<PAGE>
OFFICE OF THRIFT SUPERVISION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(D) of the
Securities Exchange Act Of 1934
For the fiscal year ended December 31, 1998
Commission file number: 000-23809
FIRST SENTINEL BANCORP, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 22-3566151
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 Woodbridge Center Drive, Woodbridge, NJ, 07095
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) had been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
issuer, based on the closing price of its Common Stock on March 16, 1999, as
quoted by the Nasdaq Stock Market, was approximately $275.0 million. Solely for
the purposes of this calculation, the shares held by directors and officers of
the registrant are deemed to be shares held by affiliates.
As of March 16, 1999, there were 43,107,075 shares issued and 41,694,782 shares
outstanding of the Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
I. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1998 (Part II).
II. Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
(Part III).
1
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<TABLE>
<CAPTION>
INDEX
PAGE
----
PART I
<S> <C> <C> <C>
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 31
Item 3. Legal Proceedings....................................................... 33
Item 4. Submission of Matters to a Vote of Security Holders..................... 33
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .. 33
Item 6. Selected Financial Data................................................. 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............ 34
Item 8. Financial Statements and Supplementary Data ............................ 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 34
Item 11. Executive Compensation.................................................. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management ......... 34
Item 13. Certain Relationships and Related Transactions.......................... 34
PART IV
Item 14. Exhibits, Financial Statement Schedules and reports on Form 8-K ........ 35
SIGNATURES 37
</TABLE>
2
<PAGE>
PART I
Item 1. Description of Business
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First Sentinel Bancorp, Inc.
First Sentinel Bancorp, Inc. ("First Sentinel" or the "Company") is a
Delaware corporation organized by First Savings Bank, SLA ("First Savings" or
the "Bank") for the purpose of holding all of the capital stock of the Company
and facilitating the Conversion and Reorganization of the Bank, which was
completed on April 8, 1998, (as further described below). At December 31, 1998,
the Company had consolidated total assets of $1.9 billion and total equity of
$299.8 million. The Company is a savings and loan holding company subject to
regulation by the Office of Thrift Supervision ("OTS") and the Securities and
Exchange Commission. The Company realized net proceeds of $162.2 million from
the Conversion and Reorganization, and transferred to the Bank 50% of these
net proceeds. Funds retained by the Company have been used for general business
activities, including cash dividends to shareholders, a loan to the Company's
ESOP, the purchase of treasury stock and other investments.
The Company's executive offices are located at 1000 Woodbridge Center
Drive, Woodbridge, New Jersey 07095. The Company's telephone number is (732)
726-9700.
Reorganization and Acquisition
On April 8, 1998, the Bank and its mutual holding company, First
Savings Bancshares, MHC, completed a conversion and reorganization into the
stock holding company structure, forming First as the new stock holding company
and issuing shares of First Sentinel Common Stock in the process (the
"Conversion and Reorganization"). As part of the Conversion and Reorganization,
the Company sold 16,550,374 shares of Common Stock in a Subscription and
Community Offering for gross proceeds of $165.6 million. Concurrently, the
Company issued 14,820,016 shares of Common Stock in exchange for shares of First
Savings Bank, SLA common stock on a 3.9133-for-1 basis (the Conversion Exchange
Ratio") in an exchange offering. All per share and earnings per share data have
been restated for the 3.9133 Conversion Exchange Ratio.
On December 18, 1998, the Company acquired Pulse Bancorp, Inc.
("Pulse"). Each share of Pulse was converted into 3.764 shares of the Company's
common stock. A total of 12,066,631 shares were issued, including 800,000
treasury stock shares, to complete the transaction. The acquisition has been
accounted for under the pooling-of-interests method of accounting and
accordingly, the Company's consolidated financial statements include the
accounts and activity of Pulse for all periods presented.
First Savings Bank, SLA
First Savings is a New Jersey-chartered capital stock savings and loan
association headquartered in Woodbridge, New Jersey. First Savings has operated
in its present market area since 1901. Until 1992, the Bank operated in the
mutual form of organization. On July 10, 1992, the Bank reorganized to become a
majority owned subsidiary of a federally-chartered mutual holding company. As
detailed above, on April 8, 1998, the Bank became a wholly owned subsidiary of
the Company.
The Bank's executive offices are located at 1000 Woodbridge Center Drive,
Woodbridge, New Jersey 07095. Its telephone number is (732) 726-9700.
3
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Business Strategy
In addition to historical information, the Form 10-K includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local taxing authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
The Company's business strategy is to preserve asset quality, to maintain a
strong capital position by continuing to emphasize single-family lending and to
seek controlled growth. The Company's strategy emphasizes customer service and
convenience, and the Company attributes the loyalty of its customer base to its
commitment to maintaining customer satisfaction. The Company attempts to set
itself apart from its competitors by providing the type of personalized service
not generally available from larger banks while offering a greater variety of
products and services than is typically available from smaller, local depository
institutions.
The Company's principal business historically has been, and, to a large
degree, continues to be, attracting retail deposits from the general public and
investing those deposits, together with funds generated from operations and
borrowings, primarily in single-family residential mortgage loans, real estate
construction loans, commercial real estate loans, home equity loans and lines of
credit and multi-family residential mortgage loans. The Company maintains a
significant portfolio of mortgage-backed securities and also invests in U.S.
Government, federal agency and corporate debt securities and other marketable
securities. The Company's revenues are derived principally from interest on its
loan and mortgage-backed securities portfolios and interest and dividends on its
investment securities. The Company's primary sources of funds are deposits,
proceeds from principal and interest payments on loans and mortgage-backed
securities; sales of loans, mortgage-backed securities and investments available
for sale; maturities of investment securities and short-term investments; and,
to an increasing extent, advances from the Federal Home Loan Bank of New York
("FHLB-NY"), reverse repurchase agreements and other borrowed funds.
In an effort to enhance its long-term profitability and increase its market
share, the Company began, in 1997, to expand its traditional thrift lending and
securities investment strategy. In this regard, the Company has begun to
diversify and expand upon the products and services it offers by focusing on
small and medium-sized retail businesses as both lending and deposit customers
by increasing its emphasis on the origination of commercial real estate,
construction and commercial loans, as well as increasing the marketing of its
business checking accounts and other business-related services. To develop
full-service relationships with commercial customers, the Company has introduced
merchant services, such as merchant credit card processing, overdraft sweep
accounts and express teller services. The Company has hired additional lending
personnel with expertise in commercial real estate lending to facilitate growth
in this area. It is also the Company's intention to increase lending volumes
through the use of third-party correspondent lending, without compromising
credit quality, as the correspondents selected must use the Company's
underwriting guidelines and approved appraisers.
As part of the Company's asset/liability management strategy, and as a
means of enhancing profitability, the Company also invests in securities. More
recently, the Company has begun to increase its borrowings as a means of funding
asset growth. The average balance of borrowings outstanding for the years ended
December 31, 1998, 1997 and 1996 were $217.1 million, $177.8 million and $78.2
million, respectively. To the extent the Company continues to increase its
utilization of borrowings, it may incur an increase in the average cost of
funds, and a corresponding decrease in its net interest margin.
The Company is in the process of redesigning its retail delivery system to
facilitate the transition from deposit gathering to active sales promotion and
tracking. The Company has also invested in a Marketing Customer Information File
marketing system to provide better target marketing and enhance product and
customer profitability levels. This strategy is intended to enable the Company
to reach new and existing customers with
4
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products and services which match their profile, and result in more effective
use of the Company's marketing resources. The desired results of the revamping
of the retail branch network are to attract low-cost deposit accounts, primarily
non-interest bearing checking, and also to maintain its current core customers
by enhancing existing services to become more efficient.
The Company has, and will continue to, actively pursue retail expansion in
contiguous markets, as evidenced by the acquisition of Pulse and previous branch
purchase transactions. The Company has recently opened new branches in Highland
Park and East Brunswick, and will also open a branch in Spotswood in the second
quarter of 1999. All three of these branches are located in Middlesex County.
The Company intends to actively seek additional expansion opportunities in the
areas surrounding its current branch locations. The Company, however, currently
does not have any pending agreements or understandings regarding acquisitions of
any specific financial institutions or branch offices.
The Company focuses its attention on quality service, but also monitors its
operating expenses to maintain its profitability. As products and services are
added, the Company develops break-even levels and budgetary constraints to make
sure the service or product offered is enhancing returns and meeting growth
targets. The Company regularly reviews its retail operations to verify that they
maintain lending and retail deposit growth initiatives and retention targets. As
a result of this review, the Company sold its Eatontown branch, with deposits of
$25.2 million, to a commercial bank in February 1998. The Company determined
that this branch had not performed to the Company's targeted retail lending and
cost of funds levels.
Market Area and Competition
The Company has 22 branch offices in central New Jersey, 18 of which are
located in Middlesex County, two in Monmouth county, one in Mercer County and
one in Union County. The Company's deposit gathering base is concentrated in the
communities surrounding its offices. The majority of the Company's loan
originations are derived from north and central New Jersey, which is a part of
the New York City metropolitan area and which has historically benefited from
having a large number of corporate headquarters and a concentration of financial
services-related industries. The area also has a well-educated employment base
and a large number of industrial, service and high-technology businesses. In the
late 1980's and early 1990's, however, due in part to the effects of a prolonged
decline in the national and regional economy, layoffs in the financial services
industry and corporate relocations, the New York/New Jersey metropolitan area
experienced reduced levels of employment. These events, in conjunction with a
surplus of available commercial and residential properties, resulted in an
overall decline during this period in the underlying values of properties
located in New Jersey. However, New Jersey's real estate market has stabilized
and appreciated in recent years. Whether such stabilization and appreciation
will continue is dependent, in large part, upon the general economic condition
of both New Jersey and the United States and other factors beyond the Company's
control and, therefore, cannot be estimated.
The Company faces significant competition both in making loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Company, and all of which are
competitors of the Company to varying degrees. The Company's competition for
loans comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from commercial
banks, savings banks savings and loan associations and credit unions. The
Company faces additional competition for deposits from short-term money market
funds, other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rate earned or paid on them.
5
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Average Balance Sheet. The following table sets forth certain information
relating to the Company's average balance sheet and reflects the average yield
on assets and average cost of liabilities for the periods indicated and the
average yields earned and rates paid. Such yields and costs are derived by
dividing annualized income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------------------------------- ------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net (1)................................. $792,168 $61,431 7.75 % $679,692 $54,635 8.04 %
Mortgage-backed securities, net................ 205,995 13,774 6.69 407,971 27,607 6.77
Investment securities.......................... 140,953 9,032 6.41 173,335 11,942 6.89
Investment and mortgage-backed
securities available for sale (2)(3)......... 554,241 34,936 6.30 236,173 15,057 6.38
Total interest-earning assets............... 1,693,357 119,173 7.04 1,497,171 109,241 7.30
------------------------ ---------------------
Non-interest earning assets...................... 51,271 55,423
------------- ----------
Total assets................................ $1,744,628 $1,552,594
============= ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and Money market accounts................ $308,609 9,008 2.92 $281,007 8,315 2.96
Savings accounts............................. 177,282 4,431 2.50 184,423 4,819 2.61
Certificate accounts......................... 719,602 39,429 5.48 722,534 39,685 5.49
Borrowed funds............................... 217,131 12,518 5.77 177,797 10,739 6.04
Total interest-bearing liabilities.......... 1,422,624 65,386 4.60 1,365,761 63,558 4.65
------------------------ --------------------
Non-interest bearing deposits.................... 35,297 26,234
Other liabilities................................ 23,817 22,996
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Total liabilities........................... 1,481,738 1,414,991
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Stockholders' equity............................. 262,890 137,603
------------- ---------
Total liabilities and
stockholders' equity...................... $1,744,628 $1,552,594
============= ==========
Net interest income/interest rate spread (4)........ $53,787 2.44 % $45,683 2.65 %
=================== ===================
Net interest-earning assets/net interest
margin (5)....................................... $270,733 3.18 % $131,410 3.05 %
============= ========== ========== =========
Ratio of interest-earning assets
to interest-bearing liabilities.................. 1.19 x 1.10 x
============= ==========
<CAPTION>
For the Year Ended December 31,
---------------------------------
1996
---------------------------------
Average Average
Balance Interest Yield/Cost
---------------------------------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Loans, net (1)................................. $623,524 $50,457 8.09 %
Mortgage-backed securities, net................ 446,448 29,732 6.66
Investment securities.......................... 129,809 8,891 6.85
Investment and mortgage-backed
securities available for sale (2)(3)......... 190,721 11,692 6.13
Total interest-earning assets............... 1,390,502 100,772 7.25
---------------------
Non-interest earning assets...................... 46,059
----------
Total assets................................ $1,436,561
==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and Money market accounts................ $268,557 7,977 2.97
Savings accounts............................. 198,292 5,136 2.59
Certificate accounts......................... 718,755 38,586 5.37
Borrowed funds............................... 78,192 4,698 6.01
Total interest-bearing liabilities.......... 1,263,796 56,397 4.46
---------------------
Non-interest bearing deposits.................... 23,861
Other liabilities................................ 16,670
----------
Total liabilities........................... 1,304,327
----------
Stockholders' equity............................. 132,234
----------
Total liabilities and
stockholders' equity....................... $1,436,561
==========
Net interest income/interest rate spread(4)......... $44,375 2.79 %
====================
Net interest-earning assets/net interest
margin (5)....................................... $126,706 3.19 %
========= =========
Ratio of interest-earning assets
to interest-bearing liabilities.................. 1.10 x
=========
</TABLE>
(1) Loans receivable, net includes non-accrual loans.
(2) Average assets available for sale are calculated using the average market
value for such assets.
(3) Includes federal funds sold and FHLB-NY stock.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
6
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Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing volume or amount of these assets and liabilities. The following table
represents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
the Company's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (change in rate multiplied by prior
volume), and (iii) the net change. Changes attributable to the combined impact
of volume and rate have been allocated proportionately to the changes due to the
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, 1997 December 31, 1996
--------------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------- -------------------
Volume Rate Net Volume Rate Net
--------- ---------- --------- --------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net............... $8,816 $(2,020) $6,796 $4,493 $(315) $4,178
Mortgage-backed securities, net.... (13,511) (322) (13,833) (2,607) 482 (2,125)
Investment securities.............. (2,120) (790) (2,910) 512 326 838
Investment and mortgage-backed
securities and loans available
for sale........................ 20,046 (167) 19,879 5,312 266 5,578
---------- ----------- --------- --------- ---------- --------
Total............................ 13,231 (3,299) 9,932 7,758 711 8,469
---------- ----------- --------- --------- ---------- --------
Interest-bearing liabilities:
Deposits:
NOW and money market accounts.... 806 (113) 693 365 (27) 338
Passbook and statement savings... (186) (202) (388) (357) 40 (317)
Certificates accounts ........... (177) (79) (256) 209 890 1,099
Borrowed funds .................. 2,279 (500) 1,779 6,018 23 6,041
---------- ----------- --------- --------- ---------- --------
Total............................ 2,722 (894) 1,828 6,235 926 7,161
---------- ----------- --------- --------- ---------- --------
Net change in interest income......... $10,509 $(2,405) $8,104 $1,523 $(215) $1,308
========== =========== ========= ========= ========== ========
</TABLE>
Lending Activities
Loan and Mortgage-Backed Securities Portfolio Compositions. The Company's
loan portfolio consists primarily of conventional first mortgage loans secured
by one- to four-family residences and, to a lesser extent, multi-family
residences and commercial real estate. At December 31, 1998, the Company's loan
portfolio totaled $854.7 million, of which $657.3 million, or 76.9% were one- to
four-family residential mortgage loans. At that date, the Company's loan
portfolio also included $57.1 million of home equity loans and lines of credit
generally secured by second liens on one- to four-family residential properties,
$23.3 million of net construction loans, $65.1 million of commercial real estate
loans, and $17.6 million of multi-family residential mortgage loans, which
represented 6.6%, 2.7%, 7.5% and 2.0%, respectively, of total loans receivable.
Of the mortgage loan portfolio outstanding at that date, 48.0% were fixed-rate
loans and 52.0% were ARM loans. Other loans held by the Company, which consist
of loans on deposit accounts, commercial business, personal, automobile and
credit card loans, totaled $43.4 million, or 5.0% of total loans outstanding at
December 31, 1998. The Company anticipates growth in commercial real estate
loans, both in amount and as a percentage of total loans receivable, in the
foreseeable future.
7
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The majority of the loans originated by the Company are held for investment.
However, the Company sells 30 year, fixed-rate, conforming loans to the Federal
Home Loan Mortgage Corporation ("Freddie Mac") and institutional investors from
time to time, and retains servicing rights. All loans are sold without recourse.
At December 31, 1998, the Company's servicing portfolio was $87.6 million.
The Company also invests in mortgage-backed securities and other mortgage-backed
products such as collateralized mortgage obligations ("CMOs"). At December 31,
1998, mortgage-backed securities, including CMOs, aggregated $661.9 million, or
35.7% of total assets, of which 54.0% were secured by ARM loans. The majority of
the Company's mortgage-backed securities are insured or guaranteed by Freddie
Mac, the Government National Mortgage Association ("GNMA"), or Fannie Mae
("FNMA"). CMOs totaled $210.0 million, or 31.7% of the Company's total
mortgage-backed securities portfolio at December 31, 1998, the majority of which
were backed or guaranteed by federal agencies. At December 31, 1998, the Company
had no mortgage-backed securities held for investment. All mortgage-backed
securities were classified as available for sale at that date. The Company will
classify all mortgage-backed security purchases as available for sale through at
least April, 2000. The actual maturity of a mortgage-backed security varies,
depending on when the underlying mortgages are repaid or prepaid. Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
affecting its yield to maturity and the related market value of the
mortgage-backed security. The actual prepayments of the underlying mortgages
depend on many factors, including the type of mortgages, the coupon rates, the
age of the mortgages, the geographical location of the underlying real estate
collateralizing the mortgages, levels of market interest rates, and general
economic conditions.
8
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The following table sets forth the composition of the Company's loan and
mortgage-backed securities portfolio in dollar amounts and as a percentage of
the portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
----------- ---------- ----------- ---------- ------------ ---------
(Dollars in thousands)
Mortgage loans(1):
One-to-four family......................... $657,284 76.09% $566,625 78.25% $493,973 75.67%
Home equity loans.......................... 57,084 6.61 56,533 7.81 52,684 8.07
Construction (2)........................... 23,349 2.70 17,827 2.46 12,996 1.99
Commercial real estate..................... 65,069 7.53 54,926 7.58 51,091 7.83
Multi-family .............................. 17,589 2.04 21,292 2.94 36,066 5.53
A.I.D. (3) ................................ - - - - - -
----------- ---------- ----------- ---------- ------------ ---------
Total mortgage loans..................... 820,375 94.97 717,203 99.04 646,810 99.09
Other loans................................... 43,405 5.03 6,954 0.96 5,956 0.91
----------- ---------- ----------- ---------- ------------ ---------
Total loans receivable ................. 863,780 100.00% 724,157 100.00% 652,766 100.00%
========== ========== =========
Less:
Net deferred loan fees (costs) and
(premiums) and discounts................... (422) (107) 524
Allowance for loan losses..................... 9,505 8,454 7,781
----------- ----------- ------------
Total loans receivable, net.............. $854,697 $715,810 $644,461
=========== =========== ============
Mortgage loans:
ARM........................................ $426,268 51.96% $421,642 58.79% $364,906 56.42%
Fixed-rate................................. 394,107 48.04 295,561 41.21 281,904 43.58
----------- ---------- ----------- ---------- ------------ ---------
Total mortgage loans..................... $820,375 100.00% $717,203 100.00% $646,810 100.00%
=========== ========== =========== ========== ============ =========
Mortgage-backed securities (4):
CMOs....................................... $209,468 32.00% $90,247 15.95% $76,493 13.31%
FHLMC...................................... 235,415 35.97 253,029 44.72 287,368 50.02
GNMA....................................... 71,347 10.90 113,179 20.00 134,877 23.47
FNMA....................................... 138,286 21.13 109,415 19.33 75,821 13.20
----------- ---------- ----------- ---------- ------------ ---------
Total mortgage-backed securities......... 654,516 100.00% 565,870 100.00% 574,559 100.00%
========== ========== =========
Net premiums.................................. 3,639 2,704 2,433
Net unrealized gain (loss) on mortgage-
backed securities available for sale ...... 3,726 1,876 535
----------- ----------- ------------
Net mortgage-backed securities................ $661,881 $570,450 $577,527
=========== =========== ============
<CAPTION>
At December 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
Percent Percent
Amount of Total Amount of Total
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Mortgage loans(1):
One-to-four family......................... $448,844 74.65% $421,216 74.36%
Home equity loans.......................... 43,853 7.29 41,638 7.35
Construction (2)........................... 7,705 1.28 3,177 0.56
Commercial real estate..................... 52,788 8.78 50,801 8.97
Multi-family............................... 42,597 7.08 45,065 7.95
A.I.D. (3)................................. 165 0.03 178 0.03
----------- ---------- ----------- ----------
Total mortgage loans..................... 595,952 99.11 562,075 99.22
Other loans................................... 5,350 0.89 4,447 0.78
----------- ---------- ----------- ----------
Total loans receivable................... 601,302 100.00% 566,522 100.00%
========== ==========
Less:
Net deferred loan fees (costs) and
(premiums) and discounts................... 995 1,383
Allowance for loan losses..................... 7,851 9,114
----------- -----------
Total loans receivable, net.............. $592,456 $556,025
=========== ===========
Mortgage loans:
ARM........................................ $321,264 53.91% $286,088 50.90%
Fixed-rate................................. 274,688 46.09 275,987 49.10
----------- ---------- ----------- ----------
Total mortgage loans..................... $595,952 100.00% $562,075 100.00%
=========== ========== =========== ==========
Mortgage-backed securities (4):
CMOs....................................... $103,368 18.78% $120,591 24.61%
FHLMC...................................... 291,141 52.88 231,096 47.17
GNMA....................................... 123,853 22.50 104,389 21.31
FNMA....................................... 32,172 5.84 33,878 6.91
----------- ---------- ----------- ----------
Total mortgage-backed securities......... 550,534 100.00% 489,954 100.00%
========== ==========
Net premiums.................................. 1,676 1,187
Net unrealized gain (loss) on mortgage-
backed securities available for sale ...... 241 (1,511)
----------- -----------
Net mortgage-backed securities................ $552,451 $489,630
=========== ===========
</TABLE>
------------------
(1) Includes $287,000, $424,000 and $148,000 in mortgage loans available for
sale at December 31, 1996, 1995 and 1994, respectively. No loans were
classified as available for sale at December 31, 1998 or 1997.
(2) Net of loans in process of $41.8 million, $27.5 million, $12.3 million,
$3.8 million, and $3.9 million at December 31, 1998, 1997, 1996, 1995 and
1994, respectively.
(3) Agency for International Development. Represented a participation interest
in a $15.0 million aggregate loan to the Korea National Housing
Corporation, a government-sponsored housing development project.
(4) Includes $661.9 million, $200.5 million, $161.1 million, $89.3 million and
$24.4 million in mortgage-backed securities available for sale at fair
value at December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
9
<PAGE>
Loan Maturity and Repricing. The following table shows the maturity or period to
repricing of the Company's loan portfolio at December 31, 1998. Loans that have
adjustable rates are shown as being due in the period during which the interest
rates are next subject to change. The table does not include prepayments or
scheduled principal amortization.
<TABLE>
<CAPTION>
At December 31, 1998
-------------------------------------------------------------------------------
One Year Three Five Years Ten Years Twenty
One Year to Three Years to to Ten to Twenty Years or
or Less Years Five Years Years Years More Total
---------- ----------- ---------- ----------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four- family....... $103,308 $ 98,814 $116,217 $125,936 $160,676 $52,333 $657,284
Home equity loans.......... 17,320 1,428 8,586 12,268 17,405 77 57,084
Construction (1)........... 23,349 - - - - - 23,349
Commercial real estate .... 4,641 18,098 7,595 4,747 21,433 8,555 65,069
Multi-family............... 2,605 6,973 2,568 3,186 1,598 659 17,589
---------- ----------- ---------------------- ----------- ---------- -----------
Total mortgage loans..... 151,223 125,313 134,966 146,137 201,112 61,624 820,375
Other loans.................. 25,384 4,353 3,206 4,035 6,403 24 43,405
---------- ----------- ---------------------- ----------- ---------- -----------
Total loans.............. $176,607 $129,666 $138,172 $150,172 $207,515 $61,648 863,780
========== =========== =========== ========== =========== ==========
Net deferred loan costs and unearned premiums ............................................... 422
Allowance for loan losses ................................................................... (9,505)
-----------
Loans receivable, net ....................................................................... $854,697
===========
</TABLE>
- -------------------
(1) Net of loans in process of $41.8 million.
The following table sets forth at December 31, 1998 the dollar amount of loans
contractually due or repricing after December 31, 1999, and whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due or reprice after December 31, 1999
--------------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans
One- to four-family ............. $ 289,627 $ 264,349 $ 553,976
Equity loans .................... 39,692 72 39,764
Commercial real estate .......... 6,512 53,916 60,428
Multi-family .................... 7,688 7,296 14,984
Other loans ........................ 18,021 -- 18,021
----------------------------------------
Total loans receivable ............. 361,540 325,633 687,173
Mortgage-backed securities (1) ..... 300,278 158,666 458,944
----------------------------------------
Total loans receivable and mortgage-
backed securities .............. $ 661,818 $ 484,299 $1,146,117
========================================
</TABLE>
- ----------------
(1) Includes $458.9 million in mortgage-backed securities available for sale,
at amortized cost.
One- to Four-Family Mortgage Loans. The Company offers fixed- and adjustable-
rate first mortgage loans secured by one- to four-family residences in New
Jersey. Typically, such residences are single family homes that serve as the
primary residence of the owner. Loan originations are generally obtained from
existing or past customers, members of the local community, and referrals from
attorneys, established builders, and realtors within the Company's market area.
In addition, one- to four-family residential mortgage loans are also originated
in the
10
<PAGE>
Company's market area through loan originators who are employees of the Company
and are compensated on a commission basis. Originated mortgage loans in the
Company's portfolio include due-on-sale clauses which provide the Company with
the contractual right to deem the loan immediately due and payable in the event
that the borrower transfers ownership of the property without the Company's
consent.
At December 31, 1998, 76.1% of total loans receivable consisted of one- to
four-family residential loans. The Company offers ARM loans with initial fixed
rate terms of either one, three, five, seven or ten years. After the initial
fixed-rate term, the loan then converts into a one-year ARM. The Company's ARM
loans may carry an initial interest rate which is less than the fully-indexed
rate for the loan. The initial discounted rate is determined by the Company in
accordance with market and competitive factors. The majority of the Company's
ARM loans adjust by a maximum of 2.00% per year, with a lifetime cap on
increases of up to 6.00%. ARM loans are originated for a term of up to 30 years.
In the past, the Company offered three year ARM loans that reset every three
years at a margin over the three year U.S. Treasury Index. Interest rates
charged on fixed-rate loans are competitively priced based on market conditions
and the Company's cost of funds. The Company's fixed-rate mortgage loans
currently are made for terms of 10 through 30 years. In previous years, the
Company offered balloon mortgages of five and seven years.
Generally, ARM loans pose credit risks different than risks inherent in
fixed-rate loans, primarily because as interest rates rise, the payments of the
borrower rise, thereby increasing the potential for delinquency and default. At
the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. In order to minimize risks, borrowers of
one-year ARM loans are qualified at the starting interest rate plus 2.00% or the
fully-indexed rate, whichever is lower. The Company does not originate ARM loans
which provide for negative amortization. At present, the Company offers Limited
Documentation loans that do not require income verification but do require full
asset verification.
The Company generally originates one- to four-family residential mortgage loans
in amounts up to 95% of the appraised value or selling price of the mortgaged
property, whichever is lower. The Company requires private mortgage insurance
for all loans originated with loan-to-value ratios exceeding 80%. Generally, the
minimum one- to four-family loan amount is $25,000, and the maximum loan amount
is $500,000. The Company typically charges an origination fee of up to 3.00% on
one- to four-family residential loans.
Home Equity Loans and Lines of Credit. The Company originates home equity loans
secured by one- to four-family residences. These loans generally are originated
as fixed-rate loans with terms from five to 15 years. Home equity loans are
primarily made on owner-occupied, one- to four-family residences and primarily
to the Company's first mortgage customers. These loans are generally subject to
a 80% loan-to-value limitation, including any other outstanding mortgages or
liens where the first mortgage lien is held by the Company, and 75% on all other
loans. The Company currently offers home equity loans for qualified borrowers
with a loan-to-value ratio of up to 90%. The Company obtains private mortgage
insurance for some of these types of loans, depending on the underwriting and
first lien position. The Company is currently offering "Helping Hand" home
equity loans for low income borrowers, with maximum terms of five years, with
loan-to-value ratios of up to 90% and a maximum loan amount of $10,000.
Generally, the Company's minimum equity loan is $5,000 and the maximum equity
loan is $200,000. As of December 31, 1998, the Company had $39.8 million in
fixed-rate home equity loans outstanding.
The Company also offers a variable rate home equity line of credit which extends
a credit line based on the applicant's income and equity in the home. Generally,
the credit line, when combined with the balance of the first mortgage lien, may
not exceed 80% of the appraised value of the property at the time of the loan
commitment where the first mortgage lien is held by the Company, and 75% on all
other loans. Home equity lines of credit are secured by a mortgage on the
underlying real estate. The Company presently charges no origination fees for
these loans. A borrower is required to make monthly payments of principal and
interest, at a minimum of $100.00 plus interest, based upon a 20 year
amortization period. Generally, the interest rate charged is the prime rate of
interest (as published in The Wall Street Journal) (the "prime rate") plus up to
0.5%. The loans have a 6.0% lifetime cap on the amount the interest rate may
increase. During 1997, the Company introduced a credit line product which is
based on a 15 year amortization and the interest rate charged is the prime rate
of interest. These loans also have a 6.0% lifetime cap. The Company offers a
fixed 12 month introductory rate on both home equity line of credit products.
11
<PAGE>
The introductory rate is currently 5.99%. The Company offers an additional
credit line product that allows for a loan-to-value ratio of up to 90%. The
rates charged on these loans vary between the prime rate plus 1.0% to the prime
rate plus 1.5%. The Company, through Pulse, offered an additional credit line
product. This product generally featured a 6.99% introductory rate which was
fixed for three years. After this period, the rate adjusts to the prime rate.
Borrowers are required to make monthly payments of principal and interest, at a
minimum of $50.00 plus interest, based upon a 20 year amortization period. The
Company's home equity lines of credit outstanding at December 31, 1998 totaled
$17.3 million, with additional available credit lines of $37.3 million.
Construction Lending. At December 31, 1998, construction loans totaled $23.3
million, or 2.7%, of the Company's total loans outstanding. Construction loans,
in the form of lines of credit, are primarily made to developers known by the
Company. Available credit lines totaled $41.8 million at December 31, 1998. The
current policy of the Company is to charge interest rates on its construction
loans which float at margins of up to 2.0% above the prime rate. The Company's
construction loans improve the interest rate sensitivity of its interest-earning
assets. The Company's construction loans typically have original principal
balances that are larger than its one- to four-family mortgage loans, with the
majority of the loans ranging from available lines of credit of $125,000 to $6.0
million. At December 31, 1998, the Company had 25 construction loans, eleven of
which had a principal balance outstanding of $1.0 million or more, with the
largest loan balance being $3.0 million. At December 31, 1998, all of the
Company's construction lending portfolio consisted of loans secured by property
located in the State of New Jersey, for the purpose of constructing one- to
four-family homes.
The Company will originate construction loans on unimproved land in amounts up
to 60% of the lower of the appraised value or the cost of the land. The Company
also originates loans for site improvements and construction costs in amounts up
to 75% of actual costs or sales price where contracts for sale have been
executed. Generally, construction loans are offered for one year terms with up
to four six-month options to extend the original term. Typically, additional
loan origination fees are charged for each extension granted, although in some
cases these fees have been waived. The Company requires an appraisal of the
property, credit reports, and financial statements on all principals and
guarantors, among other items, on all construction loans.
Construction lending, by its nature, entails additional risks as compared with
one- to four-family mortgage lending, attributable primarily to the fact that
funds are advanced upon the security of the project under construction prior to
its completion. As a result, construction lending often involves the
disbursement of substantial funds with repayment dependent on the success of the
ultimate project and the ability of the borrower or guarantor to repay the loan.
Because of these factors, the analysis of prospective construction loan projects
requires an expertise that is different in significant respects from that which
is required for residential mortgage lending. The Company addresses these risks
through its underwriting procedures. At December 31, 1998, none of the Company's
construction loans were classified as substandard. See "Delinquencies and
Classified Assets" for further discussion.
Commercial Real Estate. At December 31, 1998, the Company had 65 loans secured
by commercial real estate, totaling $65.1 million, or 7.5%, of the Company's
total loan portfolio. Commercial real estate loans are generally originated in
amounts up to 70% of the appraised value of the mortgaged property. The
Company's commercial real estate loans are permanent loans secured by improved
property such as office buildings, retail stores, small shopping centers,
medical offices, small industrial facilities, warehouses, storage facilities and
other non-residential buildings. The largest commercial real estate loan at
December 31, 1998 was a participation loan originated in 1995 on a medical arts
building with a balance of $3.7 million at that date. All commercial real estate
loans in the Company's portfolio are secured by properties located within New
Jersey.
The Company's commercial real estate loans are generally made for terms of up to
15 years. These loans typically are based upon a payout over a period of 10 to
25 years. To originate commercial real estate loans, the Company requires a
security interest in personal property, standby assignment of rents and leases
and some level of personal guarantees, if possible. The Company has established
$20.0 million as its maximum commercial real estate loan amount. The Company's
loan to one borrower limit at December 31, 1998, was approximately $33.2
million.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
12
<PAGE>
dependent on successful operation or management of the properties, repayment of
such loans may be subject, to a greater extent, to adverse conditions in the
real estate market or the economy. The Company seeks to minimize these risks by
limiting the number of such loans, lending only to established customers and
borrowers otherwise known or recommended to the Company, generally restricting
such loans to New Jersey, and obtaining personal guarantees, if possible.
Multi-Family Mortgage Loans. The Company originates multi-family mortgage loans
in its primary lending area. As of December 31, 1998, $17.6 million, or 2.0%, of
the Company's total loan portfolio consisted of multi-family residential loans.
A significant portion of the Company's multi-family loan portfolio is comprised
of loans on garden apartments and participations in senior citizen homes with
the Thrift Institutions Community Investment Corp ("TICIC"). The largest
multi-family loan at December 31, 1998, had an outstanding balance of $1.9
million. The second largest multi-family loan at that date had an outstanding
balance of $1.4 million. Large multi-family loans, such as these two loans, are
originated on the basis of the Company's underwriting standards for commercial
real estate loans. The Company also participates with other savings institutions
to provide financing for projects within the state of New Jersey via the TICIC.
The Company has four participation loans outstanding with the TICIC at
December 31, 1998, totaling $2.2 million, which are secured by four senior
citizen complexes.
Other Lending. The Company also offers other loans, primarily business,
commercial, personal and automobile loans and loans secured by savings accounts.
At December 31, 1998, $43.4 million, or 5.0%, of the loan portfolio consisted of
such other loans.
Loan Approval Authority and Underwriting. All loans secured by real estate must
have the approval or ratification of the members of the Loan Committee, which
consists of at least two directors and at least two officers engaged in the
lending area. The Loan Committee meets at least monthly to review and ratify
management's approval of loans made within the scope of its authority since the
last committee meeting, and to approve mortgage loans made in the excess of
$750,000, but not greater than $1.0 million. Real estate loans in excess of $1.0
million require prior Board approval. Prior Board approval is also required for
the origination of consumer and business loans in excess of $100,000 for
unsecured loans, and $500,000 for secured loans.
One- to four-family residential mortgage loans are generally underwritten
according to Freddie Mac guidelines, except as to loan amount and certain
documentation. For all loans originated by the Company, upon receipt of a
completed loan application from a prospective borrower, a credit report is then
requested, income, assets and certain other information are verified and, if
necessary, additional financial information is requested. An appraisal of the
real estate intended to secure the proposed loan is required, which is currently
performed by appraisers designated and approved by the Board of Directors. It is
the Company's policy to obtain appropriate insurance protections, including
title and flood insurance, on all real estate first mortgage loans. Borrowers
must also obtain hazard insurance prior to closing. Borrowers generally are
required to advance funds for certain items such as real estate taxes, flood
insurance and private mortgage insurance, when applicable.
Loan Servicing. The Company generally retains the servicing rights on loans it
has sold. The Company receives fees for these servicing activities, which
include collecting and remitting loan payments, inspecting the properties and
making certain insurance and tax payments on behalf of the borrowers. The
Company was servicing $87.6 million and $93.7 million of mortgage loans for
others at December 31, 1998 and 1997, respectively. The Company received
$237,000 and $288,000 in servicing fees for the years ended December 31, 1998
and 1997, respectively.
Loan Purchases and Sales. The Company is a Freddie Mac qualified servicer in
good standing, and may sell any of its conforming loans originated, subject to
Freddie Mac requirements, and retain the servicing rights. As a part of its
asset/liability management, the Company will sell loans, on occasion, in order
to reduce or minimize potential interest rate and credit risk. To account for
such sales, the Company has established an available for sale category and
carries loans available for sale at the lower of cost or market. As of December
31, 1998, the Company did not have any mortgage loans classified as available
for sale. Mortgage loans sold totaled $14.5 million and $5.0 million for the
years ended December 31, 1998 and 1997, respectively. From time to time, the
Company may also purchase mortgage loans in order to maintain stable interest
income, if and when management believes it is prudent to do so. The Company
purchased $26.8 million and $19.8 million in mortgage loans from third-party
correspondents for the
13
<PAGE>
years ended December 31, 1998 and 1997, respectively. The Company underwrote the
loans and verified documentation prior to purchase and has representations and
warranties for a one year period, including repayment of remaining purchased
premiums if a loan prepays within the first 12 months.
14
<PAGE>
Delinquencies and Classified Assets
Delinquent Loans. In the late 1980s and early 1990s, the Company experienced an
increase in loans delinquent 90 days or more. The increase occurred primarily
with single family residential loans, which the Company attributes, in large
part, to the decline in economic conditions in the Northeast, the weakness of
the New Jersey real estate market and the national recession. Since 1992,
delinquent loans have decreased, due to an improving economy and continued
stabilization of, and recent appreciation in, the New Jersey real estate market.
The aggregate principal balances of one- to four-family loans delinquent 90 days
or more had declined to $4.1 million at December 31, 1998, from $5.3 million at
December 31, 1997. At December 31, 1998, one- to four-family loans delinquent 90
days or more consisted of 44 loans. There can be no assurances, however, that
such declines will continue, or that increases will not occur.
At December 31, 1998, 1997 and 1996, delinquencies in the Company's loan
portfolio were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- ------------------- -------------------- -------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
--------- ---------- --------- --------- --------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ......... 12 $ 924 44 $4,137 31 $2,982 65 $5,291
Home equity loans ........... -- -- 2 35 1 23 5 108
Multi-family loans .......... -- -- -- -- -- -- 1 654
------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans .... 12 924 46 4,172 32 3,005 71 6,053
Other loans ................. 3 2 1 93 -- -- -- --
====== ------ ====== ------ ====== ------ ====== ------
Total loans ............. 15 $ 926 47 $4,265 32 $3,005 71 $6,053
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total
loans receivable, net (1) 0.11% 0.50% 0.42% 0.85%
====== ====== ====== ======
<CAPTION>
1996
----------------------------------------
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Number Principal
of Loans Balance Loans Balance
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
One- to four-family ......... 37 $3,138 74 $5,887
Home equity loans ........... 4 143 3 102
Multi-family loans .......... -- -- 1 654
------ ------ ------ ------
Total mortgage loans .... 41 3,281 78 6,643
Other loans ................. -- -- 2 4
====== ------ ====== ------
Total loans ............. 41 $3,281 80 $6,647
====== ====== ====== ======
Delinquent loans to total
loans receivable, net (1) 0.51% 1.03%
====== ======
</TABLE>
- ----------------
(1) Total loans receivable, net includes loans available for sale.
15
<PAGE>
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more, and REO. At December 31, 1998, REO totaled $1.5
million and consisted of 13 properties. It is the policy of the Company to cease
accruing interest on loans 90 days or more past due with loan-to-value ratios in
excess of 55% and to charge off all accrued interest. For the year ended
December 31, 1998, the amount of additional interest income that would have been
recognized on nonaccrual loans if such loans had continued to perform in
accordance with their contractual terms was $311,000.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans ......... $ 2,647 $ 4,457 $ 5,715 $ 7,302 $ 9,627
Non-accrual other loans ............ 93 -- 4 464 624
------- ------- ------- ------- -------
Total non-accrual loans ...... 2,740 4,457 5,719 7,766 10,251
Loans 90 days or more delinquent
and still accruing .............. 1,525 1,596 928 1,555 1,339
------- ------- ------- ------- -------
Total non-performing loans .. 4,265 6,053 6,647 9,321 11,590
Restructured loans ................. -- 2,103 2,135 4,167 4,200
Total real estate owned, net of
related allowance for loss.. 1,453 1,516 3,750 5,759 4,914
------- ------- ------- ------- -------
Total non-performing assets ........ $ 5,718 $ 9,672 $12,532 $19,247 $20,704
======= ======= ======= ======= =======
Non-performing loans to total loans
receivable, net ............ 0.50% 0.85% 1.03% 1.57% 2.08%
Total non-performing assets to total
assets ..................... 0.31% 0.61% 0.84% 1.38% 1.66%
</TABLE>
Classification of Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the OTS
to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the Company will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions, and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets that do not expose the savings
institution to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. Loans designated as special mention
are generally loans that, while current in required payment, have exhibited some
potential weaknesses that, if not corrected, could increase the level of risk in
the future. Pursuant to the Company's internal guidelines, all loans 90 days
past due are classified substandard, doubtful, or loss.
16
<PAGE>
The following table sets forth the aggregate amount of the Company's special
mention and classified assets at the dates indicated.
At December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Special mention ............. $ -- $ 698 $ 659
Classified Assets:
Substandard assets .......... 6,820 10,814 15,582
Doubtful assets ............. 6 41 167
------- ------- -------
Total special mention and
classified assets .... $ 6,826 $11,553 $16,408
======= ======= =======
As of December 31, 1998, the Company's largest special mention or classified
asset had a balance of $2.1 million.
Allowance for Loan Losses. The allowance for loan losses is established through
a provision for loan losses based on management's evaluation of the adequacy of
the allowance, including an assessment of known and inherent risks in its loan
portfolio, review of individual loans for adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and consideration of current economic conditions. Such evaluation, which
includes a review of all loans on which full collectibility may not be
reasonably assured, considers the fair value of the underlying collateral,
economic conditions, historical loan loss experience, and other factors that
warrant recognition in providing for an adequate loan loss allowance. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses and
valuation of real estate owned. Such agencies may require the Company to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
The Company provided $1.5 million and $1.2 million in provision for loan losses
for the years ended December 31, 1998 and 1997, respectively. The increase in
the provision for loan losses was the result of management's asset
classification review and continued growth in loans receivable. The Company
believes that the allowance for loan losses is adequate. At December 31, 1998,
the total allowance was $9.5 million, which amounted to 1.1% of loans
receivable, net and 166.2% of non-performing assets. The Company will continue
to monitor the level of its allowance for loan losses in order to maintain it at
a level which management considers adequate to provide for probable loan losses.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .... $ 8,454 $ 7,781 $ 7,851 $ 9,114 $ 10,386
Provision for loan losses ......... 1,469 1,200 550 310 2,950
Charge-offs ....................... (596) (527) (730) (1,809) (4,258)
Recoveries ........................ 28 -- 110 236 36
Allowance activity of Pulse
during conforming period, net .. 150 -- -- -- --
-------- -------- -------- -------- --------
Balance at end of period .......... $ 9,505 $ 8,454 $ 7,781 $ 7,851 $ 9,114
========= ======== ======== ======== ========
</TABLE>
17
<PAGE>
The following tables set forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------
Percent of Percent of
Percent of Loans in Percent of Loans in
Allowance to Each Allowance to Each
Total Category to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans
---------- -------------- ----------- ------- ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ...... $4,027 42.37% 76.09% $3,867 45.75% 78.25%
Home equity loans ........ 393 4.13 6.61 458 5.42 7.81
Construction ............. 1,223 12.87 2.70 894 10.57 2.46
Commercial real estate ... 1,963 20.65 7.53 1,877 22.20 7.58
Multi-family ............. 522 5.49 2.04 777 9.19 2.94
------ ------ ------ ------ ------ ------
Total mortgage loans ... 8,128 85.51 94.97 7,873 93.13 99.04
Other .................... 1,183 12.45 5.03 258 3.05 0.96
Unallocated .............. 194 2.04 -- 323 3.82 --
------ ------ ------ ------ ------ ------
Total allowance for loan
losses ............... $9,505 100.00% 100.00% $8,454 100.00% 100.00%
====== ====== ====== ====== ====== ======
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans Percent of Loans
Percent of in Each Percent of in Each of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
-------- ----------- -------- -------- ----------- ---------- -------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ........... $4,035 51.85% 75.67% $4,067 51.81% 74.65% $5,092 55.87% 74.36%
Home equity loans ............. 437 5.62 8.07 348 4.43 7.29 301 3.30 7.35
Construction .................. 577 7.42 1.99 301 3.83 1.28 181 1.99 0.56
Commercial real estate......... 1,714 22.03 7.83 1,766 22.49 8.78 1,666 18.28 8.97
Multi-family .................. 787 10.11 5.53 883 11.25 7.08 1,174 12.88 7.95
A.I.D ......................... -- -- -- -- -- 0.03 -- -- 0.03
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage Loans ...... 7,550 97.03 99.09 7,365 93.81 99.11 8,414 92.32 99.22
Other ......................... 187 2.40 0.91 196 2.50 0.89 222 2.44 0.78
Unallocated ................... 44 0.57 -- 290 3.69 -- 478 5.24 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses .............. $7,781 100.00% 100.00% $7,851 100.00% 100.00% $9,114 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Mortgage-backed Securities
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which, in general, are passed from the mortgage originators, through
intermediaries that pool and repackage the participation interest in the form of
securities, to investors such as the Company. Such intermediaries may be private
issuers, or agencies of the U.S. Government, including Freddie Mac, FNMA and
GNMA, that guarantee the payment of principal and interest to investors.
Mortgage-backed securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a specified range and have varying maturities.
The underlying pool of mortgages can be composed of either fixed-rate or ARM
loans. Mortgage-backed securities
18
<PAGE>
are generally referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages (e.g., fixed-rate or adjustable-rate) as well as
prepayment, default and other risks associated with the underlying mortgages
(see "Lending Activities") are passed on to the certificate holder. The life of
a mortgage-backed pass-through security is equal to the life of the underlying
mortgage(s).
The actual maturity of a mortgage-backed security varies, depending on when the
mortgagors repay or prepay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the security, thereby affecting its
yield to maturity and the related market value of the mortgage-backed security.
The yield is based upon the interest income and the amortization of the premium
or discount related to the mortgage-backed security. Premiums and discounts are
amortized over the anticipated life of the loans. The prepayment assumptions
used to determine the amortization period for premiums and discounts can
significantly affect the yield calculation of the mortgage-backed security, and
these assumptions are reviewed periodically to reflect the actual prepayment.
The actual prepayments of the underlying mortgages depend on many factors,
including the type of mortgages, the coupon rates, the age of mortgages, the
geographical location of the underlying real estate collateralizing the
mortgages, general levels of market interest rates, and general economic
conditions. GNMA mortgage-backed securities that are backed by assumable Federal
Housing Authority ("FHA") or Veterans Administration ("VA") loans generally have
a longer life than conventional non-assumable loans underlying Freddie Mac and
FNMA mortgages-backed securities. The difference between the interest rates on
the underlying mortgages and the prevailing mortgage interest rates is an
important determinant in the rate of prepayments. During periods of falling
mortgage interest rates, prepayments generally increase, as opposed to periods
of increasing interest rates whereby prepayments generally decrease. If the
interest rate of underlying mortgages significantly exceeds the prevailing
market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages. Prepayment
experience is more difficult to estimate for adjustable-rate mortgage-backed
securities, both convertible and non-convertible. The interest rate environment
during 1998 was a primary factor in high level of prepayments experienced in
1998.
The Company has significant investments in mortgage-backed securities and has
utilized such investments to complement its mortgage lending activities. At
December 31, 1998, mortgage-backed securities, net, totaled $661.9 million, or
35.7% of total assets. All such securities were classified as available for sale
and carried at market value. The Company invests in a large variety of
mortgage-backed securities, including ARM, balloon and fixed-rate
mortgage-backed securities, the majority of which are directly insured or
guaranteed by Freddie Mac, GNMA and FNMA. At such date, the mortgage-backed
securities portfolio had a weighted average interest rate of 6.58%. Fixed coupon
rates ranged from 7.50% to 9.00% for GNMA, 6.00% to 9.00% for Freddie Mac, 6.00%
to 9.50% for FNMA fixed-rate securities and 5.50% to 7.50% for fixed-rate CMOs.
Variable rate coupon ranges were as follows: 6.88% to 7.38% for GNMA ARM
mortgage-backed securities; 5.93% to 7.75% for Freddie Mac ARM mortgage-backed
securities; 5.85% to 7.63% for FNMA ARM mortgage-backed securities; and 4.47% to
6.76% for adjustable rate CMOs.
Included in the total mortgage-backed securities portfolio are CMOs which had a
market value of $210.0 million at December 31, 1998. The Company generally
purchases short-term, straight sequential or planned amortization class ("PAC")
CMOs. CMOs are securities created by segregating or portioning cash flows from
mortgage pass-through securities or from pools of mortgage loans. CMOs provide a
broad range of mortgage investment vehicles by tailoring cash flows from
mortgages to meet the varied risk and return preferences of investors. These
securities enable the issuer to "carve up" the cash flow from the underlying
securities and thereby create multiple classes of securities with different
maturity and risk characteristics. The CMOs and other mortgage-backed securities
in which the Company invests may have a multi-class structure ("Multi-Class
Mortgage Securities"). Multi-Class Mortgage Securities issued by private issuers
may be collateralized by pass-through securities guaranteed by GNMA or issued by
FNMA or Freddie Mac, or they may be collateralized by whole loans or
pass-through mortgage-backed securities of private issuers. Each class has a
specified maturity or final distribution date. In one structure, payments of
principal, including any principal prepayments, on the collateral are applied to
the classes in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
until all classes having an earlier stated maturity or final distribution date
have been paid in full. In other structures, certain classes may pay
concurrently, or one or more classes may have a priority with respect to
19
<PAGE>
payments on the underlying collateral up to a specified amount. The Company's
funds have not and will not be invested in any class with residual
characteristics. The weighted average life of CMOs at December 31, 1998, was
3.11 years. The stated weighted average contractual maturity of the Company's
CMOs, at December 31, 1998, was 22.8 years.
The Company only purchases CMOs and mortgage-backed securities that are rated
"AA" or higher at the time of purchase. Prior to purchasing CMOs, each security
is tested for Federal Financial Institutions Examination Council ("FFIEC")
qualification. FFIEC qualification is no longer a regulatory requirement,
however, the Company continues to adhere to these requirements as part of its
investment policy. A large percentage of the fixed-rate CMOs purchased have
projected average durations of three years or less using current market
prepayment assumptions prevalent at the time of purchase and projected average
durations that do not exceed nine years in the event of a 300 basis point
increase in market rates of interest. The Company receives a detailed analysis
from the broker/dealer or from the Bloomberg System on each security.
Management believes that the Company is currently in full compliance with OTS
guidelines governing securities, including Thrift Bulletin ("TB") 52, which
became effective February 10, 1992. Among other things, TB 52 sets forth certain
guidelines with respect to depository institutions' investments in certain
"high-risk mortgage securities" that are not suitable investments. "High-risk
mortgage securities" are defined as any mortgage derivative product that at the
time of purchase, or at any subsequent date, meets any of the following three
tests: (i) the expected remaining weighted average life (i.e., the expected time
until repayment of principal on a mortgage-backed security) of the security
exceeds 10 years; (ii) the expected remaining weighted average life of the
security extends by more than four years in the event of an immediate and
sustained parallel shift in the yield curve of plus 300 basis points; (iii) the
expected remaining weighted average life of the security shortens by more than
six years in the event of an immediate and sustained parallel shift in the yield
curve of negative 300 basis points; or (iv) the estimated change in the price of
the security is more than 17% in the event of an immediate and sustained
paralleled shift in the yield curve of plus or minus 300 basis points.
Additionally, floating-rate tranches that are tied to a conventional widely-used
index are subject to reflecting the impact on lifetime caps and floors.
High-risk mortgage securities may be purchased only in limited circumstances,
and if held in portfolio, must be reported as either trading securities or as
available for sale securities. As of December 31, 1998, the Company had no
securities that qualified as "high risk" mortgage securities under TB 52,
subsequent to their acquisition.
The amortized cost and market value of mortgage-backed securities held to
maturity at December 31, 1998 and 1997, by contractual maturity are shown below.
Expected maturities will differ from contractual maturities due to borrowers
having the right to call or prepay obligations, with or without penalties.
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ -----------
(In thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity due in:
Less than one year ............................................... $ -- $ -- $ 9,909 $ 9,989
One year through five years ...................................... -- -- 21,742 21,725
Five years through ten years ..................................... -- -- 34,204 34,585
Greater than ten years ........................................... -- -- 304,065 308,030
-------- -------- -------- --------
$ -- $ -- $369,920 $374,329
======== ======== ======== ========
Mortgage-backed securities available for sale due in:
Less than one year ............................................... $ 9,376 $ 9,482 $ -- $ --
One year through five years ...................................... 14,299 14,453 1,377 1,362
Five years through ten years ..................................... 55,889 56,468 27,560 27,793
Greater than ten years ........................................... 578,591 581,478 169,717 171,375
-------- -------- -------- --------
$658,155 $661,881 $198,654 $200,530
======== ======== ======== ========
</TABLE>
20
<PAGE>
Investment Activities
The Investment Policy of the Company, which is established by the Board of
Directors and reviewed by the Investment Committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk and to complement the
Company's lending activities. The Policy currently provides for held to
maturity, available for sale and trading portfolios, although all securities are
currently classified as available for sale and all purchases through April,
2000, at least, will be classified as such.
New Jersey state-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and loans on federal funds. Subject to various restrictions,
state-chartered savings institutions may also invest a portion of their assets
in commercial paper, corporate debt securities and asset-backed securities.
Investments Available for Sale. The Company maintains a portfolio of investments
available for sale to minimize interest rate and market value risk. These
investments, designated as available for sale at purchase, are marked to market
in accordance with Statement of Financial Accounting Standard No. 115. The
Company's Investment Policy designates what type of securities may be contained
in the available for sale portfolio. This portfolio of available for sale
investments is reviewed and priced at least monthly. As of December 31, 1998,
the market value of investment securities available for sale was $242.2 million,
with an amortized cost basis of $242.0 million, and was composed of U.S.
Treasury and agencies securities, state and political obligations, corporate
debt obligations and equity securities. The available for sale portfolio,
excluding equity securities, had a weighted average contractual maturity of 7.8
years. A substantial portion of the investment portfolio is comprised of
callable agency notes, which have a variety of call options available to the
issuer at predetermined dates. The investment portfolio's yield is enhanced by
the addition of callable agency notes, due to the issuer's flexibility in
repricing their funding source, while creating reinvestment risk to the Company.
At December 31, 1998, $171.8 million, or 70.9% of the total investment portfolio
was callable.
Investment Portfolio. The following table sets forth certain information
regarding the carrying and market values of the Company's investment portfolio
at the dates indicated, in thousands:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency
obligations ..................... $ -- $ -- $124,920 $124,847 $143,904 $141,550
State and political obligations...... -- -- 2,663 2,690 600 622
-------- -------- -------- -------- -------- --------
Total investment securities
held to maturity .............. $ -- $ -- $127,583 $127,537 $144,504 $142,172
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency
obligations ..................... $197,635 $198,531 $ 72,798 $ 72,934 $ 52,778 $ 51,891
State and political obligations...... 6,900 6,972 -- -- -- --
Corporate obligations ............... 13,414 13,275 4,698 4,685 2,000 1,995
Equity securities ................... 24,071 23,419 800 824 -- --
-------- -------- -------- -------- -------- --------
Total investment securities
available for sale ............ $242,020 $242,197 $ 78,296 $ 78,443 $ 54,778 $ 53,886
======== ======== ======== ======== ======== ========
Other income-earning investments:
Federal Funds sold .................. $ 14,800 $ 14,800 $ 17,975 $ 17,975 $ 2,350 $ 2,350
FHLB-NY stock ....................... 12,852 12,852 10,820 10,820 9,971 9,971
-------- -------- -------- -------- -------- --------
Total other income-earning
investments ................... 27,652 $ 27,652 $ 28,795 $ 28,795 $ 12,321 $ 12,321
======== ======== ======== ======== ======== ========
</TABLE>
21
<PAGE>
The table below sets forth certain information regarding the contractual
maturities, amortized costs, market values, and weighted average yields for the
Company's investment portfolio at December 31, 1998. Investments in equity
securities, which have no contractual maturities, are excluded from this table.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------------------
More than One More than Five More than Ten
One Year or Less Year to Five Years Years to Ten Years Years
-------------------- -------------------- -------------------- -------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Government and agency
obligations ........................ $ 5,000 5.41% $66,969 6.07% $105,160 6.69% $ 20,506 7.06%
State and political obligations ....... 90 6.04 4,084 5.29 767 6.20 1,959 6.52
Corporate obligations ................. -- -- 2,000 5.63 -- -- 11,414 6.90
-------- ---- ------- ---- -------- ---- -------- ----
Total investment securities
available for sale ................. $ 5,090 5.42% $73,053 6.02% $105,927 6.68% $ 33,879 6.98%
======== ==== ======= ==== ======== ==== ======== ====
Other income-earning investments:
Federal funds sold .................... $ 14,800 4.00% $ -- --% $ -- --% $ -- --%
FHLB-NY stock (1) ..................... 12,852 7.00 -- -- -- -- -- --
-------- ---- ------- ---- -------- ---- -------- ----
Total other income-earning
investments ........................ $ 27,652 5.39% $ -- --% $ -- -% $ -- --%
======== ==== ======= ==== ======== ==== ======== ====
<CAPTION>
At December 31, 1998
------------------------------------------
Total
-------------------- --------------------
Average Weighted
Life in Amortized Market Average
Years Cost Value Yield
--------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. Government and agency
obligations ........................ 6.98 $197,635 $198,531 6.46%
State and political obligations ...... 7.21 6,900 6,972 5.79
Corporate obligations ................ 24.90 13,414 13,275 6.71
-------- -------- -------- ----
Total investment securities
available for sale ................. 7.82 $217,949 $218,778 6.47%
======== ======== ======== ====
Other income-earning investments:
Federal funds sold ................... -- $ 14,800 $ 14,800 4.00%
FHLB-NY stock (1) .................... -- 12,852 12,852 7.00
-------- -------- -------- ----
Total other income-earning
investments ........................ -- $ 27,652 $ 27,652 5.39%
======== ======== ======== ====
</TABLE>
- -----------------------------------------
(1) FHLB-NY stock does not have a stated maturity.
22
<PAGE>
Sources of Funds
General. The Company's primary source of funds are deposits; proceeds from
principal and interest payments on loans and mortgage-backed securities; sales
of loans, mortgage-backed securities and investments available for sale;
maturities of investment securities and short-term investments; and, to an
increasing extent, advances from the FHLB-NY, reverse repurchase agreements and
other borrowed funds.
Deposits. The Company offers a variety of deposit accounts having a range of
interest rates and terms. The Company's deposits principally consist of
fixed-term certificates, passbook savings, money market, Individual Retirement
Accounts ("IRAs") and Negotiable Order of Withdrawal ("NOW") accounts. The flow
of deposits is significantly influenced by general economic conditions, changes
in money market and prevailing interest rates and competition. The Company's
deposits are typically obtained from the areas in which its offices are located.
The Company relies primarily on customer service and long-standing relationships
to attract and retain these deposits. At December 31, 1998, $140.5 million of
the Company's deposit balance consisted of IRAs. Also at that date, $117.4
million, or 9.3%, of the Company's deposit balance consisted of deposit accounts
with a balance greater than $100,000. The Company does not currently accept
brokered deposits.
The Company seeks to maintain a high level of stable core deposits by providing
convenient and high quality service through its extended branch network. To
further this objective, the Company acquired six branch offices in 1991 for a
deposit premium of $509,000. As of December 31, 1998, the Company continued to
operate four of the offices, and transferred the deposits of the other two
offices into existing First Savings branches. In February 1998, the Company sold
its Eatontown branch, with deposits of $25.2 million, to another financial
institution. The Eatontown branch was one of the six branches acquired in 1991.
The Company acquired two additional branches in 1995 with deposits of
approximately $112.8 million for a premium of $12.6 million. The Company's
strategy was to strengthen its market share within Middlesex County, and to
provide better service to the communities within which these branches reside.
For the year ended December 31, 1998, excluding the effects of the sale of the
Eatontown branch, deposits increased $66.0 million, or 5.4%.
At December 31, 1998, the Company had $117.4 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
Amount
--------------------
(In thousands)
Maturity period
---------------
Three months or less ................................. $ 73,108
Over 3 through 6 months .............................. 16,219
Over 6 through 12 months ............................. 13,335
Over 12 months ....................................... 14,707
--------
Total ......................................... $117,369
========
The following table sets forth the distribution of the Company's average
accounts for the periods indicated and the weighted average nominal interest
rates on each category of deposits presented, dollars in thousands.
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- ------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
----------- ---------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits .. $ 35,297 -% $ 26,234 -% $ 23,861 -%
NOW and Money market accounts .. 308,609 2.92 281,007 2.96 268,557 2.97
Savings accounts ............... 177,282 2.50 184,423 2.61 198,292 2.59
---------- ------ ---------- ------ ---------- ------
Sub-total ................... 521,188 2.58 491,664 2.67 490,710 2.67
Certificate accounts ........... 719,602 5.48 722,534 5.49 718,755 5.37
---------- ------ ---------- ------ ---------- ------
Total average deposits ...... $1,240,790 4.26% $1,214,198 4.35% $1,209,465 4.27%
========== ====== ========== ====== ========== ======
</TABLE>
23
<PAGE>
Borrowings
The Company's policy has been to utilize borrowings as an alternate and/or less
costly source of funds. The Company obtains advances from the FHLB-NY, which are
collateralized by the capital stock of the FHLB-NY held by the Company, and
certain mortgage loan and mortgage-backed securities of the Company. The Company
also borrows funds via reverse repurchase agreements with the FHLB-NY and
primary broker/dealers. Advances from the FHLB-NY are made pursuant to several
different credit programs, each of which has its own interest rate and maturity.
The maximum amount that the FHLB-NY will advance to member institutions,
including the Bank, for purposes other than withdrawals, fluctuates from time to
time in accordance with the policies of the FHLB-NY and the OTS. The maximum
amount of FHLB-NY advances permitted to a member institution generally is
reduced by borrowings from any other source. At December 31, 1998, the Company's
FHLB-NY advances totaled $38.0 million, representing 2.4% of total liabilities.
During 1998, the Company continued to borrow funds from the FHLB-NY and primary
broker/dealers. The borrowings are collateralized by designated mortgage-backed
and investment securities. The total of these borrowings at December 31, 1998
was $226.7 million, representing 14.6% of total liabilities.
The Company also has an available overnight line-of-credit with the FHLB-NY for
a maximum of $50.0 million. The Company may continue to increase borrowings in
the future to fund asset growth. To the extent it does so, the Company may
experience an increase in its cost of funds.
The following table sets forth certain information regarding the Company's
borrowed funds on the dates indicated:
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB-NY advances:
Average balance outstanding .......................... $ 24,072 $ 33,308 $ 21,846
Maximum amount outstanding at any month-end
during the period ............................... 50,800 40,000 30,000
Balance outstanding at end of period ................. 38,000 23,000 30,000
Weighted average interest rate during the period ..... 5.80% 6.20% 6.13%
Weighted average interest rate at end of period ...... 5.61% 6.28% 6.06%
Other borrowings
Average balance outstanding .......................... $193,059 $144,489 $ 56,346
Maximum amount outstanding at any month-end
during the period ............................... 236,175 174,669 122,544
Balance outstanding at end of period ................. 226,675 163,665 122,915
Weighted average interest rate during the period ..... 5.76% 5.97% 5.94%
Weighted average interest rate at end of period ...... 5.51% 5.92% 5.89%
Total borrowings:
Average balance outstanding .......................... $217,131 $177,797 $ 78,192
Maximum amount outstanding at any month-end
during the period ............................... 319,975 200,240 153,190
Balance outstanding at end of period ................. 264,675 186,665 152,915
Weighted average interest rate during the period ..... 5.77% 6.04% 6.01%
Weighted average interest rate at end of period ...... 5.52% 5.97% 5.93%
</TABLE>
24
<PAGE>
Subsidiary Activities
FSB Financial Corp. FSB Financial Corp. is a wholly owned subsidiary of the Bank
and provides a line of fixed and variable rate annuity products, along with
mutual funds and term life insurance. For the year ended December 31, 1998, FSB
Financial Corp. had net income of $189,000.
1000 Woodbridge Center Drive, Inc. 1000 Woodbridge Center Drive, Inc. is a
wholly owned subsidiary of the Bank. 1000 Woodbridge Center Drive, Inc. is a
real estate investment trust and the majority of the Bank's mortgage loan
portfolio is held by this subsidiary. 1000 Woodbridge Center Drive, Inc. had net
income of $17.7 million for the year ended December 31, 1998.
Pulse Investment, Inc. Pulse Investment, Inc. is a wholly-owned subsidiary of
the Company. This subsidiary was inactive in 1998.
Pulse Insurance Services, Inc. Pulse Insurance Services, Inc. is a wholly-owned
subsidiary of the Company. This subsidiary was inactive in 1998.
Pulse Real Estate, Inc. Pulse Real Estate, Inc. is a wholly-owned subsidiary of
the Company. This subsidiary was inactive in 1998.
Personnel
As of December 31, 1998, the Company had 264 full-time employees and 38
part-time employees. The employees are not represented by a collective
bargaining unit, and the Company considers its relationship with its employees
to be good.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a consolidated basis.
The Company and the Bank will report their income on a calendar year basis using
the accrual method of accounting and will be subject to federal income taxation
in the same manner as other corporations with some exceptions. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Company or the
Bank. The Bank was last audited by the IRS in 1984 and the Company and the Bank
have not been audited by the New Jersey Division of Taxation ("DOT") in the past
five years.
Bad Debt Reserve. In August 1996, the provisions repealing the current thrift
bad debt rules were passed by Congress as part of "The Small Business Job
Protection Act of 1996." The new rules eliminate the 8% of taxable income method
for deducting additions to the tax bad debt reserves for all thrifts for tax
years beginning after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their bad debt reserves added
since the base year (last taxable year beginning before January 1, 1988). As of
December 31, 1998, the Bank has a base year reserve subject to recapture equal
to $12.7 million. The Bank has previously recorded a deferred tax liability
equal to the bad debt recapture and as such, the new rules will have no effect
on net income or federal income tax expense. Retained earnings at December 31,
1998 and 1997, includes approximately $18.1 million for which no provision for
income tax has been made. This amount represents an allocation of income to bad
debt deductions for tax purposes only. Events that would result in taxation of
these reserves include failure to qualify as a bank for tax purposes,
distributions in complete or partial liquidation, stock redemptions, excess
distributions to shareholders or a change in Federal tax law. At December 31,
1998 and 1997, the Company had an unrecognized tax liability of $6.5 million
with respect to this reserve. However, dividends paid out of the Bank's current
or accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's bad
debt reserve. Thus, any dividends to the Company that would reduce amounts
appropriated to the Bank's bad debt reserve and deducted for federal income tax
purposes would create a tax liability for the Bank. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if the Bank makes a "non-dividend distribution," then
approximately one and one-half times the amount so used
25
<PAGE>
would be includable in gross income for federal income tax purposes, assuming a
35% corporate income tax rate (exclusive of state and local taxes). The Bank
does not intend to pay dividends that would result in a recapture of any portion
of its bad debt reserve.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986, as amended
(the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20%. Only 90% of AMTI can be offset by net operating loss carryovers of
which the Company currently has none. AMTI is increased by an amount equal to
75% of the amount by which the Company's adjusted current earnings exceeds its
AMTI (determined without regard to this preference and prior to reduction for
net operating losses). The Company does not expect to be subject to the AMTI.
Dividends Received Deduction and Other Matters. The Company may exclude from
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations,
except that if the Company or the Bank own more than 20% but less than 80% of
the stock of the corporation distributing the dividend, in which case 80% of any
dividends received may be deducted.
State and Local Taxation
State of New Jersey. The Bank files a New Jersey income tax return. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.
The Company is required to file a New Jersey income tax return because it is
doing business in New Jersey. For New Jersey tax purposes, regular corporations
are presently taxed at a rate equal to 9% of taxable income. For this purpose,
"taxable income" generally means Federal taxable income subject to certain
adjustments (including addition of interest income on state and municipal
obligations). The Company is not currently under audit with respect to its New
Jersey income tax returns.
Delaware Taxation. As a Delaware holding company not earning income in Delaware,
the Company is exempt from Delaware corporate income tax but is required to file
an annual report with, and pay an annual franchise tax to, the State of
Delaware.
REGULATION AND SUPERVISION
General
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI
Act").
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the Federal
Deposit Insurance Corporation ("FDIC"), as the deposit insurer. The Bank is a
member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts
are insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The OTS and/or the FDIC
conduct periodic examinations to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in
26
<PAGE>
such regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Company, the Bank and
their operations. Certain of the regulatory requirements applicable to the Bank
and to the Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations applicable to savings institutions and
their holding companies set forth in this Form 10-K does not purport to be a
complete description of such statutes and regulations and their effects on the
Bank and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding
company within the meaning of the HOLA. As a unitary savings and loan holding
company, the Company generally is not restricted under existing laws as to the
types of business activities in which it may engage, provided that the Bank
continues to be a qualified thrift lender ("QTL"). Upon any non-supervisory
acquisition by the Company of another savings institution or savings bank that
meets the QTL test and is deemed to be a savings institution by the OTS, the
Company would become a multiple savings and loan holding company (if the
acquired institution is held as a separate subsidiary) and would be subject to
extensive limitations on the types of business activities in which it could
engage. The HOLA limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the Bank Holding
Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation, and no multiple savings and loan
holding company may acquire more than 5% the voting stock of a company engaged
in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
Federal Savings Institution Regulation
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
Core capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations require that, in meeting the tangible,
leverage (core) and risk-based capital standards, institutions must generally
deduct investments in and loans to subsidiaries engaged in activities that are
not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-
27
<PAGE>
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital
regulation based on the risks the OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed earlier
under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest
rate risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. That dollar amount is deducted from an institution's total
capital in calculating compliance with its risk-based capital requirement. Under
the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings institution with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The
Director of the OTS may waive or defer a savings institution's interest rate
risk component on a case-by-case basis. For the present time, the OTS has
deferred implementation of the interest rate risk component. At December 31,
1998, the Bank met each of its capital requirements.
The following table presents the Bank's capital position at December
31, 1998.
<TABLE>
<CAPTION>
(Dollars in thousands)
Actual Required Excess Actual Required
Amount Amount Amount Percent Percent
----------- --------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Tangible $221,184 $27,298 $193,886 12.15% 1.50%
Core (Leverage) 221,184 54,597 166,587 12.15 3.00
Risk-based 229,901 55,738 174,163 33.00 8.00
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
that has a total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to the institution depending upon its category,
including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. The OTS could also
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently
insured by SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
28
<PAGE>
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon the
categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During 1998, FICO payments
for SAIF members approximated 6.10 basis points, while Bank Insurance Fund
("BIF" -- the deposit insurance fund that covers most commercial bank deposits)
members paid 1.22 basis points. By law, there will be equal sharing of FICO
payments between the members of both insurance funds on the earlier of January
1, 2000 or the date the two insurance funds are merged.
The Bank's assessment rating for the year ended December 31, 1998
required no payments for SAIF assessments. The Bank was subject to the 6.10
basis point payment toward the FICO bonds. These payments totaled $759,000 in
1998. A significant increase in SAIF insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of the Bank.
Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Thrift Rechartering Legislation. Legislation enacted in 1996 provided
that BIF and SAIF would merge by January 1, 1999, if there were no savings
associations in existence on that date. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The Bank is unable to predict
whether such legislation would be enacted or the extent to which the legislation
would restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, savings institutions may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain financial instruments and bullion. At
December 31, 1998, the Bank's limit on loans to one borrower was $33.2 million.
At December 31, 1998, the Bank's largest aggregate outstanding balance of loans
to one borrower was $9.6 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1998, the Bank maintained 75.3% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year
29
<PAGE>
or (ii) 75% of its net earnings for the previous four quarters. Any additional
capital distributions would require prior regulatory approval. In the event the
Bank's capital fell below its regulatory requirements or the OTS notified it
that it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. At December 31, 1998, the Bank was
classified as a Tier 1 Bank.
The OTS has adopted new capital distribution regulations which will
become effective on April 1, 1999. Under the new regulations, an application to
and the prior approval of the Office of Thrift supervision will be required
before an institution makes a capital distribution if (1) the institution does
not meet certain criteria for "expedited treatment" for applications under the
regulations, (2) the total capital distributions by the institution for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, (3) the institution would be
undercapitalized following the distribution or (4) the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution may still need to give advance
notice to the OTS of the capital distribution.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
short-term borrowings. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank's average liquidity ratio for the year
ended December 31, 1998 was 40.23%, which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.
Assessments. Savings institutions are required to pay assessments to
the OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are based upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended December 31, 1998 totaled $219,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally requires that certain transactions with affiliates, including loans
and asset purchases, be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and
30
<PAGE>
Soundness ("Guidelines") to implement these safety and soundness standards. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final rule establishes deadlines for the submission and review of such
safety and soundness compliance plans.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$46.5 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $46.5
million, the reserve requirement was $1.395 million plus 10% (subject to
adjustment by the Federal Reserve Board) against that portion of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
New Jersey Law
The Commissioner regulates, among other things, the Bank's internal
business procedures as well as its deposits, lending and investment activities.
The Commissioner must approve changes to the Bank's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of First Savings. Certain of the areas regulated by the
Commissioner are not subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced
distinctions between commercial banks and SAIF-insured savings institutions in
New Jersey with respect to lending and investment authority, as well as interest
rate limitations. As federal law has expanded the authority of federally
chartered savings institutions to engage in activities previously reserved for
commercial banks, New Jersey legislation and regulations ("parity legislation")
have given New Jersey chartered savings institutions, such as the Bank, the
powers of federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
Item 2. Properties
- -------------------
The Company conducts its business through its main office and 22 full service
branch offices, all located in central New Jersey. The following table sets
forth certain information concerning the main office and each branch office of
the Company at December 31, 1998. The aggregate net book value of the Company's
premises and equipment was $16.5 million at December 31, 1998.
31
<PAGE>
<TABLE>
<CAPTION>
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------- --------------------------
<S> <C> <C>
Main Office:
339 State Street 4/29 Owned
Perth Amboy, NJ 08861(1)
Corporate Headquarters: 5/94 Owned
1000 Woodbridge Center Drive
Woodbridge, NJ 07095
Branch Offices:
213 Summerhill Road 8/97 Leased
East Brunswick, NJ 08816
158 Wyckoff Road 7/93 Leased
Eatontown, NJ 07724 (2)
980 Amboy Avenue 6/74 Owned
Edison, NJ 08837
2100 Oak Tree Road 4/84 Owned
Edison, NJ 08820
206 South Avenue 9/91 Owned
Fanwood, NJ 07023
Lafayette Road & Ford Avenue 4/84 Leased
Fords, NJ 08863
Rt. 35 & Bethany Road 1/91 Leased
Hazlet, NJ 07730
301-303 Raritan Avenue 5/98 Owned
Highland Park, NJ 08904
101 New Brunswick Avenue 6/76 Leased
Hopelawn, NJ 08861
1220 Green Street 11/84 Owned
Iselin, NJ 08830
1225 Brunswick Avenue 5/92 Owned
Lawrenceville, NJ 08648 (2)
599 Middlesex Avenue 1/95 Leased
Metuchen, NJ 08840 (2)
1580 Rt. 35 South 4/95 Leased
Middletown, NJ 07748
97 North Main Street 1/95 Owned
Milltown, NJ 08850 (2)
Prospect Plains and Applegarth Roads 7/76 Owned
Monroe Township, NJ 08512
Rt. 9 & Ticetown Road 6/79 Leased
Old Bridge, NJ 08857
100 Stelton Road 9/91 Leased
Piscataway, NJ 08854
Washington Avenue & Davis Lane 7/71 Owned
South Amboy, NJ 08879
6 Jackson Street 8/65 Owned
South River, NJ 08882
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------- --------------------------
<S> <C> <C>
371 Spotswood Englishtown Road 5/98 Owned
Spotswood, NJ 08884
325 Amboy Avenue 1/70 Owned
Woodbridge, NJ 07095
Rt. 1 & St. Georges Avenue 6/80 Leased
Woodbridge, NJ 07095
</TABLE>
(1) Includes an adjacent administrative building.
(2) Acquired/leased in conjunction with the purchase of deposits.
Item 3. Legal Proceedings
The Company is involved in various legal actions arising in the normal
course of its business. In the opinion of management, the resolution of these
legal actions is not expected to have a material adverse effect on the Company's
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of stockholders was held on December 16, 1998. The
following proposals were voted on by the stockholders:
1. To approve and adopt the Agreement and Plan of Merger, dated as
of July 9, 1998 between First Sentinel Bancorp, Inc. and Pulse
Bancorp, Inc.
FOR AGAINST ABSTAIN
--- ------- -------
20,169,423 3,105,113 79,368
2. To approve and adopt First Sentinel Bancorp, Inc.'s 1998
Stock-Based Incentive Plan.
FOR AGAINST ABSTAIN
--- ------- -------
18,135,274 5,107,563 416,151
3. To approve and adopt an amendment to the First Source Bancorp,
Inc. Certificate of Incorporation to change the name of the
Company to First Sentinel Bancorp, Inc.
FOR AGAINST ABSTAIN
--- ------- -------
25,348,633 2,797,033 230,042
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information contained on the inside back cover under the section
captioned "Market Information for Common Stock" in the 1998 Annual Report to
Stockholders is incorporated herein by reference. At December 31, 1998,
42,675,397 shares of the Company's outstanding common stock was held of record
by approximately 3,403 persons or entities, not including the number of persons
or entities holding stock in nominee or stock name through various brokers or
banks.
Item 6. Selected Financial Data
The information contained in the section captioned "Consolidated
Financial Highlights" on page 1 of the 1998 Annual Report to Stockholders is
incorporated herein by reference.
33
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Comparison of Operating
Results" on pages 7 through 17 of the 1998 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Disclosure relating to market risk is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," on
pages 15 through 17 of the 1998 Annual Report to Stockholders is incorporated
herein by reference.
Item 8. Financial Statements
The Company's consolidated financial statements, together with the
report thereon by KPMG LLP, are found in the 1998 Annual Report to Stockholders
on pages 18 through 45 and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act of the Registrant
The disclosures required by Item 10 are included under the caption
"Information With Respect to Nominees, Continuing Directors and Executive
Officers" on pages 4-18 of the Company's proxy statement for the 1999 Annual
Meeting of Stockholders dated March 31, 1999 ("1999 Proxy Statement"), and are
incorporated herein by reference.
Item 11. Executive Compensation
The disclosures required by Item 11 are included under the captions
"Directors' Compensation" and "Executive Compensation" on pages 9-10 and pages
15-21 (excluding the Executive Compensation Committee Report and the Stock
Performance Graph) of the 1999 Proxy Statement dated March 31, 1999, and are
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of First Sentinel Common Stock
Disclosure relating to Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference to pages 3-6 of the 1999
Proxy Statement under the captions "Security Ownership of Certain Beneficial
Owners" and "Information With Respect to Nominees, Continuing Directors and
Executive Officers."
Item 13. Certain Relationships and Related Transactions
The disclosures required by Item 13 are included under the caption
"Transactions With Certain Related Persons" on page 21 of the 1999 Proxy
Statement dated March 31, 1999, and are incorporated herein by reference.
34
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements.
The Consolidated Financial Statements and Independent Auditors' Report for the
year ended December 31, 1998, included in the Annual Report, listed below, are
incorporated herein by reference.
Consolidated Statements of Financial Condition at December 31,
1998 and 1997 (Annual Report - Page 18).
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996 (Annual Report Page 19).
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997, and 1996 (Annual Report - Page
20).
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 (Annual Report - Page 21).
Notes to Consolidated Financial Statements (Annual Report -
Page 22 through 44).
Independent Auditors' Report (Annual Report - Page 45).
The remaining information appearing in the Annual Report of
Stockholders is not deemed to be filed as part of this report,
except as provided herein.
(2) Financial Statement Schedules.
All schedules have been omitted because the required
information is either inapplicable or included in the Notes to
Consolidated Financial Statements.
(3) Exhibits
The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
==================================================================================================
Exhibit
Number Description Reference
------------ --------------------------------------------------------------------- ---------------
<S> <C> <C>
2.1 Agreement and Plan of Merger, dated July 9, 1998, by and between
First Sentinel Bancorp, Inc. (formerly First Source Bancorp, Inc.)
and Pulse Bancorp, Inc. *
2.2 Stock Option Agreement, dated as of July 9, 1998, by and between
First Sentinel Bancorp, Inc. (formerly First Source Bancorp, Inc.)
and Pulse Bancorp, Inc. *
3.1 Certificate of Incorporation of First Sentinel Bancorp, Inc. Filed herein
3.2 Bylaws of First Sentinel Bancorp, Inc. Filed herein
4.0 Stock Certificate of First Sentinel Bancorp, Inc. **
10.1 First Sentinel Bancorp, Inc. 1992 Stock Option Plan for Outside
Directors **
10.2 First Sentinel Bancorp, Inc. 1996 Omnibus Incentive Plan **
10.3 First Savings Bank, SLA Employee Stock Ownership Plan **
10.4 First Savings Bank, SLA Directors' Deferred Fee Stock Unit Plan **
10.5 First Savings Bank, SLA Supplemental Executive Retirement Plan **
10.6 First Savings Bank, SLA Supplemental Executive Retirement Plan II **
10.7 First Savings Bank, SLA Director Retirement Plan **
==================================================================================================
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================
Exhibit
Number Description Reference
------------ --------------------------------------------------------------------- ---------------
<S> <C> <C>
10.8 Form of Employment Agreement between First Sentinel Bancorp,
Inc. and certain executive officers, including John P. Mulkerin and
Christopher Martin **
10.9 Employment Agreements between First Savings Bank, SLA and certain
executive officers, including John P. Mulkerin and Christopher
Martin **
10.10 Form of Change in Control Agreement between First Savings Bank, SLA
and certain executive officers **
10.11 First Savings Bank, SLA Employee Severance Compensation Plan **
11.0 Computation of per share earnings Filed herein
13.0 Portions of the 1998 Annual Report to Stockholders Filed herein
21.0 Subsidiaries of Registrant incorporated by reference herein to Part
I - Subsidiaries
23.0 Consent of KPMG LLP Filed herein
27.0 Financial Data Schedule Filed herein
==================================================================================================
</TABLE>
* Previously filed and incorporated herein by reference to the Exhibits
to the Registration Statement on Form S-4 (File No. 333-63601) of First
Sentinel Bancorp, Inc. (formerly known as First Source Bancorp, Inc.)
dated November 3, 1998, and all amendments thereto.
** Previously filed and incorporated herein by reference to the Exhibits
to the Registration Statement on Form S-1 (File No. 333-42757) of First
Sentinel Bancorp, Inc. (formerly known as First Source Bancorp, Inc.)
dated December 19, 1997, and all amendments thereto.
(b) Reports on Form 8-K.
None.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1999 FIRST SENTINEL BANCORP, INC.
/s/John P. Mulkerin
--------------------------
John P. Mulkerin
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ John P. Mulkerin President, Chief Executive March 30, 1999
- -------------------------- Officer and Director
John P. Mulkerin
/s/ Harry F. Burke Director March 30, 1999
- --------------------------
Harry F. Burke
/s/ Jeffries Shein Director March 30, 1999
- --------------------------
Jeffries Shein
/s/ Donald T. Akey, M.D. Director March 30, 1999
- --------------------------
Donald T. Akey, M.D.
/s/ Keith H. McLaughlin Director March 30, 1999
- --------------------------
Keith H. McLaughlin
/s/ Philip T. Ruegger, Jr. Director March 30, 1999
- --------------------------
Philip T. Ruegger, Jr.
/s/ Joseph Chadwick Director March 30, 1999
- --------------------------
Joseph Chadwick
/s/ George T. Hornyak, Jr. Director March 30, 1999
- --------------------------
George T. Hornyak, Jr.
/s/ Walter K. Timpson Chairman of the Board March 30, 1999
- --------------------------
Walter K. Timpson
/s/ Christopher P. Martin Executive Vice President, March 30, 1999
- -------------------------- Chief Operating and Financial
Christopher P. Martin Officer and Director
37
<PAGE>
EXHIBIT 3.1
Certificate of Incorporation of
First Sentinel Bancorp, Inc.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
First Source Bancorp, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
FIRST: That at a meeting of the Board of Directors of First Source
Bancorp, Inc., resolutions were duly adopted setting forth a proposed amendment
to the Certificate of Incorporation of said corporation, declaring said
amendment to be advisable and authorizing the presentation of said amendment to
stockholders of said corporation at a meeting for consideration thereof. The
resolution setting forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by striking the FIRST Article in its
entirety and replacing therefore:
"FIRST: The name of the Corporation is First Sentinel
Bancorp, Inc. (hereinafter sometimes referred to as the
`Corporation.'"
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said First Source Bancorp, Inc. has caused this
certificate to be signed by John P. Mulkerin, its President and Chief Executive
Officer, this 22nd day of December, 1998.
/s/ John P. Mulkerin
--------------------
John P. Mulkerin
President and Chief Executive Officer
<PAGE>
CERTIFICATE OF INCORPORATION
OF
FIRST SOURCE BANCORP, INC.
FIRST: The name of the Corporation is First Source Bancorp, Inc.
-----
(hereinafter sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
FOURTH:
------
A. The total number of shares of all classes of stock which
the Corporation shall have authority to issue is ninety-five million
(95,000,000) consisting of:
1. Ten million (10,000,000) shares of Preferred Stock,
par value one cent ($.01) per share (the "Preferred
Stock"); and
2. Eighty-five million (85,000,000) shares of Common
Stock, par value one cent ($.01) per share (the
"Common Stock").
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in series, and by filing a certificate
pursuant to the applicable law of the State of Delaware (such
certificate being hereinafter referred to as a "Preferred Stock
Designation"), to establish from time to time the number of shares to
be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but
not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the Common Stock,
without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the
terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate
of Incorporation, in no event shall any record owner of
any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who, as of
any record date for the determination of stockholders
entitled to vote on any matter,
2
<PAGE>
beneficially owns in excess of 10% of the then-
outstanding shares of Common Stock (the "Limit"), be
entitled, or permitted to any vote in respect of the
shares held in excess of the Limit. The number of votes
which may be cast by any record owner by virtue of the
provisions hereof in respect of Common Stock
beneficially owned by such person beneficially owning
shares in excess of the Limit shall be a number equal to
the total number of votes which a single record owner of
all Common Stock beneficially owned by such person would
be entitled to cast, (subject to the provisions of this
Article FOURTH) multiplied by a fraction, the numerator
of which is the number of shares of such class or series
which are both beneficially owned by such person and
owned of record by such record owner and the denominator
of which is the total number of shares of Common Stock
beneficially owned by such person owning shares in
excess of the Limit.
2. The following definitions shall apply to this Section
C of this Article FOURTH:
a. "Affiliate" shall have the meaning ascribed to it in
Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended, as
in effect on the date of filing of this Certificate
of Incorporation.
b. "Beneficial ownership" shall be determined pursuant
to Rule 13d-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as
amended, (or any successor rule or statutory
provision), or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or
provision thereto, pursuant to said Rule 13d-3 as in
effect on the date of filing of this Certificate of
Incorporation; provided, however, that a person
shall, in any event, also be deemed the "beneficial
owner" of any Common Stock:
(1) which such person or any of its affiliates
beneficially owns, directly or indirectly; or
(2) which such person or any of its affiliates
has: (i) the right to acquire (whether such
right is exercisable immediately or only after
the passage of time), pursuant to any
agreement, arrangement or understanding (but
shall not be deemed to be the beneficial owner
of any voting shares solely by reason of an
agreement, contract, or other arrangement with
this Corporation to effect any transaction
which is described in any one or more of
clauses 1 through 5 of Section A of Article
EIGHTH of this Certificate of Incorporation
("Article EIGHTH")),
3
<PAGE>
or upon the exercise of conversion rights,
exchange rights, warrants, or options or
otherwise, or (ii) sole or shared voting or
investment power with respect thereto pursuant
to any agreement, arrangement, understanding,
relationship or otherwise (but shall not be
deemed to be the beneficial owner of any
voting shares solely by reason of a revocable
proxy granted for a particular meeting of
stockholders, pursuant to a public
solicitation of proxies for such meeting, with
respect to shares of which neither such person
nor any such Affiliate is otherwise deemed the
beneficial owner); or
(3) which are beneficially owned, directly or
indirectly, by any other person with which
such first mentioned person or any of its
Affiliates acts as a partnership, limited
partnership, syndicate or other group pursuant
to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting
or disposing of any shares of capital stock of
this Corporation; and provided further,
however, that: (1) no Director or Officer of
this Corporation (or any Affiliate of any such
Director or Officer) shall, solely by reason
of any or all of such Directors or Officers
acting in their capacities as such, be deemed,
for any purposes hereof, to beneficially own
any Common Stock beneficially owned by any
other such Director or Officer (or any
Affiliate thereof); and (2) neither any
employee stock ownership or similar plan of
this Corporation or any subsidiary of this
Corporation, nor any trustee with respect
thereto or any Affiliate of such trustee
(solely by reason of such capacity of such
trustee), shall be deemed, for any purposes
hereof, to beneficially own any Common Stock
held under any such plan. For purposes only of
computing the percentage of beneficial
ownership of Common Stock of a person, the
outstanding Common Stock shall include shares
deemed owned by such person through
application of this subsection but shall not
include any other Common Stock which may be
issuable by this Corporation pursuant to any
agreement, or upon exercise of conversion
rights, warrants or options, or otherwise. For
all other purposes, the outstanding Common
Stock shall include only Common Stock then
outstanding and shall not include any Common
Stock which may be issuable by this
Corporation pursuant to any agreement, or upon
the exercise of conversion rights, warrants or
options, or otherwise.
4
<PAGE>
c. The "Limit" shall mean 10% of the then-outstanding
shares of Common Stock.
d. A "person" shall include an individual, a firm, a group
acting in concert, a corporation, a partnership, an
association, a joint venture, a pool, a joint stock
company, a trust, an unincorporated organization or
similar company, a syndicate or any other group formed
for the purpose of acquiring, holding or disposing of
securities or any other entity.
3. The Board of Directors shall have the power to construe and
apply the provisions of this section and to make all
determinations necessary or desirable to implement such
provisions, including but not limited to matters with respect
to: (i) the number of shares of Common Stock beneficially
owned by any person; (ii) whether a person is an affiliate of
another; (iii) whether a person has an agreement,
arrangement, or understanding with another as to the matters
referred to in the definition of beneficial ownership; (iv)
the application of any other definition or operative
provision of the section to the given facts; or (v) any other
matter relating to the applicability or effect of this
section.
4. The Board of Directors shall have the right to demand that
any person who is reasonably believed to beneficially own
Common Stock in excess of the Limit (or holds of record
Common Stock beneficially owned by any person in excess of
the Limit) supply the Corporation with complete information
as to: (i) the record owner(s) of all shares beneficially
owned by such person who is reasonably believed to own shares
in excess of the Limit; and (ii) any other factual matter
relating to the applicability or effect of this section as
may reasonably be requested of such person.
5. Except as otherwise provided by law or expressly provided in
this Section C, the presence, in person or by proxy, of the
holders of record of shares of capital stock of the
Corporation entitling the holders thereof to cast a majority
of the votes (after giving effect, if required, to the
provisions of this Section C) entitled to be cast by the
holders of shares of capital stock of the Corporation
entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in this Certificate of
Incorporation to a majority or other proportion of capital
stock (or the holders thereof) for purposes of determining
any quorum requirement or any requirement for stockholder
consent or approval shall be deemed to refer to such majority
or other proportion of the votes (or the holders thereof)
then entitled to be cast in respect of such capital stock.
5
<PAGE>
6. Any constructions, applications, or determinations made by
the Board of Directors pursuant to this section in good faith
and on the basis of such information and assistance as was
then reasonably available for such purpose shall be
conclusive and binding upon the Corporation and its
stockholders.
7. In the event any provision (or portion thereof) of this
Section C shall be found to be invalid, prohibited or
unenforceable for any reason, the remaining provisions (or
portions thereof) of this Section shall remain in full force
and effect, and shall be construed as if such invalid,
prohibited or unenforceable provision had been stricken
herefrom or otherwise rendered inapplicable, it being the
intent of this Corporation and its stockholders that each
such remaining provision (or portion thereof) of this Section
C remain, to the fullest extent permitted by law, applicable
and enforceable as to all stockholders, including
stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of
-----
the business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by
this Certificate of Incorporation or the Bylaws of the Corporation, the
Directors are hereby empowered to exercise all such powers and do all
such acts and things as may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called
annual or special meeting of stockholders of the Corporation and may
not be effected by any consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution adopted
by a majority of the Whole Board or as otherwise provided in the
Bylaws. The term "Whole Board" shall mean the total number of
authorized directorships (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is
presented to the Board for adoption).
6
<PAGE>
SIXTH:
-----
A. The number of Directors shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted
by a majority of the Whole Board. The Directors shall be divided into
three classes, as nearly equal in number as reasonably possible, with
the term of office of the first class to expire at the first annual
meeting of stockholders, the term of office of the second class to
expire at the annual meeting of stockholders one year thereafter and
the term of office of the third class to expire at the annual meeting
of stockholders two years thereafter with each Director to hold office
until his or her successor shall have been duly elected and qualified.
At each annual meeting of stockholders following such initial
classification and election, Directors elected to succeed those
Directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after
their election with each Director to hold office until his or her
successor shall have been duly elected and qualified.
B. Subject to the rights of holders of any series of Preferred
Stock outstanding, the newly created directorships resulting from any
increase in the authorized number of Directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only
by a majority vote of the Directors then in office, though less than a
quorum, and Directors so chosen shall hold office for a term expiring
at the annual meeting of stockholders at which the term of office of
the class to which they have been chosen expires. No decrease in the
number of Directors constituting the Board of Directors shall shorten
the term of any incumbent Director.
C. Advance notice of stockholder nominations for the election
of Directors and of business to be brought by stockholders before any
meeting of the stockholders of the Corporation shall be given in the
manner provided in the Bylaws of the Corporation.
D. Subject to the rights of holders of any series of Preferred
Stock then outstanding, any Director, or the entire Board of Directors,
may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of at least 80 percent of the
voting power of all of the then-outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of Directors
(after giving effect to the provisions of Article FOURTH of this
Certificate of Incorporation ("Article FOURTH")), voting together as a
single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend
-------
or repeal Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of this
Corporation required by law or by this
7
<PAGE>
Certificate of Incorporation, the affirmative vote of the holders of at least 80
percent of the voting power of all of the then-outstanding shares of the capital
stock of the Corporation entitled to vote generally in the election of Directors
(after giving effect to the provisions of Article FOURTH), voting together as a
single class, shall be required to adopt, amend or repeal any provisions of the
Bylaws of the Corporation.
EIGHTH:
------
A. In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly
provided in this Article EIGHTH:
1. any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with: (i) any
Interested Stockholder (as hereinafter defined); or (ii)
any other corporation (whether or not itself an
Interested Stockholder) which is, or after such merger
or consolidation would be, an Affiliate (as hereinafter
defined) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with any Interested Stockholder, or
any Affiliate of any Interested Stockholder, of any
assets of the Corporation or any Subsidiary having an
aggregate Fair Market Value (as hereinafter defined)
equaling or exceeding 25% or more of the combined assets
of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of
transactions) of any securities of the Corporation or
any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for
cash, securities or other property (or a combination
thereof) having an aggregate Fair Market Value (as
hereinafter defined) equaling or exceeding 25% of the
combined Fair Market Value of the outstanding common
stock of the Corporation and its Subsidiaries, except
for any issuance or transfer pursuant to an employee
benefit plan of the Corporation or any Subsidiary
thereof; or
4. the adoption of any plan or proposal for the liquidation
or dissolution of the Corporation proposed by or on
behalf of an Interested Stockholder or any Affiliate of
any Interested Stockholder; or
5. any reclassification of securities (including any
reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise
8
<PAGE>
involving an Interested Stockholder) which has the
effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any
class of equity or convertible securities of the
Corporation or any Subsidiary which is directly or
indirectly owned by any Interested Stockholder or any
Affiliate of any Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of
the voting power of the then-outstanding shares of stock of the
Corporation entitled to vote in the election of Directors (the "Voting
Stock") (after giving effect to the provisions of Article FOURTH),
voting together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law or by any other provisions
of this Certificate of Incorporation or any Preferred Stock Designation
in any agreement with any national securities exchange or otherwise.
The term "Business Combination" as used in this Article EIGHTH
shall mean any transaction which is referred to in any one or more of
paragraphs 1 through 5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall
not be applicable to any particular Business Combination, and such
Business Combination shall require only the affirmative vote of the
majority of the outstanding shares of capital stock entitled to vote
after giving effect to the provisions of Article FOURTH, or such vote
(if any), as is required by law or by this Certificate of
Incorporation, if, in the case of any Business Combination that does
not involve any cash or other consideration being received by the
stockholders of the Corporation solely in their capacity as
stockholders of the Corporation, the condition specified in the
following paragraph 1 is met or, in the case of any other Business
Combination, all of the conditions specified in either of the following
paragraphs 1 or 2 are met:
1. The Business Combination shall have been approved by a
majority of the Disinterested Directors (as hereinafter
defined).
2. All of the following conditions shall have been met:
a. The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business
Combination of consideration other than cash to be
received per share by the holders of Common Stock in
such Business Combination shall at least be equal to the
higher of the following:
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage
commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Stockholder or any of
its Affiliates for any shares of Common Stock
acquired by it: (i) within the two-year period
9
<PAGE>
immediately prior to the first public announcement
of the proposal of the Business Combination (the
"Announcement Date"); or (ii) in the transaction in
which it became an Interested Stockholder,
whichever is higher; or
(2) the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the
Interested Stockholder became an Interested
Stockholder (such latter date is referred to in
this Article EIGHTH as the "Determination Date"),
whichever is higher.
b. The aggregate amount of the cash and the Fair Market
Value as of the date of the consummation of the Business
Combination of consideration other than cash to be
received per share by holders of shares of any class of
outstanding Voting Stock other than Common Stock shall
be at least equal to the highest of the following (it
being intended that the requirements of this
subparagraph (b) shall be required to be met with
respect to every such class of outstanding Voting Stock,
whether or not the Interested Stockholder has previously
acquired any shares of a particular class of Voting
Stock):
(1) (if applicable) the Highest Per Share Price (as
hereinafter defined), including any brokerage
commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Stockholder for any
shares of such class of Voting Stock acquired by
it: (i) within the two-year period immediately
prior to the Announcement Date; or (ii) in the
transaction in which it became an Interested
Stockholder, whichever is higher; or
(2) (if applicable) the highest preferential amount per
share to which the holders of shares of such class
of Voting Stock are entitled in the event of any
voluntary or involuntary liquidation, dissolution
or winding up of the Corporation; or
(3) the Fair Market Value per share of such class of
Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
c. The consideration to be received by holders of a
particular class of outstanding Voting Stock (including
Common Stock) shall be in cash or in the same form as
the Interested Stockholder has previously paid for
shares of such class of Voting Stock. If the Interested
Stockholder has paid for shares of any class of Voting
Stock with varying forms of consideration, the form of
consideration to be received per share by holders of
shares of such class of Voting Stock shall be either
cash or the form used
10
<PAGE>
to acquire the largest number of shares of such class of
Voting Stock previously acquired by the Interested
Stockholder. The price determined in accordance with
subparagraph B.2 of this Article EIGHTH shall be subject
to appropriate adjustment in the event of any stock
dividend, stock split, combination of shares or similar
event.
d. After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of
such Business Combination: (1) except as approved by a
majority of the Disinterested Directors (as hereinafter
defined), there shall have been no failure to declare
and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding
stock having preference over the Common Stock as to
dividends or liquidation; (2) there shall have been: (i)
no reduction in the annual rate of dividends paid on the
Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by
a majority of the Disinterested Directors; and (ii) an
increase in such annual rate of dividends as necessary
to reflect any reclassification (including any reverse
stock split), recapitalization, reorganization or any
similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless
the failure to so increase such annual rate is approved
by a majority of the Disinterested Directors, and (3)
neither such Interested Stockholder or any of its
Affiliates shall have become the beneficial owner of any
additional shares of Voting Stock except as part of the
transaction which results in such Interested Stockholder
becoming an Interested Stockholder.
e. After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder
shall not have received the benefit, directly or
indirectly (except proportionately as a stockholder), of
any loans, advances, guarantees, pledges or other
financial assistance or any tax credits or other tax
advantages provided, directly or indirectly, by the
Corporation, whether in anticipation of or in connection
with such Business Combination or otherwise.
f. A proxy or information statement describing the proposed
Business Combination and complying with the requirements
of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (or any subsequent
provisions replacing such Act, and the rules or
regulations thereunder) shall be mailed to stockholders
of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or
not such proxy or information statement is required to
be mailed pursuant to such Act or subsequent
provisions).
11
<PAGE>
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a firm, a
group acting in concert, a corporation, a
partnership, an association, a joint venture, a pool,
a joint stock company, a trust, an unincorporated
organization or similar company, a syndicate or any
other group formed for the purpose of acquiring,
holding or disposing of securities or any other
entity.
2. "Interested Stockholder" shall mean any person (other
than the Corporation or any Holding Company or
Subsidiary thereof) who or which:
a. is the beneficial owner, directly or
indirectly, of more than 10% of the voting
power of the outstanding Voting Stock; or
b. is an Affiliate of the Corporation and at
any time within the two-year period
immediately prior to the date in question
was the beneficial owner, directly or
indirectly, of 10% or more of the voting
power of the then outstanding Voting Stock;
or
c. is an assignee of or has otherwise succeeded
to any shares of Voting Stock which were at
any time within the two-year period
immediately prior to the date in question
beneficially owned by any Interested
Stockholder, if such assignment or
succession shall have occurred in the course
of a transaction or series of transactions
not involving a public offering within the
meaning of the Securities Act of 1933, as
amended.
3. For purposes of this Article EIGHTH, "beneficial
ownership" shall be determined in the manner provided
in Section C of Article FOURTH hereof.
4. "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the
General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on the date of
filing of this Certificate of Incorporation.
5. "Subsidiary" means any corporation of which a
majority of any class of equity security is owned,
directly or indirectly, by the Corporation; provided,
however, that for the purposes of the definition of
Interested Stockholder set forth in Paragraph 2 of
this Section C, the term "Subsidiary" shall mean only
a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by
the Corporation.
6. "Disinterested Director" means any member of the
Board of Directors who is unaffiliated with the
Interested Stockholder and was a member of the Board
of Directors prior to the time that the Interested
12
<PAGE>
Stockholder became an Interested Stockholder, and any
Director who is thereafter chosen to fill any vacancy
of the Board of Directors or who is elected and who,
in either event, is unaffiliated with the Interested
Stockholder and in connection with his or her initial
assumption of office is recommended for appointment
or election by a majority of Disinterested Directors
then on the Board of Directors.
7. "Fair Market Value" means:
a. in the case of stock, the highest closing
sales price of the stock during the 30-day
period immediately preceding the date in
question of a share of such stock on the
National Association of Securities Dealers
Automated Quotation System or any system
then in use, or, if such stock is admitted
to trading on a principal United States
securities exchange registered under the
Securities Exchange Act of 1934, as amended,
Fair Market Value shall be the highest sale
price reported during the 30-day period
preceding the date in question, or, if no
such quotations are available, the Fair
Market Value on the date in question of a
share of such stock as determined by the
Board of Directors in good faith, in each
case with respect to any class of stock,
appropriately adjusted for any dividend or
distribution in shares of such stock or any
stock split or reclassification of
outstanding shares of such stock into a
greater number of shares of such stock or
any combination or reclassification of
outstanding shares of such stock into a
smaller number of shares of such stock; and
b. in the case of property other than cash or
stock, the Fair Market Value of such
property on the date in question as
determined by the Board of Directors in good
faith.
8. Reference to "Highest Per Share Price" shall in each
case with respect to any class of stock reflect an
appropriate adjustment for any dividend or
distribution in shares of such stock or any stock
split or reclassification of outstanding shares of
such stock into a greater number of shares of such
stock or any combination or reclassification of
outstanding shares of such stock into a smaller
number of shares of such stock.
9. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other
than cash to be received" as used in Subparagraphs
(a) and (b) of Paragraph 2 of Section B of this
Article EIGHTH shall include the shares of Common
Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of
such shares.
D. A majority of the Disinterested Directors of the
Corporation shall have the power and duty to determine for the purposes
of this Article EIGHTH, on the
13
<PAGE>
basis of information known to them after reasonable inquiry: (a)
whether a person is an Interested Stockholder; (b) the number of shares
of Voting Stock beneficially owned by any person; (c) whether a person
is an Affiliate or Associate of another; and (d) whether the assets
which are the subject of any Business Combination have, or the
consideration to be received for the issuance or transfer of securities
by the Corporation or any Subsidiary in any Business Combination has an
aggregate Fair Market Value equaling or exceeding 25% of the combined
Fair Market Value of the Common Stock of the Corporation and its
Subsidiaries. A majority of the Disinterested Directors shall have the
further power to interpret all of the terms and provisions of this
Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed
to relieve any Interested Stockholder from any fiduciary obligation
imposed by law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a
lesser vote or no vote, but in addition to any affirmative vote of the
holders of any particular class or series of the Voting Stock required
by law, this Certificate of Incorporation or any Preferred Stock
Designation, the affirmative vote of the holders of at least 80 percent
of the voting power of all of the then-outstanding shares of the Voting
Stock (after giving effect to the provisions of Article FOURTH), voting
together as a single class, shall be required to alter, amend or repeal
this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any
-----
offer of another Person (as defined in Article EIGHTH hereof) to: (A) make a
tender or exchange offer for any equity security of the Corporation; (B) merge
or consolidate the Corporation with another corporation or entity; or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, those factors that Directors of any subsidiary of the Corporation
may consider in evaluating any action that may result in a change or potential
change in the control of the subsidiary, and the social and economic effect of
acceptance of such offer: on the Corporation's present and future customers and
employees and those of its Subsidiaries (as defined in Article EIGHTH hereof);
on the communities in which the Corporation and its Subsidiaries operate or are
located; on the ability of the Corporation to fulfill its corporate objective as
a savings and loan holding company under applicable laws and regulations; and on
the ability of its subsidiary savings association to fulfill the objectives of a
New Jersey capital stock savings association under applicable statutes and
regulations.
TENTH:
-----
A. Each person who was or is made a party or is threatened to
be made a party to or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is
or was a Director or an Officer of the Corporation or is or was serving
at the request of the Corporation as a Director, Officer, employee
14
<PAGE>
or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis
of such proceeding is alleged action in an official capacity as a
Director, Officer, employee or agent or in any other capacity while
serving as a Director, Officer, employee or agent, shall be indemnified
and held harmless by the Corporation to the fullest extent authorized
by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation
to provide prior to such amendment), against all expense, liability and
loss (including attorneys' fees, judgments, fines, ERISA excise taxes
or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith; provided, however,
that, except as provided in Section C hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part
thereof) initiated by such indemnitee only if such proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its
final disposition (hereinafter and "advancement of expenses");
provided, however, that, if the Delaware General Corporation Law
requires, an advancement of expenses incurred by an indemnitee in his
or her capacity as a Director or Officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including,
without limitation, services to an employee benefit plan) shall be made
only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final
judicial decision from which there is no further right to appeal
(hereinafter a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Section or
otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who
has ceased to be a Director, Officer, employee or agent and shall inure
to the benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is
not paid in full by the Corporation within sixty days after a written
claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable
period shall be twenty days, the indemnitee may at any time thereafter
bring suit against the Corporation to recover the unpaid amount of the
claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit
15
<PAGE>
brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms
of an undertaking the Corporation shall be entitled to recover such
expenses upon a final adjudication that, the indemnitee has not met any
applicable standard for indemnification set forth in the Delaware
General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of
such suit that indemnification of the indemnitee is proper in the
circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the
indemnitee has not met such applicable standard of conduct, shall
create a presumption that the indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement
of expenses hereunder, or by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to
such advancement of expenses, under this Article TENTH or otherwise
shall be on the Corporation.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article TENTH shall not be exclusive of any
other right which any person may have or hereafter acquire under any
statute, the Corporation's Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or Disinterested Directors or
otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any Director, Officer, employee or agent of the
Corporation or subsidiary or Affiliate or another corporation,
partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not the Corporation would have
the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification and to
the advancement of expenses to any employee or agent of the Corporation
to the fullest extent of the provisions of this Article TENTH with
respect to the indemnification and advancement of expenses of Directors
and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable
--------
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability: (i) for any breach of the
Director's duty of loyalty to the Corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the Director derived an
improper personal benefit. If the Delaware General Corporation
16
<PAGE>
Law is amended to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any
-------
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Section C of Article FOURTH,
Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH
or Article TENTH.
THIRTEENTH: The name and mailing address of the sole incorporator are
----------
as follows:
Name Mailing Address
---- -------------------
Siobain Perkins Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, Delaware 19899-1347
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation and do certify that the facts herein stated
are true, and accordingly, have hereto set my hand this 15th day of December,
1997.
/s/ Siobain Perkins
-------------------
Incorporator
17
<PAGE>
EXHIBIT 3.2
Bylaws of
First Sentinel Bancorp, Inc
<PAGE>
FIRST SENTINEL BANCORP, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting.
--------- --------------
An annual meeting of the stockholders, for the election of Directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix, which date
shall be within thirteen (13) months subsequent to the later of the date of
incorporation or the last annual meeting of stockholders.
Section 2. Special Meetings.
--------- ----------------
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of Directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
--------- ------------------
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
1
<PAGE>
Section 4. Quorum.
---------- ------
At any meeting of the stockholders, the holders of a majority of all of
the shares of the stock entitled to vote at the meeting, present in person or by
proxy (after giving effect to the provisions of Article FOURTH of the
Corporation's Certificate of Incorporation), shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes is required,
a majority of the shares of such class or classes present in person or
represented by proxy (after giving effect to the provisions of Article FOURTH of
the Corporation's Certificate of Incorporation) shall constitute a quorum
entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date, or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present in person or by proxy constituting a quorum, then except as
otherwise required by law, those present in person or by proxy at such adjourned
meeting shall constitute a quorum, and all matters shall be determined by a
majority of the votes cast at such meeting.
Section 5. Organization.
--------- ------------
Such person as the Board of Directors may have designated or, in the
absence of such a person, the Chairman of the Board of the Corporation or, in
his or her absence, such person as may be chosen by the holders of a majority of
the shares entitled to vote who are present, in person or by proxy, shall call
to order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business.
--------- -------------------
(a) The chairman of any meeting of stockholders shall determine
the order of business and the procedures at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to him
or her in order. The date and time of the opening and closing of the polls for
each matter upon which the stockholders will vote at the meeting shall be
announced at the meeting.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the
2
<PAGE>
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered or mailed to and received at the principal executive offices of the
Corporation not less than ninety (90) days prior to the date of the annual
meeting; provided, however, that in the event that less than one hundred (100)
days' notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter such stockholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder and,
(iv) any material interest of such stockholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be brought before or
conducted at an annual meeting except in accordance with the provisions of this
Section 6(b). The Officer of the Corporation or other person presiding over the
annual meeting shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this Section 6(b) and, if he or she should so determine,
he or she shall so declare to the meeting and any such business so determined to
be not properly brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are to
be elected only: (i) by or at the direction of the Board of Directors or, (ii)
by any stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered or mailed to and received at the principal executive offices of the
Corporation not less than ninety (90) days prior to the date of the meeting;
provided, however, that in the event that less than one hundred (100) days'
notice or prior disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such stockholder's notice shall set forth: (i) as to each person whom such
stockholder proposes to nominate for election or re-election as a Director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including
3
<PAGE>
such person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); and (ii) as to the stockholder giving
the notice (x) the name and address, as they appear on the Corporation's books,
of such stockholder and (y) the class and number of shares of the Corporation's
capital stock that are beneficially owned by such stockholder. At the request of
the Board of Directors any person nominated by the Board of Directors for
election as a Director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the provisions
of this Section 6(c). The Officer of the Corporation or other person presiding
at the meeting shall, if the facts so warrant, determine that a nomination was
not made in accordance with such provisions and, if he or she shall so
determine, he or she shall so declare to the meeting and the defective
nomination shall be disregarded.
Section 7. Proxies and Voting.
--------- ------------------
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing filed in
accordance with the procedure established for the meeting. Any facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be made by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or his or her proxy, a stock vote shall be taken.
Every stock vote shall be taken by ballot, each of which shall state the name of
the stockholder or proxy voting and such other information as may be required
under the procedures established for the meeting. The Corporation shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make a written report thereof. The Corporation may designate one
or more persons as alternate inspectors to replace any inspector who fails to
act. If no inspector or alternate is able to act at a meeting of stockholders,
the person presiding at the meeting shall appoint one or more inspectors to act
at the meeting. Each inspector, before entering upon the discharge of his
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or the Certificate of Incorporation, all
other matters shall be determined by a majority of the votes cast.
4
<PAGE>
Section 8. Stock List.
---------- ----------
A complete list of stockholders entitled to vote at any meeting of
stockholders, arranged in alphabetical order for each class of stock and showing
the address of each such stockholder and the number of shares registered in his
or her name, shall be open to the examination of any such stockholder, for any
purpose germane to the meeting, during ordinary business hours for a period of
at least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the identity
of the stockholders entitled to vote at the meeting and the number of shares
held by each of them.
Section 9. Consent of Stockholders in Lieu of Meeting.
---------- ------------------------------------------
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at an annual or special
meeting of stockholders of the Corporation and may not be effected by any
consent in writing by such stockholders.
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
---------- ------------------------------------------
The business and affairs of the Corporation shall be under the
direction of its Board of Directors. The number of Directors who shall
constitute the Whole Board shall be such number as the Board of Directors shall
from time to time have designated, except that in the absence of such
designation the number shall be eight. The Board of Directors shall annually
elect a Chairman of the Board from among its members who shall, when present,
preside at its meetings.
The Directors, other than those who may be elected by the holders of
any class or series of Preferred Stock, shall be divided, with respect to the
time for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, Directors elected to
succeed those Directors whose terms then expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election, with each Director to hold office until his or her successor
shall have been duly elected and qualified.
5
<PAGE>
Section 2. Vacancies and Newly Created Directorships.
--------- -----------------------------------------
Subject to the rights of the holders of any class or series of
Preferred Stock, and unless the Board of Directors otherwise determines, newly
created directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or other cause
may be filled only by a majority vote of the Directors then in office, though
less than a quorum, and Directors so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been elected expires and until such Director's
successor shall have been duly elected and qualified. No decrease in the number
of authorized directors constituting the Board shall shorten the term of any
incumbent Director.
Section 3. Regular Meetings.
--------- ----------------
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all Directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
--------- ----------------
Special meetings of the Board of Directors may be called by one-third
(1/3) of the Directors then in office (rounded up to the nearest whole number),
by the Chairman of the Board or the President and shall be held at such place,
on such date, and at such time as they, or he or she, shall fix. Notice of the
place, date, and time of each such special meeting shall be given each Director
by whom it is not waived by mailing written notice not less than five (5) days
before the meeting or by telegraphing or telexing or by facsimile transmission
of the same not less than twenty-four (24) hours before the meeting. Unless
otherwise indicated in the notice thereof, any and all business may be
transacted at a special meeting.
Section 5. Quorum.
--------- ------
At any meeting of the Board of Directors, a majority of the Whole Board
shall constitute a quorum for all purposes. If a quorum shall fail to attend any
meeting, a majority of those present may adjourn the meeting to another place,
date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
--------- -------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
6
<PAGE>
Section 7. Conduct of Business.
--------- -------------------
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the Directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
--------- ------
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as
it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any Officer of the Corporation with or without cause,
and from time to time to devolve the powers and duties of any Officer
upon any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to
appoint, remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for Directors, Officers,
employees and agents of the Corporation and its subsidiaries as it may
determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for Directors, Officers, employees and agents of
the Corporation and its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent
with these Bylaws, for the management of the Corporation's business and
affairs.
Section 9. Compensation of Directors.
--------- -------------------------
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as Directors,
including, without limitation, their services as members of committees of the
Board of Directors.
7
<PAGE>
ARTICLE III - COMMITTEES
Section 1. Committees of the Board of Directors.
--------- ------------------------------------
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for these committees and any others provided
for herein, elect a Director or Directors to serve as the member or members,
designating, if it desires, other Directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designates the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 2. Conduct of Business.
--------- -------------------
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
Section 3. Nominating Committee.
--------- --------------------
The Board of Directors shall appoint a Nominating Committee of the
Board, consisting of not less than three (3) members. The Nominating Committee
shall have authority: (a) to review any nominations for election to the Board of
Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii)
of Article I of these Bylaws in order to determine compliance with such Bylaw,
and (b) to recommend to the Whole Board nominees for election to the Board of
Directors to replace those Directors whose terms expire at the annual meeting of
stockholders next ensuing.
8
<PAGE>
ARTICLE IV - OFFICERS
Section 1. Generally.
--------- ---------
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a Chairman of the Board, a Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary and a
Chief Financial Officer and/or Treasurer and from time to time may choose such
other officers as it may deem proper. The Chairman of the Board shall be chosen
from among the Directors. Any number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next
annual election of Officers and until their respective successors are chosen but
any Officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of Directors then constituting the Board of
Directors.
(c) All Officers chosen by the Board of Directors shall have such
powers and duties as generally pertain to their respective Offices, subject to
the specific provisions of this ARTICLE IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
--------- ----------------------------------
The Chairman of the Board, subject to the provisions of these Bylaws
and to the direction of the Board of Directors, unless the Board has designated
another person, when present, shall preside at all meetings of the stockholders
of the Corporation. The Chairman of the Board shall perform all duties and have
all powers which are commonly incident to the office of Chairman of the Board or
which are delegated to him or her by the Board of Directors. He or she shall
have power to sign all stock certificates, contracts and other instruments of
the Corporation which are authorized.
Section 3. President and Chief Executive Officer.
--------- -------------------------------------
The President and Chief Executive Officer (the "President") shall have
general responsibility for the management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the offices of President and Chief Executive
Officer or which are delegated to him or her by the Board of Directors. Subject
to the direction of the Board of Directors, the President and Chief Executive
Officer shall have power to sign all stock certificates, contracts and other
instruments of the Corporation which are authorized and shall have general
supervision of all of the other Officers (other than the Chairman of the Board),
employees and agents of the Corporation.
9
<PAGE>
Section 4. Vice President.
--------- --------------
The Vice President or Vice Presidents shall perform the duties of the
President in his absence or during his inability to act. In addition, the Vice
Presidents shall perform the duties and exercise the powers usually incident to
their respective offices and/or such other duties and powers as may be properly
assigned to them by the Board of Directors, the Chairman of the Board or the
President. A Vice President or Vice Presidents may be designated as Executive
Vice President or Senior Vice President.
Section 5. Secretary.
--------- ---------
The Secretary or Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such office and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President. Subject to the direction of the Board of Directors, the Secretary
shall have the power to sign all stock certificates.
Section 6. Chief Financial Officer/Treasurer.
--------- ---------------------------------
The Chief Financial Officer/Treasurer shall be the Comptroller of the
Corporation and shall have the responsibility for maintaining the financial
records of the Corporation. He or she shall make such disbursements of the funds
of the Corporation as are authorized and shall render from time to time an
account of all such transactions and of the financial condition of the
Corporation. The Chief Financial Officer/Treasurer shall also perform such other
duties as the Board of Directors may from time to time prescribe. Subject to the
direction of the Board of Directors, the Chief Financial Officer/Treasurer shall
have the power to sign all stock certificates.
Section 7. Assistant Secretaries and Other Officers.
--------- ----------------------------------------
The Board of Directors may appoint one or more Assistant Secretaries
and such other Officers who shall have such powers and shall perform such duties
as are provided in these Bylaws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 8. Action with Respect to Securities of Other Corporations.
--------- -------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President or
any Officer of the Corporation authorized by the President shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other corporation.
10
<PAGE>
ARTICLE V - STOCK
Section 1. Certificates of Stock.
--------- ---------------------
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the Chairman of the Board or the President, and
by the Secretary or an Assistant Secretary, or any Treasurer or Assistant
Treasurer, certifying the number of shares owned by him or her. Any or all of
the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
--------- ------------------
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws,
an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Date.
--------- -----------
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the next day preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment or rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
11
<PAGE>
Section 4. Lost, Stolen or Destroyed Certificates.
--------- --------------------------------------
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
--------- -----------
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI - NOTICES
Section 1. Notices.
--------- -------
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, Director, Officer, employee
or agent shall be in writing and may in every instance be effectively given by
hand delivery to the recipient thereof, by depositing such notice in the mails,
postage paid, or by sending such notice by prepaid telegram or mailgram or other
courier. Any such notice shall be addressed to such stockholder, Director,
Officer, employee or agent at his or her last known address as the same appears
on the books of the Corporation. The time when such notice is received, if hand
delivered, or dispatched, if delivered through the mails or by telegram or
mailgram or other courier, shall be the time of the giving of the notice.
Section 2. Waivers.
--------- -------
A written waiver of any notice, signed by a stockholder, Director,
Officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, Director, Officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII - MISCELLANEOUS
Section 1. Facsimile Signatures.
--------- --------------------
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
12
<PAGE>
Section 2. Corporate Seal.
--------- --------------
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
an assistant to the Treasurer.
Section 3. Reliance Upon Books, Reports and Records.
--------- ----------------------------------------
Each Director, each member of any committee designated by the Board of
Directors, and each Officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its Officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such Director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
--------- -----------
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
--------- ------------
In applying any provision of these Bylaws which requires that an act be
done or not be done a specified number of days prior to an event or that an act
be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded,
and the day of the event shall be included.
ARTICLE VIII - AMENDMENTS
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change was given not less
than two days prior to the meeting. The stockholders shall also have power to
amend, alter or repeal these Bylaws at any meeting of stockholders provided
notice of the proposed change was given in the notice of the meeting; provided,
however, that, notwithstanding any other provisions of the Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the voting stock required by law, the Certificate of Incorporation,
any Preferred Stock Designation or these Bylaws, the affirmative votes of the
holders of at least 80% of the voting power of all the then-outstanding shares
of the Voting Stock, voting together as a single class, shall be required to
alter, amend or repeal any provisions of these Bylaws.
13
<PAGE>
The above Bylaws are effective as of December 15, 1997, the date of
incorporation of First Source Bancorp, Inc.
14
<PAGE>
EXHIBIT 11.0
Computation of per share earnings
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income ................................ $19,493,000 $14,970,000 $ 8,203,000
=========== =========== ===========
Weighted average basic shares outstanding . 41,983,776 42,510,823 44,356,555
----------- ----------- -----------
Basic earnings per share .................. $ 0.46 $ 0.35 $ 0.18
=========== =========== ===========
Potential dilutive common stock ........... 710,511 706,176 919,074
----------- ----------- -----------
Weighted average diluted shares outstanding 42,694,287 43,216,999 45,275,629
=========== =========== ===========
Diluted earnings per share ................ $ 0.46 $ 0.35 $ 0.18
=========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 13.0
Portions of the Annual Report
-Market Information for Common Stock
-Consolidated Financial Highlights
-Management's Discussion and Analysis
-Financial Statements
<PAGE>
MARKET INFORMATION FOR COMMON STOCK
First Sentinel Bancorp, Inc. Common Stock trades on The Nasdaq Stock Market
under the symbol "FSLA." Newspaper financial sections list the stock as FSLA or
FSentBc. At December 31, 1998, there were 3,403 holders of record of First
Sentinel's Common Stock. The following table sets forth the high and low sales
prices per share of the Company's Common Stock, as reported on the Nasdaq
National Market. Information regarding the Company's Common Stock has been
restated to reflect the exchange of 3.9133 shares of the Company's Common Stock
for each outstanding share of common stock of First Savings Bank in connection
with the conversion and reorganization of First Savings Bank into the stock
holding company structure in April 1998. The information has also been restated
to reflect the payment of 10% stock dividend on October 30, 1997.
1998 1997
------------------------------ ------------------------------
Dividends Dividends
High Low Paid High Low Paid
---- --- ---- ---- --- ----
Fourth Quarter.... $ 8.19 $ 7.88 $.045 $13.93 $8.27 $.030
Third Quarter..... 10.00 7.00 .045 7.55 6.24 .030
Second Quarter.... 10.94 9.25 .030 6.79 4.88 .030
First Quarter..... 13.93 10.48 .030 5.46 4.24 .020
<PAGE>
CONSOLIDATED FINANCIAL HIGHLIGHTS
The following selected financial data and selected operating data should be read
in conjunction with the consolidated financial statements of the Company and
accompanying notes thereto, which are presented elsewhere herein.
On December 18, 1998, the Company acquired all of the outstanding shares of
Pulse Bancorp, Inc. ("Pulse"). The acquisition was accounted for using the
pooling-of-interests accounting method and therefore, the financial statements
for the periods prior to the merger have been restated to include the accounts
and activity of Pulse.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets ................................ $1,855,058 $1,575,332 $1,489,615 $1,390,761 $1,246,034
Loans receivable, net ....................... 854,697 715,810 644,175 592,033 555,877
Loans available for sale .................... -- -- 287 424 148
Investmentsecurities ........................ -- 127,583 144,504 153,384 111,914
Investment securities available for sale .... 242,197 78,443 53,886 2,058 13,206
Other interest-earning assets (1) .......... 27,652 28,795 12,321 30,616 24,951
Mortgage-backed securities, net ............. -- 369,920 416,475 463,112 465,263
Mortgage-backed securities available for sale 661,881 200,530 161,052 89,339 24,367
Deposits .................................... 1,268,119 1,227,304 1,189,176 1,197,376 1,077,803
Borrowed funds .............................. 264,675 186,665 152,915 39,496 34,300
Stockholders' equity ........................ 299,819 144,893 131,322 141,987 123,356
---------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income ................................ $119,173 $109,241 $100,772 $ 95,312 $ 83,257
Interest expense ............................... 65,386 63,558 56,397 52,921 38,915
-------- -------- -------- -------- --------
Net interest income ........................ 53,787 45,683 44,375 42,391 44,342
Provision for loan losses ...................... 1,469 1,200 550 310 2,950
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses .................................... 52,318 44,483 43,825 42,081 41,392
Other operating income (2) ..................... 4,696 3,383 2,020 2,465 2,091
Operating expenses (3) ........................ 26,577 24,210 32,874 23,473 21,024
-------- -------- -------- -------- --------
Income before income tax expense ........... 30,437 23,656 12,971 21,073 22,459
Income tax expense ............................. 10,944 8,686 4,768 7,506 8,166
-------- -------- -------- -------- --------
Net income ................................ $ 19,493 $ 14,970 $ 8,203 $ 13,567 $ 14,293
======== ======== ======== ======== ========
Basic earnings per share (4) ................... $ .46 $ .35 $ .18 $ .30 $ .32
======== ======== ======== ======== ========
Diluted earnings per share (4) ................. $ .46 $ .35 $ .18 $ .30 $ .31
======== ======== ======== ======== ========
Dividends per share, as adjusted (4) ........... $ .15 $ .11 $ .08 $ .08 $ .07
======== ======== ======== ======== ========
<CAPTION>
At or For the Year Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios:
Return on average assets (2)(3) .............. 1.12% 0.96% 0.57% 1.01% 1.15%
Return on average stockholders' equity (2) (3) 7.41 10.88 5.79 10.20 11.93
Average stockholders' equity to average assets 15.07 8.86 9.86 9.88 9.64
Stockholders' equity to total assets ......... 16.16 9.20 8.82 10.21 9.90
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes federal funds sold and investment in the stock of the FHLB-NY.
(2) Includes the effects of the sales of the Eatontown branch that realized
a $1.1 million gain, or $687,000, net of tax in 1998.
(3) Includes the effect of non-recurring items in 1998, 1997, and 1996. The
nonrecurring item for 1998 was the $2.1 million, or $1.7 million net of
tax, merger-related charge for the acquisition of Pulse Bancorp. The
non-recurring item for 1997 was an impairment writedown of core deposit
goodwill totaling $1.3 million, or $867,000 net of tax. Non-recurring
items for 1996 included the SAIF assessment of $7.9 million, or $5.1
million net of tax, a writedown of $334,000 of core deposit goodwill,
and a provision for benefits payable as a result of the passing of the
Bank's long-time President.
(4) Per share data gives effect to all stock dividends and splits.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND COMPARISON OF OPERATING RESULTS
- --------------------------------------------------------------------------------
General
First Sentinel Bancorp, Inc. (the "Company"), is a community-oriented financial
institution offering a variety of financial services in its market area. First
Savings Bank, SLA (the "Bank") is the Company's wholly-owned subsidiary. The
Company, through the Bank, is engaged primarily in the business of attracting
deposits from the general public and investing those deposits, together with
funds generated from operations and borrowings, primarily in single-family
residential mortgage loans, real estate construction loans, commercial real
estate loans, multi-family loans and home equity loans and lines of credit. The
Company also invests in U.S. Government and Federal agency securities, state and
local obligations and other marketable securities. The Company reorganized from
a mutual to a stock form of ownership in April, 1998.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its loans,
mortgage-backed securities ("MBS"), investment securities, and other
interest-earning assets, and its cost of funds, consisting of interest paid on
its deposits and borrowings. The Company's net income is also affected by other
factors, including non-interest income from net gains and losses on sales of
loans, MBS, and investment securities, and also income from fees and service
charges. These are offset by non-interest expenses, consisting of compensation
and employee benefits, occupancy and equipment expenses, Federal deposit
insurance premiums, loan loss provisions, other general and administrative
expenses and income taxes. The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies, and actions
of regulatory authorities.
On December 18, 1998, the Company acquired all of the outstanding shares of
Pulse Bancorp, Inc. ("Pulse"). The acquisition was accounted for using the
pooling-of-interests accounting method and therefore, the financial statements
for the periods prior to the merger have been restated to include the accounts
and results of operations of Pulse.
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Assets. Total assets increased by $279.7 million, or 17.8%, to $1.9 billion at
December 31, 1998, from $1.6 billion at December 31, 1998. Cash and cash
equivalents increased $7.7 million, or 25.8%, to $37.6 million as of December
31, 1998, from $29.9 million at December 31, 1997. The increase was due
primarily to an increase in cash balances required by the operations of one of
the Bank's subsidiaries and an increase in the Company's overall cash liquidity
needs as a result of the overall growth of the Company. Investment securities,
including those available for sale, increased $36.2 million, or 17.6%, to $242.2
million as of December 31, 1998, from $206.0 million at December 31, 1997. MBS,
including those available for sale, increased $91.4 million, or 16.0%, to $661.9
million at December 31, 1998, from $570.5 million at December 31, 1997. Net
loans receivable grew by $138.9 million, or 19.4%, to $854.7 million at December
31, 1998, from $715.8 million at December 31, 1997. The increase in loans was
due to management's strategic decision to maintain a higher percentage of loans
as a balance sheet component. Growth in loans exceeded the combined growth of
investment and MBS. Origination of specific loan types are effected by market
conditions as well as management's strategy. Loan types with the strongest net
growth in 1998 were 15 year fixed and bi-weekly loans and 5 year adjustable rate
mortgage ("ARM") loans. Total loan originations totaled $347.6 million for the
year ended December 31, 1998, as compared to $174.7 million for the same period
in 1997. Repayment of principal on loans totaled $216.5 million for the year
ended December 31, 1998, as compared to $116.1 million for the same period in
1997. Premises and equipment, net, increased $2.1 million to $16.5 million at
December 31, 1998, from $14.4 million at December 31, 1997. The increase was
primarily due to costs capitalized in conjunction with the Company's new retail
centers in Highland Park and East Brunswick and also due to construction in
progress for a new retail center in Spotswood that will open in 1999. Excess of
cost over fair value of net
<PAGE>
assets acquired decreased $850,000 to $8.0 million at December 31, 1998, from
$8.8 million at December 31, 1997. The decrease was due to normal amortization.
Liabilities. Deposits increased $40.8 million, or 3.3%, to $1.3 billion at
December 31, 1998, from $1.2 billion at December 31, 1997. This increase was net
of a sale of $25.2 million of deposits to another financial institution.
Borrowed funds increased $78.0 million, or 41.8%, to $264.7 million at December
31, 1998, from $186.7 million at December 31, 1997. The increased deposits and
borrowed funds were used primarily to fund the asset growth detailed previously,
as well as for normal operations. Advances by borrowers for taxes and insurance
increased $720,000, or 11.5%, to $7.0 million at December 31, 1998, from $6.2
million at December 31, 1997, primarily due to an increase in the residential
loan portfolio.
Stockholders' Equity. The Company's stockholders' equity increased $154.9
million for the year ended December 31, 1998. The capital accounts were
significantly affected by the conversion and reorganization. Through the
Subscription and Community Offering, 16,550,374 shares of common stock were sold
and net proceeds totaling $162.2 million were raised. The reorganization of
First Savings Bancshares, MHC (the former majority stockholder of the Bank) (the
"MHC"), also affected paid-in capital as the MHC's capital of $1.6 million was
transferred to the paid-in capital of First Sentinel. Common stock
acquired by the ESOP increased $12.5 million during the year, thereby
reducing capital, as $13.2 million of stock was purchased by the ESOP as part of
the Subscription and Community Offering. Accumulated other comprehensive income
increased $1.2 million to $2.5 million at December 31, 1998. This increase was
due to the increase in the market value of securities available for sale and the
transfer of $361.2 million of MBS and investment securities to available for
sale. The increase of $11.4 million in retained earnings was due primarily to
earnings of $19.5 million, partially offset by cash dividends of $7.3 million
declared and paid during 1998. Stock options exercised during 1998 totaled $1.6
million. Book value and tangible book value per share were $7.03 and $6.84 at
December 31, 1998, as compared to $3.37 and $3.17 at December 31, 1997,
respectively.
Comparison of Operating Results for the Year Ended December 31, 1998 and
December 31, 1997.
Results of Operations. Net income for the year ended December 31, 1998 was $19.5
million, or $0.46 basic and diluted earnings per share. This represented an
increase of $4.5 million, or 30.2%, over the net income of $15.0 million
reported for 1997. Basic and diluted earnings per share in 1997 were $0.35.
Earnings for the year ended December 31, 1998, excluding the one-time
merger-related charges of $1.7 million (net of tax), were $21.2 million, with
basic and diluted earnings per share of $0.51 and $0.50, respectively. In
addition to the one-time merger-related charges, the 1998 year was also affected
by two other non-recurring items. The Bank realized an after-tax gain of
$687,000 on the sale of deposits and an after-tax charge of $149,000 in
conjunction with a voluntary retirement incentive program. Net income for the
year ended December 31, 1998, excluding these three items, was $20.7 million,
with basic and diluted earnings per share of $0.49 and $0.48, respectively. The
earnings for 1997 were affected by an after-tax charge of $867,000 due to an
impairment writedown of the core deposit intangible. Net income for the year
ended December 31, 1997, excluding this charge, was $15.8 million.
Interest Income. Interest income increased $9.9 million, or 9.1%, to $119.2
million for the year ended December 31, 1998, compared to $109.2 million for
1997. The changes by category are primarily due to the following changes in the
average balance and yield within each category. The categories are presented in
accordance with the balance sheet captions, designated as held to maturity
("HTM") or available for sale ("AFS"). This information is presented below.
<PAGE>
For the year ended December 31,
(dollars in thousands)
<TABLE>
<CAPTION>
Average Interest Average
Balance Income Yield
------- ------ -----
<S> <C> <C> <C>
Loans - 1998 $792,168 $61,431 7.75%
Loans - 1997 679,692 54,635 8.04
------------------------------------------
CHANGE 112,476 6,796 (0.29)
------------------------------------------
MBS (HTM) - 1998 205,995 13,774 6.69
MBS (HTM) - 1997 407,971 27,607 6.77
------------------------------------------
CHANGE (201,976) (13,833) (0.08)
------------------------------------------
Investment securities (HTM) - 1998 140,953 9,032 6.41
Investment securities (HTM) - 1997 173,335 11,942 6.89
------------------------------------------
CHANGE (32,382) (2,910) (0.48)
------------------------------------------
Investment securities and MBS (AFS) - 1998 554,241 34,936 6.30
Investment securities and MBS (AFS) - 1997 236,173 15,057 6.38
------------------------------------------
CHANGE 318,068 19,879 (0.08)
------------------------------------------
Total - 1998 1,693,357 119,173 7.04
Total - 1997 1,497,171 109,241 7.30
------------------------------------------
CHANGE $196,186 $9,932 (0.26)%
==========================================
</TABLE>
The following discussion concerns the comparison of the average balance and
yield for the year ended December 31, 1998, to the year ended December 31, 1997.
The average loan balance increased primarily due to loan originations of $347.6
million exceeding principal repayments and sales of $231.0 million. The decrease
in interest rates, particularly long-term rates, affected the yield on the
portfolio. The interest rate environment allowed borrowers to refinance
their existing loans at lower rates. This situation partially contributed to the
increased originations in 1998. In addition, the decrease in interest rates
negatively affected the repricing of ARM loans as these loans reprice based on
external indices. The decrease in the average balance of the MBS portfolio was
due to the transfer of $181.8 million from MBS held to maturity to MBS available
for sale on April 30, 1998. Rates on investment securities were negatively
affected as higher yielding investments were called and rates on replacement
securities were lower than the rates on the securities that were called. In
addition, the average balance of investment securities had a higher proportion
of federal funds sold in 1998. These federal fund investments primarily
consisted of net proceeds from the stock offering. The increase in the average
balance of investments available for sale was due to the transfer of $181.8
million of MBS previously discussed and the classification of all 1998 MBS
purchases and virtually all 1998 investment security purchases as available for
sale. The level of such purchases was high as the funds from the conversion were
deployed in addition to an increase in purchases funded through borrowings. The
yield on this portfolio was also negatively affected as higher yielding
instruments prepaid or were called. It is expected that some of these purchases
will be called in 1999. Growth in interest-earning assets and total interest
income is expected to continue. Yields on the portfolio will continue to be
affected by external rates.
Interest Expense. Interest expense increased $1.8 million, or 2.9%, to $65.4
million for the year ended December 31, 1998, compared to $63.6 million for
1997. The changes by category are primarily due to changes in the average
balance and yield within each category. This information is presented below. The
abbreviation of negotiable order of withdrawal accounts is shown as "NOW."
<PAGE>
For the year ended December 31,
(dollars in thousands)
<TABLE>
<CAPTION>
Average Interest Average
Balance Income Yield
------- ------ -----
<S> <C> <C> <C>
NOW and money market accounts - 1998 $308,609 $9,008 2.92%
NOW and money market accounts - 1997 281,007 8,315 2.96
-----------------------------------------
CHANGE 27,602 693 (0.04)
-----------------------------------------
Savings accounts - 1998 177,282 4,431 2.50
Savings accounts - 1997 184,423 4,819 2.61
-----------------------------------------
CHANGE (7,141) (388) (0.11)
-----------------------------------------
Certificates of deposit - 1998 719,602 39,429 5.48
Certificates of deposit - 1997 722,534 39,685 5.49
-----------------------------------------
CHANGE (2,932) (256) (0.01)
-----------------------------------------
Non-interest bearing deposits - 1998 35,297
Non-interest bearing deposits - 1997 26,234
------------
CHANGE 9,063
------------
Total deposits - 1998 1,240,790 52,868 4.26
Total deposits - 1997 1,214,198 52,819 4.35
-----------------------------------------
CHANGE 26,592 49 (0.09)
-----------------------------------------
Borrowed funds - 1998 217,131 12,518 5.77
Borrowed funds - 1997 177,797 10,739 6.04
-----------------------------------------
CHANGE 39,334 1,779 (0.27)
-----------------------------------------
Total - 1998 1,457,921 65,386 4.48
Total - 1997 1,391,995 63,558 4.57
-----------------------------------------
CHANGE $65,926 $1,828 (0.09) %
=========================================
</TABLE>
The following discussion pertains to the comparison of the average balance and
cost of deposits and borrowings for the year ended December 31, 1998, to the
year ended December 31, 1997. The average balance of total deposits was reduced
in 1998 due to the sale of the Eatontown branch office in February, 1998, and
the withdrawal of funds by customers to purchase stock in the Subscription and
Community Offering in April, 1998. Management has concentrated on increasing the
level of core accounts and decreasing certificate accounts as a percentage of
overall deposits. The increase in the average balance of NOW and money market
accounts reflects this strategy. In addition to the growth shown in this
category, primarily NOW accounts, increased $9.1 million. The decrease in the
average balance of savings was primarily due to customers transferring their
accounts to higher-yielding money market accounts. The average balance of
certificates decreased $2.9 million with a slight decrease in cost. Although
market rates decreased over the period, competition from other financial
institutions kept rates on certificates of deposit comparably high. The Company
elected to offer certificate rates that were competitive but lower than certain
area competition. This decision caused a mild outflow of funds and prevented a
further increase in the overall cost of certificates. The average balance of
non-interest bearing deposits increased as management concentrated on attracting
business checking accounts. The increase in the average balance of this category
along with an overall shift to less costly deposits combined to reduce the
overall cost of deposits by 9 basis points. Management will continue to focus on
attracting low cost deposits. Management believes that growth at the Bank's
newer offices in Highland Park, Woodbridge and East Brunswick, along with a new
office in Spotswood scheduled to open in 1999, should assist in increasing
deposit balances in the future.
<PAGE>
Management will also attempt to reduce the cost of deposits by reducing the
interest rates on various products. This strategy may be discontinued if a
significant outflow of deposit funds occurs. Any significant deposit outflows
would be replaced by borrowings. The increase in the average balance of borrowed
funds was attributable to management's strategy to fund the purchase of
investment and MBS available for sale through the use of borrowed funds, where
accretive to earnings. This strategy is expected to continue and borrowings can
be expected to continue to increase as a percentage of total liabilities. The
decrease in cost of borrowings was due to decreased interest rates.
Net Interest Income. Net interest income increased $8.1 million, or 17.7%, to
$53.8 million for the year ended December 31, 1998, compared to $45.7 million
for 1997. Net interest spread, defined as the difference between the yield on
average total interest-earning assets and the average total interest-bearing
liabilities, decreased 20 basis points to 2.44% in 1998 from 2.64% in 1997. This
was offset by an increase in the net interest margin, represented by net
interest income divided by the average total interest-earning assets, of 13
basis points to 3.18% in 1998 compared to 3.05% in 1997.
Provision for Loan Losses. The provision for loan losses increased $269,000, or
22.4%, to $1.5 million for the year ended December 31, 1998, compared to $1.2
million for 1997. The increase in the provision was primarily due to the net
growth of the loan portfolio. Net loans increased $138.9 million for 1998. The
provision is based upon management's review and evaluation of the loan
portfolio, level of delinquencies, general market and economic conditions, and
asset classification review. In management's opinion, the allowance for loan
losses, totaling $9.5 million, is adequate to cover losses inherent in the
portfolio. Although management considers the allowance for loan losses to be
adequate, management recognizes that additional problems could develop and lead
to additional loan loss provisions and asset write-downs.
Other Operating Income. Other operating income, consisting primarily of deposit
product fees, loan servicing fees and gains and losses on loans and securities
sold, increased $1.3 million, or 38.8%, to $4.7 million for the year ended
December 31, 1998, compared to $3.4 million for 1997. Fees and service charges
increased $171,000, or 8.0%, to $2.3 million for the year ended December 31,
1998, compared to $2.1 million for 1997. The increase was due primarily to fees
generated on a higher number of demand deposit accounts. Net gain on loans and
securities available for sale increased $117,000, or 19.7%, to $710,000 for the
year ended December 31, 1998, as compared to $593,000 for 1997. Securities sold
in 1998 primarily consisted of sales of MBS available for sale which, management
believed, contained exceptionally high prepayment risk. The volume of future
sales and gains and losses on such sales are subject to significant fluctuation.
The primary reason for the overall increase in other operating income was the
pre-tax gain on sale of deposits of $1.1 million. Similar activity did not occur
in 1997 and is not expected to occur in the near future.
Operating Expenses. Operating expenses increased $2.4 million, or 9.8%, to $26.6
million for the year ended December 31, 1998, compared to $24.2 million for
1997. The increase was mainly attributable to the merger related charges of $2.1
million included in general and administrative expenses. Compensation and
employee benefits increased $1.4 million, or 11.3%, to $13.6 million for the
year ended December 31, 1998, compared to $12.2 million for 1997. The increase
in compensation and benefits was primarily due to the increased expenses
associated with the Employee Stock Ownership Plan ("ESOP"), the compensation
cost associated with three new branch offices and a cost of living salary
increase. Occupancy expense decreased $120,000, or 5.4%, to $2.1 million in 1998
compared to $2.2 million in 1997, primarily due to the decreased cost of
operations of the new corporate headquarters for First Savings Bank, versus the
three separate administration centers in operation in 1997. Amortization of
intangibles decreased $1.3 million, or 60.4%, to $850,000 for the year ended
December 31, 1998, from $2.1 million for 1997. An impairment writedown of the
core deposit intangible totaling $1.3 million was recognized in 1997 with
respect to deposits acquired from the RTC. Similar writedowns were not required
in 1998. General and administrative expenses increased $2.4 million, or 62.8%,
to $6.3 million for the year ended December 31, 1998, compared to $3.9 million
for 1997. The increase was due primarily to the merger related charges of $2.1
million. This charge resulted from the Pulse acquisition and consisted
<PAGE>
primarily of professional fees and services. The increase in this caption,
excluding this item, was $309,000, or 8.0%.
Income Taxes. Income taxes increased $2.3 million, or 26.0%, to $10.9 million
for the year ended December 31, 1998, compared to $8.7 million for 1997. The
increase was due primarily to an increase in taxable income. Taxable income in
1998 was affected by non-deductible merger related charges, the balance of
tax-exempt investments and other tax preference items. The effective tax rate
was 36.0% in 1998 versus 36.7% in 1997.
Comparison of Operating Results for the Years Ended December 31, 1997 and 1996
Results of Operations. Net income for the year ended December 31, 1997, totaled
$15.0 million, an increase from the $8.2 million earned in 1996. The increase
was primarily attributable to non-recurring charges for the special assessment
to recapitalize the Savings Association Insurance Fund ("SAIF") in 1996.
Interest Income. Interest income for the year ended December 31, 1997, totaled
$109.2 million, an increase of $8.5 million, or 8.4%, from $100.8 million for
the year ended December 31, 1996. The increase was due primarily to an increase
in the average balance of interest-earning assets to $1.5 billion for 1997, from
$1.4 billion for 1996. Interest income on loans increased $4.2 million, or 8.3%,
to $54.6 million for the year ended December 31, 1997, compared to $50.5 million
for 1996. The increase was due primarily to the increase in the average balance
of the loan portfolio to $679.7 million for the year ended December 31, 1997,
from $623.5 million for 1996, offset by a slight decrease in the yield to 8.04%
in 1997 compared to 8.09% in 1996. Interest on MBS held to maturity decreased
$2.1 million, or 7.1%, to $27.6 million for the year ended December 31, 1997,
from $29.7 million for 1996. The decrease was due primarily to a reduction in
the average size of the MBS held to maturity portfolio to $408.0 million for the
year ended December 31, 1997, from $446.4 million for 1996, as the cash flows
were used to provide funding for loan production and the purchase of investment
securities and MBS available for sale. The decrease in the portfolio was offset
by the increase in the yield of 11 basis points to 6.77% in 1997. Interest on
investment securities increased $838,000, or 7.5%, to $11.9 million for the year
ended December 31, 1997, from $11.1 million for 1996. The increase was due
primarily to an increase in the average size of the investment securities
portfolio to $173.3 million for the year ended December 31, 1997, from $167.9
million in 1996, and by an increase in the average yield on the investment
portfolio to 6.89% for 1997, from 6.62% for 1996. Interest on investment
securities and MBS available for sale increased $5.6 million, or 58.8%, to $15.1
million for the year ended December 31, 1997, from $9.5 million for 1996. The
increase was due primarily to the increased average size of the available for
sale portfolio to $236.2 million for 1997, from $152.7 million for 1996,
accompanied by an increase in the average yield to 6.38% for 1997, from 6.21%
for 1996.
Interest Expense. Total interest expense increased $7.2 million, or 12.7%, to
$63.6 million for the year ended December 31, 1997, compared to $56.4 million
for 1996. Interest expense on deposits increased $1.1 million, or 2.2%, to $52.8
million for the year ended December 31, 1997, compared to $51.7 million for
1996. The average balance of deposits increased $2.4 million to $1.2 billion in
1997, while the yield increased 3 basis points to 4.39% over the same time
period. Interest expense on borrowed funds increased $6.0 million, or 128.6%, to
$10.7 million for the year ended December 31, 1997, from $4.7 million for 1996.
The increase was due primarily to an increase in the average balance of borrowed
funds to $177.8 million for 1997, from $78.2 million for 1996, accompanied by a
slight increase in the average rate paid on borrowings to 6.04% for 1997, from
6.01% for 1996. The Company began to utilize borrowings as an alternative source
for the funding of loan production and investment and mortgage-backed security
purchases in 1997.
Net Interest Income. Net interest income increased $1.3 million, or 2.9%, to
$45.7 million for the year ended December 31, 1997, compared to $44.4 million
for 1996. The average interest rate spread for the year ended December 31, 1997,
was 2.65%, compared to 2.79% for 1996, while the net interest margin decreased
to 3.05%, from 3.19%, over the prior period.
<PAGE>
Provision for Loan Losses. The Company provided $1.2 million for possible loan
losses in 1997, as compared to $550,000 in 1996. The provision was based upon
management's review and evaluation of the loan portfolio, level of
delinquencies, general market and economic conditions, and asset classification
review. The related allowance for loan losses totaled $8.5 million at December
31, 1997.
Other Operating Income. Other operating income totaled $3.4 million for the year
ended December 31, 1997, compared to $2.0 million for 1996, which represented an
increase of $1.4 million, or 67.5%. Fees and service charges increased $330,000,
or 18.2%, to $2.1 million for the year ended December 31, 1997, compared to $1.8
million for 1996. Net gains on sales of loans and securities available for sale
totaled $593,000 for the year ended December 31, 1997, from $236,000 for 1996.
The increase was due primarily to net gains of $545,000 from sales of MBS
available for sale. Other income, consisting primarily of income from the
Company's operating subsidiaries, FSB Financial Corp. and 1000 Woodbridge Center
Drive, Inc., gains and losses on sales of real estate owned ("REO"), rental
income, and REO expenses, totaled $645,000 for the year ended December 31, 1997,
compared to a net expense of $31,000 for the year ended December 31, 1996,
representing an increase of $676,000. The increase was due to decreased REO
expenses and provisions for possible losses on REO, increased income from
operating subsidiaries, and increased profits on the sale of REO.
Operating Expenses. Operating expenses decreased $8.7 million, or 26.4%, to
$24.2 million for the year ended December 31, 1997, from $32.9 million in 1996.
There were several non-recurring expenses during 1996. Compensation and employee
benefit expense decreased $521,000, or 4.1%, to $12.2 million for the year ended
December 31, 1997, from $12.7 million for 1996. The decrease was primarily due
to a non-recurring charge for benefits payable as a result of the sudden passing
of the Bank's long-time President in 1996. Occupancy expense decreased $94,000
to $2.2 million for the year ended December 31, 1997. Equipment expense
increased $408,000, or 26.0%, to $2.0 million for the year ended December 31,
1997. The increase was due to the write-off of certain equipment determined to
be obsolete, and increased depreciation expense incurred due to an upgrade of
the Company's computer equipment. Advertising expense increased $253,000, or
34.7%, to $982,000 for the year ended December 31, 1997, from $729,000 for 1996.
The Company increased advertising in an effort to attract deposits and increase
loan production. Federal deposit insurance premiums decreased $9.9 million, or
92.9%, to $756,000 for the year ended December 31, 1997, from $10.7 million for
1996. The Deposit Insurance Funds Act of 1996 imposed a one-time special
assessment of $7.9 million on the Bank to recapitalize the SAIF (see Note 15,
"Special SAIF Assessment" in the consolidated financial statements).
Amortization of intangibles increased $795,000, or 58.9%, to $2.1 million for
the year ended December 31, 1997, from $1.3 million for 1996. The increase was
due primarily to an impairment writedown of the core deposit intangible with
respect to deposits acquired from the Resolution Trust Company ("RTC") in 1991.
A writedown totaling $1.3 million was recognized in 1997 versus a writedown of
$334,000 in 1996. General and administrative expenses increased $420,000, or
12.1%, to $3.9 million for the year ended December 31, 1997, from $3.5 million
for 1996.
Income Taxes. Income taxes totaled $8.7 million for the year ended December 31,
1997, compared to $4.8 million for 1996, which represented an increase of $3.9
million, or 82.2%. The increase was due primarily to an increase in taxable
income in 1997. The effective tax rate paid in 1997 was 36.7% versus 36.8% in
1996.
Liquidity and Capital Resources
The Company's liquidity is a measure of its ability to generate sufficient cash
flows to meet all of its current and future financial obligations and
commitments. The Company's primary sources of funds are deposits; proceeds from
principal and interest payments on loans and MBS; sales of loans, MBS and
investments available for sale; maturities of investment securities and
short-term investments; and, to an increasing extent, borrowed funds. While
maturities and scheduled amortization of loans and MBS are a predictable source
of funds, deposit flows and mortgage prepayments are greatly influenced by
interest rates, economic conditions, and competition.
The primary investing activity of the Company is the origination of loans.
During the years ended December 31, 1998, 1997 and 1996, the Company originated
mortgage loans in the amounts of $347.6
<PAGE>
million, $174.7 million and $149.9 million, respectively. The Company also
purchased loans and mortgage-backed and investment securities to reduce excess
liquidity not otherwise utilized for lending activities. Purchases of mortgage
loans totaled $26.8 million, $19.8 million and $10.1 million in 1998, 1997 and
1996, respectively. Purchases of MBS, including those available for sale,
totaled $398.8 million, $242.1 million and $247.0 million in 1998, 1997 and
1996, respectively. Purchases of investment securities, including those
available for sale, totaled $312.1 million, $61.5 million and $138.7 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Other investing
activities include investment in Federal Home Loan Bank of New York ("FHLB-NY")
stock and federal funds. The investing activities were funded primarily by
principal repayments on loans and MBS of $445.7 million, $240.1 million and
$218.8 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Additionally, proceeds from sales of mortgage-backed and
investment securities totaling $219.5 million, $137.2 million and $121.5 million
for 1998, 1997 and 1996, and called or maturing investment securities totaling
$135.0 million, $45.0 million and $74.0 million for the years ended December 31,
1998, 1997 and 1996, respectively, provided additional liquidity. Liquidity was
also provided through the sale of loans totaling $14.5 million, $5.0 million and
$6.9 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company had several other sources of liquidity, including FHLB-NY advances
which, at December 31, 1998, totaled $38.0 million, of which $6.0 million is due
in 1999. If necessary, the Company has additional borrowing capacity with the
FHLB-NY, including an available overnight line of credit of up to $50.0 million.
The Company also had other borrowings that provided additional liquidity,
totaling $226.7 million at December 31, 1998, $63.0 million of which is due in
1999. Other sources of liquidity are investment and mortgage-backed securities
available for sale, totaling $904.1 million at December 31, 1998.
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement is based
upon a percentage of deposits and short-term borrowings. The regulation was
amended by the OTS in 1998 to increase the type of assets that qualify as
"liquid assets" and to reduce the required percentage. The required minimum
ratio was 4.00% at December 31, 1998 and 1997. The Bank's liquidity ratios were
40.23% and 39.39% at December 31, 1998 and 1997, respectively. The Bank's liquid
assets at December 31, 1998, consist of cash and cash equivalents, and most
investment and mortgage-backed securities (excluding securities that have been
pledged for repurchase agreements). The level of these assets depends upon the
Bank's operating, financing and investing activities during any given period. At
December 31, 1998, 1997 and 1996, cash, cash equivalents, and investments
qualifying for liquidity purposes totaled $369.3 million, $319.4 million, and
$72.2 million, respectively.
The Company anticipates that it will have sufficient funds available to meet its
current commitments. At December 31, 1998, the Company had commitments to
originate and purchase mortgage loans of $51.8 million and commitments to
purchase mortgage-backed and investment securities of $13.0 million. The Company
is obligated to pay $1.9 million under its lease agreements for branch and
administrative facilities, of which $482,000 is due in 1999. Certificates of
deposit which are scheduled to mature in one year or less totaled $579.7 million
at December 31, 1998. Based upon historical experience, management estimates
that a significant portion of such deposits will remain with the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes presented herein have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
<PAGE>
Year 2000 Compliance Issues.
The Company has adopted a Year 2000 Compliance Plan and established a Year 2000
Compliance Committee, which includes members of senior management from all
operating areas. The objectives of the plan and the committee are to ensure that
the Company will be prepared for the new millennium. As recommended by the
Federal Financial Institutions Examination Council, the Year 2000 Compliance
Plan encompasses the following phases: Awareness, Assessment, Renovation,
Validation and Implementation. These phases will enable the Company to identify
risks, develop an action plan, perform adequate testing and complete
certification that its processing systems will be Year 2000 compliant. Execution
of the plan is on-going. The Company is currently in Phase 4 - Validation, which
includes testing of changes to hardware and software, accompanied by monitoring
and testing with vendors.
The primary operating software for the Company is obtained and maintained by an
external provider of software. This software is the Company's primary source of
information technology ("IT") and is considered "mission critical" to the
Company's Year 2000 compliance. In August, 1998, the Company received written
notification from the vendor that the software was Year 2000 compliant and a
software upgrade was sent to all users so that the necessary corrections to the
software could be made to the users' systems. The Company has received and
installed this software upgrade. Testing of this software on the Company's
hardware is substantially complete. Detail tests have been performed that test
the software and the hardware on various dates through January 25, 2001, and no
material problems have been encountered. The tests and results used to certify
the system as compliant have been reviewed by a Year 2000 consultant engaged by
the Company. The Company expects to have substantially completed the testing of
this mission critical item by March 31, 1999. The Company has also performed
minor modifications to the software obtained from the external vendor. It is the
Company's sole responsibility to ensure that any modifications to the software
are Year 2000 compliant. This operation is in process. An additional consultant
has been engaged to assist in the documentation and detailed review of the
modifications to the software. The modifications to the software are not
considered mission critical because the software can process all transactions
effectively without the modifications.
The Company has completed the preparation of test scripts and has begun testing
all other IT systems. Completion of testing for these systems is targeted for
June 30, 1999. Written assurances have been received from the vendors of such
systems stating that they are, or expect to be, Year 2000 compliant before
year-end. The Company has contacted all other material vendors and suppliers
(non IT systems) regarding their Year 2000 state of compliance. The majority of
these third parties have delivered written assurances to the Company that they
will have all mission critical systems compliant and that there will be no
interruption in service. The Company has internally imposed various deadlines
for vendors or suppliers to be Year 2000 compliant, depending on the importance
of the vendor or supplier to the Company's operations. These dates range from
March 1, 1999 to September 30, 1999. The Company will switch to an alternate
provider of the goods or services if the vendor or supplier is not Year 2000
ready by the internal deadline. In no case are these deadlines prior to the date
the vendor or supplier has indicated they expect to be Year 2000 compliant. In
addition, the Company has contacted all material borrowers to assess their Year
2000 readiness, and is in the process of finalizing the review and assessment of
their responses. The Company has also incorporated a Year 2000 readiness review
in its loan application process, in order to reduce exposure to a new borrower's
failure to be Year 2000 ready. Based upon a review its material borrowers as of
February, 1999, the Company does not anticipate any material losses resulting
from a borrower's lack of preparedness. There can be no assurances, however,
that the Company will not suffer any losses due to borrowers' failures to be
Year 2000 ready.
The Company has begun developing a contingency plan, addressing all areas of
operations, that will detail the procedures to be performed in the event of a
Year 2000 issue. This plan is targeted for completion by June 30, 1999. The
remaining phase to be addressed by the Company is the Implementation Phase. The
Implementation Phase is to certify that systems are Year 2000 compliant, along
with assurances that any new systems are compliant on a going-forward basis. The
Implementation Phase is targeted for completion by June 30, 1999. The Year 2000
consultant engaged by the Company is reviewing the Company's entire Year 2000
process, not just the mission critical items. The scope of his work includes
review of third party assurance letters, test scripts, test results and
contingency plans.
<PAGE>
The Company expects that customers may desire to withdraw funds in the weeks
preceding the century date change. In order to address that potential
consequence, the Company will need to have sufficient liquid assets toward the
end of the year. The Company is currently significantly in excess of the OTS
liquidity requirements and anticipates remaining significantly in excess
throughout 1999. The Company has also received written assurance from the
correspondent institution that provides cash to the Company's branch network
that they will be able satisfy all cash needs in that time period.
While the Company has not determined the final cost of compliance, it currently
anticipates such costs to be immaterial to the financial position or results of
operations of the Company. The costs identified directly with Year 2000
compliance are associated with the engagement of the consultants previously
discussed, the hiring of temporary help to address the additional workload
created by the Year 2000 compliance process and costs associated with customer
notification. The total cost for these services expensed in 1998 was $92,000,
and $167,000 is anticipated for 1999. No assurances can be given that the Year
2000 Compliance Plan will be completed successfully by the year 2000, in which
event the Company could incur significant operating losses.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending, investment and deposit activities. The Company's profitability is
affected by fluctuations in interest rates. A sudden and substantial increase in
interest rates may adversely impact the Company's earnings to the extent that
the interest rates borne by assets and liabilities do not change at the same
speed, to the same extent or on the same basis. To that end, management actively
monitors and manages its interest rate risk exposure.
The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Directors' approved
guidelines. Through such management, the Company seeks to minimize the
vulnerability of its operations to changes in interest rates. The Company's
Board of Directors reviews the Company's interest rate risk position quarterly.
The Company's Asset/Liability Committee is comprised of the Company's senior
management under the direction of the Board of Directors, with senior management
responsible for reviewing with the Board of Directors its activities and
strategies, the effect of those strategies on the Company's net interest margin,
the market value of the portfolio and the effect that changes in interest rates
will have on the Company's portfolio and its exposure limits. In addition, the
Company has established an Asset/Liability Strategy Committee ("ALSCO"), a
subcommittee of the Asset/Liability Committee, which is charged with
establishing and maintaining a monitoring system for all marketing initiatives,
providing management reports, and formulating and recommending strategies to the
Asset/Liability Committee.
The Company utilizes the following strategies to manage interest rate risk: (1)
emphasizing the origination and retention of fixed-rate mortgage loans having
terms to maturity of not more than 22 years, adjustable-rate loans and consumer
loans consisting primarily of home equity loans and lines of credit; (2) selling
substantially all fixed-rate conforming mortgage loans with terms of thirty
years without recourse and on a servicing-retained basis; (3) investing
primarily in adjustable-rate MBS, which may generally bear lower yields as
compared to longer term investments, but which better position the Company for
increases in market interest rates, and holding the majority of these securities
as available for sale and (4) also investing in U.S. government and agency
securities that have call features which, historically, have significantly
decreased the duration of such securities. The Company currently does not
participate in hedging programs, interest rate swaps or other activities
involving the use of off-balance sheet derivative financial instruments, but may
do so in the future to mitigate interest rate risk.
Net Portfolio Value ("NPV"). The NPV is defined as the current market value of
assets, minus the current market value of liabilities, plus or minus the current
value of off-balance sheet items and is a measure of analyzing the Company's
exposure to interest rate risk ("IRR"). The Company's interest rate sensitivity
is
<PAGE>
monitored by management through the use of an IRR model which measures IRR by
modeling the change in NPV over a range of interest rate scenarios. The OTS also
produces a similar analysis using its own model, based on data submitted on the
Bank's quarterly Thrift Financial Reports, the results of which will likely vary
from the results provided by the Company's model. The reasons for these
variances are primarily due to utilization of consolidated versus Bank-only data
and differences in assumptions utilized, including loan prepayment rates and
deposit decay rates.
The OTS uses, as a critical point, a change of plus or minus 200 basis points in
order to set its "normal" institutional results and peer comparisons. The
greater the change, positive or negative, in NPV, the more interest rate risk is
assumed to exist within the institution. The following table demonstrates the
Company's percentage change in NPV assuming an immediate change of up to plus or
minus 400 basis points from the level of interest rates at December 31, 1998,
as calculated by the Company. All market risk instruments presented in this
table are available for sale. The Company has no trading or held to maturity
securities.
<TABLE>
<CAPTION>
NPV as a % of Portfolio
Net Portfolio Value Value of Assets
Changes In ------------------------------------------------------------------------------------
Interest Rates Dollar Percent NPV
(Rate Shock)(1) Amount Change Change Ratio Change (1)
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 191,085 $(130,900) (41)% 9.85% (675)
+300 232,371 (89,614) (28) 11.97 (462)
+200 270,095 (51,890) (16) 13.92 (267)
+100 304,631 (17,354) (5) 15.70 (89)
Static 321,985 - - 16.59 -
-100 346,584 24,599 8 17.86 127
-200 336,826 14,841 5 17.36 76
-300 319,458 (2,527) (1) 16.46 (13)
-400 300,459 (21,526) (7) 15.48 (111)
</TABLE>
(1) Expressed in basis points.
Some of the interest rate risk measurements detailed above represent a
significant change from the results obtained at December 31, 1997. The primary
difference is in the amount of net portfolio value. The equity of the Company
increased significantly during the year, primarily due to the conversion and
reorganization. This increase caused a corresponding increase in the Company's
net portfolio value, which is evident in each range of the analysis. At December
31, 1998, the Company's NPV also represents a larger percentage of assets, and
this is reflected in the increased NPV Ratio. In addition to the changes due to
the increased equity, the NPV model above also details results for rate shocks
of minus 300 and minus 400 basis points that contrast with the results obtained
at December 31, 1997. These results are due to the lower interest rate
environment present at December 31, 1998. If interest rates at December 31,
1998, were to drop 300 or more basis points, the Company would be limited in its
ability to lower the cost of interest-bearing liabilities because the rates
could not be lowered below zero. Conversely, the vast majority the Company's
interest-earning assets would not be limited.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV require the making of certain
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented assumes that the composition of the Company's interest sensitive
assets and liabilities existing at the beginning of a period remains constant
over the period being measured, it further assumes that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities and also
does not consider the Company's strategic plans. Accordingly, although the NPV
measurements and net interest income models provide an indication of the
Company's interest rate risk exposure at a particular point in time, such
measurements are not
<PAGE>
intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Company's net interest income
and may differ from actual results.
In addition to historical information, this Annual Report includes certain
forward looking statements based on current management expectations. The
Company's actual results could differ materially from those management
expectations. Factors that could cause future results to vary from current
management expectations include, but are not limited to, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the federal government, changes in tax policies, rates and regulations of
federal, state and local taxing authorities, changes in interest rates, deposit
flows, the cost of funds, demand for loan products, demand for financial
services, competition, changes in the quality or composition of the Company's
loan and investment portfolios, changes in accounting principles, policies or
guidelines, and other economic competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices.
<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 10,000,000 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, respectively......... 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.
<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.
<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
$898)............................. - - - 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.
<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.
<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
<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
<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. Potential dilutive common stock are determined by applying the treasury
stock method. Potential dilutive common stock, 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.
<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
First Sentinel.............................................................. $ 38,253 $ 30,839 $ 30,225
Pulse....................................................................... 14,065 13,644 13,600
--------- -------- ---------
Total.......................................................................... $ 52,318 $ 44,483 $ 43,825
========= ======== =========
Net Income
First Sentinel.............................................................. $ 13,832 $ 9,295 $ 3,493
Pulse....................................................................... 5,661 5,675 4,710
--------- -------- ---------
Total.......................................................................... $ 19,493 $ 14,970 $ 8,203
========= ======== =========
</TABLE>
<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>
<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, 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 ("CMOs") 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.
<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.
<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
<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 0--9.34% 4.21% $ 1,227,304 0--9.34% 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>
<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
<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>
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
(12) INCOME TAXES
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>
<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 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 deferred tax liabilities......................................... 3,061 2,786
------------- -------------
Net deferred tax assets.............................................. $ 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, $859,000 and ($224,000) for the years ended
December 31, 1998, 1997 and 1996, respectively.
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 that such levels of
taxable income will be 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.
<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.
<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.
<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 8.6 $ 6.55 1,137,164 $ 3.48
=============== ========= ===== ====== ========= ======
</TABLE>
The Company applies APB 25 in accounting for the Plans. Also 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>
<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.
<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.
<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>
<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>
<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>
<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>
- --------------------------------------------------------------------------------
<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.
/s/ KPMG LLP
- ------------
KPMG LLP
Short Hills, New Jersey
January 25, 1999
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
--------------------------------
The Board of Directors
First Sentinel Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statement on Form
S-8, relating to First Sentinel Bancorp, Inc.'s 1986 Acquisition Stock Option
Plan, 1993 Acquisition Stock Option Plan and 1997 Acquisition Stock Option Plan,
and the Registration Statement on Form S-8, relating to First Sentinel Bancorp,
Inc.'s 1998 Stock-Based Incentive Plan, 1996 Omnibus Incentive Plan, 1992 Stock
Option Plan for Outside Directors, and the 1992 Incentive Stock Option Plan, of
our report dated January 25, 1999, relating 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 is incorporated by reference in the
December 31, 1998 Annual Report on Form 10-K of First Sentinel Bancorp, Inc.
/s/ KPMG LLP
KPMG LLP
Short Hills, New Jersey
March 26, 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>
