-----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, HGG6cbM7KxUplyloyMbvKOsWGwZXKO25Kp/gvWyQJqSEEk7f9mjoJoJ6AO3mVXyr rsDH5bMGhi5CtlW/YbHqOg== 0000930413-01-500122.txt : 20010402 0000930413-01-500122.hdr.sgml : 20010402 ACCESSION NUMBER: 0000930413-01-500122 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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-K SEC ACT: SEC FILE NUMBER: 000-23809 FILM NUMBER: 1587228 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-K 1 c20329_10-k.txt ANNUAL REPORT 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, 2000 Commission file number: 0-23809 FIRST SENTINEL BANCORP, INC. - -------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) DELAWARE 22-3566151 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification 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 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 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) had been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the issuer, based on the closing price of its Common Stock on March 16, 2001, as quoted by the Nasdaq Stock Market, was approximately $317.3 million. Solely for the purposes of this calculation, the shares held by directors and officers of the registrant are deemed to be shares held by affiliates. As of March 16, 2001, there were 43,106,742 shares issued and 32,691,391 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, 2000 (Part II). II. Portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders (Part III). 1 INDEX PAGE ---- PART I Item 1. Business................................................ 3 Item 2. Properties.............................................. 31 Item 3. Legal Proceedings....................................... 33 Item 4. Submission of Matters to a Vote of Security Holders..... 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................................... 33 Item 6. Selected Financial Data................................. 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 33 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...................................... 33 Item 8. Financial Statements and Supplementary Data ............ 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................. 33 PART III Item 10. Directors and Executive Officers of the Registrant...... 34 Item 11. Executive Compensation.................................. 34 Item 12. Security Ownership of Certain Beneficial Owners and Management ......................................... 34 Item 13. Certain Relationships and Related Transactions.......... 34 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................................ 35 SIGNATURES 37 2 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 Bank and facilitating the Conversion and Reorganization of the Bank, which was completed on April 8, 1998, (as further described below). At December 31, 2000, the Company had consolidated total assets of $2.0 billion and total equity of $222.2 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 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 the fiscal year ended September 30, 1998 were combined with the Company's calendar year. 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. As part of the acquisition, Pulse Savings Bank, the wholly-owned financial institution subsidiary of Pulse, was merged with and into First Savings. 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 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, 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. The Company's objectives are to enhance shareholder value by profitably meeting the needs of its 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, which is conducted through the Bank, 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 were primarily one-to-four family adjustable-rate mortgages underwritten internally at higher rates than those currently offered by the Bank. Third-party correspondent lending is expected to continue to play a minor 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, 2000, 1999 and 1998 were $503.4 million, $325.5 million and $217.1 million, respectively. The Company will continue to evaluate leveraged growth opportunities as market conditions allow. The Company repurchased 5.7 million shares, or $48.6 million, of its common stock during 2000 as part of its ongoing capital management strategy. At December 31, 2000, the Company was eligible to repurchase an additional 743,000 shares under a 5% stock repurchase program authorized in August, 2000. 4 The Company plans to complete an upgrade of branch operations in 2001. These upgrades, consisting of teller platform automation, including document preparation and online signature verification, 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 2001. 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 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 22 branch offices in central New Jersey, 18 of which are located in Middlesex County, two in Monmouth county, one in Mercer County and one in Union County. The Company's deposit gathering base is concentrated in the communities surrounding its offices. The majority of the Company's loan originations are derived from 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 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. (Dollars in thousands)
For the Year Ended December 31, ----------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------ ----------------------------- --------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------------------------------ ----------------------------- --------------------------- ASSETS: Interest-earning assets: Loans, net (1) ..................... $1,121,386 $84,174 7.51% $934,991 $68,656 7.34% $792,168 $61,431 7.75% Mortgage-backed securities, net .... -- -- -- -- -- -- 205,995 13,774 6.69 Investment securities .............. -- -- -- -- -- -- 140,953 9,032 6.41 Investment and mortgage-backed securities available for sale (2)...................... 818,035 52,615 6.43 904,744 54,732 6.05 551,323 34,936 6.34 ---------- ------- ---------- ------- ---------- -------- Total interest-earning assets ... 1,939,421 136,789 7.05 1,839,735 123,388 6.71 1,690,439 119,173 7.05 Non-interest earning assets .......... 20,695 46,536 54,189 ---------- ---------- ---------- Total assets .................... $1,960,116 $1,886,271 $1,744,628 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: NOW and money market accounts .... $354,135 9,452 2.67 $347,325 9,395 2.70 $308,609 9,008 2.92 Savings accounts ................. 166,127 3,744 2.25 170,907 3,931 2.30 177,282 4,431 2.50 Certificate accounts ............. 646,791 34,783 5.38 686,754 33,900 4.94 719,602 39,429 5.48 Borrowed funds ................... 503,372 30,893 6.14 325,501 17,780 5.46 217,131 12,518 5.77 ---------- ------- ---------- ------- ---------- ------- Total interest-bearing liabilities ................... 1,670,425 78,872 4.72 1,530,487 65,006 4.25 1,422,624 65,386 4.60 Non-interest bearing deposits ........ 48,582 44,755 35,297 Other liabilities .................... 15,253 15,004 23,817 ---------- ---------- ---------- Total liabilities ............... 1,734,260 1,590,246 1,481,738 ---------- ---------- ---------- Stockholders' equity ................. 225,856 296,025 262,890 ---------- ---------- ---------- Total liabilities and stockholders' equity .......... $1,960,116 $1,886,271 $1,744,628 ========== ========= ========== Net interest income/interest rate spread (3) ...................... $57,917 2.33% $58,382 2.46% $53,787 2.45% ======= ==== ======= ==== ======= ==== Net interest-earning assets/net interest margin (4) .................. $268,996 2.99% $309,248 3.17% $267,815 3.18% ========== ==== ========== ==== ========== ==== Ratio of interest-earning assets to interest-bearing liabilities ...... 1.16 x 1.20 x 1.19 x ============ ========== ==========
(1) Loans receivable, net includes non-accrual loans. (2) Includes federal funds sold and Federal Home Loan Bank of New York ("FHLB-NY") stock. All securities are presented at amortized cost. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. 6 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. (In thousands)
Year Ended December 31, 2000 Year Ended December 31, 1999 Compared to Year Ended Compared to Year Ended December 31, 1999 December 31, 1998 ----------------------------------- ------------------------------------ Increase (Decrease) Increase (Decrease) Due to Due to --------------------- ---------------------- Volume Rate Net Volume Rate Net -------- ------- -------- -------- -------- -------- INTEREST-EARNING ASSETS: Loans receivable, net .............. $13,903 $1,615 $15,518 $10,608 $(3,383) $7,225 Mortgage-backed securities, net .... -- -- -- (6,887) (6,887) (13,774) Investment securities .............. -- -- -- (4,516) (4,516) (9,032) Investment and mortgage-backed securities and loans available for sale ........................ (5,433) 3,316 (2,117) 21,462 (1,666) 19,796 -------- ------- -------- -------- -------- -------- Total .............................. 8,470 4,931 13,401 20,667 (16,452) 4,215 -------- ------- -------- -------- -------- -------- INTEREST-BEARING LIABILITIES: Deposits: NOW and money market accounts .... 169 (112) 57 1,090 (703) 387 Passbook and statement savings ... (105) (82) (187) (155) (345) (500) Certificates accounts ............ (2,039) 2,922 883 (1,750) (3,779) (5,529) Borrowed funds ..................... 10,680 2,433 13,113 5,966 (704) 5,262 -------- ------- -------- -------- -------- -------- Total .............................. 8,705 5,161 13,866 5,151 (5,531) (380) -------- ------- -------- -------- -------- -------- Net change in interest income ........ $(235) $(230) $(465) $15,516 $(10,921) $4,595 ======== ======= ======== ======== ======== ========
7 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, 2000, the Company's loan portfolio totaled $1.2 billion, of which $879.6 million, or 73.6% were one-to-four family residential mortgage loans. At that date, the Company's loan portfolio also included $114.2 million of home equity loans and lines of credit generally secured by second liens on one-to-four family residential properties, $41.3 million of net construction loans, $131.1 million of commercial real estate loans, and $13.1 million of multi-family residential mortgage loans, which represented 9.6%, 3.5%, 11.0% and 1.1%, respectively, of total loans receivable. Of the mortgage loan portfolio outstanding at December 31, 2000, 43.7% were fixed-rate loans and 56.3% were adjustable-rate mortgage ("ARM") loans. Other loans held by the Company, which consist of loans on deposit accounts, commercial business, personal, and automobile loans, totaled $16.1 million, or 1.4% of total loans outstanding at December 31, 2000. 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 such loans are sold without recourse. At December 31, 2000, the Company's servicing portfolio totaled $75.8 million. The Company also invests in mortgage-backed securities and other mortgage-backed products such as collateralized mortgage obligations ("CMOs"). At December 31, 2000, mortgage-backed securities, including CMOs, aggregated $447.0 million, or 22.7% of total assets, of which 60.6% 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, 2000, all mortgage-backed securities were classified as available for sale. 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. The Company expects to classify all mortgage-backed security purchases as available for sale in the foreseeable future 8 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):
At December 31, ------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------ ------------------ ---------------- ---------------- ---------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ---------- -------- ---------- -------- -------- -------- -------- -------- -------- -------- Mortgage loans(1): One-to-four family ............ $879,578 73.59 $774,858 75.52 $657,284 76.10% $566,625 78.25% $493,973 75.67% Home equity loans ............. 114,152 9.55 98,324 9.58 82,672 9.57 56,533 7.81 52,684 8.07 Construction (2) .............. 41,291 3.45 26,890 2.62 23,349 2.70 17,827 2.46 12,996 1.99 Commercial real estate ........ 131,072 10.97 96,821 9.44 65,069 7.53 54,926 7.58 51,091 7.83 Multi-family .................. 13,079 1.09 12,499 1.22 17,589 2.04 21,292 2.94 36,066 5.53 ---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loans ........ 1,179,172 98.65 1,009,392 98.38 845,963 97.94 717,203 99.04 646,810 99.09 Other loans ..................... 16,121 1.35 16,638 1.62 17,817 2.06 6,954 0.96 5,956 0.91 ---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------ Total loans receivable ...... 1,195,293 100.00% 1,026,030 100.00% 863,780 100.00% 724,157 100.00% 652,766 100.00% ====== ====== ====== ====== ====== Less: Net deferred loan fees (costs) and (premiums) and discounts .. (1,850) (1,090) (422) (107) 524 Allowance for loan losses ....... 12,341 11,004 9,505 8,454 7,781 ---------- ---------- -------- -------- -------- Total loans receivable, net $1,184,802 $1,016,116 $854,697 $715,810 $644,461 ========== ========== ======== ======== ======== Mortgage loans: ARM ........................... $664,164 56.32% $531,859 52.69% $439,234 51.92% $421,642 58.79% $364,906 56.42% Fixed-rate .................... 515,008 43.68 477,533 47.31 406,729 48.08 295,561 41.21 281,904 43.58 ---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loans ........ $1,179,172 100.00% $1,009,392 100.00% $845,963 100.00% $717,203 100.00% $646,810 100.00% ========== ====== ========== ====== ======== ====== ======== ====== ======== ====== Mortgage-backed securities (3): CMOs .......................... $201,802 44.79% $273,511 46.85% $209,468 32.00% $90,247 15.95% $76,493 13.31% FHLMC ......................... 159,755 35.45 166,992 28.60 235,415 35.97 253,029 44.72 287,368 50.02 GNMA .......................... 29,409 6.53 57,489 9.85 71,347 10.90 113,179 20.00 134,877 23.47 FNMA .......................... 59,628 13.23 85,828 14.70 138,286 21.13 109,415 19.33 75,821 13.20 ---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------ Total mortgage-backed securities ................ 450,594 100.00% 583,820 100.00% 654,516 100.00% 565,870 100.00% 574,559 100.00% ====== ====== ====== ====== ====== Net premiums .................... 1,951 2,748 3,639 2,704 2,433 Net unrealized (loss) gain on mortgage-Backed securities available for sale ............ (5,523) (11,409) 3,726 1,876 535 ---------- ---------- -------- -------- -------- Mortgage-backed securities, net ........................... $447,022 $575,159 $661,881 $570,450 $577,527 ========== ========== ======== ======== ========
- ------------------ (1) Includes $277,000 and $287,000 in mortgage loans available for sale at December 31, 2000 and 1996, respectively. No loans were classified as available for sale at December 31, 1999, 1998 or 1997. (2) Net of loans in process of $19.2 million, $28.0 million, $41.8 million, $27.5 million, and $12.3 million at December 31, 2000, 1999, 1998, 1997 and 1996, respectively. (3) Includes $447.0 million, $575.2 million, $661.9 million, $200.5 million and $161.9 million in mortgage-backed securities available for sale at fair value at December 31, 2000, 1999, 1998, 1997 and 1996, respectively. 9 LOAN MATURITY AND REPRICING The following table shows the maturity or period to repricing of the Company's loan portfolio at December 31, 2000. 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. (In thousands) At December 31, 2000 ------------------------------------------- One Year One Year to Five After or Less Years Five Years Total -------- -------- ---------- ---------- Mortgage loans: One-to-four family ............. $98,705 $340,638 $440,235 $879,578 Home equity loans .............. 39,357 18,107 56,688 114,152 Construction (1) ............... 41,291 -- -- 41,291 Commercial real estate ......... 6,842 45,399 78,831 131,072 Multi-family ................... 2,217 8,725 2,137 13,079 -------- -------- -------- ---------- Total mortgage loans ......... 188,412 412,869 577,891 1,179,172 Other loans ...................... 8,265 4,803 3,053 16,121 -------- -------- -------- ---------- Total loans .................. $196,677 $417,672 $580,944 1,195,293 ======== ======== ======== Net deferred loan costs and unearned premiums ..................... 1,850 Allowance for loan losses ......................................... (12,341) ---------- Loans receivable, net ............................................. $1,184,802 ========== (1) Excludes loans in process of $19.2 million. The following table sets forth at December 31, 2000, the dollar amount of loans contractually due or repricing after December 31, 2001, and whether such loans have fixed interest rates or adjustable interest rates (in thousands): Due or repricing after December 31, 2001 ------------------------------------ Fixed Adjustable Total -------- ---------- ---------- Mortgage loans: One-to-four family ................... $320,806 $460,067 $780,873 Equity loans ......................... 74,495 300 74,795 Commercial real estate ............... 76,295 47,936 124,231 Multi-family ......................... 1,518 9,343 10,861 Other loans ............................. 6,292 1,564 7,856 -------- -------- ---------- Total loans receivable .................. 479,406 519,210 998,616 Mortgage-backed securities (at amortized cost) .................. 178,848 230,323 409,171 -------- -------- ---------- Total loans receivable and mortgage-Backed securities ........ $658,254 $749,533 $1,407,787 ======== ======== ========== 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 10 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 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, 2000, 73.6% 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, 2000, the Company had $74.7 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 24-month introductory rate on both home equity line of credit products. The introductory rate is currently 7.49%. 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 11 plus 1.5%. The Company's home equity lines of credit outstanding at December 31, 2000 totaled $39.5 million, with additional available credit lines of $50.5 million. CONSTRUCTION LENDING. At December 31, 2000, construction loans totaled $41.3 million, or 3.5% of the Company's total loans outstanding. Available credit lines totaled $19.2 million at December 31, 2000. The current policy of the Company is to charge interest rates which float at margins of up to 2.0% above the prime rate on its construction loans. 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 $300,000 to $8.0 million. At December 31, 2000, the Company had 39 construction loans, 13 of which had principal outstanding of $1.0 million or more, with the largest outstanding loan balance being $5.8 million. At December 31, 2000, 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, 2000, none of the Company's construction loans were classified as substandard. See "Asset Quality" for further discussion. COMMERCIAL REAL ESTATE. At December 31, 2000, the Company had 139 loans secured by commercial real estate, totaling $131.1 million, or 11.0% 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, 2000 was originated in 2000 on a self-storage facility with a balance of $15.1 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, 2000, $13.1 million, or 1.1%, of the Company's total loan portfolio consisted of multi- 12 family residential loans. At December 31, 2000, the Company had one multi-family loan with an outstanding balance in 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 commercial, personal, automobile and boat loans and loans secured by savings accounts. At December 31, 2000, $16.1 million, or 1.4%, 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 $75.8 million and $81.9 million of mortgage loans for others at December 31, 2000 and 1999, respectively. The Company received $177,000 and $202,000 in servicing fees for the years ended December 31, 2000 and 1999, 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, 2000, $277,000 of mortgage loans were classified as available for sale. Mortgage loans sold totaled $9.8 million and $7.2 million for the years ended December 31, 2000 and 1999, respectively. From time to time, the Company may also purchase mortgage loans. The Company purchased $87.8 million and $57.5 million in mortgage loans from third-party correspondents for the years ended December 31, 2000 and 1999, respectively. The Company underwrote the loans and verified documentation prior to purchase and received representations and warranties for a one year period, including repayment of remaining purchased premiums if a loan prepays within the first 12 months. 13 ASSET QUALITY The following table sets forth information regarding non-accrual loans, loans delinquent 90 days or more, and REO. At December 31, 2000, REO totaled $257,000 and consisted of two 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, 2000, 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 $193,000. (Dollars in thousands) At December 31, ------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------- Non-accrual mortgage loans ....... $2,334 $2,311 $2,647 $4,457 $5,715 Non-accrual other loans .......... 15 45 93 -- 4 ------ ------ ------ ------ ------- Total non-accrual loans ...... 2,349 2,356 2,740 4,457 5,719 Loans 90 days or more delinquent and still accruing ............. 40 326 1,525 1,596 928 ------ ------ ------ ------ ------- Total non-performing loans ... 2,389 2,682 4,265 6,053 6,647 Restructured loans ............... -- -- -- 2,103 2,135 Total real estate owned, net of related allowance for loss ..... 257 466 1,453 1,516 3,750 ------ ------ ------ ------ ------- Total non-performing assets ...... $2,646 $3,148 $5,718 $9,672 $12,532 ====== ====== ====== ====== ======= Non-performing loans to total loans receivable, net .......... 0.20% 0.26% 0.50% 0.85% 1.03% Total non-performing assets to total assets ................... 0.13% 0.17% 0.31% 0.61% 0.84% 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 $5.4 million and $7.1 million at December 31, 2000 and 1999, respectively. At December 31, 2000, $2.5 million of classified loans were secured by residential properties. The remaining $2.9 million in classified loans were secured by commercial real estate. As of December 31, 2000, the Company's largest classified loan had a balance of $2.0 million and was secured by an office building complex. 14 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 the Bank's 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 $1.4 million and $1.7 million in provisions for loan losses for the years ended December 31, 2000 and 1999, respectively. The decrease in the provision for loan losses was the result of management's asset classification review, partially offset by continued growth in loans receivable. The Company believes that the allowance for loan losses is adequate. At December 31, 2000, the total allowance was $12.3 million, which amounted to 1.03% of loans receivable, net and 4.7x 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, ------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- ------- ------- Balance at beginning of period ................ $11,004 $9,505 $8,454 $7,781 $7,851 Provision for loan losses .. 1,441 1,650 1,469 1,200 550 Charge-offs (domestic): Real estate - mortgage ... (97) (151) (594) (510) (729) Installment loans to individuals ............ (7) -- (2) (17) (1) Recoveries (domestic): Real estate - mortgage ... -- -- 28 -- 110 Allowance activity of Pulse during conforming period, net .............. -- -- 150 -- -- -------- -------- ------- ------- ------- Balance at end of period ... $12,341 $11,004 $9,505 $8,454 $7,781 ======== ======== ======= ======= ======= 15 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):
At December 31, ------------------------------------------------------------------------------- 2000 1999 ------------------------------------ ------------------------------------- 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 ------- ------------- ----------- ------- ------------ ----------- One-to-four family ............................. $4,831 39.15% 73.59% $4,667 42.41% 75.52% Home equity loans .............................. 1,243 10.07 9.55 1,086 9.87 9.58 Construction ................................... 1,275 10.33 3.45 1,573 14.29 2.62 Commercial real estate ......................... 2,637 21.37 10.97 2,630 23.90 9.44 Multi-family ................................... 197 1.60 1.09 250 2.27 1.22 ------- ------ ------ ------- ------ ------ Total mortgage loans ......................... 10,183 82.51 98.65 10,206 92.74 98.38 Other .......................................... 587 4.76 1.35 541 4.92 1.62 Unallocated .................................... 1,571 12.73 -- 257 2.34 -- ------- ------ ------ ------- ------ ------ Total allowance for loan losses .............. $12,341 100.00% 100.00% $11,004 100.00% 100.00% ======= ====== ====== ======= ====== ======
At December 31, ---------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------ ------------------------------ ------------------------------ Percent Percent Percent of Loans of Loans of Loans in Each in Each in Each Percent of Category Percent of Category Percent of Category Allowance to Allowance to Allowance to to Total Total to Total Total to Total Total Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans ------ --------- -------- ------ ---------- -------- ------ ---------- -------- One-to-four family ........ $4,027 42.37% 76.10% $3,867 45.75% 78.25% $4,035 51.85% 75.67% Home equity loans ......... 1,090 11.47 9.57 458 5.42 7.81 437 5.62 8.07 Construction .............. 1,223 12.87 2.70 894 10.57 2.46 577 7.42 1.99 Commercial real Estate .... 1,963 20.65 7.53 1,877 22.20 7.58 1,714 22.03 7.83 Multi-family .............. 522 5.49 2.04 777 9.19 2.94 787 10.11 5.53 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total mortgage loans .... 8,825 92.85 97.94 7,873 93.13 99.04 7,550 97.03 99.09 Other ..................... 486 5.11 2.06 258 3.05 0.96 187 2.40 0.91 Unallocated ............... 194 2.04 -- 323 3.82 -- 44 0.57 -- ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses .......... $9,505 100.00% 100.00% $8,454 100.00% 100.00% $7,781 100.00% 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ======
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- 16 backed securities 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, 2000, mortgage-backed securities, net, totaled $447.0 million, or 22.7% of total assets. All such securities were classified as available for sale and carried at market value. The Company invests in a large variety of mortgage-backed securities, including ARM, balloon and fixed-rate mortgage-backed securities, the majority of which are directly insured or guaranteed by Freddie Mac, GNMA and FNMA. At such date, the mortgage-backed securities portfolio had a weighted average interest rate of 6.67%. Fixed coupon rates ranged from 7.50% to 9.50% for GNMA, 6.00% to 9.00% for Freddie Mac, 5.75% to 7.00% for FNMA fixed-rate securities and 5.75% to 7.25% for fixed-rate CMOs. Adjustable-rate coupon ranges were as follows: 6.00% to 7.75% for GNMA ARM mortgage-backed securities; 5.93% to 8.54% for Freddie Mac ARM mortgage-backed securities; 5.94% to 8.52% for FNMA ARM mortgage-backed securities; and 6.00% to 7.39% for adjustable-rate CMOs. Included in the total mortgage-backed securities portfolio are CMOs which had a market value of $197.4 million at December 31, 2000. The Company generally purchases short-term, 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 17 with residual characteristics. The weighted average life of CMOs at December 31, 2000, was 4.7 years. The stated weighted average contractual maturity of the Company's CMOs, at December 31, 2000, was 18.8 years. The Company only purchases CMOs and mortgage-backed securities that are rated "AA" or higher at the time of purchase. Prior to purchasing CMOs 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, 2000, by contractual maturity are shown below. Expected maturities will differ from contractual maturities due to prepayments (in thousands): AMORTIZED MARKET COST VALUE -------- -------- Mortgage-backed securities available for sale due in: Less than one year ............................... $ -- $ -- One year through five years ...................... 8,037 8,033 Five years through ten years ..................... 31,880 31,455 Greater than ten years ........................... 412,628 407,534 -------- -------- $452,545 $447,022 ======== ======== 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. 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, 2000, the market value of investment securities available for sale was $235.0 million, with an amortized cost basis of $242.7 million, and was composed of U.S. Government and Agency 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 10.2 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, 2000, $164.9 million, or 70.2% of the total investment portfolio was callable. 18 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):
At December 31, ------------------------------------------------------------------------- 2000 1999 1998 --------------------- ---------------------- ---------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value -------- -------- --------- -------- --------- -------- Investment securities available for sale: U.S. Government and agency Obligations .......................... $151,753 $149,149 $155,173 $146,810 $197,635 $198,531 State and political obligations .......... 12,813 12,451 16,976 15,706 6,900 6,972 Corporate obligations .................... 67,267 62,880 45,917 40,424 13,414 13,275 Equity securities ........................ 10,817 10,490 11,149 10,650 24,071 23,419 -------- -------- -------- -------- -------- -------- Total investment securities Available for sale ................. $242,650 $234,970 $229,215 $213,590 $242,020 $242,197 ======== ======== ======== ======== ======== ========
19 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, 2000. Investments in equity securities, which have no contractual maturities, are excluded from this table. (Dollars in thousands)
At December 31, 2000 -------------------------------------------------------------------------------------- One Year or Less More than One Year More than Five More than Ten to Five Years Years to Ten Years Years ------------------- -------------------- -------------------- -------------------- Amortized Weighted Amortized Weighted Amortized Weighted Amortized Weighted Average Average Average Average Cost Yield Cost Yield Cost Yield Cost Yield --------- --------- --------- --------- --------- --------- --------- -------- Investment securities available for sale: U.S. Government and agency obligations $6,649 5.44% $59,624 6.17% $55,991 6.76% $29,489 7.25% State and political obligations ....... 325 6.07 3,071 5.56 4,772 6.03 4,645 5.96 Corporate obligations ................. 95 2.43 16,140 7.50 13,433 7.43 37,599 7.49 ------ ----- ------- ----- ------- ----- ------- ----- Total investment securities available for sale .................. $7,069 5.43% $78,835 6.42% $74,196 6.83% $71,733 7.29% ====== ===== ======= ===== ======= ===== ======= ===== At December 31, 2000 - ------------------------------------------ Total - ------------------------------------------ Average Weighted Maturity Amortized Market Average in Years Cost Value Yield - --------- --------- -------------------- 7.23 $151,753 $149,149 6.57% 8.12 12,813 12,451 5.89 17.29 67,267 62,880 7.47 ----- -------- -------- ----- 10.17 $231,833 $224,480 6.79% ===== ======== ======== =====
20 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, 2000, $108.9 million, or 8.9%, of the Company's deposit balance consisted of IRAs. Also at that date, $155.6 million, or 12.8%, 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, 2000, certificate accounts in amounts of $100,000 or more mature as follows (in thousands): Amount ------- Maturity period Three months or less ............................. $15,763 Over 3 through 6 months .......................... 22,418 Over 6 through 12 months ......................... 15,889 Over 12 months ................................... 14,949 ------- Total ........................................ $69,019 ======= 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):
For the Year Ended December 31, ----------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------- ------------------------ Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate ---------- ---------- ---------- ---------- ---------- ---------- Non-interest bearing deposits ...... $ 48,582 --% $ 44,755 --% $ 35,297 --% NOW and money market accounts ...... 354,135 2.67 347,325 2.70 308,609 2.92 Savings accounts ................... 166,127 2.25 170,907 2.30 177,282 2.50 ---------- ---- ---------- ---- ---------- ---- Sub-total ....................... 568,844 2.32 562,987 2.36 521,188 2.58 Certificate accounts ............... 646,791 5.38 686,754 4.94 719,602 5.48 ---------- ---- ---------- ---- ---------- ---- Total average deposits .......... $1,215,635 3.95% $1,249,741 3.78% $1,240,790 4.26% ========== ==== ========== ==== ========== ====
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 one-to-four family mortgage loans held by 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, 2000, the Company's FHLB-NY advances totaled $81.0 million, representing 4.6% of total liabilities. 21 During 2000, the Company continued to borrow funds from the FHLB-NY and approved primary broker/dealers. The borrowings are collateralized by designated mortgage-backed and investment securities. The total of these borrowings at December 31, 2000 was $425.0 million, representing 24.3% 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 Year Ended December 31, ------------------------------ 2000 1999 1998 -------- -------- -------- FHLB-NY advances: Average balance outstanding ................. $ 99,102 $ 70,914 $ 24,072 Maximum amount outstanding at any month-end during the period ...................... 140,200 139,250 50,800 Balance outstanding at end of period ........ 80,955 107,000 38,000 Weighted average interest rate during the period ................................ 6.11% 5.43% 5.80% Weighted average interest rate at end of period ................................. 6.21% 5.88% 5.36% Other borrowings: Average balance outstanding ................. $404,270 $254,587 $192,730 Maximum amount outstanding at any month-end during the period ...................... 440,000 315,000 269,175 Balance outstanding at end of period ........ 425,000 315,000 226,675 Weighted average interest rate during the period ................................ 6.14% 5.47% 5.76% Weighted average interest rate at end of period ................................. 6.16% 5.58% 5.42% 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, 2000, FSB Financial Corp. had net income of $193,000. 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 $33.8 million for the year ended December 31, 2000. In addition, the Company has three wholly owned subsidiaries obtained through the Pulse acquisition which were inactive in 2000. PERSONNEL As of December 31, 2000, the Company had 272 full-time employees and 39 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 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, 2000, the Bank has a base year reserve subject to recapture equal to $1.7 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, 2000 and 1999, 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, 2000 and 1999, 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 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 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, as amended (the "FDI Act"). The Company is required to file certain reports with, and otherwise comply with, the rules and regulations of the Securities and Exchange Commission under the federal securities laws. 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 through legislation, could have a material adverse impact on the Company, the Bank and their operations and stockholders. 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 such, the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company. 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. 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 securities, credit card loans, student loans and small business loans) in at least 9 months out of each 12 month period. If First Savings fails the QTL test, First Sentinel Bancorp must convert to a bank holding company. Additionally, First Savings must wait five years before applying to the OTS to regain its status as a "qualified thrift lender." As of December 31, 2000, the Bank maintained 86.7% of its portfolio assets in qualified thrift investments and had more than 80% of its portfolio assets in qualified thrift investments for each of the 12 months ending December 31, 2000, thereby qualifying under the QTL test. 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 24 of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain activities authorized by OTS regulation, and no multiple savings and loan holding company may acquire more than 5% the voting stock of a company engaged in impermissible activities. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding company thereof, without prior written approval of the OTS or acquiring or retaining control of a depository institution that is not insured by the FDIC. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. On October 27, 2000, the OTS proposed regulations that would require certain holding companies to notify the OTS before engaging in certain debt transactions, transactions that reduce capital, some asset acquisitions and other transactions determined by the OTS on a case-by-case basis. The OTS is also considering codifying its current practice for reviewing the capital adequacy of savings and loan holding companies and, when necessary, requiring additional capital on a case-by-case basis. The OTS does not currently impose separate minimum capital requirements on savings and loan holding companies equivalent to the requirements currently imposed by the Federal Reserve Board on bank holding companies. NEW JERSEY HOLDING COMPANY 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 25 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 4.0%, 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 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. The federal banking agencies, including the FDIC, have reproposed a rule after receiving comments that would establish minimum regulatory capital requirements for equity investments in nonfinancial companies. The proposal applies a series of marginal capital charges that range from 8% to 25% depending up the size of the aggregate equity investment portfolio of the banking organization relative to its Tier 1 capital. The capital charge would be applied by making a deduction, which would be based on the adjusted carrying value of the equity investment from the organization's Tier 1 capital. If adopted as proposed, management does not believe this new capital requirement will have a material adverse effect upon the Company's operations. However, management will have to take this requirement into consideration should the Company, at some point in the future, decide to invest in nonfinancial companies. ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. Section 24 of the FDI Act, which was added by the Federal Deposit Insurance Corporation Improvement Act of 1991, generally limits the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for federally chartered national banks and their subsidiaries, unless such activities and investments are specifically exempted by Section 24 or consented to by the FDIC. Section 24 provides an exception for investments by a bank in common and preferred stocks listed on a national securities exchange or the shares of registered investment companies if: o the bank held such types of investments during the 14-month period from September 30, 1990 through November 26, 1991; o the state in which the bank is chartered permitted such investments as of September 30, 1991; and o the bank notifies the FDIC and obtains approval from the FDIC to make or retain such investments. Upon receiving such FDIC approval, an institution's investment in such equity securities will be subject to an aggregate limit up to the amount of its Tier 1 capital. First Savings received approval from the FDIC to retain and acquire such equity investments subject to a maximum permissible investment equal to the lesser of 100% of First Savings' Tier 1 capital or the maximum 26 permissible amount specified by the New Jersey Banking Act. Section 24 also provides an exception for majority owned subsidiaries of a bank, but Section 24 limits the activities of such subsidiaries to those permissible for a national bank under Section 24 of the FDI Act and the FDIC regulations issued pursuant thereto, or as approved by the FDIC. Before making a new investment or engaging in a new activity not permissible for a national bank or otherwise permissible under Section 24 of the FDIC regulations thereunder, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless the bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC insurance funds. 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. Under the OTS regulations, generally, a federally chartered savings association is treated as well capitalized if its total risk-based capital ratio is 10% or greater, its Tier 1 risk-based capital ratio is 6% or greater, and its leverage ratio is 5% or greater, and it is not subject to any order or directive by the OTS to meet a specific capital level. As of December 31, 2000, First Sentinel was considered "well capitalized" by the OTS. 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. SAIF-assessed deposits are also subject to assessments for payments on the bonds issued in the late 1980's by the Financing Corporation, or FICO, to recapitalize the now defunct Federal Savings and Loan Insurance Corporation. Our total expense in 2000 for the assessment for deposit insurance and the FICO payments was $258,000. 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. 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 27 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. COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act ("CRA"), any insured depository institution, including First Savings, has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC, in connection with its examination of a savings bank, to assess the depository institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications for additional branches and acquisitions. Among other things, current CRA regulations replace the prior process-based assessment factors with a new evaluation system that would rate an institution based on its actual performance in meeting community needs. In particular, the new evaluation system focuses on three tests: o a lending test, to evaluate the institution's record of making loans in its service areas; o an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and o a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. The CRA requires the FDIC to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system and requires public disclosure of an institution's CRA rating. First Savings has received a "satisfactory" rating in its most recent CRA examination. In addition, in May 2000, the OTS proposed regulations implementing the requirements under the Gramm-Leach Bliley Act ("Gramm-Leach") that insured depository institutions publicly disclose certain agreements that are in fulfillment of the CRA. We have no such agreement in place at this time. FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB system, which consists of twelve regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The FHLB provides a central credit facility primarily for member thrift institutions as well as other entities involved in home mortgage lending. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLBs. It makes loans to members (i.e., advances) in accordance with policies and procedures, including collateral requirements, established by the respective boards of directors of the FHLBs. These policies and procedures are subject to the regulation and oversight of the FHFB. All long-term advances are required to provide funds for residential home financing. The FHFB has also established standards of community or investment service that members must meet to maintain access to such long-term advances. The Bank, as a member of the FHLB-NY is required to purchase and hold shares of capital stock in that FHLB in an amount at least equal to the greater of (i) 1% of the aggregate principal amount of its unpaid mortgage loans, home purchase contracts and similar obligations at the beginning of each year; (ii) 0.3% of its assets; or (iii) 5% (or such greater fraction as established by the FHLB) of its advances from the FHLB as of 12/31/00. Pursuant to Gramm-Leach, the foregoing minimum share ownership requirements will be replaced by regulations to be promulgated by the FHFB. Gramm-Leach specifically provides that the minimum requirements in existence immediately prior to adoption of Gramm-Leach shall remain in effect until such regulations are adopted. The Bank is in compliance with these requirements. INSURANCE ACTIVITIES. In August, 2000, the federal banking agencies proposed regulations pursuant to Gramm-Leach which would prohibit depository institutions from conditioning the extension of credit to individuals upon either the purchase of an insurance product or annuity or an agreement by the consumer not to purchase an 28 insurance product or annuity from an entity that is not affiliated with the depository institution. The proposed regulations would also require prior disclosure of this prohibition to potential insurance product or annuity customers. Management does not believe that these regulations, if adopted as proposed, would have a material impact on the Company's operations. PRIVACY STANDARDS. Pursuant to Gramm-Leach, financial institutions are required to establish a policy governing the collection, use and protection of non-public information about their customers and consumers, provide notice of such policy to consumers and provide a mechanism for consumers to opt out of any practice of the institution whereby nonpublic personal information would otherwise be disclosed to unaffiliated third parties. The federal banking agencies, jointly with the Federal Trade Commission and the Securities and Exchange Commission, have published final regulations to implement the privacy standards of Gramm-Leach. The final regulations require First Sentinel and First Savings to disclose their privacy policy, including identifying with whom they share "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require First Sentinel and First Savings to provide their customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, First Sentinel and First Savings are required to provide their customers with the ability to "opt-out" of having First Sentinel and First Savings share their non-public personal information with unaffiliated third parties before they can disclose such information, subject to certain exceptions. Under the regulations, First Sentinel and First Savings will be required to adopt and implement a privacy policy no later than July 1, 2001, and are currently in the process of revising their privacy policy to be in full compliance with the final regulations. First Sentinel and First Savings have not yet determined the extent to which the privacy standards will affect their operations. INTERNET BANKING. Technological developments are dramatically altering the ways in which most companies, including financial institutions, conduct their business. The growth of the Internet is prompting banks to reconsider business strategies and adopt alternative distribution and marketing systems. The federal bank regulatory agencies have conducted seminars and published materials targeted to various aspects of internet banking, and have indicated their intention to reevaluate their regulations to ensure that they encourage banks' efficiency and competitiveness consistent with safe and sound banking practices. No assurance can be given that the federal bank regulatory agencies will not adopt new regulations that will materially affect First Savings' Internet operations or restrict any such further operations. TRANSACTIONS WITH AFFILIATES OF FIRST SAVINGS. First Savings is subject to the affiliate and insider transaction rules set forth in Sections 23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, and the regulations of the FRB promulgated thereunder. These provisions, among other things, prohibit or limit a savings banks from extending credit to, or entering into certain transactions with, its affiliates (which for First Savings would include First Sentinel) and principal stockholders, directors and executive officers of First Savings. In addition, provisions of the BHCA prohibit extensions of credit to a bank's insiders and their related interests by any other institution that has a correspondent banking relationship with the bank, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. Provisions of the New Jersey Banking Act impose conditions and limitations on the liabilities to a savings bank of its directors and executive officers and of corporations and partnerships controlled by such persons that are comparable in many respects to the conditions and limitations imposed on the loans and extensions of credit to insiders and their related interests under federal law and regulation, as discussed above. The New Jersey Banking Act also provides that a savings bank that is in compliance with the applicable federal laws and regulations is deemed to be in compliance with such provisions of the New Jersey Banking Act. IMPACT OF ENACTMENT OF THE GRAMM-LEACH BLILEY ACT. On November 12, 1999, President Clinton signed the Gramm-Leach Bliley Act, which among other things, establishes a comprehensive framework to permit affiliations among commercial banks, insurance companies and securities firms. As part of this framework generally, the new law (1) repeals the historical restrictions and eliminates many federal and state law barriers to affiliations among banks and securities firms, insurance companies and other financial service providers, (2) provides a uniform framework for the activities of banks, savings institutions and their holding companies and (3) broadens the activities that may be conducted by subsidiaries of national banks and state banks. 29 Gramm-Leach also restricts the powers of new unitary savings and loan association holding companies. Unitary savings and loan holding companies that are "grandfathered," i.e., unitary savings and loan holding companies in existence or with applications filed with the OTS on or before May 4, 1999, such as us, retain their authority under the prior law. All other unitary savings and loan holding companies are limited to financially related activities permissible for bank holding companies, as defined under Gramm-Leach. Gramm-Leach also prohibits non-financial companies from acquiring grandfathered unitary savings and loan association holding companies. Bank holding companies are permitted to engage in a wider variety of financial activities than permitted under the prior law, particularly with respect to insurance and securities activities. In addition, in a change form the prior law, bank holding companies are in a position to be owned, controlled or acquired by any company engaged in financially related activities. Management does not believe that the new law will have a material adverse affect upon the Company's operations in the near term. However, to the extent the new law permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This type of consolidation could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets the Company currently serves. 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 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 on insured state banks. 30 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 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 (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $42.8 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement was 3%; and for accounts aggregating greater than $42.8 million, the reserve requirement was $1,284 million plus 10% (subject to adjustment by the Federal Reserve Board) against that portion of total transaction accounts in excess of $42.8 million. The first $5.5 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. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank or a pass-through accounts as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. ITEM 2. PROPERTIES The Company conducts its business through its main office and 21 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, 2000. The aggregate net book value of the Company's premises and equipment was $16.1 million at December 31, 2000. 31 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 32 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 (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, 2000. 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 32 of the 2000 Annual Report to Stockholders is incorporated herein by reference. At December 31, 2000, 32,749,994 shares of the Company's outstanding common stock was held of record by approximately 3,013 persons or entities, not including the number of persons or entities holding stock in nominee or stock name through various brokers or banks. ITEM 6. SELECTED FINANCIAL DATA The information contained in the section captioned "Consolidated Financial Highlights" on page 9 of the 2000 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 10 through 14 of the 2000 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 10 through 14 of the 2000 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 2000 Annual Report to Stockholders on pages 15 through 32 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 33 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 5-8 of the Company's proxy statement for the 2001 Annual Meeting of Stockholders dated March 26, 2001 ("2001 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 page 11 and pages 15-21 (excluding the Compensation Committee Report) of the 2001 Proxy Statement dated March 26, 2001, and are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT BENEFICIAL OWNERSHIP OF FIRST SENTINEL COMMON STOCK Disclosure relating to Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference to pages 3-6 of the 2001 Proxy Statement dated March 26, 2001 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 21-22 of the 2001 Proxy Statement dated March 26, 2001, and are incorporated herein by reference. 34 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, 2000, included in the Annual Report, listed below, are incorporated herein by reference. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND 1999 (ANNUAL REPORT - PAGE 15). CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (ANNUAL REPORT - PAGE 16). CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (ANNUAL REPORT - PAGE 17). CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (ANNUAL REPORT - PAGE 18). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ANNUAL REPORT - PAGES 19 THROUGH 31). INDEPENDENT AUDITORS' REPORT (ANNUAL REPORT - PAGE 32). 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 ***** 10.4 First Sentinel Bancorp, Inc. 1993 Acquisition Stock Option Plan ***** 10.5 First Sentinel Bancorp, Inc. 1997 Acquisition Stock Option Plan ***** 10.6 First Savings Bank, SLA Employee Stock Ownership Plan ** 10.7 First Savings Bank Deferred Fee Plan Filed herein 10.8 First Savings Bank, SLA Supplemental Executive Retirement Plan ** 10.9 First Savings Bank Supplemental Executive Retirement Plan II Filed herein --------- ------------------------------------------------ ----------- 35 --------- ------------------------------------------------ ----------- Exhibit Number Description Reference --------- ------------------------------------------------ ----------- 10.10 First Savings Bank Non-Employee Director Retirement Plan Filed herein 10.11 Form of Employment Agreements between First Sentinel Bancorp, Inc. and (i) John P. Mulkerin and (ii) Christopher Martin Filed herein 10.12 Form of Employment Agreements between First Savings Bank and (i) Filed herein John P. Mulkerin and (ii) Christopher Martin Filed herein 10.13 Form of Two-year Change in Control Agreement between First Savings Bank and certain executive officers Filed herein 10.14 Form of Three-year Change in Control Agreement between First Filed herein Savings Bank and certain executive officers Filed herein 10.15 First Savings Bank, SLA Employee Severance Compensation Plan ** 11.0 Computation of per share earnings **** 13.0 Portions of the 2000 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 --------- ------------------------------------------------ ----------- * 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. ***** Previously filed and incorporated herein by reference to the December 31, 1999 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. (File No. 000-23809) dated March 30, 2000. (b) Reports on Form 8-K. None. 36 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, 2001 FIRST SENTINEL BANCORP, INC. /s/ JOHN P. MULKERIN ---------------------------- John P. Mulkerin President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ PHILIP T. RUEGGER, JR. Chairman of the Board March 30, 2001 - ---------------------- Philip T. Ruegger, Jr. /s/ JOHN P. MULKERIN President, Chief Executive March 30, 2001 - ---------------------- Officer and Director John P. Mulkerin /s/ CHRISTOPHER P. MARTIN Executive Vice President, March 30, 2001 - ---------------------- Chief Operating and Financial Christopher P. Martin Officer and Director /s/ JOSEPH CHADWICK Director March 30, 2001 - ---------------------- Joseph Chadwick /s/ GEORGE T. HORNYAK, JR. Director March 30, 2001 - ---------------------- George T. Hornyak, Jr. /s/ KEITH H. McLAUGHLIN Director March 30, 2001 - ---------------------- Keith H. McLaughlin /s/ JEFFRIES SHEIN Director March 30, 2001 - ---------------------- Jeffries Shein /s/ WALTER K. TIMPSON Director March 30, 2001 - ---------------------- Walter K. Timpson 37 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.
December 31, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) SELECTED FINANCIAL DATA: Total assets $1,968,709 $1,904,696 $1,855,058 $1,575,332 $1,489,615 Loans receivable, net 1,184,802 1,016,116 854,697 715,810 644,462 Investment securities -- -- -- 127,583 144,504 Investment securities available for sale 234,970 213,590 242,197 78,443 53,886 Other interest-earning assets (1) 40,693 37,175 27,652 28,795 12,321 Mortgage-backed securities, net -- -- -- 369,920 416,475 Mortgage-backed securities available for sale 447,022 575,159 661,881 200,530 161,052 Deposits 1,219,336 1,213,724 1,268,119 1,227,304 1,189,176 Borrowed funds 505,955 422,000 264,675 186,665 152,915 Stockholders' equity 222,163 244,580 299,819 144,893 131,322 =================================================================================================================================== Year Ended December 31, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) SELECTED OPERATING DATA: Interest income $ 136,789 $ 123,388 $ 119,173 $ 109,241 $ 100,772 Interest expense 78,872 65,006 65,386 63,558 56,397 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 57,917 58,382 53,787 45,683 44,375 Provision for loan losses 1,441 1,650 1,469 1,200 550 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 56,476 56,732 52,318 44,483 43,825 Non-interest income (2) 2,269 3,631 4,696 3,383 2,020 Non-interest expense (3) 24,678 24,556 26,577 24,210 32,874 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 34,067 35,807 30,437 23,656 12,971 Income tax expense 11,099 12,155 10,944 8,686 4,768 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 22,968 $ 23,652 $ 19,493 $ 14,970 $ 8,203 =================================================================================================================================== Basic earnings per share (4) $ 0.69 $ 0.60 $ 0.46 $ 0.35 $ 0.18 =================================================================================================================================== Diluted earnings per share (4) $ 0.68 $ 0.59 $ 0.46 $ 0.35 $ 0.18 =================================================================================================================================== Dividends declared per share, as adjusted (4) $ 0.24 $ 0.37 $ 0.15 $ 0.11 $ 0.08 =================================================================================================================================== At or For the Year Ended December 31, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS: Return on average assets (2) (3) 1.17% 1.25% 1.12% 0.96% 0.57% Return on average stockholders' equity (2) (3) 10.17 7.99 7.41 10.88 5.79 Average stockholders' equity to average assets 11.52 15.69 15.07 8.86 9.86 Stockholders' equity to total assets 11.29 12.84 16.16 9.20 8.82 ===================================================================================================================================
(1) Includes federal funds sold and investment in the stock of the Federal Home Loan Bank of New York ("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 the $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 Bancshares, MHC. FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 9 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, 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. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND DECEMBER 31, 1999 ASSETS. Total assets increased by $64.0 million, or 3.4%, to $2.0 billion at December 31, 2000. The change in assets consisted primarily of increases in loans receivable, investment securities available for sale, and cash and cash equivalents; partially offset by decreases in mortgage-backed securities ("MBS") available for sale, and other assets. Loans receivable, net grew by $168.7 million, or 16.6%, to $1.2 billion at December 31, 2000, from $1.0 billion at December 31, 1999. Loan originations totaled $329.2 million for the year ended December 31, 2000, as compared to $351.5 million for the same period in 1999. The Company experienced a reduction in loan applications and originations in 2000 compared with 1999, primarily among one-to-four family and multi-family residential loans, as a result of the higher interest rate environment and aggressive pricing by the competition. Mortgage loans purchased totaled $87.8 million in 2000 compared with $57.5 million in 1999. Loans purchased were primarily one-to-four family adjustable-rate mortgages underwritten internally at higher rates than those currently offered by the Company. Repayment of principal on loans totaled $237.6 million for 2000, as compared to $237.9 million for 1999. At December 31, 2000, one-to-four family mortgage loans comprised 73.7% of total loans, while commercial real estate, multi-family and construction loans comprised 15.4% and home equity loans accounted for 9.5% of the loan portfolio. Net loans receivable as a percentage of total assets grew to 60.2% at December 31, 2000 from 53.3% at December 31, 1999. 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. Investment securities available for sale increased $21.4 million, or 10.0%, to $235.0 million as of December 31, 2000, from $213.6 million at December 31, 1999. For the year 2000, purchases totaled $66.7 million while sales and calls were $53.0 million. Purchases during 2000 consisted primarily of debt securities issued by U.S. corporations and government-sponsored agencies. Cash and cash equivalents increased $4.5 million, or 14.7%, to $35.1 million as of December 31, 2000, from $30.6 million at December 31, 1999. MBS available for sale decreased $128.1 million, or 22.3%, to $447.0 million at December 31, 2000, from $575.2 million at December 31, 1999. The decrease was primarily due to sales and principal repayments of $194.8 million and $91.8 million, respectively, exceeding purchases of $153.9 million for the year ended December 31, 2000. Net proceeds were used to fund loan growth and repurchase the Company's stock. Other assets decreased $3.9 million, or 25.7%, to $11.3 million at December 31, 2000, compared with $15.2 million at December 31, 1999. The decrease was primarily attributable to a reduction in deferred tax assets caused by the increase in the market value of the MBS and investment securities available for sale portfolios. LIABILITIES. Deposits increased $5.6 million, or 0.5%, to $1.2 billion at December 31, 2000. Borrowed funds increased $84.0 million, or 19.9%, to $506.0 million at December 31, 2000, from $422.0 million at December 31, 1999. The increased borrowed funds were used primarily to fund loan originations. The Company will continue to focus on increasing core deposits as a less costly means to fund asset generation. For the year ended December 31, 2000, the average balance of core accounts totaled $568.8 million, or 46.8% of total deposits. These increases were partially offset by a reduction in other liabilities of 24.4% to $12.1 million at December 31, 2000, from $16.0 million at December 31, 1999. This decrease was primarily attributable to the payment in 2000 of a $5.8 million special cash dividend declared in 1999. STOCKHOLDERS' EQUITY. The Company's stockholders' equity decreased $22.4 million for the year ended December 31, 2000. The Company repurchased $48.6 million of its common stock during 2000 as part of its ongoing capital management strategy. Stockholders' equity was further reduced by cash dividends declared totaling $8.1 million in 2000. These decreases were partially offset by net income of $23.0 million, a reduction in accumulated other comprehensive loss of $8.8 million as a result of the increase in market values of investment securities and MBS available for sale, net of related tax benefit, and amortization of benefit plans totaling $2.0 million. Book value and tangible book value per share were $6.78 and $6.59, respectively, at December 31, 2000, as compared to $6.36 and $6.18, respectively, at December 31, 1999. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 RESULTS OF OPERATIONS. For the year ended December 31, 2000, basic and diluted earnings per share totaled $0.69 and $0.68, respectively, representing increases of 14.6% and 15.7%, respectively, over basic and diluted earnings per share of $0.60 and $0.59, respectively, for the year ended December 31, 1999. Net income for 2000 totaled $23.0 million, a decrease of $684,000, or 2.9%, compared with net income of $23.7 million for 1999. Earnings per share increased despite the reduction in net income, 10 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES as the Company repurchased 5.7 million shares of its common stock at an average cost of $8.53 per share during 2000. Return on average equity improved to 10.17% for 2000 from 7.99% for 1999, as the Company continued to leverage its capital through internal loan growth, share repurchases and cash dividends. INTEREST INCOME. Interest income increased $13.4 million, or 10.9%, to $136.8 million for the year ended December 31, 2000, compared to $123.4 million for 1999. Interest on loans increased $15.5 million, or 22.6%, to $84.2 million for 2000, as compared to $68.7 million for 1999. The average balance of the loan portfolio for the year ended December 31, 2000, increased to $1.1 billion, from $935.0 million for 1999, while the average yield on the portfolio increased to 7.51% for 2000, from 7.34% for 1999. Interest on investment securities and MBS available for sale decreased $2.1 million, or 3.9%, to $52.6 million for the year ended December 31, 2000, as compared to $54.7 million for 1999. The average balance of the investment and MBS portfolios totaled $818.0 million, with an average yield of 6.43% for the year ended December 31, 2000, while the portfolios' average balance was $904.7 million, with an average yield of 6.05% for the year ended December 31, 1999. INTEREST EXPENSE. Interest expense increased $13.9 million, or 21.3%, to $78.9 million for the year ended December 31, 2000, compared to $65.0 million for 1999. Interest expense on deposits increased $753,000, or 1.6%, to $48.0 million for 2000, as compared to $47.2 million for 1999. The increased interest expense on deposits was primarily attributable to higher rates paid on certificates of deposits. The average cost of certificates for 2000 was 5.38%, as compared to 4.94% for 1999. The average balance of certificates of deposit, however, decreased to $646.8 million for the year ended December 31, 2000, from $686.8 million for 1999, as 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 and money market demand 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 $568.8 million for the year ended December 31, 2000, as compared to $563.0 million for 1999. Average core deposits to total average deposits improved to 46.8% for 2000 from 45.0% for 1999. The average interest cost on all deposits for 2000 was 3.95%, as compared to 3.78% for 1999. Non-interest-bearing accounts averaged $48.6 million for 2000, up from $44.8 million for 1999. Interest on borrowed funds for the year ended December 31, 2000, increased $13.1 million, or 73.8%, to $30.9 million, compared to $17.8 million for 1999. The increase in the average balance of borrowed funds for 2000 to $503.4 million, from $325.5 million, was attributable to management's continuing strategy to fund earning asset growth through the use of borrowed funds, where accretive to earnings. The Company will continue to evaluate leveraged growth opportunities as market conditions allow. The average interest cost of borrowed funds was 6.14% for the year ended December 31, 2000, compared with 5.46% for 1999. NET INTEREST INCOME. Net interest income decreased $465,000, or 0.8%, to $57.9 million for the year ended December 31, 2000, compared to $58.4 million for 1999. The decrease 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 interest-earning assets and average interest-bearing liabilities, decreased 13 basis points to 2.33% in 2000, from 2.46% in 1999. This decrease was due to an increase in the cost of interest-bearing liabilities to 4.72% for the year ended December 31, 2000, from 4.25% in 1999, partially offset by an increase in the yield on interest-earning assets to 7.05%, from 6.71% for the same respective periods. The net interest margin, defined as net interest income divided by the average total interest-earning assets, decreased 18 basis points to 2.99% in 2000, compared to 3.17% in 1999. PROVISION FOR LOAN LOSSES. The provision for loan losses decreased $209,000, or 12.7%, to $1.4 million for the year ended December 31, 2000, compared to $1.7 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. The allowance for loan losses represented 1.03% of total loans, or 5.17x non-performing loans at December 31, 2000, compared with 1.07% of total loans, or 4.10x non-performing loans at December 31, 1999. In management's opinion, the allowance for loan losses, totaling $12.3 million, is adequate to cover losses inherent in the portfolio at December 31, 2000. NON-INTEREST INCOME. Non-interest income, consisting primarily of deposit product fees, loan servicing fees and gains and losses on loans and securities sold, decreased $1.4 million, or 37.5%, to $2.3 million for the year ended December 31, 2000, compared to $3.6 million for 1999. Net losses on loans and securities available for sale totaled $876,000 for the year ended December 31, 2000, as compared to net gains totaling $684,000 for 1999. The losses were taken in response to the increase in short-term interest rates during 2000, making certain fixed-rate loans and securities less profitable while the cost of funds increased. The Company used the proceeds from the sale of lower-yielding investments to fund loan growth and the Company's share repurchase program and repay higher-cost borrowings. Future sales of loans and securities and related gains and losses are dependent on market conditions, as well as the Company's liquidity and risk management needs. Other income, net increased by $296,000, or 65.9%, to $745,000 for 2000, compared with $449,000 for 1999, primarily as a result of reduced REO expenses totaling $74,000 in 2000, compared with $381,000 for 1999. Foreclosed assets totaled $257,000 at December 31, 2000, and consisted of two residential properties, one of which is under contract for sale. NON-INTEREST EXPENSE. Non-interest expense increased $122,000, or 0.5%, to $24.7 million for the year ended December 31, 2000, compared to $24.6 million for 1999. Compensation and benefits expense increased $987,000, or 7.2%, primarily as a result of increased healthcare and other benefits expenses. This increase was partially offset by a $507,000, or 66.3%, reduction in deposit FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 11 insurance costs resulting from a change in the FDIC assessment rate, as well as reduced supervisory costs resulting from the Bank's conversion to a state-chartered savings bank in January 2000, and non-recurring acquisition integration costs recorded in 1999. Non-interest expense (excluding goodwill amortization) divided by average assets fell to 1.22% for the year ended December 31, 2000, from 1.26% for the prior year. The efficiency ratio (non-interest expense divided by the sum of net interest income plus non-interest income, excluding gains and losses on the sale of loans and securities) increased slightly to 40.41% for 2000, from 40.04% in 1999. The Company expects non-interest expense to increase moderately in future periods due to the planned introduction of Internet banking and the implementation of teller/platform automation in its retail branches in 2001. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 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, 1998 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 had 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 $904.7 million, with an average yield of 6.05% for the year ended December 31, 1999, while the portfolios' average balance was $898.2 million with an average yield of 6.43% 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 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. 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 increased one basis point to 2.46% in 1999, from 2.45% in 1998. The cost of interest-bearing liabilities declined to 4.25% for the year ended December 31, 1999, from 4.60% in 1998. The yield on interest-earning assets was 6.71% for 1999, compared with 7.05% for 1998. The net interest margin decreased one basis point to 3.17% in 1999, compared to 3.18% in 1998. 12 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 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. NON-INTEREST INCOME. Non-interest income 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 non-interest income was recognition of a $1.1 million non-recurring pretax gain on the sale of deposits 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, as compared to $710,000 for 1998. NON-INTEREST EXPENSE. Non-interest expense 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 non-interest expense, excluding the Pulse charge, was $79,000, or 0.3%. Excluding the 1998 merger-related charge, non-interest expense (excluding goodwill amortization) divided by average assets fell to 1.26% for the year ended December 31, 1999, from 1.35% for 1998. Excluding the 1998 merger-related charge, the efficiency ratio improved to 40.04% for 1999, from 43.35% in 1998. 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, 2000, 1999 and 1998, the Company originated loans in the amounts of $329.2 million, $351.5 million and $347.6 million, respectively. The Company also purchased loans and mortgage-backed and investment securities. Purchases of mortgage loans totaled $87.8 million, $57.5 million and $26.8 million in 2000, 1999 and 1998, respectively. Purchases of MBS totaled $153.9 million, $372.9 million and $398.8 million in 2000, 1999 and 1998, respectively. Purchases of investment securities totaled $66.7 million, $131.4 million and $312.1 million for the years ended December 31, 2000, 1999 and 1998, respectively. Other investing activities include investment in Federal Home Loan Bank of New York ("FHLB-NY") stock. The investing activities were funded primarily by principal repayments on loans and MBS of $329.4 million, $441.9 million and $445.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Additionally, proceeds from sales, calls, and maturities of mortgage-backed and investment securities totaling $247.3 million, $384.9 million and $354.5 million for 2000, 1999 and 1998, respectively, provided additional liquidity. Liquidity was also provided through the sale of loans totaling $9.8 million, $7.2 million and $14.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. The Company has several other sources of liquidity, including FHLB-NY advances. At December 31, 2000, such advances totaled $81.0 million, of which $25.0 million are due in 2001. 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 $425.0 million at December 31, 2000, $200.0 million of which are due in 2001. Other sources of liquidity are unpledged investment and mortgage-backed securities available for sale, with an amortized cost totaling $233.3 million at December 31, 2000. The Company anticipates that it will have sufficient funds available to meet its current commitments. At December 31, 2000, the Company had commitments to originate and purchase mortgage loans of $100.0 million and commitments to purchase mortgage-backed and investment securities of $8.9 million. The Company is obligated to pay $1.8 million under its lease agreements for branch and administrative facilities, of which $447,000 is due in 2001. Certificates of deposit which are scheduled to mature in one year or less totaled $516.1 million at December 31, 2000. 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. FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 13 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 change 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 income, 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 30 years without recourse and on a servicing-retained basis; (3) investing primarily in adjustable-rate and short average-life 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. The Company's interest rate sensitivity is monitored by management through the use of an interest rate risk ("IRR") model which measures IRR by projecting the change in net interest income ("NII") and the economic value of equity ("EVE") over a range of interest rate scenarios. The EVE 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. The greater the potential change, positive or negative, in NII or EVE, the more interest rate risk is assumed to exist within the institution. The following table lists the Company's percentage change in NII and EVE assuming an immediate change of plus or minus of up to 200 basis points from the level of interest rates at December 31, 2000 and 1999, as calculated by the Company. Change in Percentage Change Percentage Change Interest Rates in NII in EVE in Basis Points ------------------------------------------------ (Rate Shock) 2000 1999 2000 1999 - -------------------------------------------------------------------------------- +200 -4 -32 -18 -34 +100 -2 -15 -8 -15 Static -- -- -- -- -100 -3 12 -2 17 -200 -9 19 -10 21 Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NII and EVE 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 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 EVE and NII models provide an indication of the Company's IRR 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. 14 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition
December 31, 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except share amounts) ASSETS Cash and due from banks $ 14,069 $ 11,532 Federal funds sold 21,050 19,075 - ----------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 35,119 30,607 Federal Home Loan Bank of New York (FHLB-NY) stock, at cost 19,643 18,100 Investment securities available for sale 234,970 213,590 Mortgage-backed securities available for sale 447,022 575,159 Loans receivable, net 1,184,802 1,016,116 Interest and dividends receivable 13,481 12,278 Premises and equipment, net 16,092 16,503 Excess of cost over fair value of net assets acquired 6,259 7,106 Other assets 11,321 15,237 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $1,968,709 $1,904,696 =================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $1,219,336 $1,213,724 Borrowed funds 505,955 422,000 Advances by borrowers for taxes and insurance 9,154 8,385 Other liabilities 12,101 16,007 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,746,546 1,660,116 - ----------------------------------------------------------------------------------------------------------------------------------- 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 32,749,994 shares issued and outstanding in 2000 and 43,106,742 and 38,443,350 shares issued and outstanding in 1999 430 431 Paid-in capital 201,264 200,781 Retained earnings 132,537 117,922 Accumulated other comprehensive loss (8,534) (17,302) Common stock acquired by the Employee Stock Ownership Plan (ESOP) (11,238) (12,156) Common stock acquired by the Recognition and Retention Plan (RRP) (2,788) (3,867) Treasury stock (10,288,827 and 4,628,604 common shares in 2000 and 1999, respectively) (89,508) (41,229) - ----------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 222,163 244,580 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,968,709 $1,904,696 ===================================================================================================================================
See accompanying notes to the consolidated financial statements. FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 15 Consolidated Statements of Income
Year Ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) INTEREST INCOME: Loans $ 84,174 $ 68,656 $ 61,431 Investment and mortgage-backed securities held to maturity -- -- 22,806 Investment and mortgage-backed securities available for sale 52,615 54,732 34,936 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest income 136,789 123,388 119,173 - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Deposits: NOW and money market demand 9,452 9,395 9,008 Savings 3,744 3,931 4,431 Certificates of deposit 34,783 33,900 39,429 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense--deposits 47,979 47,226 52,868 Borrowed funds 30,893 17,780 12,518 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest expense 78,872 65,006 65,386 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 57,917 58,382 53,787 Provision for loan losses 1,441 1,650 1,469 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 56,476 56,732 52,318 - ----------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME: Fees and service charges 2,400 2,498 2,316 Net (loss) gain on sales of loans and securities (876) 684 710 Other, net 745 449 1,670 - ----------------------------------------------------------------------------------------------------------------------------------- Total non-interest income 2,269 3,631 4,696 - ----------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE: Compensation and benefits 14,685 13,698 13,604 Occupancy 2,312 2,225 2,119 Equipment 1,692 1,672 1,946 Advertising 1,102 1,086 978 Federal deposit insurance premium 258 765 759 Amortization of intangibles 847 850 850 General and administrative 3,782 4,260 6,321 - ----------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 24,678 24,556 26,577 - ----------------------------------------------------------------------------------------------------------------------------------- Income before income tax expense 34,067 35,807 30,437 Income tax expense 11,099 12,155 10,944 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 22,968 $ 23,652 $ 19,493 =================================================================================================================================== Basic earnings per share $0.69 $0.60 $0.46 =================================================================================================================================== Diluted earnings per share $0.68 $0.59 $0.46 =================================================================================================================================== Weighted average shares outstanding--Basic 33,436,961 39,464,227 41,983,776 =================================================================================================================================== Weighted average shares outstanding--Diluted 33,755,431 40,207,600 42,694,287 ===================================================================================================================================
See accompanying notes to the consolidated financial statements. 16 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity
Accumulated Common Common Total Other Stock Stock Stock- Common Paid-In Retained Comprehensive Acquired Acquired Treasury holders' Stock Capital Earnings Income (Loss) by ESOP by RRP Stock Equity - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 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 declared ($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 Comprehensive income: Net income for the year ended December 31, 2000 -- -- 22,968 -- -- -- -- 22,968 Other comprehensive income: Unrealized holding gains arising during the period (net of tax of $4,749) -- -- -- 8,184 -- -- -- 8,184 Reclassification adjustment for losses in net income (net of tax of $314) -- -- -- 584 -- -- -- 584 -------- Total comprehensive income 31,736 -------- Cash dividends declared ($0.24 per share) -- -- (8,072) -- -- -- -- (8,072) Exercise of stock options -- -- (224) -- -- -- 367 143 Tax benefit on stock options -- 655 -- -- -- -- -- 655 Purchase and retirement of common stock (1) (278) -- -- -- -- -- (279) Purchases of treasury stock -- -- -- -- -- -- (48,646) (48,646) Amortization of RRP -- 35 -- -- -- 1,079 -- 1,114 Amortization of ESOP -- 71 (57) -- 918 -- -- 932 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000 $430 $201,264 $132,537 $(8,534) $(11,238) $(2,788) $(89,508) $222,163 ==================================================================================================================================
See accompanying notes to the consolidated financial statements. FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 17 Consolidated Statements of Cash Flows
Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,968 $ 23,652 $ 19,493 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment 1,339 1,406 1,240 Amortization of excess of cost over fair value of assets acquired 847 850 850 Amortization of ESOP 932 820 771 Amortization of RRP 1,079 1,260 104 Provision for loan losses 1,441 1,650 1,469 Provision for losses on real estate owned -- 28 122 Net loss (gain) on sales of loans and securities 876 (684) (710) Loans originated for sale (10,041) (7,259) (14,386) Proceeds from sales of mortgage loans available for sale 9,786 7,234 14,483 Net gain on sales of real estate owned (14) (1) (153) Net amortization of premiums and accretion of discounts and deferred fees 387 (168) 1,869 (Increase) decrease in interest and dividends receivable (1,203) 1,278 (1,090) Tax benefit on stock options 655 -- -- Increase (decrease) in other liabilities 1,901 (5,173) 5,353 (Increase) decrease in other assets (1,356) 2,720 (2,002) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 29,597 27,613 27,413 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales and calls of investment securities available for sale 52,979 144,123 140,727 Proceeds from sales of mortgage-backed securities available for sale 194,330 240,788 78,752 Proceeds from sales of real estate owned 523 2,375 3,443 Purchases of investment securities available for sale (66,684) (131,356) (226,583) Purchases of mortgage-backed securities available for sale (153,921) (372,883) (393,292) Purchases of investment securities -- -- (85,501) Maturities of investment securities -- -- 135,010 Purchases of mortgage-backed securities -- -- (5,541) Principal payments on mortgage-backed securities 91,839 203,929 229,144 Origination of loans (319,149) (344,286) (333,166) Purchases of mortgage loans (87,829) (57,459) (26,784) Principal repayments on loans 237,588 237,927 216,549 Purchase of FHLB-NY stock (1,543) (5,248) (2,032) Purchases of premises and equipment (928) (1,428) (3,435) Proceeds from sale of fixed assets -- -- 124 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (52,795) (83,518) (272,585) - ------------------------------------------------------------------------------------------------------------------------------------ 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 143 1,489 1,592 Cash dividends paid (13,844) (8,620) (7,250) Net increase (decrease) in deposits 5,612 (54,395) 40,815 Net (decrease) increase in short-term borrowed funds (10,000) 25,000 -- Proceeds from borrowed funds 521,000 310,000 181,675 Repayment of borrowed funds (427,045) (177,675) (103,665) Net increase in advances by borrowers for taxes and insurance 769 1,416 720 Purchases of treasury stock (48,646) (48,035) (10,728) Purchase and retirement of common stock (279) (299) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 27,710 48,881 252,900 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 4,512 (7,024) 7,728 Cash and cash equivalents at beginning of year 30,607 37,631 29,903 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 35,119 $ 30,607 $ 37,631 ==================================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 78,096 $ 63,251 $ 64,906 Income taxes 11,360 15,332 8,106 Non cash investing and financing activities for the year: Transfer of loans to real estate owned 300 1,415 3,349 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. 18 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a description of the 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 (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 year ended September 30, 1998 were combined with the Company's calendar year. 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 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 are 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 non-interest income. Investment securities and mortgage-backed securities, other than those designated as available for sale or trading, are carried at amortized historical cost and consist of those securities for which there is a positive intent and ability to hold to maturity. All securities are adjusted for amortization of premiums and accretion of discounts using the level-yield method over the estimated lives of the securities. FEDERAL HOME LOAN BANK OF NEW YORK STOCK The Bank, as a member of the FHLB-NY, is required to hold shares of capital stock in the FHLB-NY in an amount equal to 1% of the Bank's outstanding balance of 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 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 19 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, while 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. Management periodically reviews the potential impairment of the core deposit intangible asset on a non-discounted cash flow basis to assess recoverability. If the estimated future cash flows are projected to be less than the carrying amount, an impairment write-down, representing the carrying amount of the intangible asset which exceeds the present value of the estimated expected future cash flows, would be recorded as a period expense. 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 to 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 plan is expensed by the Company over the awards' vesting period based upon the fair market value of the stock on the date of the grant. Stock committed to be released to employees under the Bank's ESOP plan is expensed at fair market value. 20 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 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 amounts exclude unallocated shares held by the ESOP. All share and per share amounts have been restated for the Reorganization described in Note 2 to the Consolidated Financial Statements. (Dollars in thousands, except per share data): Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Net income $ 22,968 $ 23,652 $ 19,493 ================================================================================ Basic weighted average common shares outstanding 33,436,961 39,464,227 41,983,776 Plus: Dilutive stock options 286,164 384,069 658,941 Dilutive awards 32,306 359,304 51,570 - -------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 33,755,431 40,207,600 42,694,287 ================================================================================ Net income per common share: Basic $0.69 $0.60 $0.46 Diluted 0.68 0.59 0.46 RECLASSIFICATIONS Certain reclassifications have been made to the 1999 and 1998 amounts to conform to the 2000 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 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. (3) INVESTMENT SECURITIES A summary of investment securities at December 31, is as follows (in thousands): Gross Gross Estimated Amortized unrealized unrealized market 2000 cost gains losses value - -------------------------------------------------------------------------------- INVESTMENT SECURITIES AVAILABLE FOR SALE U.S. Government and Agency obligations $151,753 $106 $(2,710) $149,149 State and political obligations 12,813 4 (366) 12,451 Corporate obligations 67,267 356 (4,743) 62,880 Equity securities 10,817 8 (335) 10,490 - -------------------------------------------------------------------------------- Total investment securities available for sale $242,650 $474 $(8,154) $234,970 =============================================================================== Gross Gross Estimated Amortized unrealized unrealized market 1999 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 ================================================================================ The cost and estimated fair value of debt investment securities at December 31, 2000, by contractual maturity, are shown below. 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 $ 7,069 $ 7,043 One to five years 78,835 78,554 Five to ten years 74,196 73,503 Greater than ten years 71,733 65,380 - -------------------------------------------------------------------------------- $231,833 $224,480 ================================================================================ The realized gross gains and losses from sales are as follows: Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Gross realized gains $ 301 $ 247 $ 348 Gross realized losses (729) (209) (3) - -------------------------------------------------------------------------------- $(428) $ 38 $ 345 ================================================================================ Investment securities with an amortized cost of $122.8 million at December 31, 2000, 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). (4) MORTGAGE-BACKED SECURITIES A summary of mortgage-backed securities at December 31, is as follows (in thousands): Gross Gross Estimated Amortized unrealized unrealized market 2000 cost gains losses value - -------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE FHLMC $161,038 $388 $ (837) $160,589 GNMA 29,473 228 (91) 29,610 FNMA 60,269 29 (917) 59,381 Collateralized mortgage obligations 201,765 14 (4,337) 197,442 - -------------------------------------------------------------------------------- Total mortgage-backed securities available for sale $452,545 $659 $(6,182) $447,022 ================================================================================ FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 21 Gross Gross Estimated Amortized unrealized unrealized market 1999 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 - -------------------------------------------------------------------------------- Collateralized mortgage obligations ("CMOs") issued by FHLMC, FNMA, GNMA and private interests amounted to $105.0 million, $23.5 million, $6.3 million and $62.6 million, respectively, at December 31, 2000, and $158.3 million, $27.2 million, $7.0 million and $72.4 million, respectively, at December 31, 1999. 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, 2000 1999 1998 - -------------------------------------------------------------------------------- Gross realized gains $ 558 $ 1,387 $ 338 Gross realized losses (1,028) (716) (70) - -------------------------------------------------------------------------------- $ (470) $ 671 $ 268 ================================================================================ Mortgage-backed securities with an amortized cost of $263,000 at December 31, 2000, were pledged as collateral to secure deposits held for municipalities within the State of New Jersey. Mortgage-backed securities with an amortized cost of $333.8 million at December 31, 2000, 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. (5) LOANS RECEIVABLE, NET A summary of loans receivable at December 31, is as follows (in thousands): 2000 1999 - -------------------------------------------------------------------------------- LOANS RECEIVABLE Real estate mortgages: One-to-four family $ 879,578 $ 774,858 Multi-family and commercial 144,151 109,320 Home equity 114,152 98,324 - -------------------------------------------------------------------------------- 1,137,881 982,502 Real estate construction 60,452 54,889 Consumer 16,121 16,638 - -------------------------------------------------------------------------------- Total loans receivable 1,214,454 1,054,029 Loans in process (19,161) (27,999) Net unamortized premium and deferred expenses 1,850 1,090 Allowance for loan losses (12,341) (11,004) - -------------------------------------------------------------------------------- (29,652) (37,913) - -------------------------------------------------------------------------------- Loans receivable, net $ 1,184,802 $ 1,016,116 ================================================================================ Loans receivable included loans held for sale totaling $277,000 at December 31, 2000. There were no loans held for sale at December 31, 1999. The Company serviced loans for others in the amount of $75.8 million, $81.9 million and $87.6 million at December 31, 2000, 1999 and 1998, respectively. Related servicing income earned on loans serviced for others totaled $177,000, $202,000 and $237,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Loans in the amount of $3.3 million and $1.2 million were outstanding to directors and executive officers of the Company at December 31, 2000 and 1999, respectively. During 2000, new extensions of credit to directors and executive officers of the Company totaled $2.6 million and repayments by such persons totaled $500,000. 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): 2000 1999 - -------------------------------------------------------------------------------- Non-accrual loans $2,349 $2,356 Loans 90 days or more delinquent and still accruing 40 326 - -------------------------------------------------------------------------------- Total non-performing loans 2,389 2,682 Real estate owned (included in Other assets) 257 466 - -------------------------------------------------------------------------------- Total non-performing assets $2,646 $3,148 ================================================================================ At December 31, 2000 and 1999, the impaired loan portfolio totaled $170,000 and $42,000, respectively, for which general and specific allocations to the allowance for loan losses of $17,000 and $33,000 were identified at December 31, 2000 and 1999, respectively. The average balance of impaired loans during 2000, 1999 and 1998 was $195,000, $222,000 and $373,000, respectively. 22 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES If interest income on non-accrual and impaired loans had been current in accordance with their original terms, approximately $193,000, $197,000 and $311,000 of interest income for the years ended December 31, 2000, 1999 and 1998, respectively, would have been recorded. Interest income recognized on non-accrual and impaired loans totaled $132,000, $108,000 and $145,000 for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, there were no commitments to lend additional funds to borrowers whose loans are classified as non-performing. An analysis of the allowance for loan losses for the years ended December 31, is as follows (in thousands): 2000 1999 1998 - -------------------------------------------------------------------------------- Balance at beginning of year $ 11,004 $ 9,505 $ 8,454 Provision charged to operations 1,441 1,650 1,469 - -------------------------------------------------------------------------------- 12,445 11,155 9,923 Charge-offs (104) (151) (596) Recoveries -- -- 28 Allowance activity of Pulse during conforming period, net -- -- 150 - -------------------------------------------------------------------------------- Balance at end of year $ 12,341 $ 11,004 $ 9,505 ================================================================================ (6) INTEREST AND DIVIDENDS RECEIVABLE A summary of interest and dividends receivable at December 31, is as follows (in thousands): 2000 1999 - -------------------------------------------------------------------------------- Loans $ 6,351 $ 5,055 Investment securities 3,761 3,260 Mortgage-backed securities 3,369 3,963 - -------------------------------------------------------------------------------- Interest and dividends receivable $13,481 $12,278 ================================================================================ (7) PREMISES AND EQUIPMENT, NET Premises and equipment at December 31, are summarized as follows (in thousands): 2000 1999 - -------------------------------------------------------------------------------- Land $ 3,870 $ 3,870 Buildings and improvements 14,380 14,227 Leasehold improvements 1,281 1,361 Furnishings, equipment and automobiles 8,424 7,788 Construction in progress 179 67 - -------------------------------------------------------------------------------- 28,134 27,313 Accumulated depreciation and amortization (12,042) (10,810) - -------------------------------------------------------------------------------- Premises and equipment, net $ 16,092 $ 16,503 ================================================================================ (8) DEPOSITS Deposits at December 31, are summarized as follows (dollars in thousands): 2000 1999 ------------------------------- ------------------------------- Interest Weighted Interest Weighted rate average rate average Amount ranges rate Amount ranges rate - -------------------------------------------------------------------------------- Non-interest- bearing demand $ 51,739 --% --% $ 43,744 --% --% NOW and money market 358,961 1.02-3.18 2.63 354,908 0-3.22 2.63 Savings 159,812 2.15-5.16 2.32 165,593 0-5.16 2.27 Certificates of deposit 648,824 2.96-7.72 5.72 649,479 2.96-7.72 4.96 - -------------------------- ---------- $1,219,336 0-7.72% 4.12% $1,213,724 0-7.72% 3.73% ================================================================================ The scheduled maturities of certificates of deposit at December 31, 2000 are as follows (in thousands): One year or less $516,149 After one to two years 80,807 After two to three years 17,046 After three to four years 14,699 After four to five years 9,361 After five years 10,762 - -------------------------------------------------------------------------------- $648,824 ================================================================================ Included in deposits at December 31, 2000 and 1999 are $155.6 million and $154.2 million of deposits of $100,000 and over, and $444,000 and $414,000, respectively, of accrued interest payable on deposits. (9) BORROWED FUNDS FEDERAL HOME LOAN BANK OF NEW YORK ADVANCES Advances from the FHLB-NY at December 31, are summarized as follows (dollars in thousands): 2000 1999 -------------------- --------------------- Weighted Weighted average average interest interest Maturity Amount rate Amount rate - -------------------------------------------------------------------------------- 2000 $ -- --% $ 72,000 6.12% 2001 25,000 6.64 -- -- 2002 5,000 6.88 5,000 6.58 2003 15,000 5.68 25,000 5.14 2005 25,000 5.85 -- -- 2007 5,955 7.32 -- -- 2009 5,000 5.52 5,000 5.52 - ----------------------------------------- ---------- $80,955 6.21% $107,000 5.88% ================================================================================ FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 23 The Company has entered into FHLB-NY advances that have call features that may be exercised by the FHLB-NY, at par, at predetermined dates. Such advances totaled $30.0 million and $15.0 million at December 31, 2000 and 1999, respectively. The maximum amount of FHLB-NY advances outstanding at any month-end during the years ended December 31, 2000 and 1999 was $140.2 million and $139.3 million, respectively. The average amount of FHLB-NY advances outstanding during the years ended December 31, 2000 and 1999 was $99.1 million and $70.9 million, respectively. At December 31, 2000 and 1999, $5.0 million and $65.0 million, respectively, of FHLB-NY advances had adjustable rates. Advances from the FHLB-NY are secured by pledges of FHLB-NY stock of $19.6 million and $18.1 million at December 31, 2000 and 1999, 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, 2000. OTHER BORROWINGS The following is a summary of other borrowings at December 31, (dollars in thousands): 2000 1999 ------------------------- ------------------------- Weighted Weighted average average Contractual interest interest Maturity Amount rate Amount rate - -------------------------------------------------------------------------------- 2000 $ -- --% $130,000 5.75% 2001 200,000 6.58 -- -- 2002 10,000 5.08 30,000 5.49 2003 -- -- 10,000 4.70 2004 60,000 5.82 60,000 5.82 2005 65,000 6.03 -- -- 2008 35,000 5.09 55,000 5.12 2009 30,000 5.64 30,000 5.64 2010 25,000 6.47 -- -- - ----------------------------------------- ---------- $425,000 6.16% $315,000 5.58% ================================================================================ Other borrowings consist of securities sold under agreements to repurchase. The maximum amount of other borrowings outstanding at any month-end during the years ended December 31, 2000 and 1999 was $440.0 million and $315.0 million, respectively. The average amount of other borrowings outstanding during the years ended December 31, 2000 and 1999 was $404.3 million and $254.6 million, respectively. Securities underlying other borrowings included mortgage-backed and investment securities, which had an amortized cost of $456.6 million and $344.8 million, and market values of $451.5 million and $335.7 million at December 31, 2000 and 1999, respectively. The securities underlying the other borrowing agreements are under the Company's control. At December 31, 2000 and 1999, $215.0 million and $180.5 million, respectively, of other borrowings are callable at par, at defined dates and at the lender's discretion prior to the contractual maturity of the borrowings. (10) REGULATORY MATTERS Subject to applicable law, the Board of Directors of the Bank may provide for the payment of dividends. New Jersey law provides that no dividend may be paid unless, after the payment of such dividend, the capital stock of the Bank will not be impaired and either the Bank will have a statutory surplus of not less than 50% of its capital stock or the payment of such dividend will not reduce the statutory surplus of the Bank. The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Institutions categorized as "undercapitalized" or worse are subject to certain restrictions on the payment of dividends and management fees, restrictions on asset growth and executive compensation, and increased supervisory monitoring, among other things. Other restrictions may be imposed on the institution by the regulatory agencies, including requirements to raise additional capital, sell assets, or sell the entire institution. Once an institution becomes "critically undercapitalized" it must generally be placed in receivership or conservatorship within 90 days. An institution is deemed to be "critically undercapitalized" if it has a tangible equity ratio, as defined, of 2.0% or less. To be considered "well capitalized," an institution must generally have a leverage ratio (Tier 1 capital to average total assets), as defined, of at least 5.0%; a Tier 1 risk-based capital ratio, as defined, of at least 6.0%; and a total risk-based capital ratio, as defined, of at least 10.0%. Management believes that, as of December 31, 2000, the Bank met all capital adequacy requirements to which it was subject. Further, the most recent FDIC 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. 24 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 2000, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a "well capitalized" institution (dollars in thousands): FDIC Requirements ------------------------------------- Minimum capital For classification Bank actual adequacy as well capitalized ---------------- --------------- ------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------- DECEMBER 31, 2000 Leverage (Tier 1) capital $180,322 9.36% $ 77,025 4.00% $ 96,281 5.00% Risk-based capital: Tier 1 180,322 17.91 40,273 4.00 60,409 6.00 Total 192,663 19.14 80,545 8.00 100,682 10.00 The Bank converted its charter from a thrift to a stock savings bank effective January 28, 2000. Prior to the charter conversion, the Bank was subject to OTS regulation. Under the OTS regulations in effect at December 31, 1999, 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%. The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1999, compared to the OTS minimum capital adequacy requirements and the OTS requirements for classification as a "well capitalized" institution (dollars in thousands): OTS Requirements ------------------------------------- Minimum capital For classification Bank actual adequacy as well 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 (11) INCOME TAXES Income tax expense applicable to income for the years ended December 31, consists of the following (in thousands): 2000 1999 1998 - -------------------------------------------------------------------------------- FEDERAL: Current $ 11,388 $ 13,043 $ 11,273 Deferred (514) (974) (727) - -------------------------------------------------------------------------------- 10,874 12,069 10,546 STATE: Current 225 17 458 Deferred -- 69 (60) - -------------------------------------------------------------------------------- 225 86 398 - -------------------------------------------------------------------------------- $ 11,099 $ 12,155 $ 10,944 ================================================================================ 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): 2000 1999 1998 - -------------------------------------------------------------------------------- Income before income taxes $ 34,067 $ 35,807 $30,437 Applicable statutory federal tax rate 35% 35% 35% - -------------------------------------------------------------------------------- Computed "expected" federal income tax expense 11,923 12,532 10,653 Increase in federal income tax expense resulting from: State income taxes, net of federal benefit 146 56 259 Other items, net (970) (433) 32 - -------------------------------------------------------------------------------- $ 11,099 $ 12,155 $10,944 ================================================================================ 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): 2000 1999 - -------------------------------------------------------------------------------- DEFERRED TAX ASSETS Provision for loan losses--book $ 4,319 $ 3,851 Unrealized loss on securities available for sale 4,669 9,732 Postretirement benefits 552 468 Tax depreciation less than book depreciation 132 132 Excess pension expense 624 480 Stock awards 154 162 Excess cost over fair value of net assets acquired 468 465 Other 130 90 - -------------------------------------------------------------------------------- Total deferred tax assets 11,048 15,380 - -------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Provision for loan losses--tax 581 872 Deferred points 742 175 Other 111 170 - -------------------------------------------------------------------------------- Total deferred tax liabilities 1,434 1,217 - -------------------------------------------------------------------------------- Net deferred tax asset $ 9,614 $14,163 ================================================================================ Retained earnings at December 31, 2000 and 1999 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, 2000 and 1999, the Company had an unrecognized tax liability of $6.5 million with respect to this reserve. Included in other comprehensive income is income tax expense (benefit) attributable to net unrealized gains (losses) on securities available for sale in the amounts of $5,063,000, $(11,137,000) and $677,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In addition, income tax benefit of $655,000, $0 and $0 was recognized in 2000, 1999 and 1998, respectively, related to the exercise of non-qualified stock options. FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 25 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 pretax 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 expense (benefit) was $160,000, $(118,000) and $214,000 for the years ended December 31, 2000, 1999 and 1998, 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 a Supplemental Executive Retirement Plan ("SERP"), which provides post-employment supplemental retirement benefits to certain officers of the Company. The SERP is a non-qualified employee benefit plan. The Company has a non-pension postretirement benefit plan ("Other Benefits"), which provides certain healthcare benefits to eligible employees. The plan is unfunded as of December 31, 2000, and the obligation is included in Other liabilities as an accrued postretirement benefit cost. The following table shows the change in benefit obligation, the funded status for the SERP and other benefits, and (accrued cost) prepaid benefit at December 31, (in thousands): SERP Other Benefits ------------------- --------------------- 2000 1999 2000 1999 - -------------------------------------------------------------------------------- Benefit obligation at beginning of year $ 1,061 $ 1,040 $ 1,743 $ 1,646 Service cost 104 92 63 81 Interest cost 85 73 99 115 Actuarial loss (gain) 78 (144) (348) (39) Benefits paid -- -- (36) (60) - -------------------------------------------------------------------------------- Benefit obligation at the end of the year $ 1,328 $ 1,061 $ 1,521 $ 1,743 ================================================================================ Funded status $(1,328) $(1,061) $(1,521) $(1,743) Unrecognized net actuarial loss (gain) 147 69 (61) 283 - -------------------------------------------------------------------------------- Accrued benefit cost $(1,181) $ (992) $(1,582) $(1,460) ================================================================================ Weighted average assumptions as of December 31: Discount rate 7.50% 8.00% 7.50% 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 ---------------------- ------------------------ 2000 1999 1998 2000 1999 1998 - -------------------------------------------------------------------------------- Service cost $104 $ 92 $ 80 $ 63 $ 81 $ 59 Interest cost 85 73 60 99 115 87 Amortization of net actuarial loss (gain) -- 12 9 (4) 26 85 Amortization of prior service cost -- -- -- -- -- 70 - -------------------------------------------------------------------------------- Net periodic cost $189 $177 $149 $ 158 $222 $301 ================================================================================ For measurement purposes, a five percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000 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): 1 Percentage Point ---------------------- Increase Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 41 $ (31) Effect on other benefits obligation 355 (270) 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 $89,000, $88,000 and $141,000 for the years ended December 31, 2000, 1999 and 1998, respectively. RECOGNITION AND RETENTION PLAN The Company maintains a Recognition and Retention Plan ("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, 2000, 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, 2000. 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 $1,079,000, $1,260,000 and $104,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Amortization in 2000 and 1999 included $151,000 and $202,000, respectively, in accelerated expense due to the deaths of two of the Company's directors. 26 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 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 repaid. 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 and interest 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, 2000, there were 1,236,266 unallocated ESOP shares with a market value of $14.2 million. The Company recognizes compensation expense based on the fair value of shares committed to be released. Compensation expense recognized for 2000, 1999 and 1998 amounted to $932,000, $820,000 and $771,000, respectively. The Company allocated 100,920, 100,920 and 84,796, shares during 2000, 1999 and 1998, respectively. 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: 2000 1999 1998 ------------------- ------------------- ------------------- 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 2,297,996 $7.55 2,840,284 $6.55 1,751,298 $3.12 Granted 31,437 9.00 -- -- 1,702,836 8.88 Forfeited (1,000) 9.00 -- -- (43,090) 3.69 Exercised (42,589) 3.35 (542,288) 2.70 (570,760) 2.79 - ------------------------------ ------------- ------------ Outstanding at end of period 2,285,844 $7.65 2,297,996 $7.55 2,840,284 $6.55 ================================================================================ Options exercisable at year-end 1,393,094 1,074,196 1,137,164 ================================================================================ The following table summarizes information about the stock options outstanding at December 31, 2000: 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 - -------------------------------------------------------------------------------- $2.341-3.454 139,628 4.1 $3.22 139,628 $3.22 3.587-4.517 412,943 5.8 3.96 412,943 3.96 6.642-9.000 1,733,273 8.0 8.88 840,523 8.76 ---------- ---------- $2.341-9.000 2,285,844 7.4 $7.65 1,393,094 $6.78 ================================================================================ The Company applies APB Opinion No. 25 in accounting for the Plans. Consistent with Statement of Financial Accounting Standards ("SFAS") No. 123, if compensation cost for the Plans was accounted for under the fair value method, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share data): 2000 1999 1998 - -------------------------------------------------------------------------------- NET INCOME: As reported $22,968 $23,652 $19,493 Pro forma 22,229 22,920 18,762 EARNINGS PER SHARE: Basic earnings per share $ 0.69 $ 0.60 $ 0.46 Diluted earnings per share 0.68 0.59 0.46 Pro forma basic earnings per share 0.66 0.58 0.45 Pro forma diluted earnings per share 0.66 0.57 0.45 Weighted average fair value of options granted during year $ 1.19 $ -- $ 2.21 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 2000 and 1998: dividend yield of 2.50% and 2.35%; an expected volatility of 25% and 20%; and a risk-free interest rate of 6.20% and 5.00%. There were no grants made in 1999. (13) COMMITMENTS AND CONTINGENCIES COMMITMENTS FINANCIAL TRANSACTIONS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT The Company, in the normal course of conducting its business, extends credit to meet the financing needs of its customers through commitments and letters of credit. FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 27 The following commitments and contingent liabilities existed at December 31, which are not reflected in the accompanying consolidated financial statements (in thousands): 2000 1999 - -------------------------------------------------------------------------------- Origination of mortgage loans: Fixed rate $ 9,899 $ 8,904 Variable rate 88,341 95,434 Purchase of mortgage loans--variable rate 1,238 10,770 Undisbursed home equity credit lines 50,427 45,430 Purchase of investment and mortgage-backed securities 8,897 22,046 Undisbursed construction credit lines 19,161 27,999 Undisbursed consumer lines of credit 10,918 11,667 Participations in Thrift Institutions Community Investment Corp. of NJ 500 1,000 Standby letters of credit 2,296 2,856 ================================================================================ 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 makes one-to-four family first mortgage real estate loans, multi-family loans, construction loans, and nonresidential first mortgage real estate loans to borrowers throughout New Jersey. Its borrowers' abilities to repay their obligations are dependent upon various factors, including the borrowers' income and net worth, cash flows generated by the underlying collateral, value of the underlying collateral and priority of the Company's lien on the property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Company's control; the Company is therefore subject to risk of loss. The Company believes its lending policies and procedures adequately minimize the potential exposure to such risks and that adequate provisions for loan losses are provided for all known and inherent risks. Collateral and/or guarantees are required for virtually all loans. LEASE OBLIGATIONS At December 31, 2000, the Company was obligated under noncancellable operating leases for premises and equipment. Rental expense under these leases aggregated approximately $523,000, $525,000 and $507,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The projected minimum rental commitments as of December 31, 2000, are as follows (in thousands): 2001 $ 447 2002 439 2003 348 2004 313 2005 171 Thereafter 60 - -------------------------------------------------------------------------------- $1,778 ================================================================================ 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 March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25." This interpretation clarifies certain issues with respect to the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees." This interpretation results in a number of changes in the application of APB Opinion No. 25 accounting treatment to options granted to outside directors for their services as directors. The provisions of this interpretation were effective July 1, 2000 and apply prospectively, except for certain modifications to equity awards made after December 15, 1998. The initial adoption of this interpretation did not have a significant impact on the Company's financial statements. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment to FASB Statement No. 133." SFAS No. 138 amends certain aspects of SFAS No. 133 to simplify the accounting for derivatives and hedges under SFAS No. 133. SFAS No. 138 is effective upon the Company's adoption of SFAS No. 133 (January 1, 2001). The initial adoption of SFAS No. 133 and SFAS No. 138 did not have a material impact on the Company's financial statements. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (a Replacement of FASB Statement No. 125)." SFAS No. 140 supersedes and replaces the guidance in SFAS No. 125 and, accordingly, provides guidance on the following topics: securitization transactions involving financial assets; sales of financial assets such as receivables, loans and securities; factoring transactions; wash sales; servicing assets and liabilities; collateralized borrowing arrangements; securities lending transactions; repurchase agreements; loan collateralized borrowing arrangements; securities lending transactions; repurchase agreements; loan participations; and extinguishment of liabilities. While most of the provisions of SFAS No. 140 are effective for transactions entered into after March 31, 2001, companies with fiscal year ends 28 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES that hold beneficial interests from previous securitizations will be required to make additional disclosures in their December 31, 2000 financial statements. The initial adoption of SFAS No. 140 will not have a material impact on the Company's financial statements. (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 OF NY STOCK Federal Home Loan Bank of NY stock is valued at cost. INVESTMENT AND MORTGAGE-BACKED SECURITIES For investment and mortgage-backed securities, fair values were based on quoted market prices or dealer quotes. If a quoted market price was not available, fair values were estimated using quoted market prices for similar securities. LOANS RECEIVABLE, NET Fair values were estimated for portfolios of performing and nonperforming loans with similar financial characteristics. For certain analogous categories of loans, such as residential mortgages, home equity loans, non-residential mortgages, and consumer loans, fair value was estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other performing loan types was estimated by discounting the future cash flows using market discount rates that reflect the credit, collateral, and interest rate risk inherent in the loan. DEPOSITS The fair value of demand deposits, savings deposits and money market accounts were the amounts payable on demand at December 31, 2000 and 1999. 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): 2000 1999 ---------------------- ---------------------- Book Fair Book Fair Value Value Value Value - -------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and cash equivalents $ 35,119 $ 35,119 $ 30,607 $ 30,607 FHLB-NY stock 19,643 19,643 18,100 18,100 Investment securities available for sale 234,970 234,970 213,590 213,590 Mortgage-backed securities available for sale 447,022 447,022 575,159 575,159 Loans receivable, net 1,184,802 1,186,987 1,016,116 990,633 FINANCIAL LIABILITIES: Deposits 1,219,336 1,220,475 1,213,724 1,213,316 Borrowings 505,955 507,218 422,000 415,932 OFF-BALANCE SHEET INSTRUMENTS: Loan commitments -- 192 -- 661 Standby letters of credit -- 23 -- 29 LIMITATIONS The foregoing fair value estimates were made at December 31, 2000 and 1999, 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, 2000 and 1999, 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. FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 29 (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, 2000 1999 - -------------------------------------------------------------------------------- (In thousands) ASSETS Cash $ 1,667 $ 26,229 Due from subsidiary 3,603 2,300 ESOP loan receivable 12,346 12,156 Investment in subsidiaries 180,447 186,933 Investment securities available for sale 23,713 21,659 Other assets 1,543 2,011 - -------------------------------------------------------------------------------- Total assets $223,319 $251,288 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Dividends payable $-- $ 5,772 Other liabilities 1,156 936 Stockholders' equity 222,163 244,580 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $223,319 $251,288 ================================================================================ CONDENSED STATEMENTS OF INCOME Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- (In thousands) Income Dividends from subsidiary $ 37,000 $ 49,400 $13,848 Interest and dividends on securities 2,007 1,555 1,767 Net gain on sales of securities 86 179 106 Other income -- -- 1 - -------------------------------------------------------------------------------- Total income 39,093 51,134 15,722 - -------------------------------------------------------------------------------- Expense Merger expense -- -- 2,128 Other expense 703 1,343 306 - -------------------------------------------------------------------------------- Total expense 703 1,343 2,434 - -------------------------------------------------------------------------------- Income before taxes 38,390 49,791 13,288 Income taxes 878 543 208 - -------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiary 37,512 49,248 13,080 (Dividends in excess of earnings) equity in undistributed income of subsidiary (14,544) (25,596) 6,413 - -------------------------------------------------------------------------------- Net income $ 22,968 $ 23,652 $19,493 ================================================================================ CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- (In thousands) Operating Activities Net Income $ 22,968 $ 23,652 $ 19,493 Adjustments to reconcile net income to net cash provided by operating activities: Dividends in excess of earnings (increase in undistributed earnings of subsidiary) 14,544 25,596 (6,413) Net gains on sales of investment securities available for sale (86) (179) (106) Decrease (increase) in other assets 1,012 852 (543) (Decrease) increase in other liabilities 75 (678) 1,618 Amortization of ESOP 932 820 771 Amortization of RRP 1,079 1,260 104 - -------------------------------------------------------------------------------- Net cash provided by operating activities 40,524 51,323 14,924 - -------------------------------------------------------------------------------- Investing Activities Purchase of investment securities (7,814) (20,407) (47,326) Proceeds from sales and maturities of investment securities available for sale 6,657 22,280 20,405 (Increase) decrease in due from subsidiary (1,303) (600) 250 Capital contributed to subsidiary Bank -- -- (92,869) - -------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (2,460) 1,273 (119,540) - -------------------------------------------------------------------------------- Financing Activities Cash dividends paid (13,844) (8,620) (7,250) Net proceeds from stock offering -- -- 163,809 ESOP stock contribution -- -- (13,240) Equity adjustment for conforming of annual reporting periods -- -- (828) Stock options exercised 143 1,489 1,592 Purchase of treasury stock (48,646) (48,035) (10,728) Purchase and retirement of common stock (279) (299) -- - -------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (62,626) (55,465) 133,355 - -------------------------------------------------------------------------------- Net (decrease) increase in cash (24,562) (2,869) 28,739 Cash at beginning of the year 26,229 29,098 359 - -------------------------------------------------------------------------------- Cash at end of year $ 1,667 $ 26,229 $ 29,098 ================================================================================ 30 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES (17) QUARTERLY FINANCIAL DATA (UNAUDITED) The following table contains quarterly financial data (dollars in thousands, except per share data): First Second Third Fourth YEAR ENDED DECEMBER 31, 2000 Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- Interest income $32,847 $34,173 $35,145 $34,624 Interest expense 18,229 19,343 20,848 20,452 - -------------------------------------------------------------------------------- Net interest income 14,618 14,830 14,297 14,172 Provision for loan losses 393 393 393 262 - -------------------------------------------------------------------------------- Net interest income after provision for loan losses 14,225 14,437 13,904 13,910 Non-interest income 738 701 70 760 Non-interest expense 6,331 6,253 5,795 6,299 - -------------------------------------------------------------------------------- Income before income tax expense 8,632 8,885 8,179 8,371 Income tax expense 2,896 3,089 2,538 2,576 - -------------------------------------------------------------------------------- Net income $ 5,736 $ 5,796 $ 5,641 $ 5,795 ================================================================================ Basic earnings per share $0.16 $0.17 $0.17 $0.18 ================================================================================ Diluted earnings per share $0.16 $0.17 $0.17 $0.18 ================================================================================ First Second Third Fourth Year Ended December 31, 1999 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 Non-interest income 1,047 1,003 846 735 Non-interest expense 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 $0.14 $0.15 $0.15 $0.16 ================================================================================ Diluted earnings per share $0.13 $0.15 $0.15 $0.16 ================================================================================ FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES 31 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Short Hills, New Jersey January 19, 2001 Shareholder Information DIVIDEND REINVESTMENT PLAN First Sentinel offers its shareholders a convenient plan to increase their investment in the Company. Shareholders can elect to have their quarterly cash dividends automatically reinvested in additional shares of common stock at market price without any commissions or service charges. In the alternative, shareholders can elect to have their cash dividends automatically deposited in an account at First Savings Bank. Shareholders may request information about the plan and an enrollment card by contacting the Company's executive offices at 877-636-BANK. TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 800-368-5948 MARKET MAKERS Friedman, Billings, Ramsey & Co., Inc. 1001 Nineteenth Street North Arlington, Va 22209-1722 Janney Montgomery Scott, LLC 1801 Market Street Philadelphia, PA 19103 Ryan, Beck & Co. 220 South Orange Avenue Livingston, NJ 07039 Sandler O'Neill & Partners, L.P. Two World Trade Center, 104th Floor New York, NY 10048 AUDITORS KPMG LLP 150 John F. Kennedy Parkway Short Hills, NJ 07078 COUNSEL Wilentz Goldman & Spitzer 90 Woodbridge Center Drive Woodbridge, NJ 07095 Thacher Proffitt & Wood Two World Trade Center New York, NY 10048 INVESTOR RELATIONS Ann C. Clancy First Sentinel Bancorp, Inc. 1000 Woodbridge Center Drive Woodbridge, NJ 07095 732-726-9700 ANNUAL MEETING First Sentinel's Annual Meeting of Shareholders will be held on Wednesday, April 25, 2001, at 10:00 a.m. at the Sheraton at Woodbridge Place, 515 Route 1 South, Iselin, New Jersey. 10-K AVAILABILITY Copies of First Sentinel's Form 10-K for the year ended December 31, 2000, are available free-of-charge to shareholders upon written request to First Sentinel Bancorp, Inc., 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095; Attention: Bonnie Petz. CONTACTS Persons seeking general or financial information about First Sentinel should contact Investor Relations at 732-726-9700 ext. 5514. Shareholders seeking information regarding stock records, changing the name, address or ownership of stock or reporting lost certificates should contact the Company's transfer agent, Registrar and Transfer Company, at 800-368-5948. 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, 2000, there were 3,013 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. 2000 1999 ------------------------- ------------------------ Dividends Dividends High Low Paid High Low Paid - -------------------------------------------------------------------------------- Fourth Quarter $11.50 $ 8.69 $ .060 $ 9.00 $ 7.75 $ .060 Third Quarter 9.81 8.00 .060 9.50 7.69 .055 Second Quarter 8.63 7.25 .060 8.88 7.00 .055 First Quarter 8.25 7.09 .210* 8.75 7.69 .050 * Includes a special cash dividend of $0.15 paid in January 2000. 32 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES EX-10.7 2 c20329_ex10-7.txt FIRST SAVINGS BANK DEFERRED FEE PLAN FIRST SAVINGS BANK DEFERRED FEE PLAN The First Savings Bank Deferred Fee Plan is effective as of January 1, 2001, and reflects the Board of Director's decision to combine, amend and restate the Agreement for Deferment of Directors Fees (established by resolution of the Board of Directors on May 27, 1981) and the First Savings Bank, SLA 1992 Deferred Fee Stock Unit Plan. 1. PURPOSE. The purpose of the First Savings Bank Deferred Fee Plan (the "Plan") is to provide an opportunity for the members of the Board of Directors of First Savings Bank (the "Savings Bank") to defer receipt of fees earned in their capacity as a director of the Savings Bank until a future date. The ability to defer fees under the Plan applies to all fees received by directors, including retainers, regular meeting fees, special meeting fees, and committee fees. 2. PARTICIPANTS. Any active director of the Savings Bank may elect to become a participant ("Participant") under this Plan by submitting a deferral election form to the Compensation Committee of the Board of Directors of the Savings Bank ("Compensation Committee"). Also, any director who participated in one of the prior arrangements and who is still owed a benefit pursuant to that arrangement will continue as a Participant in this Plan whether or not that director continues to defer fees under this Plan. 3. DEFERRED RETAINER AND FEES. (a) Any active director may defer all or any portion of his fees which are earned as a director for the year commencing after the date of his election to defer fees. The director shall specify the terms of his election to defer fees under this Plan by completing and submitting a deferral election form to the Compensation Committee. (b) Any Participant may change the amount of, or suspend, future deferrals with respect to fees earned for years commencing after the date of change or suspension by providing written notice to the Compensation Committee. Following any suspension a director may make a new election to again begin deferring fees under this Plan, after a period of at least 12 months has lapsed since he provided the Compensation Committee with notice of his suspension. However, no Participant may make such change to his election more often than once in any 12-month period. Any such election to re-participate in the Plan must be made during a period beginning on the third business day following the date of release of the quarterly or annual statements of earnings by First Sentinel Bancorp, Inc., and ending on the twelfth business day following such date. The election to defer shall be irrevocable as to fees deferred for the particular 12-month period. 4. METHOD OF DEFERRAL AND DISTRIBUTION. (a) The Savings Bank will maintain a deferred money account ("Deferred Money Account") for all Participants. (b) Amounts deferred pursuant to the Agreement for Deferment of Directors Fees that have not previously been credited to a Stock Unit Account shall be credited with an amount equal to the interest that would be payable on such sums if they were deposited in a six-month savings certificate or similar type of account at the Savings Bank. Interest will be credited based on a 360-day year end and will be credited at the average savings certificate rate of the previous quarter and calculated on the account balance of the Participants's Deferred Money Account as of the beginning of the current quarter. (c) Each Participant's deferred fees (other than those deferred pursuant to the Agreement for Deferment of Directors Fees that have not previously been credited to a Stock Unit Account) shall be converted into Stock Units quarterly as of March 31, June 30, September 30 and December 30 of each year by dividing the Participant's quarter-end cash balance by the last reported sales price per share of the common stock as reported on the Nasdaq National Market on the last day the common stock was traded at the end of each quarter. The Compensation Committee shall keep records for each Participant noting the number of Stock Units for full shares of common stock credited to each Participant's account at the end of a quarter. The aggregate value of the Stock Units at the end of each quarter shall be charged to each Participants' Deferred Money Account. Any dollar amount remaining in a Participant's Deferred Money Account after such charge shall be used together with future fee deferrals and converted to stock units at the next quarterly conversion date. (d) Additional credits will be made to each Participant's Deferred Money Account in dollar amounts equal to the cash dividends (or the fair market value of dividends paid in property) that each Participant would have received had he been the owner of a number of shares of common stock equal to the number of Stock Units credited to his Account on such dates. Such determinations shall be made as of the record date of any dividend paid on the common stock. (e) Unless otherwise elected by a Participant, cash dividends credited to his Deferred Money Account will be converted into Stock Units in the manner and at the same time as set forth in paragraph (c) of this Section 4. (f) An adjustment will be made to each Participant's Stock Unit Account to reflect any stock dividend or stock split that a Participant would have received had he been the owner on the record dates of a number of shares of common stock equal to the Stock Units credited to the Participant. 5. DISTRIBUTION. (a) A Participant shall receive his benefits payable under this Plan commencing as of the first month next following the later of: (i) the Participant's attainment of age 65; or (ii) the Participant's last day of service as a director of the Savings Bank. Notwithstanding the foregoing, with the consent of the Compensation Committee, a Participant 2 may also elect to receive his benefits commencing as of a specific date (regardless of whether the director has terminated service as of that date), provided that such date is at least one taxable year subsequent to the date the Participant makes his election. (b) A Participant may elect not later than one (1) year prior to the benefit commencement date determined under paragraph (a) of this Section 5 to receive his benefits in a lump sum payment. Such payment shall be in lieu of the monthly benefits that would otherwise be payable to a Participant and in full satisfaction of the Savings Bank's obligation to the Participant. The Participant's election shall be made in writing on a form designated by the Savings Bank for such purpose. In the absence of such an election, the Participant's benefits will be paid to him or his beneficiary in substantially equal payments over 40 quarterly installments. (c) Notwithstanding anything in this Section to the contrary, during any period when benefits are payable under this Plan to the Participant or his beneficiary in the form of a quarterly benefit, the Compensation Committee, may in its sole discretion, authorize the payment of a lump sum which is the equivalent to the then remaining quarterly benefits otherwise payable under this Plan. Such lump sum payment shall be in lieu of the quarterly benefits that would otherwise be payable to a Participant or his beneficiary. (d) A Participant shall also elect to have his Deferred Money Account balance distributed in the form of either: (i) common stock (based on the number of Stock Units credited to a Participant's Stock Unit Account); or (ii) cash (based on the market value of the number of Stock Units credited to the Participant's Stock Unit Account); the determination of the Participant's account shall be made as of the last day of the month preceding the distribution date. Distributions of Deferred Money Accounts shall be paid in cash. (e) In the event of a Participant's death, the Participant's account balance shall be distributed or begin to be distributed to the beneficiary designated by the Participant within 90 days of the Participant's death in the method designated by the Participant. If the beneficiary has predeceased the Participant or survives the Participant but then dies before all benefits payable hereunder have been paid, then the aggregate benefits then unpaid shall be paid to the beneficiary's estate, in a lump sum, no later than the 90th day following the date of the Participant's death. (f) Notwithstanding any other provision of this Section 5 to the contrary, the entire Account balance then credited to a Participant's Accounts shall be paid immediately in a single payment if: 3 (i) the Participant is discharged for "cause" by the Savings Bank, or (ii) the Compensation Committee determines that the Participant engaged in misconduct in connection with the Participant's service with the Savings Bank. The determination of whether a Participant is discharged for "cause" or whether a Participant has engaged in misconduct in connection with his service with the Savings Bank shall be made by the Board of Directors of the Savings Bank and such determination shall be binding on all concerned parties. (g) Notwithstanding anything in this Plan to the contrary, if, at any time, a court or the Internal Revenue Service determines that an amount in a Participant's Accounts is includible in the gross income of the Participant and subject to tax, the Compensation Committee may, in its sole discretion, permit a lump sum distribution of an amount equal to the amount determined to be includible in the Participant's gross income. (h) The Compensation Committee may make any provision necessary for withholding from any payment to a Participant or beneficiary amounts required for federal, state, and local income or employment tax purposes. 6. PARTICIPANT'S RIGHTS UNSECURED. The right of any Participant to receive a distribution under this Plan shall be an unsecured claim against the general assets of the Savings Bank. A director may not encumber or assign his deferred fees. From time to time, the Savings Bank may acquire (but shall be under no obligation to do so), through an irrevocable grantor's trust, shares of the outstanding common stock in anticipation of distributions under the Plan. The Savings Bank may also contribute cash or other assets to such a trust in anticipation of its benefit obligations under this Plan. However, in no event shall any Participant have any rights in or against such assets. All such assets shall constitute general assets of the Savings Bank. 7. ACCOUNT STATEMENTS At least annually, the Savings Bank will furnish each Participant with a statement setting forth the amount credited to his Deferred Money Account and, if applicable, his Stock Unit Account under this Plan. 8. AMENDMENTS TO THE PLAN. The Board of Directors of the Savings Bank may amend the Plan at any time, without the consent of the Participants or their beneficiaries, provided, however, that no amendment shall divest any Participant or beneficiary of rights to which he would have been entitled if the Plan had been terminated on the effective date of such amendment. 9. TERMINATION OF PLAN. The Board of Directors of the Savings Bank may terminate the Plan at any time. Upon termination of the Plan, distributions in respect to credits to a Participant's Accounts as of the date of termination shall be made in a lump sum. 10. EXPENSES. Costs of administration of the Plan will be paid by the Savings Bank. 4 The First Savings Bank Deferred Fee Plan was adopted by the Board of Directors of the Savings Bank on November 15, 2000. FIRST SAVINGS BANK - ---------------------- ------------------------------- Date For the Board of Directors EX-10.9 3 c20329_ex10-9.txt SUPP EXEC RETIREMENT PLAN II - FIRST SAVINGS FIRST SAVINGS BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN II FIRST SAVINGS BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN II Article I - Introduction .................................................... 1 Article II - Definitions .................................................... 1 Article III - Eligibility and Participation ................................. 4 Article IV - Benefits ....................................................... 4 Article V - Accounts ........................................................ 6 Article VI - Supplemental Benefit Payments .................................. 7 Article VII - Claims Procedures ............................................. 9 Article VIII - Amendment and Termination .................................... 10 Article IX - General Provisions ............................................. 10 ARTICLE I INTRODUCTION SECTION 1.01 PURPOSE, DESIGN AND INTENT. (a) The purpose of the First Savings Bank Supplemental Executive Retirement Plan II (the "Plan") is to assist First Savings Bank (the "Bank") and its affiliates in retaining the services of key employees until their retirement OR TERMINATION IN CONNECTION WITH A CHANGE IN CONTROL (AS DEFINED HEREIN), to induce such employees to use their best efforts to enhance the business of the Bank and its affiliates, and to provide certain supplemental retirement benefits to such employees. The Bank intends for the Plan to provide eligible executives with benefits that would have otherwise been provided under its tax-qualified employee stock ownership plan and 401(k) plan, but for certain limitations imposed on such plans by the Internal Revenue Code. The Bank also intends for the Plan to protect the executives from a possible reduction in anticipated benefits under the employee stock ownership plan as a result of their retirement or a change in control prior to the complete repayment of the loans used by the trustee of that plan to acquire shares of common stock of First Sentinel Bancorp. This document amends and restates in its entirety the previous governing document of the Plan. (b) The Plan, in relevant part, is intended to constitute an unfunded "excess benefit plan" as defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended. The Plan is specifically designed to provide certain key employees with retirement benefits that would have been provided under various tax-qualified retirement plans sponsored by the Bank but for the applicable limitations placed on benefits and contributions under such plans by various provisions of the Internal Revenue Code of 1986, as amended. ARTICLE II DEFINITIONS SECTION 2.01 DEFINITIONS. In this Plan, whenever the context so indicates, the singular or the plural number and the masculine or feminine gender shall be deemed to include the other, the terms "he," "his," and "him," shall refer to a Participant or a beneficiary of a Participant, as the case may be, and, except as otherwise provided, or unless the context otherwise requires, the capitalized terms shall have the following meanings: (a) "AFFILIATE" means any corporation, trade or business, which, at the time of reference, is together with the Bank, a member of a controlled group of corporations, a group of trades or businesses (whether or not incorporated) under common control, or an affiliated service group, as described in Sections 414(b), 414(c), and 414(m) of the Code, respectively, or any other organization treated as a single employer with the Bank under Section 414(o) of the Code. (b) "APPLICABLE LIMITATIONS" means one or more of the following, as applicable: (i) the maximum limitations on annual additions to a tax-qualified defined contribution plan under Section 415(c) of the Code; 1 (ii) the maximum limitation on the annual amount of compensation that may, under Section 401(a)(17) of the Code, be taken into account in determining contributions to and benefits under tax-qualified plans; and (iii) the maximum limitations, under Sections 401(k), 401(m), or 402(g) of the Code, on pre-tax contributions that may be made to a qualified defined contribution plan. (c) "BANK" means First Savings Bank and its successors. (d) "BOARD OF DIRECTORS" means the Board of Directors of the Bank. (e) "CHANGE IN CONTROL" Change in Control of the Bank or the Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a), with respect to the Bank, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Company representing 20% or more of the Bank's or the Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Bank purchased by the Company and any voting securities purchased by any employee benefit plan of the Company or its Subsidiaries, or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction occurs or is effectuated in which the Bank or Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or Bank with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Bank or Company then outstanding. (f) "CODE" means the Internal Revenue Code of 1986, as amended. 2 (g) "COMMITTEE" means the person(s) designated by the Board of Directors, pursuant to Section 9.02 of the Plan, to administer the Plan. (h) "COMMON STOCK" means the common stock of the Company. (i) "COMPANY" means First Sentinel Bancorp, Inc. and its successors. (j) "ELIGIBLE INDIVIDUAL" means any Employee of the Bank or an Affiliate who participates in the ESOP or the Savings Plan, as the case may be, and whom the Board of Directors determines is one of a "select group of management or highly compensated employees," as such phrase is used for purposes of Sections 101, 201, and 301 of ERISA. (k) "EMPLOYEE" means any person employed by the Bank or an Affiliate. (l) "EMPLOYER" means the Bank or Affiliate that employs the Employee. (m) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (n) "ESOP" means the First Savings Bank Employee Stock Ownership Plan, as amended from time to time. (o) "ESOP ACQUISITION LOAN" means a loan or other extension of credit incurred by the trustee of the ESOP in connection with the purchase of Common Stock on behalf of the ESOP. (p) "ESOP VALUATION DATE" means any day as of which the investment experience of the trust fund of the ESOP is determined and individuals' accounts under the ESOP are adjusted accordingly. (q) "EFFECTIVE DATE" means January 1, 1997. (r) "PARTICIPANT" means an Eligible Employee who is entitled to benefits under the Plan. (s) "PLAN" means this First Savings Bank Supplemental Executive Retirement Plan, as amended and restated. (t) "RETIREMENT" means Normal Retirement or Early Retirement as such terms are defined under the ESOP. (u) "SAVINGS PLAN" means the Incentive Savings Plan for Employees of First Savings Bank, as amended from time to time. (v) "SUPPLEMENTAL BENEFITS" means collectively the Supplemental ESOP Benefit and the Supplemental Savings Benefit. (w) "SUPPLEMENTAL ESOP ACCOUNT" means an account established by an Employer, pursuant to Section 5.01 of the Plan, with respect to a Participant's Supplemental ESOP Benefit. 3 (x) "SUPPLEMENTAL ESOP BENEFIT" means the benefit credited to a Participant pursuant to Section 4.01 of the Plan. (y) "SUPPLEMENTAL SAVINGS BENEFIT" means the benefit credited to a Participant pursuant to Section 4.03 of the Plan. (z) "SUPPLEMENTAL SAVINGS ACCOUNT" means an account established by an Employer, pursuant to Section 5.03 of the Plan, with respect to a Participant Supplement Savings Benefit. (aa) "SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT" means an account established by an Employer, pursuant to Section 5.02 of the Plan, with respect to a Participant's Supplemental Stock Ownership Benefit. (bb) "SUPPLEMENTAL STOCK OWNERSHIP BENEFIT" means the benefit credited to a Participant pursuant to Section 4.02 of the Plan. ARTICLE III ELIGIBILITY AND PARTICIPATION SECTION 3.01 ELIGIBILITY AND PARTICIPATION (a) Each Eligible Employee may participate in the Plan. An Eligible Employee shall become a Participant in the Plan upon designation as such by the Board of Directors. An Eligible Employee whom the Board of Directors designates as a Participant in the Plan shall commence participation as of the date established by the Board of Directors. The Board of Directors shall establish an Eligible Employee's date of participation at the same time it designates the Eligible Employee as a Participant in the Plan. Current Participants of the Plan, as of the date of this amendment and restatement, shall continue participation in the Plan without interruption until such time as the Board of Directors designates otherwise. (b) The Board of Directors may, at any time, designate an Eligible Employee as a Participant for any or all supplemental benefits provided for under Article IV of the Plan. ARTICLE IV BENEFITS SECTION 4.01 SUPPLEMENTAL ESOP BENEFIT As of the last day of each plan year of the ESOP, the Employer shall credit the Participant's Supplemental ESOP Account with a Supplemental ESOP Benefit equal to the excess of (a) over (b), where: (a) Equals the annual contributions made by the Employer and/or the number of shares of Common Stock released for allocation in connection with the repayment of an ESOP Acquisition Loan that would otherwise be allocated to the accounts of the Participant under 4 the ESOP for the applicable plan year if the provisions of the ESOP were administered without regard to and of the Applicable Limitations; and (b) Equals the annual contributions made by the Employer and for the number of shares of common stock released for allocation in connection with the repayment of an ESOP Acquisition Loan that are actually allocated to the accounts of the Participant under the provisions of the ESOP for that particular plan year after giving effect to any reduction of such allocation required by the limitations imposed by any of the Applicable Limitations. SECTION 4.02 SUPPLEMENTAL STOCK OWNERSHIP BENEFIT. (a) Upon a Participant's Retirement from the Employer, the Employer shall credit to the Participant's Supplemental Stock Ownership Account a Supplemental Stock Ownership Benefit equal to (i) less (ii), the result of which is multiplied by (iii), where: (i) Equals the total number of shares of Common Stock acquired with the proceeds of all ESOP Acquisition Loans (together with any dividends, cash proceeds, or other medium related to such ESOP Acquisition Loans) that would have been allocated or credited for the benefit of the Participant under the ESOP and/or this Plan, as the case may be, had the Participant continued in the employ of the Employer through the first ESOP Valuation Date following the last scheduled payment of principal and interest on all ESOP Acquisition Loans outstanding at the time of the Participant's Retirement; and (ii) Equals the total number of shares of Common Stock acquired with the proceeds of all ESOP Acquisition Loans (together with any dividends, cash proceeds, or other medium related to such ESOP acquisition Loans) and allocated for the benefit of the Participant under the ESOP and/or this Plan as of the first ESOP Valuation Date following the Participant's Retirement; and (iii) Equals the higher of the closing price of the Common Stock as of: (A) The first ESOP Valuation Date following the Participant's Retirement, or (B) The last day of the Participant's employment with the Employer. (b) For purposes of clause: (i) of subsection (a) of this Section 4.02, the total number of shares of Common Stock shall be determined by multiplying the sum of (i) and (ii) by (iii), where: (i) equals the average of the total shares of Common Stock acquired with the proceeds of an ESOP Acquisition Loan and allocated for the benefit of the Participant under the ESOP as of three most recent ESOP Valuation Dates preceding the Participant's Retirement (or lesser number if the Participant has not participated in the ESOP for three full years); (ii) equals the average number of shares of Common Stock credited to the Participant's Supplemental ESOP Account for the three most recent plan years of 5 the ESOP (such that the three recent plan years coincide with the three most recent ESOP Valuation Dates referred to in (i) above); and (iii) equals the total number of scheduled annual payments remaining on the ESOP Acquisition Loans as of the Participant's Retirement. (c) Notwithstanding the applicable provisions of paragraphs (a) and (b) of this Section 4.02, in the event of a Change in Control: (i) A Participant's Retirement shall be deemed to have occurred as of the effective date of the Change in Control, as determined by the Board of Directors, regardless of whether the Participant continues in the employ of the Employer following the Change in Control; and (ii) The determination of fair market value of the Common Stock shall be made as the effective date of the Change in Control. SECTION 4.03 SUPPLEMENTAL SAVINGS BENEFIT. (a) A Participant's Supplemental Savings Benefit under the Plan shall equal the difference between (i) and (ii), where: (i) equals the maximum amount the Participant would be permitted to contribute to the Savings Plan for a given year but for the Applicable Limitations; and (ii) equals the Participant's actual deferrals made into the Savings Plan. (b) The Participant shall only be eligible for a benefit under this Section 4.03 if he defers the maximum amount possible under the Savings Plan, taking into consideration the Applicable Limitations. (c) The benefit provided under this Section 4.03 shall be in the form of a credit by the Bank to the Participant's Supplemental Savings Accounts and shall not come from only deferral of compensation otherwise currently payable to the Participant. ARTICLE V ACCOUNTS SECTION 5.01 SUPPLEMENTAL ESOP BENEFIT ACCOUNT For each Participant who is credited with a benefit pursuant to Section 4.01 of the Plan, the Employer shall establish, as a memorandum account on its books, a Supplemental ESOP Account. Each year, the Committee shall credit to the Participant's Supplemental ESOP Account the amount of benefits determined under Section 4.01 of the Plan for that year. The Committee shall credit the account with an amount equal to the appropriate number of shares of Common Stock or other medium of contribution that would have otherwise been made to the Participant's accounts under the ESOP but for the limitations imposed by the Code. Shares of 6 Common Stock shall be valued under this Plan in the same manner as under the ESOP. Cash contributions credited to a Participant's Supplemental ESOP Account shall be credited annually with interest at a rate equal to the combined weighted return provided to the Participant's non-stock accounts under the ESOP. SECTION 5.02 SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT The Employer shall establish, as a memorandum account on its books, a Supplemental Stock Ownership Account. Upon a Participant's Retirement or in the event of a Change in Control, the Committee shall credit to the Participant's Supplemental Stock Ownership Account the amount of benefits determined under Section 4.02 of the Plan. The Committee shall credit the account with an amount equal to the appropriate number of shares of Common Stock or other medium of contribution that would have otherwise been made to the Participant's accounts under the ESOP but for the Participant's Retirement. Shares of Common Stock shall be valued under this Plan in the same manner as under the ESOP. Cash contributions credited to a Participant's Supplemental Stock Ownership Account shall be credited annually with interest at a rate equal to the combined weighted return provided to the Participant's non-stock accounts under the ESOP. SECTION 5.03 SUPPLEMENTAL SAVINGS ACCOUNT. The Employer shall establish a memorandum account, the "Supplemental Savings Account" for each Participant on its books, and each year the Committee will credit the amount of contributions determined under Section 4.03 of the Plan. Contributions credited to a Participant's Supplemental Savings Account shall be credited monthly with interest at a rate equal to the combined weighted return provided to the Participant's matching contribution and/or other Employer contribution account(s) under the Savings Plan. ARTICLE VI SUPPLEMENTAL BENEFIT PAYMENTS SECTION 6.01 PAYMENT OF SUPPLEMENTAL ESOP BENEFIT. (a) A Participant's Supplemental ESOP Benefit shall be paid to the Participant or in the event of the Participant's death, to his beneficiary in the same form, time and medium (I.E., cash and/or shares of Common Stock) as his benefits are paid under the ESOP. (b) A Participant shall vest in his Supplemental ESOP benefit in accordance with the provisions of Section 6.04 of this Plan. SECTION 6.02 PAYMENT OF SUPPLEMENTAL STOCK OWNERSHIP BENEFIT (a) A Participant's Supplemental Stock Ownership Benefit shall be paid to the Participant or in the event of the Participant's death, to his beneficiary in the same form, time and medium (I.E., cash and/or shares of Common Stock) as his benefits are paid under the ESOP. (b) A Participant shall vest in his Supplemental Stock Ownership Benefit in accordance with the Provisions of Section 6.04 of this Plan, provided, however, that the Participant shall 7 immediately become fully vested in his Supplemental Stock Ownership Benefit in the event of a Change in Control. SECTION 6.03 PAYMENT OF SUPPLEMENTAL SAVINGS BENEFIT. (a) A Participant's Supplemental Savings Benefit shall be paid to the Participant or in the event of the Participant's death, to his beneficiary in the same form, and at the same time as his benefits are paid under the Savings Plan. (b) A Participant shall vest in his Supplemental Savings Benefit in accordance with Section 6.04 of this Plan SECTION 6.03 ALTERNATIVE PAYMENT OF BENEFITS. Notwithstanding the other provisions of this Article VI, a Participant may, with prior written consent of the Committee and upon such terms and conditions as the Committee may impose, request that the Supplemental ESOP Benefit and/or the Supplemental Stock Ownership Benefit and/or the Supplemental Savings Benefit to which he is entitled be paid commencing at a different time, over a different period, in a different form, or to different persons, than the benefit to which he or his beneficiary may be entitled under the ESOP or the Savings Plan. SECTION 6.04 VESTING IN SUPPLEMENTAL BENEFITS Except as otherwise provided for in Section 6.02(b) of the Plan, a Participant shall vest in his Supplemental ESOP and his Supplemental Stock Ownership Benefit according to the following schedule: ANNIVERSARY OF PARTICIPATION IN THIS PLAN VESTED PERCENTAGE 1st 20% 2nd 40% 3rd 60% 4th 80% 5th 100% 8 ARTICLE VII CLAIMS PROCEDURES SECTION 7.01 CLAIMS REVIEWER For purposes of handling claims with respect to this Plan, the "Claims Reviewer" shall be the Committee, unless the Committee designates another person or group of persons as Claims Reviewer. SECTION 7.02 CLAIMS PROCEDURE (a) An initial claim for benefits under the Plan must be made by the Participant or his or her beneficiary or beneficiaries in accordance with the terms of this Section 7.02. (b) Not later than ninety (90) days after receipt of such a claim, the Claims Reviewer will render a written decision on the claim to the claimant, unless special circumstances require the extension of such 90-day period. If such extension is necessary, the Claims Reviewer shall provide the Participant or the Participant's beneficiary or beneficiaries with written notification of such extension before the expiration of the initial 90-day period. Such notice shall specify the reason or reasons for the extension and the date by which a final decision can be expected. In no event shall such extension exceed a period of ninety (90) days from the end of the initial 90-day period. (c) In the event the Claims Reviewer denies the claim of a Participant or any beneficiary in whole or in part, the Claims Reviewer's written notification shall specify, in a manner calculated to be understood by the claimant, the reason for the denial; a reference to the Plan or other document or form that is the basis for the denial; a description of any additional material or information necessary for the claimant to perfect the claim; an explanation as to why such information or material is necessary; and an explanation of the applicable claims procedure. (d) Should the claim be denied in whole or in part and should the claimant be dissatisfied with the Claims Reviewer's disposition of the claimant's claim, the claimant may have a full and fair review of the claim by the Committee upon written request submitted by the claimant or the claimant's duly authorized representative and received by the Committee within sixty (60) days after the claimant receives written notification that the claimant's claim has been denied. In connection with such review, the claimant or the claimant's duly authorized representative shall be entitled to review pertinent documents and submit the claimant's views as to the issues, in writing. The Committee shall act to deny or accept the claim within sixty (60) days after receipt of the claimant's written request for review unless special circumstances require the extension of such 60-day period. If such extension is necessary, the Committee shall provide the claimant with written notification of such extension before the expiration of such initial 60-day period. In all events, the Committee shall act to deny or accept the claim within 120 days of the receipt of the claimant's written request for review. The action of the Committee shall be in the form of a written notice to 9 the claimant and its contents shall include all of the requirements for action on the original claim. (e) In no event may a claimant commence legal action for benefits the claimant believes are due the claimant until the claimant has exhausted all of the remedies and procedures afforded the claimant by this Article VII. ARTICLE VIII AMENDMENT AND TERMINATION SECTION 8.01 AMENDMENT OF THE PLAN The Bank may from time to time and at any time amend the Plan; provided, however, that such amendment may not adversely affect the rights of any Participant or beneficiary with respect to any benefit under the Plan to which the Participant or beneficiary may have previously become entitled prior to the effective date of such amendment without the consent of the Participant or beneficiary. The Committee shall be authorized to make minor or administrative changes to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes); provided, however, that such amendments must subsequently be ratified by the Board of Directors. SECTION 8.02 TERMINATION OF THE PLAN The Bank may at any time terminate the Plan; provided, however, that such termination may not adversely affect the rights of any Participant or beneficiary with respect to any benefit under the Plan to which the Participant or beneficiary may have previously become entitled prior to the effective date of such termination without the consent of the Participant or beneficiary. Unless an election for distribution is made by the Participant, any amounts credited to the supplemental accounts of any Participant shall remain subject to the provisions of the Plan and no distribution of benefits shall be accelerated because of termination of the Plan. ARTICLE IX GENERAL PROVISIONS SECTION 9.01 UNFUNDED, UNSECURED PROMISE TO MAKE PAYMENTS IN THE FUTURE The right of a Participant or any beneficiary to receive a distribution under this Plan shall be an unsecured claim against the general assets of the Bank or its Affiliates and neither a Participant nor his designated beneficiary or beneficiaries shall have any rights in or against any amount credited to any account under this Plan or any other assets of the Bank or an Affiliate. The Plan at all times shall be considered entirely unfunded both for tax purposes and for purposes of Title I of ERISA. Any funds invested hereunder shall continue for all purposes to be part of the general assets of the Bank or an Affiliate and available to its general creditors in the event of bankruptcy or insolvency. Accounts under this Plan and any benefits which may be payable pursuant to this Plan are not subject in any manner to anticipation, sale, alienation, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of a Participant or a Participant's 10 beneficiary. The Plan constitute a mere promise by the Bank or Affiliate to make benefit payments in the future. No interest or right to receive a benefit may be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such Participant or beneficiary, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. SECTION 9.02 COMMITTEE AS PLAN ADMINISTRATOR (a) The Plan shall be administered by the Committee designated by the Board of Directors. (b) The Committee shall have the authority, duty and power to interpret and construe the provisions of the Plan as it deems appropriate. The Committee shall have the duty and responsibility of maintaining records, making the requisite calculations and disbursing the payments hereunder. In addition, the Committee shall have the authority and power to delegate any of its administrative duties to employees of the Bank or Affiliate, as they may deem appropriate. The Committee shall be entitled to rely on all tables, valuations, certificates, opinions, data and reports furnished by any actuary, accountant, controller, counsel or other person employed or retained by the Bank with respect to the Plan. The interpretations, determination, regulations and calculations of the Committee shall be final and binding on all persons and parties concerned. SECTION 9.03 EXPENSES Expenses of administration of the Plan shall be paid by the Bank or an Affiliate. SECTION 9.04 STATEMENTS. The Committee shall furnish individual annual statements of accrued benefits to each Participant, or current beneficiary, in such form as determined by the Committee or as required by law. SECTION 9.05 RIGHTS OF PARTICIPANTS AND BENEFICIARIES (a) The sole rights of a Participant or beneficiary under this Plan shall be to have this Plan administered according to its provisions, to receive whatever benefits he or she may be entitled to hereunder. (b) Nothing in the Plan shall be interpreted as a guaranty that any funds in any trust which may be established in connection with the Plan or assets of the Bank or an Affiliate will be sufficient to pay any benefit hereunder. (c) The adoption and maintenance of this Plan shall not be construed as creating any contract of employment or service between the Bank or an Affiliate and any Participant or other individual. The Plan shall not affect the right of the Bank or an Affiliate to deal with any Participants in employment or service respects, including their hiring, discharge, compensation, and conditions of employment or other service. 11 SECTION 9.06 INCOMPETENT INDIVIDUALS The Committee may from time to time establish rules and procedures which it determines to be necessary for the proper administration of the Plan and the benefits payable to a Participant or beneficiary in the event that such Participant or beneficiary is declared incompetent and a conservator or other person legally charged with that Participant's or beneficiary's care is appointed. Except as otherwise provided herein, when the Committee determines that such Participant or beneficiary is unable to manage his or her financial affairs, the Committee may pay such Participant's or beneficiary's benefits to such conservator, person legally charged with such Participant's or beneficiary's care, or institution then contributing toward or providing for the care and maintenance of such Participant or beneficiary. Any such payment shall constitute a complete discharge of any liability of the Bank or an Affiliate and the Plan for such Participant or beneficiary. SECTION 9.07 SALE, MERGER, OR CONSOLIDATION OF THE BANK The Plan shall be binding upon and inure to the benefit of any successor organization succeeding to substantially all of the assets and business of the Employer. The Employer agrees that it will make appropriate provision for the preservation of participants' rights under the Plan in any agreement or plan which it may enter into to effect any merger, consolidation, reorganization or transfer of assets. Any legal fees incurred by a Participant in determining benefits to which such Participant is entitled under the Plan following a sale, merger, or consolidation of the Bank or an Affiliate of which the Participant is an Employee or, if applicable, a member of the Board of Directors, shall be paid by the resulting or succeeding entity. Upon such a merger, consolidation, reorganization, or transfer of assets, the term "Employer" shall refer to the successor organization and the Plan shall continue in full force and effect. Not later than three business days after a change in control of the Employer, the Employer or the successor organization shall (i) deposit, in an irrevocable grantor trust (the "Trust"), an amount reasonably projected to be sufficient to fund the payment of all benefits that are or may become payable under the Plan after the closing date of the change in control, and (ii) provide the Trustee of the Trust with a written direction both to hold said amount and any investment return thereon in segregated accounts for the benefit of the Participants and their beneficiaries, and to follow the procedures set forth in the next paragraph as to the payment of such amounts from the Trust. The provisions of this Section 9.07(b) shall be null and void with respect to any Participant only if the Participant provides a written release of the obligations of the Employer under this provision. After a change in control of the Employer, the Participant may provide the trustee of the Trust with a written notice directing the trustee to pay to the Participant an amount designated in the notice as being payable pursuant to the terms of this Plan. Within three business days after receiving said notice, the trustee of the Trust shall pay such amount to the Participant, and coincidentally shall provide the Employer or its successor with notice of such payment. Upon the Trust's final payment of all amounts due under the Plan to all Participants, the trustee of the Trust shall pay to the Bank the entire balance, if any, remaining in the segregated accounts maintained for the benefit of the Participants. The Participants shall thereafter have no further interest in the Trust. 12 SECTION 9.08 LOCATION OF PARTICIPANTS Each Participant shall keep the Bank informed of his or her current address and the current address of his or her designated beneficiary or beneficiaries. The Bank shall not be obligated to search for any person. If such person is not located within three (3) years after the date on which payment of the Participant's benefits payable under this Plan may first be made, payment may be made as though the Participant or his or her beneficiary had died at the end of such three-year period. SECTION 9.09 LIABILITY OF THE BANK AND ITS AFFILIATES Notwithstanding any provision herein to the contrary, neither the Bank nor any individual acting as an employee or agent of the Bank shall be liable to any Participant, former Participant, beneficiary, or any other person for any claim, loss, liability or expense incurred in connection with the Plan, unless attributable to fraud or willful misconduct on the part of the Bank or any such employee or agent of the Bank. SECTION 9.10 GOVERNING LAW All questions pertaining to the construction, validity and effect of the Plan shall be determined in accordance with the laws of the United States and to the extent not preempted by such laws, by the laws of the State of New Jersey. ****************************************************************************** Having been approved by its Board of Directors on November 15, 2000, this Amended and Restated Plan is executed by its duly authorized officer this 15th day of November, 2000. FIRST SAVINGS BANK Attest: s/ ANN C. CLANCY By: /s/ PHILIP T. RUEGGER, JR. ---------------- -------------------------- Corporate Secretary Chairman of the Board 13 EX-10.10 4 c20329_ex10-10.txt NON-EMPLOYEE DIRECTOR RETIRE PLAN - FIRST SAVINGS FIRST SAVINGS BANK NON-EMPLOYEE DIRECTOR RETIREMENT PLAN ARTICLE I PURPOSE SECTION 1.01 PURPOSE. The purpose of this plan is to recognize the valuable services provided to First Savings Bank by its non-employee directors and to assist it in retaining present non-employee directors and in attracting new non-employee directors in the future by providing such individuals with retirement benefits under the terms and conditions set forth in this document. ARTICLE II DEFINITIONS SECTION 2.01 DEFINITIONS. In this document, whenever the context so indicates, the singular or the plural number and the masculine or feminine gender shall be deemed to include the other, the terms "he," "his," and "him," shall refer to a Participant or a beneficiary of a Participant, as the case may be, and, except as otherwise provided, or unless the context otherwise requires, the capitalized terms shall have the following meanings: (a) "Annual Director Compensation" means the annual retainer paid to a Non-Employee Director for service as a member of the Board of Directors for the calendar year immediately preceding the year in which the Non-Employee Director's Retirement Date occurs. (b) "Bank" means First Savings Bank, Woodbridge, New Jersey. (c) "Board of Directors" means the Board of Directors of the Bank. (d) "Change in Control" of the Bank or the Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. SS. 303.4(a), with respect to the Bank, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Company representing 20% or more of the Bank's or the Company's outstanding voting securities or right to 1 acquire such securities except for any voting securities of the Bank purchased by the Company and any voting securities purchased by any employee benefit plan of the Company or its Subsidiaries, or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction occurs or is effectuated in which the Bank or Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or Bank with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Bank or Company then outstanding. (e) "Company" means First Sentinel Bancorp, Inc. (f) "Non-Employee Director" means a non-employee member of the Board of Directors. (g) "Plan" means this First Savings Bank Non-Employee Director Retirement Plan. (h) "Retirement Date" means the date on which a Non-Employee Director retires from the Board of Directors. For this purpose, a Non-Employee Director shall be considered to have retired from the Board of Directors upon his termination of service with the Board of Directors, unless such termination of service is as a result of the Board of Directors having "just cause," which shall include fraud, misappropriation of or other intentional misconduct damaging to the property or business of the Bank, its holding company or any subsidiary of the Bank, or commission of a crime. ARTICLE III ELIGIBILITY AND BENEFITS SECTION 3.01 ELIGIBILITY. (a) All Non-Employee Directors who have served on the Board of Directors for at least five (5) continuous years shall be eligible to participate in this Plan. Service with the board of directors of any entity other than the Bank shall not be credited for any purpose under this Plan. 2 (b) A Non-Employee Director's participation in the Plan shall terminate upon his death or upon his ceasing to be a member of the Board of Directors, unless a benefit is payable pursuant to Section 3.02(c) of the Plan. SECTION 3.02 DETERMINATION OF BENEFITS. (a) If a Non-Employee Director retires at or after age 70 and has completed at least ten (10) years of continuous service with the Board of Directors, then upon that Non-Employee Director's Retirement Date he shall be entitled to receive an annual retirement benefit, payable in accordance with Section 3.03 of the Plan, equal to his Annual Director Compensation. (b) If a Non-Employee Director retires prior to age 70, but not before age 55, then upon that Non-Employee Director's Retirement Date he shall be entitled to receive an annual retirement benefit, payable in accordance with Section 3.03 of the Plan, equal to the sum of the following: (i) 50% of his Annual Director Compensation, plus (ii) 5% of his Annual Director Compensation multiplied by the Non-Employee Director's number of years of continuous service with the Board of Directors in excess of five years, up to a maximum factor of ten. Notwithstanding Section 3.01(a), for purposes of this Section 3.02(b)(ii), partial years of service with the Board of Directors shall be used in determining a fractional portion of a full year's credit. (c) If a Non-Employee Director incurs a Disability, he shall be entitled to the annual retirement benefit provided for in paragraph (b) of this Section 3.02 upon his termination of service with the Board of Directors. For this purpose, "Disability" shall mean a Non-Employee Director's inability to serve as a member of the Board of Directors by reason of physical or mental illness or condition. SECTION 3.03 TIME AND MANNER OF PAYMENT. (a) One-twelfth of the annual retirement benefits provided for under Section 3.02 of the Plan shall be paid to the eligible Non-Employee Director commencing upon the first business day of the month following the Non-Employee Director's Retirement Date and ending on the first business day of the month following the death of the Non-Employee Director. (b) If an individual who is receiving benefits under the Plan again becomes a Non-Employee Director, all benefit payments to such individual shall cease during the period of service as a member of the Board of Directors. Payments shall resume upon subsequent termination of membership on the Board of Directors, without adjustment for the period during which payments were not made. 3 ARTICLE IV CHANGE IN CONTROL SECTION 4.01 CHANGE IN CONTROL. (a) Notwithstanding any other provision in this Plan to the contrary, in the event of a Change in Control, each Non-Employee Director who would not otherwise have satisfied the requirements for a retirement benefit under this Plan shall be treated as having met all of the requirements for the minimum retirement benefit provided for in Section 3.02(b) of the Plan, regardless of his age and the number of years of service he has with the Board of Directors at the time of the Change in Control. (b) Notwithstanding any other provision in this Plan to the contrary, in the event of a Change in Control, each Non-Employee Director who has not yet begun to collect retirement benefits under this Plan shall be entitled to receive a benefit in the time and manner selected on a form similar to that attached to this Plan as Appendix A; provided that such form is delivered to the Bank within 30 days of the effective time of the Change in Control. If the form is not returned to the Bank within this time frame, the Non-Employee Director shall receive, at the effective time of the Change in Control, a lump sum payment equal to the actuarial value of the benefits due him under the Plan, determined by an actuary and based on actuarial factors provided for in paragraph (d) of this Section 4.01. (c) Notwithstanding any other provision in this Plan to the contrary, in the event of a Change in Control, each Non-Employee Director who is then collecting retirement benefits under this Plan shall be entitled to receive his remaining benefits in the time and manner selected on a form similar to that attached to this Plan as Appendix B; provided that such form is delivered to the Bank within 30 days of the effective time of the Change in Control. If the form is not returned to the Bank within this time frame, the Non-Employee Director shall receive, at the effective time of the Change in Control, a lump sum payment equal to the actuarial value of the benefits due him under the Plan, determined by an actuary and based on actuarial factors provided for in paragraph (d) of this Section 4.01. (d) Within thirty days following a Change in Control, the Bank shall establish a grantor trust, as described in Section 6.01(b). The Bank shall contribute to such trust the amount necessary in cash or cash equivalents to fund all benefits accrued as of the Change in Control, determined using actuarial factors as determined by an actuary appointed by the Bank prior to the Change in Control, using reasonable actuarial factors based on the actuarial standards set forth in Section 417(e) of the Internal Revenue Code of 1986, as amended, or any successor thereto. Following a Change in Control a change in the actuary may only take effect with the unanimous written consent of all Non-Employee Directors in the Plan. 4 (e) No remuneration paid to a Non-Employee Director by the Bank or its successor following a Change in Control shall reduce the benefits payable under this Plan. ARTICLE V ADMINISTRATION AND CLAIM SECTION 5.01 ADMINISTRATION. The administration of the Plan, the exclusive power to interpret it, and the responsibility for carrying out its provisions are vested in the Bank or its designee. The Bank or its designee shall have the authority to resolve any question under the Plan. The determination of the Bank or its designee as to the interpretation of the Plan or any disputed question shall be conclusive and final to the extent permitted by applicable law. SECTION 5.02 CLAIMS PROCEDURES. (a) Claims for benefits under the Plan shall be submitted in writing to the Bank or to an individual designated by the Bank for this purpose. (b) If any claim for benefits is wholly or partially denied, the claimant shall be given written notice within a reasonable period following the date on which the claim is filed, which notice shall set forth: (i) the specific reason or reasons for the denial; (ii) specific reference to pertinent Plan provisions on which the denial is based; (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the Plan's claim review procedure. If the claim has not been granted and written notice of the denial of the claim is not furnished in a timely manner following the date on which the claim is filed, the claim shall be deemed denied for the purpose of proceeding to the claim review procedure. (c) The claimant or his authorized representative shall have 30 days after receipt of written notification of denial of a claim to request a review of the denial by making written request to the Bank, and may review pertinent documents and submit issues and comments in writing within such 30-day period. After receipt of the request for review, the Bank or its designee shall, in a timely manner, render and furnish to the claimant a written decision, which shall include specific reasons for the decision and shall make specific references to pertinent Plan provisions on which it is based. Such decision by the Bank shall not be subject to further review. If a decision 5 on review is not furnished to a claimant, the claim shall be deemed to have been denied on review. (d) No claimant shall institute any action or proceeding in any state or federal court of law or equity or before any administrative tribunal or arbitrator for a claim for benefits under the Plan until the claimant has first exhausted the provisions set forth in this section. SECTION 5.03 EXPENSES. Expenses attributable to the administration of the Plan shall be paid directly by the Bank. ARTICLE VI GENERAL PROVISIONS SECTION 6.01 NO FUNDING. (a) All amounts payable in accordance with the Plan shall constitute a general unsecured obligation of the Bank. Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Bank, to the extent not paid from the asset of any trust established pursuant to paragraph (b) of this Section 6.01. (b) The Bank may, for administrative reasons, establish a grantor trust with an independent trustee for the benefit of Participants in the Plan. The assets placed in said trust shall be held separate and apart from other Bank funds and shall be used exclusively for the purposes set forth in the Plan and the applicable trust agreement, subject to the following conditions: (i) the Bank shall be treated as "grantor" of said trust for purposes of Section 677 of the Code; and (ii) the agreement of said trust shall provide that its assets may be used upon the insolvency or bankruptcy of the Bank to satisfy claims of the Bank's general creditors and that the rights of such general creditor are enforceable by them under federal and state law. SECTION 6.02 AMENDMENT OF THE PLAN. The Bank reserves the right to modify or amend the Plan, in whole or in part, at any time, and from time to time. However, no modification or amendment shall adversely affect the right of any Participant to receive the vested benefits accrued as of the date of such modification, amendment or discontinuance without their unanimous written consent. Notwithstanding the foregoing, no amendment or modification to the Plan may be made in connection with, or after, a Change in Control without the unanimous written consent of the Non-Employee Directors who are entitled to benefits under the Plan. 6 SECTION 6.03 TERMINATION OF THE PLAN. The Bank reserves the right to terminate the Plan at any time, provided, however, that no termination shall be effective retroactively. As of the effective date of termination of the Plan: (a) the benefits of any Participant whose benefit payments have commenced shall continue to be paid, and (b) any Participant whose benefit is vested in accordance with Section 2.02 shall be entitled to receive such benefit in accordance with the terms of the Plan. Notwithstanding the foregoing, the Plan may not be terminated in connection with, or after, a Change in Control without the unanimous, written consent of the Participants who are entitled to benefits under the Plan. SECTION 6.04 PLAN NOT A DIRECTORSHIP AGREEMENT. The Plan is not a directorship agreement, and the Participant's service as a Non-Employee Director shall not be affected in any way by the Plan or related instruments, except as specifically provided therein. The establishment of the Plan shall not be construed as conferring any legal rights upon any person for a continuation of service as a Non-Employee Director. Each Participant and all persons who may have or claim any right by reason of his participation shall be bound by the terms of the Plan and all agreements entered into pursuant thereto. SECTION 6.05 FACILITY OF PAYMENT. In the event that the Bank shall find that a Participant is unable to care for his affairs because of illness or accident, the Bank may, unless a claim shall have been made therefor by a duly appointed legal representative, direct that any benefit payment due him be paid on his behalf to his spouse, a child, a parent or other blood relative, or to a person with whom he resides, and any such payment so made shall be a complete discharge of the liabilities of the Bank and the Plan therefor. SECTION 6.06 WITHHOLDING TAXES. The Bank shall have the right to deduct from each payment to be made under the Plan any required withholding taxes. SECTION 6.07 NONALIENATION. Subject to any applicable law, no benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. Nor shall any such benefit be in any manner liable for or subject to garnishment, attachment, execution or levy, or liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefits. 7 SECTION 6.08 FORFEITURE FOR CAUSE. In the event that the Non-Employee Director's service as a Non-Employee director is involuntarily terminated for reason of serious misconduct, including by way of example, dishonesty or fraud on the part of such Participant in his relationship with the Bank, all benefits that would otherwise be payable to him under the Plan shall be forfeited. Notwithstanding the foregoing, no forfeiture shall take place following a Change in Control unless the Participant is convicted of a felony involving dishonesty or fraud on the part of such Participant in his relationship with the Bank. SECTION 6.09 CONSTRUCTION. (a) The Plan shall be construed, regulated and enforced under the laws of the State of New Jersey. (b) The masculine pronoun shall mean the feminine wherever appropriate. (c) The illegality of any particular provision of this document shall not affect the other provisions and the document shall be construed in all respects as if such invalid provision were omitted. (d) The headings and subheadings in the Plan have been inserted for convenience of reference only, and are to be ignored in any construction of the provisions thereof. SECTION 6.10 EFFECTIVE DATE. The effective date of the Plan is August 1, 1989. The Plan was amended and restated in its entirety as of November 15, 2000. 8 EXHIBIT A 9 EXHIBIT "A" SAMPLE FIRST SAVINGS BANK NON-EMPLOYEE DIRECTOR RETIREMENT PLAN -------------------------- ELECTION OF PAYMENT METHOD AFTER A CHANGE IN CONTROL -------------------------- AGREEMENT, made this ______ day of _________, ____, by and between __________________ (the "Non-Employee Director") and First Savings Bank (the "Bank"), with respect to distribution of the Non-Employee Director's retirement benefits ("Retirement Benefits") that have accrued under the First Savings Bank Non-Employee Director Retirement Plan and have or become payable due to a change in control. NOW THEREFORE, it is mutually agreed as follows: 1. FORM OF PAYMENT. The Employee shall receive his Retirement Benefits in cash that is paid-- [_] in one lump sum equal to the present value of his accrued but unpaid Retirement Benefits. [_] in substantially equal annual payments over a period of _______ years (no more than 10), on the unpaid present value of his Retirement Benefits. [_] for the remainder of his life. 2. TIME OF PAYMENT. The Employee shall begin to receive Retirement Benefits as soon as practicable after-- [_] A change in control closes. [_] the January 1st after a change in control closes. [_] the _____________ annual anniversary of the January 1st after a change in control closes. 10 3. FREQUENCY OF PAYMENT. Unless paid in a lump sum, the Retirement Benefits shall be paid on a _____________ monthly, _____________ quarterly, _____________ semi-annual, or _____________ annual basis. 4. EFFECT OF ELECTION. The elections made in paragraphs 1, 2, and 3 hereof shall become irrevocable on the date 90 days before the closing of a change in control. The Non-Employee Director may at any time and from time to time change his designation of, and manner of payment to, a beneficiary. Such election shall, however, become irrevocable upon the Non-Employee Director's death. 5. MUTUAL COMMITMENTS. The Bank agrees to make payment of all amounts due the Non-Employee Director in accordance with the terms of the plan and the elections made by the Non-Employee Director herein. The Non-Employee Director agrees to be bound by the terms of the plan, as in effect on the date hereof and as properly amended hereafter. The parties recognize and agree that this Agreement supersedes and nullifies any prior distribution election to the extent it is inconsistent herewith. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above-written. Witnessed by: NON-EMPLOYEE DIRECTOR ------------------------------- Witnessed by: FIRST SAVINGS BANK By: ---------------------------- Chairman of the Board 11 EX-10.11(I) 5 c20329_ex10-11i.txt EMPLOYMENT AGREEMENT - FIRST SENTINEL - MULKERIN FIRST SENTINEL BANCORP, INC. EMPLOYMENT AGREEMENT This AGREEMENT ("Agreement"), originally entered into on November 18, 1998, is amended and restated, effective as of November 15, 2000 (the "Effective Date"), by and between First Sentinel Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of Delaware, with its principal administrative offices at 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095, and John P. Mulkerin ("Executive"). Any reference to the "Institution" in this Agreement shall mean First Savings Bank or any successor to First Savings Bank. WHEREAS, the Holding Company wishes to continue to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Holding Company and its subsidiaries on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of Executive's employment under this Agreement, Executive agrees to serve as President and Chief Executive Officer of the Holding Company. Executive shall render administrative and management services to the Holding Company such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve as a director and officer of the Institution, as well as a director of the Holding Company. 2. TERMS. (a) The period of Executive's employment under this Agreement shall be deemed to have commenced as of the date first written above and shall continue for a period of thirty-six (36) full calendar months from the Effective Date of this Agreement, as amended and restated. Commencing on the date of execution of this Agreement, the term of this Agreement shall be extended for one day each day, so that a constant thirty-six (36) calendar month term shall remain in effect, until such time as the Board of Directors of the Holding Company (the "Board") or Executive elects not to extend the term of the Agreement by giving written notice to the other party in accordance with Section 8 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the third anniversary of the date of such written notice. (b) During the period of Executive's employment hereunder, except for periods of absence occasioned by illness, vacation, and other reasonable leaves of absence, Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties under this Agreement, including activities and services related to the organization, operation and management of the Holding Company and its direct or indirect subsidiaries ("Subsidiaries") and participation in industry, community and civic organizations; provided, however, that, with Board notification of said participation, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Holding Company or its Subsidiaries, or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything herein contained to the contrary, either Executive or the Holding Company may terminate Executive's employment with the Holding Company at any time during the term of this Agreement, subject to the terms and conditions of this Agreement. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute consideration paid by the Holding Company in exchange for the duties described in Section 1 of this Agreement. The Holding Company shall pay Executive, as compensation, a salary of not less than $315,000 ("Base Salary"). Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Holding Company or its Subsidiaries. Base Salary shall be payable in accordance with the normal payroll practices of the Holding Company. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; on or about the first of January of each year. Such review shall be conducted by the Board or by a committee of the Board delegated such responsibility by the Board. The Board or the committee may increase Executive's Base Salary at any time. Any increase in Base Salary shall thereafter become the new "Base Salary" for purposes of this Agreement. (b) Executive shall be entitled to participate in any employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, as amended and restated, and the Holding Company and its Subsidiaries will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites (or any plans, arrangements or perquisites with respect to which Executive begins to participate at any time during the term of this Agreement, as amended and restated) which would adversely affect Executive's rights or benefits thereunder, without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse affect, unless such change is general in nature and applies in a nondiscriminatory manner to all employees covered by the plan, arrangement or perquisite. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive shall be entitled to participate in and receive benefits 2 under any employee benefit plans including, but not limited to, retirement plans (such as pension, profit sharing and employee stock ownership plans), supplemental retirement plans, incentive plans, health and welfare plans and any other employee benefit plan or arrangement made available by the Holding Company or its Subsidiaries now or in the future to full-time employees of the Holding Company or its Subsidiaries and/or senior executives and key management employees of the Holding Company or its Subsidiaries, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation and benefits to which Executive is otherwise entitled under this Agreement. (c) The Holding Company shall pay or reimburse Executive for all reasonable expenses incurred by Executive in performing his obligations under this Agreement. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during Executive's term of employment under this Agreement, but prior to the date Executive attains age 65, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Holding Company of Executive's full-time employment hereunder for any reason other than termination governed by Section 5(a) of this Agreement, or Termination for Cause, as defined in Section 7 of this Agreement, or Retirement or Disability, as defined in paragraph (f) of this Section 4 or; (ii) Executive's resignation from the Holding Company's employ, upon, any (A) notice to Executive by the Holding Company of non-renewal of the term of this Agreement, (B) failure to re-elect or re-appoint Executive as President and Chief Executive Officer of the Holding Company or a failure to nominate or re-elect Executive to the Board of Directors of the Holding Company or of the Institution, unless Executive otherwise consents (C) material change in Executive's function, duties, or responsibilities with the Holding Company, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 of this Agreement (and any such material change shall be deemed as continuing breach of this Agreement), unless Executive otherwise consents, (D) relocation of Executive's principal place of employment by more than 25 miles from its location at the effective date of this Agreement, (E) material reduction in the benefits, arrangements or perquisites to Executive which is not general in nature and applicable on a nondiscriminatory basis to all employees covered by such benefits, arrangements, or perquisites or, pursuant to Section 3(b) of this Agreement, to which Executive does not consent or for which Executive is not or will not be provided the economic benefit, (F) liquidation or dissolution of the Holding Company or the Institution, or (G) breach of this Agreement by the Holding Company. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E), (F) or (G), above, Executive shall have the right to elect to terminate employment under this Agreement by resignation upon not less than sixty 3 (60) days prior written notice given within six full calendar months after the event giving rise to said right to elect. (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8 of this Agreement, the Holding Company shall be obligated to pay Executive, or, in the event of Executive's subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, the amount of the remaining payments and benefits that Executive would have earned if he had continued his employment with the Holding Company during the remaining unexpired term of this Agreement, based on Executive's Base Salary and the benefits provided to Executive as of the date of the Event of Termination, as set forth in Sections 3(a) and (b) of this Agreement, as the case may be, and the amount still due Executive under any paragraph of Section 3 for service rendered through the Date of Termination. Except as provided for in paragraphs (c) and (d) of Section 4, the determination of Executive's benefits as of the date of the Event of Termination shall be made based on (i) the value of the allocation attributable to employer contributions for the most recent plan year under any defined contribution type plan; (ii) the percentage of salary of any incentive or bonus payment for the most recently-completed fiscal year; and (iii) the employer-provided cost of any other benefit for the most recently-completed fiscal year. At the election of Executive, which election is to be made within thirty (30) days of the Date of Termination, such payments shall be made in a lump sum (without discount for early payment) or paid monthly during the remaining term of the Agreement following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. Notwithstanding anything to the contrary elsewhere in this Agreement, to the extent Executive is entitled to continued coverage or benefit accrual under any retirement or welfare benefit plan during the remaining unexpired term of this Agreement, as amended and restated, the amount payable under this Section 4(b) should be adjusted to the extent necessary to avoid any duplication of such benefits. (c) Upon the occurrence of an Event of Termination, Executive will be entitled to receive benefits due him under or contributed by the Holding Company or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or arrangement maintained by the Holding Company or its Subsidiaries to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Institution or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (d) To the extent that the Holding Company or its Subsidiaries continue to offer any life, medical, health, disability or dental insurance plan or arrangement in 4 which Executive participates in on the last day of his employment (each being a "Welfare Plan"), after an Event of Termination (as herein defined), Executive and his dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event of Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. If the Holding Company or its Subsidiaries does not offer the Welfare Plans (or if for any reason Executive's participation in said plans is prohibited) after the Event of Termination, then the Holding Company shall provide Executive with a payment equal to the actuarial value of the provision of such benefit for the period which runs until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) the end of the remaining term of this Agreement. (e) In the event that Executive is receiving monthly payments pursuant to Section 4(b) of this Agreement, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. (f) Termination of Executive based on Disability shall mean termination by written notice from either the Executive, the Holding Company or its Subsidiaries upon a determination by a physician chosen by the Holding Company, who is reasonably acceptable to Executive or Executive's personal representatives, that the Executive is not capable of fulfilling Executive's responsibilities as an officer of the Holding Company. Upon termination of Executive upon Disability, Executive shall be entitled to all benefits under any disability plan of the Holding Company or its Subsidiaries or any other plans to which Executive is a party or a participant in accordance with the terms of the plan or arrangement. Executive shall be entitled to all compensation and benefits provided for in Section 3 of this Agreement through the date of his termination of employment as specified in the written notice. 5. CHANGE IN CONTROL. (a) Change in Control of the Holding Company or the Institution shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Holding Company or the Institution within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. SS. 303.4(a), with respect to the Institution, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Holding Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term 5 is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Institution purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company or its Subsidiaries, or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs or is effectuated in which the Institution or Holding Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Institution or Holding Company then outstanding. (b) If any of the events described in Section 5(a) of this Agreement constituting a Change in Control have occurred, or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his termination of employment on or after the date the Change in Control occurs due to (i) Executive's dismissal at any time during the term of this Agreement, (ii) Executive's resignation for any reason within the sixty (60) day period following the date that is one-year from the date the Change in Control occurred or (iii) Executive's resignation during the remaining term of this Agreement following any demotion, loss of title, office or significant authority or responsibility, reduction in the annual compensation or benefits or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, unless such termination is because of Executive's Termination for Cause; provided, however, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 5(b) shall be strictly limited to the terms specified in such written consent. Under no circumstances can a termination of employment during the term of this Agreement on or after the date of a Change in Control occurs be considered a termination on account of retirement or disability for 6 purposes of determining Executive's rights to the payment of benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5. (c) Upon Executive's entitlement to payment pursuant to Section 5(b) of this Agreement, the Holding Company shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of: (1) the payments and benefits that would have been due pursuant to Section 3 of this Agreement for the remaining term of the Agreement; or (2) three (3) times the Executive's average annual compensation (excluding compensation attributable to the exercise of stock options) for the three most recently completed taxable years of Executive. Except as provided for in the preceding sentence, for purposes of this Section 5(c), annual compensation shall include Base Salary and any other taxable income paid by the Holding Company or its Subsidiaries, including but not limited to amounts related to the granting, vesting or exercise of restricted stock, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty-six (36) months following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (d) Upon the occurrence of a Change in Control followed by Executive's termination of employment, Executive will be entitled to receive benefits due him under or contributed by the Holding Company or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or other arrangement maintained by the Institution or the Holding Company on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan and related supplemental executive retirement plan maintained by the Institution or, if not permitted under such plans, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (e) Upon the occurrence of a Change in Control and Executive's termination of employment pursuant to the provisions of Section 5(b) of this Agreement in connection therewith, the Holding Company will cause to be continued any welfare Plan 7 benefit (as described in Section 4(d) of this Agreement) substantially identical to the benefit coverage maintained by the Holding Company or its Subsidiaries for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's dependent's participation in any such plan or program is barred, the Holding Company shall arrange to provide Executive and his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans and programs by operation of this provision or provide their economic equivalent to executive and his dependents. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will at the end of the term of this Agreement no longer be available to Executive, Executive will have the option to purchase all rights then held by the Holding Company or its Subsidiaries to such item for a price equal to the then fair market value of the item. (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 6. CHANGE OF CONTROL RELATED PROVISIONS. (a) Notwithstanding the preceding provisions of Section 5 of this Agreement, for any taxable year in which Executive shall be liable for the payment of an excise tax under Section 4999 of the Internal Revenue Code (or any successor provision thereto), with respect to any payment in the nature of the compensation made by the Holding Company or its Subsidiaries to (or for the benefit of) Executive pursuant to this Agreement or otherwise, the Holding Company (or any successor thereto) shall pay to Executive an amount determined under the following formula: 8 An amount equal to: (E x P) + X WHERE: X = E x P ---------------------- 1 - [(FI x (1 - SLI)) + SLI + E + M] and E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 6; FI = the highest marginal rate of federal income, employment, and other taxes (other than taxes imposed under Section 4999 of the Code) applicable to Executive for the taxable year in question with respect to such payment (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); SLI = the sum of the highest marginal rates of income and payroll tax applicable to Executive under applicable state and local laws for the taxable year in question (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); M = highest marginal rate of Medicare tax; and With respect to any payment in the nature of compensation that is made to (or for the benefit of) Executive under the terms of this Section 6 or otherwise and on which an excise tax under Section 4999 of the Code may or will be assessed, the payment determined under this Section 6 shall be made to Executive on the earliest of (i) the date the Holding Company is required to withhold such tax, (ii) the date the tax is required to be paid by Executive, or (iii) at the time of termination resulting from the Change in Control. It is the intention of the parties that the Holding Company provide Executive with a full tax gross-up under the provisions of this Section 6, so that on a net after-tax basis, the result to Executive shall be the same as if the excise tax under Section 4999 (or any successor provisions) of the Code had not been imposed. The tax gross-up may be adjusted, as appropriate, if alternative minimum tax rules are applicable to Executive. (b) Notwithstanding the foregoing, if it is (i) initially determined by the Holding Company's tax advisors that no excise tax under Section 4999 of the Code is due with respect to any payment or benefit described in the first paragraph of Section 6(a) and thereafter it is determined in a final judicial determination or administrative settlement that the Section 4999 excise tax is due with respect to such payments or benefits or 9 subsequently determined in a final judicial determination or a final administrative settlement to which Executive is a party that the excise tax under Section 4999 of the Code is due or that the excess parachute payment as defined in Section 4999 of the Code is more than the amount determined as "P", above (such revised determination under (i) or (ii) above thereafter being referred to as the "Determinative Excess Parachute Payment"), then the tax advisors of the Holding Company (or any successor thereto) shall determine the amount (the "Adjustment Amount"), the Holding Company (or any successor thereto) must pay to Executive, in order to put Executive in the same position as Executive would have been if the amount determined as "P" above had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the tax advisors shall take into account any and all taxes (including any penalties and interest) paid or payable by Executive in connection with such final judicial determination or final administrative settlement. As soon as practicable after the Adjustment Amount has been so determined, the Holding Company shall pay the Adjustment Amount to Executive. (c) The Holding Company (or its successor) shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, reasonable accountant's fees, interest, fines and penalties of any kind) which Executive incurs as a result of any administrative or judicial review of Executive's liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of Executive's liability for the Section 4999 excise tax or otherwise relating to the classification for purposes of Section 280G of the Code of any payment or benefit in the nature of compensation made or provided to Executive by the Holding Company or any successor thereto. Executive shall promptly notify the Holding Company in writing whenever Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Supplemental Agreement is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of Executive's liability under Section 4999). The Holding Company (or its successor) may assume control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Agreement) and Executive shall cooperate fully with the Holding Company in any such proceeding. Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Holding Company (or its successor) may have in connection therewith without prior consent to the Holding Company (or its successor). In the event that the Holding Company (or any successor thereto) elects not to assume control over such matters, the Holding Company (or any successor thereto) shall promptly reimburse Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto. 7. TERMINATION FOR CAUSE. 10 The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation and benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Holding Company or its Subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause except all benefits shall be deemed to have remained in effect if Executive is reinstated. 8. NOTICE. (a) Any purported termination by the Holding Company or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) Except as otherwise provided for in this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be 11 extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Holding Company will continue to pay Executive's Base Salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated at the time of such notice in effect when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 8(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 9. POST-TERMINATION OBLIGATIONS. All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for one (1) full year after the earlier of the expiration of this Agreement or termination of Executive's employment with the Holding Company. Executive shall, upon reasonable notice, furnish such information and assistance to the Holding Company with regard to matters as to which he has personal knowledge and as may reasonably be required by the Holding Company in connection with any litigation in which it or any of its Subsidiaries or affiliates is, or may become, a party. The Holding Company shall reimburse Executive for all out-of-pocket expenses incurred and at an hourly rate equivalent to the hourly rate (based on an eight-hour work day) of his Base Salary in effect at the time of his termination from employment for any time incurred in connection with services rendered pursuant to this Section 9. 10. NON-COMPETITION. (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 of this Agreement, Executive agrees not to compete with the Holding Company or its Subsidiaries for a period of one (1) year following such termination in the county in which the Holding Company's executive office is located as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said location, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Holding Company or its Subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Holding Company or its Subsidiaries, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Holding Company or its Subsidiaries, will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 hereof, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Holding Company or its Subsidiaries, and that the enforcement of a remedy by way of injunction will not prevent Executive 12 from earning a livelihood. Nothing herein will be construed as prohibiting the Holding Company or its Subsidiaries from pursuing any other remedies available to the Holding Company or its Subsidiaries for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company and its Subsidiaries as it may exist from time to time, is a valuable, special and unique asset of the business of the Holding Company and its Subsidiaries. Executive will not, during or after the term of Executive's employment, disclose any knowledge of the past, present, planned or considered business activities of the Holding Company and its Subsidiaries thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Holding Company will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Holding Company or its Subsidiaries or from rendering any services to any person, firm, corporation, or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company from pursuing any other remedies available to the Holding Company for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. (a) All payments provided in this Agreement shall be timely paid in cash, check or other mutually agreed upon method from the general funds of the Holding Company subject to Section 11(b) of this Agreement. (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under the Employment Agreement in effect between Executive and the Institution, such payments and benefits paid by the Institution will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. Payments pursuant to this Agreement and the Institution Agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Institution on a quarterly basis; provided, however, that except for the reduction provided by the first sentence of this Section 11(b), the Holding Company will be obligated to pay 100% of the amounts due Executive hereunder. 13 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Holding Company or any predecessor of the Holding Company and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Holding Company and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 14 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware, unless otherwise specified herein. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Institution, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company, if Executive is successful pursuant to a legal judgment, arbitration or settlement. 20. INDEMNIFICATION. The Holding Company shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of Executive having been a director or officer of the Holding Company or its 15 Subsidiaries (whether or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 21. SUCCESSOR TO THE HOLDING COMPANY. The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Institution or the Holding Company, expressly and unconditionally to assume and agree to perform the Holding Company's obligations under this Agreement, in the same manner and to the same extent that the Holding Company would be required to perform if no such succession or assignment had taken place. 16 SIGNATURES IN WITNESS WHEREOF, First Sentinel Bancorp, Inc. has caused this Agreement, as amended and restated, to be executed and its seal to be affixed hereunto by its duly authorized officer and its directors, and Executive has signed this Agreement, on ____________________________. ATTEST: FIRST SENTINEL BANCORP, INC. By: - ------------------------------------ --------------------------------- Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE By: - ------------------------------------ --------------------------------- 17 EX-10.11(II) 6 c20329_ex10-11ii.txt EMPLOYMENT AGREEMENT - FIRST SENTINEL - MARTIN FIRST SENTINEL BANCORP, INC. EMPLOYMENT AGREEMENT This AGREEMENT ("Agreement"), originally entered into on November 18, 1998, is amended and restated, effective as of November 15, 2000 (the "Effective Date"), by and between First Sentinel Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of Delaware, with its principal administrative offices at 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095, and Christopher Martin ("Executive"). Any reference to the "Institution" in this Agreement shall mean First Savings Bank or any successor to First Savings Bank. WHEREAS, the Holding Company wishes to continue to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Holding Company and its subsidiaries on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of Executive's employment under this Agreement, Executive agrees to serve as Executive Vice President and Chief Financial Officer of the Holding Company. Executive shall render administrative and management services to the Holding Company such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve as a director and officer of the Institution, as well as a director of the Holding Company. 2. TERMS. (a) The period of Executive's employment under this Agreement shall be deemed to have commenced as of the date first written above and shall continue for a period of thirty-six (36) full calendar months from the Effective Date of this Agreement, as amended and restated. Commencing on the date of execution of this Agreement, the term of this Agreement shall be extended for one day each day, so that a constant thirty-six (36) calendar month term shall remain in effect, until such time as the Board of Directors of the Holding Company (the "Board") or Executive elects not to extend the term of the Agreement by giving written notice to the other party in accordance with Section 8 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the third anniversary of the date of such written notice. (b) During the period of Executive's employment hereunder, except for periods of absence occasioned by illness, vacation, and other reasonable leaves of absence, Executive shall devote substantially all of his business time, attention, skill, 1 and efforts to the faithful performance of his duties under this Agreement, including activities and services related to the organization, operation and management of the Holding Company and its direct or indirect subsidiaries ("Subsidiaries") and participation in industry, community and civic organizations; provided, however, that, with Board notification of said participation, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Holding Company or its Subsidiaries, or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything herein contained to the contrary, either Executive or the Holding Company may terminate Executive's employment with the Holding Company at any time during the term of this Agreement, subject to the terms and conditions of this Agreement. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute consideration paid by the Holding Company in exchange for the duties described in Section 1 of this Agreement. The Holding Company shall pay Executive, as compensation, a salary of not less than $250,000 ("Base Salary"). Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Holding Company or its Subsidiaries. Base Salary shall be payable in accordance with the normal payroll practices of the Holding Company. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; on or about the first of January of each year. Such review shall be conducted by the Board or by a committee of the Board delegated such responsibility by the Board. The Board or the committee may increase Executive's Base Salary at any time. Any increase in Base Salary shall thereafter become the new "Base Salary" for purposes of this Agreement. (b) Executive shall be entitled to participate in any employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, as amended and restated, and the Holding Company and its Subsidiaries will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites (or any plans, arrangements or perquisites with respect to which Executive begins to participate at any time during the term of this Agreement, as amended and restated) which would adversely affect Executive's rights or benefits thereunder, without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse affect, unless such change is general in nature and applies in a nondiscriminatory manner to all employees covered by the plan, arrangement or perquisite. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive shall be entitled to participate in and receive benefits 2 under any employee benefit plans including, but not limited to, retirement plans (such as pension, profit sharing and employee stock ownership plans), supplemental retirement plans, incentive plans, health and welfare plans and any other employee benefit plan or arrangement made available by the Holding Company or its Subsidiaries now or in the future to full-time employees of the Holding Company or its Subsidiaries and/or senior executives and key management employees of the Holding Company or its Subsidiaries, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation and benefits to which Executive is otherwise entitled under this Agreement. (c) The Holding Company shall pay or reimburse Executive for all reasonable expenses incurred by Executive in performing his obligations under this Agreement. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during Executive's term of employment under this Agreement, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Holding Company of Executive's full-time employment hereunder for any reason other than termination governed by Section 5(a) of this Agreement, or Termination for Cause, as defined in Section 7 of this Agreement, or Retirement or Disability, as defined in paragraph (f) of this Section 4 or; (ii) Executive's resignation from the Holding Company's employ, upon, any (A) notice to Executive by the Holding Company of non-renewal of the term of this Agreement, (B) failure to re-elect or re-appoint Executive as Executive Vice President and Chief Financial Officer of the Holding Company or a failure to nominate or re-elect Executive to the Board of Directors of the Holding Company or of the Institution, unless Executive otherwise consents, (C) material change in Executive's function, duties, or responsibilities with the Holding Company, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 of this Agreement (and any such material change shall be deemed as continuing breach of this Agreement), unless Executive otherwise consents, (D) relocation of Executive's principal place of employment by more than 25 miles from its location at the effective date of this Agreement, (E) material reduction in the benefits, arrangements or perquisites to Executive which is not general in nature and applicable on a nondiscriminatory basis to all employees covered by such benefits, arrangements, or perquisites or, pursuant to Section 3(b) of this Agreement, to which Executive does not consent or for which Executive is not or will not be provided the economic benefit, (F) liquidation or dissolution of the Holding Company or the Institution, or (G) breach of this Agreement by the Holding Company. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E), (F) or (G), above, Executive shall have the right to elect to terminate employment under this Agreement by resignation upon not less than sixty 3 (60) days prior written notice given within six full calendar months after the event giving rise to said right to elect. (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8 of this Agreement, the Holding Company shall be obligated to pay Executive, or, in the event of Executive's subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, the amount of the remaining payments and benefits that Executive would have earned if he had continued his employment with the Holding Company during the remaining unexpired term of this Agreement, based on Executive's Base Salary and the benefits provided to Executive as of the date of the Event of Termination, as set forth in Sections 3(a) and (b) of this Agreement, as the case may be, and the amount still due Executive under any paragraph of Section 3 for service rendered through the Date of Termination. Except as provided for in paragraphs (c) and (d) of Section 4, the determination of Executive's benefits as of the date of the Event of Termination shall be made based on (i) the value of the allocation attributable to employer contributions for the most recent plan year under any defined contribution type plan; (ii) the percentage of salary of any incentive or bonus payment for the most recently-completed fiscal year; and (iii) the employer-provided cost of any other benefit for the most recently-completed fiscal year. At the election of Executive, which election is to be made within thirty (30) days of the Date of Termination, such payments shall be made in a lump sum (without discount for early payment) or paid monthly during the remaining term of the Agreement following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. Notwithstanding anything to the contrary elsewhere in this Agreement, to the extent Executive is entitled to continued coverage or benefit accrual under any retirement or welfare benefit plan during the remaining unexpired term of this Agreement, as amended and restated, the amount payable under this Section 4(b) should be adjusted to the extent necessary to avoid any duplication of such benefits. (c) Upon the occurrence of an Event of Termination, Executive will be entitled to receive benefits due him under or contributed by the Holding Company or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or arrangement maintained by the Holding Company or its Subsidiaries to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Institution or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (d) To the extent that the Holding Company or its Subsidiaries continue to offer any life, medical, health, disability or dental insurance plan or arrangement in 4 which Executive participates in on the last day of his employment (each being a "Welfare Plan"), after an Event of Termination (as herein defined), Executive and his dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event of Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. If the Holding Company or its Subsidiaries does not offer the Welfare Plans (or if for any reason Executive's participation in said plans is prohibited) after the Event of Termination, then the Holding Company shall provide Executive with a payment equal to the actuarial value of the provision of such benefit for the period which runs until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) the end of the remaining term of this Agreement. (e) In the event that Executive is receiving monthly payments pursuant to Section 4(b) of this Agreement, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. (f) Termination of Executive based on Disability shall mean termination by written notice from either the Executive, the Holding Company or its Subsidiaries upon a determination by a physician chosen by the Holding Company, who is reasonably acceptable to Executive or Executive's personal representatives, that the Executive is not capable of fulfilling Executive's responsibilities as an officer of the Holding Company. Upon termination of Executive upon Disability, Executive shall be entitled to all benefits under any disability plan of the Holding Company or its Subsidiaries or any other plans to which Executive is a party or a participant in accordance with the terms of the plan or arrangement. Executive shall be entitled to all compensation and benefits provided for in Section 3 of this Agreement through the date of his termination of employment as specified in the written notice. 5. CHANGE IN CONTROL. (a) Change in Control of the Holding Company or the Institution shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Holding Company or the Institution within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss. 303.4(a), with respect to the Institution, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Holding Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term 5 is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Institution purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company or its Subsidiaries, or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs or is effectuated in which the Institution or Holding Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Institution or Holding Company then outstanding. (b) If any of the events described in Section 5(a) of this Agreement constituting a Change in Control have occurred, or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his termination of employment on or after the date the Change in Control occurs due to (i) Executive's dismissal at any time during the term of this Agreement, (ii) Executive's resignation for any reason within the sixty (60) day period following the date that is one-year from the date the Change in Control occurred or (iii) Executive's resignation during the remaining term of this Agreement following any demotion, loss of title, office or significant authority or responsibility, reduction in the annual compensation or benefits or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, unless such termination is because of Executive's Termination for Cause; provided, however, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 5(b) shall be strictly limited to the terms specified in such written consent. Under no circumstances can a termination of employment during the term of this Agreement on or after the date of a Change in Control occurs be considered a termination on account of retirement or disability for 6 purposes of determining Executive's rights to the payment of benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5. (c) Upon Executive's entitlement to payment pursuant to Section 5(b) of this Agreement, the Holding Company shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of: (1) the payments and benefits that would have been due pursuant to Section 3 of this Agreement for the remaining term of the Agreement; or (2) three (3) times the Executive's average annual compensation (excluding compensation attributable to the exercise of stock options) for the three most recently completed taxable years of Executive. Except as provided for in the preceding sentence, for purposes of this Section 5(c), annual compensation shall include Base Salary and any other taxable income paid by the Holding Company or its Subsidiaries, including but not limited to amounts related to the granting, vesting or exercise of restricted stock, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty-six (36) months following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (d) Upon the occurrence of a Change in Control followed by Executive's termination of employment, Executive will be entitled to receive benefits due him under or contributed by the Holding Company or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or other arrangement maintained by the Institution or the Holding Company on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan and related supplemental executive retirement plan maintained by the Institution or, if not permitted under such plans, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (e) Upon the occurrence of a Change in Control and Executive's termination of employment pursuant to the provisions of Section 5(b) of this Agreement in connection therewith, the Holding Company will cause to be continued any welfare Plan 7 benefit (as described in Section 4(d) of this Agreement) substantially identical to the benefit coverage maintained by the Holding Company or its Subsidiaries for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's dependent's participation in any such plan or program is barred, the Holding Company shall arrange to provide Executive and his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans and programs by operation of this provision or provide their economic equivalent to executive and his dependents. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will at the end of the term of this Agreement no longer be available to Executive, Executive will have the option to purchase all rights then held by the Holding Company or its Subsidiaries to such item for a price equal to the then fair market value of the item. (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 6. CHANGE OF CONTROL RELATED PROVISIONS. (a) Notwithstanding the preceding provisions of Section 5 of this Agreement, for any taxable year in which Executive shall be liable for the payment of an excise tax under Section 4999 of the Internal Revenue Code (or any successor provision thereto), with respect to any payment in the nature of the compensation made by the Holding Company or its Subsidiaries to (or for the benefit of) Executive pursuant to this Agreement or otherwise, the Holding Company (or any successor thereto) shall pay to Executive an amount determined under the following formula: 8 An amount equal to: (E x P) + X WHERE: X = E x P ---------------------- 1 - [(FI x (1 - SLI)) + SLI + E + M] and E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 6; FI = the highest marginal rate of federal income, employment, and other taxes (other than taxes imposed under Section 4999 of the Code) applicable to Executive for the taxable year in question with respect to such payment (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); SLI = the sum of the highest marginal rates of income and payroll tax applicable to Executive under applicable state and local laws for the taxable year in question (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); M = highest marginal rate of Medicare tax; and With respect to any payment in the nature of compensation that is made to (or for the benefit of) Executive under the terms of this Section 6 or otherwise and on which an excise tax under Section 4999 of the Code may or will be assessed, the payment determined under this Section 6 shall be made to Executive on the earliest of (i) the date the Holding Company is required to withhold such tax, (ii) the date the tax is required to be paid by Executive, or (iii) at the time of termination resulting from the Change in Control. It is the intention of the parties that the Holding Company provide Executive with a full tax gross-up under the provisions of this Section 6, so that on a net after-tax basis, the result to Executive shall be the same as if the excise tax under Section 4999 (or any successor provisions) of the Code had not been imposed. The tax gross-up may be adjusted, as appropriate, if alternative minimum tax rules are applicable to Executive. (b) Notwithstanding the foregoing, if it is (i) initially determined by the Holding Company's tax advisors that no excise tax under Section 4999 of the Code is due with respect to any payment or benefit described in the first paragraph of Section 6(a) and thereafter it is determined in a final judicial determination or administrative settlement 9 that the Section 4999 excise tax is due with respect to such payments or benefits or subsequently determined in a final judicial determination or a final administrative settlement to which Executive is a party that the excise tax under Section 4999 of the Code is due or that the excess parachute payment as defined in Section 4999 of the Code is more than the amount determined as "P", above (such revised determination under (i) or (ii) above thereafter being referred to as the "Determinative Excess Parachute Payment"), then the tax advisors of the Holding Company (or any successor thereto) shall determine the amount (the "Adjustment Amount"), the Holding Company (or any successor thereto) must pay to Executive, in order to put Executive in the same position as Executive would have been if the amount determined as "P" above had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the tax advisors shall take into account any and all taxes (including any penalties and interest) paid or payable by Executive in connection with such final judicial determination or final administrative settlement. As soon as practicable after the Adjustment Amount has been so determined, the Holding Company shall pay the Adjustment Amount to Executive. (c) The Holding Company (or its successor) shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, reasonable accountant's fees, interest, fines and penalties of any kind) which Executive incurs as a result of any administrative or judicial review of Executive's liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of Executive's liability for the Section 4999 excise tax or otherwise relating to the classification for purposes of Section 280G of the Code of any payment or benefit in the nature of compensation made or provided to Executive by the Holding Company or any successor thereto. Executive shall promptly notify the Holding Company in writing whenever Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Supplemental Agreement is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of Executive's liability under Section 4999). The Holding Company (or its successor) may assume control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Agreement) and Executive shall cooperate fully with the Holding Company in any such proceeding. Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Holding Company (or its successor) may have in connection therewith without prior consent to the Holding Company (or its successor). In the event that the Holding Company (or any successor thereto) elects not to assume control over such matters, the Holding Company (or any successor thereto) shall promptly reimburse Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto. 10 7. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation and benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Holding Company or its Subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause except all benefits shall be deemed to have remained in effect if Executive is reinstated. 8. NOTICE. (a) Any purported termination by the Holding Company or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) Except as otherwise provided for in this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal 11 having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Holding Company will continue to pay Executive's Base Salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated at the time of such notice in effect when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 8(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 9. POST-TERMINATION OBLIGATIONS. All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for one (1) full year after the earlier of the expiration of this Agreement or termination of Executive's employment with the Holding Company. Executive shall, upon reasonable notice, furnish such information and assistance to the Holding Company with regard to matters as to which he has personal knowledge and as may reasonably be required by the Holding Company in connection with any litigation in which it or any of its Subsidiaries or affiliates is, or may become, a party. The Holding Company shall reimburse Executive for all out-of-pocket expenses incurred and at an hourly rate equivalent to the hourly rate (based on an eight-hour work day) of his Base Salary in effect at the time of his termination from employment for any time incurred in connection with services rendered pursuant to this Section 9. 10. NON-COMPETITION. (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 of this Agreement, Executive agrees not to compete with the Holding Company or its Subsidiaries for a period of one (1) year following such termination in the county in which the Holding Company's executive office is located as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said location, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Holding Company or its Subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Holding Company or its Subsidiaries, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Holding Company or its Subsidiaries, will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 hereof, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Holding Company or its Subsidiaries, 12 and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Holding Company or its Subsidiaries from pursuing any other remedies available to the Holding Company or its Subsidiaries for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company and its Subsidiaries as it may exist from time to time, is a valuable, special and unique asset of the business of the Holding Company and its Subsidiaries. Executive will not, during or after the term of Executive's employment, disclose any knowledge of the past, present, planned or considered business activities of the Holding Company and its Subsidiaries thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Holding Company will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Holding Company or its Subsidiaries or from rendering any services to any person, firm, corporation, or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company from pursuing any other remedies available to the Holding Company for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. (a) All payments provided in this Agreement shall be timely paid in cash, check or other mutually agreed upon method from the general funds of the Holding Company subject to Section 11(b) of this Agreement. (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under the Employment Agreement in effect between Executive and the Institution, such payments and benefits paid by the Institution will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. Payments pursuant to this Agreement and the Institution Agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Institution on a quarterly basis; provided, however, that except for the reduction provided by the first sentence of this Section 11(b), the Holding Company will be obligated to pay 100% of the amounts due Executive hereunder. 13 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Holding Company or any predecessor of the Holding Company and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Holding Company and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 14 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Delaware, unless otherwise specified herein. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Institution, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Holding Company, if Executive is successful pursuant to a legal judgment, arbitration or settlement. 20. INDEMNIFICATION. The Holding Company shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under Delaware law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of Executive having been a director or officer of the Holding Company or its 15 Subsidiaries (whether or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 21. SUCCESSOR TO THE HOLDING COMPANY. The Holding Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Institution or the Holding Company, expressly and unconditionally to assume and agree to perform the Holding Company's obligations under this Agreement, in the same manner and to the same extent that the Holding Company would be required to perform if no such succession or assignment had taken place. 16 SIGNATURES IN WITNESS WHEREOF, First Sentinel Bancorp, Inc. has caused this Agreement, as amended and restated, to be executed and its seal to be affixed hereunto by its duly authorized officer and its directors, and Executive has signed this Agreement, on ____________________________. ATTEST: FIRST SENTINEL BANCORP, INC. By: - ---------------------------------- --------------------------------- President For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE By: - ---------------------------------- ---------------------------------- EX-10.12(I) 7 c20329_ex10-12i.txt EMPLOYEMENT AGREEMENT - FIRST SAVINGS FIRST SAVINGS BANK EMPLOYMENT AGREEMENT This AGREEMENT ("Agreement"), originally entered into on November 20, 1996, is amended and restated, effective as of November 15, 2000 (the "Effective Date"), by and between First Savings Bank (the "Institution"), a New Jersey chartered savings bank, with its principal administrative offices at 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095, First Sentinel Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of Delaware, and John P. Mulkerin ("Executive"). WHEREAS, the Institution wishes to continue to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Institution and its subsidiaries on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of Executive's employment under this Agreement, Executive agrees to serve as President and Chief Executive Officer of the Institution. Executive shall render administrative and management services to the Institution such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve as a director of the Institution. 2. TERMS. (a) The period of Executive's employment under this Agreement shall be deemed to have commenced as of the date first written above and shall continue for a period of thirty-six (36) full calendar months from the Effective Date of this Agreement, as amended and restated. Commencing on the date of execution of this Agreement, the term of this Agreement shall be extended for one day each day, so that a constant thirty-six (36) calendar month term shall remain in effect, until such time as the Board of Directors of the Institution (the "Board") or Executive elects not to extend the term of the Agreement by giving written notice to the other party in accordance with Section 8 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the third anniversary of the date of such written notice. (b) During the period of Executive's employment hereunder, except for periods of absence occasioned by illness, vacation, and other reasonable leaves of absence, Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties under this Agreement, including activities and services related to the organization, operation and management of the Institution and its direct or indirect subsidiaries ("Subsidiaries") and participation in industry, community and civic organizations; provided, however, that, with Board notification of said participation, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Institution or its Subsidiaries, or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything herein contained to the contrary, either Executive or the Institution may terminate Executive's employment with the Institution at any time during the term of this Agreement, subject to the terms and conditions of this Agreement. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute consideration paid by the Institution in exchange for the duties described in Section 1 of this Agreement. The Institution shall pay Executive, as compensation, a salary of not less than $315,000 ("Base Salary"). Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Institution or its Subsidiaries. Base Salary shall be payable in accordance with the normal payroll practices of the Institution. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; on or about the first of January of each year. Such review shall be conducted by the Board or by a committee of the Board delegated such responsibility by the Board. The Board or the committee may increase Executive's Base Salary at any time. Any increase in Base Salary shall thereafter become the new "Base Salary" for purposes of this Agreement. (b) Executive shall be entitled to participate in any employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, as amended and restated, and the Institution and its Subsidiaries will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites (or any plans, arrangements or perquisites with respect to which Executive begins to participate at any time during the term of this Agreement, as amended and restated) which would adversely affect Executive's rights or benefits thereunder, without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse affect, unless such change is general in nature and applies in a nondiscriminatory manner to all employees covered by the plan, arrangement or perquisite. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive shall be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans (such as pension, profit sharing and employee stock ownership plans), supplemental 2 retirement plans, incentive plans, health and welfare plans and any other employee benefit plan or arrangement made available by the Institution or its Subsidiaries now or in the future to full-time employees of the Institution or its Subsidiaries and/or senior executives and key management employees of the Institution or its Subsidiaries, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation and benefits to which Executive is otherwise entitled under this Agreement. (c) The Institution shall pay or reimburse Executive for all reasonable expenses incurred by Executive in performing his obligations under this Agreement. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during Executive's term of employment under this Agreement, but prior to the date Executive attains age 65, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Institution of Executive's full-time employment hereunder for any reason other than termination governed by Section 5(a) of this Agreement, or Termination for Cause, as defined in Section 7 of this Agreement, or Retirement or Disability, as defined in paragraph (f) of this Section 4 or; (ii) Executive's resignation from the Institution's employ, upon, any (A) notice to Executive by the Institution of non-renewal of the term of this Agreement, (B) failure to re-elect or re-appoint Executive as President and Chief Executive Officer of the Institution or a failure to nominate or re-elect Executive to the Board of Directors of the Institution, unless Executive otherwise consents, (C) material change in Executive's function, duties, or responsibilities with the Institution, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 of this Agreement (and any such material change shall be deemed as continuing breach of this Agreement), unless Executive otherwise consents, (D) relocation of Executive's principal place of employment by more than 25 miles from its location at the effective date of this Agreement, (E) material reduction in the benefits, arrangements or perquisites to Executive which is not general in nature and applicable on a nondiscriminatory basis to all employees covered by such benefits, arrangements, or perquisites or, pursuant to Section 3(b) of this Agreement, to which Executive does not consent or for which Executive is not or will not be provided the economic benefit, (F) liquidation or dissolution of the Holding Company or the Institution, or (G) breach of this Agreement by the Institution. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E), (F) or (G), above, Executive shall have the right to elect to terminate employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within six full calendar months after the event giving rise to said right to elect. (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8 of this Agreement, the Institution shall be obligated 3 to pay Executive, or, in the event of Executive's subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, the amount of the remaining payments and benefits that Executive would have earned if he had continued his employment with the Institution during the remaining unexpired term of this Agreement, based on Executive's Base Salary and the benefits provided to Executive as of the date of the Event of Termination, as set forth in Sections 3(a) and (b) of this Agreement, as the case may be, and the amount still due Executive under any paragraph of Section 3 for service rendered through the Date of Termination. Except as provided for in paragraphs (c) and (d) of Section 4, the determination of Executive's benefits as of the date of the Event of Termination shall be made based on (i) the value of the allocation attributable to employer contributions for the most recent plan year under any defined contribution type plan; (ii) the percentage of salary of any incentive or bonus payment for the most recently-completed fiscal year; and (iii) the employer-provided cost of any other benefit for the most recently-completed fiscal year. At the election of Executive, which election is to be made within thirty (30) days of the Date of Termination, such payments shall be made in a lump sum (without discount for early payment) or paid monthly during the remaining term of the Agreement following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. Notwithstanding anything to the contrary elsewhere in this Agreement, to the extent Executive is entitled to continued coverage or benefit accrual under any retirement or welfare benefit plan during the remaining unexpired term of this Agreement, as amended and restated, the amount payable under this Section 4(b) should be adjusted to the extent necessary to avoid any duplication of such benefits. (c) Upon the occurrence of an Event of Termination, Executive will be entitled to receive benefits due him under or contributed by the Institution or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or arrangement maintained by the Institution or its Subsidiaries to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Institution or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (d) To the extent that the Institution or its Subsidiaries continue to offer any life, medical, health, disability or dental insurance plan or arrangement in which Executive participates in on the last day of his employment (each being a "Welfare Plan"), after an Event of Termination (as herein defined), Executive and his dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event of Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of 4 this Agreement. If the Institution or its Subsidiaries does not offer the Welfare Plans (or if for any reason Executive's participation in said plans is prohibited) after the Event of Termination, then the Institution shall provide Executive with a payment equal to the actuarial value of the provision of such benefit for the period which runs until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) the end of the remaining term of this Agreement. (e) In the event that Executive is receiving monthly payments pursuant to Section 4(b) of this Agreement, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. (f) Termination of Executive based on Disability shall mean termination by written notice from either the Executive, the Institution or its Subsidiaries upon a determination by a physician chosen by the Institution, who is reasonably acceptable to Executive or Executive's personal representatives, that the Executive is not capable of fulfilling Executive's responsibilities as an officer of the Institution. Upon termination of Executive upon Disability, Executive shall be entitled to all benefits under any disability plan of the Institution or its Subsidiaries or any other plans to which Executive is a party or a participant in accordance with the terms of the plan or arrangement. Executive shall be entitled to all compensation and benefits provided for in Section 3 of this Agreement through the date of his termination of employment as specified in the written notice. 5. CHANGE IN CONTROL. (a) Change in Control of the Holding Company or the Institution shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Holding Company or the Institution within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. SS. 303.4(a), with respect to the Institution, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Holding Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Institution purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company, the Institution or its Subsidiaries, or (B) individuals who 5 constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs or is effectuated in which the Institution or Holding Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Institution or Holding Company then outstanding. (b) If any of the events described in Section 5(a) of this Agreement constituting a Change in Control have occurred, or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his termination of employment on or after the date the Change in Control occurs due to (i) Executive's dismissal at any time during the term of this Agreement, (ii) Executive's resignation for any reason within the sixty (60) day period following the date that is one-year from the date the Change in Control occurred or (iii) Executive's resignation during the remaining term of this Agreement following any demotion, loss of title, office or significant authority or responsibility, reduction in the annual compensation or benefits or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, unless such termination is because of Executive's Termination for Cause; provided, however, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 5(b) shall be strictly limited to the terms specified in such written consent. Under no circumstances can a termination of employment during the term of this Agreement on or after the date of a Change in Control occurs be considered a termination on account of retirement or disability for purposes of determining Executive's rights to the payment of benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5. (c) Upon Executive's entitlement to payment pursuant to Section 5(b) of this Agreement, the Institution shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of: (1) the payments and benefits that would have been due pursuant to Section 3 of this 6 Agreement for the remaining term of the Agreement; or (2) three (3) times the Executive's average annual compensation (excluding compensation attributable to the exercise of stock options) for the three most recently completed taxable years of Executive. Except as provided for in the preceding sentence, for purposes of this Section 5(c), annual compensation shall include Base Salary and any other taxable income paid by the Institution or its Subsidiaries, including but not limited to amounts related to the granting, vesting or exercise of restricted stock, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty-six (36) months following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (d) Upon the occurrence of a Change in Control followed by Executive's termination of employment, Executive will be entitled to receive benefits due him under or contributed by the Institution or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or other arrangement maintained by the Institution on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan and related supplemental executive retirement plan maintained by the Institution or, if not permitted under such plans, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (e) Upon the occurrence of a Change in Control and Executive's termination of employment pursuant to the provisions of Section 5(b) of this Agreement in connection therewith, the Institution will cause to be continued any welfare Plan benefit (as described in Section 4(d) of this Agreement) substantially identical to the benefit coverage maintained by the Institution or its Subsidiaries for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's dependent's participation in any such plan or program is barred, the Institution shall arrange to provide Executive and his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans 7 and programs by operation of this provision or provide their economic equivalent to executive and his dependents. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will at the end of the term of this Agreement no longer be available to Executive, Executive will have the option to purchase all rights then held by the Institution or its Subsidiaries to such item for a price equal to the then fair market value of the item. (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 6. CHANGE OF CONTROL RELATED PROVISIONS. (a) Notwithstanding the preceding provisions of Section 5 of this Agreement, for any taxable year in which Executive shall be liable for the payment of an excise tax under Section 4999 of the Internal Revenue Code (or any successor provision thereto), with respect to any payment in the nature of the compensation made by the Institution or its Subsidiaries to (or for the benefit of) Executive pursuant to this Agreement or otherwise, the Institution (or any successor thereto) shall pay to Executive an amount determined under the following formula: 8 An amount equal to: (E x P) + X WHERE: X = E x P / ---------------------- 1 - [(FI x (1 - SLI)) + SLI + E + M] and E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 6; FI = the highest marginal rate of federal income, employment, and other taxes (other than taxes imposed under Section 4999 of the Code) applicable to Executive for the taxable year in question with respect to such payment (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); SLI = the sum of the highest marginal rates of income and payroll tax applicable to Executive under applicable state and local laws for the taxable year in question (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); M = highest marginal rate of Medicare tax; and With respect to any payment in the nature of compensation that is made to (or for the benefit of) Executive under the terms of this Section 6 or otherwise and on which an excise tax under Section 4999 of the Code may or will be assessed, the payment determined under this Section 6 shall be made to Executive on the earliest of (i) the date the Institution is required to withhold such tax, (ii) the date the tax is required to be paid by Executive, or (iii) at the time of termination resulting from the Change in Control. It is the intention of the parties that the Institution provide Executive with a full tax gross-up under the provisions of this Section 6, so that on a net after-tax basis, the result to Executive shall be the same as if the excise tax under Section 4999 (or any successor provisions) of the Code had not been imposed. The tax gross-up may be adjusted, as appropriate, if alternative minimum tax rules are applicable to Executive. (b) Notwithstanding the foregoing, if it is (i) initially determined by the Institution's tax advisors that no excise tax under Section 4999 of the Code is due with respect to any payment or benefit described in the first paragraph of Section 6(a) and thereafter it is determined in a final judicial determination or administrative settlement that the Section 4999 excise tax is due with respect to such payments or benefits or subsequently determined in a final judicial determination or a final administrative 9 settlement to which Executive is a party that the excise tax under Section 4999 of the Code is due or that the excess parachute payment as defined in Section 4999 of the Code is more than the amount determined as "P", above (such revised determination under (i) or (ii) above thereafter being referred to as the "Determinative Excess Parachute Payment"), then the tax advisors of the Institution (or any successor thereto) shall determine the amount (the "Adjustment Amount"), the Institution (or any successor thereto) must pay to Executive, in order to put Executive in the same position as Executive would have been if the amount determined as "P" above had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the tax advisors shall take into account any and all taxes (including any penalties and interest) paid or payable by Executive in connection with such final judicial determination or final administrative settlement. As soon as practicable after the Adjustment Amount has been so determined, the Institution shall pay the Adjustment Amount to Executive. (c) The Institution (or its successor) shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, reasonable accountant's fees, interest, fines and penalties of any kind) which Executive incurs as a result of any administrative or judicial review of Executive's liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of Executive's liability for the Section 4999 excise tax or otherwise relating to the classification for purposes of Section 280G of the Code of any payment or benefit in the nature of compensation made or provided to Executive by the Institution or any successor thereto. Executive shall promptly notify the Institution in writing whenever Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Supplemental Agreement is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of Executive's liability under Section 4999). The Institution (or its successor) may assume control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Agreement) and Executive shall cooperate fully with the Institution in any such proceeding. Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Institution (or its successor) may have in connection therewith without prior consent of the Institution (or its successor). In the event that the Institution (or any successor thereto) elects not to assume control over such matters, the Institution (or any successor thereto) shall promptly reimburse Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto. 7. TERMINATION FOR CAUSE. 10 The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation and benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Institution or its Subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause except all benefits shall be deemed to have remained in effect if Executive is reinstated. 8. NOTICE. (a) Any purported termination by the Institution or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) Except as otherwise provided for in this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party 11 giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Institution will continue to pay Executive's Base Salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated at the time of such notice in effect when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 8(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 9. POST-TERMINATION OBLIGATIONS. All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for one (1) full year after the earlier of the expiration of this Agreement or termination of Executive's employment with the Institution. Executive shall, upon reasonable notice, furnish such information and assistance to the Institution with regard to matters as to which he has personal knowledge and as may reasonably be required by the Institution in connection with any litigation in which it or any of its Subsidiaries or affiliates is, or may become, a party. The Institution shall reimburse Executive for all out-of-pocket expenses incurred and at an hourly rate equivalent to the hourly rate (based on an eight-hour work day) of his Base Salary in effect at the time of his termination from employment for any time incurred in connection with services rendered pursuant to this Section 9. 10. NON-COMPETITION. (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 of this Agreement, Executive agrees not to compete with the Institution or its Subsidiaries for a period of one (1) year following such termination in the county in which the Institution's executive office is located as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said location, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Institution or its Subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Institution or its Subsidiaries, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Institution or its Subsidiaries, will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 hereof, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Institution or its Subsidiaries, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Institution or its Subsidiaries from pursuing any other 12 remedies available to the Institution or its Subsidiaries for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Institution and its Subsidiaries as it may exist from time to time, is a valuable, special and unique asset of the business of the Institution and its Subsidiaries. Executive will not, during or after the term of Executive's employment, disclose any knowledge of the past, present, planned or considered business activities of the Institution and its Subsidiaries thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Institution. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Institution will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Institution or its Subsidiaries or from rendering any services to any person, firm, corporation, or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Institution from pursuing any other remedies available to the Institution for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. (a) All payments provided in this Agreement shall be timely paid in cash, check or other mutually agreed upon method from the general funds of the Institution subject to Section 11(b) of this Agreement. The Holding Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Institution are not timely paid or provided by the Institution, such amounts and benefits shall be paid or provided by the Holding Company. (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under an employment agreement in effect between Executive and the Holding Company, such payments and benefits paid by the Holding Company will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. Payments pursuant to this Agreement and the Holding Company Agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Institution on a quarterly basis; provided, however, that except for the reduction provided by the first sentence of this Section 11(b), the Institution will be obligated to pay 100% of the amounts due Executive hereunder. 13 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Institution or any predecessor of the Institution and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Institution and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 14 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of New Jersey, unless otherwise specified herein. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Institution, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Institution, if Executive is successful pursuant to a legal judgment, arbitration or settlement. 20. INDEMNIFICATION. The Institution shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under New Jersey law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of Executive having been a director or officer of the Institution or its Subsidiaries (whether 15 or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 21. SUCCESSOR TO THE INSTITUTION. The Institution shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Institution, expressly and unconditionally to assume and agree to perform the Institution's obligations under this Agreement, in the same manner and to the same extent that the Institution would be required to perform if no such succession or assignment had taken place. 16 SIGNATURES IN WITNESS WHEREOF, First Savings Bank and First Sentinel Bancorp, Inc. have caused this Agreement, as amended and restated, to be executed and their seals to be affixed hereunto by their duly authorized officers and directors, and Executive has signed this Agreement, on ____________________________. ATTEST: FIRST SAVINGS BANK By: - ------------------------------------ --------------------------------- Secretary For the Entire Board of Directors [SEAL] ATTEST: FIRST SENTINEL BANCORP, INC. (Guarantor) By: - ------------------------------------ --------------------------------- Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE By: - ------------------------------------ --------------------------------- 17 EX-10.12(II) 8 c20329_ex10-12ii.txt EMPLOYMENT AGREEMENT - FIRST SAVINGS FIRST SAVINGS BANK EMPLOYMENT AGREEMENT This AGREEMENT ("Agreement"), originally entered into on November 20, 1996, is amended and restated, effective as of November 15, 2000 (the "Effective Date"), by and between First Savings Bank (the "Institution"), a New Jersey chartered savings bank, with its principal administrative offices at 1000 Woodbridge Center Drive, Woodbridge, New Jersey 07095, First Sentinel Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of Delaware, and Christopher Martin ("Executive"). WHEREAS, the Institution wishes to continue to assure itself of the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Institution and its subsidiaries on a full-time basis for the term of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES. During the period of Executive's employment under this Agreement, Executive agrees to serve as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Institution. Executive shall render administrative and management services to the Institution such as are customarily performed by persons in a similar executive capacity. During the term of this Agreement, Executive also agrees to serve as a director of the Institution. 2. TERMS. (a) The period of Executive's employment under this Agreement shall be deemed to have commenced as of the date first written above and shall continue for a period of thirty-six (36) full calendar months from the Effective Date of this Agreement, as amended and restated. Commencing on the date of execution of this Agreement, the term of this Agreement shall be extended for one day each day, so that a constant thirty-six (36) calendar month term shall remain in effect, until such time as the Board of Directors of the Institution (the "Board") or Executive elects not to extend the term of the Agreement by giving written notice to the other party in accordance with Section 8 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the third anniversary of the date of such written notice. (b) During the period of Executive's employment hereunder, except for periods of absence occasioned by illness, vacation, and other reasonable leaves of absence, Executive shall devote substantially all of his business time, attention, skill, and efforts to the faithful performance of his duties under this Agreement, including activities and services related to the organization, operation and management of the Institution and its direct or indirect subsidiaries ("Subsidiaries") and participation in industry, community and civic organizations; provided, however, that, with Board notification of said participation, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in the Board's judgment, will not present any conflict of interest with the Institution or its Subsidiaries, or materially affect the performance of Executive's duties pursuant to this Agreement. (c) Notwithstanding anything herein contained to the contrary, either Executive or the Institution may terminate Executive's employment with the Institution at any time during the term of this Agreement, subject to the terms and conditions of this Agreement. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute consideration paid by the Institution in exchange for the duties described in Section 1 of this Agreement. The Institution shall pay Executive, as compensation, a salary of not less than $250,000 ("Base Salary"). Base Salary shall include any amounts of compensation deferred by Executive under any tax-qualified retirement or welfare benefit plan or any other deferred compensation arrangement maintained by the Institution or its Subsidiaries. Base Salary shall be payable in accordance with the normal payroll practices of the Institution. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; on or about the first of January of each year. Such review shall be conducted by the Board or by a committee of the Board delegated such responsibility by the Board. The Board or the committee may increase Executive's Base Salary at any time. Any increase in Base Salary shall thereafter become the new "Base Salary" for purposes of this Agreement. (b) Executive shall be entitled to participate in any employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, as amended and restated, and the Institution and its Subsidiaries will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites (or any plans, arrangements or perquisites with respect to which Executive begins to participate at any time during the term of this Agreement, as amended and restated) which would adversely affect Executive's rights or benefits thereunder, without separately providing for an arrangement that ensures Executive receives or will receive the economic value that Executive would otherwise lose as a result of such adverse affect, unless such change is general in nature and applies in a nondiscriminatory manner to all employees covered by the plan, arrangement or perquisite. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive shall be entitled to participate in and receive benefits under any employee benefit plans including, but not limited to, retirement plans (such 2 as pension, profit sharing and employee stock ownership plans), supplemental retirement plans, incentive plans, health and welfare plans and any other employee benefit plan or arrangement made available by the Institution or its Subsidiaries now or in the future to full-time employees of the Institution or its Subsidiaries and/or senior executives and key management employees of the Institution or its Subsidiaries, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Nothing paid to Executive under any such plans or arrangements will be deemed to be in lieu of other compensation and benefits to which Executive is otherwise entitled under this Agreement. (c) The Institution shall pay or reimburse Executive for all reasonable expenses incurred by Executive in performing his obligations under this Agreement. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during Executive's term of employment under this Agreement, the provisions of this Section 4 shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Institution of Executive's full-time employment hereunder for any reason other than termination governed by Section 5(a) of this Agreement, or Termination for Cause, as defined in Section 7 of this Agreement, or Retirement or Disability, as defined in paragraph (f) of this Section 4 or; (ii) Executive's resignation from the Institution's employ, upon, any (A) notice to Executive by the Institution of non-renewal of the term of this Agreement, (B) failure to re-elect or re-appoint Executive as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Institution or a failure to nominate or re-elect Executive to the Board of Directors of the Institution, unless Executive otherwise consents, (C) material change in Executive's function, duties, or responsibilities with the Institution, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 of this Agreement (and any such material change shall be deemed as continuing breach of this Agreement), unless Executive otherwise consents, (D) relocation of Executive's principal place of employment by more than 25 miles from its location at the effective date of this Agreement, (E) material reduction in the benefits, arrangements or perquisites to Executive which is not general in nature and applicable on a nondiscriminatory basis to all employees covered by such benefits, arrangements, or perquisites or, pursuant to Section 3(b) of this Agreement, to which Executive does not consent or for which Executive is not or will not be provided the economic benefit, (F) liquidation or dissolution of the Holding Company or the Institution, or (G) breach of this Agreement by the Institution. Upon the occurrence of any event described in clauses (A), (B), (C), (D), (E), (F) or (G), above, Executive shall have the right to elect to terminate employment under this Agreement by resignation upon not less than sixty (60) days prior written notice given within six full calendar months after the event giving rise to said right to elect. 3 (b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8 of this Agreement, the Institution shall be obligated to pay Executive, or, in the event of Executive's subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, the amount of the remaining payments and benefits that Executive would have earned if he had continued his employment with the Institution during the remaining unexpired term of this Agreement, based on Executive's Base Salary and the benefits provided to Executive as of the date of the Event of Termination, as set forth in Sections 3(a) and (b) of this Agreement, as the case may be, and the amount still due Executive under any paragraph of Section 3 for service rendered through the Date of Termination. Except as provided for in paragraphs (c) and (d) of Section 4, the determination of Executive's benefits as of the date of the Event of Termination shall be made based on (i) the value of the allocation attributable to employer contributions for the most recent plan year under any defined contribution type plan; (ii) the percentage of salary of any incentive or bonus payment for the most recently-completed fiscal year; and (iii) the employer-provided cost of any other benefit for the most recently-completed fiscal year. At the election of Executive, which election is to be made within thirty (30) days of the Date of Termination, such payments shall be made in a lump sum (without discount for early payment) or paid monthly during the remaining term of the Agreement following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. Notwithstanding anything to the contrary elsewhere in this Agreement, to the extent Executive is entitled to continued coverage or benefit accrual under any retirement or welfare benefit plan during the remaining unexpired term of this Agreement, as amended and restated, the amount payable under this Section 4(b) should be adjusted to the extent necessary to avoid any duplication of such benefits. (c) Upon the occurrence of an Event of Termination, Executive will be entitled to receive benefits due him under or contributed by the Institution or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or arrangement maintained by the Institution or its Subsidiaries to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan maintained by the Institution or, if not permitted under such plan, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (d) To the extent that the Institution or its Subsidiaries continue to offer any life, medical, health, disability or dental insurance plan or arrangement in which Executive participates in on the last day of his employment (each being a "Welfare Plan"), after an Event of Termination (as herein defined), Executive and his dependents shall continue participating in such Welfare Plans, subject to the same premium contributions on the part of Executive as were required immediately prior to the Event of 4 Termination until the earlier of (i) his death (ii) his employment by another employer other than one of which he is the majority owner or (iii) the end of the remaining term of this Agreement. If the Institution or its Subsidiaries does not offer the Welfare Plans (or if for any reason Executive's participation in said plans is prohibited) after the Event of Termination, then the Institution shall provide Executive with a payment equal to the actuarial value of the provision of such benefit for the period which runs until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) the end of the remaining term of this Agreement. (e) In the event that Executive is receiving monthly payments pursuant to Section 4(b) of this Agreement, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum or on a pro rata basis. Such election shall be irrevocable for the year for which such election is made. (f) Termination of Executive based on Disability shall mean termination by written notice from either the Executive, the Institution or its Subsidiaries upon a determination by a physician chosen by the Institution, who is reasonably acceptable to Executive or Executive's personal representatives, that the Executive is not capable of fulfilling Executive's responsibilities as an officer of the Institution. Upon termination of Executive upon Disability, Executive shall be entitled to all benefits under any disability plan of the Institution or its Subsidiaries or any other plans to which Executive is a party or a participant in accordance with the terms of the plan or arrangement. Executive shall be entitled to all compensation and benefits provided for in Section 3 of this Agreement through the date of his termination of employment as specified in the written notice. 5. CHANGE IN CONTROL. (a) Change in Control of the Holding Company or the Institution shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Holding Company or the Institution within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. SS. 303.4(a), with respect to the Institution, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Holding Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Institution or the Holding Company representing 20% or more of the Institution's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Institution purchased by 5 the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company, the Institution or its Subsidiaries, or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Institution or the Holding Company or similar transaction occurs or is effectuated in which the Institution or Holding Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Institution with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Institution or the Holding Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Institution or Holding Company then outstanding. (b) If any of the events described in Section 5(a) of this Agreement constituting a Change in Control have occurred, or the Board has determined that a Change in Control has occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5 upon his termination of employment on or after the date the Change in Control occurs due to (i) Executive's dismissal at any time during the term of this Agreement, (ii) Executive's resignation for any reason within the sixty (60) day period following the date that is one-year from the date the Change in Control occurred or (iii) Executive's resignation during the remaining term of this Agreement following any demotion, loss of title, office or significant authority or responsibility, reduction in the annual compensation or benefits or relocation of Executive's principal place of employment by more than 25 miles from its location immediately prior to the Change in Control, unless such termination is because of Executive's Termination for Cause; provided, however, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of the Executive under this Section 5(b) shall be strictly limited to the terms specified in such written consent. Under no circumstances can a termination of employment during the term of this Agreement on or after the date of a Change in Control occurs be considered a termination on account of retirement or disability for purposes of determining Executive's rights to the payment of benefits provided in paragraphs (c), (d), (e), (f), and (g) of this Section 5. (c) Upon Executive's entitlement to payment pursuant to Section 5(b) of this Agreement, the Institution shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiary or beneficiaries, or estate, as the case may 6 be, as severance pay or liquidated damages, or both, a sum equal to the greater of: (1) the payments and benefits that would have been due pursuant to Section 3 of this Agreement for the remaining term of the Agreement; or (2) three (3) times the Executive's average annual compensation (excluding compensation attributable to the exercise of stock options) for the three most recently completed taxable years of Executive. Except as provided for in the preceding sentence, for purposes of this Section 5(c), annual compensation shall include Base Salary and any other taxable income paid by the Institution or its Subsidiaries, including but not limited to amounts related to the granting, vesting or exercise of restricted stock, commissions, bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. At the election of Executive, which election is to be made prior to or within thirty (30) days of the Date of Termination on or following a Change in Control, such payment may be made in a lump sum (without discount for early payment) on or immediately following the Date of Termination (which may be the date a Change in Control occurs) or paid in equal monthly installments during the thirty-six (36) months following Executive's termination. In the event that no election is made, payment to Executive will be made in a lump sum. Such payments shall not be reduced in the event Executive obtains other employment following termination of employment. (d) Upon the occurrence of a Change in Control followed by Executive's termination of employment, Executive will be entitled to receive benefits due him under or contributed by the Institution or its Subsidiaries on his behalf pursuant to any retirement, incentive, profit sharing, employee stock ownership, bonus, performance, disability or other employee benefit plan or other arrangement maintained by the Institution on Executive's behalf to the extent such benefits are not otherwise paid to Executive under a separate provision of this Agreement. In addition, for purposes of determining his vested accrued benefit, Executive shall be credited either under any defined benefit pension plan and related supplemental executive retirement plan maintained by the Institution or, if not permitted under such plans, under a separate arrangement, with the additional "years of service" that he would have earned for vesting and benefit accrual purposes for the remaining term of the Agreement had his employment not terminated. (e) Upon the occurrence of a Change in Control and Executive's termination of employment pursuant to the provisions of Section 5(b) of this Agreement in connection therewith, the Institution will cause to be continued any welfare Plan benefit (as described in Section 4(d) of this Agreement) substantially identical to the benefit coverage maintained by the Institution or its Subsidiaries for Executive and any of his dependents covered under such plans prior to the Change in Control. Such coverage shall cease upon the expiration of thirty-six (36) full calendar months following the Date of Termination. In the event Executive's or Executive's dependent's participation in any such plan or program is barred, the Institution shall arrange to provide Executive and 7 his dependents with benefits coverage substantially similar to those which Executive and his dependents would otherwise have been entitled to receive under such plans and programs by operation of this provision or provide their economic equivalent to executive and his dependents. (f) The use or provision of any membership, license, automobile use, or other perquisites shall be continued during the remaining term of the Agreement on the same financial terms and obligations as were in place immediately prior to the Change in Control. To the extent that any item referred to in this paragraph will at the end of the term of this Agreement no longer be available to Executive, Executive will have the option to purchase all rights then held by the Institution or its Subsidiaries to such item for a price equal to the then fair market value of the item. (g) In the event that Executive is receiving monthly payments pursuant to Section 5(c) hereof, on an annual basis, thereafter, between the dates of January 1 and January 31 of each year, Executive shall have the right to elect whether the balance of the amount payable under the Agreement for that year shall be paid in a lump sum pursuant to such section. Such election shall be irrevocable for the year for which such election is made. 6. CHANGE OF CONTROL RELATED PROVISIONS. (a) Notwithstanding the preceding provisions of Section 5 of this Agreement, for any taxable year in which Executive shall be liable for the payment of an excise tax under Section 4999 of the Internal Revenue Code (or any successor provision thereto), with respect to any payment in the nature of the compensation made by the Institution or its Subsidiaries to (or for the benefit of) Executive pursuant to this Agreement or otherwise, the Institution (or any successor thereto) shall pay to Executive an amount determined under the following formula: 8 An amount equal to: (E x P) + X WHERE: X = E x P / ---------------------- 1 - [(FI x (1 - SLI)) + SLI + E + M] and E = the rate at which the excise tax is assessed under Section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this Section 6; FI = the highest marginal rate of federal income, employment, and other taxes (other than taxes imposed under Section 4999 of the Code) applicable to Executive for the taxable year in question with respect to such payment (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); SLI = the sum of the highest marginal rates of income and payroll tax applicable to Executive under applicable state and local laws for the taxable year in question (including any effective increase in Executive's tax rate attributable to the resultant disallowance of any deduction or the phase-out of any personal exemption or similar items); M = highest marginal rate of Medicare tax; and With respect to any payment in the nature of compensation that is made to (or for the benefit of) Executive under the terms of this Section 6 or otherwise and on which an excise tax under Section 4999 of the Code may or will be assessed, the payment determined under this Section 6 shall be made to Executive on the earliest of (i) the date the Institution is required to withhold such tax, (ii) the date the tax is required to be paid by Executive, or (iii) at the time of termination resulting from the Change in Control. It is the intention of the parties that the Institution provide Executive with a full tax gross-up under the provisions of this Section 6, so that on a net after-tax basis, the result to Executive shall be the same as if the excise tax under Section 4999 (or any successor provisions) of the Code had not been imposed. The tax gross-up may be adjusted, as appropriate, if alternative minimum tax rules are applicable to Executive. (b) Notwithstanding the foregoing, if it is (i) initially determined by the Institution's tax advisors that no excise tax under Section 4999 of the Code is due with respect to any payment or benefit described in the first paragraph of Section 6(a) and thereafter it is determined in a final judicial determination or administrative settlement that the Section 4999 excise tax is due with respect to such payments or benefits or subsequently determined in a final judicial determination or a final administrative 9 settlement to which Executive is a party that the excise tax under Section 4999 of the Code is due or that the excess parachute payment as defined in Section 4999 of the Code is more than the amount determined as "P", above (such revised determination under (i) or (ii) above thereafter being referred to as the "Determinative Excess Parachute Payment"), then the tax advisors of the Institution (or any successor thereto) shall determine the amount (the "Adjustment Amount"), the Institution (or any successor thereto) must pay to Executive, in order to put Executive in the same position as Executive would have been if the amount determined as "P" above had been equal to the Determinative Excess Parachute Payment. In determining the Adjustment Amount, the tax advisors shall take into account any and all taxes (including any penalties and interest) paid or payable by Executive in connection with such final judicial determination or final administrative settlement. As soon as practicable after the Adjustment Amount has been so determined, the Institution shall pay the Adjustment Amount to Executive. (c) The Institution (or its successor) shall indemnify and hold Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney's fees, reasonable accountant's fees, interest, fines and penalties of any kind) which Executive incurs as a result of any administrative or judicial review of Executive's liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of Executive's liability for the Section 4999 excise tax or otherwise relating to the classification for purposes of Section 280G of the Code of any payment or benefit in the nature of compensation made or provided to Executive by the Institution or any successor thereto. Executive shall promptly notify the Institution in writing whenever Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Supplemental Agreement is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of Executive's liability under Section 4999). The Institution (or its successor) may assume control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for Executive to resolve any such proceeding with respect to any matter unrelated to amounts paid or payable pursuant to this Agreement) and Executive shall cooperate fully with the Institution in any such proceeding. Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Institution (or its successor) may have in connection therewith without prior consent of the Institution (or its successor). In the event that the Institution (or any successor thereto) elects not to assume control over such matters, the Institution (or any successor thereto) shall promptly reimburse Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto. 7. TERMINATION FOR CAUSE. 10 The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board and which such meeting shall be held not more than 30 days from the date of notice during which period Executive may be suspended with pay), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause except for compensation and benefits already vested. Any stock options and related limited rights granted to Executive under any stock option plan, or any unvested awards granted to Executive under any restricted stock benefit plan of the Institution or its Subsidiaries, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause except all benefits shall be deemed to have remained in effect if Executive is reinstated. 8. NOTICE. (a) Any purported termination by the Institution or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) Except as otherwise provided for in this Agreement, "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a reasonable dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party 11 giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Institution will continue to pay Executive's Base Salary and continue to cover Executive under each Welfare Benefit Plan in which Executive participated at the time of such notice in effect when the notice giving rise to the dispute was given until the dispute is finally resolved in accordance with this Agreement. Amounts paid under this Section 8(c) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 9. POST-TERMINATION OBLIGATIONS. All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with this Section 9 for one (1) full year after the earlier of the expiration of this Agreement or termination of Executive's employment with the Institution. Executive shall, upon reasonable notice, furnish such information and assistance to the Institution with regard to matters as to which he has personal knowledge and as may reasonably be required by the Institution in connection with any litigation in which it or any of its Subsidiaries or affiliates is, or may become, a party. The Institution shall reimburse Executive for all out-of-pocket expenses incurred and at an hourly rate equivalent to the hourly rate (based on an eight-hour work day) of his Base Salary in effect at the time of his termination from employment for any time incurred in connection with services rendered pursuant to this Section 9. 10. NON-COMPETITION. (a) Upon any termination of Executive's employment hereunder pursuant to Section 4 of this Agreement, Executive agrees not to compete with the Institution or its Subsidiaries for a period of one (1) year following such termination in the county in which the Institution's executive office is located as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Executive agrees that during such period and within said location, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Institution or its Subsidiaries. The parties hereto, recognizing that irreparable injury will result to the Institution or its Subsidiaries, its business and property in the event of Executive's breach of this Subsection 10(a) agree that in the event of any such breach by Executive, the Institution or its Subsidiaries, will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive's partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event of the termination of his employment pursuant to Section 4 hereof, Executive's experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Institution or its Subsidiaries, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Institution or its Subsidiaries from pursuing any other 12 remedies available to the Institution or its Subsidiaries for such breach or threatened breach, including the recovery of damages from Executive. (b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Institution and its Subsidiaries as it may exist from time to time, is a valuable, special and unique asset of the business of the Institution and its Subsidiaries. Executive will not, during or after the term of Executive's employment, disclose any knowledge of the past, present, planned or considered business activities of the Institution and its Subsidiaries thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever unless expressly authorized by the Board of Directors or required by law. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Institution. In the event of a breach or threatened breach by the Executive of the provisions of this Section 10, the Institution will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Institution or its Subsidiaries or from rendering any services to any person, firm, corporation, or other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Institution from pursuing any other remedies available to the Institution for such breach or threatened breach, including the recovery of damages from Executive. 11. SOURCE OF PAYMENTS. (a) All payments provided in this Agreement shall be timely paid in cash, check or other mutually agreed upon method from the general funds of the Institution subject to Section 11(b) of this Agreement. The Holding Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Institution are not timely paid or provided by the Institution, such amounts and benefits shall be paid or provided by the Holding Company. (b) Notwithstanding any provision herein to the contrary, to the extent that payments and benefits, as provided by this Agreement, are paid to or received by Executive under an employment agreement in effect between Executive and the Holding Company, such payments and benefits paid by the Holding Company will be subtracted from any amount due simultaneously to Executive under similar provisions of this Agreement. Payments pursuant to this Agreement and the Holding Company Agreement shall be allocated in proportion to the level of activity and the time expended on such activities by Executive as determined by the Holding Company and the Institution on a quarterly basis; provided, however, that except for the reduction provided by the first sentence of this Section 11(b), the Institution will be obligated to pay 100% of the amounts due Executive hereunder. 13 12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Institution or any predecessor of the Institution and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 13. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Institution and their respective successors and assigns. 14. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 14 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of New Jersey, unless otherwise specified herein. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Institution, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. In the event any dispute or controversy arising under or in connection with Executive's termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Institution, if Executive is successful pursuant to a legal judgment, arbitration or settlement. 20. INDEMNIFICATION. The Institution shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under New Jersey law against all expenses and liabilities reasonably incurred by Executive in connection with or arising out of any action, suit or proceeding in which Executive may be involved by reason of Executive having been a director or officer of the Institution or its Subsidiaries (whether 15 or not Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 21. SUCCESSOR TO THE INSTITUTION. The Institution shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Institution, expressly and unconditionally to assume and agree to perform the Institution's obligations under this Agreement, in the same manner and to the same extent that the Institution would be required to perform if no such succession or assignment had taken place. 16 SIGNATURES IN WITNESS WHEREOF, First Savings Bank and First Sentinel Bancorp, Inc. have caused this Agreement, as amended and restated, to be executed and their seals to be affixed hereunto by their duly authorized officers and directors, and Executive has signed this Agreement, on ____________________________. ATTEST: FIRST SAVINGS BANK By: - ------------------------------------ --------------------------------- Secretary For the Entire Board of Directors [SEAL] ATTEST: FIRST SENTINEL BANCORP, INC. (Guarantor) By: - ------------------------------------ --------------------------------- Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE By: - ------------------------------------ --------------------------------- 17 EX-10.13 9 c20329_ex10-13.txt 2-YEAR CHANGE IN CONTROL AGREEMENT - FIRST SAVINGS FORM OF FIRST SAVINGS BANK TWO-YEAR CHANGE IN CONTROL AGREEMENT This AGREEMENT, originally entered into on November 18, 1998, is amended and restated in its entirety effective November 15, 2000, by and between First Savings Bank (the "Bank"), a New-Jersey chartered savings bank, with its principal administrative office at 1000 Woodbridge Center Drive, Woodbridge, New Jersey,__________________ ("Executive"), and First Sentinel Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the State of Delaware which is the holding company for the Bank. WHEREAS, the Bank recognizes the substantial contribution Executive has made to the Bank and wishes to protect Executive's position therewith for the period provided in this Agreement; and WHEREAS, Executive has agreed to serve in the employ of the Bank. NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT The term of this First Savings Bank Two-Year Change in Control Agreement (the "Agreement") shall be deemed to have commenced as of the date first above written and shall continue for a period of twenty-four (24) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, as amended and restated, and continuing on each anniversary date thereafter, the Board of Directors of the Bank (the "Board") or Executive may extend the term of this Agreement for an additional year so that the remaining term is a full twenty-four (24) calendar months, unless Executive elects not to extend the term of the Agreement by providing written notice to the Board in accordance with Section 4 of the Agreement. 2. CHANGE IN CONTROL (a) Upon the occurrence of a "Change in Control" of the Bank or the Holding Company (as defined in Section 2(b) this Agreement) followed by the termination of Executive's employment, other than in connection with a Termination for Cause, (as defined in Section 2(c) of this Agreement), at any time during either the term of this Agreement or within a sixty (60) day period following the one (1) year anniversary date of the Change in Control, the provisions of Section 3 of this Agreement shall apply. Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in Executive's annual compensation or benefits, or relocation of Executive's principal place of employment by more than twenty-five (25) miles from its location immediately prior to a Change in Control; PROVIDED, HOWEVER, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Bank or the Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Holding Company or the Bank within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. SS. 303.4(a), with respect to the Bank, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Holding Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Holding Company representing 20% or more of the Bank's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Bank purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company or its Subsidiaries, or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs or is effectuated in which the Bank or Holding Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Bank with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Holding Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Bank or Holding Company then outstanding. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 of this Agreement upon Termination for Cause. The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of 2 the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause, except for compensation and benefits already accrued or vested. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 4 of this Agreement through the Date of Termination for Cause, stock options and related limited rights granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock benefit plan of the Holding Company or the Bank vest. At the Date of Termination such stock options (and related limited rights (if any)) and such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause. 3. TERMINATION BENEFITS Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by termination of Executive's employment due to: (1) the involuntary termination of Executive's employment (other than Termination for Cause); (2) Executive's voluntary termination of employment during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in annual compensation or benefits, or relocation of Executive's principal place of employment more than twenty-five (25) miles from its location immediately prior to a Change in Control (unless Executive so consents); or (3) Executive's resignation from employment for any reason within the sixty (60) day period following the one (1) year anniversary date of the Change in Control, the Bank shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiaries or estate, as the case may be, a sum equal to two (2) times Executive's average annual compensation for the three (3) most recent taxable years Executive has been employed by the Bank, or such lesser number of years in the event Executive is employed with the Bank for less than three (3) years. Annual compensation shall include base salary and any other taxable income paid by the Holding Company or the Bank, including but not limited to amounts related to the granting or vesting of restricted stock, commissions, bonuses, severance payments, retirement benefits and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. Provided, however, annual compensation shall not include income attributable to the exercise of stock options. At the election of Executive, which election is to be made prior to a Change in Control, such payments shall be made in a lump sum or on an annual basis in approximately equal installments over a two (2) year period. In the event no election is made, payment to Executive will be made on a monthly basis in approximately equal installments during the remaining term of the Agreement. (b) Upon the occurrence of a Change in Control of the Bank or the Holding Company followed at any time during the term of this Agreement by Executive's voluntary or involuntary termination of employment in accordance with paragraph (a) of this Section 3, other than for Termination for Cause, the Bank shall cause to be continued life, medical and disability coverage 3 substantially identical to the coverage maintained by the Bank or Holding Company for Executive prior to Executive's severance, except to the extent such coverage may be changed in its application to all Bank or Holding Company employees on a nondiscriminatory basis. Such coverage and payments shall cease upon the expiration of twenty-four (24) full calendar months from the Date of Termination. (c) Notwithstanding the preceding paragraphs of this Section 3, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive, which are deemed to be parachute payments as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor thereof (the "Termination Benefits"), would be deemed to include an "excess parachute payment" under Section 280G of the Code; and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G and the Non-Triggering Amount less the product of the marginal rate of any applicable state and federal income tax and the Non-Triggering Amount would be greater than the aggregate value of the Termination Benefits (without such reduction) minus (i) the amount of tax required to be paid by the Executive thereon by Section 4999 of the Code and further minus (ii) the product of the Termination Benefits and the marginal rate of any applicable state and federal income tax, then the Termination Benefits shall be reduced to the Non-Triggering Amount. The allocation of the reduction required hereby among the Termination Benefits shall be determined by the Executive. 4. NOTICE OF TERMINATION (a) Any purported termination by the Bank or by Executive in connection with a Change in Control shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the instance of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given); provided, however, that if a dispute regarding the Executive's termination exists, the "Date of Termination" shall be determined in accordance with Section 4(c) of this Agreement. 4 (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute in connection with a Change in Control, in the event that the Executive is terminated for reasons other than Termination for Cause, the Bank will continue to pay Executive full compensation in effect when the Notice was given (including, but not limited to base salary) until the earlier of: (1) the resolution of the dispute in accordance with this Agreement; or (2) the expiration of the remaining term of this Agreement as determined as of the Date of Termination. 5. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank. Further, the Holding Company guarantees such payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid and provided by the Holding Company. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to Executive without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain Executive in its employ for any period. 7. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Holding Company and their respective successors and assigns. 5 8. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 9. REQUIRED REGULATORY PROVISIONS Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and any rules and regulations promulgated thereunder, including 12 C.F.R. Part 359. 10. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. 11. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references to the masculine shall apply equally to the feminine. 12. GOVERNING LAW The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of New Jersey. 13. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank's main office, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until 6 the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 14. PAYMENT OF COSTS AND LEGAL FEES All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank (which payments are guaranteed by the Holding Company pursuant to Section 5 of this Agreement) if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 15. INDEMNIFICATION The Bank shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under New Jersey law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 16. SUCCESSOR TO THE BANK The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, to expressly and unconditionally assume and agree to perform the Bank's obligations under this Agreement in the same manner and to the same extent that the Bank would be required to perform such obligations if no such succession or assignment had taken place. 7 SIGNATURES IN WITNESS WHEREOF, First Savings Bank has caused this Agreement, as amended and restated, to be executed by their duly authorized officers, and Executive has signed this Agreement, on the ______ day of ____________, 200__. ATTEST: FIRST SAVINGS BANK By: - ------------------------------- ------------------------------------ SEAL ATTEST: FIRST SENTINEL BANCORP, INC. (Guarantor) By: - ------------------------------- ------------------------------------ WITNESS: EXECUTIVE - ------------------------------- ------------------------------------ 8 EX-10.14 10 c20329_ex10-14.txt 3-YEAR CHANGE IN CONTROL AGREEMENT - FIRST SAVINGS FORM OF FIRST SAVINGS BANK THREE-YEAR CHANGE IN CONTROL AGREEMENT This AGREEMENT, originally entered into on November 18, 1998, is amended and restated in its entirety effective November 15, 2000, by and between First Savings Bank (the "Bank"), a New-Jersey chartered savings bank, with its principal administrative office at 1000 Woodbridge Center Drive, Woodbridge, New Jersey,__________________ ("Executive"), and First Sentinel Bancorp, Inc. (the "Holding Company"), a corporation organized under the laws of the State of Delaware which is the holding company for the Bank. WHEREAS, the Bank recognizes the substantial contribution Executive has made to the Bank and wishes to protect Executive's position therewith for the period provided in this Agreement; and WHEREAS, Executive has agreed to serve in the employ of the Bank. NOW, THEREFORE, in consideration of the contribution and responsibilities of Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: 1. TERM OF AGREEMENT The term of this First Savings Bank Three-Year Change in Control Agreement (the "Agreement") shall be deemed to have commenced as of the date first above written and shall continue for a period of thirty-six (36) full calendar months thereafter. Commencing on the execution of this Agreement, as amended and restated, the term of this Agreement shall be extended for one day each day, so that a constant thirty-six (36) calendar month term shall remain in effect, until such time as the Board of Directors of the Bank (the "Board") or Executive elects not to extend the term of this Agreement by giving written notice to the other party in accordance with Section 4 of this Agreement, in which case the term of this Agreement shall be fixed and shall end on the third anniversary of the date of such written notice. 2. CHANGE IN CONTROL (a) Upon the occurrence of a "Change in Control" of the Bank or the Holding Company (as defined in Section 2(b) this Agreement) followed by the termination of Executive's employment, other than in connection with a Termination for Cause, (as defined in Section 2(c) of this Agreement), at any time during either the term of this Agreement or within a sixty (60) day period following the one (1) year anniversary date of the Change in Control, the provisions of Section 3 of this Agreement shall apply. Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in Executive's annual compensation or benefits, or relocation of Executive's principal place of employment by more than twenty-five (25) miles from its location immediately prior to a Change in Control; PROVIDED, HOWEVER, Executive may consent in writing to any such demotion, loss, reduction or relocation. The effect of any written consent of Executive under this Section 2(a) shall be strictly limited to the terms specified in such written consent. (b) For purposes of this Agreement, a "Change in Control" of the Bank or the Holding Company shall mean an event of a nature that: (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in Control of the Holding Company or the Bank within the meaning of the Change in Bank Control Act and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. SS. 303.4(a), with respect to the Bank, and the Rules and Regulations promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor agency), with respect to the Holding Company, as in effect on the date of this Agreement; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of voting securities of the Bank or the Holding Company representing 20% or more of the Bank's or the Holding Company's outstanding voting securities or right to acquire such securities except for any voting securities of the Bank purchased by the Holding Company and any voting securities purchased by any employee benefit plan of the Holding Company or its Subsidiaries, or (B) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Holding Company's stockholders was approved by a Nominating Committee solely composed of members which are Incumbent Board members, shall be, for purposes of this clause (B), considered as though he were a member of the Incumbent Board, or (C) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Holding Company or similar transaction occurs or is effectuated in which the Bank or Holding Company is not the resulting entity, or (D) a proxy statement has been distributed soliciting proxies from stockholders of the Holding Company, by someone other than the current management of the Holding Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Holding Company or Bank with one or more corporations as a result of which the outstanding shares of the class of securities then subject to such plan or transaction are exchanged for or converted into cash or property or securities not issued by the Bank or the Holding Company shall be distributed, or (E) a tender offer is made for 20% or more of the voting securities of the Bank or Holding Company then outstanding. (c) Executive shall not have the right to receive termination benefits pursuant to Section 3 of this Agreement upon Termination for Cause. The term "Termination for Cause" shall mean termination because of Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to Executive a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of 2 the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for Executive, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause, except for compensation and benefits already accrued or vested. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 4 of this Agreement through the Date of Termination for Cause, stock options and related limited rights granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock benefit plan of the Holding Company or the Bank vest. At the Date of Termination such stock options (and related limited rights (if any)) and such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such Termination for Cause. 3. TERMINATION BENEFITS Upon the occurrence of a Change in Control, followed at any time during the term of this Agreement by termination of Executive's employment due to: (1) the involuntary termination of Executive's employment (other than Termination for Cause); (2) Executive's voluntary termination of employment during the term of this Agreement following any demotion, loss of title, office or significant authority, reduction in annual compensation or benefits, or relocation of Executive's principal place of employment more than twenty-five (25) miles from its location immediately prior to a Change in Control (unless Executive so consents); or (3) Executive's resignation from employment for any reason within the sixty (60) day period following the one (1) year anniversary date of the Change in Control, the Bank shall pay Executive, or in the event of Executive's subsequent death, Executive's beneficiaries or estate, as the case may be, a sum equal to three (3) times Executive's average annual compensation for the three (3) most recent taxable years Executive has been employed by the Bank, or such lesser number of years in the event Executive is employed with the Bank for less than three (3) years. Annual compensation shall include base salary and any other taxable income paid by the Holding Company or the Bank, including but not limited to amounts related to the granting or vesting of restricted stock, commissions, bonuses, severance payments, retirement benefits and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, as well as profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive for such year. Provided, however, annual compensation shall not include income attributable to the exercise of stock options. At the election of Executive, which election is to be made prior to a Change in Control, such payments shall be made in a lump sum or on an annual basis in approximately equal installments over a three (3) year period. In the event no election is made, payment to Executive will be made on a monthly basis in approximately equal installments during the remaining term of the Agreement. (b) Upon the occurrence of a Change in Control of the Bank or the Holding Company followed at any time during the term of this Agreement by Executive's voluntary or involuntary termination of employment in accordance with paragraph (a) of this Section 3, other than for Termination for Cause, the Bank shall cause to be continued life, medical and disability coverage 3 substantially identical to the coverage maintained by the Bank or Holding Company for Executive prior to Executive's severance, except to the extent such coverage may be changed in its application to all Bank or Holding Company employees on a nondiscriminatory basis. Such coverage and payments shall cease upon the expiration of thirty-six (36) full calendar months from the Date of Termination. (c) Notwithstanding the preceding paragraphs of this Section 3, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive, which are deemed to be parachute payments as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor thereof (the "Termination Benefits"), would be deemed to include an "excess parachute payment" under Section 280G of the Code; and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G and the Non-Triggering Amount less the product of the marginal rate of any applicable state and federal income tax and the Non-Triggering Amount would be greater than the aggregate value of the Termination Benefits (without such reduction) minus (i) the amount of tax required to be paid by the Executive thereon by Section 4999 of the Code and further minus (ii) the product of the Termination Benefits and the marginal rate of any applicable state and federal income tax, then the Termination Benefits shall be reduced to the Non-Triggering Amount. The allocation of the reduction required hereby among the Termination Benefits shall be determined by the Executive. 4. NOTICE OF TERMINATION (a) Any purported termination by the Bank or by Executive in connection with a Change in Control shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the instance of Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given); provided, however, that if a dispute regarding the Executive's termination exists, the "Date of Termination" shall be determined in accordance with Section 4(c) of this Agreement. 4 (c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute in connection with a Change in Control, in the event that the Executive is terminated for reasons other than Termination for Cause, the Bank will continue to pay Executive full compensation in effect when the Notice was given (including, but not limited to base salary) until the earlier of: (1) the resolution of the dispute in accordance with this Agreement; or (2) the expiration of the remaining term of this Agreement as determined as of the Date of Termination. 5. SOURCE OF PAYMENTS It is intended by the parties hereto that all payments provided in this Agreement shall be paid in cash or check from the general funds of the Bank. Further, the Holding Company guarantees such payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid and provided by the Holding Company. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to Executive without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain Executive in its employ for any period. 7. NO ATTACHMENT (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. 5 (b) This Agreement shall be binding upon, and inure to the benefit of, Executive, the Holding Company and their respective successors and assigns. 8. MODIFICATION AND WAIVER (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 9. REQUIRED REGULATORY PROVISIONS Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. SS.1828(k) and any rules and regulations promulgated thereunder, including 12 C.F.R. Part 359. 10. SEVERABILITY If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall, to the full extent consistent with law, continue in full force and effect. 11. HEADINGS FOR REFERENCE ONLY The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references to the masculine shall apply equally to the feminine. 12. GOVERNING LAW The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of New Jersey. 13. ARBITRATION Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank's main office, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, 6 however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 14. PAYMENT OF COSTS AND LEGAL FEES All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank (which payments are guaranteed by the Holding Company pursuant to Section 5 of this Agreement) if Executive is successful with respect to such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. 15. INDEMNIFICATION The Bank shall provide Executive (including Executive's heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and Executive's heirs, executors and administrators) to the fullest extent permitted under New Jersey law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities); such expenses and liabilities to include, but not to be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 16. SUCCESSOR TO THE BANK The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank, to expressly and unconditionally assume and agree to perform the Bank's obligations under this Agreement in the same manner and to the same extent that the Bank would be required to perform such obligations if no such succession or assignment had taken place. 7 SIGNATURES IN WITNESS WHEREOF, First Savings Bank has caused this Agreement, as amended and restated, to be executed by their duly authorized officers, and Executive has signed this Agreement, on the ______ day of ____________, 200__. ATTEST: FIRST SAVINGS BANK By: - ------------------------------- ------------------------------------ SEAL ATTEST: FIRST SENTINEL BANCORP, INC. (Guarantor) By: - ------------------------------- ------------------------------------ WITNESS: EXECUTIVE - ------------------------------- ------------------------------------ 8 EX-23 11 c20329_ex-23.txt INDEPENDENT ACCOUNTANTS' CONSENT 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 19, 2001, relating to the consolidated statements of financial condition of First Sentinel Bancorp, Inc. and Subsidiaries as of December 31, 2000 and 1999 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, 2000, which report is incorporated by reference in the December 31, 2000 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. KPMG LLP Short Hills, New Jersey March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----