UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 1999
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
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(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 17, 2000, as
quoted by the Nasdaq Stock Market, was approximately $253.6 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 17, 2000, there were 43,106,742 shares issued and 36,063,045 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, 1999 (Part II).
II. Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
(Part III).
1
<PAGE>
INDEX
PAGE
----
PART I
Item 1. Business .............................................. 3
Item 2. Properties ............................................ 28
Item 3. Legal Proceedings ..................................... 30
Item 4. Submission of Matters to a Vote of Security Holders ... 30
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................... 30
Item 6. Selected Financial Data ............................... 30
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ......... 30
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ..................................... 30
Item 8. Financial Statements and Supplementary Data ........... 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ................ 30
PART III
Item 10. Directors and Executive Officers of the Registrant .... 31
Item 11. Executive Compensation ................................ 31
Item 12. Security Ownership of Certain
Beneficial Owners and Management ...................... 31
Item 13. Certain Relationships and Related Transactions ........ 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................... 32
SIGNATURES 34
2
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FIRST SENTINEL BANCORP, INC.
First Sentinel Bancorp, Inc. ("First Sentinel" or the "Company") is a
Delaware corporation organized by First Savings Bank ("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, 1999, the
Company had consolidated total assets of $1.9 billion and total equity of $244.6
million. The Company is a unitary thrift holding company subject to regulation
by the Office of Thrift Supervision ("OTS") and the Securities and Exchange
Commission ("SEC").
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 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 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. 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 and 1997 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
reduction was made to stockholders' equity to include Pulse's operations for the
three months ended December 31, 1998.
FIRST SAVINGS BANK
First Savings is a New Jersey-chartered capital stock savings bank
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. The Bank's telephone number is (732) 726-9700.
3
<PAGE>
BUSINESS STRATEGY
Statements contained in this report that are not historical fact are
forward-looking statements, as that term is defined in the Private Securities
Litigation 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.
The Company's objectives are to enhance shareholder value by profitably
meeting the needs of our customers and seeking controlled growth, while
preserving asset quality and maintaining a strong capital position. 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 is 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 and investment
securities 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 has endeavored to expand its traditional thrift lending and
securities investment strategy. Toward this end, the Bank continues 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. The Bank
has increased its emphasis on the origination of commercial real estate,
construction and commercial loans, as well as the marketing of its business
checking accounts and other business-related services. To develop full-service
relationships with commercial customers, the Bank provides merchant services,
such as merchant credit card processing, overdraft sweep accounts, express
teller services and escrow management. The Bank has hired, and intends to
continue hiring, additional personnel with expertise in commercial lending to
facilitate growth in this area. The Bank has also increased loan volumes through
the use of third-party correspondent lending. Purchased loans are
re-underwritten by the Bank and are extended under the same terms and conditions
as the Bank's direct loan originations. Third-party correspondent lending is
expected to continue to play a role in the future operations of the Bank.
As part of the Company's asset/liability management strategy, and as a
means of enhancing profitability, the Company also invests in investment and
mortgage-backed securities. In recent years, 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, 1999, 1998 and 1997 were
$325.5 million, $217.1 million and $177.8 million, respectively. Additional
leveraged growth is anticipated as market conditions allow.
The Company repurchased $48.0 million of its common stock during 1999 as
part of its ongoing capital management strategy. The Company intends to
repurchase an additional 10% of its outstanding common stock in 2000.
4
<PAGE>
The Company will be upgrading branch operations in 2000. 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 provide front-line
personnel with interactive sales tools, enhance customer service, streamline the
account opening process, reduce printing costs and provide improved security and
research capabilities. In addition, the Company plans to introduce transactional
internet banking in 2000. Supplementing the Company's existing delivery
channels, internet banking will provide customers with on-line access to
commercial and retail services. These services are expected to include on-line
loan applications, funds transfers, electronic bill payment and the receipt of
on-line statements.
The Company will continue to actively pursue retail expansion in contiguous
markets, having opened its twenty-third branch and successfully completed the
integration of the former Pulse branches in 1999. 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.
MARKET AREA AND COMPETITION
The Company has 23 branch offices in central New Jersey, 19 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 northern 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.
Prolonged expansion in the national and regional economies, low unemployment
levels and favorable interest rates have contributed to the stabilization and
appreciation in New Jersey's real estate market 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
<PAGE>
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. Average
balances are derived from month-end balances.
<TABLE>
<CAPTION>
(Dollars in thousands)
For the Year Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------------------------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans, net (1) .................... $ 934,991 $68,656 7.34% $ 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) ............... 893,097 54,732 6.13 554,241 34,936 6.30 236,173 15,057 6.38
-------------------- -------------------- --------------------
Total interest-earning
assets ...................... 1,828,088 123,388 6.75 1,693,357 119,173 7.04 1,497,171 109,241 7.30
Non-interest earning assets ......... 58,183 51,271 55,423
---------- ---------- ----------
Total assets $1,886,271 $1,744,628 $1,552,594
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
NOW and Money market accounts ... $ 347,325 9,395 2.70 $ 308,609 9,008 2.92 $ 281,007 8,315 2.96
Savings accounts ................ 170,907 3,931 2.30 177,282 4,431 2.50 184,423 4,819 2.61
Certificate accounts ............ 686,754 33,900 4.94 719,602 39,429 5.48 722,534 39,685 5.49
Borrowed funds .................. 325,501 17,780 5.46 217,131 12,518 5.77 177,797 10,739 6.04
-------------------- -------------------- --------------------
Total interest-bearing
liabilities ................. 1,530,487 65,006 4.25 1,422,624 65,386 4.60 1,365,761 63,558 4.65
Non-interest bearing deposits ....... 44,755 35,297 26,234
Other liabilities ................... 15,004 23,817 22,996
---------- ---------- ----------
Total liabilities ............. 1,590,246 1,481,738 1,414,991
---------- ---------- ----------
Stockholders' equity ................ 296,025 262,890 137,603
---------- ---------- ----------
Total liabilities and
stockholders' equity ........ $1,886,271 $1,744,628 $1,552,594
========== ========== ==========
Net interest income/interest
rate spread (4) ..................... $58,382 2.50% $53,787 2.44% $45,683 2.65%
============== ============== ==============
Net interest-earning assets/net
interest margin (5) ................. $ 297,601 3.19% $ 270,733 3.18% $ 131,410 3.05%
======= ========== ====== ========== ======
Ratio of interest-earning assets
to interest-bearing liabilities ..... 1.19 x 1.19 x 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
<PAGE>
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 change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
(Dollars in thousands)
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 December 31, 1997
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------- ---------------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net ........................ $10,608 $ (3,383) $ 7,225 $ 8,816 $(2,020) $ 6,796
Mortgage-backed securities, net .............. (6,887) (6,887) (13,774) (13,511) (322) (13,833)
Investment securities ........................ (4,516) (4,516) (9,032) (2,120) (790) (2,910)
Investment and mortgage-backed
securities and loans available
for sale .................................. 20,764 (968) 19,796 20,046 (167) 19,879
------- ------- ------- ------- ------- -------
Total ........................................ 19,969 (15,754) 4,215 13,231 (3,299) 9,932
------- ------- ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Deposits:
NOW and money market accounts .............. 1,090 (703) 387 806 (113) 693
Passbook and statement savings ............. (155) (345) (500) (186) (202) (388)
Certificates accounts ...................... (1,750) (3,779) (5,529) (177) (79) (256)
Borrowed funds ............................... 5,966 (704) 5,262 2,279 (500) 1,779
------- ------- ------- ------- ------- -------
Total ........................................ 5,151 (5,531) (380) 2,722 (894) 1,828
------- ------- ------- ------- ------- -------
Net change in interest income .................. $14,818 $(10,223) $ 4,595 $10,509 $(2,405) $ 8,104
======= ======== ======= ======= ======= =======
</TABLE>
7
<PAGE>
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, 1999, the Company's loan
portfolio totaled $1.0 billion, of which $774.9 million, or 75.5% were one- to
four-family residential mortgage loans. At that date, the Company's loan
portfolio also included $98.3 million of home equity loans and lines of credit
generally secured by second liens on one-to-four family residential properties,
$26.9 million of net construction loans, $96.8 million of commercial real estate
loans, and $12.5 million of multi-family residential mortgage loans, which
represented 9.6%, 2.6%, 9.4% and 1.2%, respectively, of total loans receivable.
Of the mortgage loan portfolio outstanding at December 31, 1999, 47.3% were
fixed-rate loans and 52.7% 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 $16.6 million, or 1.6% of total loans
outstanding at December 31, 1999. The Company anticipates growth in commercial
business and commercial real estate loans, both in amount and as a percentage of
total loans receivable, in the foreseeable future.
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" or "FHLMC") and institutional
investors from time to time, and retains servicing rights. All loans are sold
without recourse. At December 31, 1999, the Company's servicing portfolio
totaled $81.9 million.
The Company also invests in mortgage-backed securities and other mortgage-backed
products such as collateralized mortgage obligations ("CMOs"). At December 31,
1999, mortgage-backed securities, including CMOs, aggregated $575.2 million, or
30.2% of total assets, of which 50.2% 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"). At December 31, 1999, 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 expects classify all mortgage-backed security
purchases as available for sale in the foreseeable future. Mortgage-backed
securities available for sale are held for an indefinite period of time and may
be sold in response to changing market and interest rate conditions, or to
provide liquidity to fund activities such as common stock repurchases or loan
originations.
8
<PAGE>
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 (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1):
One-to-four family .............. $ 774,858 75.52 $657,284 76.10% $566,625 78.25% $493,973 75.67% $448,844 74.65%
Home equity loans ............... 98,324 9.58 82,672 9.57 56,533 7.81 52,684 8.07 43,853 7.29
Construction (2) ................ 26,890 2.62 23,349 2.70 17,827 2.46 12,996 1.99 7,705 1.28
Commercial real estate .......... 96,821 9.44 65,069 7.53 54,926 7.58 51,091 7.83 52,788 8.78
Multi-family .................... 12,499 1.22 17,589 2.04 21,292 2.94 36,066 5.53 42,597 7.08
A.I.D. (3) ...................... -- -- -- -- -- -- -- -- 165 0.03
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans .......... 1,009,392 98.38 845,963 97.94 717,203 99.04 646,810 99.09 595,952 99.11
Other loans ....................... 16,638 1.62 17,817 2.06 6,954 0.96 5,956 0.91 5,350 0.89
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable ........ 1,026,030 100.00% 863,780 100.00% 724,157 100.00% 652,766 100.00% 601,302 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan fees
(costs) and (premiums)
and discounts ................... (1,090) (422) (107) 524 995
Allowance for loan losses ......... 11,004 9,505 8,454 7,781 7,851
---------- -------- -------- -------- --------
Total loans receivable, net ... $1,016,116 $854,697 $715,810 $644,461 $592,456
========== ======== ======== ======== ========
Mortgage loans:
ARM ............................. $ 531,859 52.69% $439,234 51.92% $421,642 58.79% $364,906 56.42% $321,264 53.91%
Fixed-rate ...................... 477,533 47.31 406,729 48.08 295,561 41.21 281,904 43.58 274,688 46.09
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans .......... $1,009,392 100.00% $845,963 100.00% $717,203 100.00% $646,810 100.00% $595,952 100.00%
========== ====== ======== ====== ======== ====== ======== ====== ======== ======
Mortgage-backed securities (4):
CMOs ............................ $ 273,511 46.85% $209,468 32.00% $ 90,247 15.95% $ 76,493 13.31% $103,368 18.78%
FHLMC ........................... 166,992 28.60 235,415 35.97 253,029 44.72 287,368 50.02 291,141 52.88
GNMA ............................ 57,489 9.85 71,347 10.90 113,179 20.00 134,877 23.47 123,853 22.50
FNMA ............................ 85,828 14.70 138,286 21.13 109,415 19.33 75,821 13.20 32,172 5.84
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage-backed
securities .................. 583,820 100.00% 654,516 100.00% 565,870 100.00% 574,559 100.00% 550,534 100.00%
====== ====== ====== ====== ======
Net premiums ...................... 2,748 3,639 2,704 2,433 1,676
Net unrealized gain (loss) on
mortgage-backed securities
available for sale ........... (11,409) 3,726 1,876 535 241
---------- -------- -------- -------- --------
Net mortgage-backed
securities ................... $ 575,159 $661,881 $570,450 $577,527 $552,451
========== ======== ======== ======== ========
</TABLE>
- ----------
(1) Includes $287,000 and $424,000 in mortgage loans available for sale at
December 31, 1996 and 1995, respectively. No loans were classified as
available for sale at December 31, 1999, 1998 or 1997.
(2) Net of loans in process of $28.0 million, $41.8 million, $27.5 million,
$12.3 million, and $3.8 million at December 31, 1999, 1998, 1997, 1996 and
1995, 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 $575.2 million, $661.9 million, $200.5 million, $161.1 million and
$89.3 million in mortgage-backed securities available for sale at fair
value at December 31, 1999, 1998, 1997, 1996 and 1995, 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, 1999. 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.
(Dollars in thousands)
At December 31, 1999
--------------------------------------------
One Year
One Year to Five After
or Less Years Five Years Total
-------- -------- -------- ----------
Mortgage loans:
One-to-four family ......... $ 98,009 $245,796 $431,053 $ 774,858
Home equity loans .......... 27,287 22,835 48,202 98,324
Construction (1) ........... 26,890 -- -- 26,890
Commercial real estate ..... 11,678 16,450 68,693 96,821
Multi-family ............... 266 7,422 4,811 12,499
-------- -------- -------- ----------
Total mortgage loans ..... 164,130 292,503 552,759 1,009,392
Other loans .................. 9,754 5,592 1,292 16,638
-------- -------- -------- ----------
Total loans .............. $173,884 $298,095 $554,051 1,026,030
======== ======== ========
Net deferred loan costs and unearned premiums .................... 1,090
Allowance for loan losses ........................................ (11,004)
----------
Loans receivable, net ............................................ $1,016,116
==========
(1) Excludes loans in process of $28.0 million.
The following table sets forth at December 31, 1999, the dollar amount of loans
contractually due or repricing after December 31, 2000, and whether such loans
have fixed interest rates or adjustable interest rates (dollars in thousands):
Due or repricing after
December 31, 2000
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- -------- ----------
Mortgage loans:
One-to-four family .................... $327,916 $348,933 $ 676,849
Equity loans .......................... 63,424 7,613 71,037
Commercial real estate ................ 74,290 10,853 85,143
Multi-family .......................... 6,454 5,779 12,233
Other loans .............................. 5,567 1,317 6,884
-------- -------- ----------
Total loans receivable ................... 477,651 374,495 852,146
Mortgage-backed securities
(at amortized cost) ................... 293,370 118,495 411,865
-------- -------- ----------
Total loans receivable and mortgage-
backed securities .................... $771,021 $492,990 $1,264,011
======== ======== ==========
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 Company's market area through loan originators who are employees of the
Company and are compensated on a
10
<PAGE>
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, 1999, 75.5% 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.
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.
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 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. In addition, 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, 1999, the Company had $63.5 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. The Company also offers 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. The introductory
rate is currently 6.99%. 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's home equity lines of credit outstanding at December 31, 1999 totaled
$34.8 million, with additional available credit lines of $45.4 million.
11
<PAGE>
CONSTRUCTION LENDING. At December 31, 1999, construction loans totaled $26.9
million, or 2.6% of the Company's total loans outstanding. Available credit
lines totaled $28.0 million at December 31, 1999. 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
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, 1999, the
Company had 31 construction loans, 10 of which had principal outstanding of $1.0
million or more, with the largest outstanding loan balance being $3.8 million.
At December 31, 1999, all of the Company's construction lending portfolio
consisted of loans secured by property located in the State of New Jersey,
primarily for the purpose of constructing one-to-four family homes.
The Company will originate construction loans on unimproved land in amounts up
to 70% 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, 1999, none of the Company's
construction loans were classified as substandard.
See "Assets Quality" for further discussion.
COMMERCIAL REAL ESTATE. At December 31, 1999, the Company had 121 loans secured
by commercial real estate, totaling $96.8 million, or 9.4% 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, 1999 was a participation loan originated in 1999 on a hotel
building with a balance of $5.5 million. 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.
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
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, 1999, $12.5 million, or 1.2%, of
the Company's total loan portfolio consisted of multi-family residential loans.
At December 31, 1999, the Company had three multi-family loans with outstanding
balances in
12
<PAGE>
excess of $1.0 million. Large multi-family loans such as these are originated on
the basis of the Company's underwriting standards for commercial real estate
loans.
OTHER LENDING. The Company also offers other loans, primarily business,
commercial, personal and automobile loans and loans secured by savings accounts.
At December 31, 1999, $16.6 million, or 1.6%, 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 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 $81.9 million and $87.6 million of mortgage loans for
others at December 31, 1999 and 1998, respectively. The Company received
$202,000 and $237,000 in servicing fees for the years ended December 31, 1999
and 1998, 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. As of December
31, 1999, the Company did not have any mortgage loans classified as available
for sale. Mortgage loans sold totaled $7.2 million and $14.5 million for the
years ended December 31, 1999 and 1998, respectively. From time to time, the
Company may also purchase mortgage loans. The Company purchased $57.5 million
and $26.8 million in mortgage loans from third-party correspondents for the
years ended December 31, 1999 and 1998, 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.
13
<PAGE>
ASSET QUALITY
The following table sets forth information regarding non-accrual loans, loans
delinquent 90 days or more, and REO. At December 31, 1999, REO totaled $466,000
and consisted of 7 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 reverse all previously accrued interest. For the year ended
December 31, 1999, 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 $197,000.
(Dollars in thousands)
At December 31,
--------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------- -------
Non-accrual mortgage loans ...... $2,311 $2,647 $4,457 $ 5,715 $ 7,302
Non-accrual other loans ......... 45 93 -- 4 464
------ ------ ------ ------- -------
Total non-accrual loans ...... 2,356 2,740 4,457 5,719 7,766
Loans 90 days or more
delinquent and still
accruing ....................... 326 1,525 1,596 928 1,555
------ ------ ------ ------- -------
Total non-performing
loans ....................... 2,682 4,265 6,053 6,647 9,321
Restructured loans .............. -- -- 2,103 2,135 4,167
Total real estate owned,
net of related allowance
for loss ...................... 466 1,453 1,516 3,750 5,759
------ ------ ------ ------- -------
Total non-performing assets ..... $3,148 $5,718 $9,672 $12,532 $19,247
====== ====== ====== ======= =======
Non-performing loans to total
loans receivable, net .......... 0.26% 0.50% 0.85% 1.03% 1.57%
Total non-performing assets
to total assets ................ 0.17% 0.31% 0.61% 0.84% 1.38%
CLASSIFICATION OF ASSETS. The Bank classifies loans and other assets such as
debt and equity securities considered 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. The Company's classified assets totaled $7.1
million and $6.8 million at December 31, 1999 and 1998, respectively. At
December 31, 1999, $2.5 million of classified loans were secured by residential
properties. The remaining $4.6 million in classified loans were secured by
commercial real estate. In early 2000, the Bank received full repayment on a
$1.3 million commercial loan classified at December 31, 1999. As of December 31,
1999, the Company's largest classified loan had a balance of $2.0 million and
was secured by an occupied office building.
14
<PAGE>
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 recorded $1.7 million and $1.5 million in provisions for loan losses
for the years ended December 31, 1999 and 1998, 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, 1999,
the total allowance was $11.0 million, which amounted to 1.1% of loans
receivable, net and 349.6% 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 (in thousands):
For the Years Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
Balance at beginning
of period ................. $ 9,505 $ 8,454 $ 7,781 $ 7,851 $ 9,114
Provision for loan losses ... 1,650 1,469 1,200 550 310
Charge-offs ................. (151) (596) (527) (730) (1,809)
Recoveries .................. -- 28 -- 110 236
Allowance activity of
Pulse during conforming
period, net ............... -- 150 -- -- --
-------- ------- ------- ------- -------
Balance at end of period .... $ 11,004 $ 9,505 $ 8,454 $ 7,781 $ 7,851
======== ======= ======= ======= =======
15
<PAGE>
The following tables set forth the Company's percentage 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 (dollars in
thousands):
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------------- --------------------------------------
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
------ --------- ----------- ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ....................... $ 4,667 42.41% 75.52% $4,027 42.37% 76.10%
Home equity loans ......................... 1,086 9.87 9.58 1,090 11.47 9.57
Construction .............................. 1,573 14.29 2.62 1,223 12.87 2.70
Commercial real estate .................... 2,630 23.90 9.44 1,963 20.65 7.53
Multi-family .............................. 250 2.27 1.22 522 5.49 2.04
------- ------ ------ ------ ------ ------
Total mortgage loans .................... 10,206 92.74 98.38 8,825 92.85 97.94
Other ..................................... 541 4.92 1.62 486 5.11 2.06
Unallocated ............................... 257 2.34 -- 194 2.04 --
======= ====== ====== ====== ====== ======
Total allowance for loan losses ......... $11,004 100.00% 100.00% $9,505 100.00% 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Percent
of
Loans Percent Percent
in Each Percent of Loans Percent of Loans
Percent of Category of in Each of in Each
Allowance to Allowance Category Allowance Category
to Total Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ................ $3,867 45.75% 78.25% $4,035 51.85% 75.67% $4,067 51.81% 74.65%
Home equity loans .................. 458 5.42 7.81 437 5.62 8.07 348 4.43 7.29
Construction ....................... 894 10.57 2.46 577 7.42 1.99 301 3.83 1.28
Commercial real estate ............. 1,877 22.20 7.58 1,714 22.03 7.83 1,766 22.49 8.78
Multi-family ....................... 777 9.19 2.94 787 10.11 5.53 883 11.25 7.08
A.I.D .............................. -- -- -- -- -- -- -- -- 0.03
------ ------ ------ ------ ------ ------ ------ ------ ------
Total mortgage loans ............. 7,873 93.13 99.04 7,550 97.03 99.09 7,365 93.81 99.11
Other .............................. 258 3.05 0.96 187 2.40 0.91 196 2.50 0.89
Unallocated ........................ 323 3.82 -- 44 0.57 -- 290 3.69 --
====== ====== ====== ====== ====== ====== ====== ====== ======
Total allowance for loan losses .. $8,454 100.00% 100.00% $7,781 100.00% 100.00% $7,851 100.00% 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
16
<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 or accretion of
the premium or discount related to the mortgage-backed security. Premiums and
discounts are amortized or accreted over the anticipated life of the loans. The
prepayment assumptions used to determine the amortization or accretion 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 Company has significant investments in mortgage-backed securities and has
utilized such investments to complement its mortgage lending activities. At
December 31, 1999, mortgage-backed securities, net, totaled $575.2 million, or
30.2% 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 6.52%. Fixed coupon
rates ranged from 7.50% to 10.00% for GNMA, 6.00% to 9.50% for Freddie Mac,
5.50% to 8.00% for FNMA fixed-rate securities and 5.50% to 7.00% for fixed-rate
CMOs. Adjustable-rate coupon ranges were as follows: 6.13% to 6.75% for GNMA ARM
mortgage-backed securities; 5.75% to 7.75% for Freddie Mac ARM mortgage-backed
securities; 5.81% to 7.77% for FNMA ARM mortgage-backed securities; and 5.47% to
7.70% for adjustable-rate CMOs.
Included in the total mortgage-backed securities portfolio are CMOs which had a
market value of $264.9 million at December 31, 1999. 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
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, 1999, was
17
<PAGE>
4.91 years. The stated weighted average contractual maturity of the Company's
CMOs, at December 31, 1999, was 19.5 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 and
periodically throughout their lives, individual securities are reviewed for
suitability with respect to projected weighted average lives and price
sensitivity. 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.
The amortized cost and market value of mortgage-backed securities at December
31, 1999, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities due to prepayments (dollars in thousands):
AMORTIZED MARKET
COST VALUE
-------- --------
Mortgage-backed securities available for sale due in:
Less than one year ............................... $ 2,179 $ 2,101
One year through five years ...................... 12,193 12,047
Five years through ten years ..................... 38,973 38,207
Greater than ten years ........................... 533,223 522,804
-------- --------
$586,568 $575,159
======== ========
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, 1999,
the market value of investment securities available for sale was $213.6 million,
with an amortized cost basis of $229.2 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 12.4
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, 1999, $155.6 million, or 72.8% of the total investment portfolio
was callable.
18
<PAGE>
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,
------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- --------------------
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
State and political obligations .................... -- -- -- -- 2,663 2,690
-------- -------- -------- -------- -------- --------
Total investment securities
held to maturity ............................. $ -- $ -- $ -- $ -- $127,583 $127,537
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency obligations ............. $155,173 $146,810 $197,635 $198,531 $ 72,798 $ 72,934
State and political obligations .................... 16,976 15,706 6,900 6,972 -- --
Corporate obligations .............................. 45,917 40,424 13,414 13,275 4,698 4,685
Equity securities .................................. 11,149 10,650 24,071 23,419 800 824
-------- -------- -------- -------- -------- --------
Total investment securities
available for sale ........................... $229,215 $213,590 $242,020 $242,197 $ 78,296 $ 78,443
======== ======== ======== ======== ======== ========
</TABLE>
19
<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, 1999. Investments in equity
securities, which have no contractual maturities, are excluded from this table.
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31, 1999
----------------------------------------------------------------------------------------------------
More than More than
One Year Five Years More than
One Year or Less to Five Years to Ten Years Ten Years Total
---------------- --------------- --------------- -------------- ---------------------------------
Average
Amor- Weighted Amor- Weighted Amor- Weighted Amor- Weighted Life Amor- Weighted
tized Average tized Average tized Average tized Average in tized Market Average
Cost Yield Cost Yield Cost Yield Cost Yield Years Cost Value Yield
------ -------- ----- -------- ----- -------- ----- -------- ----- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
available for sale:
U.S. Government and
agency obligations ....... $10,000 5.74% $38,980 6.00% $73,586 6.47% $32,607 6.93% 8.48 $155,173 $146,810 6.40%
State and political
obligations .............. 160 6.39 3,611 6.56 6,468 8.73 6,737 6.91 8.64 16,976 15,706 7.33
Corporate obligations ..... 302 5.96 2,000 5.63 9,928 6.89 33,687 7.24 26.98 45,917 40,424 7.08
------- ---- ------- ---- ------- ---- ------- ---- ----- -------- -------- ----
Total investment
securities available
for sale ................. $10,462 5.76% $44,591 6.03% $89,982 6.68% $73,031 7.07% 12.39 $218,066 $202,940 6.62%
======= ==== ======= ==== ======= ==== ======= ==== ===== ======== ======== ====
</TABLE>
20
<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 fixed-rate certificates, passbook and statement 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, 1999, $116.9 million of the Company's deposit balance consisted of
IRAs. Also at that date, $92.6 million, or 7.6%, 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.
At December 31, 1999, certificate accounts in amounts of $100,000 or more mature
as follows (in thousands):
Amount
-------
MATURITY PERIOD
Three months or less ......................... $50,551
Over 3 through 6 months ...................... 14,540
Over 6 through 12 months ..................... 12,193
Over 12 months ............................... 15,308
-------
Total ................................. $92,592
=======
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,
--------------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits ............... $ 44,755 --% $ 35,297 --% $ 26,234 --%
NOW and money market accounts ............... 347,325 2.70 308,609 2.92 281,007 2.96
Savings accounts ............................ 170,907 2.30 177,282 2.50 184,423 2.61
---------- ---- ---------- ---- ---------- ----
Sub-total ................................ 562,987 2.36 521,188 2.58 491,664 2.67
Certificate accounts ........................ 686,754 4.94 719,602 5.48 722,534 5.49
---------- ---- ---------- ---- ---------- ----
Total average deposits ................... $1,249,741 3.78% $1,240,790 4.26% $1,214,198 4.35%
========== ==== ========== ==== ========== ====
</TABLE>
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. The maximum amount of
FHLB-NY advances permitted to a member institution generally is reduced by
borrowings from any other source. At December 31, 1999, the Company's FHLB-NY
advances totaled $107.0 million, representing 6.4% of total liabilities.
21
<PAGE>
During 1999, 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, 1999
was $315.0 million, representing 19.0% 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 following table sets forth certain information regarding the Company's
borrowed funds on the dates indicated (dollars in thousands):
At or For the Years Ended December 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
FHLB-NY advances:
Average balance outstanding ..... $ 70,914 $ 24,072 $ 33,308
Maximum amount outstanding
at any month-end during
the period .................... 139,250 50,800 40,000
Balance outstanding at end
of period ..................... 107,000 38,000 23,000
Weighted average interest
rate during the period ........ 5.43% 5.80% 6.20%
Weighted average interest
rate at end of period ......... 5.88% 5.36% 6.28%
Other borrowings:
Average balance outstanding ..... $254,587 $192,730 $144,489
Maximum amount outstanding
at any month-end during
the period .................... 315,000 269,175 174,669
Balance outstanding at end
of period ..................... 315,000 226,675 163,665
Weighted average interest
rate during the period ........ 5.47% 5.76% 5.97%
Weighted average interest
rate at end of period ......... 5.58% 5.42% 5.92%
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, 1999, FSB
Financial Corp. had net income of $160,000.
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 $32.2 million for the year ended December 31, 1999.
In addition, the Company has three wholly owned subsidiaries obtained through
the Pulse acquisition which were inactive in 1999.
PERSONNEL
As of December 31, 1999, the Company had 273 full-time employees and 23
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.
22
<PAGE>
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.
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 eliminated 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, 1999, the Bank has a base year reserve subject to recapture equal
to $2.5 million. The Bank has previously recorded a deferred tax liability for
the tax effect of the bad debt recapture and as such, the new rules have no
effect on net income or federal income tax expense. Retained earnings at
December 31, 1999 and 1998, 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, 1999 and 1998, 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 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
alternative minimum tax.
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 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).
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.
23
<PAGE>
REGULATION AND SUPERVISION
GENERAL
The Company, as holding company for the Bank, 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").
As a New Jersey chartered savings bank, the Bank is subject to extensive
regulation, examination and supervision by the Commissioner of the New Jersey
Department of Banking and Insurance (the "Commissioner") as its chartering
agency, and by the Federal Deposit Insurance Corporation ("FDIC"), as the
deposit insurer. The Bank's 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 Commissioner 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 depository institutions and opening or acquiring branch offices. The
Commissioner and the FDIC conduct periodic examinations to assess the Bank's
compliance with various regulatory requirements.
The regulation and supervision of the Company and the Bank 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 such regulatory requirements and policies, whether by the
Commissioner, the FDIC, the OTS 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.
HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL") to elect to be treated as a savings association for
purposes of the savings and loan holding company provisions of the HOLA. Such
election would result in its holding company being regulated as a savings and
loan holding company by the OTS, rather than as a bank holding company by the
Federal Reserve Board. The Bank made such election and received approval from
the OTS to become a savings and loan holding company. The Company is regulated
as 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 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
24
<PAGE>
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.
NEW JERSEY REGULATION. Under the New Jersey Banking Act, a company owning
or controlling a savings bank is regulated as a bank holding company. The New
Jersey Banking Act defines the terms "company" and "bank holding company" as
such terms are defined under the BHC Act. Each bank holding company controlling
a New Jersey chartered bank or savings bank must file certain reports with the
Commissioner and is subject to examination by the Commissioner. 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.
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.
FEDERAL BANKING REGULATION
CAPITAL REQUIREMENTS. FDIC regulations require SAIF-insured banks, such as
the Bank, to maintain minimum levels of capital. The FDIC regulations define two
Tiers, or classes, of capital.
Tier 1 capital is comprised of the sum of common stockholders' equity
(excluding the net unrealized appreciation or depreciation, net of tax, from
available-for-sale securities), non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan losses. Allowance
for possible loan losses includible in Tier 2 capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of Tier 2 capital that may be
included in total capital can not exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1
capital to total assets. For all other banks, the minimum leverage capital
requirement is 3.0% plus an additional cushion of at least 100 to 200 basis
points; as a result, the minimum leverage capital ratio for such banks consists
of a ratio of Tier 1 capital to total assets of not less than 4 percent. The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital regulations to provide that the minimum leverage capital ratio
for a depository institution that has not been assigned the highest composite
rating of 1 under the Uniform Financial Institutions Rating System will be 4%,
unless a higher leverage capital ratio is warranted by particular circumstances
or risk profile of the depository institution.
The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance of a
ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2
capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital
25
<PAGE>
for interest rate risk on a case-by-case basis, with consideration of both
quantitative and qualitative factors. According to the agencies, applicable
considerations include the quality of the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital. The agencies also
issued a joint policy statement providing guidance on interest rate risk
management, including a discussion of the critical factors affecting the
agencies' evaluation of interest rate risk in connection with capital adequacy.
PROMPT CORRECTIVE ACTION. Under the FDIC prompt corrective action
regulations, the FDIC 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
FDIC 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 FDIC 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 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.
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.
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,
1999, the Bank maintained 83.9% 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."
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 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.
26
<PAGE>
RECENT DEVELOPMENTS. On November 12, 1999, the Gramm-Leach-Bliley Financial
Modernization Act of 1999 became law. The Modernization Act contains new
financial privacy provisions will generally prohibit financial institutions,
including the Company and the Bank, from disclosing nonpublic personal financial
information to third parties unless customers have the opportunity to "opt out"
of the disclosure. The Modernization Act also allows, among other things, for
bank holding companies meeting certain management, capital and CRA standards to
engage in a substantially broader range of nonbanking activities than were
previously permissible, including insurance underwriting and making merchant
banking investments in commercial and financial companies. The Modernization Act
further allows insurers and other financial services companies to acquire banks;
removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
Because the Modernization Act permits banks, securities firms and insurers
to combine and to offer a wide variety of financial products and services, many
of these resulting companies will be larger and have more resources than the
Company. Should these companies choose to compete directly with the Company in
its target markets, the Company's results of operations could be adversely
impacted.
NEW JERSEY BANKING REGULATION
ACTIVITY POWERS. The Bank derives its lending, investment and other
activity powers primarily from the applicable provisions of the New Jersey
Banking Act and its related regulations. Under these laws and regulations,
savings banks, including First Place Savings, generally may invest in:
(1) real estate mortgages;
(2) consumer and commercial loans;
(3) specific types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and
agencies;
(4) certain types of corporate equity securities; and
(5) certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the New Jersey Banking Act. Such
investments must comply with a number of limitations on the individual and
aggregate amounts of the investments. A savings bank may also exercise trust
powers upon approval of the Department. New Jersey savings banks may also
exercise any power authorized for federally chartered savings banks unless the
Department determines otherwise. The exercise of these lending, investment and
activity powers are limited by federal law and the related regulations.
LOANS-TO-ONE-BORROWER LIMITATIONS. With certain specified exceptions, a New
Jersey chartered savings bank may not make loans or extend credit to a single
borrower and to entities related to the borrower in an aggregate amount that
would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of the New Jersey Banking Act. The Bank currently complies with
applicable loans-to-one-borrower limitations.
DIVIDENDS. Under the New Jersey Banking Act, a stock savings bank may
declare and pay a dividend on its capital stock only to the extent that the
payment of the dividend would not impair the capital stock of the savings bank.
In addition, a stock savings bank may not pay a dividend if the surplus of the
savings bank would, after the payment of the dividend, be reduced unless after
such reduction the surplus was 50% or more of the bank's capital stock.
MINIMUM CAPITAL REQUIREMENTS. Regulations of the Department impose on New
Jersey chartered depository institutions, including the Bank, minimum capital
requirements similar to those imposed by the FDIC.
EXAMINATION AND ENFORCEMENT. The New Jersey Department of Banking and
Insurance may examine the Bank whenever it deems an examination advisable. The
Commissioner will examine the Bank at least every two years. The Department may
order any savings bank to discontinue any violation of law or unsafe or unsound
business practice and may direct any director, officer, attorney or employee of
a savings bank engaged in an
27
<PAGE>
objectionable activity, after the Department has ordered the activity to be
terminated, to show cause at a hearing before the Department why such person
should not be removed.
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
$44.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $44.3
million, the reserve requirement was $1,329 million plus 10% (subject to
adjustment by the Federal Reserve Board) against that portion of total
transaction accounts in excess of $44.3 million. The first $5.0 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.
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, 1999. The aggregate net book value of the Company's
premises and equipment was $16.5 million at December 31, 1999.
28
<PAGE>
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------ ---------------
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
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
33 Lafayette Road 4/84 Leased
Fords, NJ 08863
Rt. 35 & Bethany Road 1/91 Leased
Hazlet, NJ 07730
301 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
29
<PAGE>
Location Date Leased or Acquired Leased or Owned
--------------- ------------------------ ---------------
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
(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
There were no matters submitted to a vote of stockholders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the section captioned "Market Information
for Common Stock" on page 44 of the 1999 Annual Report to Stockholders is
incorporated herein by reference. At December 31, 1999, 38,443,350 shares of the
Company's outstanding common stock was held of record by approximately 5,395
persons or entities, not including the number of persons or entities holding
stock in nominee or stock name through various brokers or banks. On December 14,
1999, the Company declared a special cash dividend of $.15 per share, payable
January 14, 2000, to stockholders of record as of December 28, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section captioned "Consolidated
Financial Highlights" on page 1 of the 1999 Annual Report to Stockholders is
incorporated herein by reference.
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 9 through 18 of the 1999 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 17 through 18 of the 1999 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 1999 Annual Report to Stockholders
on pages 19 through 42 and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
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 4-7 of the Company's proxy statement for the 2000 Annual
Meeting of Stockholders dated March 24, 2000 ("2000 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 8-9 and pages
13-17 (excluding the Compensation Committee Report) of the 2000 Proxy Statement
dated March 24, 2000, 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 3-5 of the 2000
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 pages 17-18 of the 2000 Proxy
Statement dated March 24, 2000, and are incorporated herein by reference.
31
<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, 1999, included in the Annual Report, listed below, are
incorporated herein by reference.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31,
1999 AND 1998 (ANNUAL REPORT - PAGE 19).
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER
31, 1999, 1998 AND 1997 (ANNUAL REPORT PAGE 20).
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1999, 1998, AND 1997 (ANNUAL REPORT - PAGE
21).
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997 (ANNUAL REPORT - PAGE 22).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ANNUAL REPORT -
PAGES 23 THROUGH 41).
INDEPENDENT AUDITORS' REPORT (ANNUAL REPORT - PAGE 42).
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.
- --------------------------------------------------------------------------------
Exhibit
Number Description Reference
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of First Sentinel
Bancorp, Inc. *
3.2 Bylaws of First Sentinel Bancorp, Inc. *
4.0 Stock Certificate of First Sentinel Bancorp, Inc. **
10.1 First Sentinel Bancorp, Inc. 1996 Omnibus
Incentive Plan **
10.2 First Sentinel Bancorp, Inc. Amended and Restated
1998 Stock-based Incentive Plan ***
10.3 First Sentinel Bancorp, Inc. 1986 Acquisition
Stock Option Plan Filed herein
10.4 First Sentinel Bancorp, Inc. 1993 Acquisition
Stock Option Plan Filed herein
10.5 First Sentinel Bancorp, Inc. 1997 Acquisition
Stock Option Plan Filed herein
10.6 First Savings Bank, SLA Employee Stock Ownership
Plan **
10.7 First Savings Bank, SLA Directors' Deferred Fee
Stock Unit Plan **
10.8 First Savings Bank, SLA Supplemental Executive
Retirement Plan **
10.9 First Savings Bank, SLA Supplemental Executive
Retirement Plan II **
- --------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
Exhibit
Number Description Reference
- --------------------------------------------------------------------------------
10.10 First Savings Bank, SLA Director Retirement Plan **
10.11 Form of Employment Agreement between First
Sentinel Bancorp, Inc. and John P. Mulkerin and
Christopher Martin **
10.12 Employment Agreements between First Savings Bank,
SLA and John P. Mulkerin and Christopher Martin **
10.13 Form of Change in Control Agreement between First
Savings Bank, SLA and certain executive officers **
10.14 First Savings Bank, SLA Employee Severance
Compensation Plan **
11.0 Computation of per share earnings ****
13.0 Portions of the 1999 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
- --------------------------------------------------------------------------------
* Previously filed and incorporated herein by reference to the December 31,
1998 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. (File No.
000-23809) dated March 30, 1999.
** 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.
*** Previously filed and incorporated herein by reference to the Proxy
Statement for the 1999 Annual Meeting of Stockholders of First Sentinel
Bancorp, Inc. (File No. 000-23809) filed on March 30, 1999.
**** Filed herein as a component of Exhibit 13.0, under footnote one of the
Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated December 17, 1999
under Item 5, Other Events, pertaining to the declaration of a special cash
dividend of $.15 per common share.
33
<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, 2000 FIRST SENTINEL BANCORP, INC.
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
- --------- ----- ----
JOHN P. MULKERIN President, Chief Executive March 30, 2000
- --------------------------- Officer and Director
John P. Mulkerin
JEFFRIES SHEIN Director March 30, 2000
- ---------------------------
Jeffries Shein
DONALD T. AKEY, M.D. Director March 30, 2000
- ---------------------------
Donald T. Akey, M.D.
KEITH H. MCLAUGHLIN Director March 30, 2000
- ---------------------------
Keith H. McLaughlin
PHILIP T. RUEGGER, JR. Director March 30, 2000
- ---------------------------
Philip T. Ruegger, Jr.
JOSEPH CHADWICK Director March 30, 2000
- ---------------------------
Joseph Chadwick
GEORGE T. HORNYAK, JR. Director March 30, 2000
- ---------------------------
George T. Hornyak, Jr.
WALTER K. TIMPSON Chairman of the Board March 30, 2000
- ---------------------------
Walter K. Timpson
CHRISTOPHER P. MARTIN Executive Vice President, March 30, 2000
- --------------------------- Chief Operating and Financial
Christopher P. Martin Officer and Director
34
FIRST SENTINEL BANCORP, INC.
1986 ACQUISITION STOCK
OPTION PLAN
1. PURPOSE OF THE PLAN. The Plan shall be known as the Pulawski Savings and
Loan Association, South River, New Jersey 1986 Stock Option and Incentive Plan
(the "Plan"). The purpose of the Plan is to attract and retain the best
available personnel as officers and employees and to provide additional
incentive to employees of Pulawski Savings and Loan Association (the
"Association") or any present or future parent or subsidiary of the Association
to promote the success of the business. The Plan is Intended to provide for the
grant of both "Incentive Stock Options", within the meaning of Section 422A of
the Internal Revenue Code of 1954, as amended (the "Code"), and Non-Incentive
Stock Options. Each and every one of the provisions of the Plan relating to
Incentive Stock Options shall be Interpreted to conform to the requirements of
Section 422A of the Code.
2. DEFINITIONS. As used herein, the following definitions shall apply,
(a) "Association" shall mean Pulawski Savings and Loan Association.
(b) "Award" means the grant by the Committee or the Board of Directors
of an Incentive Stock Option, a Non-Incentive Stock Option, or Stock
Appreciation Right, or any combination thereof, as provided in the Plan.
(c) "Board" shall mean the Board of Directors of the Association.
(d) "Common Stock" shall mean common stock, par value $1.00 per share
of the Association.
(e) "Code" shall mean the Internal Revenue Code of 1954, as amended.
(f) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with paragraph 4(a) of the Plan.
(g) "Continuous Employment" or "Continuous Status as an Employee"
shall mean the absence of any interruption or termination of employment by the
Association or any present or future Parent or Subsidiary of the Association.
Employment shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the Association or in
the case of transfers between payroll locations of the Association or between
the Association, its Parent, its Subsidiaries or a successor.
(h) "Conversion" shall mean the Association's mutual-to-stock
conversion pursuant to the Regulations of the Federal Savings and Loan Insurance
Corporation.
(i) "Effective Date" shall mean the date specified in Section 15
hereof.
(j) "Employee" shall mean any person employed on a full-time basis by
the Association or any present or future Parent or Subsidiary of the
Association.
(k) "Incentive Stock Option" means an option to purchase Shares
granted by the Committee pursuant to Section 7 hereof which is subject to the
limitations and restrictions of Section 7 hereof and is intended to qualify
under Section 422A of the Code.
1
<PAGE>
(l) "Non-Incentive Stock Option" means an option to purchase Shares
granted by the Committee pursuant to Section 8 or by the Board pursuant to
Section 4 hereof, which option is not intended to qualify under Section 422A of
the Code.
(m) "Option" shall mean an Incentive or Non-incentive Stock Option
granted pursuant to this Plan.
(n) "Optioned Stock" shall mean stock subject to an Option granted
pursuant to the Plan.
(o) "Optionee" shall mean any person who receives an Option.
(p) "Parent" shall mean any present or future corporation which would
be a "parent corporation" as defined in Subsections 425(e) and (g) of the Code.
(q) "Participant" means any director, officer, or key employee of the
Association or any Parent or Subsidiary of the Association or any other person
providing a service to the Association who is selected by the Committee or the
Board, acting pursuant to Section 4(a)(ii), to receive an Award.
(r) "Plan" shall mean the Pulawski Savings and Loan Association 1986
Stock Option and Incentive Plan.
(s) "Related" means (i) in the case of a Stock Appreciation Right, a
Stock Appreciation Right which is granted in connection with, and to the extent
exercisable, in whole or in part, in lieu of, an Option and (ii) in the case of
an Option, an Option with respect to which and to the extent a Stock
Appreciation Right is exercisable, in whole or in part, in lieu thereof has been
granted.
(t) "Stock Appreciation Right" means a stock appreciation right with
respect to Shares granted by the Committee pursuant to Section 12 hereof.
(u) "Share" shall mean one share of the Common Stock.
(v) "Subsidiary" shall mean any present or future corporation which
would be a "subsidiary corporation" as defined in Subsections 425(f) and (g) of
the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 94,038 shares.
Such Shares may either be authorized but unissued or treasury shares.
Shares which are subject to Stock Appreciation Rights and related Options
shall be counted only once in determining whether the maximum number of Shares
with respect to which Awards may be granted under the Plan has been exceeded. An
Award shall not be considered to have been made under the Plan with respect to
any Option or Stock Appreciation Right which terminates and new Awards may be
granted under the Plan with respect to the number of Shares as to which such
termination has occurred.
2
<PAGE>
4. ADMINISTRATION OF THE PLAN.
(a) (i) Composition of the Committee. Except as indicated in paragraph
4(a)(ii) below, the Plan shall be administered by the Committee consisting of
three directors of the Association appointed by the Board. Officers, directors,
key employees and other persons who are designated by the Committee shall be
eligible to receive Awards under the Plan, and all persons designated as members
of the Committee shall be "disinterested persons" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934. A "disinterested person" is an
administrator who at the time he exercises discretion in administering the Plan
is not eligible and has not at any time within one year prior thereto been
eligible for selection as a person to whom stock options or stock appreciation
rights may be granted pursuant to any Plan of the Association or any of its
affiliates.
(ii) For the purpose of granting Awards to directors, the selection of
any director to whom Awards may be granted, as well as the number of shares
subject to Awards, must be determined by a disinterested committee, as defined
in Rule 16b-3 under the Securities Exchange Act of 1934.
(b) Powers of the Committee. The Committee is authorized (but only to the
extent not contrary to the express provisions of the Plan or to resolutions
adopted by the Board) to interpret the Plan to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the form and content of
Awards to be issued under the Plan and to make other determinations necessary or
advisable for the administration of the Plan, and shall have and may exercise
such other power and authority as may be delegated to it by the Board from time
to time. A majority of the entire Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum is
present shall be deemed the action of the Committee. In no event may the
Committee revoke outstanding Awards without the consent of the Participant.
The President of the Association and such other officers as shall be
designated by the Committee are hereby authorized to execute instruments
evidencing Awards on behalf of the Association and to cause them to be delivered
to the Participants.
(c) Effect of Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
5. Eligibility. Awards may be granted to officers, directors, key employees
and other persons. The Committee shall from time to time determine the officers,
directors, key employees and other persons who shall be granted options or
Awards under the Plan, the number to be granted to each such officers,
directors, key employees and other persons under the Plan, and whether Options
granted to each such Employee under the Plan shall be Incentive and/or
Non-Incentive Stock Options. In selecting Participants and in determining the
number of shares of Common Stock to be granted to each such Participant pursuant
to each Award granted under the Plan, the Committee may consider the nature of
the services rendered by each such Participant, each such Participant's current
and potential contribution to the Company, and such other factors as the
Committee may, in its sole discretion, deem relevant. Officers, directors, key
employees or other persons who have been granted an Award may, if otherwise
eligible, be granted additional Options or Awards.
3
<PAGE>
The aggregate fair market value (determined as of the date the Option is
granted) of the Shares for which any Employee may be granted Options in any
calendar year (under all Incentive Stock Option plans, as defined In Section
422A of the Code of the Association or any present or future Parent or
Subsidiary of the Association) prior to December 31, 1986 shall not exceed
$100,000, plus any unused limit carryover to such year, as defined In Section
422A(c) of the Code. The aggregate fair market value (determined as of the date
of the Option is granted) of the Shares with respect to which Incentive Stock
Options granted after December 31, 1986 are exercisable for the first time by an
Employee during any calendar year shall not exceed $100,000. Notwithstanding the
prior provisions of this Section 5, the Committee may grant Options in excess of
the foregoing limitations, provided said Options shall be clearly and
specifically designated as not being Incentive Stock Options, as defined in
Section 422A of the Code.
6. TERM OF PLAN. The Plan shall continue in effect for a term of ten (10)
years from the Effective Date, unless sooner terminated pursuant to Section 18.
No Option shall be granted under the Plan after ten (10) years from the
Effective Date.
7. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS. Incentive Stock Options
may be granted only to Participants who are Employees. Each Incentive Stock
Option granted pursuant to the Plan shall be evidenced by an instrument in such
form as the Committee shall from time to time approve. Each and every Incentive
Stock Option granted pursuant to the Plan shall comply with, and be subject to,
the following terms and conditions:
(a) Option Price.
(i) The price per share at which each Incentive Stock Option
granted under the Plan may be exercised shall not, as to any particular
Incentive Stock Option, be less than the fair market value of the Common Stock
at the time such Incentive Stock Option is granted. For such purposes, if the
Common Stock is traded otherwise than on a national securities exchange at the
time of the granting of an Option, then the price per share of the Optioned
Stock shall be not less than the mean between the bid and asked price on the
date the Incentive Stock Option is granted or, if there be no bid and asked
price on said date, then on the next prior business day on which there was a bid
and asked price. If no such bid and asked price is available, then the price per
share shall be determined by the Committee. If the Common Stock is listed on a
national securities exchange at the time of the granting an Incentive Stock
Option, then the price per share shall be not less than the average of the
highest and lowest selling price on such exchange on the date such Incentive
Stock Option is granted or, if there were no sales on said date, then the price
shall be not less than the mean between the bid and asked price on such date.
(ii) In the case of an Employee who owns Common Stock
representing more than ten percent (10%) of the outstanding Common Stock at the
time the Incentive Stock Option is granted, the Incentive Stock Option price
shall not be less than one hundred and ten percent (110%) of the fair market
value of the Common Stock at the time the Incentive Stock Option is granted.
(b) Payment.
Full payment for each share of Common Stock purchased upon the
exercise of any Incentive Stock Option granted under the Plan shall be made at
the time of exercise of each such Incentive Stock Option and shall be paid in
cash (in United States Dollars), Common Stock or a combination of cash and
Common Stock. Common
4
<PAGE>
Stock utilized in full or partial payment of the exercise Price shall be valued
at its fair market value at the date of exercise. The Association shall accept
full or partial payment in Common Stock only to the extent permitted by
applicable law. No shares of Common Stock shall be issued until full payment
therefor has been received by the Association, and no Optionee shall have any of
the rights of a shareholder of the Association until shares of Common Stock are
Issued to him.
(C) TERM OF INCENTIVE STOCK OPTION.
The term of each Incentive Stock Option granted pursuant to the
Plan shall be not more ten (10) years from the date each such Incentive Stock
Option is granted, provided that in the case of an Employee who owns stock
representing more than 10% of the Common Stock outstanding at the time the
Incentive Stock Option is granted, the term of the Incentive Stock Option shall
not exceed five (5) years.
(d) EXERCISE GENERALLY.
Except as otherwise provided In Section 9 hereof, no Incentive
Stock Option may be exercised unless the optionee shall have been in the employ
of the Association at all times during the period beginning with the date of
grant of any such Incentive Stock Option and ending on the date three (3) months
prior to the date of exercise of any such Incentive Stock Option. The Committee,
may impose additional conditions upon the right of an Optionee to exercise any
Incentive Stock Option granted hereunder which are not inconsistent with the
terms of the Plan or the requirements for qualification as an Incentive Stock
Option under Section 422A of the Code.
(e) Serial Exercise.
No Incentive Stock Option granted pursuant to the Plan prior to
December 31, 1986 shall be exercised by any Optionee while there is outstanding
(as such term is defined In Section 422A of the Code) any incentive stock option
which was granted prior to the date of grant of such Incentive Stock Option to
such Optionee, whether pursuant to the Plan or any other plan of the
Association. In the event that any additional Incentive Stock Option is granted
at a later date pursuant to the Plan to any Optionee, the instrument evidencing
any such additional Incentive Stock Option shall include the following
provisions;
"This incentive stock option is not exercisable while
there is outstanding (within the meaning of Section
422A(c)(7) of the Internal Revenue Code of 1954, as
amended) any Incentive Stock Option which was granted
prior to the date of the grant hereof to the holder of
this stock option to purchase shares of common stock of
Pulawski Savings and Loan Association or any of its
subsidiaries."
(f) Transferability.
Any incentive Stock Option granted pursuant to the Plan shall be
exercised during any Optionee's lifetime only by the Optionee to whom it was
granted and shall not be assignable or transferable otherwise than by will or by
the laws of descent and distribution.
5
<PAGE>
8. Terms and Conditions of Non-Incentive Stock Options. Each Non-Incentive
Stock option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each and every
Non-Incentive Stock Option granted pursuant to the plan shall comply with and be
subject to the following terms and conditions:
(a) Options Granted to Directors in Conversion.
1,000 Non-incentive Stock Options were granted to each person who
was a director immediately upon completion of the Conversion at a price equal to
the fair market value of the stock on such date, which price was equal to the
price indicated on the Association's final Conversion Offering Circular.
(b) Option Price.
The exercise price per share of Common Stock for each
Non-Incentive Stock Option granted pursuant to the Plan shall be any price as
the Committee may determine in its sole discretion. Such price may be below fair
market value and has no minimum,
(c) Payment.
Full payment for each share of Common Stock purchased upon the
exercise of any Non-Incentive Stock Option granted under the Plan shall be made
at the time of exercise of each such Non-Incentive Stock Option and shall be
paid in cash (in United States Dollars), Common Stock or a combination of cash
and Common Stock. Common Stock utilized in full or partial payment of the
exercise price shall be valued at its fair market value at the date of exercise.
The Association shall accept full or partial payment in Common Stock only to the
extent permitted by applicable law. No shares of Common Stock shall be issued
until full payment therefor has been received by the Association and no Optionee
shall have any of the rights of a shareholder of the Association until the
shares of Common Stock are issued to him.
(d) Term.
The term of each Non-Incentive Stock Option granted pursuant to
the Plan shall be not more than ten (10) years from the date each such
Non-Incentive Stock Option is granted, provided that, in the case of an Employee
who owns stock representing more than 10% of the Common Stock at the time the
Incentive Stock Option is granted, the term of the Non-Incentive Stock Option
shall not exceed five (5) years.
(e) Exercise Generally.
The Committee may impose additional conditions upon the right any
Participant to exercise any Non-Incentive Stock Option granted hereunder which
are not inconsistent with the terms of the Plan.
(f) Transferability.
Any Non-Incentive Stock Option granted pursuant to the Plan shall
be exercised during any Optionee's lifetime only by the Optionee to whom it was
granted and shall not be assignable or transferable otherwise than by will or by
the laws of descent and distribution.
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9. Effect of Termination of Employment, Disability or Death on Incentive
Stock Options.
(a) Termination of Employment.
In the event that any Optionee's employment by the Company shall
terminate for any reason, other than Permanent and Total Disability (as such
term is defined in Section 105(d)(4) of the Code) or death, all of any such
Optionee's Incentive Stock Options, and all of any such Optionee's rights to
purchase or receive shares of Common Stock pursuant thereto, as the case may be,
shall automatically terminate on the date of such termination of employment.
However, no termination of an Optionee's Incentive Stock Options shall occur if,
and to the extent that, the Committee authorizes the Optionee to exercise any
such Incentive Stock Options at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the
expiration of not more than three (3) months after the date of such termination
of employment, but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of such termination of
employment. In the event that a subsidiary ceases to be a subsidiary of the
Association, the employment of all of its employees who are not immediately
thereafter employees of the Association shall be deemed to terminate upon the
date such subsidiary so ceases to be a subsidiary of the Association.
(b) Disability.
In the event that any Optionee's employment by the Association
shall terminate as the result of the Permanent and Total disability of such
Optlonee, such Optionee may exercise any Incentive Stock Options granted to him
pursuant to the Plan at any time prior to the earlier of (i) the respective
expiration dates of any such Incentive Stock Options or (ii) the date which is
one (1) year after the date of such termination of employment, but only if, and
to the extent that, the Optionee was entitled to exercise any such Incentive
Stock Options at the date of such termination of employment.
(c) Death.
In the event of the death of any Optionee, any Incentive Stock
Options granted to any such Optionee may be exercised by the person or persons
to whom the Optionee's rights under any such Incentive Stock Options pass by
will or by the laws of descent and distribution (including the Optionee's estate
during the period of administration) at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is six (6) months after the date of death of such Optionee (or such later
period not exceeding one (1) year to which the Committee may, in its discretion,
extend such period), but only if, and to the extent that, the Optionee was
entitled to exercise any such Incentive Stock Options at the date of death. For
purposes of this Section 9(c), any Incentive Stock Option held by an Optionee
shall be considered exercisable at the date of his death if the only unsatisfied
condition precedent to the exercisability of such Incentive Stock Option at the
date of death is the passage of a specified period of time.
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(d) Incentive Stock Options Deemed Exercisable.
For purposes of Seetions 9(a), 9(b) and 9(c) above, any Incentive
Stock Option held by any Optionee shall be considered exercisable at the date of
the termination of his employment if, but for the requirement of serial exercise
set forth in Section 7(e) hereof, any such Incentive Stock Option would have
been exercisable at such date of termination of employment. Any exercise of any
Incentive Stock Option granted pursuant to the Plan which is considered
exercisable pursuant to this Section 9(d) shall nevertheless be subject to the
provisions and restrictions contained In Section 7(e) hereof.
(e) Termination of Incentive Stock Options.
To the extent that any Incentive Stock Option granted under the
Plan to any Optionee whose employment by the Association terminates shall not
have been exercised within the applicable period set forth in this Section 9.
any such Incentive Stock Option, and all rights to purchase or receive shares of
Common Stock pursuant thereto, as the case may be, shall terminate on the last
day of the applicable period.
10. EFFECT OF TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH ON
NON-INCENTIVE STOCK OPTIONS. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment,
disability of an Optionee or his death shall be such terms and conditions as the
Committee shall, in its sole discretion, determine at the time of termination.
11. RIGHT OF REPURCHASE AND RESTRICTIONS ON DISPOSITION. The Committee, in
its sole discretion, may include, as a term of any Incentive Stock Option or
Non-Incentive Stock Option, the right (the "Repurchase Right"), but not the
obligation, to repurchase all or any amount of the Shares acquired by an
Optionee pursuant to the exercise of any such Options. The intent of the
Repurchase Right is to encourage the continued employment of the Optionee. The
Repurchase Right shall provide for, among other things, a specified duration of
the Repurchase Right, a specified price per Share to be paid upon the exercise
of the Repurchase Right and a restriction on the disposition of the Shares by
the Optionee during the period of the Repurchase Right. The Repurchase Right may
permit the Association to transfer or assign such right to another party. The
Association may exercise the Repurchase Right only to the extent permitted by
applicable law.
12. STOCK APPRECIATION RIGHTS. A Stock Appreciation Right shall, upon its
exercise, entitle the Participant to whom such Stock Appreciation Right was
granted to receive a number of Shares or cash or combination thereof, as the
Committee in its discretion shall determine, the aggregate value of which (i.e.,
the sum of the amount of cash and/or the fair market value of such Shares on the
date of exercise) shall equal (as nearly as possible, it being understood that
the Association shall not issue any fractional shares) the amount by which the
fair market value per Share an the date of such exercise shall exceed the
exercise price of such Stock Appreciation Right, multiplied by the number of
Shares with respect to which such Stock Appreciation Right shall have been,
exercised. A Stock Appreciation Right may be related to an Option or may be
granted independently of any Option as the Committee shall determine whether and
to what extent a Related Stock Appreciation Right shall be granted with respect
thereto; provided, however and notwithstanding any other provision of the Plan,
that if the Related Option is an Incentive Stock Option, the Related Stock
Appreciation Right shall satisfy all the restrictions and limitations of Section
7 hereof as if such Related Stock Appreciation Right were an Incentive Stock
Option. In the case of a Related Option, such Related Option shall cease to be
exercisable to the extent of the Shares, with
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respect to which the Related Stock Appreciation Right was exercised. Upon the
exercise or termination of a Related Option any Related Stock Appreciation
Right shall terminate to the extent to the Shares with respect to which the
Related Option was exercised or terminated.
13. Recapitalization, Merger, Consolidation, Change in Control and Similar
Transactions.
(a) Adjustment.
Subject to any required action by the shareholders of the
Association, the aggregate number of shares of Common Stock for which stock
options may be granted hereunder, the number of shares of Common Stock covered
by each outstanding stock Option, and the exercise price Per share of Common
Stock of each such stock option, shall all be Proportionately adjusted for any
increase or decrease in the number of issued and outstanding shares of Common
Stock resulting from a subdivision or consolidation of Shares or the Payment of
a stock dividend (but only on the Common Stock) or any other Increase or
decrease in the number of such shares of Common Stock effected without the
receipt of consideration by the Association.
(b) Change in Control.
All outstanding options shall become Immediately exercisable in
the event of a change in control or Imminent change in control of the
Association, as determined by the Committee. For purposes of this Section,
"change in control" shall mean. (i) the execution of an agreement for the sale
of all, or a material portion, of the assets of the Association; (ii) the
execution of an agreement for a merger or recapitalization of the Association or
any merger or recapitalization whereby the Association is not the surviving
entity; (iii) a change of control of the Association, as otherwise defined or
determined by the Federal Home Loan Bank Board or regulations promulgated by it;
or (iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules promulgated thereunder) of
twenty-five percent (25%) or more of the outstanding voting securities of the
Association by any person, trust, entity or group. For purposes of this Section,
"Imminent change in control" shall refer to any offer or announcement, oral or
written, by any person or persons acting as a group, to acquire control of the
Association.
(c) Extraordinary Corporate Action.
Subject to any required action by the shareholders of the
Association, in the event of any Change in Control, recapitalization, merger,
consolidation, exchange of shares, spin-off, reorganization, tender offer,
liquidation or other extraordinary corporate action or event, the Committee, in
its sole discretion, shall have the power, prior or subsequent to such action or
event to:
(i) appropriately adjust the number of shares of Common Stock
subject to each stock option. the exercise price per share of Common Stock, and
the consideration to be given or received by the Association upon the exercise
of any outstanding Option;
(ii) cancel any or all previously granted Options, provided that
appropriate consideration is paid to the Optionee in connection therewith;
and/or Optionee in connection therewith; and/or
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(iii) make such other adjustments in connection with the Plan as
the Committee, in its sole discretion, or the Board, acting pursuant to Section
4(a)(ii), deems necessary, desirable, appropriate or advisable; provided,
however, that no action shall be taken by the Committee which would cause
Incentive Stock Options granted pursuant to the Plan to fail to meet the
requirements of Section 422A of the Code.
Except as expressly provided in Sections 13(a) and 13(b) hereof,
no Optionee shall have any rights by reason of the occurrence of any of the
events described in this Section 13.
(d) Acceleration.
The Committee shall at all times have the power to accelerate the
exercise date of Options previously granted under the Plan. In no event,
however, will such action permit Participants to exercise Incentive Stock
Options in an order other than provided in Section 7(e).
14. TIME OF GRANTING OPTIONS. The date of grant of an Option under the Plan
shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Notice of the determination shall be
given to each Employee to whom an Option is so granted within a reasonable time
after the date of such grant.
15. EFFECTIVE DATE. The Plan shall become effective upon the completion of
the Association's conversion from mutual to stock form. Options may be granted
prior to ratification of the Plan by the stockholders if the exercise of such
Options is subject to such stockholder ratification.
16. APPROVAL BY SHAREHOLDERS. The Plan shall be approved by stockholders of
the Association within twelve (12) months before or after the date it becomes
effective.
17. MODIFICATION OF OPTIONS. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Option, provided no such modification,
extension or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on him by the grant of a new Option at such
time, or shall not materially decrease the Optionee's benefits under the Option
without the consent of the holder of the Option except as otherwise permitted
under Section 18 hereof.
18. AMENDMENT AND TERMINATION OF THE PLAN.
(a) Action by the Board.
The Board may alter, suspend or discontinue the Plan, except that
no action of the Board may increase (other than as provided in Section 13) the
maximum number of Shares permitted to be optional under the Plan, materially
increase the benefits accruing to participants under the Plan or materially
modify the requirements for eligibility for participation in the Plan unless
such action of the Board shall be subject to approval or ratification by the
shareholders of the Association.
(b) Change in Applicable Law.
Notwithstanding any other provision contained in the Plan, in the
event of a change in any federal or state law, rule or regulation which would
make the exercise of all or part of any previously granted Incentive and/or
Non-Incentive Stock
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Option unlawful or subject the Corporation to any penalty, the Committee may
restrict any such exercise without the consent of the Optionee or other holder
thereof in order to comply with any such law, rule or regulation or to avoid any
such penalty.
19. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to any Option granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law and the requirements
of any stock exchange upon which the Shares may then be listed.
The inability of the Association to obtain from any regulatory body or
authority deemed by the Association's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder shall relieve the Association of any
liability in respect of the non-issuance or sale of such Shares.
As a condition to the exercise of an Option, the Association may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
20. RESERVATION OF SHARES. During the term of the Plan, the Association,
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. UNSECURED OBLIGATION. No Participant under the Plan shall have any
interest in any fund or special asset of the Association by reason of the Plan
or the grant of any Incentive or Non-Incentive Stock Option to him under the
Plan. No trust fund shall be created in connection with the Plan or any grant of
any Incentive or Non-Incentive Stock Option hereunder and there shall be no
required funding of amounts which may become payable to any participant.
22. WITHHOLDING TAX. The Association shall have the right to deduct from
all amounts paid in cash with respect to the exercise of a Stock Appreciation
Right under the Plan any taxes required by law to be withheld with respect to
such cash payments. Where a Participant or other person is entitled to receive
Shares pursuant to the exercise of an Option of Stock Appreciation Right
pursuant to the Plan, the Association shall have the right to require the
Participant or such other person to pay the Association the amount of any taxes
which the Association is required to withhold with respect to such Shares, or,
in lieu thereof, to retain, or sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
23. GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of New Jersey, except to the extent that
Federal law shall be deemed to apply.
11
FIRST SENTINEL BANCORP, INC.
1993 ACQUISITION STOCK OPTION PLAN
1. Purpose of the Plan. The Plan shall be known as Pulse Bancorp, Inc.,
1993 Stock Option and Incentive Plan (the "Plan"). The purpose of the Plan is to
attract and retain the best available personnel for positions of substantial
responsibility and to provide additional incentives to officers, directors and
key employees of Pulse Bancorp, Inc., (the "Corporation"), or any present or
future parent or subsidiary of the Corporation to promote the success of the
business. The Plan is intended to provide for the grant of "Incentive Stock
Options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") and Non-Incentive Stock Options, options that do
not so qualify. Each and every one of the provisions of the Plan relating to
Incentive Stock Options shall be interpreted to conform to the requirements of
Section 422 of the Code.
2. Definitions. As used herein, the following definitions shall apply.
(a) "Award" means the grant by the Committee of an Incentive Stock
Option or a Non-Incentive Stock Option, or any combination thereof, as provided
in the Plan.
(b) "Board" shall mean the Board of Directors of the Corporation, or
any successor or parent corporation thereto.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with paragraph 5(a) of the Plan,
(e) "Common Stock" shall mean common stock, par value $1.00 per share,
of the Corporation, or any successor or parent corporation thereto.
(f) "Continuous Employment" or "Continuous Status as an Employee"
shall mean the absence of any interruption or termination of employment with the
Corporation or any present or future Parent or Subsidiary of the Corporation.
Employment shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the Corporation or in
the case of transfers between payroll locations, of the Corporation or between
the Corporation, its Parent, its Subsidiaries or a successor.
(g) "Corporation" shall mean Pulse Bancorp, Inc., and any successor or
parent corporation thereto.
(h) "Director" shall mean a member of the Board of the Corporation, or
any successor or parent corporation thereto.
(i) "Effective Date" shall mean the date specified in Section 15
hereof.
(j) "Employee" shall mean any person employed by the Corporation or
any present or future Parent or Subsidiary of the Corporation.
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(k) "Incentive Stock Option" or "ISO" shall mean an option to purchase
Shares granted by the Committee pursuant to Section 8 hereof which is subject to
the limitations and restrictions of Section 8 hereof and is intended to qualify
under Section 422 of the Code,
(l) "Non-Incentive Stock Option" or "Non-ISO" shall mean an option to
purchase Shares granted pursuant to Section 9 hereof, which option is not
intended to qualify under Section 422 of the Code.
(m) "Option" shall mean an Incentive or Non-Incentive Stock Option
granted pursuant to this plan providing the holder of such Option with the right
to purchase Common Stock.
(n) "Optioned Stock" shall mean stock subject to an Option granted
pursuant to the Plan,
(o) "Optionee" shall mean any person who receives an Option or Award
pursuant to the Plan.
(p) "Parent" shall mean any present or future corporation which would
be a "parent corporation" as defined in Subsections 424(e) and (g) of the Code.
(q) "Participant" means any director, officer or key employee of the
Corporation or any Parent or Subsidiary of the Corporation or any other person
providing a service to the Corporation who is selected by the Committee to
receive an Award, or who by the express terms of the Plan is granted an Award.
(r) "Plan" shall mean Pulse Bancorp, Inc., 1993 Stock Option and
Incentive Plan.
(s) "Savings Bank" shall mean Pulawski Savings Bank, or any successor
corporation thereto.
(t) "Share" shall mean one share of the Common Stock.
(u) "Subsidiary" shall mean any present or future corporation which
would be a "subsidiary corporation" as defined in Subsections 424(f) and (g) of
the Code.
3. SHARES SUBJECT TO THE PLAN. Except as otherwise required by the
provisions of Section 13 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 183,921 Shares.
Such Shares may either be authorized but unissued shares or treasury shares.
An Award shall not be considered to be made under the Plan with respect to
any Award which terminates prior to its exercise, and new Awards may be granted
under the Plan with respect to the number of Shares as to which such termination
has occurred.
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4. SIX MONTH HOLDING PERIOD.
A total of six months must elapse between the date of the grant of an
Award and the date of the sale of Common Stock received through such Award.
5. ADMINISTRATION OF THE PLAN.
(a) (i) COMPOSITION OF THE COMMITTEE. Except as indicated in paragraph
5(a)(ii) below, the Plan shall be administered by the Committee consisting of at
least three non-employee Directors of the Corporation appointed by the Board and
serving at the pleasure of the Board. Officers, Directors, key employees and
other persons who are designated by the Committee shall be eligible to receive
Awards under the Plan, and all persons designated as members of the Committee
shall be "disinterested persons" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934.
(ii) For the purpose of granting Awards to directors, the
selection of any Director to whom Awards may be granted, as well as the number
of Shares subject to Awards, must be determined by a "disinterested committee",
as defined in Rule 16b-3 under the Securities Exchange Act of 1934.
(b) Powers of the Committee. The Committee is authorized (but only to
the extent not contrary to the express provisions of the Plan or to resolutions
adopted by the Board) to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the form and content of
Awards to be issued under the Plan and to make other determinations necessary or
advisable for the administration of the Plan, and shall have and may exercise
such other power and authority as may be delegated to it by the Board from time
to time. A majority of the entire Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum is
present shall be deemed the action of the Committee. In no event may the
Committee revoke outstanding Awards without the consent of the Participant.
The Chairman of the Corporation and such other officers as shall be
designated by the Committee are hereby authorized to execute instruments
evidencing Awards on behalf of the Corporation and to cause them to be delivered
to the Participants.
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby, subject to ratification by the Board by a majority of its
disinterested members.
6. ELIGIBILITY.
(i) Awards may be granted to officers, Directors, key employees
and other persons. The Committee shall from time to time determine the officers,
Directors, key employees and other persons who shall be granted Awards under the
Plan, the number to be granted to each such officer, Director, key employee and
other persons under the Plan, and whether Awards granted to each such
Participant under the Plan shall be Incentive and/or Non-Incentive Stock
Options. In selecting Participants and in determining the number of Shares of
Common Stock to be granted to each such Participant pursuant to each Award
granted under the Plan, the Committee may consider the nature of the services
rendered by each such Participant, each such Participant's current and potential
contribution to the Corporation and such other factors as the Committee may, in
its sole discretion, deem relevant. Officers, Directors, key employees or other
persons who have been granted an Award may, if otherwise eligible, be granted
additional Awards.
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(ii) The aggregate fair market value (determined as of the date
the Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by each Employee during any calendar
year (under all Incentive Stock Option plans, as defined in Section 422 of the
Code, of the Corporation or any present or future Parent or Subsidiary of the
Corporation) shall not exceed $100,000. Notwithstanding the prior provisions of
this Section 6, the Committee may grant Options in excess of the foregoing
limitations, provided said Options shall be clearly and specifically designated
as not being Incentive Stock Options, as defined in Section 422 of the Code.
(iii) In no event shall Shares subject to Options granted to
Directors in their capacity as such, pursuant to Section 9(a) herein in the
aggregate under this Plan exceed more than 40% of the Shares authorized for
delivery under this Plan pursuant to Section 3 herein. If such Shares in the
aggregate are not awarded to Directors pursuant to Section 9(a) herein, such
Shares may be awarded to officers or key employees.
7. TERM OF THE PLAN. The Plan shall continue in effect for a term of ten
(10) years from the Effective Date, unless sooner terminated pursuant to Section
18 hereof. No Option shall be granted under the Plan after ten (10) years from
the Effective Date.
8. TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS. Incentive Stock Options
may be granted only to Participants who are Employees. Each Incentive Stock
Option granted pursuant to the Plan shall be evidenced by an instrument in such
form as the Committee shall from time to time approve. Each and every Incentive
Stock Option granted pursuant to the Plan shall comply with, and be subject to,
the following terms and conditions:
(a) Option Price.
(i) The price per Share at which each Incentive Stock Option
granted under the Plan may be exercised shall not, as to any particular
Incentive Stock Option, be less than the fair market value of the Common Stock
at the time such Incentive Stock Option is granted. For such purposes, if the
Common Stock is traded otherwise than on a national securities exchange at the
time of the granting of an Option, then the price per Share of the Optioned
Stock shall be not less than the mean between the bid and asked price on the
date the Incentive Stock Option is granted or, if there is no bid and asked
price on said date, then on the next prior business day on which there was a bid
and asked price. If no such bid and asked price is available, then the price per
Share shall be determined by the Committee. If the Common Stock is listed on a
national securities exchange at the time of the granting of an Incentive Stock
Option, then the price per Share shall be not less than the average of the
highest and lowest selling price on such exchange on the date such Incentive
Stock Option is granted or, if there were no sales on said date, then the price
shall be not less than the mean between the bid and asked price on such date.
(ii) In the case of an Employee who owns Common Stock
representing more than ten percent (10%) of the outstanding Common Stock at the
time the Incentive Stock Option is granted, the Incentive Stock Option price
shall not be less than one hundred and ten percent (110%) of the fair market
value of the Common Stock at the time the Incentive Stock Option is granted.
(b) PAYMENT. Full payment for each Share of Common Stock purchased
upon the exercise of any Incentive Stock Option granted under the Plan shall be
made at the time of exercise of each such Incentive Stock Option and shall be
paid in cash (in United States Dollars), Common Stock or a combination of cash
and Common Stock. Common Stock utilized in full or partial payment of the
exercise price shall be valued at its fair market value at the date of exercise.
The Corporation shall accept full or partial payment in Common Stock only to the
extent permitted by applicable law. No Shares of Common Stock shall be issued
until full payment therefor
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has been received by the Corporation, and no Optionee shall have any of the
rights of a stockholder of the Corporation until Shares of Common Stock are
issued to him.
(c) TERM OF INCENTIVE STOCK OPTION. The term of each Incentive Stock
Option granted pursuant to the Plan shall be not more than ten (10) years from
the date each such Incentive Stock Option is granted, provided that in the case
of an Employee who owns stock representing more than ten percent (10%) of the
Common Stock outstanding at the time the Incentive Stock Option is granted, the
term of the Incentive Stock Option shall not exceed five (5) years.
(d) EXERCISE GENERALLY. Except as, otherwise provided in Section 10
hereof, no Incentive Stock Option may be execised unless the Optionee shall have
been in the employ of the Corporation at all times during the period beginning
with the date of grant of any such Incentive Stock Option and ending on the date
three (3) months prior to the date of exercise of any such Incentive Stock
Option. The Committee may impose additional conditions upon the right of an
Optionee to exercise any Incentive Stock Option granted hereunder which are not
inconsistent with the terms of the Plan or the requirements for qualification as
an Incentive Stock Option under Section 422 of the Code.
(e) CASHLESS EXERCISE. An Optionee. who has held an Incentive Stock
Option for at least six months may engage in the "cashless exercise" of the
Option. In a cashless exercise, an Optionee gives the Corporation written notice
of the exercise of the Option together with an order to a registered
broker-dealer or equivalent third party, to sell part or all of the Optioned
Stock and to deliver enough of the proceeds to the Corporation to pay the Option
price and any applicable withholding taxes. If the Optionee does not sell the
Optioned Stock through a registered broker-dealer or equivalent third party, he
can give the Corporation written notice of the exercise of the Option and the
third party purchaser of the Optioned Stock shall pay the Option price plus any
applicable withholding taxes to the Corporation.
(f) TRANSFERABILITY. Any Incentive Stock Option granted pursuant to
the Plan shall be exercised during an Optionee's lifetime only by the Optionee
to whom it was granted and shalt not be assignable or transferable otherwise
than by will or by the laws of descent and distribution.
9. TERMS AND CONDITIONS OF NON-INCENTIVE STOCK OPTIONS. Each Non-Incentive
Stock Option granted pursuant to the Plan shall be evidenced by an instrument in
such form as the Committee shall from time to time approve. Each and every
Non-Incentive Stock Option granted pursuant to the Plan shall comply with and be
subject to the following terms and conditions,
(a) OPTIONS GRANTED TO DIRECTORS. Subject to the limitations of
Section 6(iii), Non-incentive Stock Options will be granted to each Director as
follows: Effective October 22, 1992, each Director of the Company shall be
granted Options to purchase 3,000 shares of Common Stock at the fair market
value of such Common Stock on that date, which was $17,625 per share. On January
1, 1994, and annually thereafter, each Director of the Company then serving
shall be granted additional Options to purchase 3,000 shares of Common Stock at
the fair market value of such Common Stock on the date of grant. Such grant of
Options to Directors shall be reduced pro rata to the extent that such number of
Options available for grant shall be less than 3,000 per Director. Options
granted pursuant to this paragraph will be exercisable immediately upon the date
it is granted subject to stockholder ratification of the Plan and will remain
exercisable for up to ten years from such date of grant. The price per Share at
which such Options granted shall be equal to the fair market value of the Common
Stock at the time such Options are granted. For such purposes, if the Common
Stock is traded otherwise than on a national securities exchange at the time of
the granting of the Options, then the price per Share of the Optioned Stock
shall be not less than the mean between the bid and asked price on the date the
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Options are granted or, if there is no bid and asked price on said date, then on
the next prior business day on which there was a bid and asked price. If no such
bid and asked price is available, then the price per Share shall be determined
by the Committee. If the Common Stock is listed on a national securities
exchange at the time of the granting of an Options, then the price per Share
shall be not less than the average of the highest and lowest selling price on
such exchange on the date such Options are granted or, if there were no sales on
said date, then the price shall be not less than the mean between the bid and
asked price on such date. Such Options may be exercised only while the Optionee
is a Director of the Corporation, or within one year after termination of the
Optionee's status as a Director but not later than the date on which such
Options would otherwise expire, or in the event of such person's death during
the term of his directorship, by the personal representation of his estate or
person or persons to whom his rights under such Option shall have passed by will
or by laws of descent and distribution. Such Options of a deceased Director may
be exercised within two years from the date of his death, but not later than the
date on which the Option would otherwise expire. Unless otherwise inapplicable,
or inconsistent with the provisions of this paragraph, the Options to be granted
to Directors hereunder shall be subject to all other provisions of this Plan.
Notwithstanding anything herein to the contrary, Options granted pursuant to
this Section 9(a) to Directors who are also Employees at the time of such grant
shall be deemed Incentive Stock Options; provided that if such Options shall not
be exercised within 3 months of the date of termination of employment, except in
the case of disability or death, as noted above, such Options shall thereafter
be deemed Non-Incentive Stock Options and shall remain exercisable for the
remaining term of exercisability or within one year of termination of the
Optionee's status as a Director, whichever is earlier. Notwithstanding the
provisions of Section 9(a), additional Awards may be made to Directors who are
serving as Employees within the sole discretion of the Committee.
(b) OPTION PRICE. The exercise price per Share of Common Stock for
each Non-Incentive Stock Option granted pursuant to the Plan, other than Options
granted pursuant to Section 9(a) herein, shall be at such price as the Committee
may determine in its sole discretion.
(c) PAYMENT. Full payment for each Share of Common Stock purchased
upon the exercise of any Non-Incentive Stock Option granted under the Plan shall
be made at the time of exercise of each such Non-Incentive Stock Option and
shall be paid in cash (in United States Dollars), Common Stock or a combination
of cash and Common Stock. Common Stock utilized in full or partial payment of
the exercise price shall be valued at its fair market value at the date of
exercise. The Corporation shall accept full or partial payment in Common Stock
only to the extent permitted by applicable law. No Shares of Common Stock shall
be issued until full payment therefor has been received by the Corporation and
no Optionee shall have any of the rights of a stockholder of the Corporation
until the Shares of Common Stock are issued to him.
(d) TERM. The term of each Non-Incentive Stork Option granted pursuant
to the Plan shall be not more than ten (10) years from the date each such
Non-Incentive Stock Option is granted.
(e) EXERCISE GENERALLY. The Committee may impose additional conditions
upon the right of any Participant to exercise any Non-Incentive Stock Option
granted hereunder which is not inconsistent with the terms of the Plan
(f) CASHLESS EXERCISE. An Optionee who has held a Non-Incentive Stock
Option for at least six months may engage in the "cashless exercise" of the
Option. In a cashless exercise, an Optionee gives the Corporation written notice
of the exercise of the Option together with an order to a registered
broker-dealer or equivalent third party, to sell part or all of the Optioned
Stock and to deliver enough of the proceeds to the Corporation to pay the Option
price and any applicable withholding taxes. If the Optionee does not sell the
Optioned Stock through a registered broker-dealer or equivalent third party, he
can give the Corporation written
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notice of the exercise of the Option and the third Party purchaser of the
Optioned Stock shall pay the Option price plus any applicable withholding taxes;
to the Corporation.
(g) TRANSFERABILITY. Any Non-Incentive Stock Option granted pursuant
to the Plan shall be exercised during an Optionee's lifetime only by the
Optionee to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
10. EFFECT OF TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH ON INCENTIVE
STOCK OPTIONS.
(a) TERMINATION OF EMPLOYMENT. In the event that any Optionee's
employment with the Corporation shall terminate for any reason, other than
Permanent and Total Disability (as such term is defined in Section 22(e)(3) of
the Code) or death, all of any such Optionee's Incentive Stock Options, and all
of any such Optionee's rights to purchase or receive Shares of Common Stock
pursuant thereto, shall automatically terminate on the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the
expiration of not more than three (3) months after the date of such termination
of employment, but only if, and to the extent that, the Optionee was entitled to
exercise any such Incentive Stock Options at the date of such termination of
employment. In the event that a subsidiary ceases to be a subsidiary of the
Corporation, the employment of all of its employees who are not immediately
thereafter employees of the Corporation shall be deemed to terminate upon the
date such subsidiary so ceases to be a Subsidiary of the Corporation.
(b) DISABILITY. In the event that any Optionee's employment with the
Corporation shall terminate as the result of the Permanent and Total Disability
of such Optionee, such Optionee may exercise any Incentive Stock Options granted
to him pursuant to the Plan at any time prior to the earlier of (i) the
respective expiration date of any such Incentive Stock Options or (ii) the date
which is one (1) year after the date of such termination of employment, but only
if, and to the extent that, the Optionee was entitled to exercise any such
Incentive Stock Options at the date of such termination of employment.
(c) DEATH. In the event of the death of an Optionee, any Incentive
Stock Options granted to such Optionee may be exercised by the person or persons
to whom the Optionee's rights under any such Incentive Stock Options pass by
will or by the laws of descent and distribution (including the Optionee's estate
during the period of administration) at any time prior to the earlier of (i) the
respective expiration dates of any such Incentive Stock Options or (ii) the date
which is two (2) years after the date of death of such Optionee but only if, and
to the extent that, the Optionee was entitled to exercise any such Incentive
Stock Options at the date of death. For purposes of this Section 10(c), any
Incentive Stock Option held by an Optionee shall be considered exercisable at
the date of his death if the only unsatisfied condition precedent to the
exercisability of such Incentive Stock Option at the date of death is the
passage of a specified period of time. At the discretion of the Committee, upon
exercise of such Options the Optionee may receive Shares or cash or combination
thereof. If cash shall be paid in lieu of Shares, such cash shall be equal to
the difference between the fair market value of such Shares and the exercise
price of such Options on the exercise date.
(d) INCENTIVE STOCK OPTIONS DEEMED EXERCISABLE. For purposes of
Sections 10(a), 10(b) and 10(c) above, any Incentive Stock Option held by any
Optionee shall be considered exercisable at the date of termination of his
employment if any such Incentive Stock Option would have been exercisable at
such date of termination of employment.
(e) TERMINATION OF INCENTIVE STOCK OPTIONS. To the extent that any
Incentive Stock Option granted under the Plan to any Optionee, whose employment
with the Corporation terminates shall not have been exercised within the
applicable peiod set forth in this Section 10, any such Incentive Stock Option,
and all rights
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to purchase or receive Shares of Common Stock pursuant thereto, as the case may
be, shall terminate on the last day of the applicable period.
11. EFFECT OF TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH ON
NON-INCENTIVE STOCK OPTIONS. The terms and conditions of Non-Incentive Stock
Options relating to the effect of the termination of an Optionee's employment,
disability of an Optionee or his death shall be such terms and conditions as the
Committee shall, in its sole discretion, determine at the time of termination,
unless specifically provided for by the terms of the Agreement at the time of
grant of the Award.
12. RIGHT OF REPURCHASE AND RESTRICTIONS ON DISPOSITION. The Committee, In
its sole discretion, may include, as a term of any Incentive Stock Option or
Non-Incentive Stock Option, the right (the "Repurchase Right"), but not the
obligation, to repurchase all or any amount of the Shares acquired by an
Optionee pursuant to the exercise of any such Options. The intent of the
Repurchase Right is to encourage the continued employment of the Optionee. The
Repurchase Right shall provide for, among other things, a specified duration of
the Repurchase Right, a specified price per Share to be paid upon the exercise
of the Repurchase Right and a restriction on the disposition of the Shares by
the Optionee during the period of the Repurchase Right. The Repurchase Right may
permit the Corporation to transfer or assign such right to another party, The
Corporation may exercise the Repurchase Right only to the extent permitted by
applicable law.
13. RECAPITALIZATION, MERGER, CONSOLIDATION IN CONTROL AND SIMILAR
TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the stockholders of
the Corporation, within the sole discretion of the Committee, the aggregate
number of Shares of Common Stock for which Options may be granted hereunder, the
number of Shares of Common Stock covered by each outstanding Option, and the
exercise price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt of consideration by the Corporation (other than
Shares held by dissenting stockholders).
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(b) CHANGE IN CONTROL. Notwithstanding anything herein to the
contrary, all outstanding Awards shall become immediately exercisable in the
event of a change in control or imminent change in control of the Corporation,
as determined by the Committee. In the event of such a change in control or
imminent Change in control, the Optionee shall, at the discretion of the
Committee, be entitled to receive cash in an amount equal to the fair market
value of the Common Stock subject to any Incentive or Non-Incentive Stock Option
over the Option Price of such Shares, in exchange for the surrender of such
Options by the Optionee on that date in the event of a change in control or
imminent change in control of the Corporation. For purposes of this Section 13,
"change in control" shall mean: (i) the execution of an agreement for the sale
of all, or a material portion, of the assets of the Corporation; (ii) the
execution of an agreement for a merger or recapitalization of the Corporation or
any merger or recapitalization whereby the Corporation is not the surviving
entity; (iii) a change of control of the Corporation, as otherwise defined or
determined by the New Jersey Department of Banking or regulations promulgated by
it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder) of ten percent (10%) or more of the outstanding voting securities of
the Corporation by any person, trust, entity or group. This limitation shall not
apply the purchase of shares by underwriters in connection with a public
offering of Corporation stock, or the purchase of shares of up to 25% of any
class of securities of the Corporation by a tax-qualified employee stock benefit
plan. The term "person" refers to an individual or a corporation, partnership,
trust, association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization or any other form of entity not specifically listed
herein. For purposes of this Section 13, "imminent change in control" shall
refer to any offer or announcement, oral or written, by any person or persons
acting as a group, to acquire control of the Corporation. The decision of the
Committee as to whether a change in control or imminent change in control has
occurred shall be conclusive and binding.
(c) EXTRAORDINARY CORPORATE ACTION. Subject to any required action by
the stockholders of the Corporation, in the event of any change in control,
recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, liquidation or other extraordinary corporate
action or event, the, Committee, in its sole discretion, shall have the power,
prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock
subject to each Option, the exercise price per Share of Common Stock, and the
consideration to be given or received by the Corporation upon the exercise of
any outstanding Option;
(ii) cancel any or all previously granted Options, provided that
appropriate Consideration is paid to the Optionee in connection therewith;
and/or
(iii) make such other adjustments in connection with the Plan as
the Committee, in its sole discretion, deems necessary, desirable, appropriate
or advisable; PROVIDED, however, that no action shall be taken by the Committee
which would cause Incentive Stock Options granted pursuant to the Plan to fail
to meet the requirements of Section 422 of the Code.
Except as expressly provided in Sections 13(a) and 13(b) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 13,
(d) ACCELERATION. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan.
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14. TIME OF GRANTING OPTIONS. The date of grant of an Option under the Plan
shall, for all purposes, be the date on which the Committee makes the
determination of granting such Option. Except, however, for purposes of
compliance with Section 16 of the Securities Exchange Act of 1934. the date of
grant of an Option shall be deemed the later of the date of grant or the date of
stockholder approval of the Plan. Notice of the determination of the grant of an
Option shall be given to each Individual to whom an Option is so granted within
a reasonable time after the date of such grant in a form determined by the
Committee.
15. EFECTIVE DATE. The Plan shall become effective upon the date of
adoption of the Plan by the Board. Awards may be granted prior to ratification
of the Plan by the stockholders of the Corporation if the granting or exercise
of such Awards is subject to such stockholder ratification.
16. APPROVAL BY STOCKHOLDERS. The Plan shall be approved by stockholders of
the Corporation within twelve (12) months before or after the date the Plan
becomes effective.
17. MODIFICATION OF OPTIONS. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Award, provided no such modification,
extension or renewal shall confer on the holder of said Award any right or
benefit which could not be conferred on him by the grant of a new Award at such
time, or shall not materially decrease the Optionee's benefits under the Award
without the consent of the holder of the Award except as otherwise permitted
under Section 18 hereof. Notwithstanding anything herein to the contrary, the
Committee shall have the authority to cancel outstanding Awards with the consent
of the Optionee and to reissue new Awards at a low exercise price, but in no
event less than the then fair market value per share of Common Stock, in the
event that the fair market value per share of Common Stock at any time prior to
the date of exercise of outstanding Awards falls below the exercise price of
such Awards.
18. AMENDMENT AND TERMINATION OF THE PLAN.
(a) ACTION BY THE BOARD. The Board may alter, suspend or discontinue
the Plan, except that no action of the Board may increase (other than as
provided in Section 13 hereof) the maximum number of Shares permitted to be
awarded under the Plan, materially increase the benefits accruing to
Participants under the Plan or materially modify the requirements for
eligibility for participation in the Plan unless such action of the Board shall
be subject to approval or ratification by the stockholders of the Corporation.
(b) CHANGE IN APPLICABLE LAW. Notwithstanding any other provision
contained in the Plan, in the event of a change in any federal or state law,
rule or regulation which would make the exercise of all or part of any
previously granted Award or Stock Option unlawful or subject the Corporation to
any penalty, the Committee may restrict any such exercise without the consent of
the Optionee or other holder thereof in order to comply with any such law, rule
or regulation or to avoid any such penalty.
19. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to any Award granted under the Plan unless the issuance and delivery of
such Shares shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, any applicable state securities law and the requirements
of any stock exchange upon which the Shares may then be listed.
The inability of the Corporation to obtain from any regulatory body or
authority deemed by the Corporation's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder shall relieve the Corporation of any
liability in respect of the non-issuance or sale of such Shares.
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As a condition to the exercise of an Award the Corporation may require the
person exercising the Award make such representations and warranties as may be
necessary to assure the availability of an exemption from the registration
requirements of federal or state securities law.
20. RESERVATION OF SHARES. During the term of the Plan, the Corporation
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
21. UNSECURED OBLIGATION. No Participant under the Plan shall have any
interest in any fund or special asset of the Corporation by reason of the Plan
or the grant of any Award under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Award hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
22. WITHHOLDING TAX. The Corporation shall have the right to deduct from
all amounts paid in cash with respect to the cashless exercise of Options or
other Award under the Plan any taxes required by law to be withheld with respect
to such cash payments. Where a Participant or other person is entitled to
receive Shares pursuant to the exercise of an Award pursuant to the Plan, the
Corporation shall have the right to require the Participant or such other person
to pay the Corporation the amount of any taxes which the Corporation is required
to withhold with respect to such Shares, or, in lieu thereof, to retain, or sell
without notice, a number of such Shares sufficient to cover the amount required
to be withheld.
23. GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of Now Jersey, except to the extent that
federal law shall be deemed to apply.
11
FIRST SENTINEL BANCORP, INC.
1997 ACQUISITION STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. The Plan shall be known as the Pulse Bancorp, Inc.
("Company") 1997 Directors Stock Compensation Plan (the "Plan"). The purpose of
the Plan is to retain and reward qualified personnel for positions of
substantial responsibility as members of the Board of Directors of the Company
or any present or future parent or subsidiary of the Company to promote the
success of the business. The Plan is intended to provide for the grant of Stock
Options that are NOT Incentive Stock Options," within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").
2. DEFINITIONS. The following words and phrases when used in this plan with
an initial capital letter, unless the context clearly indicates otherwise, shall
have the meaning as set forth below, Wherever appropriate, the masculine pronoun
shall include the feminine pronoun and the singular shall include the plural.
(a) "Award" means the grant by the Committee or in accordance with the
terms of the Plan of a Stock Option.
(b) "Board" shall mean the Board of Directors of the Company, or any
successor or parent corporation thereto,
(c) "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Company; (ii) the merger or recapitalization of
the Company whereby the Company is not the surviving entity; (iii) a change in
control of the Company, as otherwise defined or determined by the New Jersey
Department of Banking or regulations promulgated by it: or (iv) the acquisition,
directly or indirectly, of the beneficial ownership (within the meaning of that
term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and
the rules and regulations promulgated (thereunder) of twenty-five percent (25%)
or more of the outstanding voting securities of the Company by any person,
trust, entity or group. This limitation shall not apply to the purchase of
shares by underwriters in connection with a public offering of Company stock, or
the purchase of shares of up to 25% of any class of securities of the Company by
a tax-qualified employee stock benefit plan. The term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Committee as
to whether a Change in Control has occurred shall be conclusive and binding.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended,
and regulations promulgated thereunder.
(e) "Committee" shall mean the Board or the Stock Option Committee
appointed by the Board in accordance with Section 5(a) of the Plan,
(f) "Common Stock" shall mean the common stock of the Company, or any
successor or parent corporation thereto.
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(g) "Company" shall mean the Pulse Bancorp, Inc., the parent
corporation of the Savings Bank, or any successor or Parent thereof.
(h) "Director" shall mean a member of the Board of the Company, or any
successor or parent corporation thereto.
(i) "Director Emeritus" shall mean a person serving as a director
emeritus, advisory director, consulting director, or other similar position as
may be appointed by the Board of Directors of the Savings Bank or the Company
from time to time,
(j) "Disability" means any physical or mental impairment which renders
the Participant incapable of continuing in the employment or service of the
Savings Association or the Parent in his then curent capacity as determined by
the Committee.
(k) "Dividend Equivalent Rights" shall mean the rights to receive a
cash payment in accordance with Section 10 of the Plan,
(l) "Effective Date" shall mean October 23, 1997.
(m) "Employee" shall mean any person employed by the Company or any
present or future Parent or Subsidiary of the Company. "Non-Employee" shall mean
an individual not employed by the Company or any present or future Parent or
Subsidiary of the Company.
(n) "Fair Market Value" shall mean: (i) if the Common Stock is traded
otherwise than on a national securities exchange, then the Fair Market Value per
Share shall be equal to the mean between the last bid and ask price of such
Common Stock on such date or, if there is no bid and ask price on said date,
then on the immediately prior business day on which there was a bid and ask
price. Notwithstanding the foregoing, for purposes of the award of Options to
Directors in accordance with Section 9, such Fair Market Value shall be
calculated based upon the average of the last reported sale price of the Common
Stock for the preceding three-business-day period. If no such bid and ask price
is available, then the Fair Market Value shall be detemined based upon the
average of the mean between the last bid and ask price of such Common Stock
during such three-day period; or (ii) if the Common Stock is listed on a
national securities exchange, then the Fair Market Value per Share shall be not
less than the average of the highest and lowest selling price of such Common
Stock on such exchange on such date, or if there were no sales on said date,
then the Fair Market Value shall be not less than the mean between the last bid
and ask price on such date.
(o) "Option" or "Stock Option" shall mean an Award granted pursuant to
this Plan providing the holder of such Option with the right to purchase Common
Stock.
(p) "Optioned Stock" shall mean stock subject to an Option granted
pursuant to the Plan,
(q) "Optionee" shall mean any person who receives an Option or Award
pursuant to the Plan.
(r) "Parent" shall mean any present or future corporation which would
be a "parent corporation" as defined in Sections 424(e) and (g) of the Code.
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(s) "Participant" means any director of the Company or any Parent or
Subsidiary of the Company or any other person providing a service to the Company
who is selected by the Committee to receive an Award, or who by the express
terms of the Plan is granted an Award.
(t) "Plan" shall mean the Pulse Bancorp, Inc. 1997 Directors Stock
Compensation Plan.
(u) "Savings Bank" shall mean Pulse Savings Bank, South River, New
Jersey, or any successor corporation thereto,
(v) "Share" shall mean one share of the Common Stock.
(w) "Subsidiary" shall mean any present or future corporation which
constitutes a "subsidiary" corporation as defined in Sections 424(f) and (g) of
the Code.
3. SHARES SUBJECT TO THE PLAN. Except as otherwise required by the
provisions of Section 11 hereof. the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 25,000 Shares.
Such Shares may either be from authorized but unissued shares or shares
purchased in the market for Plan purposes. If an Award shall expire, become
unexercisable, or be forfeited for any reason prior to its exercise, new Awards
may be granted under the Plan with respect to the number of Shares as to which
such expiration has occurred.
4. SIX MONTH HOLDING PERIOD.
Except in the event of the death or disability of the Optionee or a
Change in Control of the Company, a minimum of six months must elapse between
the date of the grant of an Option and the date of the sale of the Common Stock
received through the exercise of such Option.
5. ADMINISTRATION OF THE PLAN.
(a) COMPOSITION OF THE COMMITTEE. The Plan shall be administered by
the Board of Directors of the Company or a Committee which shall consist of not
less than two Directors of the Company appointed by the Board and serving at the
pleasure of the Board. All persons designated as members of the Committee shall
meet the requirements of a "Non-Employee Director" within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended, as found at 17 CFR
ss.240.16b-3.
(b) POWERS OF THE COMMITTEE. The Committee is authorized (but only to
the extent not contrary to the express provisions of the Plan or to resolutions
adopted by the Board) to interpret the Plan, to prescribe, amend and rescind
rules and regulations relating to the Plan, to determine the form and content of
Awards to be issued under the Plan and to make other determinations necessary or
advisable for the administration of the Plan, and shall have and may exercise
such other power and authority as may be delegated to it by the Board from time
to time. A majority of the entire Committee shall constitute a quorum and the
action of a majority of the members present at any meeting at which a quorum is
present shall be deemed the action of the Committee. In no event may the
Committee revoke outstanding Awards without the consent of the Participant.
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The President of the Company and such other officers as shall be
designated by the Committee are hereby authorized to execute written agreements
evidencing Awards on behalf of the Company and to cause them to be delivered to
the Participants. Such agreements shall set forth the Option exercise price, the
number of shares of Common Stock subject to such Option, the expiration date of
such Options, and such other terms and restrictions applicable to such Award as
are determined in accordance with the Plan or the actions of the Committee,
(c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
6. ELIGIBILITY FOR AWARDS AND LIMITATIONS.
(a) The Committee shall from time to time detemine the Participants
who shall be granted Awards under the Plan and the number of Awards to be
granted to each such persons. In selecting Participants and in determining the
number of Shares of Common Stock to be granted to each such Participant, the
Committee may consider the nature of the prior and anticipated future services
rendered by each such Participant, each such Participant's current and potential
contribution to the Company and such other factors as the Committee may, in its
sole discretion. deem relevant. Participants who have been granted an Award may,
if otherwise eligible, be granted additional Awards.
(b) In no event shall Shares subject to Options granted to any
Participant exceed more than 17% of the total number of Shares authorized for
delivery under the Plan.
7. TERM OF THE PLAN. The Plan shall continue in effect for a term of ten
(10) years from the Effective Date, unless the Plan is terminated by the Board
in accordance with the Plan.
8. TERMS AND CONDITIONS OF STOCK OPTIONS. Stock Options may be granted or
awarded only to Participants. Each Stock Option granted pursuant to the Plan
shall be evidenced by an instrument in such form as the Committee shall from
time to time approve. Each Stock Option granted pursuant to the Plan shall
comply with, and be subject to, the following terms and conditions:
(a) OPTION PRICE. The price per Share at which each Stock Option
granted by the Committee under the Plan may be exercised shall not, as to any
particular Stock Option, be less than the Fair Market Value of the Common Stock
on the date that such Stock Option is granted.
(b) PAYMENT. Full payment for each Share of Common Stock purchased
upon the exercise of any Stock Option granted under the Plan shall be made at
the time of exercise of each such Stock Option and shall be paid in cash (in
United States Dollars), Common Stock or a combination of cash and Common Stock.
Common Stock utilized in full or partial payment of the exercise price shall be
valued at the Fair Market Value at the date of exercise. The Company shall
accept full or partial payment in Common Stock only to the extent permitted by
applicable law. No Shares of Common Stock shall be issued until full payment has
been received by the Company, and no Optionee shall have any of the rights of a
stockholder of the Company until Shares of Common Stock are issued to the
Optionee
(c) TERM OF STOCK OPTION. The term of exercisability of each Stock
Option granted pursuant to the Plan shall be not more than ten (10) years from
the date each such Stock Option is granted.
4
<PAGE>
(d) EXERCISE GENERALLY. Except as otherwise provided by the terms of the
Plan by action of the Committee at the time of the grant of the Options, the
Options granted will be first exercisable as of the date of grant of such
options and shall remain exercisable during such periods of service as a
Director or Director Emeritus.
(e) CASHLESS EXERCISE. Subject to vesting requirements. if applicable,
an Optionee who has held a Stock Option for at least six months may engage in
the "cashless exercise" of the Option. Upon a cashless exercise, an Optionee
shall give the Company written notice of the exercise of the Option together
with an order to a registered broker-dealer or equivalent third party, to sell
part or all of the Optioned Stock and to deliver enough of the proceeds to the
Company to pay the Option exercise price and any applicable withholding taxes.
If the Optionee does not sell the Optioned Stock through a registered
broker-dealer or equivalent third party, the Optionee can give the Company
written notice of the exercise of the Option and the third party purchaser of
the Optioned Stock shall pay the Option exercise price plus any applicable
withholding taxes to the Company.
(f) TRANSFERABILITY. A Stock Option granted pursuant to the Plan shall
be exercised during an Optionee's lifetime only by the Optionee to whom it was
granted and shall not be assignable or transferable otherwise than by will or by
the laws of descent and distribution.
9. Awards to Directors.
Stock Options to purchase 2,000 shares of Common Stock will be granted
to each Director of the Company as of November 1, 1997, and an additional 2,000
shares of Common Stock will be granted to each Director of the Company then
serving as of November 1, 1998. The number of options to be awarded to each
Director shall be reduced pro rata in the event that the aggregate number of
shares of Common Stock reserved under the Plan shall not be available to satisfy
the Awards contemplated herein. Such Options shall be exercisable at a price
equal to the Fair Market Value of the Common Stock as of the date of grant of
such options. Such Options will be first exercisable as of the date of Grant.
Such Options shall continue to be exercisable for a period of ten years
following the date of grant without regard to the continued services of such
Director as an Employee, Director or Director Emeritus. In the event of the
Optionee's death, such Options may be exercised by the personal representative
of his estate or person or persons to whom his rights under such Option shall
have passed by will or by the laws of descent and distribution. All Options
awarded in accordance with this Section 9 shall have Dividend Equivalent Rights
associated with such Options. as detailed at Section 10 herein. Unless otherwise
inapplicable, or inconsistent with the provisions of this paragraph. the Options
to be granted to Directors hereunder shall be subject to all other provisions of
this Plan.
10. DIVIDEND EQUIVALENT RIGHTS. The Committee, in its sole discretion, may
include as a term of any Option, the right of the Optionee to receive Dividend
Equivalent Rights. Such rights shall provide that upon the payment of a dividend
on the Common Stock, the holder of such Options shall receive payment of
compensation in an amount equivalent to the dividend payable as if such Options
had been exercised and such Common Stock held as of the dividend record date.
Such rights shall expire upon the expiration or exercise of such underlying
Options. Such rights are non-transferable and shall attach to Options whether or
not such Options are immediately exercisable. The dividend equivalent payments
associated with Options shall be paid to the Option holder at the dividend
payment date of the Common Stock. All Options granted in accordance with Section
9 of the Plan as of the Effective Date shall have Dividend Equivalent Rights
associated with such Options.
5
<PAGE>
11. RECAPITALIZATION, MERGER, CONSOLIDATION, CHANGE IN CONTROL AND
OTHER TRANSACTIONS.
(a) ADJUSTMENT. Subject to any required action by the stockholders of
the Company, within the sole discretion of the Committee, the aggregate number
of Shares of Common Stock for which Options may be granted hereunder, the number
of Shares of Common Stock covered by each outstanding Option, and the exercise
price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
affected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
(b) CHANGE IN CONTROL. All outstanding Awards shall become immediately
exercisable in the event of a Change in Control of the Company, as determined by
the Committee. In the event of such a Change in Control, the Committee and the
Board of Directors will take one or more of the following actions to be
effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent options
shall be substituted. ("Substitute Options") by the acquiring or succeeding
corporation (or an affiliate thereof), provided that: the shares of stock
issuable upon the exercise of such Substitute Options shall constitute
securities registered in accordance with the Securities Act of 1933, as amended,
("1933 Act") or such securities shall be exempt from such registration in
accordance with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively,
"Registered Securities"), or in the alternative, if the securities issuable upon
the exercise of such Substitute Options shall not constitute Registered
Securities, then the Optionee will receive upon consummation of the Change in
Control transaction a cash payment for each Option surrendered equal to the
difference between (1) the Fair Market Value of the consideration to be received
for each share of Common Stock in the Change in Control transaction times the
number of shares of Common stock subject to such surrendered Options, and (2)
the aggregate exercise price of all such surrendered Options, or
(ii) in the event of a transaction under the terms of which the
holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment (the "Merger Price") for each share of Common Stock
exchanged in the Change in Control transaction, to make or to provide for a cash
payment to the Optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such Options held by each
Optionee (to the extent then exercisable at prices not in excess of the Merger
Price) and (B) the aggregate exercise price of all such surrendered Options in
exchange for such surrendered Options.
(c) EXTRAORDINARY COPORATE ACTION. Notwithstanding any provisions of
the Plan to the contrary, subject to any required action by the stockholders of
the Company, in the event of any Change in Control, recapitalization, merger,
consolidation, exchange of Shares, spin-off reorganization, tender offer,
partial or complete liquidation or other extraordinary corporate action or
event, the Committee in its sole discretion, shall have the power, prior or
subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock
subject to each Option, the Option exercise price per Share of Common Stock, and
the consideration to be given or received by the Company upon the exercise of
any outstanding Option;
6
<PAGE>
(ii) cancel any or all previously granted Options, provided that
consideration is paid to the Optionee in connection (therewith: and/or
(iii) make such other adjustments in connection with the Plan as
the Committee, in its sole discretion, deems necessary, desirable, appropriate
or advisable.
(d) ACCELERATION. The Committee shall at all times have the power to
accelerate the exercise date of Options previously granted under the Plan.
(e) NON-RECURRING DIVIDENDS. Upon the payment of a special or
non-recurring cash dividend that has the effect of a return of capital to the
stockholders, the Option exercise price per share shall be adjusted
proportionately, except to the extent that the Participant shall otherwise
receive payments associated with Dividend Equivalent Rights attributable to such
Options with regard to such special or non-recurring cash dividends.
Except as expressly provided in Sections 11(a), 11(b) and 11(e) hereof, no
Optionee shall have any rights by reason of the occurrence of any of the events
described in this Section 11.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option under the Plan
shall, for all purposes, be the date specified in accordance with the Plan or
the date on which the Committee makes the determination of granting such Option.
Notice of the grant of an Option shall be given to each individual to whom an
Option is so granted within a reasonable time after the date of such grant in a
form determined by the Committee.
13. MODIFICATION OF OPTIONS. At any time and from time to time, the Board
may authorize the Committee to direct the execution of an instrument providing
for the modification of any outstanding Option, provided no such modification,
extension or renewal shall confer on the holder of said Option any right or
benefit which could not be conferred on the Optionee by the grant of a new
Option at such time, or shall not materially decrease the Optionee's benefits
under the Option without the consent of the holder of the Option, except as
otherwise permitted under Section 14 hereof.
14. AMENDMENT AND TERMINATION OF THE PLAN.
(a) ACTION BY THE BOARD. The Board may alter, suspend or discontinue
the Plan.
(b) CHANGE IN APPLICABLE LAW. Notwithstanding any other provision
contained in the Plan, in the event of a change in any federal or state law,
rule or regulation which would make the exercise of all or part of any
previously granted Option unlawful or subject the Company to any penalty, the
Committee may restrict any such exercise without the consent of the Optionee or
other holder thereof in order to comply with any such law, rule or regulation or
to avoid any such penalty.
7
<PAGE>
15. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATIONS ON OPTION EXERCISES;
CANCELLATION OF OPTION RIGHTS.
(a) Shares shall not be issued with respect to any Option granted
under the Plan unless the issuance and delivery of such Shares shall comply with
all relevant provisions of applicable law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities laws and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) The inability of the Company to obtain any necessary
authorizations, approvals or letters of non-objection from any regulatory body
or authority deemed by the Company's counsel to be necessay to the lawful
issuance and sale of any Shares issuable hereunder shall relieve the Company of
any liability with respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the
termination of employment or service of an Optionee by the Company or its
Subsidiaries for "cause" within the sole discretion of the Board, all Options
held by such Participant cease to be exercisable as of the date of such
termination of employment or service.
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee. in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in part, in lieu of the
delivery of shares of Common Stock. Such cash payment to be paid in lieu of
delivery of Common Stock shall be equal to the difference between the Fair
Market Value of the Common Stock and the date of the Option exercise and the
exercise price per share of the Option. Such cash payment shall be in exchange
for the cancellation of such Option. Such cash payment shall not be made in the
event that such transaction would result in liability to the Optionee or the
Company under Section 16(b) of the Securities Exchange Act of 1934, as amended.
and regulations promulgated thereunder.
16. RESERVATION OF SHARES. During the term of the Plan, the Company will
reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
17. UNSECURED OBLIGATION. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
18. WITHHOLDING TAX. The Company shall have the right to deduct from all
amounts paid in cash with respect to the cashless exercise of Options and
Dividend Equivalent Rights under the Plan any taxes required by law to be
withheld with respect to such cash payments. Where a Participant or other person
is entitled to receive Shares pursuant to the exercise of an Option, the Company
shall have the right to require the Participant or such other person to pay the
Company the amount of any taxes which the Company is required to withhold with
respect to such Shares, or, in lieu thereof, to retain, or to sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
8
<PAGE>
19. NO EMPLOYMENT RIGHTS. No Director, Employee or other person shall have
a right to be selected as a Participant under the Plan. Neither the Plan nor any
action taken by the Committee right in administration of the Plan shall be
construed as giving any person any rights of employment or retention as an
Employee, Director or in any other capacity with the Company, the Savings
Association or other Subsidiaries.
20. GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of New Jersey, except to the extent that
federal law shall be deemed to apply.
9
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>
(Dollars in thousands) December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets $1,904,696 $1,855,058 $1,575,332 $1,489,615 $1,390,761
Loans receivable, net 1,016,116 854,697 715,810 644,175 592,033
Loans available for sale -- -- -- 287 424
Investment securities -- -- 127,583 144,504 153,384
Investment securities
available for sale 213,590 242,197 78,443 53,886 2,058
Other interest-earning assets (1) 37,175 27,652 28,795 12,321 30,616
Mortgage-backed securities, net -- -- 369,920 416,475 463,112
Mortgage-backed securities available for sale 575,159 661,881 200,530 161,052 89,339
Deposits 1,213,724 1,268,119 1,227,304 1,189,176 1,197,376
Borrowed funds 422,000 264,675 186,665 152,915 39,496
Stockholders' equity 244,580 299,819 144,893 131,322 141,987
(Dollars in thousands, except per share data) Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA:
Interest income $ 123,388 $ 119,173 $ 109,241 $ 100,772 $ 95,312
Interest expense 65,006 65,386 63,558 56,397 52,921
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 58,382 53,787 45,683 44,375 42,391
Provision for loan losses 1,650 1,469 1,200 550 310
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 56,732 52,318 44,483 43,825 42,081
Other operating income (2) 3,631 4,696 3,383 2,020 2,465
Operating expenses (3) 24,556 26,577 24,210 32,874 23,473
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 35,807 30,437 23,656 12,971 21,073
Income tax expense 12,155 10,944 8,686 4,768 7,506
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 23,652 $ 19,493 $ 14,970 $ 8,203 $ 13,567
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (4) $ .60 $ .46 $ .35 $ .18 $ .30
Diluted earnings per share (4) $ .59 $ .46 $ .35 $ .18 $ .30
Dividends per share, as adjusted (4) $ .37 $ .15 $ .11 $ .08 $ .08
At or For the Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Return on average assets (2) (3) 1.25% 1.12% .96% .57% 1.01%
Return on average stockholders' equity (2) (3) 7.99 7.41 10.88 5.79 10.20
Average stockholders' equity to average assets 15.69 15.07 8.86 9.86 9.88
Stockholders' equity to total assets 12.84 16.16 9.20 8.82 10.21
</TABLE>
(1) Includes Federal funds sold and investment in the stock of the FHLB-NY.
(2) Includes the effect of the sale 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
non-recurring item in 1998 was a $2.1 million, or $1.7 million net of tax,
merger-related charge for the acquisition of Pulse Bancorp. The
non-recurring item in 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 and the
exchange of 3.9133 shares of Company Common Stock for each share of Bank
Common Stock in connection with the 1998 conversion and reorganization of
First Savings Bank.
1
<PAGE>
MD&A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND COMPARISON OF OPERATING RESULTS
General
Statements contained in this report that are not historical fact are
forward-looking statements, as that term is defined in the Private Securities
Litigation 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.
COMPARISON OF FINANCIAL CONDITION AT
DECEMBER 31, 1999 AND DECEMBER 31, 1998
ASSETS Total assets increased by $49.6 million, or 2.7%, to $1.9 billion at
December 31, 1999. The change in assets consisted primarily of increases in
loans receivable, other assets, and Federal Home Loan Bank of New York
("FHLB-NY") stock, partially offset by decreases in mortgage-backed securities
("MBS") available for sale, investment securities available for sale, and cash
and cash equivalents.
Net loans receivable grew by $161.4 million, or 18.9%, to $1.0 billion at
December 31, 1999, from $854.7 million at December 31, 1998. Loan originations
totaled $351.5 million for the year ended December 31, 1999, as compared to
$347.6 million for the same period in 1998. The loan origination mix continued
to diversify the loan portfolio, with emphasis on commercial real estate,
residential construction and multi-family loans. These categories of loans
accounted for $99.2 million, or 28.2%, of 1999 originations, up from $65.5
million, or 19.2%, of 1998 originations. In addition to growth in originations,
mortgage loans purchased totaled $57.5 million in 1999 compared with $26.8
million in 1998. 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 $237.9 million for the
year ended December 31, 1999, as compared to $216.5 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.
FHLB-NY stock increased by $5.2 million to $18.1 million at December 31, 1999,
from $12.9 million at December 31, 1998. Additional purchases of FHLB-NY stock
were made during 1999 as required by the Company's borrowing agreements with the
FHLB-NY.
LOANS RECEIVABLE NET
In thousands
[BAR CHART OMITTED]
1995 $ 592
1996 $ 644
1997 $ 716
1998 $ 855
1999 $1,016
LOAN PORTFOLIO COMPOSITION
[PIE CHART OMITTED]
10% Home Equity
3% Construction
11% Commercial (Real Estate/Multi-family)
76% (Single family)
9
<PAGE>
DEPOSIT COMPOSITION
[PIE CHART OMITTED]
4% Non-interest bearing
29% NOW/MMDA
14% Savings
53% Certificates of Deposit
MBS, all of which are classified as available for sale, decreased $86.7 million,
or 13.1%, to $575.2 million at December 31, 1999, from $661.9 million at
December 31, 1998. The decrease was primarily due to sales and principal
repayments of $240.1 million and $203.9 million, respectively, exceeding
purchases of $372.9 million for the year ended December 31, 1999. Net proceeds
were used to fund loan growth and repurchase the Company's stock. In addition,
there was an unrealized market value decrease of $15.1 million as interest rates
rose throughout 1999. Management expects the market value to recover and has the
ability to carry these securities through various interest rate scenarios.
Investment securities available for sale decreased $28.6 million, or 11.8%, to
$213.6 million as of December 31, 1999, from $242.2 million at December 31,
1998. The decrease was due to sales and calls of $144.1 million exceeding
purchases of $131.4 million. These net proceeds were used to fund loan growth
and repurchase the Company's stock. In addition, there was an unrealized market
value decrease of $15.8 million as interest rates rose throughout the year.
Management expects the market value to recover and has the ability to carry
these securities through various interest rate scenarios.
Other assets increased $7.4 million, or 95.2%, to $15.2 million at December 31,
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 MBS and investment securities available for sale
portfolios. Cash and cash equivalents decreased $7.0 million, or 18.7%, to $30.6
million as of December 31, 1999, from $37.6 million at December 31, 1998.
LIABILITIES Deposits decreased $54.4 million, or 4.3%, to $1.2 billion at
December 31, 1999, from $1.3 billion at December 31, 1998. Deposit outflows were
concentrated primarily in maturing certificates of deposit, as opposed to the
balance of the core deposit base. This decrease was attributable to management's
decision to offer lower rates on maturing certificates of deposit obtained
through the Pulse acquisition. Borrowed funds increased $157.3 million, or
59.4%, to $422.0 million at December 31, 1999, from $264.7 million at December
31, 1998. The increased borrowed funds were used primarily to fund loan
originations and repurchases of the Company's stock. Advances by borrowers for
taxes and insurance increased $1.4 million, or 20.3%, to $8.4 million at
December 31, 1999, from $7.0 million at December 31, 1998, primarily due to an
increase in the residential loan portfolio.
STOCKHOLDERS' EQUITY The Company's stockholders' equity decreased $55.2 million
for the year ended December 31, 1999. The Company repurchased $48.0 million of
its common stock during 1999 as part of its ongoing capital management strategy.
Accumulated other comprehensive loss increased $19.8 million to $17.3 million at
December 31, 1999, compared with accumulated other comprehensive income of $2.5
million at December 31, 1998, as a result of the decline in market values of
investment securities and MBS available for sale, net of related tax benefit.
Cash dividends declared during 1999 totaled $14.4 million. These decreases were
partially offset by net income of $23.7 million, proceeds from the exercise of
stock options totaling $1.5 million and amortization of benefit plans totaling
$2.1 million. Book value and tangible book value per share were $6.36 and $6.18
at December 31, 1999, as compared to $7.03 and $6.84 at December 31, 1998,
respectively.
10
<PAGE>
Comparison of Operating Results for
the Years Ended December 31, 1999 and
December 31, 1998
Efficiency Ratio
[LINE CHART OMITTED]
First Sentinel
1995 52.4%
1996 50.3%
1997 49.9%
1998 43.4%
1999 40.2%
Mid-Atlantic Peers
1995 58.1%
1996 57.8%
1997 59.9%
1998 59.2%
1999 57.9%
Source: SNL Securities,
Thrift Performance report as of
December 1999
RESULTS OF OPERATIONS Net income for the year ended December 31, 1999 was $23.7
million, or $0.60 basic and $0.59 diluted earnings per share. This represented
an increase of $4.2 million, or 21.3%, over the net income of $19.5 million
reported for 1998. Basic and diluted earnings per share in 1998 were $0.46.
Earnings for the year ended December 31, 1998, excluding the one-time
merger-related charge 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 charge, 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 1998,
excluding these three items, was $20.7 million, with basic and diluted earnings
per share of $0.49 and $0.48, respectively.
INTEREST INCOME Interest income increased $4.2 million, or 3.5%, to $123.4
million for the year ended December 31, 1999, compared to $119.2 million for
1998. Interest on loans increased $7.2 million, or 11.8%, to $68.7 million for
1999, as compared to $61.4 million for 1998. The increase was primarily due to
loan originations exceeding principal repayments and sales. The average balance
of the loan portfolio for the year ended December 31, 1999 increased to $935.0
million, from $792.2 million for 1998, while the average yield on the portfolio
decreased to 7.34% for 1999, from 7.75% for 1998. Although interest rates
increased in 1999, the yield on the portfolio declined during the year 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.
Interest on investment securities and MBS, including those classified as
available for sale, decreased $3.0 million, or 5.2%, to $54.7 million for the
year ended December 31, 1999, compared to $57.7 million for 1998. The average
balance of the investment and MBS portfolios totaled $893.1 million, with an
annualized yield of 6.13% for the year ended December 31, 1999, while the
portfolios' average balance was $901.2 million with an annualized yield of 6.41%
for the year ended December 31, 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. The yield on the MBS 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.
INTEREST EXPENSE Interest expense decreased $380,000, or 0.5%, to $65.0 million
for the year ended December 31, 1999, compared to $65.4 million for 1998.
Interest expense on deposits decreased $5.6 million, or 10.7%, to $47.2 million
for 1999, compared to $52.9 million for 1998. Management continued to
concentrate its efforts on increasing the level of core accounts as a percentage
of overall deposits. The increase in the average balance of NOW, money market
and savings accounts, along with the increase in the average balance of
non-interest bearing deposits, reflected this strategy. The average balance of
these core accounts totaled $563.0 million for the year ended December 31, 1999,
compared
11
<PAGE>
to $521.2 million for 1998. The outflow of certificate accounts contributed to a
lower cost of funds in 1999. The average interest cost on all deposits for the
year ended December 31, 1999 was 3.78%, compared to 4.26% for the same period in
1998. Non-interest bearing accounts averaged $44.8 million for the year ended
December 31, 1999, up from $35.3 million for 1998. The average balance of
certificates of deposit decreased to $686.8 million for the year ended December
31, 1999, from $719.6 million for 1998, due primarily to the sale of higher rate
deposits in a branch sold in the first quarter of 1998 and to management's
reduction in the interest rates offered to maturing certificate customers. The
average cost of certificates for the year ended December 31, 1999, was 4.94%, as
compared to 5.48% for the same period in 1998.
Interest on borrowed funds for the year ended December 31, 1999, increased $5.3
million, or 42.0%, to $17.8 million, compared to $12.5 million for 1998. The
increase in the average balance of borrowed funds for 1999 to $325.5 million,
from $217.1 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 5.46% for the year ended December 31, 1999, down from 5.77% for
1998.
NET INTEREST INCOME Net interest income increased $4.6 million, or 8.5%, to
$58.4 million for the year ended December 31, 1999, compared to $53.8 million
for 1998. The increase was due to the changes in interest income and interest
expense described above. Net interest spread, defined as the difference between
the average yield on average total interest-earning assets and average total
interest-bearing liabilities, increased six basis points to 2.50% in 1999, from
2.44% in 1998. This increase was due to a reduction in the cost of
interest-bearing liabilities to 4.25% for the year ended December 31, 1999, from
4.60% in 1998, partially offset by a reduction in the yield on interest-earning
assets to 6.75%, from 7.04% for the same respective periods. The net interest
margin, defined as net interest income divided by the average total
interest-earning assets, increased one basis point to 3.19% in 1999, compared to
3.18% in 1998, as a consequence of the increase in net interest income resulting
from the increase in earning assets and a reduction in the average cost of
funds.
PROVISION FOR LOAN LOSSES The provision for loan losses increased $181,000, or
12.3%, to $1.7 million for the year ended December 31, 1999, compared to $1.5
million for 1998. The increase in the provision was primarily due to the net
growth and change in composition of the loan portfolio. Net loans increased
$161.4 million for 1999. 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. In management's opinion,
the allowance for loan losses, totaling $11.0 million, is adequate to cover
losses inherent in the portfolio at December 31, 1999.
OTHER OPERATING INCOME Other operating income, consisting primarily of deposit
product fees, loan servicing fees and gains and losses on loans and securities
sold, decreased $1.1 million, or 22.7%, to $3.6 million for the year ended
December 31, 1999, compared to $4.7 million for 1998. The primary reason for the
overall decrease in other
LOAN QUALITY
(In thousands)
[BAR/LINE CHART OMITTED]
Non-performing loans
1995 $ 9,321
1996 $ 8,156
1997 $ 7,947
1998 $ 4,265
1999 $ 2,882
Reserves/Non-performing loans
1995 84.23%
1996 117.06%
1997 139.68%
1998 222.86%
1999 410.29%
12
<PAGE>
operating income was recognition of a non-recurring pre-tax gain on the sale of
deposits of $1.1 million in 1998. Fees and service charges increased $182,000,
or 7.9%, to $2.5 million for the year ended December 31, 1999, compared to $2.3
million for 1998. 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 decreased $26,000, or 3.7%, to $684,000 for the year ended December 31,
1999, compared to $710,000 for 1998. The volume of future sales and gains and
losses on such sales are subject to significant fluctuation, depending on
liquidity needs and prevailing market conditions.
OPERATING EXPENSES Operating expenses decreased $2.0 million, or 7.6%, to $24.6
million for the year ended December 31, 1999, compared to $26.6 million for
1998. The decrease was mainly attributable to the merger-related charge of $2.1
million included in general and administrative expenses in 1998. This charge
resulted from the Pulse acquisition and consisted primarily of professional fees
and services. The increase in operating expenses, excluding the Pulse charge,
was $79,000, or 0.3%. The Company's successful efforts at controlling operating
costs while increasing revenue are reflected in the improvements in the
operating expense to average assets and efficiency ratios. Excluding the 1998
merger-related charge, operating expense (excluding goodwill amortization)
divided by average assets fell to 1.26% for the year ended December 31, 1999,
from 1.35% for the prior year. Excluding the 1998 merger-related charge, the
efficiency ratio improved to 40.16% for 1999, from 43.35% in 1998. Operating
expenses are expected to increase in the future, however, as the Company
undertakes a planned upgrade of branch operations in 2000. 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. The Company anticipates the cost of
such upgrades will approximate $2.0 million, to be amortized over their
estimated useful lives.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 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 average balance of loans increased to $792.2 million for 1998, from
$679.7 million for 1997, primarily due to loan originations of $347.6 million
exceeding principal repayments and sales of $231.0 million. The decrease in
interest rates in 1998, particularly long-term rates, resulted in a decline in
the yield on the portfolio of 29 basis points to 7.75% for 1998, from 8.04% for
1997. The lower 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 to $206.0 million for
the year ended December 31, 1998, compared to $408.0 million for 1997, was due
to the transfer of $181.8 million from MBS held to maturity to MBS available for
sale on April 30, 1998. Yields on investment securities declined 48 basis points
to 6.41% for 1998, compared to 6.89% for 1997, due primarily to higher yielding
investments being called and rates on replacement securities having lower rates
than those that were called. In addition, the average
13
<PAGE>
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 to $554.2 million for the year ended December 31, 1998, compared to
$236.2 million for 1997, 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 1998 conversion stock
offering were deployed, in addition to an increase in purchases funded through
borrowings. The yield on this portfolio decreased 8 basis points to 6.30% for
1998, compared to 6.38% for 1997, as higher yielding instruments prepaid or were
called.
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 average balance of total deposits of $1.2 billion for the year ended
December 31, 1998 included the sale of the Eatontown branch office in February,
1998, and the withdrawal of funds by customers to purchase stock in the
conversion stock offering in April, 1998. Management 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 to $308.6 million for the year ended December 31, 1998, from $281.0
million for the same period in 1997, reflected this strategy. The decrease in
the average balance of savings of $7.1 million to $177.3 million for the year
ended December 31, 1998, from $184.4 million for 1997 was primarily due to
customers transferring their accounts to higher-yielding money market accounts.
The average balance of certificates decreased $2.9 million to $719.6 million for
the year ended December 31, 1998, from $722.5 million for 1997, with a slight
decrease in the cost to 5.48% for 1998, compared to 5.49% for 1997. Although
external rates decreased over the period, competition from other financial
institutions kept rates on certificates of deposit comparably high. The Company
elected to offer certificate rates that were competitive but lower than certain
area competition. This decision caused a mild outflow of funds and prevented a
further increase in the overall cost of certificates. The average balance of
non-interest bearing deposits increased $9.1 million to $35.3 million for the
year ended December 31, 1998, from $26.2 million for the same period in 1997 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 to 4.26% for 1998, compared to 4.35% for 1997.
The increase in the average balance of borrowed funds to $217.1 million for the
year ended December 31, 1998, from $177.8 million for 1997 was attributable to
management's continuing strategy to fund the purchase of investment and MBS
available for sale through the use of borrowed funds, where accretive to
earnings. The decrease in cost of borrowings to 5.77% for 1998, from 6.04% for
1997, 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. The increase was due primarily to an increase in the average balance
of interest earning assets to $1.7 billion for the year ended December 31, 1998,
from $1.5 billion in 1997, partially offset by a decrease in the yield of 26
basis points to 7.04% for 1998, from 7.30% for 1997. In addition, the cost of
interest-bearing liabilities decreased by nine basis points to 4.48% for 1998,
from 4.57% for 1997. Net interest spread 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 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 was based upon management's review and evaluation of the loan
portfolio, level of delinquencies, general market and economic conditions and
asset classification review.
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
14
<PAGE>
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
MBS available for sale which, management believed, contained exceptionally high
prepayment risk. The primary reason for the overall increase in other operating
income was the pre-tax gain on the sale of deposits of $1.1 million.
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 cost of the Employee Stock Ownership Plan, 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. The 1997 period was
also slightly inflated as it included costs of the move to the new corporate
center. 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 charge of $2.1 million. This charge resulted from the Pulse
acquisition and consisted primarily of professional fees and services. The
increase in this caption, excluding this item, was $309,000, or 8.0%.
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, 1999, 1998 and 1997, the Company originated
loans in the amounts of $351.5 million, $347.6 million and $174.7 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 $57.5 million, $26.8
million and $19.8 million in 1999, 1998 and 1997, respectively. Purchases of
MBS, including those available for sale, totaled $372.9 million, $398.8 million
and $242.1 million in 1999, 1998 and 1997, respectively. Purchases of investment
securities, including those available for sale, totaled $131.4 million, $312.1
million and $61.5 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Other investing activities included investment in FHLB-NY stock.
The investing activities were funded primarily by principal repayments on loans
and MBS of $441.9 million, $445.7 million and $240.1 million for the years ended
December 31, 1999, 1998 and 1997, respectively. Additionally, proceeds from
sales and/or calls of mortgage-backed and investment securities totaling $384.9
million, $219.5 million and $137.2 million for 1999, 1998 and 1997, and maturing
investment securities totaling $135.0 million and $45.0 million for the years
ended December 31, 1998 and 1997, respectively, provided additional liquidity.
Liquidity was also provided through the sale of loans totaling $7.2 million,
$14.5 million and $5.0 million for the years ended December 31, 1999, 1998 and
1997, respectively.
The Company has several other sources of liquidity, including FHLB-NY advances,
which, at December 31, 1999, totaled $107.0 million, of which $72.0 million are
due in 2000. 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 $315.0 million at December 31, 1999, $130.0 million of which
are due in 2000. Other sources of liquidity are unpledged investment and
mortgage-backed securities available for sale, totaling $359.6 million at
December 31, 1999.
15
<PAGE>
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 OTS amended the
regulation 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, 1999 and 1998. The Bank's liquidity ratios were 36.49% and
40.23% at December 31, 1999 and 1998, respectively. The Bank's liquid assets at
December 31, 1999, consisted of cash and cash equivalents, and most investment
and mortgage-backed securities (excluding securities that have been pledged for
other borrowings). The level of these assets depends upon the Bank's operating,
financing and investing activities during any given period. At December 31,
1999, 1998 and 1997, cash, cash equivalents, and investments qualifying for
liquidity purposes totaled $488.3 million, $369.3 million and $319.4 million,
respectively.
The Company anticipates that it will have sufficient funds available to meet its
current commitments. At December 31, 1999, the Company had commitments to
originate and purchase mortgage loans of $116.1 million and commitments to
purchase mortgage-backed and investment securities of $22.0 million. The Company
is obligated to pay $1.6 million under its lease agreements for branch and
administrative facilities, of which $364,000 is due in 2000. Certificates of
deposit which are scheduled to mature in one year or less totaled $513.8 million
at December 31, 1999. 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.
YEAR 2000
Issues surrounding the Year 2000 arose out of the fact that many computer
programs used only two digits to identify a year in the date field. Computer
hardware and software that had not been made Year 2000 ready would likely
interpret "00" as year 1900, rather than year 2000. The Company adopted a Year
2000 Compliance Plan and established a Year 2000 Compliance Committee with
members of senior management from all operating areas to identify and address
all issues related to the century date change. As recommended by the Federal
Financial Institutions Examination Council, the Year 2000 Compliance Plan
encompassed the following phases: Awareness, Assessment, Renovation, Validation
and Implementation. These phases entailed 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 were Year 2000
compliant. As of December 31, 1999, all phases of the plan were completed. The
Company's operations continued to function through and after the century date
change, and the Company has experienced no Year 2000-related customer service
disruptions to date.
The direct costs specifically attributable to Year 2000 compliance included the
engagement of consultants and the hiring of temporary help to address the
additional workload created by the Year 2000 compliance process. In addition,
the Company conducted a Customer Awareness Campaign to educate consumers on Year
2000 issues, which incurred certain expenses. The Company expensed $92,000 in
1998 and $175,000 in 1999 as a result of Year 2000 readiness preparations. The
Company projects additional Year 2000-related expense of approximately $75,000
to be incurred in the first quarter of 2000.
All disclosures 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.
16
<PAGE>
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, 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 measurement of the Company's exposure
to interest rate risk ("IRR"). The Company's interest rate sensitivity is
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.
17
<PAGE>
The following tables list the Company's percentage change in NPV assuming an
immediate change of plus or minus of up to 300 basis points from the level of
interest rates at December 31, 1999 and 1998, as calculated by the Company. All
market risk instruments presented in these tables are available for sale. The
Company has no trading or held to maturity securities.
(Dollars in thousands)
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
Changes In NPV as a % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
In Basis -------------------------------------------------------------
Points NPV
(Rate Shock) Amount Change % Change Ratio Change (1)
- --------------------------------------------------------------------------------
+300 $ 78,589 $(101,580) (56)% 4.70% (515)
+200 118,406 (61,763) (34) 6.84 (300)
+100 152,266 (27,903) (15) 8.54 (130)
Static 180,169 -- -- 9.85 --
-100 209,898 29,729 17 11.16 132
-200 218,513 38,344 21 11.43 158
-300 218,275 38,106 21 11.28 143
- --------------------------------------------------------------------------------
1998
- --------------------------------------------------------------------------------
Changes In NPV as a % of Portfolio
Interest Rates Net Portfolio Value Value of Assets
In Basis -------------------------------------------------------------
Points NPV
(Rate Shock) Amount Change % Change Ratio Change (1)
- --------------------------------------------------------------------------------
+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)
(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, 1998. Stockholders'
equity has decreased at December 31, 1999, compared with 1998 as a result of the
Company's ongoing capital management initiatives and the increase in unrealized
holding losses on investment and mortgage-backed securities available for sale.
This reduction in equity has resulted in corresponding decreases in the
Company's NPV in each range of the analysis. In addition, changes in discount
rates based on current market conditions have also affected the Company's NPV in
each range of the analysis. Rising interest rates and competitive pressures have
caused a narrowing of the interest rate spread at December 31, 1999, and this
compression is reflected in the valuation of loan, deposit and borrowing cash
flows.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV requires 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, 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 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 will differ from actual results.
18
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share amounts)
December 31,
--------------------------
ASSETS 1999 1998
--------------------------
Cash and due from banks $ 11,532 $ 22,831
- -----------------------------------------------------
Federal funds sold 19,075 14,800
- -------------------------------------------------------------------------------
Total cash and cash equivalents 30,607 37,631
- -----------------------------------------------------
Federal Home Loan Bank of New York (FHLB-NY)
stock, at cost 18,100 12,852
- -----------------------------------------------------
Investment securities available for sale 213,590 242,197
- -----------------------------------------------------
Mortgage-backed securities available for sale 575,159 661,881
- -----------------------------------------------------
Loans receivable, net 1,016,116 854,697
- -----------------------------------------------------
Interest and dividends receivable 12,278 13,556
- -----------------------------------------------------
Premises and equipment, net 16,503 16,481
- -----------------------------------------------------
Excess of cost over fair value of net
assets acquired 7,106 7,956
- -----------------------------------------------------
Other assets 15,237 7,807
- -------------------------------------------------------------------------------
Total assets $1,904,696 $1,855,058
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $1,213,724 $1,268,119
- -----------------------------------------------------
Borrowed funds 422,000 264,675
- -----------------------------------------------------
Advances by borrowers for taxes and insurance 8,385 6,969
- -----------------------------------------------------
Other liabilities 16,007 15,476
- -------------------------------------------------------------------------------
Total liabilities 1,660,116 1,555,239
- -------------------------------------------------------------------------------
Commitments and contingencies (note 13)
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 38,443,350 shares
issued and outstanding in 1999 and
43,105,497 and 42,675,397 shares
issued and outstanding in 1998 431 431
- -----------------------------------------------------
Paid-in capital 200,781 201,105
- -----------------------------------------------------
Retained earnings 117,922 112,601
- -----------------------------------------------------
Accumulated other comprehensive (loss) income (17,302) 2,498
- -----------------------------------------------------
Common stock acquired by the Employee Stock
Ownership Plan (ESOP) (12,156) (13,073)
- -----------------------------------------------------
Common stock acquired by the Recognition
and Retention Plan (RRP) (3,867) (79)
- -----------------------------------------------------
Treasury stock (4,628,604 and 430,100 common
shares in 1999 and 1998, respectively) (41,229) (3,664)
- -------------------------------------------------------------------------------
Total stockholders' equity 244,580 299,819
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,904,696 $1,855,058
- -------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
19
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Year Ended December 31,
---------------------------------------
Interest Income 1999 1998 1997
---------------------------------------
Loans $ 68,656 $ 61,431 $ 54,635
- ---------------------------------------
Mortgage-backed securities -- 13,774 27,607
- ---------------------------------------
Investment securities -- 9,032 11,942
- ---------------------------------------
Investment and mortgage-backed
securities available for sale 54,732 34,936 15,057
- --------------------------------------------------------------------------------
Total interest income 123,388 119,173 109,241
- --------------------------------------------------------------------------------
Interest expense
Deposits:
NOW and money market demand 9,395 9,008 8,315
- ---------------------------------------
Savings 3,931 4,431 4,819
- ---------------------------------------
Certificates of deposit 33,900 39,429 39,685
- --------------------------------------------------------------------------------
Total interest expense-deposits 47,226 52,868 52,819
- ---------------------------------------
Borrowed funds 17,780 12,518 10,739
- --------------------------------------------------------------------------------
Total interest expense 65,006 65,386 63,558
- --------------------------------------------------------------------------------
Net interest income 58,382 53,787 45,683
- ---------------------------------------
Provision for loan losses 1,650 1,469 1,200
- --------------------------------------------------------------------------------
Net interest income after provision
for loan losses 56,732 52,318 44,483
- --------------------------------------------------------------------------------
Other operating income
Fees and service charges 2,498 2,316 2,145
- ---------------------------------------
Net gain on sales of loans
and securities 684 710 593
- ---------------------------------------
Other, net 449 1,670 645
- --------------------------------------------------------------------------------
Total other operating income 3,631 4,696 3,383
- --------------------------------------------------------------------------------
Operating expenses
Compensation and benefits 13,698 13,604 12,228
- ---------------------------------------
Occupancy 2,225 2,119 2,239
- ---------------------------------------
Equipment 1,672 1,946 1,979
- ---------------------------------------
Advertising 1,086 978 982
- ---------------------------------------
Federal deposit insurance premium 765 759 756
- ---------------------------------------
Amortization / writedowns
of intangibles 850 850 2,144
- ---------------------------------------
General and administrative 4,260 6,321 3,882
- --------------------------------------------------------------------------------
Total operating expenses 24,556 26,577 24,210
- --------------------------------------------------------------------------------
Income before income tax expense 35,807 30,437 23,656
- ---------------------------------------
Income tax expense 12,155 10,944 8,686
- --------------------------------------------------------------------------------
Net income $ 23,652 $ 19,493 $ 14,970
- --------------------------------------------------------------------------------
Basic earnings per share $ 0.60 $ 0.46 $ 0.35
- --------------------------------------------------------------------------------
Diluted earnings per share $ 0.59 $ 0.46 $ 0.35
- --------------------------------------------------------------------------------
Weighted average shares
outstanding - Basic 39,464,227 41,983,776 42,510,823
- --------------------------------------------------------------------------------
Weighted average shares
outstanding - Diluted 40,207,600 42,694,287 43,216,999
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
20
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other Common Common
Comprehensive 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, 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 ($0.11 per share) -- -- (3,802) -- -- -- -- (3,802)
- ------------------------------------
Amortization of RRP -- -- -- -- -- 103 -- 103
- ------------------------------------
Amortization of ESOP -- -- -- -- 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 ($0.15 per share) -- -- (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
- ------------------------------------
Amortization of ESOP -- 58 -- -- 713 -- -- 771
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 431 201,105 112,601 2,498 (13,073) (79) (3,664) 299,819
- ------------------------------------
Comprehensive income:
Net income for the year ended
December 31, 1999 -- -- 23,652 -- -- -- -- 23,652
- ------------------------------------
Other comprehensive loss:
Unrealized holding losses
arising during the period
(net of tax of $(10,882)) -- -- -- (19,346) -- -- -- (19,346)
- ------------------------------------
Reclassification adjustment
for gains in net income
(net of tax of $(255)) -- -- -- (454) -- -- -- (454)
- ------------------------------------ --------
Total comprehensive income 3,852
- ------------------------------------ --------
Cash dividends declared
($0.37 per share) -- -- (14,392) -- -- -- -- (14,392)
- ------------------------------------
Exercise of stock options -- 6 (3,283) -- -- -- 4,766 1,489
- ------------------------------------
Purchase and retirement of
common stock -- (299) -- -- -- -- -- (299)
- ------------------------------------
Purchases of treasury stock -- -- -- -- -- -- (48,035) (48,035)
- ------------------------------------
Transfer of treasury stock to RRP -- -- (656) -- -- (5,048) 5,704 --
- ------------------------------------
Amortization of RRP -- 66 -- -- -- 1,260 -- 1,326
- ------------------------------------
Amortization of ESOP -- (97) -- -- 917 -- -- 820
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 431 $ 200,781 $ 117,922 $(17,302) $(12,156) $(3,867) $(41,229) $ 244,580
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
21
<PAGE>
FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands) Year Ended December 31,
--------------------------------
1999 1998 1997
--------------------------------
Cash flows from operating activities
Net income $ 23,652 $ 19,493 $ 14,970
- ---------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of premises and
equipment 1,406 1,240 1,154
- ---------------------------------------------
Amortization of excess of cost
over fair value of assets acquired 850 850 2,144
- ---------------------------------------------
Amortization of ESOP 820 771 100
- ---------------------------------------------
Amortization of RRP 1,260 104 103
- ---------------------------------------------
Provision for loan losses 1,650 1,469 1,200
- ---------------------------------------------
Provision for losses on real
estate owned 28 122 114
- ---------------------------------------------
Net gain on sales of loans
and securities (684) (710) (593)
- ---------------------------------------------
Loans originated for sale (7,259) (14,386) (4,708)
- ---------------------------------------------
Proceeds from sales of mortgage
loans available for sale 7,234 14,483 5,011
- ---------------------------------------------
Net gain on sales of real estate owned (1) (153) (160)
- ---------------------------------------------
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 (168) 1,869 (693)
- ---------------------------------------------
Decrease (increase) in interest
and dividends receivable 1,278 (1,090) (524)
- ---------------------------------------------
(Decrease) increase in other
liabilities (5,173) 5,353 (1,311)
- ---------------------------------------------
Decrease (increase) in other assets 2,720 (2,002) 1,812
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 27,613 27,413 18,601
- --------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sales and calls of
investment securities available for sale 144,123 140,727 10,128
- ---------------------------------------------
Proceeds from sales of mortgage-backed
securities available for sale 240,788 78,752 127,058
- ---------------------------------------------
Proceeds from sales of real estate owned 2,375 3,443 3,765
- ---------------------------------------------
Purchases of investment securities
available for sale (131,356) (226,583) (33,481)
- ---------------------------------------------
Purchases of mortgage-backed securities
available for sale (372,883) (393,292) (187,986)
- ---------------------------------------------
Purchases of investment securities -- (85,501) (28,062)
- ---------------------------------------------
Maturities of investment securities -- 135,010 44,996
- ---------------------------------------------
Purchases of mortgage-backed securities -- (5,541) (54,117)
- ---------------------------------------------
Principal payments on mortgage-backed
securities 203,929 229,144 123,968
- ---------------------------------------------
Origination of loans (344,286) (333,166) (170,021)
- ---------------------------------------------
Purchases of mortgage loans (57,459) (26,784) (19,809)
- ---------------------------------------------
Principal repayments on loans 237,927 216,549 116,113
- ---------------------------------------------
Purchase of FHLB-NY stock (5,248) (2,032) (849)
- ---------------------------------------------
Purchases of premises and equipment (1,428) (3,435) (3,972)
- ---------------------------------------------
Proceeds from sale of fixed assets -- 124 --
- --------------------------------------------------------------------------------
Net cash used in investing activities (83,518) (272,585) (72,269)
- --------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from stock offering -- 163,809 --
- ---------------------------------------------
Purchase of ESOP shares -- (13,240) --
- ---------------------------------------------
Equity adjustment for conforming
of annual reporting periods -- (828) --
- ---------------------------------------------
Stock options exercised 1,489 1,592 682
- ---------------------------------------------
Cash dividends paid (8,620) (7,250) (3,802)
- ---------------------------------------------
Net (decrease) increase in deposits (54,395) 40,815 38,128
- ---------------------------------------------
Net increase in borrowed funds 157,325 78,010 33,750
- ---------------------------------------------
Net increase in advances by borrowers
for taxes and insurance 1,416 720 1,021
- ---------------------------------------------
Purchase of treasury stock (48,035) (10,728) --
- ---------------------------------------------
Purchase and retirement of
common stock (299) -- --
- --------------------------------------------------------------------------------
Net cash provided by financing
activities 48,881 252,900 69,779
- --------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (7,024) 7,728 16,111
- ---------------------------------------------
Cash and cash equivalents at beginning
of year 37,631 29,903 13,792
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,607 $ 37,631 $ 29,903
- --------------------------------------------------------------------------------
Supplemental disclosures of cash
flow information
Cash paid during the year for:
Interest $ 63,251 $ 64,906 $ 63,018
- ---------------------------------------------
Income taxes 15,332 8,106 2,436
- ---------------------------------------------
Non cash investing and financing
activities for the year:
Transfer of loans to real estate owned 1,415 3,349 1,419
- ---------------------------------------------
Transfer of investment and
mortgage-backed securities from held
to maturity to available for sale -- 361,191 --
- --------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
22
<PAGE>
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-interests 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 and 1997 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 reduction was made
to stockholders' equity to include Pulse's operations for the three months ended
December 31, 1998.
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 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.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand,
amounts due from depository institutions and Federal funds sold. Generally,
Federal funds sold are sold for a one-day period.
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.
23
<PAGE>
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 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. If, however, 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 placed 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 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 an impairment writedown of $1.3
million for the year ended December 31, 1997. No impairment writedowns were
required in 1999 or 1998.
24
<PAGE>
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 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 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 similarly to 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. All share and per share
amounts have been restated for stock dividends and splits, as well as the
Reorganization described in note 2 to the Consolidated Financial Statements.
(Dollars in thousands, -------------------------------------
except per share data): 1999 1998 1997
-------------------------------------
Net income $ 23,652 $ 19,493 $ 14,970
- --------------------------------------------------------------------------------
Basic weighted average
common shares outstanding 39,464,227 41,983,776 42,510,823
- ---------------------------------------
Plus:
Dilutive stock options 384,069 658,941 685,738
- ---------------------------------------
Dilutive awards 359,304 51,570 20,438
- --------------------------------------------------------------------------------
Diluted weighted average
common shares outstanding 40,207,600 42,694,287 43,216,999
- --------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.60 $ 0.46 $ 0.35
- ---------------------------------------
Diluted 0.59 0.46 0.35
- ---------------------------------------
RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997
amounts to conform to the 1999 presentation.
(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 data has been restated for the 3.9133 conversion ratio.
25
<PAGE>
(3) INVESTMENT SECURITIES
A summary of investment securities at December 31 is as follows (in
thousands):
------------------------------------------
1999
------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
------------------------------------------
Investment Securities Available
For Sale
U.S. Government and Agency
obligations $155,173 $ -- $(8,363) $146,810
- -----------------------------------
State and political obligations 16,976 -- (1,270) 15,706
- -----------------------------------
Corporate obligations 45,917 -- (5,493) 40,424
- -----------------------------------
Equity securities 11,149 -- (499) 10,650
- --------------------------------------------------------------------------------
Total investment securities
available for sale $229,215 $ -- $(15,625) $213,590
- --------------------------------------------------------------------------------
------------------------------------------
1998
------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
------------------------------------------
Investment Securities 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
- --------------------------------------------------------------------------------
The cost and estimated fair value of debt investment securities at December 31,
1999, 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.
Estimated
Amortized market
cost value
Investment Securities Available For Sale ---------------------------
Due in:
Less than one year $ 10,462 $ 10,439
- ---------------------------------------------------
One to five years 44,591 43,141
- ---------------------------------------------------
Five to ten years 89,982 85,350
- ---------------------------------------------------
Greater than ten years 73,031 64,010
- --------------------------------------------------------------------------------
$218,066 $202,940
---------------------------
The realized gross gains and losses from sales are as follows (in thousands):
Year Ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
Gross realized gains $ 247 $ 348 $ 184
- ----------------------------------------
Gross realized losses (209) (3) (84)
- --------------------------------------------------------------------------------
$ 38 $ 345 $ 100
------------------------------------
Investment securities with an amortized cost of $93.4 million at December 31,
1999, are pledged as collateral for other borrowings. Pursuant to a collateral
agreement with the FHLB-NY, all otherwise unpledged, qualifying investment
securities, including those available for sale, are pledged to secure advances
from the FHLB-NY (see note 9).
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 1998. 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 in December, 1998, investment securities
of $68.2 million with a
26
<PAGE>
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. The Company expects to classify all securities purchases as available
for sale in the foreseeable future.
(4) MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at December 31 is as follows (in
thousands):
--------------------------------------------
1999
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------------------------------------------
Mortgage-backed Securities
Available For Sale
FHLMC $ 168,557 $ 226 $ (1,746) $167,037
- ----------------------------------
GNMA 58,018 477 (276) 58,219
- ----------------------------------
FNMA 86,540 47 (1,571) 85,016
- ----------------------------------
Collateralized mortgage
obligations 273,453 276 (8,842) 264,887
- --------------------------------------------------------------------------------
Total mortgage-backed
securities available for sale $ 586,568 $ 1,026 $(12,435) $575,159
- --------------------------------------------------------------------------------
--------------------------------------------
1998
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
--------------------------------------------
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) 140,222
- ----------------------------------
Collateralized mortgage
obligations 209,570 898 (533) 209,935
- --------------------------------------------------------------------------------
Total mortgage-backed
securities available for sale $ 658,155 $ 5,429 $ (1,703) $661,881
- --------------------------------------------------------------------------------
Collateralized mortgage obligations ("CMOs") issued by FHLMC, FNMA, GNMA and
private interests amounted to $158.3 million, $27.2 million, $7.0 million and
$72.4 million, respectively, at December 31, 1999, and $103.7 million, $46.8
million, $3.1 million and $56.0 million, respectively, at December 31, 1998. 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 "AAA" 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 the 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.
The realized gross gains and losses from sales are as follows (in thousands):
Year Ended December 31,
-----------------------------------
1999 1998 1997
-----------------------------------
Gross realized gains $ 1,387 $ 338 $ 528
- ------------------------------------------
Gross realized losses (716) (70) (53)
- --------------------------------------------------------------------------------
$ 671 $ 268 $ 475
-----------------------------------
Mortgage-backed securities with an amortized cost of $371,000 at December 31,
1999, were pledged as collateral to secure deposits held for municipalities
within the State of New Jersey. Mortgage-backed securities with an amortized
cost of $251.4 million at December 31, 1999, were pledged as collateral for
other borrowings. Pursuant to a collateral agreement with the FHLB-NY, all
otherwise unpledged, qualifying mortgage-backed securities are pledged to secure
advances from the FHLB-NY (see note 9). The contractual maturities of
mortgage-backed securities generally exceed ten years, however the effective
lives are expected to be shorter due to prepayments of the underlying mortgages.
27
<PAGE>
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 1998. 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 in December,
1998, 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. The Company
expects to classify all mortgage-backed securities purchases as available for
sale in the foreseeable future.
(5) LOANS RECEIVABLE, NET
A summary of loans receivable at December 31 is as follows (in thousands):
-------------------------
1999 1998
-------------------------
Real estate mortgages:
One- to four-family $ 768,747 $ 649,272
- ----------------------------------------------------
Multi-family and commercial 109,320 82,658
- ----------------------------------------------------
Home equity 98,324 82,671
- ----------------------------------------------------
FHA-insured and VA-guaranteed 6,111 8,012
- --------------------------------------------------------------------------------
982,502 822,613
Real estate construction 54,889 65,161
- ----------------------------------------------------
Consumer 16,638 17,818
- --------------------------------------------------------------------------------
Total loans receivable 1,054,029 905,592
- ----------------------------------------------------
Loans in process (27,999) (41,812)
- ----------------------------------------------------
Net unamortized premium and deferred expenses 1,090 422
- ----------------------------------------------------
Allowance for loan losses (11,004) (9,505)
- --------------------------------------------------------------------------------
Loans receivable, net $ 1,016,116 $ 854,697
- --------------------------------------------------------------------------------
The Company serviced loans for others in the amount of $81.9 million, $87.6
million and $93.7 million at December 31, 1999, 1998 and 1997, respectively.
Related servicing income earned on loans serviced for others totaled $202,000,
$237,000 and $288,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Loans in the amount of $1.2 million and $2.4 million were outstanding to
directors and executive officers of the Company at December 31, 1999 and 1998,
respectively. During 1999, new extensions of credit to directors and executive
officers of the Company totaled $419,000 and repayments by such persons totaled
$1.6 million. The loans consist primarily of loans secured by mortgages on
residential properties.
The Company has pledged, under a blanket assignment, its unpledged and
qualifying mortgage portfolio to secure advances from the FHLB-NY (see note 9).
A summary of non-performing assets at December 31 is as follows (in thousands):
---------------------
1999 1998
---------------------
Non-accrual loans $2,356 $2,740
- --------------------------------------------------------
Loans 90 days or more delinquent
and still accruing 326 1,525
- --------------------------------------------------------------------------------
Total non-performing loans 2,682 4,265
- --------------------------------------------------------
Real estate owned
(included in Other assets) 466 1,453
- --------------------------------------------------------------------------------
Total non-performing assets $3,148 $5,718
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, the impaired loan portfolio totaled $42,000 and
$734,000, respectively, for which general and specific allocations to the
allowance for loan losses of $33,000 and $175,000 were identified at December
31, 1999 and 1998, respectively.
The average balance of impaired loans during 1999, 1998 and 1997 was $222,000,
$373,000 and $654,000, respectively. If interest income on non-accrual and
impaired loans had been current in accordance with their original terms,
approximately $197,000, $311,000 and $629,000 of interest income for the years
ended December 31, 1999, 1998 and 1997, respectively, would have been recorded.
Interest income recognized on non-accrual and impaired loans totaled $108,000,
$145,000 and $227,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. At December 31, 1999, there were no commitments to lend additional
funds to borrowers whose loans are classified as non-performing.
28
<PAGE>
An analysis of the allowance for loan
losses for the years ended December 31 is as follows (in thousands):
----------------------------------
1999 1998 1997
----------------------------------
Balance at beginning of year $ 9,505 $ 8,454 $ 7,781
- --------------------------------------------
Provision charged to operations 1,650 1,469 1,200
- --------------------------------------------------------------------------------
11,155 9,923 8,981
Charge-offs (151) (596) (527)
- --------------------------------------------
Recoveries -- 28 --
- --------------------------------------------
Allowance activity of Pulse
during conforming period, net -- 150 --
- --------------------------------------------------------------------------------
Balance at end of year $ 11,004 $ 9,505 $ 8,454
- --------------------------------------------------------------------------------
(6) INTEREST AND DIVIDENDS RECEIVABLE
A summary of interest and dividends receivable at December 31 is as follows (in
thousands):
---------------------
1999 1998
---------------------
Loans $ 5,055 $ 4,585
- ----------------------------------------------------------
Investment securities 3,260 4,064
- ----------------------------------------------------------
Mortgage-backed securities 3,963 4,907
- --------------------------------------------------------------------------------
Interest and dividends receivable $12,278 $13,556
- --------------------------------------------------------------------------------
(7) PREMISES AND EQUIPMENT, NET
Premises and equipment at December 31 are summarized as follows (in thousands):
------------------------
1999 1998
------------------------
Land $ 3,870 $ 3,870
- -------------------------------------------------------
Buildings and improvements 14,227 12,969
- -------------------------------------------------------
Leasehold improvements 1,361 1,354
- -------------------------------------------------------
Furnishings, equipment and automobiles 7,788 6,934
- -------------------------------------------------------
Construction in progress 67 794
- --------------------------------------------------------------------------------
Total 27,313 25,921
- -------------------------------------------------------
Accumulated depreciation and amortization (10,810) (9,440)
- --------------------------------------------------------------------------------
Premises and equipment, net $ 16,503 $ 16,481
- --------------------------------------------------------------------------------
(8) DEPOSITS
Deposits at December 31 are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
--------------------------------------- ------------------------------------
1999 1998
--------------------------------------- ------------------------------------
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 $ 43,744 --% --% $ 41,012 --% --%
- ----------------------------
NOW and money market 354,908 0 - 3.22 2.63 340,423 0 - 3.20 2.92
- ----------------------------
Savings 165,593 0 - 5.16 2.27 172,910 0 - 2.25 2.50
- ----------------------------
Certificates of deposit 649,479 2.57 - 7.72 4.96 713,774 2.00 - 9.34 5.48
- --------------------------------------------------------------------------------------------------------------
$ 1,213,724 0 - 7.72% 3.73% $1,268,119 0 - 9.34% 4.21%
---------------------------------------------------------------------------------
</TABLE>
The scheduled maturities of certificates of deposit at December 31, 1999 are as
follows (in thousands):
One year or less $513,839
- ----------------------------------------------------------------------
After one to two years 70,398
- ----------------------------------------------------------------------
After two to three years 24,346
- ----------------------------------------------------------------------
After three to four years 12,605
- ----------------------------------------------------------------------
After four to five years 15,599
- ----------------------------------------------------------------------
After five years 12,692
- --------------------------------------------------------------------------------
$649,479
--------
Included in deposits at December 31, 1999 and 1998 are $92.6 million and $117.4
million, respectively, of deposits of $100,000 and over, and $414,000 and
$493,000, respectively, of accrued interest payable on deposits.
29
<PAGE>
(9) BORROWED FUNDS
FEDERAL HOME LOAN BANK-NEW YORK ADVANCES Advances from the FHLB-NY at December
31 are summarized as follows (dollars in thousands):
--------------------------------------------------
1999 1998
--------------------------------------------------
Weighted Weighted
average average
interest interest
Contractual maturity Amount rate Amount rate
- --------------------------------------------------------------------------------
1999 $ -- --% $ 6,000 5.87%
- ---------------------------
2000 72,000 6.12 2,000 5.76
- ---------------------------
2002 5,000 6.58 5,000 5.69
- ---------------------------
2003 25,000 5.14 25,000 5.14
- ---------------------------
2009 5,000 5.52 -- --
- --------------------------------------------------------------------------------
$107,000 5.88% $38,000 5.36%
--------------------------------------------------
The Company has entered into FHLB-NY advances that have call features that may
be exercised by the FHLB-NY at predetermined dates. Such advances totaled $15.0
million at December 31, 1999 and 1998. The maximum amount of FHLB-NY advances
outstanding at any month-end during the years ended December 31, 1999 and 1998
was $139.3 million and $50.8 million, respectively. The average amount of
FHLB-NY advances outstanding during the years ended December 31, 1999 and 1998
was $70.9 million and $24.1 million, respectively. At December 31, 1999 and
1998, $65.0 million and $5.0 million of FHLB-NY advances had adjustable rates,
respectively.
Advances from the FHLB-NY are secured by pledges of FHLB-NY stock of $18.1
million and $12.9 million at December 31, 1999 and 1998, respectively, and a
blanket assignment of the Company's unpledged, qualifying mortgage loans,
mortgage-backed securities and investment securities. Such loans and securities
remain under the control of the Company.
The Company has an available overnight line of credit with the FHLB-NY for a
maximum of $50.0 million at December 31, 1999.
OTHER BORROWINGS The following is a summary of other borrowings at December 31
(dollars in thousands):
---------------------------------------------------
1999 1998
---------------------------------------------------
Weighted Weighted
average average
interest interest
Contractual maturity Amount rate Amount rate
- --------------------------------------------------------------------------------
1999 $ -- --% $ 63,000 5.73%
- ---------------------------
2000 130,000 5.75 28,675 5.93
- ---------------------------
2001 -- -- 15,000 5.05
- ---------------------------
2002 30,000 5.49 20,000 5.70
- ---------------------------
2003 10,000 4.70 25,000 4.83
- ---------------------------
2004 60,000 5.82 20,000 5.36
- ---------------------------
2008 55,000 5.12 55,000 5.09
- ---------------------------
2009 30,000 5.64 -- --
- --------------------------------------------------------------------------------
$315,000 5.58% $226,675 5.42%
---------------------------------------------------
The maximum amount of other borrowings outstanding at any month-end during the
years ended December 31, 1999 and 1998 was $315.0 million and $269.2 million,
respectively. The average amount of other borrowings outstanding during the
years ended December 31, 1999 and 1998 was $254.6 million and $192.7 million,
respectively. Securities underlying other borrowings included mortgage-backed
and investment securities, which had an amortized cost of $344.8 million and
$191.4 million, and market values of $335.7 million and $192.1 million at
December 31, 1999 and 1998, respectively. The securities underlying the other
borrowing agreements are under the Company's control. At December 31, 1999 and
1998, $180.5 million and $165.2 million, respectively, of other borrowings are
callable at defined dates and at the lender's discretion prior to the
contractual maturity of the borrowings.
30
<PAGE>
(10) 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 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, 1999 and
1998, 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, 1999, the Bank met all capital
adequacy requirements to which it was 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, 1999 and 1998, compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a well capitalized
institution (dollars in thousands):
OTS Requirements
--------------------------------
For
Classification
Minimum Capital as Well
Bank Actual Adequacy Capitalized
--------------- --------------- --------------
Amount Ratio Amount Ratio Amount Ratio
--------------- --------------- --------------
December 31, 1999:
Tangible capital $194,702 10.25% $28,501 1.50% $ -- --%
- --------------------------
Tier 1 (core) capital 194,702 10.25 57,003 3.00 95,005 5.00
- --------------------------
Risk-based capital:
Tier 1 194,702 24.14 32,265 4.00 48,398 6.00
- --------------------------
Total 204,796 25.39 64,531 8.00 80,663 10.00
- --------------------------------------------------------------------------------
December 31, 1998:
Tangible capital $221,184 12.15% $27,298 1.50% $ -- --%
- --------------------------
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
- --------------------------------------------------------------------------------
31
<PAGE>
(11) INCOME TAXES
Income tax expense applicable to income for the years ended December 31 consists
of the following (in thousands):
------------------------------------------
1999 1998 1997
------------------------------------------
Federal:
Current $ 13,043 $ 11,273 $7,156
- ------------------------------------
Deferred (974) (727) 813
- --------------------------------------------------------------------------------
12,069 10,546 7,969
------------------------------------------
State:
Current 17 458 676
- ------------------------------------
Deferred 69 (60) 41
- --------------------------------------------------------------------------------
86 398 717
------------------------------------------
$ 12,155 $ 10,944 $8,686
------------------------------------------
The effective tax rates for years ended December 31, 1999, 1998 and 1997 were
34.0%, 36.0% and 36.7%, 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 is as follows (in thousands):
----------------------------------
1999 1998 1997
----------------------------------
Income before income taxes $ 35,807 $30,437 $ 23,656
- --------------------------------------------
Applicable statutory federal tax rate 35% 35% 35%
- --------------------------------------------------------------------------------
Computed "expected" federal income
tax expense 12,532 10,653 8,280
- --------------------------------------------
Increase in federal income tax
expense resulting from:
State income taxes, net of federal benefit 56 259 468
- --------------------------------------------
Other items, net (433) 32 (62)
- --------------------------------------------------------------------------------
$ 12,155 $10,944 $ 8,686
----------------------------------
The tax effects of temporary differences that give rise to a significant portion
of deferred tax assets and liabilities at December 31 are as follows (in
thousands):
----------------------
1999 1998
----------------------
Deferred Tax Assets
Provision for loan losses-book $ 3,851 $3,512
- --------------------------------------------------------
Unrealized loss on securities
available for sale 9,732 --
- --------------------------------------------------------
Postretirement benefits 468 413
- --------------------------------------------------------
Tax depreciation less than
book depreciation 132 132
- --------------------------------------------------------
Excess pension expense 480 432
- --------------------------------------------------------
Stock awards 162 --
- --------------------------------------------------------
Deferred directors' fees 14 129
- --------------------------------------------------------
Excess cost over fair value
of net assets acquired 465 450
- --------------------------------------------------------
Other 76 114
- --------------------------------------------------------------------------------
Total deferred tax assets 15,380 5,182
- --------------------------------------------------------------------------------
Deferred Tax Liabilities
Provision for loan losses-tax 872 1,128
- --------------------------------------------------------
Unrealized gain on securities
available for sale -- 1,405
- --------------------------------------------------------
Deferred points 175 361
- --------------------------------------------------------
Other 170 167
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,217 3,061
- --------------------------------------------------------------------------------
Net deferred tax asset $14,163 $2,121
- --------------------------------------------------------------------------------
32
<PAGE>
Retained earnings at December 31, 1999 and 1998, 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, 1999 and 1998, the Company had an
unrecognized tax liability of $6.5 million with respect to this reserve.
Included in other comprehensive income is income tax (benefit) expense
attributable to net unrealized (losses) gains on securities available for sale
in the amounts of $(11,137,000), $677,000 and $859,000 for the years ended
December 31, 1999, 1998 and 1997, 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.
(12) 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 (benefit) expense was $(118,000),
$214,000 and $371,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
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 SERPs are non-qualified employee benefit plans.
The Company has a non-pension postretirement benefit plan ("Other Benefits"),
which provides certain healthcare benefits to eligible employees. The plan is
unfunded as of December 31, 1999, 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 SERPs and other benefits, and (accrued cost) prepaid benefit at December
31 (in thousands):
SERP Other Benefits
------------------ ------------------
1999 1998 1999 1998
------------------ ------------------
Benefit obligation at
beginning of year $ 1,040 $ 865 $ 1,646 $ 1,106
- -------------------------------------
Service cost 92 80 81 59
- -------------------------------------
Interest cost 73 60 115 87
- -------------------------------------
Amendments -- -- -- 69
- -------------------------------------
Actuarial (gain) loss (144) 35 (39) 345
- -------------------------------------
Benefits paid -- -- (60) (20)
- --------------------------------------------------------- ------------------
Benefit obligation at the
end of the year $ 1,061 $ 1,040 $ 1,743 $ 1,646
- --------------------------------------------------------- ------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ -- $ -- $ -- $ --
- -------------------------------------
Employer contribution -- -- 60 20
- -------------------------------------
Benefits paid -- -- (60) (20)
- --------------------------------------------------------- ------------------
Fair value of plan assets
at end of year $ -- $ -- $ -- $ --
- --------------------------------------------------------- ------------------
Funded status $(1,061) $(1,040) $(1,743) $(1,646)
- -------------------------------------
Unrecognized net transition
obligation 614 680 -- --
- -------------------------------------
Unrecognized net actuarial loss 69 225 283 348
- --------------------------------------------------------- ------------------
Accrued benefit cost $ (378) $ (135) $(1,460) $(1,298)
- --------------------------------------------------------- ------------------
33
<PAGE>
SERP Other Benefits
------------------ ------------------
1999 1998 1999 1998
------------------ ------------------
Weighted average assumptions
as of December 31:
Discount rate 8.00% 6.75% 8.00% 6.75%
- -------------------------------------
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
- -------------------------------------
Net periodic cost at December 31 includes the following components (in
thousands):
SERP Other Benefits
------------------- ------------------
1999 1998 1997 1999 1998 1997
------------------- ------------------
Service cost $ 92 $ 80 $ 75 $ 81 $ 59 $ 61
- -------------------------------------
Interest cost 73 60 95 115 87 72
- -------------------------------------
Amortization of net
transition obligation 66 66 66 -- -- --
- -------------------------------------
Amortization of net
actuarial loss (gain) 12 9 (46) 26 85 (34)
- -------------------------------------
Amortization of prior service cost -- -- 347 -- 70 --
- --------------------------------------------------------- ------------------
Net periodic cost $243 $215 $ 537 $222 $301 $ 99
- --------------------------------------------------------- ------------------
For measurement purposes, a 5 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999 and all future years.
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):
Increase Decrease
-------------------
Effect on total of service and interest cost components $ 43 $ (36)
- -----------------------------------------------------------
Effect on other benefits obligation 282 (269)
- -----------------------------------------------------------
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 25%
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 $88,000, $141,000 and $134,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
RECOGNITION AND RETENTION PLANS The Company maintains Recognition and Retention
Plans ("RRP") 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, 1999, 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. All RRP awards granted in 1996 have been paid out at December 31, 1999. RRP
awards granted in 1998 are payable over a five-year period at a rate of 20% per
year, commencing one year from the date of the award grant. Amortization of the
RRP was $1,260,000, $104,000 and $103,000 for the years ended December 31, 1999,
1998 and 1997. 1999 amortization included $202,000 in accelerated expense due to
the death of one of the Company's directors.
EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains 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, 1999, there were 1,337,187
unallocated ESOP shares with a market value of $10.4 million. In 1999 and 1998,
the Company recognized compensation expense based on the fair value of shares
committed to be released. In 1997, expense was recognized based on the original
cost of shares allocated. Compensation expense recognized for 1999, 1998 and
1997 amounted to $820,000, $771,000 and $100,000, respectively. The Company
allocated 100,920, 84,796 and 114,589 shares during 1999, 1998 and 1997,
respectively.
34
<PAGE>
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 1998 Plan 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:
-----------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
-----------------------------------------------------------
Outstanding at
beginning
of period 2,840,284 $6.55 1,751,298 $3.12 2,064,540 $2.35
- --------------------
Granted -- -- 1,702,836 8.88 308,648 4.25
- --------------------
Expired -- -- (43,090) 3.69 -- --
- --------------------
Exercised (542,288) 2.70 (570,760) 2.79 (621,890) 2.10
- --------------------------------------------------------------------------------
Outstanding at
end of period 2,297,996 $7.55 2,840,284 $6.55 1,751,298 $3.12
- --------------------------------------------------------------------------------
Options exercisable
at year-end 1,074,196 1,137,164 1,592,410
- --------------------------------------------------------------------------------
The following table summarizes information about the stock options outstanding
at December 31, 1999, as adjusted for the effect of stock dividends:
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
- ------------------------------------------------------ -----------------------
$2.291 - 2.341 27,640 3.0 $2.33 27,640 $2.33
3.326 - 4.517 567,520 6.5 3.81 567,520 3.81
6.642 - 6.908 90,336 8.5 6.77 90,336 6.77
9.000 1,612,500 9.0 9.00 388,700 9.00
- ------------------------------------------------------ -----------------------
$2.291 - 9.000 2,297,996 8.3 $7.55 1,074,196 $5.90
- ------------------------------------------------------ -----------------------
The Company applies APB 25 in accounting for the Plans. Consistent with SFAS
123, if compensation cost for the Plans was accounted for under the fair value
method, the Company's net income and earnings per share for the years ended
December 31 would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data):
------------------------------------
1999 1998 1997
------------------------------------
Net Income:
As reported $ 23,652 $ 19,493 $ 14,970
- ------------------------------------------
Pro forma 22,920 18,762 14,569
- ------------------------------------------
Earnings per share:
Basic earnings per share $ 0.60 $ 0.46 $ 0.35
- ------------------------------------------
Diluted earnings per share 0.59 0.46 0.35
- ------------------------------------------
Pro forma basic earnings per share 0.58 0.45 0.34
- ------------------------------------------
Pro forma diluted earnings per share 0.57 0.45 0.34
- ------------------------------------------
Weighted average fair value
of options granted during year -- 2.21 2.03
- --------------------------------------------------------------------------------
35
<PAGE>
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 and 1997:
dividend yield of 2.35% and 3.00%; an expected volatility of 20% and 50%; and a
risk-free interest rate of 5.00% and 6.59%.
(13) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
ACQUISITIONS In connection with the Pulse acquisition, the Company recorded a
pre-tax merger charge of approximately $5.0 million in 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 were paid in 1998 and the
remaining $1.0 million were paid in 1999.
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
which are not reflected in the accompanying consolidated financial statements
(in thousands):
---------------------
1999 1998
---------------------
Origination of mortgage loans:
Fixed rate $ 8,904 $21,718
- --------------------------------------------------------
Variable rate 95,434 25,131
- --------------------------------------------------------
Purchase of mortgage loans - variable rate 10,770 3,526
- --------------------------------------------------------
Undisbursed home equity credit lines 45,430 37,256
- --------------------------------------------------------
Purchase of investment and
mortgage-backed securities 22,046 13,000
- --------------------------------------------------------
Undisbursed construction credit lines 27,999 41,812
- --------------------------------------------------------
Undisbursed commercial lines of credit 11,667 12,938
- --------------------------------------------------------
Participations in Thrift Institutions
Community Investment Corp. of NJ 1,000 1,400
- --------------------------------------------------------
Standby letters of credit 2,856 2,199
- --------------------------------------------------------
Sale of mortgage loans -- 1,845
- --------------------------------------------------------------------------------
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, construction loans, and nonresidential first mortgage real estate
loans to borrowers throughout New Jersey. 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.
36
<PAGE>
LEASE OBLIGATIONS At December 31, 1999, the Company was obligated under
noncancellable operating leases for premises and equipment. Rental expense under
these leases aggregated approximately $525,000, $507,000 and $613,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The projected minimum rental commitments as of December 31, 1999, are as follows
(in thousands):
2000 $ 364
- ----------------------------------------------------------------------
2001 292
- ----------------------------------------------------------------------
2002 286
- ----------------------------------------------------------------------
2003 198
- ----------------------------------------------------------------------
2004 165
- ----------------------------------------------------------------------
Thereafter 269
- -------------------------------------------------------------------------------
$1,574
------
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.
(14) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." This statement amends SFAS No. 133 by delaying the effective
date one year. SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all derivative
instruments as either assets or liabilities in the statement of financial
position and measurement of those instruments at fair value. This statement is
now effective for all fiscal quarters of fiscal years beginning after June 15,
2000, on a prospective basis. The adoption of SFAS No. 133 is not expected to
have a material impact on the financial position or the results of operations of
the Company.
(15) 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.
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.
37
<PAGE>
DEPOSITS The fair value of demand deposits, savings deposits and money market
accounts were the amounts payable on demand at December 31, 1999 and 1998. 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
were as follows (in thousands):
----------------------------------------------
1999 1998
----------------------------------------------
Book Fair Book Fair
value value value value
----------------------------------------------
FINANCIAL ASSETS:
Cash and cash equivalents $ 30,607 $ 30,607 $ 37,631 $ 37,631
- ---------------------------------
FHLB-NY stock 18,100 18,100 12,852 12,852
- ---------------------------------
Investment securities
available for sale 213,590 213,590 242,197 242,197
- ---------------------------------
Mortgage-backed securities
available for sale 575,159 575,159 661,881 661,881
- ---------------------------------
Loans receivable, net 1,016,116 990,633 854,697 862,231
- ---------------------------------
FINANCIAL LIABILITIES:
Deposits 1,213,724 1,213,316 1,268,119 1,272,466
- ---------------------------------
Borrowings 422,000 415,932 264,675 264,663
- ---------------------------------
Off-Balance Sheet Instruments:
Loan commitments -- 661 -- 152
- ---------------------------------
Standby letters of credit -- 29 -- 21
- ---------------------------------
LIMITATIONS The foregoing fair value estimates were made at December 31, 1999
and 1998, 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, 1999 and 1998, 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.
38
<PAGE>
(16) CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
The condensed financial statements of First Sentinel Bancorp (parent company
only) are presented below:
CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31,
----------------------
(In thousands) 1999 1998
----------------------
ASSETS
Cash $ 26,229 $ 29,098
- -------------------------------------------------------
Due from subsidiary 2,300 1,700
- -------------------------------------------------------
ESOP loan receivable 12,156 13,073
- -------------------------------------------------------
Investment in subsidiaries 186,933 229,911
- -------------------------------------------------------
Investment securities available for sale 21,659 27,164
- -------------------------------------------------------
Other assets 2,011 544
- --------------------------------------------------------------------------------
Total assets $251,288 $301,490
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 5,772 $ --
- -------------------------------------------------------
Other liabilities 936 1,671
- -------------------------------------------------------
Stockholders' equity 244,580 299,819
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $251,288 $301,490
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME Year Ended December 31,
-------------------------------
(In thousands) 1999 1998 1997
-------------------------------
INCOME
Dividends from subsidiary $ 49,400 $13,848 $ 2,146
- ---------------------------------------------
Interest and dividends on securities 1,555 1,767 135
- ---------------------------------------------
Net gain on sales of securities 179 106 --
- ---------------------------------------------
Other income -- 1 12
- --------------------------------------------------------------------------------
Total income 51,134 15,722 2,293
- --------------------------------------------------------------------------------
EXPENSES
Merger expense -- 2,128 --
- ---------------------------------------------
Other expense 1,343 306 103
- --------------------------------------------------------------------------------
Total expense 1,343 2,434 103
- --------------------------------------------------------------------------------
Income before taxes 49,791 13,288 2,190
- ---------------------------------------------
Income taxes 543 208 11
- --------------------------------------------------------------------------------
Income before equity in
undistributed income
of subsidiary 49,248 13,080 2,179
- ---------------------------------------------
(Dividends in excess of earnings)
increase in undistributed
earnings of subsidiary (25,596) 6,413 12,791
- --------------------------------------------------------------------------------
Net income $ 23,652 $19,493 $14,970
- --------------------------------------------------------------------------------
39
<PAGE>
Condensed Statements of Cash Flows Year Ended December 31,
-------------------------------
(In thousands) 1999 1998 1997
-------------------------------
OPERATING ACTIVITIES
Net income $ 23,652 $ 19,493 $ 14,970
- ----------------------------------------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Dividends in excess of earnings
(increase in undistributed
earnings of subsidiary) 25,596 (6,413) (12,791)
- ----------------------------------------------
Net gains on sales of investment
securities available for sale (179) (106) --
- ----------------------------------------------
Decrease (increase) in other assets 852 (543) 1,529
- ----------------------------------------------
(Decrease) increase in
other liabilities (678) 1,618 1,093
- ----------------------------------------------
Amortization of ESOP 820 771 100
- ----------------------------------------------
Amortization of RRP 1,260 104 103
- --------------------------------------------------------------------------------
Net cash provided by
operating activities 51,323 14,924 5,004
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities (20,407) (47,326) (824)
- ----------------------------------------------
Proceeds from sales and maturities
of investment securities
available for sale 22,280 20,405 --
- ----------------------------------------------
(Increase) decrease in due from subsidiary (600) 250 (1,000)
- ----------------------------------------------
Capital contributed to subsidiary Bank -- (92,869) --
- --------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 1,273 (119,540) (1,824)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash dividends paid (8,620) (7,250) (3,802)
- ----------------------------------------------
Net proceeds from stock offering -- 163,809 --
- ----------------------------------------------
ESOP stock contribution -- (13,240) --
- ----------------------------------------------
Equity adjustment for conforming
of annual reporting periods -- (828) --
- ----------------------------------------------
Stock options exercised 1,489 1,592 682
- ----------------------------------------------
Purchase of treasury stock (48,035) (10,728) --
- ----------------------------------------------
Purchase and retirement of
common stock (299) -- --
- --------------------------------------------------------------------------------
Net cash (used in) provided
by financing activities (55,465) 133,355 (3,120)
- --------------------------------------------------------------------------------
Net (decrease) increase in cash (2,869) 28,739 60
- ----------------------------------------------
Cash at beginning of year 29,098 359 299
- --------------------------------------------------------------------------------
Cash at end of year $ 26,229 $ 29,098 $ 359
- --------------------------------------------------------------------------------
40
<PAGE>
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains quarterly financial data (dollars in thousands,
except per share data):
Year Ended December 31, 1999 First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Interest income $29,944 $30,482 $31,087 $31,875
- ---------------------------------------
Interest expense 15,912 15,910 16,132 17,052
- --------------------------------------------------------------------------------
Net interest income 14,032 14,572 14,955 14,823
- ---------------------------------------
Provision for loan losses 450 450 300 450
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 13,582 14,122 14,655 14,373
- ---------------------------------------
Other operating income 1,047 1,003 846 735
- ---------------------------------------
Operating expenses 6,059 6,306 6,185 6,006
- --------------------------------------------------------------------------------
Income before income
tax expense 8,570 8,819 9,316 9,102
- ---------------------------------------
Income tax expense 2,959 2,939 3,164 3,093
- --------------------------------------------------------------------------------
Net income $ 5,611 $ 5,880 $ 6,152 $ 6,009
- --------------------------------------------------------------------------------
Basic earnings per share $ .14 $ .15 $ .15 $ .16
- --------------------------------------------------------------------------------
Diluted earnings per share $ .13 $ .15 $ .15 $ .16
- --------------------------------------------------------------------------------
Year Ended December 31, 1998 First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
41
<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, 1999 and
1998, 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,
1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
January 21, 2000
42
<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, 1999, there were
5,395 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 the 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 all stock
dividends and splits.
-----------------------------------------------------
1999 1998
-----------------------------------------------------
Dividends Dividends
High Low Paid High Low Paid
-----------------------------------------------------
Fourth Quarter $ 9.00 $ 7.75 $ .060 $ 8.19 $ 7.88 $ .045
- ------------------------
Third Quarter 9.50 7.69 .055 10.00 7.00 .045
- ------------------------
Second Quarter 8.88 7.00 .055 10.94 9.25 .030
- ------------------------
First Quarter 8.75 7.69 .050 13.93 10.48 .030
- ------------------------
43
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 21, 2000, relating to the consolidated statements of
financial condition of First Sentinel Bancorp, Inc. and Subsidiaries as of
December 31, 1999 and 1998 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, 1999, which report is incorporated by reference in the
December 31, 1999 Annual Report on Form 10-K of First Sentinel Bancorp, Inc.
KPMG LLP
Short Hills, New Jersey
March 27, 2000
<TABLE> <S> <C>
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