UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended ..............................SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to ___________
Commission File No.: 000-23809
FIRST SENTINEL BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 22-3566151
(State or other jurisdiction (IRS Employer I.D. No.)
of incorporation or organization)
1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ 07095
(Address of principal executive offices)
Registrant's telephone number, including area code: (732) 726-9700
NOT APPLICABLE
Former Name, Address, and Fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes______X No______.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1999
- -------------------------------- -------------------------------------
Common Stock 39,777,009 shares
<PAGE>
FIRST SENTINEL BANCORP, INC.
INDEX TO FORM 10-Q
PAGE #
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Condition as of September
30, 1999 and December 31, 1998 3
Consolidated Statements of Income for the three and nine months
ended September 30, 1999 and 1998 4
Consolidated Statements of Stockholders' Equity for the nine
months ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II. OTHER INFORMATION. 17
SIGNATURES 18
2
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- --------------
ASSETS
<S> <C> <C>
Cash and due from banks......................................................... $ 19,020 $ 22,831
Federal funds sold.............................................................. -- 14,800
---------------- --------------
Total cash and cash equivalents............................................ 19,020 37,631
Federal Home Loan Bank of New York (FHLB-NY) stock, at cost..................... 15,732 12,852
Investment securities available for sale........................................ 232,964 242,197
Mortgage-backed securities available for sale................................... 629,482 661,881
Loans receivable, net........................................................... 957,870 854,697
Interest and dividends receivable............................................... 12,045 13,556
Premises and equipment, net..................................................... 16,685 16,481
Excess of cost over fair value of net assets acquired........................... 7,318 7,956
Other assets.................................................................... 13,223 7,807
---------------- --------------
Total assets............................................................... $ 1,904,339 $ 1,855,058
================ ==============
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits........................................................................ $ 1,237,628 $ 1,268,119
Borrowed funds.................................................................. 383,325 264,675
Advances by borrowers for taxes and insurance................................... 8,452 6,969
Other liabilities............................................................... 12,784 15,476
---------------- --------------
Total liabilities........................................................... 1,642,189 1,555,239
---------------- --------------
STOCKHOLDERS' EQUITY
Preferred Stock; authorized 10,000,000 shares; issued and outstanding - none.... - -
Common Stock, $.01 par value, 85,000,000 shares authorized; 43,106,742
and 39,777,009 shares issued and outstanding at 9/30/99 and
43,105,497 and 42,675,397 shares issued and outstanding at 12/31/98........ 431 431
Paid-in capital................................................................. 201,053 201,105
Retained earnings............................................................... 119,448 112,601
Accumulated other comprehensive (loss) income................................... (12,386) 2,498
Less: Treasury stock (3,329,733 and 430,100 shares at September 30, 1999 and
December 31, 1998, respectively) ....................................... (29,705) (3,664)
Unearned Common Stock acquired by the Employee Stock
Ownership Plan (ESOP)................................................... (12,385) (13,073)
Unearned Common Stock acquired by the Recognition and
Retention Plan (RRP).................................................... (4,306) (79)
---------------- --------------
Total stockholders' equity................................................ 262,150 299,819
---------------- --------------
Total liabilities and stockholders' equity................................ $ 1,904,339 $ 1,855,058
================ ==============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended September
September 30, 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Loans........................................................$ 17,359 $ 15,748 $ 50,270 $ 45,124
Mortgage-backed securities held to maturity.................. -- 2,212 -- 11,810
Investment securities held to maturity....................... -- 1,799 -- 7,096
Investment and mortgage-backed securities
available for sale......................................... 13,728 10,400 41,243 23,842
-------------- -------------- -------------- --------------
Total interest income..................................... 31,087 30,159 91,513 87,872
-------------- -------------- -------------- --------------
INTEREST EXPENSE:
Deposits:
NOW and money market demand ................................ 2,404 2,725 7,013 7,517
Savings..................................................... 981 677 2,970 2,497
Certificates of deposit..................................... 8,384 9,918 25,781 29,615
-------------- -------------- -------------- --------------
Total interest expense - deposits......................... 11,769 13,320 35,764 39,629
Borrowed funds................................................ 4,363 3,054 12,190 8,954
-------------- -------------- -------------- --------------
Total interest expense.................................... 16,132 16,374 47,954 48,583
-------------- -------------- -------------- --------------
Net interest income....................................... 14,955 13,785 43,559 39,289
Provision for loan losses..................................... 300 352 1,200 1,092
-------------- -------------- -------------- --------------
Net interest income after provision for loan losses....... 14,655 13,433 42,359 38,197
-------------- -------------- -------------- --------------
OTHER OPERATING INCOME:
Fees and service charges..................................... 626 569 1,859 1,679
Net gain on sales of loans and securities available for sale. 273 372 850 521
Net gain on sale of deposits................................. -- -- -- 1,084
Other, net................................................... (53) 142 187 440
-------------- -------------- -------------- --------------
Total other operating income.............................. 846 1,083 2,896 3,724
-------------- -------------- -------------- --------------
OPERATING EXPENSES:
Compensation and benefits.................................... 3,362 3,425 10,163 9,830
Occupancy.................................................... 582 542 1,671 1,589
Equipment.................................................... 444 484 1,239 1,439
Advertising.................................................. 350 193 953 714
Federal deposit insurance.................................... 186 190 574 568
Amortization of intangibles.................................. 213 213 638 638
General and administrative................................... 1,048 1,118 3,312 3,117
-------------- -------------- -------------- --------------
Total operating expenses.................................. 6,185 6,165 18,550 17,895
-------------- -------------- -------------- --------------
Income before income tax expense.......................... 9,316 8,351 26,705 24,026
Income tax expense............................................. 3,164 2,720 9,062 8,452
-------------- -------------- -------------- --------------
Net income................................................$ 6,152 $ 5,631 $ 17,643 $ 15,574
============== ============== ============== ==============
Basic earnings per share.......................................$ 0.15 $ 0.13 $ 0.44 $ 0.37
============== ============== ============== ==============
Weighted average shares outstanding - Basic ................... 39,709,257 41,995,394 40,364,014 42,113,311
============== ============== ============== ==============
Diluted earnings per share.....................................$ 0.15 $ 0.13 $ 0.43 $ 0.36
============== ============== ============== ==============
Weighted average shares outstanding - Diluted.................. 40,028,012 42,669,009 40,784,389 42,768,096
============== ============== ============== ==============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Common Common Total
Compre- Stock Stock Stock-
Common Paid In Retained hensive Treasury Acquired Acquired holders'
Stock Capital Earnings Income(Loss) Stock by ESOP by RRP Equity
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 .......... $470 $59,348 $101,186 $1,295 ($16,677) ($546) ($183) $144,893
Net proceeds from stock offering....... -- 162,232 -- -- -- -- -- 162,232
Adjustment for Mutual Holding Co. ..... -- 1,577 -- -- -- -- -- 1,577
Purchase of ESOP shares................ -- -- -- -- -- (13,240) -- (13,240)
Net income for the nine months ended
September 30, 1998................. -- -- 15,574 -- -- -- -- 15,574
Cash dividends......................... -- -- (5,208) -- -- -- -- (5,208)
Net change in unrealized gain/(loss)
on securities available for sale.... -- -- -- 2,345 -- -- -- 2,345
Amortization of RRP.................... -- -- -- -- -- -- 78 78
Principal payments on ESOP loan........ -- 82 -- -- -- 483 -- 565
Exercise of stock options.............. 1 592 -- -- -- -- -- 593
-----------------------------------------------------------------------------------------
Balance at September 30, 1998 ......... $471 $223,831 $111,552 $3,640 ($16,677) ($13,303) ($105) $304,409
=========================================================================================
Balance at December 31, 1998........... $431 $201,105 $112,601 $2,498 ($3,664) ($13,073) ($79) $299,819
Net income for the nine months
ended September 30, 1999 ........... -- -- 17,643 -- -- -- -- 17,643
Cash dividends......................... -- -- (6,857) -- -- -- -- (6,857)
Net change in unrealized gain/(loss)
on securities available for sale.... -- -- -- (14,884) -- -- -- (14,884)
Purchases of treasury stock............ -- -- -- -- (36,511) -- -- (36,511)
Exercise of stock options.............. -- 6 -- -- -- -- -- 6
Exercise of stock options, issued
from existing treasury stock........ -- -- (3,283) -- 4,766 -- -- 1,483
Transfer of treasury stock to RRP...... -- -- (656) -- 5,704 -- (5,048) --
Amortization of RRP.................... -- -- -- -- -- -- 821 821
Principal payments on ESOP loan ...... -- (58) -- -- -- 688 -- 630
-----------------------------------------------------------------------------------------
Balance at September 30, 1999 ......... $431 $201,053 $119,448 ($12,386) ($29,705) ($12,385) ($4,306) 262,150
=========================================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income....................................................................... $ 17,643 $ 15,574
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Depreciation of premises and equipment........................................... 1,040 919
Amortization of excess of cost over fair value of assets acquired................ 638 638
Amortization of ESOP............................................................. 630 565
Amortization of RRP.............................................................. 821 78
Net amortization of premiums and accretion of discounts and deferred fees.... (198) 390
Provision for loan losses........................................................ 1,200 1,092
Provision for losses on real estate owned........................................ 31 110
Loans originated for sale........................................................ (7,099) (8,883)
Proceeds from sales of mortgage loans available for sale......................... 7,075 8,932
Net gain on sales of loans and securities available for sale..................... (850) (521)
Net loss (gain) on sales of real estate owned.................................... 23 (148)
Increase in interest and dividends receivable.................................... (1,511) (1,176)
(Decrease) increase in other liabilities......................................... (2,692) 2,194
Increase in other assets......................................................... 2,411 (861)
------------ ------------
Net cash provided by operating activities.................................. 22,137 18,903
------------ ------------
Cash flows from investing activities:
Proceeds from sales/calls of investment securities available for sale............ 118,126 34,828
Maturities of investment securities.............................................. -- 62,010
Purchases of investment securities available for sale............................ (119,133) (167,587)
Purchases of investment securities............................................... -- (18,880)
Purchase of FHLB-NY stock........................................................ (2,880) (369)
Proceeds from sales of mortgage-backed securities available for sale ............ 159,984 65,067
Principal payments on mortgage-backed securities................................. 174,394 189,258
Purchases of mortgage-backed securities available for sale....................... (313,952) (248,443)
Purchases of mortgage-backed securities.......................................... -- (5,541)
Principal repayments on loans.................................................... 192,053 158,310
Origination of loans............................................................. (264,832) (261,953)
Purchases of mortgage loans...................................................... (32,678) (13,230)
Proceeds from sale of real estate owned ......................................... 1,651 2,340
Purchases of premises and equipment.............................................. (1,244) (2,739)
Proceeds from sales of fixed assets.............................................. -- 124
------------ ------------
Net cash used in investing activities..................................... (88,511) (206,805)
------------ ------------
Cash flows from financing activities:
Net proceeds from stock offering and Mutual Holding Co. reorganization .......... -- 163,809
Purchase of treasury stock....................................................... (36,511) --
Purchase of ESOP shares.......................................................... -- (13,240)
Stock options exercised.......................................................... 1,489 593
Cash dividends paid.............................................................. (6,857) (5,208)
Net (decrease) increase in deposits.............................................. (30,491) 17,039
Net increase in borrowed funds................................................... 118,650 46,010
Net increase in advances by borrowers for taxes and insurance ................... 1,483 1,163
------------ ------------
Net cash provided by financing activities............................... 47,763 210,166
------------ ------------
Net (decrease) increase in cash and cash equivalents.................... (18,611) 22,264
Cash and cash equivalents at beginning of period.................................... 37,631 29,903
------------ ------------
Cash and cash equivalents at end of period.......................................... $ 19,020 $ 52,167
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest..................................................................... $ 47,270 $ 45,545
Income taxes................................................................. 9,043 7,331
Non cash investing and financing activities for the period:
Transfer of mortgage-backed securities from Held to Maturity to Available
for Sale..................................................................... -- 181,811
Transfer of loans to real estate owned...................................... $ 1,399 $ 3,167
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and in conformity with the instructions to Form 10-Q and
Article 10 of Regulation S-X for First Sentinel Bancorp, Inc. ("First Sentinel"
or the "Company") and its wholly-owned subsidiaries, First Savings Bank, SLA,
("First Savings" or the "Bank") Pulse Investment, Inc., Pulse Insurance
Services, Inc. and Pulse Real Estate, Inc., and the Bank's wholly-owned
subsidiaries, FSB Financial Corp., and 1000 Woodbridge Center Drive, Inc.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial condition, results
of operations, and changes in cash flows have been made at and for the three and
nine months ended September 30, 1999 and 1998. The results of operations for the
three and nine months ended September 30, 1999, are not necessarily indicative
of results that may be expected for the entire fiscal year ending December 31,
1999. These interim financial statements should be read in conjunction with the
December 31, 1998 annual report.
(2) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the daily
average number of common shares outstanding during the period. Common stock
equivalents are not included in the calculation.
Diluted earnings per share is computed similarly 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 utilizing the treasury stock method.
Calculation of Basic and Diluted Earnings Per Share
- --------------------------------------------------------
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months ended September Nine Months ended September 30,
30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 6,152 $ 5,631 $ 17,643 $ 15,574
============== ============== ============== ==============
Basic weighted-average common shares
outstanding 39,709,257 41,995,394 40,364,014 42,113,311
Plus: Dilutive stock options and awards 318,755 673,615 420,375 654,785
-------------- -------------- -------------- --------------
Diluted weighted-average common
shares outstanding 40,028,012 42,669,009 40,784,389 42,768,096
============== ============== ============== ==============
Net income per common share:
Basic $ 0.15 $ 0.13 $ 0.44 $ 0.37
============== ============== ============== ==============
Diluted $ 0.15 $ 0.13 $ 0.43 $ 0.36
============== ============== ============== ==============
</TABLE>
(3) DIVIDENDS
Based upon current operating results, the Company declared cash dividends of
$0.055 per share on August 2, 1999, payable August 31, 1999, to stockholders of
record on August 13, 1999.
7
<PAGE>
(4) COMMITMENTS AND CONTINGENCIES
At September 30, 1999, the Company had the following commitments: (i) to
originate loans of $81.0 million; (ii) to purchase mortgage loans of $13.4
million; (iii) to purchase mortgage-backed securities of $18.6 million, (iv)
unused equity lines of credit of $42.2 million; (v) unused commercial lines of
credit of $14.0 million; (vi) unused construction lines of credit of $31.6
million; and (vii) letters of credit outstanding totaling $2.9 million. Further,
certificates of deposits, which are scheduled to mature and/or rollover in one
year or less, totaled $542.3 million at September 30, 1999.
(5) ALLOWANCE FOR LOAN LOSSES
The following table presents the activity in the allowance for loan losses.
For the nine months ended September 30,
---------------------------------------
1999 1998
---- ----
(unaudited) (in thousands)
Balance at beginning of period $9,505 $8,454
Provision charged to operations 1,200 1,092
Charge offs, net of recoveries (88) (501)
---- -----
Balance at end of period $10,617 $9,045
======= ======
(6) COMPREHENSIVE INCOME
Total comprehensive income, consisting of net income and the net change in
unrealized gain/(loss) on securities available for sale, was $2.8 million and
$17.9 million for the nine months ended September 30, 1999 and 1998,
respectively.
(7) RECENT ACCOUNTING PRONOUNCEMENTS
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This statement amends FASB Statement 65
"Accounting for Certain Mortgage Banking Activities." It requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. The adoption of this Statement did not have a material
impact on the financial position or results of operations of the Company.
8
<PAGE>
FIRST SENTINEL BANCORP, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL.
Statements contained in this report that are not historical fact are
forward-looking statements, as that term is defined in the Private Securities
Reform Act of 1995. Such statements may be characterized as management's
intentions, hopes, beliefs, expectations or predictions of the future. It is
important to note that such forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
projected in such forward-looking statements. Factors that could cause future
results to vary materially from current expectations include, but are not
limited to, changes in interest rates, competition by larger financial
institutions, deposit and loan growth, changes in the quality or composition of
the Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, legislative and regulatory changes, changes in the
economy generally and changes in business conditions in the New Jersey market.
CONVERSION AND REORGANIZATION
On April 8, 1998, First Savings Bank and its mutual holding company, First
Savings Bancshares, MHC, completed a conversion and reorganization into the
stock holding company structure, forming First Sentinel 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, raising 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 to reflect 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 12,066,298 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.
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 entail the identification of risks,
the development of an action plan, the performance of adequate testing and the
completion of certification that the Company's processing systems will be Year
2000 Compliant. As of September 30, 1999, all phases of the plan were
substantially completed, although certain procedures remain ongoing. Progress
reports on the implementation of the plan are reviewed by the Board of Directors
on a monthly basis.
An integral component of the plan has been to identify and assess the
capabilities of the Company's operating systems, as well as the operating
systems of third parties upon which the Company's operations are dependent. The
Company's primary operating software is obtained from, 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 vendor provided the Company
with remediated software and written notification that the remediated software
was Year 2000 compliant. The Company has installed this software and performed
detail tests on both the software and hardware on various dates through April
30, 2001. No material problems have been
9
<PAGE>
encountered during such testing. The tests and results used to certify the
system as compliant have also been reviewed by an independent Year 2000
consultant engaged by the Company for that purpose.
The Company has also performed minor modifications to the software obtained from
the vendor. It is the Company's sole responsibility to ensure that any
modifications to the software are Year 2000 compliant. The Company has completed
testing of these modifications. No material problems have been encountered
during such testing. The tests and results used to certify the system as
compliant have also been reviewed by an independent Year 2000 consultant engaged
by the Company for that purpose. The modifications to the software being
performed by the Company are not considered mission critical as the software can
process all transactions effectively without the modifications.
The Company has substantially completed testing of all other IT systems as well.
These systems are also provided to the Company by third party vendors, all of
whom have provided written assurances to the Company that the systems are, or
are expected to be, Year 2000 compliant before the year-end. The Company has
also contacted all other material vendors and suppliers of non-IT systems
regarding their Year 2000 state of compliance. The majority of these third party
vendors and suppliers 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 established internal guidelines, by
which time material vendors and suppliers must be compliant, or the Company will
seek alternate vendors and suppliers. Based upon its current assessment,
management believes that the Company's material third party vendors are taking
the necessary steps to ensure Year 2000 compliance. There can be no assurances,
however, that such third parties will be compliant by year-end.
In addition, the Company has contacted all material borrowers to assess their
Year 2000 readiness. 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 of its material
borrowers as of April 1999, the Company does not anticipate any material losses
resulting from a borrower's lack of preparedness. All new borrowers since that
time have been evaluated for Year 2000 preparation in the loan review process,
with the exception of those loans purchased by the Company in connection with
the acquisition of Pulse. A review of the former Pulse borrowers for Year 2000
preparedness is in progress. Because the majority of Pulse loans are secured by
real estate, management does not anticipate any material losses on such loans.
Despite these measures, however, there can be no assurances that the Company
will not suffer any losses due to a borrower's failure to be Year 2000 compliant
or that the Company will not have to establish any reserves for any such
potential losses.
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 expects to have additional liquid assets available
toward year-end. The Company is significantly in excess of the OTS liquidity
requirements, and anticipates remaining so throughout 1999. Management has
developed a detailed Liquidity Plan that includes procedures for addressing
liquidity needs in the final weeks of 1999. The Liquidity Plan is expected to
reduce interest-earning assets and net interest income for that period. Any such
reduction, however, is expected to be immaterial to the results of operations or
financial condition of the Company.
Management has also developed a Contingency Plan that incorporates both
remediation and business continuity plans. The remediation contingency plans
focus on implementing oversight mechanisms to ensure that the Company's
Compliance Plan achieves its intended results of renovating, testing and
implementing necessary changes to all mission critical systems prior to January
1, 2000. The business continuity plans set forth the necessary policies and
procedures to follow in the event that critical business functions are
interrupted or impaired due to internal system or third party failures. These
plans are an enhancement of the Company's existing Disaster Recovery Plan, and
combined, are intended to help ensure the continuity of operations in the event
of a loss of critical resources. Testing of the Contingency Plan has been
substantially completed with satisfactory results as of September 30, 1999.
These tests and results have also been reviewed by an independent Year 2000
consultant engaged by the Company for that purpose.
10
<PAGE>
While the Company has not determined the final cost of compliance, it currently
anticipates such cost to be immaterial to the results of operations or financial
condition of the Company. The direct costs specifically attributable to Year
2000 compliance are the engagement of the consultants discussed above and the
hiring of temporary help to address the additional workload created by the Year
2000 compliance process. In addition, the Company has initiated a Customer
Awareness Campaign to educate consumers on Year 2000 issues, which has incurred
certain expenses. To date, the Company has expensed $92,000 in 1998 and $123,000
in the first nine months of 1999. Additional expense of $152,000 is projected
for the final three months of 1999.
Management believes that it is taking all reasonable and appropriate steps to
prepare for the Year 2000, and believes that its efforts are on schedule. Due to
the general uncertainty inherent with Year 2000 issues, and the inability to
control external parties or circumstances upon which the Company may be
dependent, however, there can be no assurances that the Company will not be
adversely affected by the century date change. Such adverse impact could result
from failures of the Company's internal systems, failures of material third
party vendors or failures of material borrowers. The Company could also be
subjected to litigation from customers, borrowers or vendors due to either
internal or external Year 2000 failures. All disclosure concerning the Year 2000
date change should be considered "Year 2000 Readiness Disclosure" pursuant to
the Year 2000 Information and Readiness Disclosure Act. The Year 2000
information provided herein should be read in conjunction with the Year 2000
Information and Readiness Disclosure Act which, among other things, mandates
that certain Year 2000 readiness disclosures may not be used in litigation.
ASSETS. Total assets remained relatively stable at $1.9 billion at September 30,
1999, reflecting an increase of $49.3 million, or 2.7% from December 31, 1998.
The change in assets consisted primarily of increases in loans receivable and
other assets, offset by decreases in mortgage-backed securities ("MBS")
available for sale, Federal funds sold, and investment securities available for
sale. Net loans increased $103.2 million, or 12.1%, to $957.9 million as of
September 30, 1999, from $854.7 million at December 31, 1998. The increase was
due primarily to loan originations exceeding loan amortization, prepayments and
sales. Total loan originations for the nine months ended September 30, 1999,
were $271.9 million, which represented a 0.4% increase over originations of
$270.8 million for the comparable 1998 period. Fixed-rate single-family first
mortgage loan originations totaled $77.2 million or 28.4% of production, while
adjustable-rate single-family first mortgage loans accounted for $74.3 million
or 27.4% of total originations for the first nine months of 1999. Also during
the first nine months of 1999, commercial real estate, commercial and
multi-family loan originations totaled $37.8 million, or 13.9% of total
originations, while construction lending totaled $35.8 million, or 13.1%. During
the same period, consumer loan originations, including home equity loans and
credit lines, totaled $46.8 million or 17.2% of total originations. In addition,
the Company purchased $31.7 million of adjustable-rate single-family first
mortgage loans and $1.0 million of fixed-rate single-family first mortgage loans
through correspondents during the nine months ended September 30, 1999.
Purchased loans are re-underwritten by the Bank and are extended under the same
terms and conditions as the Bank's direct loan originations. Repayment of
principal on loans totaled $192.1 million for the nine months ended September
30, 1999, as compared to $158.3 million for the same period in 1998. Management
has emphasized the origination of loans in an effort to increase loans as a
percentage of assets. While management intends to continue to actively seek to
originate loans, the future levels of loan originations and repayments will be
significantly influenced by external interest rates and other economic factors
outside of the control of the Company.
Mortgage-backed securities ("MBS") available for sale decreased $32.4 million,
or 4.9%, to $629.5 million at September 30, 1999, from $661.9 million at
December 31, 1998. The decrease was primarily due to sales and principal
repayments of $159.3 million and $174.4 million, respectively, exceeding
purchases of $314.0 million for the nine month period ended September 30, 1999.
Net proceeds were used to fund loan growth and repurchase the Company's stock.
In addition, a market value decrease of ($12.7 million) resulted from the change
in the value of the MBS portfolio as interest rates rose in anticipation of a
change in Federal Reserve monetary policy, which widened spreads and affected
MBS pricing. Management expects the market value to recover and has the ability
to carry these securities through various interest rate scenarios.
11
<PAGE>
Investment securities available for sale decreased $9.2 million, or 3.8%, to
$233.0 million as of September 30, 1999 from $242.2 million at December 31,
1998. The decrease was primarily due to a market value adjustment of ($10.3
million) reflecting the change in value as interest rates rose in anticipation
of a change in Federal Reserve monetary policy. Management expects the market
value to recover and has the ability to carry these securities through various
interest rate scenarios. For the nine months ended September 30, 1999, sales and
calls of investment securities available for sale totaled $118.0 million, while
purchases totaled $119.1 million. Calls of investment securities available for
sale were concentrated in the portfolio obtained through the Pulse acquisition.
Federal funds sold decreased $14.8 million from December 31, 1998 as these funds
were deployed in other areas. Other assets increased $5.4 million, or 69.4%, to
$13.2 million at September 30, 1999, compared with $7.8 million at December 31,
1998. The increase was primarily due to the increased deferred tax benefit
caused by the decrease in the market value of the securities available for sale
portfolios.
LIABILITIES. Deposits decreased $30.5 million, or 2.4%, to $1.2 billion at
September 30, 1999. The Company continued to experience deposit outflows at the
former Pulse branches. The outflow was concentrated primarily in certificates of
deposit, as opposed to the balance of the core deposit base, as management
lowered the rates on higher-costing certificates of deposit. The Company
continues to focus on a reduction in the dependence on certificates of deposit
as its primary funding source. Borrowed funds increased $118.6 million, or
44.8%, to $383.3 million at September 30, 1999, from $264.7 million at December
31, 1998. The increased borrowed funds were used primarily to fund loan
originations and, to a lesser degree, mitigate deposit outflows. Advances by
borrowers for taxes and insurance increased $1.5 million, or 21.3%, to $8.5
million at September 30, 1999, from $7.0 million at December 31, 1998, primarily
due to the increase in the residential loan portfolio. Other liabilities
decreased $2.7 million, or 17.4%, to $12.8 million at September 30, 1999, from
$15.5 million at December 31, 1998, primarily due to decreases in income taxes
payable and various other accrual accounts.
CAPITAL. The Company's stockholders' equity decreased $37.7 million, or 12.6%,
to $262.2 million at September 30, 1999, from $299.8 million at December 31,
1998. The primary reasons for the decrease in equity were the purchase of $36.5
million of treasury stock, the increase in the net unrealized loss on securities
available for sale of $14.9 million, and cash dividends of $6.9 million. These
decreases were partially offset by net income of $17.6 million for the nine
months ended September 30, 1999.
The Office of Thrift Supervision ("OTS") requires that the Bank meet minimum
tangible, core and risk-based capital requirements. At September 30, 1999, the
Bank exceeded all regulatory capital requirements, as follows:
<TABLE>
<CAPTION>
Required Actual
---------------------- ---------------------- Excess of Actual
% of % of over Regulatory
Amount Assets Amount Assets Requirements
----------- ---------- ----------- ---------- -----------------------
(Dollars in thousands) (Unaudited)
<S> <C> <C> <C> <C> <C>
Tangible Capital $28,397 1.50% $219,949 11.62% $191,552
Core Capital 56,794 3.00% 219,949 11.62% 163,155
Risk-based Capital 61,905 8.00% 229,632 29.68% 167,727
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of funds are
deposits; proceeds from principal and interest payments on loans and
mortgage-backed securities; sales of loans, mortgage-backed securities and
investments available for sale; maturities or calls of investment securities and
short-term investments; and, to an increasing extent, advances from the FHLB-NY
and other borrowed funds. While maturities and scheduled amortization of loans
and mortgage-backed securities are a predictable source of funds, deposit cash
flows and mortgage prepayments are greatly influenced by general interest rates,
competition, and economic conditions.
The most significant sources of funds for the first nine months of 1999 were
principal repayments and prepayments of loans and mortgage-backed securities,
totaling $192.1 million and $174.4 million, respectively. Other significant
sources of funds for the nine months ended September 30, 1999, were sales and
calls of investment securities available for sale of $118.1 million, sales of
MBS available for sale totaling $160.0 million, and a net increase in borrowed
funds totaling $118.7 million.
12
<PAGE>
The primary investing activities of the Company for the first nine months of
1999 were the purchases of mortgage-backed securities available for sale
totaling $314.0 million, origination of loans totaling $271.9 million, and the
purchases of investment securities available for sale totaling $119.1 million.
Other significant uses of funds during the nine months ended September 30, 1999,
were $36.5 million for the repurchase of common stock, $32.7 million in
purchases of mortgage loans and $30.5 million in decreased deposits.
The Bank is required to maintain an average daily balance of liquid assets as
defined by OTS regulations. This ratio is based upon a percentage of deposits
and short-term borrowings. The required minimum ratio is currently 4.00%. The
Bank's liquidity ratio at September 30, 1999, was 48.2% and assets qualifying
for liquidity purposes totaled $573.3 million.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER
30, 1999 AND 1998.
RESULTS OF OPERATIONS. Net income for the three and nine months ended September
30, 1999, totaled $6.2 million and $17.6 million, respectively, with
basic/diluted earnings per share of $0.15/$0.15 and $0.44/$0.43, respectively.
This represented an increase of $521,000 and $2.1 million, or 9.3% and 13.3%,
respectively, over the net income of $5.6 million and $15.6 million, or
$0.13/$0.13 and $0.37/$0.36 basic/diluted earnings per share, respectively, for
the comparable 1998 periods. Earnings in 1998 were augmented by a $687,000 after
tax, non-recurring gain on the sale of deposits realized in the first quarter.
The 1999 year-to-date increase in net income, exclusive of the 1998
non-recurring gain, was $2.8 million or 18.5%. The increase in net income in
1999 was partially attributable to earnings on the $162.2 million in net
proceeds from the Company's Conversion and Reorganization in April, 1998. The
proceeds raised in the Conversion and Reorganization allowed the Company to
increase interest-earning assets without a corresponding increase in interest
bearing liabilities.
INTEREST INCOME. Interest income for the three and nine months ended September
30, 1999, increased by $928,000 and $3.6 million, or 3.1% and 4.1%,
respectively, from the same periods in 1998. Interest on loans increased $1.6
million and $5.1 million, or 10.2% and 11.4%, respectively, to $17.4 million and
$50.3 million for the three and nine months ended September 30, 1999, as
compared to $15.7 million and $45.1 million for the same period in 1998. The
increase was primarily due to loan originations exceeding principal repayments
and sales. The average balance of the loan portfolio for the nine month period
ended September 30, 1999 increased to $914.8 million from $772.2 million for
1998, while the average yield on the portfolio decreased to 7.33% for the nine
months ended September 30, 1999, from 7.79% for the same period in 1998.
Although interest rates have increased in 1999, the yield on the portfolio has
declined during the nine months ended September 30, 1999 as the rates on
principal repayments have exceeded the rates on new loan originations. In
addition, a decrease in interest rates in the first quarter of 1999 as compared
with the first quarter of 1998 negatively affected the yield on adjustable rate
mortgage loans repricing during that time period.
As of December 31, 1998, the Company had classified the entire balance of all
MBS and investment securities as available for sale. It is anticipated that all
MBS and investment security purchases will be classified as available for sale
for the foreseeable future. Such classification is also the reason for the
significant increase in the investments and MBS available for sale category. The
average balance of the investment and MBS available for sale portfolios totaled
$908.2 million, with an annualized yield of 6.05% for the nine months ended
September 30, 1999, while the combined available for sale and held to maturity
portfolios' average balance was $859.4 million with an annualized yield of 6.63%
for the nine months ended September 30, 1998. Declining interest rates
throughout 1998 have significantly affected the yield on the portfolio. Rates on
investment securities available for sale 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. The yield on the MBS
available for sale portfolio was also negatively affected as higher rate
underlying loans prepaid. Due to market interest rates, new purchases had a
lower yield than the MBS in the portfolio in 1998. Growth in interest-earning
assets is expected to continue. Yields on the portfolio will continue to be
affected by market interest rates.
13
<PAGE>
INTEREST EXPENSE. Interest expense decreased $242,000 to $16.1 million for the
three months ended September 30, 1999, compared to $16.4 million for the same
period in 1998. For the nine months ended September 30, 1999, interest expense
decreased $629,000 to $48.0 million, compared to $48.6 million for the
comparable 1998 period. Interest expense on deposits decreased $1.6 million and
$3.9 million, or 11.6% and 9.8%, respectively, to $11.8 million and $35.8
million for the three and nine months ended September 30, 1999, as compared to
$13.3 million and $39.6 million for the same periods in 1998. Management
continued to concentrate its efforts on increasing the level of core accounts
and decreasing certificate accounts as a percentage of overall deposits. The
increase in the average balance of NOW and money market demand and savings
accounts, along with the increase in the average balance of non-interest bearing
deposits, reflects this strategy. The average balance of these core accounts
totaled $561.2 million for the nine months ended September 30, 1999, as compared
to $510.1 million for the same period in 1998. The average interest cost on all
deposits for the nine months ended September 30, 1999 was 3.79% as compared to
4.28% for the same period in 1998. Non-interest bearing accounts averaged $44.2
million for the nine months ended September 30, 1999, up from $40.0 million for
the comparable 1998 period. The average balance of certificates of deposit
decreased to $696.1 million for the nine months ended September 30, 1999, from
$725.8 million for the same period in 1998 due primarily to the sale of higher
rate deposits in a branch sold in the first quarter of 1998 and by management's
reduction in the interest rates offered to certificate customers. The average
cost of certificates over the nine-month period ended September 30, 1999, was
4.94%, as compared to 5.44% over the same period in 1998. Management will
continue to offer certificate rates that are competitive, but lower than certain
area competition. This strategy may continue to cause a limited outflow of
funds. Interest on borrowed funds for the three and nine months ended September
30, 1999, increased $1.3 million and $3.2 million, or 42.9% and 36.1%,
respectively, to $4.4 million and $12.2 million, compared to $3.1 million and
$9.0 million for the same respective periods in 1998. The increase in the
average balance of borrowed funds for the nine months ended September 30, 1999,
to $302.4 million, from $209.7 million was attributable to management's
continuing strategy to fund earning asset growth through the use of borrowed
funds, where accretive to earnings, and to use borrowed funds to mitigate the
outflow of certificate of deposit accounts. This strategy is expected to
continue and borrowings can be expected to continue to increase as a percentage
of total liabilities. Offsetting the increase in the average balance of borrowed
funds was the reduced interest cost of 5.37% for the nine months ended September
30, 1999, down from 5.69% for the same period in 1998.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before
provision for loan losses increased $1.1 million and $4.3 million, or 8.5% and
10.9%, respectively, to $15.0 million and $43.6 million for the three and nine
months ended September 30, 1999, compared to $13.8 million and $39.3 million for
the same periods in 1998. The increase was due to the changes in interest income
and interest expense described above. The interest rate spread increased to
2.54% for the three months ended September 30, 1999, from 2.38% for the same
period in 1998. The increase was due to a reduction in the cost of
interest-bearing liabilities to 4.23% for the quarter ended September 30, 1999,
from 4.63% for the same period in 1998, partially offset by a reduction in the
yield on interest earning assets to 6.77% from 7.01% for the same respective
periods. For the nine months ended September 30, 1999, interest spread declined
to 2.47% from 2.57% for the same period in 1998 as reductions in the yield on
earning assets outpaced the decrease in the average cost of interest-bearing
liabilities. Comparing the nine months ended September 30, 1999 and 1998, the
yield on interest-earning assets declined 49 basis points to 6.69%, while the
cost of interest-bearing liabilities decreased by 39 basis points to 4.22%. The
net interest margin increased to 3.25% for the three months ended September 30,
1999, from 3.21% for the same period in 1998, as a result of the increase in net
interest income resulting from the increase in earning asset volume and a
reduction in the average cost of funds. For the nine months ended September 30,
1999, the net interest margin decreased to 3.19% from 3.21% for the same period
in 1998 as a result of the compression in the interest rate spread.
PROVISION FOR LOAN LOSSES. The provision for loan losses for the three and nine
months ended September 30, 1999, decreased $52,000 and increased $108,000, or
(14.8%) and 9.9%, respectively, to $300,000 and $1.2 million, compared to
$352,000 and $1.1 million for the same periods in 1998. Provisions for loan
losses are made based on management's evaluation of risks inherent in the loan
portfolio, giving consideration to on-going credit evaluations and changes in
the balance and composition of the loan portfolio. Total loans, net of unearned
and deferred income, increased $130.8 million for the nine months ended
September 30, 1999, with commercial real estate loans increasing to $86.7
million or 8.9% of total
14
<PAGE>
loans, up from $65.1 million or 7.5% at December 31, 1998. In management's
opinion, the allowance for loan losses, totaling $10.6 million at September 30,
1999, is adequate to cover losses inherent in the portfolio. Management will
continue to review the need for additions to its allowance for loan losses based
upon its quarterly review of the loan portfolio, the level of delinquencies, and
general market and economic conditions.
The following table sets forth ratios regarding nonaccrual loans, and loans
which are 90 days or more delinquent, but on which the Company is accruing
interest at the dates indicated. The Company discontinues accruing interest on
delinquent loans when collection of interest is considered doubtful, generally
when 90 days or more delinquent and when loan-to-value ratios exceed 55%, at
which time all accrued but uncollected interest is reversed. Total foreclosed
real estate ("REO"), net, totaled $1.2 million at September 30, 1999 and
consisted of 10 properties. The largest individual property, carried at
$504,000, was under contract for sale at September 30, 1999. Management
continues to pursue the sale of REO properties in an expedient manner.
<TABLE>
<CAPTION>
(dollars in thousands) Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
1999 1999 1998 1998 1999
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans ......................... $2,251 $2,537 $3,112 $2,648 $2,429
Non-accrual other loans............................. 82 82 94 92 93
--------- ---------- ---------- --------- ----------
Total non-accrual loans.......................... 2,333 2,619 3,206 2,740 2,522
Loans 90 days or more delinquent and
still accruing................................. 320 224 127 1,525 1,292
Restructured loans.................................. - - - - 2,081
--------- ---------- ---------- --------- ----------
Total non-performing loans ......................... 2,653 2,843 3,333 4,265 5,895
Total foreclosed real estate, net of related
allowance...................................... 1,193 1,422 1,516 1,453 2,356
========= ========== ========== ========= ==========
Total non-performing assets ........................ $3,846 $4,265 $4,849 $5,718 $8,251
========= ========== ========== ========= ==========
Non-performing loans to loans receivable, net ...... 0.27% 0.32% 0.38% 0.50% 0.71%
Non-performing assets to total assets .............. 0.20% 0.23% 0.26% 0.31% 0.46%
</TABLE>
OTHER OPERATING INCOME. Other operating income decreased $237,000, or 21.9%, to
$846,000 for the three months ended September 30, 1999, compared to $1.1 million
for the same period in 1998. An increase in fees and service charges was offset
by the decline in the Other, net category caused primarily by charge-offs
related to a real estate owned property totaling $150,000. For the nine months
ended September 30, 1999, other operating income totaled $2.9 million, a
decrease of $828,000, or 22.2% from the same period in 1998. Excluding the
non-recurring gain on the sale of deposits in 1998, total other operating income
increased $256,000, or 9.7% for the nine months ended September 30, 1999,
compared with the same period in 1998. Fees and service charges increased
$180,000, or 10.7%, to $1.9 million for the nine months ended September 30,
1999, compared to $1.7 million for the same period in 1998. This increase
occurred despite the waiver of service charges on the former Pulse accounts for
a three-month period ending in September, 1999. The increase in net gain on
sales of loans and securities during the nine months ended September 30, 1999
was primarily due to sales of MBS. Management disposed of numerous MBS whose
principal balance had been reduced significantly due to paydowns, and
adjustable-rate MBS whose price performance target had been attained. The net
gain on sale of deposits in the first nine months of 1998 represented the gain
resulting from the sale of the Eatontown branch office to another financial
institution in February, 1998.
OPERATING EXPENSES. Operating expenses for the three and nine months ended
September 30, 1999, increased $20,000 and $655,000, or 0.3% and 3.7%,
respectively, to $6.2 million and $18.6 million, compared to $6.2 million and
$17.9 million for the same periods in 1998. Compensation and benefits decreased
$63,000 and increased $333,000, or (1.8%) and 3.4%, respectively, to $3.4
million and $10.2 million for the three and nine months ended September 30,
1999. The year to date increase in compensation and benefits was primarily due
to: expenses associated with the Company's 1998 Stock-Based Incentive Plan which
commenced in December, 1998; the cost of accrued postretirement healthcare
benefits; the compensation cost associated with the opening of the Highland Park
branch office in June 1998 and the Spotswood branch in June, 1999; and a cost of
living salary increase in the first quarter of 1999. These increases were
partially mitigated by First Savings offering a voluntary retirement incentive
15
<PAGE>
that reduced payroll beginning in the first quarter of 1999, as well as staffing
efficiencies realized as a result of the Pulse acquisition. Advertising expense
increased $157,000 and $239,000, or 81.3% and 33.5%, respectively, to $350,000
and $953,000 for the three and nine months ended September 30, 1999, compared to
$193,000 and $714,000 for the same periods in 1998, as the Company continued to
solicit additional loan volume and promoted the opening of the Spotswood branch.
Equipment expense for the three and nine months ended September 30, 1999,
totaled $444,000 and $1.2 million, a decrease of $40,000 and $200,000, or 8.3%
and 13.9%, respectively, primarily due to expenses incurred in 1998 for new
computer equipment purchased by the former Pulse Bank. General and
administrative expenses decreased $70,000 and increased $195,000, or (6.3%) and
6.3%, respectively, to $1.0 million and $3.3 million for the three and nine
months ended September 30, 1999. The year to date increase in general and
administrative expenses was primarily related to the conversion of the data
systems from the former Pulse data center to the Company's in-house systems
which took place in the second quarter of 1999, and an increase in supervisory
examination fees. As a measure of the Company's non-interest expense control,
the Company's overhead ratio (operating expense, excluding goodwill
amortization, divided by average assets) improved to 1.27% for the three and
nine months ended September 30, 1999, compared to 1.33% and 1.36% for the three
and nine months ended September 30, 1998. Operating expenses are expected to
increase, however, in the first half of 2000 as the Company undertakes a planned
upgrade of branch operations. The Company is currently interviewing vendors and
evaluating hardware and software solutions to facilitate teller platform
automation, including document preparation and online signature verification.
These upgrades are intended to enhance customer service, streamline the account
opening process, reduce printing costs and provide improved security and
research capabilities. At present, the Company has not determined the cost of
such upgrades, which are expected to begin in the first quarter of 2000.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the end of the
preceding fiscal year to the date of the most recent interim financial
statements (September 30, 1999).
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
There are various claims and lawsuits in which the Registrant is
periodically involved incidental to the Registrant's business. In the
opinion of management, no material loss is expected from any of such
pending claims and lawsuits.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a.) EXHIBITS
- ---------- -------------------------------------------------------- ------------
Exhibit
Number Description Reference
- ---------- -------------------------------------------------------- ------------
3.1 Certificate of Incorporation of First Sentinel Bancorp, *
Inc.
3.2 Bylaws of First Sentinel Bancorp, Inc. *
4 Stock certificate of First Sentinel Bancorp, Inc. *
11 Statement re: Computation of Ratios page 7
27 Financial Data Schedule attached
- ---------- -------------------------------------------------------- ------------
b.) REPORTS ON FORM 8 - K
None
* - Incorporated herein by reference into this document from the Registration
Statement on Form S-1 and exhibits thereto of First Sentinel Bancorp, Inc.
(formerly First Source Bancorp, Inc.), and any amendments or supplements thereto
filed with the SEC on December 19, 1997 and amended on February 9, 1998, SEC
File No. 333-42757.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST SENTINEL BANCORP, INC.
Date: November 10, 1999 By: JOHN P. MULKERIN
----------------
John P. Mulkerin
President and Chief Executive Officer
Date: November 10, 1999 By: CHRISTOPHER MARTIN
------------------
Christopher Martin
Executive Vice President and Chief
Operating and Financial Officer and
Corporate Secretary
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
Financial Data Schedule Worksheet for:
FIRST SENTINEL BANCORP, INC.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,020
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 862,446
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 968,487
<ALLOWANCE> 10,617
<TOTAL-ASSETS> 1,904,339
<DEPOSITS> 1,237,628
<SHORT-TERM> 184,650
<LIABILITIES-OTHER> 21,236
<LONG-TERM> 198,675
0
0
<COMMON> 431
<OTHER-SE> 261,719
<TOTAL-LIABILITIES-AND-EQUITY> 1,904,339
<INTEREST-LOAN> 50,270
<INTEREST-INVEST> 41,243
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 91,513
<INTEREST-DEPOSIT> 35,764
<INTEREST-EXPENSE> 47,954
<INTEREST-INCOME-NET> 43,559
<LOAN-LOSSES> 1,200
<SECURITIES-GAINS> 850
<EXPENSE-OTHER> 18,550
<INCOME-PRETAX> 26,705
<INCOME-PRE-EXTRAORDINARY> 26,705
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,643
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.43
<YIELD-ACTUAL> 2.47
<LOANS-NON> 2,333
<LOANS-PAST> 320
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,505
<CHARGE-OFFS> 88
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 10,617
<ALLOWANCE-DOMESTIC> 10,617
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
