<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 18, 1998
FIRST SENTINEL BANCORP, INC.
-------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 000-23809 22-3566151
-------- --------- ----------
(STATE OR OTHER JURISDICTION (COMMISSION FILE NO.) (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
</TABLE>
1000 WOODBRIDGE CENTER DRIVE
Woodbridge, New Jersey
----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
07095
-----
(ZIP CODE)
(732) 726-9700
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On December 18, 1998, First Sentinel Bancorp, Inc. (the "Registrant " or
"First Sentinel") completed its merger with Pulse Bancorp, Inc. ("Pulse")
pursuant to an Agreement and Plan of Merger (the "Agreement ") dated as of July
9, 1998. As a result of the merger, Pulse has been merged into Registrant and
Pulse Savings Bank, the wholly owned subsidiary of Pulse, has been merged into
First Savings Bank, SLA, the wholly owned subsidiary of First Sentinel. The
transaction is being accounted for using the pooling-of-interests method of
accounting. This Form 8-K/A is filed to furnish financial statements of Pulse
Bancorp, Inc. and pro forma financial information.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Pulse Bancorp, Inc. and Subsidiaries Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Statements of Financial Condition as of September 30,
1997 and 1998
Consolidated Statements of Income for the Years Ended September 30,
1996, 1997 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the Years Ended September
30, 1996, 1997 and 1998
Notes to Consolidated Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION.
The Registrant's audited financial statements as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996 reflect the
consummation of the merger of Pulse Bancorp, Inc. with and into the
Registrant. Pursuant to Section 210.11-02(c) of Regulation S-X, the
following audited financial statements of First Sentinel Bancorp, Inc. are
filed herewith:
2
<PAGE>
Consolidated Statements of Financial Condition as of December 31, 1998 and
1997
Consolidated Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(c) EXHIBITS.
The following Exhibits are filed as part of this report:
Exhibit 23.1 Consent of KPMG LLP for Pulse Bancorp, Inc.
Exhibit 23.2 Consent of KPMG LLP for First Sentinel Bancorp, Inc.
Exhibit 27 Financial Data Schedule
3
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1998
<PAGE>
[KPMG LLP Letterhead]
Independent Auditors' Report
The Board of Directors and Stockholders
Pulse Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Pulse Bancorp, Inc. and Subsidiaries as of September 30, 1997 and 1998, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended September
30, 1998. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pulse Bancorp, Inc.
and Subsidiaries as of September 30, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Short Hills, New Jersey
October 27, 1998
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from depository institutions.................................. $ 3,550,908 $ 4,490,568
Federal funds sold......................................................... 11,925,000 12,450,000
------------ ------------
Total cash and cash equivalents........................................ 15,475,908 16,940,568
Investment securities available for sale................................... 60,741,955 115,870,790
Mortgage-backed securities available for sale.............................. 53,393,335 36,735,343
Investment securities held to maturity; estimated fair value of
$96,386,850 in 1997 and $85,876,034 in 1998.............................. 96,551,885 85,185,743
Mortgage-backed securities held to maturity; estimated fair value of
$163,645,986 in 1997 and $114,824,209 in 1998............................ 162,763,525 113,711,194
Loans receivable, net...................................................... 127,310,525 153,948,035
Real estate owned.......................................................... 136,491 732,154
Premises and equipment, net................................................ 1,322,718 2,531,403
Federal Home Loan Bank of New York stock, at cost.......................... 2,775,500 2,836,700
Interest receivable........................................................ 4,584,337 4,868,951
Other assets............................................................... 959,530 1,128,395
------------ ------------
Total assets........................................................... $526,015,709 $534,489,276
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Deposits................................................................... $411,020,719 $436,236,599
Borrowings................................................................. 67,675,000 46,675,000
Advance payments by borrowers for taxes and insurance...................... 805,394 835,937
Other liabilities.......................................................... 3,308,037 2,839,751
------------ ------------
Total liabilities...................................................... 482,809,150 486,587,287
------------ ------------
Commitments and contingencies (Note 13).................................... - -
------------ ------------
Stockholders' equity
Common stock; par value $1.00; authorized 10,000,000 shares; 4,142,628
in 1997 and 4,251,880 in 1998 shares issued and 3,080,548 in 1997 and
3,189,800 in 1998 shares outstanding..................................... 4,142,628 4,251,880
Paid-in capital in excess of par value..................................... 12,293,206 13,475,115
Retained earnings - substantially restricted............................... 42,676,884 45,835,998
Treasury stock at cost; 1,062,080 common shares............................ (16,677,500) (16,677,500)
Unrealized gain on securities available for sale, net of tax............... 771,341 1,016,496
------------ ------------
Total stockholders' equity............................................. 43,206,559 47,901,989
------------ ------------
Total liabilities and stockholders' equity............................. $526,015,709 $534,489,276
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
Year Ended September 30,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans................................................ $11,861,002 $11,012,919 $11,723,492
Securities available for sale........................ 3,277,058 5,757,544 10,364,846
Securities held to maturity.......................... 16,734,714 18,514,811 14,431,754
Other interest-earning assets........................ 860,031 733,708 867,315
----------- ----------- -----------
Total interest income.............................. 32,732,805 36,018,982 37,387,407
----------- ----------- -----------
Interest expense:
Deposits............................................. 17,806,866 18,658,276 19,590,352
Borrowings........................................... 1,325,972 3,717,034 3,732,167
----------- ----------- -----------
Total interest expense............................. 19,132,838 22,375,310 23,322,519
----------- ----------- -----------
Net interest income.................................... 13,599,967 13,643,672 14,064,888
Provision for loan losses.............................. - - -
----------- ----------- -----------
Net interest income after provision for loan losses.... 13,599,967 13,643,672 14,064,888
----------- ----------- -----------
Non-interest income:
Fees and service charges............................. 257,523 301,557 314,247
Miscellaneous........................................ 68,199 208,967 96,606
----------- ----------- -----------
Total non-interest income.......................... 325,722 510,524 410,853
----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits....................... 2,465,912 2,698,133 2,994,913
Occupancy expense.................................... 285,267 271,765 419,381
Equipment............................................ 538,308 553,480 628,908
Advertising.......................................... 283,769 381,441 348,115
Federal insurance premium............................ 3,600,986 341,712 257,367
Loss (income) from foreclosed real estate, net....... 300,379 (72,208) 37,621
Miscellaneous........................................ 998,993 1,100,459 1,011,221
----------- ----------- -----------
Total non-interest expense......................... 8,473,614 5,274,782 5,697,526
----------- ----------- -----------
Income before income taxes............................. 5,452,075 8,879,414 8,778,215
Income taxes........................................... 1,959,466 3,204,255 3,117,242
----------- ----------- -----------
Net income............................................. $ 3,492,609 $ 5,675,159 $ 5,660,973
=========== =========== ===========
Basic earnings per common share........................ $ 0.96 $ 1.85 $ 1.82
=========== =========== ===========
Diluted earnings per common share...................... $ 0.94 $ 1.80 $ 1.75
=========== =========== ===========
Dividends per common share............................. $ 0.70 $ 0.70 $ 0.80
=========== =========== ===========
Basic weighted average shares outstanding.............. 3,645,505 3,063,096 3,107,085
=========== =========== ===========
Diluted weighted average shares outstanding............ 3,728,116 3,156,741 3,223,927
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
PULSE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Paid-in Retained Net Unrealized (Loss)
Capital in Earnings Gain on Securities
Common Excess of Substantially Treasury Available For Sale,
Stock Par Value Restricted Stock Net of Tax Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance-September 30, 1995 $4,077,828 $11,819,769 38,078,494 (1,702,500) - 52,273,591
Net income for the year ended
September 30, 1996..................... - - 3,492,609 - - 3,492,609
Issuance of common stock................ 34,130 285,772 - - - 319,902
Purchase of treasury stock.............. - - - (14,975,000) - (14,975,000)
Cash dividends, $0.70 per
share.................................. - - (2,423,494) (2,423,494)
Change in unrealized loss on
securities available for sale,
net of tax............................. - - - - (229,074) (229,074)
----------------------------------------------------------------------------------------
Balance-September 30, 1996 4,111,958 12,105,541 39,147,609 (16,677,500) (229,074) 38,458,534
Net income for the year ended
September 30, 1997..................... - - 5,675,159 - - 5,675,159
Issuance of common stock................ 30,670 187,665 - - - 218,335
Cash dividends, $0.70 per share......... - - (2,145,884) - - (2,145,884)
Change in unrealized loss on
securities available for sale,
net of tax............................. - - - - 1,000,415 1,000,415
---------------------------------------------------------------------------------------
Balance-September 30, 1997.............. 4,142,628 12,293,206 42,676,884 (16,677,500) 771,341 43,206,559
Net income for the year ended
September 30, 1998..................... - - 5,660,973 - - 5,660,973
Issuance of common stock................ 109,252 1,181,909 - - - 1,291,161
Cash dividends, $0.80 per share......... - - (2,501,859) - - (2,501,859)
Change in unrealized gain on
securities available for sale,
net of tax............................. - - - - 245,155 245,155
Balance September 1998.................. $4,251,880 $13,475,115 $45,835,998 $(16,677,500) $1,016,496 $47,901,989
========== =========== =========== ============ ========== ===========
</TABLE>
See accompanying notes to
consolidated financial statements.
3
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------
1996 1997 1998
---------- --------- ---------
<S> <C> <C> <C>
Cash flows form operating activities
Net income........................................................................... $3,492,609 $5,675,159 $5,660,973
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation....................................................................... 142,007 147,749 185,405
Amortization of premiums, discounts and fees, net.................................. (189,083) (101,573) (242,557)
Provision for losses on real estate owned.......................................... 341,500 32,850 --
(Gain) loss on sale of real estate owned........................................... (62,462) (72,208) 19,952
Increase in interest receivable.................................................... (456,275) (56,983) (284,614)
Deferred income tax (benefit) expense.............................................. (805,042) 1,072,313 171,895
Decrease (increase) in other assets................................................ 37,092 1,680,904 (340,760)
Increase (decrease) in other liabilities........................................... 2,547,953 (1,806,617) (223,131)
------------- ------------ -----------
Net cash provided by operating activities........................................ 5,048,299 6,571,594 4,947,163
------------- ------------ -----------
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities held to maturity....... 55,000,000 19,002,500 75,010,000
Purchase of investment securities held to maturity................................. (75,932,187) (10,000,000) (63,620,859)
Proceeds from calls and maturities of investment securities available for sale..... 4,197,200 -- 59,389,705
Purchase of investment securities available for sale............................... (10,000,000) (20,787,500) (114,361,875)
Purchase of mortgage-backed securities held to maturity............................ (40,624,537) (23,838,620) (1,007,187)
Purchase of mortgage-backed securities available for sale.......................... (15,081,456) (19,960,841) --
Principle repayments on mortgage-backed securities held to maturity................ 18,198,392 25,140,550 50,036,969
Principle repayments on mortgage-backed securities available for sale.............. 4,318,741 7,503,277 16,665,463
Proceeds from sale of student loans................................................ 4,454 -- --
Net (increase) decrease in loans receivable........................................ (790,568) 6,984,919 (28,510,202)
Proceeds from sales of and repayments on real estate owned......................... 913,852 2,488,168 1,335,048
Additions to premises and equipment................................................ (169,980) (235,332) (1,394,090)
Net increase in Federal Home Loan Bank of New York stock........................... (2,900) (232,400) (61,200)
------------- ------------ -----------
Net cash used in investing activities............................................ (59,968,989) (13,935,279) (6,518,228)
------------- ------------ -----------
Cash flows from financing activities:
Net increase in deposits........................................................... 3,542,768 16,440,108 25,215,880
Net increase (decrease) in borrowings.............................................. 64,275,000 3,400,000 (21,000,000)
Increase in advance payments by borrowers for taxes and insurance.................. 169,887 177,151 30,543
Issuance of common stock........................................................... 319,902 218,335 1,291,161
Purchase of treasury stock......................................................... (14,975,000) -- --
Cash dividends paid................................................................ (2,424,494) (2,145,884) (2,501,859)
------------- ------------ -----------
Net cash provided by financing activities........................................ 50,909,063 18,089,710 3,035,725
------------- ------------ -----------
Net (decrease) increase in cash and cash equivalents............................... (4,011,627) 10,726,025 1,464,660
Cash and cash equivalents - beginning.............................................. 8,761,510 4,749,883 15,475,908
------------- ------------ -----------
Cash and cash equivalents - ending................................................. $ 4,749,883 $ 15,475,908 $ 16,940,568
============= ============ ============
Supplemental schedule of noncash investing activities:
Transfer of loans receivable to real estate owned.................................. $ 797,650 $ 286,491 $ 1,950,663
============= ============ ============
Transfer of mortgage-backed securities and investments held to maturity to
available for sale................................................................ $ 58,764,618 $ -- $ --
============= ============ ============
Cash paid during the period for:
Income taxes....................................................................... $ 2,495,000 $ 1,881,014 $ 3,089,140
============= ============ ============
Interest........................................................................... $ 18,835,293 $ 22,295,412 $ 23,477,807
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Pulse
Bancorp, Inc. (the "Corporation"), a savings bank holding company, and
its wholly owned subsidiaries, Pulse Savings Bank (the "Bank"), Pulse
Insurance Services, Inc., Pulse Real Estate, Inc., and Pulse
Investment, Inc. The Corporation's business is conducted principally
through the Bank. The other three subsidiaries were formed during the
1996 period to afford possible economic opportunities in future
periods. All three, however, are currently inactive. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The consolidated financial statements of the
Corporation have been prepared in conformity with generally accepted
accounting principles. In preparing the consolidated financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the consolidated statements of financial condition and income
for the period then ended. Actual results could differ significantly
from those estimates. Material estimates that are particularly
susceptible to significant changes relate to the determination of the
allowance for loan losses and the valuation of real estate owned.
Management believes that the allowance for loan losses is adequate and
real estate owned is appropriately valued. While management uses
available information to recognize losses on loans and real estate
owned, future additions to the allowance for loan losses or further
writedowns of real estate owned may be necessary based on changes in
economic conditions in the market area. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and real
estate owned valuations. Such agencies may require the Bank to
recognize additions to the allowance or additional writedowns based on
their judgments about information available to them at the time of
their examination.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits in other banks having original
5
<PAGE>
maturities of three months or less and federal funds sold. Generally,
federal funds sold are sold for one-day periods.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Corporation classifies its securities among three categories:
held-to-maturity, trading, and available for sale. Management
determines the appropriate classification of the securities at the
time of purchase. As of September 30, 1998, the Bank has classified
its investments and mortgage-backed securities between held to
maturity and available for sale.
Investment and mortgage-backed securities are classified as securities
held to maturity based on management's intent and the Corporation's
ability to hold them to maturity. Such securities are stated at cost,
adjusted for unamortized purchase premiums and discounts. Purchase
premiums and discounts are amortized over the life of the related
security using the level yield method.
Investment and mortgage-backed securities not classified as securities
held to maturity or trading account securities are classified as
securities available for sale, and are stated at fair value.
Unrealized gains and losses are excluded from earnings, and are
reported as a separate component of stockholders' equity, net of
taxes. Upon realization, such gains and losses will be included in
earnings using the specific identification method. Such securities
include those that may be sold in response to changes in interest
rates, changes in prepayment risk or other factors.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees and
discounts. The Bank defers loan origination fees and certain direct
loan origination costs and amortizes such amounts as an adjustment of
yield over the estimated lives of the related loans.
An allowance for loan losses is maintained at a level considered
adequate to provide for potential loan losses. Management of the Bank,
in determining the allowance for loan losses, considers the risks
inherent in its loan portfolio and changes in the nature and volume of
its loan activities, along with the general economic and real estate
market conditions. The Bank utilizes a two tier approach: (1)
identification of problem loans and the establishment of loss
allowances on such loans; and (2) establishment of valuation
allowances on the remainder of its loan portfolio. The Bank maintains
a loan review system which allows for a
6
<PAGE>
periodic review of its loan portfolio and the early identification of
potential problem loans. Such system takes into consideration, among
other things, delinquency status, size of loans, types of collateral
and financial condition of the borrowers.
Loan loss allowances are established for identified loans based on a
review of such information and/or appraisals of the underlying
collateral. On the remainder of the loan portfolio, loan loss
allowances are established based upon a combination of factors
including, but not limited to, actual loan loss experience,
composition of the loan portfolio, current economic conditions and
management's judgment. Although management believes that adequate
allowances for loan losses are established, actual losses are
dependent upon future events and, as such, further additions to the
level of the loan loss allowance may be necessary.
Non-accrual loans include loans for which reasonable doubt exists as
to timely collectibility. At the time a loan is placed on non-accrual
status, previously accrued and uncollected interest is reversed
against interest income in the current period. Interest collections on
non-accrual loans are generally credited to interest income when
received. After principal and interest payments have been brought
current and future collectibility is reasonably assured, loans are
returned to accrual status.
Restructured loans are loans whose contractual interest rates have
been reduced to below market rates or where other significant
concessions have been made due to a borrower's financial difficulties.
Interest income on restructured loans is generally accrued.
The Bank defines an impaired loan as a loan for which it is probable
based upon current information that the Bank will not collect amounts
due under the contractual terms of the loan agreement. The Bank has
defined the population of impaired loans to be all commercial and
construction real estate loans as well as residential real estate
loans greater than $500,000. Impaired loans are individually assessed
to determine that each loan's carrying value is not in excess of the
fair value of the related collateral or the present value of the
expected future cash flows. Income recognition policies for impaired
loans are the same as non-accrual loans.
REAL ESTATE OWNED
Real estate owned consists of real estate acquired by foreclosure or
deed in lieu of foreclosure and is initially recorded at the lower of
cost or fair value at the date of acquisition. Fair value is defined
as the amount reasonably expected to be received in a current sale
between a willing
7
<PAGE>
seller (the Bank) and a willing buyer. Real estate owned is
subsequently carried at the lower of cost or fair value (estimated
using current appraisals) less estimated selling costs. Costs incurred
in developing or preparing properties for sale are capitalized. Income
and expenses of operating and holding properties are recorded in
operations as incurred. Gains and losses from sales of such properties
are recognized as incurred.
CONCENTRATION OF RISK
The Bank's real estate and lending activities are concentrated in real
estate and loans secured by real estate located primarily in the State
of New Jersey.
PREMISES AND EQUIPMENT
Land is stated at cost. Buildings, building improvements, furnishings
and equipment are stated at cost, less accumulated depreciation
computed on the straight-line method over the estimated lives of each
type of asset. Significant renewals and betterments are capitalized to
the property and equipment account. Maintenance and repairs are
charged to operations in the year incurred.
FEDERAL HOME LOAN BANK OF NEW YORK STOCK
The Bank, as a member of the Federal Home Loan Bank of New York
(FHLB), is required to hold shares of capital stock in the FHLB in an
amount equal to 1% of the Bank's outstanding balance of residential
mortgage loans or 5% of its outstanding advances from the FHLB,
whichever is greater.
STOCK-BASED COMPENSATION
The Corporation applies the "intrinsic value based method" as
described in Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation.
Accordingly, no compensation cost has been recognized for the stock
option plans. Pro forma disclosures, as if the Corporation applied the
"Fair Value Based Method" for stock issued to employees, have been
provided in Note 10 to the consolidated financial statements.
INTEREST-RATE RISK
The Bank is principally engaged in the business of attracting deposits
from the general public and using these deposits, together with
borrowings and other funds, to reinvest in investment and mortgage-
backed securities and to make loans secured by real estate and, to a
lesser extent, consumer loans. The potential for interest-rate risk
exists as a result of the shorter
8
<PAGE>
duration of the Bank's interest-sensitive liabilities compared to the
generally longer duration of interest-sensitive assets. In a rising
rate environment, liabilities will reprice faster than assets, thereby
reducing the market value of long-term assets and net interest income.
For this reason, management regularly monitors the maturity structure
of the Bank's assets and liabilities in order to measure its level of
interest rate risk and plan for future volatility.
INCOME TAXES
Federal and state income taxes are provided for utilizing the asset
and liability method. Under the asset and liability method,
temporarydifferences between the basis of assets and liabilities for
financial reporting and tax purposes are measured as of the statement
of financial condition date. Deferred tax liabilities or recognizable
deferred tax assets are calculated on such differences, using current
statutory rates which result in future taxable or deductible amounts.
The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Corporation and the subsidiaries file a consolidated federal
income tax return. Income taxes are allocated to the Corporation and
the sudsidiaries based on the contribution of their income to the
consolidated return. Separate state income tax returns are filed by
the Corporation and the subsidiaries.
EARNINGS PER COMMON SHARE
Effective October 1, 1997, the Corporation adopted Statement of
Financial Accounting Standard (SFAS) No. 128, "Earning Per Share". All
prior period share amounts have been restated to comply with the
provisions of SFAS 128.
Basic earnings per share is computed based upon income available to
common shareholders divided by the weighted average number of common
shares outstanding for the period. Diluted earnings per share is
calculated based on net income available to common shareholders
divided by the average weighted shares outstanding including potential
common stock utilizing the treasury stock method.
The following reconciles the weighted average number of common shares
outstanding used to calculate basic and diluted net income per share.
9
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Weighted Average Shares Outstanding ............... 3,645,505 3,063,096 3,107,085
Effect of Dilutive Securities:
Stock Options............................................ 83,066 93,645 116,842
Diluted Weighted Average Shares Outstanding.............. 3,728,116 3,156,741 3,223,927
----------------------------------------------------------------------------------------------
</TABLE>
RECLASSIFICATION
Certain amounts for the prior years have been reclassified to conform
with the current year's presentation.
10
<PAGE>
2. INVESTMENT SECURITIES
A summary of investment securities held to maturity and available for sale
is as follows:
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Government (including agencies):
After one year but within five years......... $ 22,991,739 $ 6,875 $ 27,239 $ 22,971,375
After five years but within ten years........ 64,962,649 281,619 454,993 64,789,275
After ten years.............................. 8,000,000 25,000 21,300 8,003,700
------------ ------------ ------------ ------------
95,954,388 313,494 503,532 95,764,350
------------ ------------ ------------ ------------
Obligations of states and political
subdivisions:
After ten years.............................. 597,497 25,003 -- 622,500
------------ ------------ ------------ ------------
$ 96,551,885 $ 338,497 $ 503,532 $ 96,386,850
============ ============ ============ ============
Investment Securities Available For Sale
U.S. Government (including agencies):
Within one year.............................. $ 8,000,000 $ -- $ 15,600 $ 7,984,400
After one year but within five years......... 10,000,000 -- 90,100 9,909,900
After five years but within ten years........ 41,822,275 333,264 131,384 42,024,155
------------ ------------ ------------ ------------
59,822,275 333,264 237,084 59,918,455
------------ ------------ ------------ ------------
Equity Securities.............................. 800,000 23,500 -- 823,500
------------ ------------ ------------ ------------
$ 60,622,275 $ 356,764 $ 237,084 $ 60,741,955
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES HELD TO MATURITY
U.S. Government (including agencies):
After one year but within five years......... $ 2,000,000 $ 2,500 $ -- $ 2,002,500
After five years but within ten years........ 82,598,216 652,096 -- 83,250,312
------------ ------------ ------------ ------------
84,598,216 654,596 -- 85,252,812
------------ ------------ ------------ ------------
Obligations of states and political
subdivisions:
After five years but within ten years........ 190,000 19,703 -- 209,703
After ten years.............................. 397,527 15,993 -- 413,519
------------ ------------ ------------ ------------
$ 85,185,743 $ 690,292 $ -- $ 85,876,034
============ ============ ============ ============
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
U.S. Government (including agencies):
Within one year.............................. $ 5,000,000 $ 21,875 $ -- $ 5,021,875
After one year but within five years......... 39,481,451 298,773 -- 39,780,224
After five years but within ten years....... 53,539,364 645,017 1,250 54,183,131
After ten years.............................. 14,500,000 98,750 -- 14,598,750
------------ ------------ ------------ ------------
112,520,815 1,064,415 1,250 113,583,980
------------ ------------ ------------ ------------
Equity Securities.............................. 2,320,000 59,500 92,690 2,286,810
------------ ------------ ------------ ------------
$114,840,815 $ 1,123,915 $ 93,940 $115,870,790
============ ============ ============ ============
</TABLE>
There were no sales of investment securities held to maturity and available
for sale during the years ended September 30, 1996, 1997 and 1998.
3. MORTGAGE-BACKED SECURITIES
A summary mortgage-backed securities is as follows:
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Government National Mortgage Association....... $ 62,595,447 $ 1,404,217 $ -- $ 63,999,664
Federal Home Loan Mortgage Corporation......... 35,726,553 409,980 265,291 35,871,242
Federal National Mortgage Association.......... 30,556,079 182,409 155,962 30,582,526
Collateralized Mortgage Obligations............ 33,885,446 1,836 694,728 33,192,554
------------ ------------ ------------ ------------
$162,763,525 $ 1,998,442 $ 1,115,981 $163,645,986
============ ============ ============ ============
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Government National Mortgage Association....... $ 33,217,483 $ 774,300 $ -- $ 33,991,783
Federal Home Loan Mortgage Corporation......... 9,473,817 189,614 -- 9,663,431
Federal National Mortgage Association.......... 9,616,497 121,624 -- 9,738,121
------------ ------------ ------------ ------------
$ 52,307,797 $ 1,085,538 $ -- $ 53,393,335
============ ============ ============ ============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
------------------------------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Government National Mortgage Association....... $ 43,227,304 $ 825,107 $ 17,134 $ 44,035,277
Federal Home Loan Mortgage Corporation......... 22,993,496 380,248 202,571 23,171,173
Federal National Mortgage Association.......... 23,380,679 409,830 84,319 23,706,190
Collateralized Mortgage Obligations............ 24,109,715 32,483 230,629 23,911,569
------------ ------------ ------------ ------------
$113,711,194 $ 1,647,668 $ 534,653 $114,824,209
============ ============ ============ ============
MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Government National Mortgage Association....... $ 21,970,344 $ 369,125 $ 89,440 $ 22,250,029
Federal Home Loan Mortgage Corporation......... 7,915,218 291,798 -- 8,207,016
Federal National Mortgage Association.......... 6,291,482 51,690 64,874 6,278,298
------------ ------------ ------------ ------------
$ 36,177,044 $ 712,613 $ 154,314 $ 36,735,343
============ ============ ============ ============
</TABLE>
There were no sales of mortgage-backed securities held to maturity and available
for sale during the years ended September 30, 1996, 1997 and 1998. The
contractual maturities of the mortgage-backed securities generally exceed 20
years; however, the effective average life is expected to be significantly less,
due to anticipated prepayments.
4. LOANS RECEIVABLE, NET
A summary of loans receivable is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Real estate mortgage:
One-to-four family.................................................. $ 77,761,695 $ 98,584,592
Multi-family........................................................ 15,088,127 10,189,283
Commercial.......................................................... 22,321,707 22,153,709
------------ ------------
115,171,529 130,927,584
------------ ------------
Real estate construction.............................................. 1,037,150 693,750
============ ============
Consumer:
Passbook or certificate............................................. 229,173 209,972
Home equity......................................................... 14,348,020 24,920,431
------------ ------------
14,577,193 25,130,403
------------ ------------
Total loans........................................................... 130,785,872 156,751,737
Less: Allowance for loan losses....................................... 2,357,396 1,980,743
Deferred loan fees and discounts................................. 300,057 209,809
Loans in process................................................. 817,894 613,150
------------ ------------
3,475,347 2,803,702
------------ ------------
$127,310,525 $153,948,035
============ ============
</TABLE>
13
<PAGE>
Non-accrual and restructured loans are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Non-accrual......................................................... $ 999 $ 722 $ 68
Restructured........................................................ 2,135 2,103 --
------------ ------------ ------------
$ 3,134 $ 2,825 $ 68
============ ============ ============
</TABLE>
The impact of non-accrual and restructured loans on interest income is as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Interest income if performing in accordance with original terms...... $ 325 $ 303 $ 67
Interest income actually recorded.................................... 154 143 --
------------ ------------ ------------
Interest income lost................................................. $ 171 $ 160 $ 67
============ ============ ============
</TABLE>
At September 30, 1997 and 1998, the impaired loan portfolio was primarily
collateral dependent and totaled $654,000 and $-0-, respectively, for which
general and specific allocations to the allowance for loan losses of $262,000
and $-0- were identified at September 30, 1997 and 1998. The average balance of
impaired loans during the 1996, 1997 and 1998 fiscal year was $654,000, $654,000
and $113,000, respectively. No cash basis interest income was recognized on
impaired loans during the years ended September 30, 1996, 1997 and 1998.
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Balance-beginning..................................................... $ 2,603,852 $ 2,458,777 $ 2,357,396
Losses charged to allowance........................................... (145,075) (101,381) (376,653)
------------ ------------ ------------
Balance-ending........................................................ $ 2,458,777 $ 2,357,396 $ 1,980,743
============ ============ ============
</TABLE>
14
<PAGE>
The activity during the years ended September 30, 1997 and 1998, with respect
to loans to directors, officers and associates of such persons is as follows:
Balance -- September 30, 1996............................... 507,912
Loans originated............................................ 118,000
Loan principal repayments................................... (123,173)
---------
Balance -- September 30, 1997............................... 502,739
Loans originated............................................ 134,134
Loan principal repayments................................... (17,012)
Balance -- September 30, 1998............................... $ 619,861
=========
5. PREMISES AND EQUIPMENT, NET
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Land.................................................................. $ 247,037 $ 545,318
------------ -------------
Buildings and improvements............................................ 1,452,296 1,482,447
Less accumulated depreciation......................................... 771,640 823,995
------------ -------------
680,656 658,452
------------ -------------
Furnishings and equipment............................................. 1,454,554 1,858,383
Less accumulated depreciation......................................... 1,084,462 1,217,513
------------ -------------
370,092 640,870
------------ -------------
Construction in progress.............................................. 24,933 686,763
------------ -------------
$ 1,322,718 $ 2,531,403
============ =============
</TABLE>
Depreciation charges are computed on the straight-line method over the assets'
estimated useful lives, which range from 10 to 40 years for buildings and
improvements and 3 to 10 years for furnishings and equipment.
6. INTEREST RECEIVABLE
A summary of interest receivable is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Loans................................................................. $ 864,939 $ 975,711
Mortgage-backed securities held to maturity........................... 971,265 689,757
Mortgage-backed securities available for sale......................... 305,044 212,944
Investment securities held to maturity................................ 1,646,319 1,216,592
Investment securities available for sale.............................. 796,770 1,773,947
------------ ------------
$ 4,584,337 $ 4,868,951
============ ============
</TABLE>
15
<PAGE>
7. DEPOSITS
A summary of deposits by type is as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------
1997 1998
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
Weighted Weighted
Average Average
Interest Interest
Rate Amount Rate Amount
---- ------------ ---- ------------
Demand:
Non-interest-bearing................................................. 0.00% $ 4,754,356 0.00% $ 4,761,165
Interest-bearing..................................................... 3.11% 87,026,200 2.98% 91,300,209
----- ------------ ----- ------------
2.97% 91,780,556 2.83% 96,061,374
Savings and club...................................................... 2.74% 55,662,965 2.50% 56,128,225
Certificates of deposit............................................... 5.51% 263,577,198 5.48% 284,047,000
----- ------------ ----- ------------
4.57% 411,020,719 4.51% 436,236,599
===== =========== ===== ============
</TABLE>
Certificates of deposit with balances of $100,000 or more totaled approximately
$17,500,000 and $21,408,000 at September 30, 1997 and 1998, respectively.
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------
1997 1998
------------ ------------
(In Thousands)
<S> <C> <C>
One year or less...................................................... $ 213,917 $ 249,702
After one to two years................................................ 36,809 24,942
After two to three years.............................................. 8,769 4,641
After three years..................................................... 4,082 4,762
------------ ------------
$ 263,577 $ 284,047
============ ============
</TABLE>
16
<PAGE>
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Interest-bearing demand............................................... $ 2,854,521 $ 2,735,882 $ 2,730,850
Savings and club...................................................... 1,622,457 1,566,213 1,439,864
Certificates of deposit less than $100,000............................ 12,604,742 13,466,098 14,309,425
Certificates of deposit $100,000 or more.............................. 725,146 890,083 1,110,213
------------ ------------ ------------
$ 17,806,866 $ 18,658,276 $ 19,590,352
============ ============ ============
</TABLE>
8. BORROWINGS
The following is a summary of borrowings:
<TABLE>
<CAPTION>
At September 30,
--------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Contractual Maturity
1998................................................... 51,875,000 --
1999................................................... 15,800,000 38,000,000
2000................................................... -- 8,675,000
------------ ------------
$ 67,675,000 $ 46,675,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1997 1998
----------- ----------- -----------
Weighted average interest rate at the end of the period 5.79% 5.84% 5.80%
Weighted average interest rate during the period 5.77% 5.87% 5.92%
Average amount outstanding during the period $22,951,000 $63,223,000 $63,053,000
Maximum amount outstanding at any month-end during the period $64,550,000 $68,775,000 $79,675,000
</TABLE>
Securities collateralizing the borrowings included agencies and mortgage-backed
securities, which had an amortized cost of $74.3 million and $54.9 million and a
fair value of $74.4 million and $55.9 million at September 30, 1997 and 1998,
respectively. The securities underlying the borrowings are under the Bank's
control.
9. STOCKHOLDERS' EQUITY
Dividends payable by the Bank to the Corporation and dividends payable by the
Corporation to stockholders are subject to various limitations imposed by
federal and state laws, regulations and policies adopted by federal and state
regulatory agencies. The Bank is required by federal law to obtain FDIC approval
for the payment of dividends if the total of all dividends declared by the Bank
in any year
17
<PAGE>
exceed the total of the Bank's net profits (as defined) for that year and the
retained net profits (as defined) for the preceding two years, less any required
transfers to surplus. Under New Jersey law, the Bank may not pay dividends
unless, following payment, the capital stock of the Bank would be unimpaired and
(a) the Bank will have a surplus of not less than 50% of its capital stock, or,
if not, (b) the payments of such dividends will not reduce the surplus of the
Bank.
10. BENEFIT PLANS
RETIREMENT PLAN
The Bank has a non-contributory defined contribution plan covering all eligible
employees. Pension plan costs are determined by a money purchase type formula.
Total pension plan expense for the years ended September 30, 1996, 1997 and 1998
amounted to $160,000, $181,000 and $189,000, respectively.
STOCK OPTION PLAN
The Bank maintains stock option plans (the Plans) for its directors, officers
and certain other employees. Options granted under the Plans are vested at grant
date and are exercisable over a period not to exceed ten years. Changes in the
number of shares outstanding under the Plans and the weighted average exercise
price of those shares are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 304,852 $11.293 273,858 $11.597 325,188 $13.095
Granted 3,136 17.000 82,000 16.000 12,000 25.000
Expirations -- -- -- -- 11,448 13.900
Exercised 34,130 9.373 30,670 7.119 109,252 11.820
------- ------- ------- ------- ------- -------
Outstanding at end of period 273,858 $11.597 325,188 $13.095 216,448 $14.410
======= ======= ======= ======= ======= =======
</TABLE>
For options that were granted in 1996, 1997, and 1998, the exercise price of the
options equaled the market value of the stock at grant date.
The following table summarizes information about the stock options outstanding
at September 30, 1998:
Options Outstanding and Exercisable
------------------------------------------------------------------
Range Weighted Average Weighted
of Number of Remaining Average
Exercise Shares Contractual Exercise
Prices Outstanding Life in Years Price
--------------------- ----------- ----------------- --------
$8.625- $8.8125 28,000 4.0 $ 8.746
13.000- 17.000 176,488 7.3 14.587
25.000 12,000 9.1 25.000
--------------------- ----------- ----------------- --------
$8.625- $25.000 216,488 6.5 $14.410
===================== =========== ================= ========
18
<PAGE>
If compensation cost for the Plan was included as compensation expense, under
the fair value method, the Bank's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- ----------
<S> <C> <C> <C>
NET INCOME:
As reported............................................................... $ 3,492,609 $5,675,159 $5,660,973
Pro forma................................................................. 3,476,713 5,274,212 5,587,655
EARNINGS PER SHARE:
Basic earnings per common share........................................... $ 0.96 $ 1.85 $ 1.82
Diluted earnings per common share......................................... $ 0.94 $ 1.80 $ 1.75
Pro forma basic earnings per common share................................. $ 0.95 $ 1.72 $ 1.80
Pro forma diluted earnings per common share............................... $ 0.94 $ 1.68 $ 1.73
</TABLE>
The fair value of stock options granted by the Bank was estimated through the
use of the Black-Scholes option-pricing model that takes into account the
following factors as of the grant date: the exercise price and expected life of
the option, the market price of the underlying stock at the grant date and its
expected volatility, and the risk-free interest rate for the expected term of
the option. In deriving the fair value of the stock options, the stock price at
the grant date is reduced by the value of the dividends to be paid during the
life of the option. The following assumptions were used for grants in 1996, 1997
and 1998: dividend yield of 3.00%, 3.00% and 3.20% and an expected volatility of
50%, 50% and 34.3% and the risk free interest rate of 5.79%, 6.59% and 7.15%,
respectively. The effects of applying the fair value method on the pro forma net
income may not be representative of the effect on pro forma net income for
future years.
11. INCOME TAXES
The bad debt reserve method which was available to thrift institutions has been
repealed for tax years beginning after December 1995. As a result, the Bank may
no longer use the percentage of taxable income reserve method. A large thrift
(one with more than $500 million in assets) must use the specific charge-off
method to compute its bad debt deduction.
The Bank is required to recapture into income the portion of its bad debt
reserve (other than supplemental reserve) that exceeds its base year reserves,
approximately $808,000. The recapture amount generally will be taken into income
ratably (on a straight-line basis) over a six year period.
The Bank has not recognized a deferred tax liability of approximately $1,950,000
for "bad debt reserves" for tax purposes which arose in tax years beginning
before December 31, 1987 (i.e., base year). A deferred tax liability will be
recognized if the Bank expects that charges to the bad debt reserves, other than
losses on loans or recomputations of bad debt deductions resulting from
operating loss carrybacks to prior years, would result in taxable income.
19
<PAGE>
Income tax expense for the years ended September 30, 1996, 1997, and 1998 is
made up of the following components:
Year Ended September 30,
-----------------------------------
1996 1997 1998
---------- ---------- ----------
Current tax expense:
Federal............... $2,537,250 $1,925,478 $2,696,637
State................. 227,258 206,464 248,710
---------- ---------- ----------
2,764,508 2,131,942 2,945,347
Deferred tax expense:
Federal............... (760,740) 1,013,303 162,436
State................. (44,302) 59,010 9,459
---------- ---------- ----------
(805,042) 1,072,313 171,895
---------- ---------- ----------
$1,959,466 $3,204,255 $3,117,242
========== ========== ==========
A reconciliation between the effective income tax expense and the amount
calculated by multiplying the applicable statutory Federal income tax rate of
34% for the years ended September 30, 1996, 1997 and 1998 is as follows:
Year Ended September 30,
------------------------------------
1996 1997 1998
---------- ---------- ----------
Computed "expected" Federal tax expense $1,853,706 $3,019,001 $2,984,593
State income tax, net of Federal tax 120,751 175,213 170,392
benefit
Tax-exempt interest (13,145) (13,046) (11,707)
Other ( 1,846) 23,087 (26,036)
---------- ---------- ----------
$1,959,466 $3,204,255 $3,117,242
========== ========== ==========
20
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1997 1998
---------- ---------
<S> <C> <C>
From operations:
Deferred tax assets
Allowance for loan and real estate losses......... $ 848,191 $ 712,672
Deferred fees..................................... 111,278 97,754
Core deposit amortization......................... 66,562 58,766
Non-accrued interest.............................. 36,700 36,700
---------- ---------
Total gross deferred assets 1,062,731 905,892
---------- ---------
Deferred tax liabilities
Depreciation...................................... 35,011 37,616
Discount accretion on bonds....................... 27,739 39,886
Bad debt tax reserve in excess of base year..... 290,740 291,044
---------- ---------
Total gross deferred tax liabilities 353,490 368,546
---------- ---------
Net deferred tax asset from operations 709,241 537,346
Stockholders' equity - unrealized gains
on securities available for sale.............. (433,638) (571,783)
---------- ---------
Total net deferred tax asset (liability).......... $ 275,603 $ (34,437)
========== =========
</TABLE>
Management believes, based upon current facts, that more likely than not there
will be sufficient taxable income in future years to realize the net deferred
tax asset. However, there can be no assurance about the levels of future
earnings.
12. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios. Total Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital, (as defined), to total assets (as defined). Management believes,
as of September 30, 1998, that the
21
<PAGE>
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
Required To be well capitalized
for capital under prompt corrective
Actual adequacy purposes action provision
- -----------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997
Total capital (to risk-weighted assets)... $41,550 27.74% $11,982 8.00% $14,977 10.00%
Tier 1 capital (to risk-weighted assets).. 39,678 26.49% 5,991 4.00% 8,986 6.00%
Tier 1 capital (to total assets).......... 39,678 7.54% 21,041 4.00% 26,301 5.00%
- ------------------------------------------------------------------------------------------------------------------------------------
As of September 30, 1998
Total capital (to risk-weighted assets)... $44,730 26.37% $13,570 8.00% $16,963 10.00%
Tier 1 capital (to risk-weighted assets).. 42,749 25.20% 6,785 4.00% 10,178 6.00%
Tier 1 capital (to total assets).......... 42,749 7.99% 21,407 4.00% 26,758 5.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and purchase securities. The
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statements of
financial condition. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments as it
does for on-balance sheet instruments. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon
22
<PAGE>
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but primarily includes residential real
estate and commercial real estate properties. Commitments to purchase securities
are contracts for delayed delivery of securities in which the seller agrees to
make delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movements in
securities values and interest rates.
The Bank has the following outstanding commitments:
September 30,
--------------------------
1997 1998
---- ----
To originate loans...................... $16,409,000 $ 7,865,000
=========== ===========
Homeowners' Equity Credit Line Program.. $10,711,000 $17,763,000
=========== ===========
Commitments to purchase securities...... $ 200,000 $10,000,000
=========== ===========
At September 30, 1998, of the $7,865,000 in outstanding commitments to originate
loans, $5,931,900 are for loans at fixed interest rates within a range of 7.00%
to 7.50% and $1,933,100 are for adjustable rate loans. The Homeowners' Equity
Credit Line Program represents undisbursed funds from approved lines of credit.
Unless specifically cancelled by notice from the Bank, these are firm
commitments to the respective borrowers on demand. The lines of credit are
secured by the respective one to four-family residential properties owned by the
borrowers. The interest rate charged for any month on funds disbursed under the
program ranges from 0% to 1.50% above the prime rate as most recently published
in The Wall Street Journal prior to the last business day of the month
immediately preceding the month in which the billing cycle begins.
The Corporation also has, in the normal course of business, commitments for
services and supplies. Management does not anticipate losses on any of the
above-mentioned commitments. The Corporation is also a party to litigation which
arises primarily in the ordinary course of business. In the opinion of
management, the ultimate disposition of such litigation should not have a
material effect on the consolidated financial statements of the Corporation.
14. RECAPITALIZATION OF SAVINGS INSTITUTION INSURANCE FUND ("SAIF")
On September 30, 1996, legislation was enacted, which among other things,
imposed a special one-time assessment on SAIF member institutions, including the
Bank, to recapitalize the SAIF and spread the obligations for payment of
Financing Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund
("BIF") members. The Federal Deposit Insurance Corporation ("FDIC") special
assessment levy amounted to 65.7 basis points on SAIF assessable deposits held
as of March 31, 1995. The special assessment was recognized in the fourth
quarter of fiscal 1996 and was tax deductible. The Bank recorded a charge of
$2.7 million before tax-effect, as a result of the FDIC special assessment.
23
<PAGE>
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of estimated fair values for
financial instruments.
LIMITATIONS
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. Fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Further, the foregoing estimates may not reflect the actual
amount that could be realized if all or substantially all of the financial
instruments were offered for sale at one time. In addition, the fair value
estimates are based on existing on-and-off balance sheet financial instruments
without attempting to value the anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered financial assets and
liabilities include mortgage servicing rights, premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates. Finally, reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform
valuation methodologies introduces a greater degree of subjectivity to these
estimated fair values. The estimation methodologies used and the estimated fair
values and carrying values of financial instruments are set forth below:
CASH AND CASH EQUIVALENTS AND INTEREST RECEIVABLE
The carrying amounts for cash and cash equivalents approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Available for sale securities are reported at their respective fair values in
the Consolidated Statements of Financial Condition. These values were based on
quoted market prices. The fair values of securities held to maturity were also
based upon quoted market prices.
LOANS RECEIVABLE
The fair value of fixed rate loans receivable is estimated by discounting the
future cash flows, using the current
24
<PAGE>
rates at which similar loans with similar remaining maturities would be made to
borrowers with similar credit ratings. For those loans with floating interest
rates, it is presumed that estimated fair values generally approximate their
recorded book balances.
DEPOSITS
The fair value of demand, savings and club accounts is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated by discounting future cash flows using rates currently
offered for deposits of similar remaining maturities. For those deposits with
floating interest rates, it is presumed that estimated fair values generally
approximate their recorded book balances.
BORROWINGS
The fair values for borrowings are calculated by discounting estimated future
cash flows using current rates offered for similar remaining maturities.
COMMITMENTS
The fair values of commitments related to loans approximate their fair value and
are estimated using fees currently charged to enter into similar agreements
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest and the
committed rates. The fair value of commitments to purchase mortgage-backed
securities is based upon quoted market prices of similar securities.
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1997 1998
------------------ --------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
(In Thousands)
Financial assets
- ----------------
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 15,476 $ 15,476 $ 16,941 $ 16,941
Investment securities available for sale........ 60,742 60,742 115,871 115,871
Mortgage-backed securities available for sale... 53,393 53,393 36,735 36,735
Investment securities held to maturity.......... 96,552 96,387 85,186 85,876
Mortgage-backed securities held to maturity..... 162,764 163,646 113,711 114,824
Loans receivable............................... 127,311 128,035 153,948 155,272
Financial liabilities
- ---------------------
Deposits........................................ 411,021 409,844 436,237 437,364
Borrowings...................................... 67,675 67,292 46,675 46,867
</TABLE>
25
<PAGE>
16. PARENT CORPORATION FINANCIAL DATA
The following condensed financial statements of the Corporation should be read
in conjunction with the notes to consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
September 30,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash........................................... $ 26,956 $ 74,570
Loans receivable from subsidiary............... 1,950,000 1,700,000
Investment in subsidiaries..................... 40,436,444 43,789,527
Investment securities available for sale....... 823,500 2,286,812
Due from subsidiary............................ 530,061 738,021
Other assets.................................. 9,980 26,238
----------- -----------
Total assets.................................. $43,776,941 $48,615,168
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Dividends payable.............................. $ 539,096 $ 637,960
Other liabilities.............................. 31,286 75,219
----------- -----------
Total liabilities............................. 570,382 713,179
----------- -----------
STOCKHOLDERS' EQUITY
Common stock................................... 4,142,628 4,251,880
Paid-in-capital in excess of par value......... 12,293,206 13,475,115
Retained earnings-- substantially restricted.. 42,676,884 45,835,998
Unrealized gain on securities available for
sale, net of tax.............................. 771,341 1,016,496
Treasury stock, at cost........................ (16,677,500) (16,677,500)
----------- -----------
Total stockholders' equity..................... 43,206,559 47,901,989
----------- -----------
Total liabilities and stockholders' equity.... $43,776,941 $48,615,168
=========== ===========
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Income:
Dividends from subsidiary..................... $ 2,423,495 $ 2,145,884 $ 2,501,860
Interest...................................... 170,732 81,887 208,175
Miscellaneous................................. --- 12,595 1,000
------------ ----------- -----------
Total Income............................. 2,594,227 2,240,366 2,711,035
------------ ----------- -----------
Miscellaneous expense.............................. 58,422 64,438 79,059
------------ ----------- -----------
Income before income taxes and equity
in undistributed earnings of subsidiary........... 2,535,805 2,175,928 2,631,976
Income taxes....................................... 39,293 10,760 42,651
------------ ----------- -----------
Income before equity in undistributed earnings..... 2,496,512 2,165,168 2,589,325
Undistributed earnings of subsidiary.......... 996,097 3,509,991 3,071,648
------------ ----------- -----------
Net income......................................... $ 3,492,609 $ 5,675,159 $ 5,660,973
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended September 30,
----------------------------------------
1996 1997 1998
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 3,492,609 $ 5,675,159 $ 5,660,973
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in undistributed
earnings of subsidiary....................... 767,023 (3,494,953) (3,051,240)
Decrease (increase) in due from subsidiary.... 69,100 (31,295) (207,960)
Decrease in fraud loss receivable............. 35,000 1,565,000 --
Increase in other assets...................... -- (9,980) (16,258)
(Decrease) increase in dividends payable...... (44,195) 5,367 98,864
Increase (decrease) in other liabilities...... 9,861 (6,023) 43,933
------------ ----------- -----------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net cash provided by operating
activities................................... 4,329,398 3,703,275 2,528,312
------------ ----------- -----------
Cash flows provided by investing activities:
Purchase of investment securities............. -- (823,500) (1,520,000)
Distribution from bank subsidiary............. 12,733,880 -- --
Decrease (increase) in loans receivable
from subsidiary.............................. 50,000 (1,000,000) 250,000
------------ ----------- -----------
Net cash provided by (used in)
investing activities.............................. 12,783,880 (1,823,500) (1,270,000)
------------ ----------- -----------
Cash flows from financing activities:
Issuance of common stock......................... 319,902 218,335 1,291,161
Cash dividends paid.............................. (2,423,494) (2,145,884) (2,501,859)
Purchase of treasury stock....................... (14,975,000) -- --
------------ ----------- -----------
Net cash used in financing activities.............. (17,078,592) (1,927,549) (1,210,698)
------------ ----------- -----------
Net increase (decrease) in cash.................... 34,686 (47,774) 47,614
Cash -- beginning.................................. 40,044 74,730 26,956
------------ ----------- -----------
Cash -- ending..................................... $ 74,730 $ 26,956 $ 74,570
============ =========== ===========
</TABLE>
17. IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 does
not require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. SFAS 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid in capital in the equity
section of a statement of financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Statement of Financial Accounting Standards No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132") revises
employers' disclosures about pension and other postretirement benefits plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information in changes in the
benefit obligations and fair value of plan assets that will facilitate financial
analysis, and eliminates certain required disclosures of previous accounting
pronouncements.
28
<PAGE>
SFAS 132 is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available. As SFAS 132 affects disclosure requirements, it is not
expected to have an impact on the financial statements of the Corporation.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") establishes accounting and
reporting standards for derivative instruments, and for hedging activities. SFAS
133 supersedes the disclosure requirements in Statements No. 80, 105 and 119.
This statement is effective for periods beginning after June 15, 1999. The
adoption of SFAS 133 is not expected to have a material impact on the financial
position or results of the Corporation.
Statement of Financial Accounting Standards No. 134 "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise" ("SFAS 134") amends FASB Statement No. 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. SFAS 134 is effective January 1, 1999. The adoption of this
statement is not expected to have a material impact on the financial position or
results of operations of the Corporation.
18. PLAN OF MERGER
The Corporation entered into an Agreement and Plan of Merger (Merger Plan) dated
July 9, 1998 with First Source Bancorp, Inc. (First Source). The Merger Plan, if
approved would result in the Corporation being merged with and into First
Source. Each issued and outstanding share of the Corporation will be converted
into and exchangeable for the numbers of shares of First Source common stock
determined as follows: (i) subject to certain provisions of the Merger Plan, if
the average closing price of First Source common stock is equal to or greater
than $11.50, the exchange ratio shall be 3.2; (ii) if the average closing price
is $10.00 or greater but less than $11.50, the exchange ratio shall be 3.2;
(iii) if the average closing price is greater than $8.50 but less than $10.00,
the exchange ratio shall equal $32.00 divided by the average closing price; or
subject to certain provisions of the merger plan, if the average closing price
is equal to or less than $8.50, the exchange ratio shall be 3.764. The average
closing price is defined as the average closing sales price of the First Source
Common Stock on the Nasdaq Stock Market for 10 consecutive trading days ending
on the fifth business day prior to the date on which the later of approval of
First Source's stockholders, the Corporation's stockholders, or the date the
last required regulatory approval for the merger plan is obtained. The merger is
expected to be complete in the fourth quarter of 1998.
29
<PAGE>
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the quarterly consolidated financial data is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1997 Quarter Quarter Quarter Quarter
- --------------------------------------- ------- ------- ------- -------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income........................ $8,843 $9,015 $9,086 $9,075
Interest expense....................... 5,487 5,506 5,647 5,735
------ ------ ------ ------
Net interest income................... 3,356 3,509 3,439 3,340
Non-interest income.................... 111 76 192 131
Non-interest expense................... 1,366 1,357 1,328 1,224
------ ------ ------ ------
Income before income taxes............. 2,101 2,228 2,303 2,247
Income taxes........................... 769 798 825 812
------ ------ ------ ------
Net income............................. $1,332 $1,431 $1,478 $1,435
====== ====== ====== ======
Basic earnings per common share........ $ 0.44 $ 0.47 $ 0.48 $ 0.46
====== ====== ====== ======
Diluted earnings per common share...... $ 0.43 $ 0.46 $ 0.48 $ 0.45
====== ====== ====== ======
Dividends per common share............. $0.175 $0.175 $0.175 $0.175
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1998 Quarter Quarter Quarter Quarter
- --------------------------------------- ------- ------- ------- -------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income........................ $9,288 $9,353 $9,364 $9,382
Interest expense....................... 5,899 5,785 5,845 5,793
------ ------ ------ ------
Net interest income................... 3,389 3,568 3,519 3,589
Non-interest income.................... 116 58 75 162
Non-interest expense................... 1,414 1,503 1,407 1,374
------ ------ ------ ------
Income before income taxes............. 2,091 2,123 2,187 2,377
Income taxes........................... 729 760 784 844
Net income............................. $1,362 $1,363 $1,403 $1,533
====== ====== ====== ======
Basic earnings per common share........ $ 0.44 $ 0.44 $ 0.45 $ 0.49
====== ====== ====== ======
Diluted earnings per common share...... $ 0.42 $ 0.42 $ 0.43 $ 0.48
====== ====== ====== ======
Dividends per common share............. $ 0.20 $ 0.20 $ 0.20 $ 0.20
====== ====== ====== ======
</TABLE>
30
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks.............................................................. $ 22,831 $ 11,928
Federal funds sold................................................................... 14,800 17,975
--------------- ---------------
Total cash and cash equivalents.................................................... 37,631 29,903
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost ......................... 12,852 10,820
Investment securities, at amortized cost (estimated fair value of $127,537
at December 31, 1997)............................................................... -- 127,583
Investment securities available for sale............................................. 242,197 78,443
Mortgage-backed securities, net (estimated fair value of $374,329
at December 31,1997) ............................................................... -- 369,920
Mortgage-backed securities available for sale........................................ 661,881 200,530
Loans receivable, net................................................................ 854,697 715,810
Interest and dividends receivable.................................................... 13,556 12,466
Premises and equipment, net.......................................................... 16,481 14,410
Excess of cost over fair value of net assets acquired................................ 7,956 8,806
Other assets......................................................................... 7,807 6,641
--------------- ---------------
Total assets....................................................................... $ 1,855,058 $ 1,575,332
=============== ===============
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits............................................................................... $ 1,268,119 $ 1,227,304
Borrowed funds......................................................................... 264,675 186,665
Advances by borrowers for taxes and insurance.......................................... 6,969 6,249
Other liabilities...................................................................... 15,476 10,221
--------------- ---------------
Total liabilities.................................................................... 1,555,239 1,430,439
--------------- ---------------
Commitments and contingencies (note 14)
STOCKHOLDERS' EQUITY
Preferred stock; authorized 1,000,000 shares; issued and outstanding - none............ -- --
Common stock, $.01 par value, 85,000,000 shares authorized;
43,105,497 and 42,675,397 shares issued and outstanding in 1998 and
46,963,242 and 42,965,573 shares issued and outstanding in 1997 ...................... 431 470
Paid-in capital........................................................................ 201,105 59,348
Retained earnings...................................................................... 112,601 101,186
Accumulated other comprehensive income ................................................ 2,498 1,295
Common stock acquired by the Employee Stock Ownership Plan (ESOP)...................... (13,073) (546)
Common stock acquired by the Recognition and Retention Plan (RRP) ..................... (79) (183)
Treasury stock (430,100 and 3,997,669 common shares in
1998 and 1997, respectively) ......................................................... (3,664) (16,677)
--------------- ---------------
Total stockholders' equity........................................................... 299,819 144,893
--------------- ---------------
Total liabilities and stockholders' equity........................................... $ 1,855,058 $ 1,575,332
=============== ===============
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
1
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
--------------- ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans............................................................ $ 61,431 $ 54,635 $ 50,457
Mortgage-backed securities....................................... 13,774 27,607 29,732
Investment securities............................................ 9,032 11,942 11,104
Investment and mortgage-backed securities and
loans available for sale........................................ 34,936 15,057 9,479
--------------- ------------ ------------
Total interest income......................................... 119,173 109,241 100,772
--------------- ------------ ------------
INTEREST EXPENSE:
Deposits:
NOW and money market demand..................................... 9,008 8,315 7,977
Savings......................................................... 4,431 4,819 5,136
Certificates of deposit......................................... 39,429 39,685 38,586
--------------- ------------ ------------
52,868 52,819 51,699
Borrowed funds................................................... 12,518 10,739 4,698
--------------- ------------ ------------
Total interest expense........................................ 65,386 63,558 56,397
--------------- ------------ ------------
Net interest income........................................... 53,787 45,683 44,375
Provision for loan losses........................................ 1,469 1,200 550
--------------- ------------ ------------
Net interest income after provision for loan losses............ 52,318 44,483 43,825
--------------- ------------ ------------
OTHER OPERATING INCOME:
Fees and service charges......................................... 2,316 2,145 1,815
Net gain on sales of loans and securities ....................... 710 593 236
Other, net....................................................... 1,670 645 (31)
--------------- ------------ ------------
Total other operating income................................... 4,696 3,383 2,020
--------------- ------------ ------------
OPERATING EXPENSES:
Compensation and benefits ....................................... 13,604 12,228 12,749
Occupancy........................................................ 2,119 2,239 2,333
Equipment........................................................ 1,946 1,979 1,571
Advertising...................................................... 978 982 729
Federal deposit insurance........................................ 759 756 10,681
Amortization / writedowns of intangibles......................... 850 2,144 1,349
General and administrative....................................... 6,321 3,882 3,462
--------------- ------------ ------------
Total operating expenses....................................... 26,577 24,210 32,874
--------------- ------------ ------------
Income before income tax expense............................... 30,437 23,656 12,971
Income tax expense................................................ 10,944 8,686 4,768
--------------- ------------ ------------
Net income..................................................... $ 19,493 $ 14,970 $ 8,203
=============== ============ ============
Basic and diluted earnings per share.............................. $ 0.46 $ 0.35 $ 0.18
=============== ============ ============
Weighted average shares outstanding - Basic....................... 41,983,776 42,510,823 44,356,555
=============== ============ ============
Weighted average shares outstanding - Diluted..................... 42,694,287 43,216,999 45,275,629
=============== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Common Common
hensive Stock Stock Total
Common Paid In Retained Income Acquired Acquired Treasury Stockholders'
Stock Capital Earnings (Loss) by ESOP by RRP Stock Equity
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995......... $461 $ 37,509 $106,300 $ 165 ($746) $ - ($1,702) $141,987
Comprehensive income:
Net income for the year ended
December 31, 1996 ................. - - 8,203 - - - - 8,203
Other comprehensive loss:
Unrealized holding losses arising
during the period (net of tax of
$125)............................ - - - (220) - - - (220)
Reclassification adjustment for
gains in net income (net of
tax of $99)...................... - - - (177) - - - (177)
---------
Total comprehensive income 7,806
=========
Issuance of 10% stock dividend....... 1 5,394 (5,395) - - - - -
Cash in lieu of fractional shares.... - (3) - - - - - (3)
Stock acquired by RRP ............... - - - - - (310) - (310)
Cash dividends ...................... - - (3,661) - - - - (3,661)
Amortization of RRP - - - - - 24 - 24
Principal payments on ESOP loan...... - - - - 100 - - 100
Purchase of treasury stock........... - - - - - - (14,975) (14,975)
Exercise of stock options............ 2 352 - - - - - 354
-----------------------------------------------------------------------------------------
Balance at December 31, 1996......... 464 43,252 105,447 (232) (646) (286) (16,677) 131,322
Comprehensive income:
Net income for the year ended
December 31, 1997 ................. - - 14,970 - - - - 14,970
Other comprehensive income:
Unrealized holding gains arising
during the period (net of tax of
($1,066)).......................... - - - 1,895 - - - 1,895
Reclassification adjustment for
gains in net income (net of
tax of $207)....................... - - - (368) - - - (368)
---------
Total comprehensive income 16,497
=========
Issuance of 10% stock dividend....... 4 15,425 (15,429) - - - - -
Cash in lieu of fractional shares.... - (9) - - - - - (9)
Cash dividends....................... - - (3,802) - - - - (3,802)
Amortization of RRP.................. - - - - - 103 - 103
Principal payments on ESOP loan...... - - - - 100 - - 100
Exercise of stock options............ 2 680 - - - - - 682
-----------------------------------------------------------------------------------------
Balance at December 31, 1997......... 470 59,348 101,186 1,295 (546) (183) (16,677) 144,893
Comprehensive income:
Net income for the year ended
December 31, 1998 ................. - - 19,493 - - - - 19,493
Other comprehensive income:
Unrealized holding gains arising
during the period (net of tax of
($392))........................... - - - 1,595 - - - 1,595
Reclassification adjustment for
gains in net income (net of
tax of $221)...................... - - - (392) - - - (392)
---------
Total comprehensive income 20,696
=========
Cash dividends..................... - - (7,250) - - - - (7,250)
Equity adjustment for conforming
of annual reporting periods....... - - (828) - - - - (828)
Net proceeds from stock offering
and conversion ................... - 162,232 - - - - - 162,232
Adjustment for reorganization
of Mutual Holding Company......... - 1,577 - - - - - 1,577
Exercise of stock options.......... 11 1,581 - - - - - 1,592
Purchase of stock for ESOP......... - - - - (13,240) - - (13,240)
Purchases of treasury stock........ - - - - - - (10,728) (10,728)
Retirement of treasury stock....... (50) (23,691) - - - - 23,741 -
Amortization of RRP................ - - - - - 104 - 104
Principal payments on ESOP loan.... - 58 - - 713 - - 771
-----------------------------------------------------------------------------------------
Balance at December 31, 1998....... $431 $201,105 $112,601 $2,498 ($13,073) ($79) ($3,664) $299,819
=========================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 19,493 $ 14,970 $ 8,203
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment................................................. 1,240 1,154 984
Amortization of excess of cost over fair value of assets acquired...................... 850 2,144 1,349
Amortization of ESOP................................................................... 771 100 100
Amortization of RRP.................................................................... 104 103 24
Provision for loan losses.............................................................. 1,469 1,200 550
Provision for losses on real estate owned.............................................. 122 114 446
Net gain on sales of loans and securities................................................. (710) (593) (236)
Loans originated for sale.............................................................. (14,386) (4,708) (6,798)
Proceeds from sales of mortgage loans available for sale............................... 14,483 5,011 6,892
Net gain on sales of real estate owned................................................. (153) (160) (246)
Investment securities purchased for trading............................................ - (1,989) -
Proceeds from sales of investment securities held for trading.......................... - 1,971 -
Net amortization of premiums and accretion of discounts and deferred fees.............. 1,869 (693) 718
Increase in interest and dividends receivable.......................................... (1,090) (524) (1,078)
Increase (decrease) in other liabilities............................................... 5,353 (1,311) 3,313
(Decrease) increase in other assets.................................................... (2,002) 1,812 (763)
Net cash provided by operating activities............................................ 27,413 18,601 13,458
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale........................ 140,727 10,128 25,175
Proceeds from sales of mortgage-backed securities available for sale................... 78,752 127,058 96,309
Proceeds from sale of real estate owned................................................ 3,443 3,765 5,265
Purchases of investment securities available for sale.................................. (226,583) (33,481) (41,808)
Purchases of mortgage-backed securities available for sale............................. (393,292) (187,986) (152,016)
Purchases of investment securities..................................................... (85,501) (28,062) (96,869)
Maturities of investment securities.................................................... 135,010 44,996 74,000
Purchases of mortgage-backed securities................................................ (5,541) (54,117) (95,017)
Principal payments on mortgage-backed securities....................................... 229,144 123,968 120,909
Origination of loans................................................................... (333,166) (170,021) (143,060)
Purchases of mortgage loans............................................................ (26,784) (19,809) (10,118)
Principal repayments on loans.......................................................... 216,549 116,113 97,843
Purchase of FHLB-NY stock.............................................................. (2,032) (849) (1,155)
Purchases of premises and equipment.................................................... (3,435) (3,972) (2,019)
Proceeds from sale of fixed assets..................................................... 124 - -
Net cash used in investing activities................................................ (272,585) (72,269) (122,561)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock offering....................................................... 163,809 - -
Purchase of ESOP shares................................................................ (13,240) - -
Cost of stock contributed to RRP....................................................... - - (310)
Equity adjustment for conforming of annual reporting periods........................... (828) - -
Stock options exercised................................................................ 1,592 682 354
Cash dividends paid.................................................................... (7,250) (3,802) (3,661)
Net increase (decrease) in deposits.................................................... 40,815 38,128 (8,200)
Net increase in borrowed funds......................................................... 78,010 33,750 113,419
Net increase in advances by borrowers for taxes and insurance.......................... 720 1,021 957
Purchase of treasury stock............................................................. (10,728) - (14,975)
---------- ---------- ----------
Net cash provided by financing activities............................................ 252,900 69,779 87,584
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents................................. 7,728 16,111 (21,519)
Cash and cash equivalents at beginning of year............................................ 29,903 13,792 35,311
---------- ---------- ----------
Cash and cash equivalents at end of year ................................................. $ 37,631 $ 29,903 $ 13,792
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.............................................................................. $ 64,906 $ 63,018 $ 55,802
Income taxes.......................................................................... 8,106 2,436 6,326
Non cash investing and financing activities for the year:
Transfer of loans to real estate owned................................................ 3,349 1,419 3,333
Transfer of investment and mortgage-backed securities from held
to maturity to available for sale.................................................... $ 361,191 $ - $ 58,765
========== ========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting policies used
in preparation of the accompanying consolidated financial statements of First
Sentinel Bancorp, Inc. and Subsidiaries (the "Company").
Principles of Consolidation
The consolidated financial statements are comprised of the accounts of 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. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. On December 18, 1998, the Company
acquired Pulse Bancorp, Inc. ("Pulse"). Each share of Pulse was converted into
3.764 shares of the Company's common stock. A total of 12,066,631 shares were
issued including 800,000 treasury stock shares, to complete the transaction.
The acquisition has been accounted for under the pooling-of-interest method of
accounting and accordingly, the Company's consolidated financial statements
include the accounts and activity of Pulse for all periods presented. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for loan losses, management generally obtains independent appraisals for
significant properties.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Under SFAS No. 130, comprehensive income is divided into net income and other
comprehensive income. Other comprehensive income includes items previously
recorded directly to equity, such as unrealized gains and losses on securities
available for sale.
Comprehensive income is presented in the consolidated statements of
stockholders' equity. SFAS No. 130 requires only additional disclosures and
does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
Investment and Mortgage-backed Securities
Management determines the appropriate classification of investment and mortgage-
backed securities as either available for sale, held to maturity, or trading at
the purchase date. Securities available for sale include debt, mortgage-backed,
and marketable equity securities that are held for an indefinite period of time
and may be sold in response to changing market and interest rate conditions.
These securities are reported at fair value with unrealized gains and losses,
net of tax, included as a separate component of stockholders' equity. Upon
realization, such gains and losses will be included in earnings using the
specific identification method.
Trading account securities are adjusted to market value through earnings. Gains
and losses from adjusting trading account securities to market value and from
the sale of these securities are included in noninterest income.
Investment securities and mortgage-backed securities, other than those
designated as available for sale or trading, are carried at amortized historical
cost and consist of those securities for which there is a positive intent and
ability to hold to maturity. All securities are adjusted for amortization of
premiums and accretion of discounts using the level-yield method over the
estimated lives of the securities.
Federal Home Loan Bank of New York Stock
The Bank, as a member of the FHLB-NY, is required to hold shares of capital
stock in the FHLB-NY in an amount equal to 1% of the Bank's outstanding balance
of
5
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
residential mortgage loans or 5% of its outstanding advances from the FHLB-
NY, whichever is greater.
Loans Receivable, Net
Loans receivable, other than loans available for sale, are stated at the unpaid
principal balance, net of premiums, unearned discounts, net deferred loan
origination and commitment fees, and the allowance for loan losses.
Loans are classified as non-accrual when they are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to timely
collectibility. However, if a loan meets the above criteria but a current
appraisal of the property indicates that the total outstanding balance is less
than 55% of the appraised value and in the process of collection, the loan is
not classified as non-accrual. At the time a loan is place on non-accrual
status, previously accrued and uncollected interest is reversed against interest
income. Interest received on non-accrual loans is generally credited to
interest income for the current period. If principal and interest payments are
brought contractually current and future collectibility is reasonably assured,
loans are returned to accrual status. Discounts are accreted and premiums
amortized to income using the level yield method over the estimated lives of the
loans. Loan fees and certain direct loan origination costs are deferred, and
the net fee or cost is recognized in interest income using the level-yield
method over the contractual life of the individual loans, adjusted for actual
prepayments.
The Company has defined the population of impaired loans to be all non-accrual
commercial real estate, multi-family and land loans. Impaired loans are
individually assessed to determine that the loan's carrying value is not in
excess of the fair value of the collateral or the present value of the loan's
expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment, such as residential mortgage loans and
installment loans, are specifically excluded from the impaired loan portfolio.
Income recognition policies for impaired loans are the same as non-accrual
loans.
Loans available for sale are carried at the lower of cost or market using the
aggregate method. Valuation adjustments, if applicable, are reflected in current
operations. Gains and losses on sales are recorded using the specific
identification method. Management determines the appropriate classification of
loans as either held to maturity or available for sale at origination, in
conjunction with the Company's overall asset/liability management strategy.
The majority of the Company's loans are secured by real estate in the
State of New Jersey. Accordingly, as with most financial institutions in the
market area, the collectibility of a substantial portion of the carrying value
of the Company's loan portfolio and real estate owned is susceptible to changes
in market conditions.
Allowance for Loan Losses
The allowance for loan losses is based on management's evaluation of the
adequacy of the allowance, including an assessment of known and inherent risks
in the portfolio, review of individual loans for adverse situations that may
affect the borrower's ability to repay, the estimated value of any underlying
collateral, and consideration of current economic conditions.
Additions to the allowance arise from charges to operations through the
provision for loan losses or from the recovery of amounts previously charged
off. The allowance is reduced by loan charge-offs.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in the Company's market area. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Real Estate Owned, Net
Real estate owned is recorded at the fair value at the date of acquisition, with
a charge to the allowance for loan losses for any excess of cost over fair
value. Subsequently, real estate owned is carried at the lower of cost or fair
value, as determined by current appraisals, less estimated selling costs.
Certain costs incurred in preparing properties for sale are capitalized, and
expenses of holding foreclosed properties are charged to operations as incurred.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired from the acquisition
of deposits is amortized to expense over the expected life of the acquired
deposit base (7 to 15 years) using the straight-line method. Core deposit
6
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
studies regarding the retention of the deposits acquired are performed by the
Company on an annual basis. After reviewing the results of the core deposit
studies, a writedown of the core deposit premium may be recognized if the
current balance of the core deposit premium is overstated. The Company
recognized impairment writedowns of $1.3 million and $334,000 for the years
ended December 31, 1997 and 1996, respectively. No impairment writedown was
required in 1998.
Premises and Equipment
Premises and equipment, including leasehold improvements, are stated at cost,
less accumulated amortization and depreciation. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives,
ranging from three years to forty years depending on the asset or lease. Repair
and maintenance items are expensed and improvements are capitalized. Upon
retirement or sale, any gain or loss is recorded in operations.
Income Taxes
The Company accounts for income taxes according to the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using the enacted tax rates applicable to taxable income for the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Employee Benefit Plans
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 132,
"Employers Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 revises employers' disclosures about pensions and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. SFAS No. 132 revises disclosures only and does not affect the Company's
financial position or results of operations. Prior year financial statement
disclosures have been revised to conform to the requirements of SFAS No. 132.
Pension plan costs based on actuarial computation of current and future benefits
for employees are charged to expense and are funded based on the maximum amount
that can be deducted for Federal income tax purposes.
The Company accrues the expected cost of providing health care and other
benefits to employees subsequent to their retirement during the estimated
service periods of the employees.
The Company applies the "intrinsic value based method" as described in
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its stock based
compensation. The Company has provided in the notes to the consolidated
financial statements, the pro forma disclosures as if the Company had adopted
the fair value method of accounting for the issuance of stock options. Stock
awarded to employees under the Company's Recognition and Retention plans is
expensed by the Company over the awards vesting period based upon the fair
market value of the stock on the date of the grant. Stock committed to be
released to employees under the Bank's ESOP plan is expensed at fair market
value.
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. 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. Common stock equivalents are determined by applying the treasury stock
method. Common stock equivalents, which consisted of stock options, totaled
710,511, 706,176 and 919,074 at December 31, 1998, 1997 and 1996, respectively.
All share and per share amounts have been restated for subsequent stock
dividends and splits, as well as the reorganization as described in Note 2 to
the Consolidated Financial Statements.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 amounts to conform
to the 1998 presentation.
7
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
(2) REORGANIZATION AND STOCK ISSUANCE
On April 8, 1998, the Company and First Savings Bancshares, MHC, completed a
conversion and reorganization into the stock holding company structure and also
completed the offering of the common stock of First Sentinel Bancorp, Inc., the
new stock holding company of the Bank. Through a Subscription and Community
Offering, the Company raised $165.6 million in gross proceeds. Shares of First
Savings Bank, SLA were converted into shares of First Sentinel Bancorp, Inc. at
an exchange ratio of 3.9133. A total of 16,550,374 shares were sold and
14,820,016 shares were converted into First Sentinel Bancorp stock. All per
share and earnings per share data have been restated for the 3.9133 conversion
ratio.
(3) ACQUISITIONS
On December 18, 1998, the Company acquired Pulse Bancorp, Inc. ("Pulse"). Each
share of Pulse was converted into 3.764 shares of the Company's common stock. A
total of 12,066,631 shares were issued including 800,000 treasury stock shares,
to complete the transaction. The acquisition has been accounted for under the
pooling-of-interest method of accounting and accordingly, the Company's
consolidated financial statements include the accounts and activity of Pulse for
all periods presented. Prior to the combination, Pulse's fiscal year ended on
September 30. In recording the transaction, Pulse's results of operations for
fiscal years ended September 30, 1998, 1997 and 1996 and financial condition as
of September 30, 1997 were combined with the Company's calendar years. Pulse's
results of operations through December 31, 1998 were included as an adjustment
in the consolidated statements of stockholders' equity. As part of the merger,
Pulse adopted the Company's reporting period, and an $828,000 adjustment was
made to stockholders' equity to include Pulse's results of operations for the
three months ended December 31, 1998. The Company recorded a pre-tax merger
charge related to the Pulse acquisition of approximately $5.0 million. Of this
total, $2.1 million is included in general and administrative expense and $2.9
million was recorded by Pulse through December 31, 1998. The charge consisted
primarily of severance payments and other compensation charges totaling $2.4
million and professional fees and services of $2.1 million. Approximately $4.0
million of the merger charges have been paid through December 31, 1998. It is
anticipated that the remainder of the merger charges will be paid through the
second quarter of 1999.
Separate results of the combined entities for the years ended December 31, 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands) 1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Net interest income after provision for loan losses
The Company................................................................. $ 38,253 $ 30,839 $ 30,225
Pulse....................................................................... 14,065 13,644 13,600
--------- -------- ---------
Total.......................................................................... $ 52,318 $ 44,483 $ 43,825
========= ======== =========
Net Income
The Company................................................................. $ 13,832 $ 9,295 $ 3,493
Pulse....................................................................... 5,661 5,675 4,710
--------- -------- ---------
Total.......................................................................... $ 19,493 $ 14,970 $ 8,203
========= ======== =========
</TABLE>
8
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Pulse's results of operations through December 18, 1998, are
as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Net interest income after provision for loan losses..... $ 3,092
Other operating income.................................. 47
Other operating expense................................. 4,183
-------
Loss before income tax benefit.......................... (1,044)
Income tax benefit...................................... 216
-------
Net loss................................................ $ (828)
=======
</TABLE>
(4) INVESTMENT SECURITIES
A summary of investment securities at December 31, 1998 and 1997, is as follows
(in thousands):
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
Gross Gross Estimated
unrealized unrealized market
Cost gains losses value
---------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Investments Available For Sale
U.S. Government and Agency obligations................. $ 197,635 $ 1,127 $ (231) $ 198,531
State and political obligations........................ 6,900 109 (37) 6,972
Corporate obligations.................................. 13,414 97 (236) 13,275
Equity securities...................................... 24,071 114 (766) 23,419
--------- --------------- ------------ -----------
Total investment securities available for sale......... $ 242,020 $ 1,447 $ (1,270) $ 242,197
========= =============== ============ ===========
</TABLE>
There were no investment securities classified as held to maturity at December
31, 1998.
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Gross Gross Estimated
unrealized Unrealized market
Cost gains losses value
--------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Investments Held To Maturity
U.S. Government and Agency obligations................. $ 124,920 $ 442 $ (515) $ 124,847
State and political obligations........................ 2,663 31 (4) 2,690
--------- ------------ ------------ -----------
Total investment securities held to maturity........... $ 127,583 $ 473 $ (519) $ 127,537
========= ============ ============ ===========
Investments Available For Sale
U.S. Government and Agency obligations................. $ 72,798 $ 390 $ (254) $ 72,934
Equity Securities...................................... 800 24 - 824
Corporate obligations.................................. 4,698 - (13) 4,685
--------- ------------ ------------ -----------
Total investment securities available for sale......... $ 78,296 $ 414 $ (267) $ 78,443
========= ============ ============ ===========
</TABLE>
The cost and estimated fair value of debt investment securities at December 31,
1998, by contractual maturity, are shown below (in thousands). Expected
maturities may differ from contractual maturities because issuers may have the
right to call or repay obligations at par value without prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized market
Cost value
----------- -----------
<S> <C> <C>
Investments Available For Sale
Due in:
Less than one year................... $ 5,090 $ 5,091
One to five years.................... 73,053 73,218
Five to ten years.................... 105,927 106,669
Greater than ten years............... 33,879 33,800
----------- -----------
$ 217,949 $ 218,778
=========== ===========
</TABLE>
9
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The realized gross gains and losses from sales are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Gross realized gains.............. $ 348 $ 184 $ 147
Gross realized losses............. (3) (84) (33)
------- ------ ------
$ 345 $ 100 $ 114
======= ====== ======
</TABLE>
Investment securities with an amortized cost of $55.6 million at December 31,
1998, respectively, are pledged as collateral for other borrowings. Pursuant to
a collateral agreement with the FHLB-NY, all unpledged, qualifying investment
securities, including those available for sale, are pledged to secure advances
from the FHLB-NY (see Note 10).
Investment securities held to maturity with an amortized cost of $10.0 million
and a net unrealized gain of $169,000 were transferred to investment securities
available for sale during the year. These securities were transferred to
increase the overall level of liquidity and improve the ability to manage
interest rate risk. As part of the Pulse acquisition, investment securities of
$68.2 million with a net unrealized gain of $126,000 were transferred to
investment securities available for sale at the date of the merger. The
securities were transferred to conform to the Company's existing interest rate
risk position and credit policies.
(5) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at December 31, 1998 and 1997, is as
follows (in thousands):
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities Available For Sale
FHLMC...................................................... $ 237,571 $ 2,198 $ (817) $ 238,952
GNMA....................................................... 71,537 1,386 (151) 72,772
FNMA....................................................... 139,477 947 (202) 140,173
Collateralized mortgage obligations........................ 209,570 898 (533) 209,984
-------------- ------------ ------------ -----------
Total mortgage-backed securities available for sale........ $ 658,155 $ 5,429 $ (1,703) $ 661,881
============== ============ ============ ===========
</TABLE>
There were no mortgage-backed securities classified as held to maturity at
December 31, 1998.
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities Held To Maturity
FHLMC...................................................... $ 155,859 $ 3,135 $ (288) $ 158,706
GNMA....................................................... 80,194 1,916 - 82,110
FNMA....................................................... 60,992 538 (170) 61,360
Collateralized mortgage obligations........................ 72,875 111 (833) 72,153
-------------- ------------ ------------ -----------
Total mortgage-backed securities held to maturity.......... $ 369,920 $ 5,700 $ (1,291) $ 374,329
============== ============ ============ ===========
Mortgage-Backed Securities Available For Sale
FHLMC...................................................... $ 98,977 $ 824 $ (174) $ 99,627
GNMA....................................................... 72,624 912 - 73,536
FNMA....................................................... 9,617 121 - 9,738
Collateralized mortgage obligations........................ 17,436 233 (40) 17,629
-------------- ------------ ------------ -----------
Total mortgage-backed securities available for sale........ $ 198,654 $ 2,090 $ (214) $ 200,530
============== ============ ============ ===========
</TABLE>
Collateralized mortgage obligations issued by FHLMC, FNMA, GNMA and private
interests amounted to $103.7 million, $46.8 million, $3.1 million and $56.0
million, respectively, at December 31, 1998 and $47.5 million, $29.6 million,
$406,000 and $12.8 million, respectively, at December 31, 1997. The privately
issued CMOs have generally been underwritten by large investment banking firms
with the timely payment of principal and interest on these securities supported
(credit enhanced) in varying degrees by either insurance issued by a financial
guarantee insurer, letters of credit or subordination techniques. Substantially
all such securities are triple "A" rated by one or more of the nationally
recognized securities rating agencies. The privately-issued CMOs are subject to
certain credit-related risks normally not associated with U.S. Government Agency
CMOs. Among such risks is the limited loss protection generally provided by the
various forms of credit enhancements as losses in excess of certain levels are
not protected. Furthermore, the credit enhancement itself is subject to credit
worthiness of the enhancer. Thus, in the event a credit enhancer does not
fulfill its obligations, the CMO holder could be subject to risk of loss similar
to a purchaser of a whole loan pool. Management believes that the credit
enhancements are adequate to protect the Company from losses and has therefore,
not provided an allowance for losses on its privately-issued CMOs.
10
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The realized gross gains and losses from sales are as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Gross realized gains.............. $ 338 $ 528 $ 324
Gross realized losses............. (70) (53) (162)
------- ------ ------
$ 268 $ 475 $ 162
======= ====== ======
</TABLE>
Mortgage-backed securities with an amortized cost of $238,000 at December 31,
1998, were pledged as collateral to secure deposits held for municipalities
within the State of New Jersey. Mortgage-backed securities with an amortized
cost of $135.8 million at December 31, 1998, were pledged as collateral for
other borrowings. Pursuant to a collateral agreement with the FHLB-NY, all
unpledged, qualifying mortgage-backed securities are pledged to secure advances
from the FHLB-NY (see Note 10). Expected maturities of mortgage-backed
securities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties.
Mortgage-backed securities held to maturity with an amortized cost of $181.8
million and a net unrealized gain of $2.3 million were transferred to mortgage-
backed securities available for sale during the year. These securities were
transferred to increase the overall level of liquidity and improve the ability
to manage interest rate risk. As part of the Pulse acquisition, mortgage-backed
securities of $101.3 million with a net unrealized gain of $1.1 million were
transferred to mortgage-backed securities available for sale at the date of the
merger. The securities were transferred to conform to the Company's existing
interest rate risk position and credit policies.
(6) LOANS RECEIVABLE, NET
A summary of loans receivable at December 31, 1998 and 1997, is as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Loans Receivable
Real estate mortgages:
One- to four-family............................... $ 649,272 $ 559,172
Multi-family and commercial....................... 82,658 76,218
Home equity....................................... 57,084 56,533
FHA-insured and VA-guaranteed..................... 8,012 7,453
--------- ---------
797,026 699,376
Real estate construction............................. 65,161 45,357
Consumer............................................. 43,405 6,954
--------- ---------
Total Loans....................................... 905,592 751,687
--------- ---------
Loans in process.................................. (41,812) (27,530)
Net deferred expenses............................. 281 24
Net unamortized premium........................... 141 83
Allowance for loan losses......................... (9,505) (8,454)
--------- ---------
(50,895) (35,877)
--------- ---------
Loans receivable, net............................. $ 854,697 $ 715,810
========= =========
</TABLE>
The Company serviced loans for others in the amount of $87.6 million, $93.7
million and $101.2 million at December 31, 1998, 1997 and 1996, respectively.
Related servicing income earned on loans serviced for others totaled $237,000,
$288,000, and $325,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Loans in the amount of $2.4 million, and $2.1 million were outstanding to
directors and executive officers of the Company at December 31, 1998 and 1997,
respectively. The loans consist primarily of loans secured by mortgages on
residential properties.
11
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The Company has pledged, under a blanket assignment, its unpledged and
qualifying mortgage portfolio to secure advances from the FHLB-NY (see Note 10).
A summary of nonperforming assets at December 31, 1998 and 1997, is as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Nonaccrual loans ......................................... $ 2,740 $ 4,457
Loans 90 days or more delinquent and still accruing ...... 1,525 1,596
Restructured loans ....................................... -- 2,103
------------- -------------
Total nonperforming loans ........................... 4,265 8,156
Real estate owned (included in other assets) ............. 1,453 1,516
------------- -------------
Total nonperforming assets .......................... $ 5,718 $ 9,672
============= =============
</TABLE>
At December 31, 1998 and 1997, the impaired loan portfolio was primarily
collateral dependent and totaled $734,000 and $654,000, respectively, for which
general and specific allocations to the allowance for loan losses of $175,000
and $262,000 were identified at December 31, 1998 and 1997. The average balance
of impaired loans during 1998, 1997, and 1996 was $373,000, $654,000 and
$654,000, respectively.
If interest income on nonaccrual and impaired loans had been current in
accordance with their original terms, approximately $311,000, $629,000 and
$689,000 of interest income for the years ended December 31, 1998, 1997 and
1996, respectively, would have been recorded. Interest income recognized on
nonaccrual and impaired loans totaled $145,000, $227,000 and $259,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. At December 31,
1998, there were no commitments to lend additional funds to borrowers whose
loans are classified as nonperforming.
An analysis of the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year............... $ 8,454 $ 7,781 $ 7,851
Provision charged to operations............ 1,469 1,200 550
------- ------- -------
9,923 8,981 8,401
Charge-offs................................ (596) (527) (730)
Recoveries................................. 28 -- 110
Allowance activity of Pulse during
conforming period, net................. 150 -- --
------- ------- -------
Balance at end of year..................... $ 9,505 $ 8,454 $ 7,781
======= ======= =======
</TABLE>
(7) INTEREST AND DIVIDENDS RECEIVABLE, NET
A summary of interest and dividends receivable, net of allowance for uncollected
interest of $240,000 and $344,000 at December 31, 1998 and 1997, respectively,
is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loans....................................... $ 4,585 $ 4,169
Investment securities....................... 4,064 3,333
Mortgage-backed securities.................. 4,907 4,964
-------- --------
$ 13,556 $ 12,466
======== ========
</TABLE>
(8) PREMISES AND EQUIPMENT, NET
12
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Premises and equipment at December 31, 1998 and 1997, are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land ................................................. $ 3,870 $ 2,482
Buildings and improvements ........................... 12,969 12,365
Leasehold improvements ............................... 1,354 1,405
Furnishings, equipment and automobiles ............... 6,934 6,201
Construction in progress ............................. 794 148
-------- --------
Total.............................................. 25,921 22,601
Accumulated depreciation and amortization............. (9,440) (8,191)
-------- --------
$ 16,481 $ 14,410
======== ========
</TABLE>
(9) DEPOSITS
Deposits at December 31, 1998 and 1997, are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
Interest Weighted Interest Weighted
rate average rate average
Amount ranges rate Amount ranges rate
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand .................. $ 41,012 --% --% $ 31,195 --% --%
NOW and money market ......................... 340,423 0--3.20 2.92 288,585 0--5.43 2.97
Savings ...................................... 172,910 0--2.25 2.50 178,209 0--2.50 2.58
Certificates of deposit....................... 713,774 2.00--9.34 5.48 729,315 3.69--9.34 5.53
----------- -----------
$ 1,268,119 4.21% $ 1,227,304 4.36%
=========== ======== =========== =======
</TABLE>
The scheduled maturities of certificates of deposit at December 31, 1998 are as
follows (in thousands):
<TABLE>
<S> <C>
One year or less.............................. $ 579,710
After one to two years........................ 65,639
After two to three years...................... 19,528
After three to four years..................... 20,471
After four to five years...................... 10,648
After five years.............................. 17,778
----------
$ 713,774
==========
</TABLE>
Included in deposits at December 31, 1998 and 1997, are $117.4 million and
$98.9 million of deposits of $100,000 and over, and $493,000 and $500,000,
respectively, of accrued interest payable on deposits.
(10) BORROWED FUNDS
Advances from the FHLB-NY at December 31, 1998 and 1997, are summarized as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Weighted Weighted
Average Average
Interest Interest
Maturity Amount Rate Amount Rate
- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1998 $ -- -- % $ 10,000 6.71%
1999 6,000 5.87 6,000 5.87
2000 2,000 5.76 2,000 5.76
2002 5,000 5.69 5,000 6.10
2003 25,000 5.14 -- --
---------- ----------
$ 38,000 5.36 % $ 23,000 6.28%
========== =========== ========== ===========
</TABLE>
13
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The Company has entered into FHLB-NY advances that have call features that may
be exercised by the FHLB-NY at predetermined dates. The total of such advances
at December 31, 1998 and 1997, totaled $15.0 million and $5.0 million,
respectively. The maximum amount of FHLB-NY advances outstanding at any month-
end during the years ended December 31, 1998 and 1997 was $50.8 million and
$40.0 million, respectively. The average amount of FHLB-NY advances outstanding
during the years ended December 31, 1998 and 1997 was $24.1 million and
$33.3 million, respectively. At December 31, 1998 and 1997, $5.0 million and
$10.0 million of FHLB-NY advances had adjustable rates, respectively.
Advances from the FHLB-NY are secured by pledges of FHLB-NY stock of
$12.9 million and $10.8 million at December 31, 1998 and 1997, respectively, and
a blanket assignment of the Company's unpledged, qualifying mortgage loans,
mortgage-backed securities and investment securities.
The Company has an available overnight line of credit with the FHLB-NY for a
maximum of $50.0 million at December 31, 1998.
Other Borrowings
The following is a summary of other borrowings at December 31, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
Weighted Weighted
Average Average
Interest Interest
Contractual Maturity Amount Rate Amount Rate
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
1998................................. $ -- -- % $ 77,319 5.95%
1999................................. 63,000 5.73 30,800 5.89
2000................................. 28,675 5.93 20,000 6.05
2001................................. 15,000 5.05 5,000 5.55
2002................................. 20,000 5.70 20,000 5.70
2003................................. 25,000 4.83 -- --
2004................................. 20,000 5.36 10,000 5.97
2005................................. -- -- 546 7.00
2008................................. 55,000 5.09 -- --
------------ ------------
$ 226,675 5.42 % $ 163,665 5.89%
============ =========== ============ ==========
</TABLE>
The maximum amount of other borrowings outstanding at any month-end during the
years ended December 31, 1998 and 1997 was $269.2 million and $174.7 million,
respectively. The average amount of other borrowings outstanding during the
years ended December 31, 1998 and 1997 was $192.7 million and $143.9 million,
respectively. Securities underlying other borrowings included mortgage-backed
and investment securities, which had an amortized cost of $191.4 million and
$181.9 million, and market values of $192.1 million and $181.2 million at
December 31, 1998 and 1997, respectively. The securities underlying the other
borrowing agreements are under the Company's control. At December 31, 1998 and
1997, $165.2 million and $76.5 million, respectively, of other borrowings are
callable at defined dates and at the lender's discretion prior to the
contractual maturity of the borrowings.
(11) REGULATORY MATTERS
Capital distributions, in the form of any dividend paid or other distribution in
cash or in kind, are limited by the Office of Thrift Supervision ("OTS"). A
"Tier 1" association, which is defined as an association that has capital
immediately prior to
14
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
a proposed capital distribution that is equal to or greater than the amount of
its fully phased-in capital requirement, is authorized to make capital
distributions during a calendar year up to the higher of 100% of its net income
to date during the calendar year plus the amount that would reduce by one-half
its surplus capital ratio at the beginning of the calendar year, or 75% of its
net income over the most recent four-quarter period. The Bank is a Tier 1
association.
OTS regulations require savings institutions to maintain minimum levels of
regulatory capital. Under the regulations in effect at December 31, 1998 and
1997, the Bank was required to maintain a minimum ratio of tangible capital to
total adjusted assets of 1.5%; a minimum ratio of Tier 1 (core) capital to total
adjusted assets of 3.0%; a minimum ratio of Tier 1 (core) capital to risk-
weighted assets of 4.0% and a minimum ratio of total (core and supplementary)
capital to risk-weighted assets of 8.0%.
Under the prompt corrective action regulations, the OTS is required to take
certain supervisory actions and may take additional discretionary actions with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of savings institutions into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a Tier 1 (core) capital
ratio of at least 5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and
a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the OTS about capital components, risk
weightings and other factors.
Management believes that, as of December 31, 1998, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent OTS
notification categorized the Bank as a well capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1998 and 1997, compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
OTS Requirements
-------------------------------------------------------------------
For Classification as
Bank Actual Minimum Capital Adequacy Well-Capitalized
----------------------------- ------------------------------ ------------------------------
Amount Ratio (%) Amount Ratio (%) Amount Ratio (%)
------------ --------------- ------------- --------------- ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
- ---------------------------
Tangible capital .......... $221,184 12.15 $27,298 1.50 N/A N/A
Tier 1 (core) capital...... 221,184 12.15 54,597 3.00 $90,995 5.00
Risk-based capital:
Tier 1................... 221,184 31.75 27,866 4.00 41,804 6.00
Total.................... $229,901 33.00 $55,738 8.00 $69,673 10.00
======== ===== ======= ==== ======= =====
December 31, 1997
- ---------------------------
Tangible capital........... $132,022 8.42 $23,516 1.50 N/A N/A
Tier 1 (core) capital...... 132,022 8.42 47,031 3.00 $78,385 5.00
Risk-based capital:
Tier 1................... 132,022 22.55 23,419 4.00 35,136 6.00
Total.................... $139,347 23.80 $46,847 8.00 $58,559 10.00
======== ===== ======= ==== ======= =====
</TABLE>
(12) INCOME TAXES
15
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Income tax expense applicable to income for the years ended December 31, 1998,
1997 and 1996, consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Federal:
Current..... $ 11,273 $ 7,156 $ 5,720
Deferred.... (727) 813 (1,364)
------------- ------------- -------------
10,546 7,969 4,356
------------- ------------- -------------
State:
Current..... 458 676 509
Deferred.... (60) 41 (97)
------------- ------------- -------------
398 717 412
------------- ------------- -------------
$ 10,944 $ 8,686 $ 4,768
============= ============= =============
</TABLE>
The effective tax rates for years ended December 31, 1998, 1997 and 1996, the
rates were 36.0%, 36.7% and 36.8%, respectively.
A reconciliation between the effective income tax expense and the amount
computed by multiplying the applicable statutory federal income tax rate for the
years ended December 31, 1998, 1997 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Income before income taxes................................. $ 30,437 $ 23,656 $ 12,971
Applicable statutory federal tax rate ..................... 35% 35% 35%
------------- ------------- -------------
Computed "expected" federal income tax expense............. 10,653 8,280 4,540
Increase in federal income tax expense resulting from:
State income taxes, net of federal benefit .............. 259 468 268
Other items, net......................................... 32 (62) (40)
------------- ------------- -------------
$ 10,944 $ 8,686 $ 4,768
============= ============= =============
</TABLE>
16
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to a significant portion
of deferred tax assets and liabilities at December 31, 1998 and 1997, are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred Tax Assets
Provision for loan losses-book........................................... $ 3,512 $ 3,125
Postretirement benefits.................................................. 413 376
Tax depreciation less than book depreciation............................. 132 --
Excess pension expense................................................... 432 304
Deferred directors' fees................................................. 129 98
Excess cost over fair value of net assets acquired....................... 450 482
Other.................................................................... 114 115
------------- -------------
Total gross deferred tax assets........................................ 5,182 4,500
------------- -------------
Deferred Tax Liabilities
Provision for loan losses-tax............................................ 1,128 1,452
Unrealized gain on securities available for sale......................... 1,405 728
Tax depreciation greater than book depreciation.......................... -- 245
Excess sum-of-year discount over straight line........................... -- 81
Net mortgage premium amortization........................................ -- 93
Deferred points.......................................................... 361 26
Other.................................................................... 167 161
------------- -------------
Total gross deferred tax liabilities................................... 3,061 2,786
------------- -------------
Net deferred tax asset............................................... $ 2,121 $ 1,714
============= =============
</TABLE>
Retained earnings at December 31, 1998 and 1997, includes approximately
$18.1 million for which no provision for income tax has been made. This amount
represents an allocation of income to bad debt deductions for tax purposes only.
Events that would result in taxation of these reserves include failure to
qualify as a bank for tax purposes, distributions in complete or partial
liquidation, stock redemptions, excess distributions to shareholders or a change
in Federal tax law. At December 31, 1998 and 1997, the Company had an
unrecognized tax liability of $6.5 million with respect to this reserve.
Included in other comprehensive income are income tax expense (benefits)
attributable to net unrealized gains (losses) on securities available for sale
in the amounts of $677,000, $855,000 and ($224,000) for the years ended
December 31, 1998, 1997 and 1996.
Management has determined that it is more likely than not that it will realize
the deferred tax assets based upon the nature and timing of the items listed
above. There can be no assurances, however, that there will be no significant
differences in the future between taxable income and pre-tax book income if
circumstances change. In order to fully realize the net deferred tax asset, the
Company will need to generate future taxable income. Management has projected
that the Company will generate sufficient taxable income to utilize the net
deferred tax asset; however, there can be no assurance as to such levels of
taxable income generated.
(13) EMPLOYEE BENEFIT PLANS
The Company is a participant in the Financial Institutions Retirement Fund, a
multi-employer defined benefit plan. All employees who attain the age of 21
years and complete one year of service are eligible to participate in this plan.
Retirement benefits are based upon a formula utilizing years of service and
average compensation, as defined. Participants are vested 100% upon the
completion of five years of service. Pension expense was $214,000, $371,000 and
$480,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
17
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Financial Institutions Retirement Fund does not segregate its assets,
liabilities or costs by participating employer. Therefore, disclosure of the
accumulated benefit obligations, plan assets and the components of annual
pension expense attributable to the Company cannot be ascertained.
The Company has Supplemental Executive Retirement Plans ("SERP"), which
provide post-employment supplemental retirement benefits to certain officers
of the Company. The SERP is non-qualified employee benefit plan.
The Company has a non pension postretirement benefit plan ("Other Benefits"),
which provides certain healthcare benefits to eligible employees. The plan is
non contributory. The plan is unfunded as of December 31, 1998, and the
obligation is included in Other liabilities as an accrued postretirement benefit
cost.
The following table shows the change in benefit obligation, the funded status
for the SERP and other benefits, and (accrued cost) prepaid benefit at
December 31 (in thousands):
<TABLE>
<CAPTION>
SERP Other Benefits
-------------------------- ------------------------
1998 1997 1998 1997
---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 865 $ 2,084 $ 1,106 $ 1,002
Service cost 80 75 59 61
Interest cost 60 95 87 72
Amendments -- -- 69 --
Actuarial (gain) loss 35 (1) 345 --
Benefits paid -- (1,388) (20) (29)
----------- ------------ ----------- -----------
Benefit obligation at the end of the year $ 1,040 $ 865 1,646 $ 1,106
=========== ============ =========== ===========
Change in Plan Assets
Fair value of plan assets at beginning of year $ -- $ -- $ -- $ --
Employer Contribution -- 1,388 20 29
Benefits paid -- (1,388) (20) (29)
----------- ------------ ----------- -----------
Fair value of plan assets at end of year $ -- $ -- $ -- $ --
=========== ============ =========== ===========
Funded status $ (1,040) $ (865) $ (1,646) $ (1,106)
Unrecognized net transition obligation 680 746 -- --
Unrecognized net actuarial (gain) loss 225 202 348 --
----------- ------------ ----------- -----------
Prepaid (accrued) benefit cost $ (135) $ 83 $ (1,298) $ (1,106)
=========== ============ =========== ===========
Weighted average assumptions as of December 31,
Discount rate 6.75% 6.75% 6.75% 6.75%
Expected return on plan assets n/a n/a n/a n/a
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
</TABLE>
Net periodic cost at December 31 includes the following components (in
thousands):
<TABLE>
<CAPTION>
SERP Other Benefits
------------------------------------- -------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic cost
Service cost $ 80 $ 75 $ 78 $ 58 $ 61 $ 56
Interest cost 60 95 130 87 72 66
Amortization of net transition obligation 66 66 66 - - -
Amortization of net actuarial loss (gain) 9 (46) 23 85 (34) 49
Amortization of prior service cost - 347 - 70 - -
---------- ---------- ---------- ---------- ---------- ----------
Net periodic cost $ 215 $ 537 $ 297 $ 301 $ 99 $ 171
========== ========== ========== ========== ========== ==========
</TABLE>
For measurement purposes, a 5 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998 and all future years.
18
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Assumed health care trend rates have a significant effect on the amounts
reported for the health care plans. A one percentage point change in the
assumed health care cost trend rates would have the following effects (in
thousands):
<TABLE>
<CAPTION>
1 Percentage Point
-------------------------
Increase Decrease
---------- ----------
<S> <C> <C>
Effect on total of service and interest
cost components $ 27 $ (23)
Effect on Other benefits obligation 213 (183)
</TABLE>
The Company also maintains an incentive savings plan for eligible employees.
Employees may make contributions to the plan of 2% to 12% of their compensation.
For the first 6% of the employee's contribution, the Company will contribute 50%
of that amount to the employee's account. At the end of the plan year, the
Company may make an additional contribution to the plan. The contributions
under this plan were $141,000, $134,000 and $135,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Bank Recognition and Retention Plan and Trust
In 1992, the Company adopted a Recognition and Retention Plan and Trust for the
benefit of directors, officers and key employees of the Company. During 1996,
the Board of Directors adopted an Omnibus Incentive Plan and awarded 21,780
RRP shares following approval by the OTS and stockholders. In 1998, the Board
of Directors and stockholders approved the granting of 662,014 shares as RRP
awards under the 1998 Stock-Based Incentive Plan ("1998 Plan"). As of
December 31, 1998, the Company had granted 641,799 RRP shares under the 1998
Plan.
RRP awards are granted in the form of shares of common stock held by the RRP.
RRP awards granted in 1996 are payable over a three year period at a rate of
33.3% per year, commencing on the date of the award grant. RRP awards granted
in 1998 are payable over a five year period at a rate of 20% per year,
commencing on the date of the award grant.
The market value of shares issued and granted under the RRP in 1996 was
$310,000. Amortization of the RRP was $104,000, $103,000 and $24,000 for the
years ended December 31, 1998, 1997 and 1996.
Employee Stock Ownership Plan
The Company established an ESOP for eligible employees who have completed a
twelve-month period of employment with the Company. ESOP shares were purchased
in each of the Company's public offerings. Funds for the purchase of additional
shares were borrowed from the Bank's parent, First Sentinel Bancorp. Shares
purchased by the ESOP are held by a trustee for allocation among participants as
the loan is paid. The Company, at its discretion, contributes funds, in cash to
pay principal and interest on the ESOP loan. The number of shares of common
stock released each year is proportional to the amount of principal paid on the
ESOP loan for the year. Dividends paid on unallocated ESOP shares are used to
repay the loan. Unallocated ESOP shares are not considered outstanding for
purposes of calculating earnings per share. At December 31, 1998, there were
1,438,107 unallocated ESOP shares with a market value of $11.7 million.
In 1998, the Company recognized compensation expense when debt payments are
made in accordance with the American Institute of Certified Public Accountants
Statement of Position 93-6. Prior year expense is based upon the original
cost of the shares allocated. Compensation expense recognized for 1998, 1997
and 1996 amounted to $771,000, $100,000 and $100,000, respectively. The Company
allocated 84,796, 114,589, and 114,589, shares during 1998, 1997, and 1996,
respectively.
19
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Stock Option Plans
The Company maintains stock option plans ("the Plans") for the benefit of
directors, officers, and other key employees of the Company. Options granted
under the Plans are exercisable over a period not to exceed ten years from the
date of grant. Under all Plans originated prior to 1998, the exercise price of
each option equals the market price of the Company's stock on the date of grant.
The exercise price for options granted under the Plan originated in 1998 is the
greater of the market price of the Company's stock on the date of grant or
$9.00. The following table summarizes the options granted and exercised under
the Plans during the periods indicated and their respective weighted average
exercise price:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise Of exercise of exercise
shares price Shares price shares price
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period..... 1,751,298 $ 3.12 2,064,540 $ 2.35 1,967,796 $ 2.11
Granted................................ 1,702,836 8.88 308,648 4.25 265,395 3.68
Expired................................ (43,090) 3.69 - - - -
Exercised.............................. (570,760) 2.79 (621,890) 2.10 (168,651) 2.11
--------- ------- --------- -------- --------- --------
Outstanding at end of period .......... 2,840,284 $ 6.55 1,751,298 $ 3.12 2,064,540 $ 2.35
========= ======= ========= ======== ========= ========
Options exercisable at year-end........ 1,137,164 1,592,410 1,781,178
========= ========= =========
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1998, as adjusted for the effect of stock dividends:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------ --------------------------
Weighted
average Weighted Number of Weighted
Range of Number remaining average shares average
Exercise of shares contractual exercise exercisable exercise
Prices outstanding life in years price at period end price
- --------------- ------------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$ 0.872 - 2.341 281,354 4.0 $ 1.42 281,354 $ 1.42
3.326 - 4.517 856,094 7.3 3.83 765,474 3.85
6.642 - 6.908 90,336 9.5 6.77 90,336 6.77
9.000 1,612,500 10.0 9.00 - -
- --------------- --------- ----- ------ --------- ------
$ 0.872 - 9.000 2,840,284 8.58 $ 6.62 1,137,164 $ 3.48
=============== ========= ===== ====== ========= ======
</TABLE>
The Company applies APB 25 in accounting for the Plans. Consistent with
SFAS 123, if compensation cost for the Plans was included, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
Net Income:
As reported................................................... $19,493 $14,970 $8,203
Pro forma..................................................... 18,762 14,569 8,126
Earnings per share:
Basic and diluted earnings per share.......................... $ 0.46 $ 0.35 $ 0.18
Pro forma basic and diluted earnings per share................ 0.45 0.34 0.18
Weighted average fair value of options granted during year....... $ 2.21 $ 2.03 $ 1.59
</TABLE>
20
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
The fair value of stock options granted by the Company was estimated through the
use of the Black-Scholes option-pricing model that takes into account the
following factors as of the grant dates: the exercise price and expected life of
the option, the market price of the underlying stock at the grant date and its
expected volatility, and the risk-free interest rate for the expected term of
the option. In deriving the fair value of a stock option, the stock price at the
grant date is reduced by the value of the dividends to be paid during the life
of the option. The following assumptions were used for grants in 1998, 1997 and
1996: dividend yield of 2.35%, 3.00% and 2.52%; an expected volatility of 20%,
50% and 29%; and a risk-free interest rate of 5.00%, 6.59% and 6.47%. The
effects of applying SFAS 123 on the pro forma net income may not be
representative of the effects on pro forma net income for future years.
(14) COMMITMENTS AND CONTINGENCIES
Commitments
Financial Transactions with Off-Balance-Sheet Risk and Concentrations of Credit
The Company, in the normal course of conducting its business, extends credit to
meet the financing needs of its customers through commitments and letters of
credit.
The following commitments and contingent liabilities existed at December 31,
1998 and 1997, which are not reflected in the accompanying consolidated
financial statements (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Origination of mortgage loans:
Fixed rate............................................................... $ 21,718 $ 12,158
Variable rate............................................................ 25,131 37,631
Purchase of mortgage loans - variable rate................................. 3,526 --
Undisbursed home equity credit lines....................................... 37,256 25,011
Purchase of investment and mortgage-backed securities ..................... 13,000 --
Undisbursed construction credit lines...................................... 41,812 27,530
Undisbursed consumer lines of credit....................................... 12,938 1,939
Participations in Thrift Institutions Community Investment Corp. of NJ..... 1,400 100
Unused credit card lines................................................... -- 907
Standby letters of credit.................................................. 2,199 2,228
Sale of mortgage loans..................................................... 1,845 --
========= =========
</TABLE>
These instruments involve elements of credit and interest rate risk in excess of
the amount recognized in the consolidated financial statements. The Company
uses the same credit policies and collateral requirements in making commitments
and conditional obligations as it does for on-balance-sheet loans. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness on a case-
by-case basis. The amount of collateral obtained is based on management's
credit evaluation of the borrower.
The Company grants one- to four-family first mortgage real estate loans, multi-
family, and nonresidential first mortgage real estate loans to borrowers
throughout New Jersey. Its borrowers' abilities to repay their obligations are
dependent upon various factors, including the borrowers' income and net worth,
cash flows generated by the underlying collateral, value of the underlying
collateral and priority of the Company's lien on the property. Such factors are
dependent upon various economic conditions and individual circumstances beyond
the Company's control; the Company is therefore subject to risk of loss. The
Company believes its lending policies and procedures adequately minimize the
potential exposure to such risks and that adequate provisions for loan losses
are provided for all known and inherent risks. Collateral and/or guarantees are
required for virtually all loans.
21
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Lease Obligations
At December 31, 1998, the Company was obligated under noncancellable operating
leases for premises and equipment. Rental expense under these leases aggregated
approximately $507,000, $613,000 and $711,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
The projected minimum rental commitments as of December 31, 1998, are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999..................... $ 482
2000..................... 346
2001..................... 288
2002..................... 283
2003..................... 194
Thereafter............... 297
------
$1,890
======
</TABLE>
Contingencies
The Company is a defendant in certain claims and legal actions arising in the
ordinary course of business. Management is of the opinion that the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition or results of operations.
- --------------------------------------------------------------------------------
(15) SPECIAL SAIF ASSESSMENT
The Deposit Insurance Funds Act of 1996 (the "Act") was signed into law on
September 30, 1996. Among other things, the Act required depository
institutions to pay a one-time special assessment of 65.7 basis points on their
Savings Association Insurance Fund ("SAIF")-assessable deposits, in order to
recapitalize the SAIF to the reserve level required by law. The Company's
financial statements for the year ended December 31, 1996 reflect a charge of
$7.9 million for this special SAIF assessment. As a result of the Act, the
Company's annual SAIF insurance premium has been reduced to 6.4 basis points.
In addition to this special SAIF assessment, the Company paid federal deposit
insurance premiums of $759,000, $756,000 and $2.8 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
(16) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 supersedes the disclosure requirements in
Statements No. 80, 105 and 119. This statement is effective for fiscal years
beginning after June 15, 1999. The adoption of SFAS No. 133 is not expected to
have a material impact on the financial position or the results of the Company.
In October 1998, 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 SFAS No. 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 interest based on its ability and intent to sell or hold those
investments. SFAS No. 134 is effective January 1, 1999. The adoption of this
statement is not expected to have a material impact on the financial position or
results of operations of the Company.
- --------------------------------------------------------------------------------
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following fair value estimates, methods and assumptions were used to measure
the fair value of each class of financial instrument for which it is practical
to estimate that value.
22
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
For such short-term investments, the carrying amount was considered to be a
reasonable estimate of fair value.
Federal Home Loan Bank-NY Stock
Federal Home Loan Bank-NY stock is valued at cost.
Investment and Mortgage-backed Securities
For investment and mortgage-backed securities, fair values were based on quoted
market prices or dealer quotes. If a quoted market price was not available,
fair values were estimated using quoted market prices for similar securities.
Loans Receivable, Net
Fair values were estimated for portfolios of performing and nonperforming loans
with similar financial characteristics. For certain analogous categories of
loans, such as residential mortgages, home equity loans, non-residential
mortgages, and consumer loans, fair value was estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other performing loan types was estimated by
discounting the future cash flows using market discount rates that reflect the
credit, collateral, and interest rate risk inherent in the loan.
Deposits
The fair value of demand deposits, savings deposits and money market accounts
were the amounts payable on demand at December 31, 1998 and 1997. The fair
values of certificates of deposit were based on the discounted value of
contractual cash flows. The discount rate was estimated utilizing the rate
currently offered for deposits of similar remaining maturities.
Borrowings
For short-term borrowings, the carrying amount was considered to be a reasonable
estimate of fair value. For long-term borrowings, the fair value was based upon
the discounted value of the cash flows. The discount rates utilized were based
on rates currently available with similar terms and maturities.
Off-Balance Sheet Instruments
For commitments to extend credit and letters of credit, the fair value would
approximate fees currently charged to enter into similar agreements.
The estimated fair values of the Company's financial instruments at December 31,
1998 and 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents.................................... $ 37,631 $ 37,631 $ 29,903 $ 29,903
FHLB-NY stock................................................ 12,852 12,852 10,820 10,820
Investment securities........................................ -- -- 127,583 127,537
Investment securities available for sale..................... 242,197 242,197 78,443 78,443
Mortgage-backed securities................................... -- -- 369,920 374,329
Mortgage-backed securities available for sale ............... 661,881 661,881 200,530 200,530
Loans receivable, net........................................ 854,697 862,231 715,810 722,579
Financial Liabilities:
Deposits..................................................... 1,268,119 1,272,466 1,227,304 1,227,083
Borrowings................................................... 264,675 264,663 186,665 185,704
</TABLE>
23
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Off-Balance Sheet Instruments:
Loan commitments............................................. $ -- $ 152 $ -- $ 134
Standby letters of credit.................................... -- 21 -- 22
</TABLE>
Limitations
The foregoing fair value estimates were made at December 31, 1998 and 1997,
based on pertinent market data and relevant information on the financial
instrument. These estimates do not include any premium or discount that could
result from an offer to sell, at one time, the Company's entire holdings of a
particular financial instrument or category thereof. Since no market exists for
a substantial portion of the Company's financial instruments, fair value
estimates were necessarily based on judgments with respect to future expected
loss experience, current economic conditions, risk assessments of various
financial instruments involving a myriad of individual borrowers, and other
factors. Given the innately subjective nature of these estimates, the
uncertainties surrounding them and the matters of significant judgment that must
be applied, these fair value estimations cannot be calculated with precision.
Modifications in such assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for on- and off-balance
sheet financial instruments at December 31, 1998 and 1997, no attempt was made
to estimate the value of anticipated future business of the value of
nonfinancial statement assets and liabilities. Other important elements which
are not deemed to be financial assets or liabilities include the value of the
Company's retail branch delivery system, its existing core deposit base,
premises and equipment, and goodwill. Further, certain tax implications related
to the realization of the unrealized gains and losses could have a substantial
impact on these fair value estimates and have not been incorporated into any of
the estimates.
- --------------------------------------------------------------------------------
(18) CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
The condensed financial statements of First Sentinel Bancorp (parent company
only) are presented below:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition December 31,
(In thousands) 1998 1997
---------- ----------
<S> <C> <C>
Assets
Cash $ 29,098 $ 359
Loans from subsidiary 1,700 1,950
ESOP loan receivable 13,073 546
Investment in subsidiary 229,911 141,078
Investment securities available for sale 27,164 1,012
Other assets 544 540
---------- ----------
Total assets $ 301,490 $ 145,485
========== ==========
Liabilities and Stockholders' Equity
Dividends payable - 539
Other liabilities 1,671 53
Stockholders' Equity 299,819 144,893
---------- ----------
Total Liabilities and Stockholders' Equity $ 301,490 $ 145,485
========== ==========
</TABLE>
24
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Condensed Statements of Income For the Years Ended December 31,
--------------------------------------------
(In thousands) 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 13,848 $ 2,146 $ 2,423
Interest and dividends on securities 1,767 135 229
Net gain on sales of securities 106 - -
Other income 1 12 -
------------ ------------ ------------
Total income 15,722 2,293 2,652
------------ ------------ ------------
Merger expense 2,128 - -
Other expense 306 103 100
------------ ------------ ------------
Total expense 2,434 103 100
------------ ------------ ------------
Income before taxes 13,288 2,190 2,552
Income taxes 208 11 39
------------ ------------ ------------
Income before equity in undistributed income of subsidiary 13,080 2,179 2,513
Equity in undistributed income of subsidiary 6,413 12,791 5,690
------------ ------------ ------------
Net income $ 19,493 $ 14,970 $ 8,203
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows For the Years Ended December 31,
(in thousands) 1998 1997 1996
----------- ------------- ------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 19,493 $ 14,970 $ 8,203
Adjustments to reconcile net income to
net cash provided by operating activities
Increase in undistributed earnings of subsidiary (6,413) (12,791) (5,690)
Net gains on sales of investment securities available for sale (106) - -
(Increase) decrease in other assets (4) 1,524 (2,064)
(Decrease) increase in dividends payable (539) 5 534
Increase in other liabilities 1,618 1,093 5,593
Amortization of ESOP 771 100 100
Amortization of RRP 104 103 24
------------ ------------ ------------
Net cash provided by operating activities 14,924 5,004 6,700
------------ ------------ ------------
Investing Activities
Purchase of investment securities (47,326) (824) (9)
Proceeds from sales of investment securities available for sale 20,405 - -
Distribution from subsidiary - - 12,734
Capital contributed to subsidiary Bank (92,869) - -
Decrease (increase) in loans from subsidiary 250 (1,000) (950)
------------ ------------ ------------
Net cash (used in) provided by investing activities (119,540) (1,824) 11,775
------------ ------------ ------------
Financing Activities
Cash dividends paid (7,250) (3,802) (3,661)
Net proceeds from stock offering 163,809 - -
ESOP stock contribution (13,240) - -
Equity adjustment for conforming of annual reporting periods (828) - -
Stock options exercised 1,592 682 354
Purchase of treasury stock (10,728) - (14,975)
------------ ------------ ------------
Net cash provided by (used in) financing activities 133,355 (3,120) (18,282)
------------ ------------ ------------
Net increase in cash 28,739 60 193
Cash at beginning of the year 359 299 106
------------ ------------ ------------
Cash at end of year $ 29,098 $ 359 $ 299
============ ============ ============
</TABLE>
25
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data for the years ended
December 31, 1998 and 1997 (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31, 1998 First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 27,905 $ 29,808 $ 30,159 $ 31,301
Interest expense 16,330 15,879 16,374 16,803
--------- --------- --------- ---------
Net interest income 11,575 13,929 13,785 14,498
Provision for loan losses 375 365 352 377
--------- --------- --------- ---------
Net interest income after provision for loan losses 11,200 13,564 13,433 14,121
Other operating income 1,902 739 1,083 972
Operating expenses 5,708 6,022 6,165 8,682
--------- --------- --------- ---------
Income before income tax expense 7,394 8,281 8,351 6,411
Income tax expense 2,693 3,039 2,720 2,492
--------- --------- --------- ---------
Net income $ 4,701 $ 5,242 $ 5,631 $ 3,919
========= ========= ========= =========
Basic and diluted earnings per share $ .11 $ .13 $ .13 $ .09
========= ========= ========= =========
<CAPTION>
Year Ended December 31, 1997 First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 26,634 $ 27,278 $ 27,668 $ 27,661
Interest expense 15,315 15,768 16,148 16,327
--------- --------- --------- ---------
Net interest income 11,319 11,510 11,520 11,334
Provision for loan losses 300 300 300 300
--------- --------- --------- ---------
Net interest income after provision for loan losses 11,019 11,210 11,220 11,034
Other operating income 726 589 1,333 735
Operating expenses 5,580 5,760 7,374 5,496
--------- --------- --------- ---------
Income before income tax expense 6,165 6,039 5,179 6,273
Income tax expense 2,332 2,154 1,896 2,304
--------- --------- --------- ---------
Net income $ 3,833 $ 3,885 $ 3,283 $ 3,969
========= ========= ========= =========
Basic and diluted earnings per share $ .09 $ .09 $ .08 $ .09
========= ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors and Stockholders
First Sentinel Bancorp Inc.:
We have audited the accompanying consolidated statements of financial condition
of First Sentinel Bancorp, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Sentinel
Bancorp, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
Short Hills, New Jersey
January 25, 1999
27
<PAGE>
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, hereunto duly authorized.
FIRST SENTINEL BANCORP, INC.
By: /s/ John P. Mulkerin
----------------------------
John P. Mulkerin
President and Chief Executive Officer
DATE: March 5, 1999
<PAGE>
Exhibit Index
-------------
The following Exhibits are filed as part of this report:
Exhibit 23.1 Consent of KPMG LLP for Pulse Bancorp, Inc.
Exhibit 23.2 Consent of KPMG LLP for First Sentinel Bancorp, Inc.
Exhibit 27 Financial Data Schedule
<PAGE>
Exhibit 23.1
[KPMG LLP Letterhead]
Independent Accountants' Consent
We consent to the inclusion of our report dated October 27, 1998, with respect
to the consolidated statements of financial condition of Pulse Bancorp, Inc. and
subsidiaries as of September 30, 1997 and 1998 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended September 30, 1998, which report
appears in the Form 8-K/A of First Sentinel Bancorp, Inc. dated March 5, 1999.
/s/ KPMG LLP
Short Hills, New Jersey
March 5, 1999
<PAGE>
Exhibit 23.2
[KPMG LLP Letterhead]
Independent Accountants' Consent
We consent to the inclusion of our report dated January 25, 1999, with respect
to the consolidated statements of financial condition of First Sentinel Bancorp,
Inc. and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998, which report
appears in the Form 8-K/A of First Sentinel Bancorp, Inc. dated March 5, 1999.
/s/ KPMG LLP
Short Hills, New Jersey
March 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 22,831
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 904,078
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 854,697
<ALLOWANCE> 9,505
<TOTAL-ASSETS> 1,855,058
<DEPOSITS> 1,268,119
<SHORT-TERM> 69,000
<LIABILITIES-OTHER> 22,445
<LONG-TERM> 195,675
0
0
<COMMON> 431
<OTHER-SE> 299,388
<TOTAL-LIABILITIES-AND-EQUITY> 1,855,058
<INTEREST-LOAN> 61,431
<INTEREST-INVEST> 57,742
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 119,173
<INTEREST-DEPOSIT> 52,868
<INTEREST-EXPENSE> 65,386
<INTEREST-INCOME-NET> 53,787
<LOAN-LOSSES> 1,469
<SECURITIES-GAINS> 710
<EXPENSE-OTHER> 26,577
<INCOME-PRETAX> 30,437
<INCOME-PRE-EXTRAORDINARY> 30,437
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,493
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 3.18
<LOANS-NON> 2,740
<LOANS-PAST> 1,525
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,454
<CHARGE-OFFS> 596
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 9,505
<ALLOWANCE-DOMESTIC> 100
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
