Registration Statement on Form S-1 and exhibits thereto of First Source
Bancorp, Inc., and any amendments or supplements thereto filed with the
SEC on December 19, 1997 and amended on February 9, 1998, SEC File No.
333-42757.
b.) Reports on Form 8 - K
---------------------
A report on Form 8-K was filed with the SEC on July 17, 1998, in which
the Company reported, under Item 5 of the report, that it had entered
into an Agreement and Plan of Merger with Pulse Bancorp, Inc.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SOURCE BANCORP, INC.
Date: November 12, 1998 By: \s\ John P. Mulkerin
--------------------
John P. Mulkerin
President and Chief Executive Officer
Date: November 12, 1998 By: \s\ Christopher Martin
----------------------
Christopher Martin
Executive Vice President and Chief
Operating and Financial Officer and
Corporate Secretary
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 15,263 15,263
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 1,675 1,675
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 506,424 506,424
<INVESTMENTS-CARRYING> 12,994 12,994
<INVESTMENTS-MARKET> 14,988 14,988
<LOANS> 681,962 681,962
<ALLOWANCE> 7,064 7,064
<TOTAL-ASSETS> 1,262,151 1,262,151
<DEPOSITS> 809,696 809,696
<SHORT-TERM> 1,000 1,000
<LIABILITIES-OTHER> 15,946 15,946
<LONG-TERM> 172,000 172,000
0 0
0 0
<COMMON> 318 318
<OTHER-SE> 263,191 263,191
<TOTAL-LIABILITIES-AND-EQUITY> 1,262,151 1,262,151
<INTEREST-LOAN> 12,781 36,553
<INTEREST-INVEST> 8,014 23,314
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 20,795 59,867
<INTEREST-DEPOSIT> 8,370 25,093
<INTEREST-EXPENSE> 10,529 31,056
<INTEREST-INCOME-NET> 10,266 28,811
<LOAN-LOSSES> 352 1,092
<SECURITIES-GAINS> 372 521
<EXPENSE-OTHER> 4,758 13,569
<INCOME-PRETAX> 6,164 17,625
<INCOME-PRE-EXTRAORDINARY> 6,164 17,625
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,228 11,446
<EPS-PRIMARY> 0.14 0.38
<EPS-DILUTED> 0.14 0.37
<YIELD-ACTUAL> 3.43 3.41
<LOANS-NON> 2,454 2,454
<LOANS-PAST> 186 186
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6,758 6,097
<CHARGE-OFFS> 70 152
<RECOVERIES> 24 27
<ALLOWANCE-CLOSE> 7,064 7,064
<ALLOWANCE-DOMESTIC> 100 100
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
