-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UtBOtjuT85la7fA5O3GE9KbVCPdKY84NbdikBbBvRgjolf95Tp9XG1/+uWWAKE7c 1fnlcVTftAZ4uEnOVUwzBQ== 0000930413-01-501485.txt : 20020410 0000930413-01-501485.hdr.sgml : 20020410 ACCESSION NUMBER: 0000930413-01-501485 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST SENTINEL BANCORP INC CENTRAL INDEX KEY: 0001051092 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 223566151 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23809 FILM NUMBER: 1782485 BUSINESS ADDRESS: STREET 1: 1000 WOODBRIDGE CENTER DRIVE CITY: WOODBRIDGE STATE: NJ ZIP: 07095 BUSINESS PHONE: 7327268700 MAIL ADDRESS: STREET 1: 1000 WOODBRIDGE CENTER DRIVE CITY: WOODBRIDGE STATE: NJ ZIP: 07095 FORMER COMPANY: FORMER CONFORMED NAME: FIRST SOURCE BANCORP INC DATE OF NAME CHANGE: 19971209 10-Q 1 c22231_10q-.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ............. SEPTEMBER 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File No.: 000-23809 FIRST SENTINEL BANCORP, INC. (exact name of registrant as specified in its charter) DELAWARE 22-3566151 (State or other jurisdiction of (IRS Employer I.D. No.) incorporation or organization) 1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ 07095 (Address of principal executive offices) Registrant's telephone number, including area code: (732) 726-9700 NOT APPLICABLE Former Name, Address, and Fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT NOVEMBER 1, 2001 - ---------------------------------- --------------------------------------- Common Stock 31,228,929 shares FIRST SENTINEL BANCORP, INC. INDEX TO FORM 10-Q PAGE # PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition as of September 30, 2001 and December 31, 2000 3 Consolidated Statements of Income for the three and nine months ended September 30, 2001 and 2000 4 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2001 and 2000 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16 PART II. OTHER INFORMATION 16 SIGNATURES 17 2 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data) (Unaudited) September 30, December 31, 2001 2000 ------------- ------------ ASSETS Cash and due from banks ......................... $ 26,550 $ 14,069 Federal funds sold .............................. 44,100 21,050 ------------- ------------ Total cash and cash equivalents ............ 70,650 35,119 Federal Home Loan Bank of New York (FHLB-NY) stock, at cost ...................... 20,417 19,643 Investment securities available for sale ........ 106,346 234,970 Mortgage-backed securities available for sale ... 587,574 447,022 Loans available for sale, net ................... 1,285 277 Loans receivable, net ........................... 1,218,722 1,184,525 Interest and dividends receivable ............... 11,668 13,481 Premises and equipment, net ..................... 15,475 16,092 Excess of cost over fair value of net assets acquired ............................... 5,624 6,259 Other assets .................................... 26,951 11,321 ------------- ------------ Total assets ............................... $ 2,064,712 $ 1,968,709 ============= ============ - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits ........................................ $ 1,294,948 $ 1,219,336 Borrowed funds .................................. 515,851 505,955 Advances by borrowers for taxes and insurance ... 10,050 9,154 Other liabilities ............................... 12,192 12,101 ------------- ------------ Total liabilities ........................... 1,833,041 1,746,546 ------------- ------------ STOCKHOLDERS' EQUITY Preferred Stock; authorized 10,000,000 shares; none issued and outstanding ........... -- -- Common Stock, $.01 par value, 85,000,000 shares authorized; 43,106,742 and 31,257,679 shares issued and outstanding at 9/30/01 and 43,106,742 and 32,749,994 shares issued and outstanding at 12/31/00 ....................... 430 430 Paid-in capital ................................. 201,581 201,264 Retained earnings ............................... 143,801 132,537 Accumulated other comprehensive income (loss) ... 5,217 (8,534) Less: Treasury stock (11,775,586 and 10,288,827 shares at 9/30/2001 and 12/31/2000, respectively) ................. (106,679) (89,508) Common stock acquired by the Employee Stock Ownership Plan (ESOP) ................... (10,550) (11,238) Common stock acquired by the Recognition and Retention Plan (RRP) .......................... (2,129) (2,788) ------------- ------------ Total stockholders' equity .................... 231,671 222,163 ------------- ------------ Total liabilities and stockholders' equity .... $ 2,064,712 $ 1,968,709 ============= ============ See accompanying notes to the unaudited consolidated financial statements. 3 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)
Three months ended Nine months ended September 30, September 30, ----------------------------- ----------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- INTEREST INCOME: Loans .......................................................... $ 22,518 $ 22,033 $ 67,450 $ 61,709 Investment and mortgage-backed securities available for sale ........................................... 10,802 13,112 33,442 40,456 ------------- ------------- ------------- ------------- Total interest income ...................................... 33,320 35,145 100,892 102,165 ------------- ------------- ------------- ------------- INTEREST EXPENSE: Deposits: NOW and money market demand .................................. 2,644 2,374 7,428 7,106 Savings ...................................................... 994 937 2,823 2,820 Certificates of deposit ...................................... 8,264 8,926 26,320 25,584 ------------- ------------- ------------- ------------- Total interest expense - deposits .......................... 11,902 12,237 36,571 35,510 Borrowed funds ............................................... 6,856 8,611 20,494 22,910 ------------- ------------- ------------- ------------- Total interest expense ..................................... 18,758 20,848 57,065 58,420 ------------- ------------- ------------- ------------- Net interest income ........................................ 14,562 14,297 43,827 43,745 Provision for loan losses .................................... 150 393 500 1,179 ------------- ------------- ------------- ------------- Net interest income after provision for loan losses ........ 14,412 13,904 43,327 42,566 ------------- ------------- ------------- ------------- NON-INTEREST INCOME: Fees and service charges ....................................... 598 623 1,861 1,753 Net gain (loss) on sales of loans and securities available for sale ........................................... 147 (669) 625 (766) Income on Bank Owned Life Insurance ............................ 373 -- 443 -- Other income ................................................. 261 116 474 522 ------------- ------------- ------------- ------------- Total non-interest income .................................. 1,379 70 3,403 1,509 ------------- ------------- ------------- ------------- NON-INTEREST EXPENSE: Compensation and benefits ...................................... 3,819 3,489 11,483 10,770 Occupancy ...................................................... 562 571 1,701 1,742 Equipment ...................................................... 404 392 1,257 1,254 Advertising .................................................... 208 188 857 923 Federal deposit insurance ...................................... 59 64 176 195 Amortization of intangibles .................................... 211 211 635 635 General and administrative ..................................... 1,004 880 3,207 2,860 ------------- ------------- ------------- ------------- Total non-interest expense ................................... 6,267 5,795 19,316 18,379 ------------- ------------- ------------- ------------- Income before income tax expense ............................. 9,524 8,179 27,414 25,696 Income tax expense ............................................... 2,955 2,538 8,703 8,523 ------------- ------------- ------------- ------------- Net income ..................................................... $ 6,569 $ 5,641 $ 18,711 $ 17,173 ============= ============= ============= ============= Basic earnings per share ......................................... $ 0.22 $ 0.17 $ 0.61 $ 0.50 ============= ============= ============= ============= Weighted average shares outstanding - Basic ...................... 29,843,217 32,531,953 30,477,126 34,020,609 ============= ============= ============= ============= Diluted earnings per share ....................................... $ 0.21 $ 0.17 $ 0.60 $ 0.50 ============= ============= ============= ============= Weighted average shares outstanding - Diluted .................... 30,591,551 32,845,734 31,149,629 34,317,027 ============= ============= ============= =============
See accompanying notes to the unaudited consolidated financial statements. 4 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands) (Unaudited)
Accumulated Other Common Common Total Compre- Stock Stock Stock- Common Paid In Retained hensive Treasury Acquired Acquired Holders' Stock Capital Earnings Income(Loss) Stock by ESOP by RRP Equity ----------------------------------------------------------------------------------------- Balance at December 31, 1999 ........... $ 431 $ 200,781 $ 117,922 $(17,302) $ (41,229) $(12,156) $ (3,867) $ 244,580 Net income for the nine months ended September 30, 2000 .................. -- -- 17,173 -- -- -- -- 17,173 Cash dividends declared ($.18) ......... -- -- (6,072) -- -- -- -- (6,072) Net change in unrealized gain/(loss) on securities available for sale ..... -- -- -- 633 -- -- -- 633 Purchases of treasury stock ............ -- -- -- -- (38,931) -- -- (38,931) Exercise of stock options .............. -- -- (112) -- 192 -- -- 80 Tax benefit on stock options and RRP ... -- 599 -- -- -- -- -- 599 Purchase and retirement of common stock ................................ -- (14) -- -- -- -- -- (14) Amortization of RRP .................... -- -- -- -- -- -- 860 860 Amortization of ESOP ................... -- -- (46) -- -- 688 -- 642 ----------------------------------------------------------------------------------------- Balance at September 30, 2000 .......... $ 431 $ 201,366 $ 128,865 $(16,669) $ (79,968) $(11,468) $ (3,007) $ 219,550 ========================================================================================= Balance at December 31, 2000 ........... $ 430 $ 201,264 $ 132,537 $ (8,534) $ (89,508) $(11,238) $ (2,788) $ 222,163 Net income for the nine months ended September 30, 2001 ............. -- -- 18,711 -- -- -- -- 18,711 Cash dividends declared ($.225) ........ -- -- (7,215) -- -- -- -- (7,215) Net change in unrealized gain/(loss) on securities available for sale ..... -- -- -- 13,751 -- -- -- 13,751 Purchases of treasury stock ............ -- -- -- -- (18,324) -- -- (18,324) Exercise of stock options .............. -- -- (232) -- 1,153 -- -- 921 Tax benefit on stock options and RRP ... -- 150 -- -- -- -- -- 150 Purchase and retirement of common stock ................................ -- (56) -- -- -- -- -- (56) Amortization of RRP .................... -- -- -- -- -- -- 659 659 Amortization of ESOP ................... -- 223 -- -- -- 688 -- 911 ----------------------------------------------------------------------------------------- Balance at September 30, 2001 .......... $ 430 $ 201,581 $ 143,801 $ 5,217 $(106,679) $(10,550) $ (2,129) $ 231,671 =========================================================================================
See accompanying notes to the unaudited consolidated financial statements. 5 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine months ended September 30, ------------------------ 2001 2000 ---------- ---------- Cash flows from operating activities: Net income ....................................... $ 18,711 $ 17,173 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation of premises and equipment ........... 974 1,043 Amortization of excess of cost over fair value of assets acquired ....................... 635 635 Amortization of ESOP ............................. 911 642 Amortization of RRP .............................. 659 860 Net amortization of premiums and accretion of discounts and deferred fees ................. 1,437 273 Provision for loan losses ........................ 500 1,179 Loans originated for sale ........................ (38,693) (2,255) Proceeds from sales of mortgage loans available for sale ............................. 37,787 2,248 Net (gain) loss on sales of loans and securities available for sale .................. (625) 766 Net (gain) loss on sales of real estate owned .... (85) 49 Net loss on sales of premises and equipment ...... 102 -- Decrease (increase) in interest and dividends receivable ........................... 1,813 (817) Tax benefit on stock options and RRP ............. (150) (599) Increase (decrease) in other liabilities ......... 241 (761) Decrease in other assets ......................... 1,908 717 ---------- ---------- Net cash provided by operating activities .... 26,125 21,153 ---------- ---------- Cash flows from investing activities: Proceeds from sales/calls/maturities of investment securities available for sale ....... 179,940 39,490 Purchases of investment securities available for sale ....................................... (43,326) (56,730) Purchase of FHLB-NY stock ........................ (774) (1,543) Proceeds from sales of mortgage-backed securities available for sale .................. 202,623 154,407 Principal payments on mortgage-backed securities ..................................... 96,900 71,239 Purchases of mortgage-backed securities available for sale ............................. (427,431) (130,078) Principal repayments on loans .................... 278,717 176,084 Origination of loans ............................. (299,926) (254,002) Purchases of mortgage loans ...................... (14,153) (69,331) Purchase of Bank Owned Life Insurance ("BOLI") ... (25,000) -- Proceeds from sale of real estate owned .......... 565 306 Proceeds from sales of premises and equipment .... 186 -- Purchases of premises and equipment .............. (645) (394) ---------- ---------- Net cash used in investing activities ........ (52,324) (70,552) ---------- ---------- Cash flows from financing activities: Purchase of treasury stock ....................... (18,324) (38,931) Purchase and retirement of common stock .......... (56) (14) Stock options exercised .......................... 921 80 Cash dividends paid .............................. (7,215) (11,849) Net increase in deposits ......................... 75,612 354 Net increase in short-term borrowed funds ........ -- 168,050 Proceeds from borrowed funds ..................... 285,000 296,000 Repayment of borrowed funds ..................... (275,104) (382,011) Net increase in advances by borrowers for taxes and insurance ........................ 896 1,432 ---------- ---------- Net cash provided by financing activities .... 61,730 33,111 ---------- ---------- Net increase (decrease) in cash and cash equivalents ........................... 35,531 (16,288) Cash and cash equivalents at beginning of period ... 35,119 30,607 ---------- ---------- Cash and cash equivalents at end of period ......... $ 70,650 $ 14,319 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ....................................... $ 58,035 $ 58,879 Income taxes ................................... 6,107 9,350 Non cash investing and financing activities for the period: Transfer of loans to real estate owned ......... $ 305 $ 104 See accompanying notes to the unaudited consolidated financial statements. 6 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X for First Sentinel Bancorp, Inc. ("First Sentinel" or the "Company") and its wholly-owned subsidiaries, First Savings Bank, ("First Savings" or the "Bank") Pulse Investment, Inc., Pulse Insurance Services, Inc. and Pulse Real Estate, Inc., and the Bank's wholly-owned subsidiaries, FSB Financial Corp., and 1000 Woodbridge Center Drive, Inc. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial condition, results of operations, and changes in cash flows have been made at and for the three and nine months ended September 30, 2001 and 2000. The results of operations for the three and nine months ended September 30, 2001, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2001. These interim financial statements should be read in conjunction with the December 31, 2000 Annual Report to Stockholders. (2) EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income by the daily average number of common shares outstanding during the period. Potential dilutive common shares are not included in the calculation. 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. Calculation of Basic and Diluted Earnings Per Share - -------------------------------------------------------- (dollars in thousands, except per share data) Three months ended Nine months ended September 30, September 30, ------------------------ ------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net income ................. $ 6,569 $ 5,641 $ 18,711 $ 17,173 =========== =========== =========== =========== Basic weighted-average common shares outstanding .............. 29,843,217 32,531,953 30,477,126 34,020,609 Plus: Dilutive stock options and awards ....... 748,334 313,781 672,503 296,418 ----------- ----------- ----------- ----------- Diluted weighted-average common shares outstanding .............. 30,591,551 32,845,734 31,149,629 34,317,027 =========== =========== =========== =========== Net income per common share: Basic .................... $ 0.22 $ 0.17 $ 0.61 $ 0.50 =========== =========== =========== =========== Diluted .................. $ 0.21 $ 0.17 $ 0.60 $ 0.50 =========== =========== =========== =========== (3) DIVIDENDS Based upon current operating results, the Company declared cash dividends of $0.075 per share on July 24, 2001, payable August 31, 2001, to stockholders of record on August 17, 2001. 7 (4) COMMITMENTS AND CONTINGENCIES At September 30, 2001, the Company had the following commitments: (i) to originate loans of $90.7 million; (ii) to purchase mortgage loans of $1.5 million; (iii) unused equity lines of credit of $54.6 million; (iv) unused commercial lines of credit of $11.7 million; (v) unused construction lines of credit of $58.8 million; and (vi) letters of credit outstanding totaling $2.3 million. Further, certificates of deposits, which are scheduled to mature and/or rollover in one year or less, totaled $544.3 million at September 30, 2001. (5) ALLOWANCE FOR LOAN LOSSES The following table presents the activity in the allowance for loan losses (in thousands): Nine Months Ended September 30, ------------------------- 2001 2000 -------- -------- Balance at beginning of period $ 12,341 $ 11,004 Provision charged to operations 500 1,179 Charge offs, net of recoveries (34) (102) -------- -------- Balance at end of period $ 12,807 $ 12,081 ======== ======== (6) COMPREHENSIVE INCOME Total comprehensive income, consisting of net income and the net change in unrealized gain/(loss) on securities available for sale, was $11.4 million and $10.8 million for the three months ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000, comprehensive income totaled $32.5 million and $17.8 million, respectively. (7) RECENT ACCOUNTING PRONOUNCEMENTS On October 3, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the fundamental provisions of that Statement. The Statement is effective for fiscal years beginning after December 15, 2001. The Company does not anticipate that the initial adoption of SFAS No. 144 will have a significant impact on the Company's financial statements. In August, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. The Company is required to adopt the provisions of SFAS No. 143 for fiscal years beginning after June 15, 2002. The Company does not anticipate that SFAS No. 143 will significantly impact the Company's consolidated financial statements. On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions 8 of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 142 requires that goodwill and any intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142. The Company adopted the provisions of SFAS No. 141 in July, 2001. The initial adoption of SFAS No. 141 had no impact on the Company's consolidated financial statements. The Company is required to adopt SFAS No. 142 effective January 1, 2002. The Company currently has no recorded goodwill and does not anticipate that SFAS No. 142 will significantly impact the Company's accounting for currently recorded intangible assets, primarily core deposit intangibles. 9 FIRST SENTINEL BANCORP, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. Statements contained in this report that are not historical fact are forward-looking statements, as that term is defined in the Private Securities 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, economic conditions, deposit and loan growth, real estate values, loan loss provisions, competition, customer retention, changes in accounting principles, policies or guidelines and legislative and regulatory changes. ASSETS. Total assets grew to $2.1 billion at September 30, 2001, an increase of $96.0 million, or 4.9%, from December 31, 2000. The change in assets consisted primarily of increases in loans receivable, mortgage-backed securities ("MBS") available for sale, cash and cash equivalents and other assets, partially offset by a decrease in investment securities available for sale. Net loans totaled $1.2 billion at September 30, 2001, an increase of $35.2 million, or 3.0%, from December 31, 2000. Of the total loan portfolio at September 30, 2001, 1-4 family mortgage loans comprised 69.7%, home equity loans represented 9.2%, commercial real estate, multi-family and construction loans comprised 19.4%, and other consumer loans accounted for 1.7%. Total loan originations for the nine months ended September 30, 2001, were $338.6 million, compared to $256.3 million for the same period in 2000. Fixed-rate, 1-4 family first mortgage loan originations totaled $69.6 million, or 20.5% of production, while adjustable-rate, 1-4 family first mortgage loans accounted for $81.7 million, or 24.1%, of total originations for the first nine months of 2001. Also during the first nine months of 2001, consumer loan originations, including home equity loans and credit lines, totaled $83.1 million, or 24.5% of total originations. During the same period, construction lending totaled $56.4 million, or 16.7% of total originations, while commercial real estate, commercial and multi-family loan originations totaled $47.9 million, or 14.1%. In addition, the Company purchased $14.2 million of primarily adjustable-rate, single-family first mortgage loans through correspondents during the nine months ended September 30, 2001. Purchased loans are re-underwritten by the Bank and are extended at rates higher than those currently offered by the Bank. Repayment of principal on loans totaled $278.7 million for the nine months ended September 30, 2001, compared to $176.1 million for the same period in 2000. Mortgage loan refinancing totaled $47.5 million during the first nine months of 2001, up from $6.6 million for the first nine months of 2000, as borrowers capitalized on the lower interest rate environment. In addition, the Company sold $37.7 million of primarily fixed-rate, 1-4 family mortgage loans during the first nine months of 2001 as part of its on-going interest rate risk management process and to provide additional funding for current operations. 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 Bank. MBS available for sale increased $140.6 million, or 31.4%, to $587.6 million at September 30, 2001, from $447.0 million at December 31, 2000. The increase was primarily due to purchases of MBS of $427.4 million exceeding sales and principal repayments of $202.6 million and $96.9 million, respectively, for the nine month period ended September 30, 2001. Due to the increased steepness of the yield curve, the Company executed several leveraged securities purchases in recent months, acquiring approximately $138.5 10 million in MBS which were funded by longer-term borrowings. Leveraged growth has a positive impact on the Company's net interest income, earnings and return on average equity, while causing some compression of its net interest margin. The Company will continue to evaluate leveraged growth opportunities in the future, giving appropriate consideration to market conditions and balance sheet composition. Other assets increased $15.6 million to $27.0 million at September 30, 2001, from $11.3 million at December 31, 2000. The increase was primarily due to the purchase of $25.0 million of Bank Owned Life Insurance ("BOLI") late in the second quarter of 2001. BOLI provides an attractive tax-exempt return to the Company and is used to fund various employee benefit costs. This increase in other assets was partially offset by a reduction in the deferred tax asset associated with unrealized securities losses, as the interest rate environment continued to decline throughout the first nine months of 2001 and investment portfolio market values increased. Investment securities available for sale decreased $128.6 million, or 54.7%, to $106.3 million as of September 30, 2001, from $235.0 million at December 31, 2000. For the nine months ended September 30, 2001, purchases of investment securities available for sale totaled $43.3 million, while sales, calls and maturities totaled $179.9 million. Lower market interest rates resulted in a significant increase in the exercise of call provisions on U.S. government agency debt securities during the first nine months of 2001. Proceeds from sales, calls and maturities were used to fund loan growth, purchase BOLI, purchase MBS and repurchase the Company's common stock. LIABILITIES. Total deposits increased $75.6 million, or 6.2%, to $1.3 billion at September 30, 2001. This growth was primarily in core deposits, consisting of checking, savings and money market accounts. These core deposit categories grew by $60.0 million to $630.4 million, and accounted for 48.7% of total deposits at September 30, 2001. Certificates of deposit increased by $15.6 million, or 2.4%, compared with year-end 2000, with most of the increase occurring in three-month and six-month maturity certificates. Borrowed funds increased $9.9 million, or 2.0%, to $515.9 million at September 30, 2001, from $506.0 million at December 31, 2000. CAPITAL. The Company's stockholders' equity increased $9.5 million, or 4.3%, to $231.7 million at September 30, 2001, from $222.2 million at December 31, 2000. The increase in equity was a result of net income of $18.7 million for the nine months ended September 30, 2001, an increase in net unrealized gains on securities available for sale of $13.8 million, the exercise of stock options and the amortization of stock-based compensation and benefit plans and related tax benefits of $2.6 million. These increases were partially offset by the repurchase of $18.4 million of the Company's common stock and cash dividends declared of $7.2 million. In June 2001, the Company announced the commencement of a 5% stock repurchase program, the Company's fifth such repurchase program since going public in April 1998. The Company repurchased 78,500 shares and 1,617,490 shares, respectively, during the three and nine months ended September 30, 2001, at an average cost per share of $12.05 and $11.33, respectively. Stated and tangible book value per share at September 30, 2001, were $7.41 and $7.23, respectively. The Federal Deposit Insurance Corporation requires that the Bank meet minimum leverage, Tier 1 and Total Risk-based Capital requirements. At September 30, 2001, the Bank exceeded all regulatory capital requirements, as follows (dollars in thousands): Required Actual ------------------ ------------------ Excess of Actual % of % of Over Regulatory Amount Assets Amount Assets Requirements ------------------ ------------------ --------------- Leverage Capital $ 80,776 4.00% $181,227 8.97% $100,451 Risk-based Capital: Tier 1 41,704 4.00% 181,227 17.38% 139,523 Total 83,407 8.00% 194,034 18.61% 110,627 11 LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of funds are deposits; proceeds from principal and interest payments on loans and mortgage-backed securities; sales of loans, mortgage-backed securities and investments available for sale; maturities or calls of investment securities and short-term investments; and advances from the FHLB-NY and other borrowed funds. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit cash flows and mortgage prepayments are greatly influenced by general interest rates, competition, and economic conditions. The most significant sources of funds for the first nine months of 2001 were principal repayments and prepayments of loans and mortgage-backed securities, totaling $278.7 million and $96.9 million, respectively. As interest rates continue to decline, the Company anticipates that prepayments on loans and MBS will continue at an accelerated pace. Other significant sources of funds for the nine months ended September 30, 2001, were proceeds from sales of MBS available for sale totaling $202.6 million, sales and calls of investment securities available for sale of $179.9 million, deposit growth of $75.6 million, and proceeds from the sales of mortgage loans totaling $37.8 million. If necessary, the Company has additional borrowing capacity with FHLB-NY, including an available overnight line of credit of up to $50.0 million. At September 30, 2001, the Company had unpledged investment securities and MBS available for sale with a market value of $287.1 million. The primary investing activities of the Company for the first nine months of 2001 were the origination of loans totaling $338.6 million, purchases of mortgage-backed securities available for sale totaling $427.4 million, and purchases of investment securities available for sale totaling $43.3 million. Other significant uses of funds during the nine months ended September 30, 2001, were $25.0 million in purchases of BOLI, $18.4 million in repurchases of common stock, $14.2 million in purchases of mortgage loans and $7.2 million in cash dividends paid. COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000. RESULTS OF OPERATIONS. Net income for the three and nine months ended September 30, 2001, totaled $6.6 million and $18.7 million, respectively. This represented increases of $928,000 and $1.5 million, or 16.5% and 9.0%, respectively, over net income of $5.6 million and $17.2 million for the comparable 2000 periods. For the quarter ended September 30, 2001, basic and diluted earnings per share were $0.22 and $0.21, respectively, representing a 26.9% and 25.0% increase, respectively, over third quarter 2000 basic and diluted earnings per share of $0.17. For the nine months ended September 30, 2001, basic and diluted earnings per share were $0.61 and $0.60, respectively, representing a 21.6% and 20.0% increase, respectively, over basic and diluted earnings per share of $0.50 for the first nine months of 2000. Annualized return on average equity improved to 11.50% and 10.98% for the three and nine months ended September 30, 2001, respectively, from 10.23% and 10.10% for the comparable 2000 periods. Annualized return on average assets was 1.29% and 1.25% for the three and nine months ended September 30, 2001, respectively, compared with 1.14% and 1.17% for the three and nine months ended September 30, 2000, respectively. INTEREST INCOME. Interest income decreased by $1.8 million, or 5.2%, and $1.3 million, or 1.3%, for the three and nine months ended September 30, 2001, respectively, compared with the same periods in 2000. Interest on loans increased $485,000 and $5.7 million, or 2.2% and 9.3%, respectively, to $22.5 million and $67.5 million for the three and nine months ended September 30, 2001, compared to $22.0 million and $61.7 million for the same periods in 2000. The average balance of the loan portfolio for the three month period ended September 30, 2001, increased $74.4 million to $1.2 billion, while the average yield on the portfolio decreased to 7.31% for the three months ended September 30, 2001, from 7.61% for the same period in 2000. The average balance of the loan portfolio for the nine month period ended September 30, 2001, increased $112.6 million to $1.2 billion, while the average yield on the portfolio decreased to 7.42% for the nine months ended September 30, 2001, from 7.48% for the same period in 2000. 12 Interest on securities declined $2.3 million and $7.0 million, or 17.6% and 17.3%, respectively, to $10.8 million and $33.4 million for the three and nine months ended September 30, 2001, as compared to $13.1 million and $40.5 million for the same periods in 2000. The average balance of the investment, FHLB stock and MBS available for sale portfolios totaled $738.4 million, with an annualized yield of 5.85% for the three months ended September 30, 2001, compared with an average balance of $815.0 million with an annualized yield of 6.44% for the three months ended September 30, 2000. The average balance of the investment, FHLB stock and MBS available for sale portfolios totaled $720.0 million, with an annualized yield of 6.19% for the nine months ended September 30, 2001, compared with an average balance of $843.5 million with an annualized yield of 6.39% for the nine months ended September 30, 2000. INTEREST EXPENSE. Interest expense decreased $2.1 million to $18.8 million for the three months ended September 30, 2001, compared to $20.8 million for the same period in 2000. For the nine months ended September 30, 2001, interest expense decreased $1.4 million to $57.1 million, versus $58.4 million for the comparable 2000 period. Interest expense on deposits decreased $335,000, or 2.7%, and increased $1.1 million, or 3.0%, to $11.9 million and $36.6 million for the three and nine months ended September 30, 2001, respectively, compared to $12.2 million and $35.5 million for the same respective periods in 2000. The quarter-to-quarter decrease is attributable to the lower average cost of deposits in the third quarter of 2001 as market interest rates significantly declined from the same period in 2000. The average cost of interest-bearing deposits fell to 3.89% for the quarter ended September 30, 2001, from 4.20% for the same period in 2000. For the quarter ended September 30, 2001, average interest-bearing deposits increased $56.8 million to $1.2 billion, compared to the same period in 2000. For the year-to-date, average interest-bearing deposits increased $27.6 million to $1.2 billion, compared to $1.1 billion for the same period in 2000. The average cost of interest-bearing deposits for the nine months ended September 30, 2001 was 4.07%, compared with 4.05% for the same period last year. Interest on borrowed funds for the three and nine months ended September 30, 2001, decreased $1.8 million and $2.4 million, or 20.4% and 10.6%, respectively, to $6.9 million and $20.5 million, compared to $8.6 million and $22.9 million for the same respective periods in 2000. The average balance of borrowed funds for the three months ended September 30, 2001, declined to $511.2 million, from $541.6 million for the same period in 2000. The average interest rate paid on borrowed funds was 5.36% for the three months ended September 30, 2001, compared with 6.36% for the same period in 2000. The average balance of borrowed funds for the nine months ended September 30, 2001, declined to $486.1 million, from $502.6 million for the same period in 2000. The average interest rate paid on borrowed funds was 5.62% for the nine months ended September 30, 2001, compared with 6.08% for the same period in 2000. NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before provision for loan losses increased $265,000 and $82,000, or 1.9% and 0.2%, respectively, to $14.6 million and $43.8 million for the three and nine months ended September 30, 2001, compared to $14.3 million and $43.7 million for the same periods in 2000. The increase was due to the changes in interest income and interest expense described above. The interest rate spread increased 20 basis points to 2.44% for the three months ended September 30, 2001, compared with 2.24% for the same period in 2000. For the three months ended September 30, the average earning asset yield was 6.76% for 2001 and 7.13% for 2000, while the average cost of interest-bearing liabilities declined to 4.32% for 2001 from 4.88% for 2000. For the nine months ended September 30, 2001, the interest rate spread increased nine basis points to 2.44% compared with 2.35% for the same period in 2000. The average earning asset yield was 6.96% for the first nine months of 2001, compared with 7.01% for the first nine months of 2000, while the average cost of interest-bearing liabilities was 4.52% and 4.66% for the same respective periods. The net interest margin was 2.96% and 3.02% for the three and nine months ended September 30, 2001, respectively, compared with 2.90% and 3.00% for the three and nine months ended September 30, 2000, respectively. Net interest margin has been affected by the purchase of $25.0 million of BOLI in June, 2001, 13 as well as leveraged MBS purchases of approximately $138.5 million. Each of these actions, while causing net interest margin compression, enhance earnings and return on stockholders' equity. The purchase of BOLI resulted in a $25.0 million reduction of interest-earning assets and an increase in other assets, and the income resulting from the increase in cash surrender value of BOLI is reported as non-interest income. PROVISION FOR LOAN LOSSES. The provision for loan losses for the three and nine months ended September 30, 2001, decreased $243,000 and $679,000, or 61.8% and 57.6%, respectively, to $150,000 and $500,000, compared to $393,000 and $1.2 million for the same periods in 2000. Provisions for loan losses are made based on management's evaluation of risks inherent in the loan portfolio, giving consideration to on-going credit evaluations and changes in the balance and composition of the loan portfolio. Loans receivable totaled $1.2 billion at September 30, 2001 and December 31, 2000, while non-performing loans declined to $2.2 million at September 30, 2001, from $2.4 million at December 31, 2000, and $2.8 million at September 30, 2000. The allowance for loan losses as a percentage of total loans was 1.04% and 1.03% at September 30, 2001, and December 31, 2000, respectively. In management's opinion, the allowance for loan losses, totaling $12.8 million at September 30, 2001, adequately addresses the risks inherent in the portfolio. Management will continue to review the need for additions to its allowance for loan losses based upon its quarterly review of the loan portfolio, the level of delinquencies, and general market and economic conditions. The following table sets forth ratios regarding non-accrual loans, and loans which are 90 days or more delinquent, but on which the Company is accruing interest at the dates indicated. The Company discontinues accruing interest on delinquent loans when collection of interest is considered doubtful, generally when 90 days or more delinquent and when loan-to-value ratios exceed 55%, at which time all accrued but uncollected interest is reversed. Total foreclosed real estate ("REO"), net, totaled $79,000 at September 30, 2001, and consisted of two residential properties, one of which is under contract for sale. Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, (dollars in thousands) ........ 2001 2001 2001 2000 2000 ------ ------ ------ ------ ------ Non-accrual mortgage loans .... $1,904 $1,828 $1,922 $2,334 $2,620 Non-accrual other loans ....... -- -- -- 15 -- ------ ------ ------ ------ ------ Total non-accrual loans ..... 1,904 1,828 1,922 2,349 2,620 Loans 90 days or more delinquent and still accruing .............. 263 413 40 40 166 Restructured loans ............ -- -- -- -- -- ------ ------ ------ ------ ------ Total non-performing loans .... 2,167 2,241 1,962 2,389 2,786 Total foreclosed real estate, net of related allowance .... 79 531 445 257 215 ------ ------ ------ ------ ------ Total non-performing assets ... $2,246 $2,772 $2,407 $2,646 $3,001 ====== ====== ====== ====== ====== Non-performing loans to loans receivable, net ....... 0.18% 0.18% 0.16% 0.20% 0.24% Non-performing assets to total assets ............. 0.11% 0.14% 0.12% 0.13% 0.15% NON-INTEREST INCOME. Non-interest income increased $1.3 million, to $1.4 million for the three months ended September 30, 2001, compared to $70,000 for the same period in 2000. For the nine months ended September 30, 2001, non-interest income totaled $3.4 million, an increase of $1.9 million, or 125.5% from the same period in 2000. The increase was primarily attributable to net gains on sales of loans and securities totaling $147,000 and $625,000 for the three and nine months ended September 30, 2001, respectively, compared with losses of $669,000 and $766,000 for the respective 2000 periods. The sales of loans and securities and related gains or losses are dependent on market conditions, as well as the Company's liquidity and risk management requirements. In addition, income resulting from the increase in the cash surrender value of BOLI purchased in June, 2001, totaled $373,000 and $443,000 for the three and nine months ended September 30, 2001, respectively. NON-INTEREST EXPENSE. Non-interest expense for the three and nine months ended September 30, 2001, increased $472,000 and $937,000, or 8.1% and 5.1%, respectively, to $6.3 million and $19.3 million, compared to $5.8 million and $18.4 million for the same periods in 2000. 14 Compensation and benefits increased $330,000 and $713,000, or 9.5% and 6.6%, respectively, to $3.8 million and $11.5 million for the three and nine months ended September 30, 2001, primarily as a result of increased healthcare and other benefit costs. General and administrative expenses increased $124,000 and $347,000, or 14.1% and 12.1%, respectively, to $1.0 million and $3.2 million for the three and nine months ended September 30, 2001, primarily due to increased legal fees, MAC charges, telecommunications expense and costs associated with the implementation of Internet banking and branch automation initiatives. The Company's annualized non-interest expense, excluding amortization of intangibles, divided by average assets was 1.19% and 1.25% for the three and nine months ended September 30, 2001, respectively, compared to 1.13% and 1.21% for the three and nine months ended September 30, 2000, respectively. The Company's efficiency ratio, calculated as non-interest expense divided by the sum of net interest income plus non-interest income, excluding gains on the sale of loans and securities, was 39.7% and 41.5% for the three and nine months ended September 30, 2001, respectively, compared with 38.5% and 39.9% for the comparable 2000 periods. 15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. There have been no material changes to information required regarding quantitative and qualitative disclosures about market risk from the end of the preceding fiscal year to the date of the most recent interim financial statements (September 30, 2001). PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. There are various claims and lawsuits in which the Registrant is periodically involved incidental to the Registrant's business. In the opinion of management, no material loss is expected from any of such pending claims and lawsuits. Item 2. CHANGES IN SECURITIES. None. Item 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Item 5. OTHER INFORMATION. None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. a.) Exhibits -------- ---------------------------------------------------------------------- Exhibit Number Description Reference ---------------------------------------------------------------------- 3.1 Certificate of Incorporation of First Sentinel Bancorp, Inc. * 3.2 Bylaws of First Sentinel Bancorp, Inc. * 4 Stock certificate of First Sentinel Bancorp, Inc. * 11 Statement re: Computation of Ratios Page 7 ---------------------------------------------------------------------- b.) Reports on Form 8 - K --------------------- None. * - Incorporated herein by reference into this document from the Registration Statement on Form S-1 and exhibits thereto of First Sentinel Bancorp, Inc. (formerly First Source Bancorp, Inc.), and any amendments or supplements thereto filed with the SEC on December 19, 1997 and amended on February 9, 1998, SEC File No. 333-42757. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST SENTINEL BANCORP, INC. Date: November 13, 2001 By: JOHN P. MULKERIN ---------------- John P. Mulkerin President and Chief Executive Officer Date: November 13, 2001 By: CHRISTOPHER MARTIN ------------------ Christopher Martin Executive Vice President and Chief Operating and Financial Officer and Corporate Secretary -----END PRIVACY-ENHANCED MESSAGE-----