<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............................ June 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 August 11, 1998
- ---------------------- -----------------------------------------
Common Stock 31,749,464 shares
<PAGE>
FIRST SOURCE BANCORP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page #
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 1998
(unaudited) and December 31, 1997 (audited) 3
Consolidated Statements of Income for the three and six months ended
June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Stockholders' Equity for the six months
ended June 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the six months ended June
30, 1998 and 1997 (unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
PART II. OTHER INFORMATION 20
SIGNATURES 21
</TABLE>
2
<PAGE>
FIRST SOURCE BANCORP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30 December 31,
1998 1997
---------------- ----------------
(unaudited) (audited)
<S> <C> <C>
Assets
Cash and due from banks........................................................ $ 11,680 $ 8,377
Federal funds sold............................................................. 14,000 6,050
---------------- ---------------
Total cash and cash equivalents........................................... 25,680 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 $16,059
at June 30, 1998 and $31,150 at December 31, 1997, respectively).......... 15,994 31,031
Investment securities available for sale....................................... 57,053 17,701
Mortgage-backed securities, net (estimated fair value of $210,683
at December 31, 1997, respectively)....................................... - 207,157
Mortgage-backed securities available for sale.................................. 432,785 147,137
Loans receivable, net.......................................................... 644,385 588,500
Interest and dividends receivable.............................................. 8,702 7,882
Premises and equipment, net.................................................... 14,088 13,087
Excess of cost over fair value of net assets acquired.......................... 8,381 8,806
Other assets................................................................... 5,618 5,543
---------------- ---------------
Total assets.............................................................. $ 1,221,038 $ 1,049,316
================ ===============
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Liabilities
Deposits....................................................................... $ 807,591 $ 816,283
Borrowed funds................................................................. 139,544 118,990
Advances by borrowers for taxes and insurance.................................. 6,344 5,444
Other liabilities.............................................................. 8,239 6,913
---------------- ---------------
Total liabilities............................................................ 961,718 947,630
---------------- ---------------
Stockholders' Equity
Preferred Stock; authorized 10,000,000 shares; issued and outstanding - none .. - -
Common Stock, $.01 par value, 85,000,000 shares authorized;
31,739,555 and 31,370,390 shares issued and outstanding at
June 30, 1998 and December 31, 1997, respectively......................... 317 80
Paid-in capital................................................................ 206,948 43,302
Retained earnings.............................................................. 63,812 58,509
Accumulated other comprehensive income......................................... 1,886 524
Less: Unallocated Common Stock acquired by the ESOP............................ (13,512) (546)
Unearned Common Stock acquired by the Recognition and Retention Plan..... (131) (183)
---------------- ---------------
Total stockholders' equity................................................ 259,320 101,686
---------------- ---------------
Total liabilities and stockholders' equity................................ $ 1,221,038 $ 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 June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans.............................................. $ 12,135 $ 10,712 $ 23,772 $ 20,993
Mortgage-backed securities......................... 1,089 4,318 4,530 8,499
Investment securities.............................. 1,290 1,003 2,035 1,991
Investment and mortgage-backed securities and
loans available for sale......................... 5,941 2,230 8,735 4,571
-------------- -------------- -------------- --------------
Total interest income........................... 20,455 18,263 39,072 36,054
-------------- -------------- -------------- --------------
Interest expense:
Deposits:
NOW and money market demand....................... 334 326 617 535
Savings........................................... 1,973 1,883 3,929 3,819
Certificates of deposit........................... 5,951 6,298 12,177 12,447
-------------- -------------- -------------- --------------
Total interest expense - deposits............... 8,258 8,507 16,723 16,801
Borrowed funds..................................... 1,837 1,755 3,804 3,289
-------------- -------------- -------------- --------------
Total interest expense.......................... 10,095 10,262 20,527 20,090
-------------- -------------- -------------- --------------
Net interest income............................. 10,360 8,001 18,545 15,964
Provision for loan losses............................ 365 300 740 600
-------------- -------------- -------------- --------------
Net interest income after provision for
loan losses.................................. 9,995 7,701 17,805 15,364
-------------- -------------- -------------- --------------
Other operating income:
Fees and service charges........................... 485 399 970 804
Net gain on sales of loans and securities.......... 42 43 149 48
Net gain on sale of deposits....................... - - 1,084 -
Other, net......................................... 154 84 264 199
-------------- -------------- -------------- --------------
Total other operating income.................... 681 526 2,467 1,051
-------------- -------------- -------------- --------------
Operating expenses:
Compensation and benefits.......................... 2,501 2,422 4,922 4,707
Occupancy.......................................... 417 423 835 950
Equipment.......................................... 328 395 648 660
Advertising........................................ 185 163 304 308
Federal deposit insurance.......................... 127 129 249 157
Amortization of intangibles........................ 212 212 425 424
General and administrative......................... 748 673 1,428 1,335
-------------- -------------- -------------- --------------
Total operating expenses........................ 4,518 4,417 8,811 8,541
-------------- -------------- -------------- --------------
Income before income tax expense................ 6,158 3,810 11,461 7,874
Income tax expense................................... 2,279 1,356 4,243 2,919
-------------- -------------- -------------- --------------
Net income...................................... $ 3,879 $ 2,454 $ 7,218 $ 4,955
============== ============== ============== ==============
Basic earnings per share............................. $ 0.13 $ 0.08 $ 0.24 $ 0.16
============== ============== ============== ==============
Weighted average shares outstanding.................. 30,262,611 30,920,126 30,517,846 30,891,125
============== ============== ============== ==============
Diluted earnings per share........................... $ 0.13 $ 0.08 $ 0.23 $ 0.16
============== ============== ============== ==============
Weighted average shares outstanding
including potential common stock.................. 30,537,580 31,494,176 30,841,800 31,459,387
============== ============== ============== ==============
</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 six months
ended June 30, 1997................. - - 4,955 - - - 4,955
Cash dividends - - (767) - - - (767)
Net change in unrealized gain/loss
on securities available for sale.... - - - 67 - - 67
Amortization of RRP.................... - - - - - 52 52
Principal payments on ESOP loan ....... - - - - 50 - 50
Exercise of stock options.............. 1 60 - - - - 61
------------------------------------------------------------------------------------
Balance at June 30, 1997............... $73 $27,487 $70,487 $64 $(596) $(234) $97,281
====================================================================================
Balance at December 31, 1997 .......... $80 $43,302 $58,509 $524 ($546) ($183) $101,686
Net income for the six months
ended June 30, 1998................. - - 7,218 - - - 7,218
Cash dividends......................... - - (1,915) - - - (1,915)
Net change in unrealized gain/loss
on securities available for sale.... - - - 1,362 - - 1,362
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)
Amortization of RRP.................... - - - - - 52 52
Amortization of ESOP shares ........... - 74 - - 274 - 348
------------------------------------------------------------------------------------
Balance at June 30, 1998............... $317 $206,948 $63,812 $1,886 ($13,512) ($131) $259,320
====================================================================================
</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>
Six Months Ended June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities: (unaudited)
Net income.......................................................................... $ 7,218 $ 4,955
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment.............................................. 564 464
Amortization of excess of cost over fair value of assets acquired................... 425 424
Amortization of ESOP................................................................ 348 50
Amortization of RRP................................................................. 52 52
Provision for loan losses........................................................... 740 600
Provision for losses on real estate owned........................................... 10 39
Loans originated for sale........................................................... (5,316) (1,594)
Proceeds from sales of mortgage loans available for sale............................ 5,341 1,882
Net gain on sales of assets available for sale or trading........................... (149) (48)
Net gain (loss) on sales of real estate owned....................................... (47) 10
Investment securities purchased for trading......................................... - (2,000)
Proceeds from sales of investment securities held for trading....................... - 1,960
Net accretion of premiums and amortization of discounts............................. (685) 511
Increase in interest and dividends receivable....................................... (820) (320)
Increase (decrease) in other liabilities............................................ 1,326 (1,876)
Increase in other assets............................................................ (680) (88)
------------ ------------
Net cash provided by operating activities..................................... 8,327 5,021
------------ ------------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale..................... 9,281 2,982
Proceeds from sales of mortgage-backed securities available for sale................ 41,453 60,484
Proceeds from sale of real estate owned............................................. 946 460
Investment securities purchased for sale............................................ (48,534) (7,000)
Mortgage-backed securities purchased for sale....................................... (179,182) (68,090)
Purchases of investment securities.................................................. (1,880) (8,000)
Maturities/calls of investment securities........................................... 17,000 6,000
Origination of loans................................................................ (158,393) (63,459)
Purchases of mortgage loans......................................................... - (1,009)
Purchases of mortgage-backed securities............................................. (4,534) (27,261)
Principal repayments on loans....................................................... 100,709 26,871
Principal payments on mortgage-backed securities.................................... 66,516 42,765
Purchase of FHLB-NY stock........................................................... (307) (617)
Sales of fixed assets............................................................... 124 -
Purchases of premises and equipment................................................. (1,689) (3,376)
------------ ------------
Net cash used in investing activities........................................ (158,490) (39,250)
------------ ------------
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............................................................. - 61
Cash dividends paid................................................................. (1,915) (767)
Net (decrease) increase in deposits................................................. (8,692) 20,571
Net increase in borrowed funds...................................................... 20,554 21,750
Net increase in advances by borrowers for taxes and insurance....................... 900 831
------------ ------------
Net cash provided by financing activities.................................. 161,416 42,446
------------ ------------
Net increase in cash and cash equivalents.................................. 11,253 8,217
Cash and cash equivalents at beginning of period....................................... 14,427 9,042
------------ ------------
Cash and cash equivalents at end of period............................................. $ 25,680 $ 17,259
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................................ $ 20,443 $ 19,886
Income taxes.................................................................... 4,310 3,401
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......................................... 1,070 533
============ ============
</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. (the "Company") and
its wholly-owned subsidiary, First Savings Bank, SLA (the "Bank") 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
six months ended June 30, 1998 and 1997. The results of operations for the three
and six months ended June 30, 1998, are not necessarily indicative of results
that may be expected for the entire fiscal year ended 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.
7
<PAGE>
<TABLE>
(dollars in thousands, except Three months ended June 30, Six months ended June 30,
per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $3,879 $2,454 $7,218 $4,955
Basic weighted-average common 30,262,611 30,920,126 30,517,846 30,891,125
shares outstanding
Plus: Dilutive stock options and awards 274,969 574,050 323,954 568,262
----------------------------------------------------------------
Diluted weighted-average common
shares outstanding 30,537,580 31,494,176 30,841,800 31,459,387
================================================================
Net income per common share
Basic $0.13 $0.08 $0.24 $0.16
Diluted 0.13 0.08 0.23 0.16
================================================================
</TABLE>
(4) Dividends
Based upon current operating results, the Bank declared a cash dividend of $0.03
per share on January 28, 1998, payable February 27, 1998, to stockholders of
record on February 13, 1998, and a cash dividend of $0.03 per share on April 22,
1998, payable May 29, 1998, to stockholders of record on May 15, 1998.
(5) Commitments and Contingencies
At June 30, 1998, the Company had the following commitments: (i) to originate
loans of $63.0 million; (ii) to sell mortgage loans of $3.3 million; (iii) to
purchase mortgage-backed securities of $15.2 million; (iv) unused equity lines
of credit of $17.1 million; (v) unused commercial lines of credit of $8.3
million; (vi) unused construction lines of credit of $28.9 million: (vii) unused
credit card lines of $937,000; and (viii) letters of credit outstanding totaling
$2.3 million. Further, certificates of deposits, which are scheduled to mature
and/or rollover in one year or less, totaled $330.8 million at June 30, 1998.
(6) Allowance for Loan Losses
<TABLE>
<CAPTION>
For the six months For the six months
ended June 30, 1998 ended June 30, 1997
----------------------- -----------------------
(unaudited) (in thousands)
<S> <C> <C>
Balance at beginning of period $6,097 $5,322
Provision charged to operations 740 600
Recoveries 3 ---
Loans charged - off (82) (86)
----------------------- -----------------------
Balance at end of period $6,758 $5,836
======================= =======================
</TABLE>
(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
8
<PAGE>
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.
(in thousands) Total
Comprehensive
Income
------
For the quarter ended:
----------------------
June 30, 1998.................................. $5,180
June 30, 1997.................................. 3,388
For the six months ended:
-------------------------
June 30, 1998.................................. 8,580
June 30, 1997.................................. 5,022
(8) Recent Accounting Pronouncements
In June 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 June 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.
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 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 currently on target. The Company is
currently in Phase 2--Assessment, which will identify and inventory all
hardware, software, networks and forms affected by the Year 2000 change.
Concurrently, the Company is also addressing some issues related to subsequent
phases. Prioritization of the most critical applications has been addressed,
along with contract and service agreements. 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. The Company has received written assurances from this
vendor that modification of the software for Year 2000 readiness is a top
priority and will be accomplished by December 31, 1998. The Company has
performed minor modifications to this 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 is in the process
of contacting all material customers regarding their Year 2000 state of
readiness. The Assessment Phase is targeted for completion by September 30,
1998. The Renovation Phase will include code enhancements, program changes,
hardware and software upgrades, and system replacements, if necessary. 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 June 30, 1999. The Implementation Phase is to certify that systems
are Year 2000 ready, along with assurance that any new systems are compliant on
a going-forward basis. The Implementation Phase is targeted for completion by
September 30, 1999.
While the Company has not determined the final cost of compliance, it currently
anticipates such costs to be immaterial. The costs identified directly with Year
2000 readiness are associated with the engagement of a consultant previously
discussed. The total cost for these services is estimated to be approximately
$150,000 of which $50,000 has been incurred and expensed. 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 has determined that a contingency plan is not necessary at
this time. Should difficulties develop regarding Year 2000 compliance for the
external provider of the primary operating software for the Company, a
contingency plan will be promptly developed. If this external provider of the
primary operating software for the Company does not attain Year 2000 readiness,
it is uncertain if there will be a material impact on the Company.
Conversion and Reorganization. The three and six months ended June 30, 1998,
represent the initial reporting period for First Source Bancorp, Inc. 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. 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, represent 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 the fourth quarter of 1998. 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 $171.7 million, or 16.4%, to $1.2 billion at
June 30, 1998, from $1.0 billion at December 31, 1997. Cash and cash equivalents
increased $11.3 million to $25.7 million as of June 30, 1998, from $14.4 million
at December 31, 1997. This increase was primarily due to an $8.0 million
increase in federal funds sold. Investment securities decreased $15.0 million,
or 48.5%, to $16.0 million as of June 30, 1998. Investment securities available
for sale increased $39.4 million, or 222.3%, to $57.1 million as of June 30,
1998. Over 96% of the investment securities purchased during the six months
ended June 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 $55.9
million, or 9.5%, to $644.4 million as of June 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 six months
ended June 30, 1998, were $132.0 million. Loan types comprising the majority of
the activity were single-family 15 year fixed-rate loans and 5 year adjustable
rate mortgages ("ARMs") in addition to construction lending on 1-4 family
developments or projects. Mortgage loan closings for the six months ended June
30, 1997, totaled $72.8 million. Consumer loan closing volume was $31.7 million
for the six months ended June 30, 1998, as compared to $8.4 million for the
comparable 1997 period. Repayment of principal on loans totaled $100.7 million
for the six months ended June 30, 1998 as compared to $26.9 million for the same
period in 1997. 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
10
<PAGE>
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 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 MBS purchases through April 30, 2000, as available
for sale. MBS available for sale, excluding the effects of the transfer,
increased $103.8 million, or 70.6%, during the six months ended June 30, 1998.
The increase was primarily due to purchases of $179.2 million exceeding sales
and principal repayments of $78.2 million. This significant excess of purchases
over sales and principal repayments was due to the partial deployment of funds
received from the stock offering. A portion of the purchases were also funded
through borrowings and 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 $4.4 million.
Liabilities. Deposits decreased $8.7 million, or 1.1%, to $807.6 million at June
30, 1998, from $816.3 million at December 31, 1997. Deposit balances were
affected by the February sale of the Eatontown branch office to another
financial institution (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 $35.3 million, or 4.3%. Borrowed funds increased
$20.6 million, or 17.3%, to $139.5 million at June 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 $900,000, or 16.5%, to $6.3 million at June 30,
1998, from $5.4 million at December 31, 1997, primarily due to the increase in
the residential loan portfolio. Other liabilities increased $1.3 million, or
19.2%, to $8.2 million at June 30, 1998, from $6.9 million at December 31, 1997,
primarily due to increases in income taxes payable and custodial accounts.
Capital. The Company's stockholders' equity increased $157.6 million to $259.3
million at June 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 $13.0 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 $1.4 million to $1.9 million at June 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 $8.17 and $7.91 at June
30, 1998, as compared to $3.24 and $2.96 at June 30, 1997, respectively.
The Office of Thrift Supervision ("OTS") requires that the Bank meet minimum
tangible, core and risk-based capital requirements. At June 30, 1998, the Bank
exceeded all regulatory capital requirements, as follows:
11
<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 $18,016 1.50% $168,678 14.04% $150,662
Core Capital 36,032 3.00% 168,678 14.04% 132,646
Risk-based Capital 39,862 8.00% 174,911 35.10% 135,049
</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 six months of 1998
were principal repayment and prepayment of mortgage loans, totaling $106.1
million, and mortgage-backed securities, totaling $66.5 million. Other
significant sources of funds for the six months ended June 30, 1998, were sales
of MBS available for sale totaling $41.5 million, sales and calls of investment
securities totaling $26.3 million and borrowed funds totaling $20.6 million.
The primary investing activities of the Bank for the first six months of 1998
were the purchases of mortgage-backed securities available for sale totaling
$179.5 million, origination of loans totaling $163.7 million, and the purchases
of investment securities available for sale totaling $48.5 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 June 30, 1998, was 46.9%. The definition of assets
considered liquid was recently redefined by the OTS. As of June 30, 1998, assets
qualifying for liquidity purposes totaled $392.2 million.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997.
Results of Operations. Earnings for the six months ended June 30, 1998, totaled
$7.2 million, with basic and diluted earnings per share of $0.24 and $0.23,
respectively. This represents an increase of $2.2 million, or 45.7%, over the
net income of $5.0 million, or $0.16 basic and diluted earnings per share,
reported for the comparable 1997 period. Earnings for the six months ended June
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 $6.5 million, with basic and diluted earnings per share of $0.21.
Interest Income. Interest income increased by $3.0 million, or 8.4%, to $39.1
million for the six months ended June 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.
12
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) For the six months ended June 30,
---------------------------------
Average Interest Average
Income Statement Caption Balance Income Yield
------------------------ ------- ------ -----
<S> <C> <C> <C>
Loans - 1998 $609,745 $23,772 7.80 %
Loans - 1997 524,470 20,993 8.01
---------------- ---------------- ---------------
CHANGE 85,275 2,779 (0.21)
---------------- ---------------- ---------------
Mortgage-backed securities - 1998 135,536 4,530 6.68
Mortgage-backed securities - 1997 247,279 8,499 6.87
---------------- ---------------- ---------------
CHANGE (111,743) (3,969) (0.19)
---------------- ---------------- ---------------
Investment securities - 1998 66,714 2,035 6.10
Investment securities - 1997 57,784 1,991 6.89
---------------- ---------------- ---------------
CHANGE 8,930 44 (0.79)
---------------- ---------------- ---------------
Investment and mortgage-backed securities
and loans available for sale - 1998 281,434 8,735 6.21
Investment and mortgage-backed securities
and loans available for sale - 1997 147,736 4,571 6.19
---------------- ---------------- ---------------
CHANGE 133,698 4,164 0.02
---------------- ---------------- ---------------
Total interest income - 1998 1,093,429 39,072 7.15
Total interest income - 1997 977,269 36,054 7.38
---------------- ---------------- ---------------
CHANGE $116,160 $3,018 (0.23)
================ ================ ===============
</TABLE>
The following discussion concerns the comparison of the average balance and
yield for the six months ended June 30, 1998, to the six months ended June 30,
1997. The average loan balance increased due to loan originations of $163.7
million exceeding principal repayments and sales of $106.1 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 6.82%
while the weighted average rate on mortgage prepayments was 7.79%. 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 primarily due to the transfer of $181.8 million
from MBS to MBS available for sale on April 30, 1998. The decrease in yield on
the portfolio was also affected by prepayments on higher yielding securities,
combined with rates on purchases being lower than the rates on the prepayments.
Rates on investment securities were subject to similar circumstances as higher
yielding investments were called and rates on purchases 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 primarily due to the transfer of $181.8
million of MBS previously discussed. The yield on this portfolio increased
slightly due to the components of the portfolio. In 1998, the portfolio was
subject the same effects of external rates as the above categories. However, the
assets transferred into this category had a higher yield than the existing
securities in the available for sale 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 $437,000, or 2.2%, to $20.5 million
for the six months ended June 30, 1998, compared to $20.1 million for the same
period in 1997. 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 six months ended June 30,
Average Interest Average
Income Statement Caption Balance Expense Cost
------------------------ ------- ------- ----
<S> <C> <C> <C>
NOW and money market demand - 1998 $94,378 $617 1.31 %
NOW and money market demand - 1997 87,850 535 1.22
------------- ------------- ------------
CHANGE 6,528 82 0.09
------------- ------------- ------------
Savings accounts - 1998 237,640 3,929 3.31
Savings accounts - 1997 230,032 3,819 3.32
------------- ------------- ------------
CHANGE 7,608 110 (0.01)
------------- ------------- ------------
Certificates of deposit - 1998 450,829 12,177 5.40
Certificates of deposit - 1997 463,174 12,447 5.37
------------- ------------- ------------
CHANGE (12,345) (270) 0.03
------------- ------------- ------------
Non-interest bearing deposits - 1998 28,866
Non-interest bearing deposits - 1997 22,658
-------------
CHANGE 6,208
-------------
Total deposits - 1998 811,713 16,723 4.12
Total deposits - 1997 803,714 16,801 4.18
------------- ------------- ------------
CHANGE 7,999 (78) (0.06)
------------- ------------- ------------
Borrowed funds - 1998 129,191 3,804 5.89
Borrowed funds - 1997 109,235 3,289 6.02
------------- ------------- ------------
CHANGE 19,956 515 (0.13)
------------- ------------- ------------
Total interest expense - 1998 940,904 20,527 4.36
Total interest expense - 1997 912,949 20,090 4.40
------------- ------------- ------------
CHANGE $27,955 $437 (0.04)
============= ============= ============
</TABLE>
The following discussion concerns the comparison of the average balance and cost
of interest bearing liabilities for the six months ended June 30, 1998, to the
six months ended June 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. Both the average balance and
cost of NOW and money market demand accounts increased slightly. This was due to
growth in the money market demand accounts, which bear a higher cost than NOW
accounts. The average balance of savings accounts increased 3.3% with a
relatively static cost. The average balance of certificates of deposit decreased
2.7% with a slight 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. Management had concentrated on increasing non-interest bearing
deposits. The average balance in this category has increased 27.4% and was a
contributing factor in reducing the overall cost of deposits by six basis
points. Management will continue to focus on attracting low cost deposits.
Growth at the Bank's newer offices in Woodbridge and Highland Park should assist
in increasing deposit balances in the future. 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. The decrease in cost of borrowings is due to decreased external rates.
Net Interest Income Before Provision for Loan Losses. Net interest income before
provision for loan losses increased $2.6 million, or 16.2%, to $18.5 million for
the six months ended June 30, 1998, compared to $16.0 million for the same
period in 1997. The increase was due to the changes in interest
14
<PAGE>
income and interest expense described above. The net interest margin increased
to 3.39% for the six months ended June 30, 1998, from 3.27% 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 2.65% for the six months ended June 30, 1998, from
2.87% for the same period in 1997. This decrease was primarily attributable to
decreased external rates and a flattening yield curve.
Provision for Loan Losses. The provision for loan losses increased $140,000, or
23.3%, to $740,000 for the six months ended June 30, 1998, compared to $600,000
for the same period in 1997. The increase in the provision was due to the
increase in the size of the loan portfolio and its composition. Net loans
increased $98.3 million between June 30, 1998 and June 30, 1997, and the
balances of construction and commercial real estate loans have also increased.
In management's opinion, the allowance for loan losses, totaling $6.8 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, increased $161,000 during the six
month period ended June 30, 1998. At June 30, 1998, REO consisted of 16
residential properties totaling $1.5 million. Five of these properties, with a
carrying value of $640,000, were under contract for sale at June 30, 1998.
During the six month period ended June 30, 1998, ten properties were acquired
while seven were disposed. Management continues to pursue the sale of REO
properties in an expedient manner.
<TABLE>
<CAPTION>
(dollars in thousands) June 30, Mar. 31, Dec. 31, Sept. 30, June 30,
1998 1998 1997 1997 1997
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans ............................. $2,259 $2,911 $3,706 $3,547 $4,839
Non-accrual other loans................................. 118 38 29 14 82
----------------------------------------------------
Total non-accrual loans.............................. 2,377 2,949 3,735 3,561 4,921
Loans 90 days or more delinquent and still
accruing................................................ 134 407 597 379 335
----------------------------------------------------
Total non-performing loans ............................. 2,511 3,356 4,332 3,940 5,256
Total foreclosed real estate, net of related allowance.. 1,542 2,005 1,380 1,398 1,541
----------------------------------------------------
Total non-performing assets ............................ $4,053 $5,361 $5,712 $5,338 $6,797
====================================================
Non-performing loans to loans receivable, net .......... 0.39% 0.55% 0.74% 0.69% 0.95%
Non-performing assets to total assets .................. 0.33% 0.46% 0.54% 0.51% 0.66%
Other Operating Income. The changes to other operating income are detailed below.
<CAPTION>
(dollars in thousands) Six Months Ended June 30, Increase
1998 1997 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Other operating income:
Fees and service charges $970 $804 $166 20.65%
Net gain on sales of loans and securities 149 48 101 210.42%
Net gain on sale of deposits 1,084 - 1,084 n/a
Other, net 264 199 65 32.66%
-------------- -------------- ------------ ------------
Total other operating income $2,467 $1,051 $1,416 134.73%
============== ============== ============ ============
</TABLE>
15
<PAGE>
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
increase in net gain on sales was due to activity that occurred in the first
quarter of 1998 when MBS were sold which, management believed, contained
exceptionally high prepayment risk. 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) Six Months Ended June 30, Increase
-------------------------
1998 1997 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Operating expenses:
Compensation and benefits $4,922 $4,707 $215 4.57%
Occupancy 835 950 (115) (12.11)%
Equipment 648 660 (12) (1.82)%
Advertising 304 308 (4) (1.30)%
Federal deposit insurance 249 157 92 58.60%
Amortization of intangibles 425 424 1 0.24%
General and administrative 1,428 1,335 93 6.97%
-------------- -------------- ------------ ------------
Total operating expenses $8,811 $8,541 $270 3.16%
============== ============== ============ ============
</TABLE>
The increase in compensation and benefits was primarily due to the increased
expense associated with the cost of the ESOP. This was due to the increased
shares of stock necessary to be amortized in connection with the increased ESOP
plan and the accounting treatment required for such shares. During 1998, the
Bank was affected by the provisions of Statement of Position 93-6, which
requires that compensation expense be recognized for the market value of shares
to be distributed and/or released to an ESOP. 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 also
included costs of the move to the new corporate center. Federal deposit
insurance premiums were reduced for the three months ended March 31, 1997, due
to a one-time credit in 1997. The Bank's effective assessment rate for the
quarter ended March 31, 1997, was 1.62 basis points, while the rate in effect
for 1998 has been 6.48 basis points.
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
1997.
The comparison of operating results for the three months ended June 30, 1998 and
1997 should be read in conjunction with the comparison of operating results for
the six months ended June 30, 1998 and 1997. Many of the discussion items
applicable to changes for the three months period were previously described in
the discussion for the six month period. Such items will be referenced to the
six month comparison and will not be detailed in this section.
Results of Operations. Earnings for the three months ended June 30, 1998,
totaled $3.9 million, with basic and diluted earnings per share of $0.13. This
represented an increase of $1.4 million, or 58.1%, over the net income of $2.5
million, or $0.08 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.
Interest Income. Interest income increased by $2.2 million, or 12.0%, to $20.5
million for the three months ended June 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.
16
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) For the three months ended June 30,
-----------------------------------
Average Interest Average
Income Statement Caption Balance Income Yield
------------------------ ------- ------ -----
<S> <C> <C> <C>
Loans - 1998 $624,057 $12,135 7.78 %
Loans - 1997 533,841 10,712 8.03
---------------- ---------------- ---------------
CHANGE 90,216 1,423 (0.25)
---------------- ---------------- ---------------
Mortgage-backed securities - 1998 66,977 1,089 6.50
Mortgage-backed securities - 1997 247,625 4,318 6.98
---------------- ---------------- ---------------
CHANGE (180,648) (3,229) (0.48)
---------------- ---------------- ---------------
Investment securities - 1998 87,309 1,290 5.91
Investment securities - 1997 58,006 1,003 6.92
---------------- ---------------- ---------------
CHANGE 29,303 287 (1.01)
---------------- ---------------- ---------------
Investment and mortgage-backed securities
and loans available for sale - 1998 382,482 5,941 6.21
Investment and mortgage-backed securities
and loans available for sale - 1997 146,774 2,230 6.08
---------------- ---------------- ---------------
CHANGE 235,708 3,711 0.13
---------------- ---------------- ---------------
Total interest income - 1998 1,160,825 20,455 7.05
Total interest income - 1997 986,246 18,263 7.41
---------------- ---------------- ---------------
CHANGE $174,579 $2,192 (0.36)
================ ================ ===============
</TABLE>
The following discussion concerns the comparison of the average balance and
yield for the three months ended June 30, 1998, to the three months ended June
30, 1997. All factors described in the comparable comparison for the six month
period are also applicable to this quarterly comparison, except as follows. The
average loan balance increased due to loan originations of $99.8 million
exceeding principal repayments and sales of $64.6 million. The decreased yield
on the MBS portfolio was more pronounced in the three month period due to
prepayments of higher yielding securities and transfer of securities to
investments available for sale. The decreased yield on the investment security
portfolio was more pronounced in the three month period due to the higher
proportion of fed funds as a component of the average balance. The fed fund
investment increased in conjunction with receipt of the proceeds from the stock
offering. The increased yield on the investments available for sale was due to
the greater proportion, in the period, of higher yielding securities that were
transferred from the MBS portfolio into available for sale.
Interest Expense. Interest expense decreased $167,000, or 1.6%, to $10.1 million
for the three months ended June 30, 1998, compared to $10.3 million for the same
period in 1997. The changes by category are primarily due to changes in the
average balance and yield within each category. This information is presented
below.
17
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands) For the three months ended June 30,
-----------------------------------
Average Interest Average
Income Statement Caption Balance Expense Cost
------------------------ ------- ------- ----
<S> <C> <C> <C>
NOW and money market demand - 1998 $96,394 $334 1.39 %
NOW and money market demand - 1997 86,813 326 1.50
------------- ------------- ------------
CHANGE 9,581 8 (0.11)
------------- ------------- ------------
Savings accounts - 1998 238,887 1,973 3.30
Savings accounts - 1997 232,425 1,883 3.24
------------- ------------- ------------
CHANGE 6,462 90 0.06
------------- ------------- ------------
Certificates of deposit - 1998 441,310 5,951 5.39
Certificates of deposit - 1997 463,522 6,298 5.43
------------- ------------- ------------
CHANGE (22,212) (347) (0.04)
------------- ------------- ------------
Non-interest bearing deposits - 1998 30,085
Non-interest bearing deposits - 1997 24,679
-------------
CHANGE 5,406
-------------
Total deposits - 1998 806,676 8,258 4.09
Total deposits - 1997 807,439 8,507 4.21
------------- ------------- ------------
CHANGE (763) (249) (0.12)
------------- ------------- ------------
Borrowed funds - 1998 125,070 1,837 5.88
Borrowed funds - 1997 115,307 1,755 6.09
------------- ------------- ------------
CHANGE 9,763 82 (0.21)
------------- ------------- ------------
Total interest expense - 1998 931,746 10,095 4.33
Total interest expense - 1997 922,746 10,262 4.45
------------- ------------- ------------
CHANGE 9,000 (167) (0.12)
============= ============= ============
</TABLE>
The following discussion concerns the comparison of the average balance and cost
of interest bearing liabilities for the three months ended June 30, 1998, to the
three months ended June 30, 1997. All factors described in the comparable
comparison for the six month period are also applicable to this quarterly
comparison, except as follows. The average balance of total deposits was reduced
in 1998 due to the withdrawal of funds by customers to purchase stock in the
Subscription and Community Offering in April, 1998. The average balance of
certificates of deposit decreased 4.8% accompanied by a slight decrease in cost.
The Company's decision to offer certificate rates that were competitive but
lower than certain area competition had a greater effect in the quarterly
period.
Net Interest Income Before Provision for Loan Losses. Net interest income before
provision for loan losses increased $2.4 million, or 29.5%, to $10.4 million for
the three months ended June 30, 1998, compared to $8.0 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 3.57% for
the three months ended June 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 2.57% for the three months ended June 30, 1998, from 2.84%
for the same period in 1997. This decrease was primarily attributable to the
decreased external rates and a flattening yield curve.
Provision for Loan Losses. The provision for loan losses increased $65,000, or
21.7%, to $365,000 for the three months ended June 30, 1998, compared to
$300,000 for the same period in 1997. See additional discussion in the
comparison of the six month periods. Total foreclosed REO decreased $463,000
during
18
<PAGE>
the three month period ended June 30, 1998. Four properties were acquired and
three properties were disposed during the quarter ended June 30, 1998.
Other Operating Income. The changes to other operating income are detailed
below.
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended June 30, Increase
--------------------------
1998 1997 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Other operating income:
Fees and service charges $485 $399 $86 21.55%
Net gain on sales of loans and
securities 42 43 (1) (2.33)%
Net gain on sale of deposits - - - n/a
Other, net 154 84 70 83.33%
-------------- -------------- ------------ ----------
Total other operating income $681 $526 $155 29.47%
============== ============== ============ ==========
</TABLE>
The increase in fees and service charges was attributable to the increased loan
volume and also due to an increased number of checking accounts. The increase in
Other, net was primarily due to increased profit on the sale of REO properties
and increased income from the rental of REO properties.
Operating Expenses. The changes to other operating expenses are detailed below.
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended June 30, Increase
---------------------------
1998 1997 (Decrease) Change
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Operating expenses:
Compensation and benefits $2,501 $2,422 $79 3.26%
Occupancy 417 423 (6) (1.42)%
Equipment 328 395 (67) (16.96)%
Advertising 185 163 22 13.50%
Federal deposit insurance 127 129 (2) (1.55)%
Amortization of intangibles 212 212 0 0.00%
General and administrative 748 673 75 11.14%
----------------- -------------- ------------- ------------
Total operating expenses $4,518 $4,417 $101 2.29%
================= ============== ============= ============
</TABLE>
The decrease in equipment expense was due to the write-off of certain equipment
considered to be obsolete in the 1997 period. See discussion of other changes in
the six 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 (June
30, 1998).
19
<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.
<TABLE>
<CAPTION>
Item Description Response
---- ----------- --------
<S> <C> <C>
Effective date of Registration Statement February 12, 1998
1 File number of Registration Statement 333-42757
2 Offering date February 11, 1998
3 Termination date April 8, 1998
4 Managing underwriter Sandler O'Neil & Partners, L.P.
5 Title of stock common stock, $0.01 par
6 Number of shares registered 31,740,000
aggregate offering price $317,400,000.00
number of shares sold (a) 16,550,374
aggregate offering proceeds $165,503,740
7 Expenses of offering (b),(c)
underwriter commissions $1,859,158
underwriter expenses (d) $0
finders fee $0
other $1,407,996
total $3,267,154
8 Net offering proceeds $162,236,586
9 Itemized use of proceeds (c)
temporary investments Approximately $14,000,000
purchase of ESOP stock Approximately $13,240,000
purchase of MBS available for sale Approximately $71,000.000
origination of loans Approximately $63,760,000
10 Usages of proceeds differing from prospectus not applicable
</TABLE>
(a) The offering proceeds reflect a sales price of $10 per share for
an aggregate of 16,550,374 shares sold. An additional 15,189,626
shares were issued in exchange for shares of First Savings Bank,
SLA common stock outstanding, at an exchange ratio of 3.9133 to
1.
(b) All expense amounts are actual.
(c) None of the payments, directly or indirectly, were made to
officers, directors or beneficial owners of 10% or more of the
Company.
(d) Underwriter's expenses were absorbed by the underwriters.
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.
None
Item 6. Exhibits and Reports on Form 8-K.
a.) Exhibits
Exhibit
Number Description Reference
------- ----------- ---------
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
* 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 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 on July 17, 1998 regarding
Item 5, Other Events.
20
<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: August 13, 1998 By: \s\ John P. Mulkerin
--------------------
John P. Mulkerin
President and Chief Executive Officer
Date: August 13, 1998 By: \s\ Christopher Martin
----------------------
Christopher Martin
Executive Vice President and Chief
Operating and Financial Officer and
Corporate Secretary
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 11,680 11,680
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 14,000 14,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 489,838 489,838
<INVESTMENTS-CARRYING> 24,346 24,346
<INVESTMENTS-MARKET> 24,411 24,411
<LOANS> 644,385 644,385
<ALLOWANCE> 6,758 6,758
<TOTAL-ASSETS> 1,221,038 1,221,038
<DEPOSITS> 807,591 807,591
<SHORT-TERM> 11,544 11,544
<LIABILITIES-OTHER> 14,583 14,583
<LONG-TERM> 128,000 128,000
0 0
0 0
<COMMON> 317 317
<OTHER-SE> 259,003 259,003
<TOTAL-LIABILITIES-AND-EQUITY> 1,221,038 1,221,038
<INTEREST-LOAN> 12,135 23,772
<INTEREST-INVEST> 8,320 15,300
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 20,455 39,072
<INTEREST-DEPOSIT> 8,258 16,723
<INTEREST-EXPENSE> 10,095 20,527
<INTEREST-INCOME-NET> 10,360 18,545
<LOAN-LOSSES> 365 740
<SECURITIES-GAINS> 42 149
<EXPENSE-OTHER> 4,518 8,811
<INCOME-PRETAX> 6,158 11,461
<INCOME-PRE-EXTRAORDINARY> 6,158 11,461
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,879 7,218
<EPS-PRIMARY> 0.13 0.24
<EPS-DILUTED> 0.13 0.23
<YIELD-ACTUAL> 3.57 3.39
<LOANS-NON> 2,377 2,377
<LOANS-PAST> 134 134
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6,406 6,097
<CHARGE-OFFS> 16 82
<RECOVERIES> 3 3
<ALLOWANCE-CLOSE> 6,758 6,758
<ALLOWANCE-DOMESTIC> 100 100
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
