-----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, Ela5i665ib2MOc6RLXcyBnym2Env1jHH4wIFO5830s9vxDQaQ3dZfIywn84SKwtJ QWPme/tMoRs7foTSSVgmzA== 0000930413-04-002506.txt : 20040510 0000930413-04-002506.hdr.sgml : 20040510 20040510150918 ACCESSION NUMBER: 0000930413-04-002506 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST SENTINEL BANCORP INC CENTRAL INDEX KEY: 0001051092 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 223566151 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23809 FILM NUMBER: 04792684 BUSINESS ADDRESS: STREET 1: 1000 WOODBRIDGE CENTER DRIVE CITY: WOODBRIDGE STATE: NJ ZIP: 07095 BUSINESS PHONE: 7327268700 MAIL ADDRESS: STREET 1: 1000 WOODBRIDGE CENTER DRIVE CITY: WOODBRIDGE STATE: NJ ZIP: 07095 FORMER COMPANY: FORMER CONFORMED NAME: FIRST SOURCE BANCORP INC DATE OF NAME CHANGE: 19971209 10-Q 1 c32262_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended............................. MARCH 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission File No.: 000-23809 FIRST SENTINEL BANCORP, INC. (exact name of registrant as specified in its charter) DELAWARE 22-3566151 (State or other jurisdiction of incorporation (IRS Employer I.D. No.) or organization) 1000 WOODBRIDGE CENTER DRIVE, WOODBRIDGE, NJ 07095 (Address of principal executive offices) Registrant's telephone number, including area code: (732) 726-9700 NOT APPLICABLE Former Name, Address, and Fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ------- ------- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MAY 1, 2004 - ---------------------- ----------------------------------------------------- Common Stock 28,299,252 shares, including 964,656 shares held by the Directors' Deferred Fee Plan not otherwise considered outstanding under accounting principles generally accepted in the United States of America FIRST SENTINEL BANCORP, INC. INDEX TO FORM 10-Q
PAGE # PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Statements of Financial Condition as of March 31, 2004 and December 31, 2003 3 Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003 4 Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2004 and 2003 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 18 Item 4. Controls and Procedures 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20
2 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share data)
March 31, 2004 December 31, (Unaudited) 2003 ---------------- --------------- ASSETS Cash and due from banks .......................................................... $ 32,169 $ 16,007 Federal funds sold ............................................................... 41,500 59,800 ---------------- -------------- Total cash and cash equivalents ............................................. 73,669 75,807 Federal Home Loan Bank of New York (FHLB-NY) stock, at cost ...................... 19,523 21,075 Investment securities available for sale, at fair value .......................... 101,859 106,459 Mortgage-backed securities available for sale, at fair value ..................... 692,652 722,794 Loans held for sale, net ......................................................... 917 777 Loans receivable, net ............................................................ 1,221,945 1,209,944 Interest and dividends receivable ................................................ 9,159 9,282 Premises and equipment, net ...................................................... 14,847 15,160 Core deposit intangibles ......................................................... 3,520 3,730 Other assets ..................................................................... 38,359 39,642 ---------------- -------------- Total assets ................................................................ $ 2,176,450 $ 2,204,670 ================ ==============
- -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES Deposits ......................................................................... $ 1,346,240 $ 1,339,858 Borrowed funds ................................................................... 550,457 591,500 Subordinated debentures .......................................................... 25,774 25,774 Advances by borrowers for taxes and insurance .................................... 9,780 9,519 Other liabilities ................................................................ 8,857 10,445 ---------------- -------------- Total liabilities ........................................................... 1,941,108 1,977,096 ================ ============== STOCKHOLDERS' EQUITY Preferred stock; authorized 10,000,000 shares; none issued and outstanding ....... -- -- Common stock, $.01 par value, 85,000,000 shares authorized; 43,106,742 and 27,305,249 shares issued and outstanding at 3/31/04 and 43,106,742 and 27,251,064 shares issued and outstanding at 12/31/03 ......... 430 430 Paid-in capital .................................................................. 209,530 208,523 Retained earnings ................................................................ 169,893 166,902 Accumulated other comprehensive income ........................................... 7,327 4,059 Treasury stock (14,704,218 and 14,748,818 shares at 3/31/04 and 12/31/03, respectively) ................................................................ (150,115) (150,571) Common stock acquired by the Employee Stock Ownership Plan (ESOP) ................ (8,257) (8,486) Common stock acquired by the Recognition and Retention Plan (RRP) ................ (209) (280) Common stock acquired by the Deferred Directors Fee Plan (DDFP) .................. (2,858) (2,768) DDFP Transition Differential ..................................................... (7,674) (7,674) Deferred compensation - DDFP ..................................................... 17,275 17,439 ---------------- -------------- Total stockholders' equity .................................................. 235,342 227,574 ---------------- -------------- Total liabilities and stockholders' equity .................................. $ 2,176,450 $ 2,204,670 ================ ==============
See accompanying notes to the unaudited consolidated financial statements. 3 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except share data) (Unaudited)
Three Months Ended March 31, -------------------------------------- 2004 2003 -------------- -------------- INTEREST INCOME: Loans ..................................................... $ 17,827 $ 19,193 Investment and other and mortgage-backed securities available for sale ...................................... 8,736 9,588 -------------- -------------- Total interest income .................................. 26,563 28,781 -------------- -------------- INTEREST EXPENSE: Deposits: NOW and money market ..................................... 1,061 1,336 Savings .................................................. 458 722 Certificates of deposit .................................. 2,888 4,180 -------------- -------------- Total interest expense - deposits ...................... 4,407 6,238 Borrowed funds ............................................ 6,796 7,532 Subordinated debentures ................................... 477 -- -------------- -------------- Total interest expense ................................. 11,680 13,770 -------------- -------------- Net interest income .................................... 14,883 15,011 Provision for loan losses ................................... -- -- -------------- -------------- Net interest income after provision for loan losses .... 14,883 15,011 -------------- -------------- NON-INTEREST INCOME: Fees and service charges .................................. 1,030 888 Net gain on sales of loans and securities available for sale ..................................... 363 893 Income on Bank Owned Life Insurance ....................... 394 398 Other income .............................................. 99 244 -------------- -------------- Total non-interest income .............................. 1,886 2,423 -------------- -------------- NON-INTEREST EXPENSE: Compensation and benefits ................................. 4,385 3,852 Occupancy ................................................. 642 646 Equipment ................................................. 538 428 Advertising ............................................... 129 255 Federal deposit insurance ................................. 54 58 Amortization of core deposit intangibles .................. 210 210 Distributions on preferred capital securities ............. -- 472 General and administrative ................................ 1,278 1,171 Merger-related expense .................................... 264 -- -------------- -------------- Total non-interest expense ............................. 7,500 7,092 -------------- -------------- Income before income tax expense ....................... 9,269 10,342 Income tax expense .......................................... 3,238 3,494 -------------- -------------- Net income ............................................. $ 6,031 $ 6,848 ============== ============== Basic earnings per share .................................... $ 0.23 $ 0.26 ============== ============== Weighted average shares outstanding - Basic ................. 26,334,868 25,961,344 ============== ============== Diluted earnings per share .................................. $ 0.22 $ 0.24 ============== ============== Weighted average shares outstanding - Diluted ............... 27,881,458 27,652,037 ============== ==============
See accompanying notes to the unaudited consolidated financial statements. 4 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands) (Unaudited)
Accumulated Other Common Common Common Deferred Total Compre- Stock Stock Stock DDPF Compen- Stock- Common Paid-In Retained hensive Acquired Acquired Treasury Acquired Transition sation holders' Stock Captial Earnings Income By ESOP By RRP Stock By DDFP Differential DDFP Equity ----- -------- -------- ------ ------- ------ --------- ------- ------------ ------- -------- Balance at December 31, 2002 .... $430 $205,915 $161,453 $9,776 $(9,404) $(1,032) $(145,480) $(2,412) $(7,674) $ -- $211,572 Net income for the three months ended March 31, 2003 ..... -- -- 6,848 -- -- -- -- -- -- -- 6,848 Cash dividends declared ($0.105) ... -- -- (2,881) -- -- -- -- -- -- -- (2,881) Net change in unrealized gain on securities available for sale ... -- -- -- 1,445 -- -- -- -- -- -- 1,445 Purchases of treasury stock ....... -- -- -- -- -- -- (12,353) -- -- -- (12,353) Increase in cost of DDFP, net ......... -- -- -- -- -- -- -- (90) -- -- (90) Exercise of stock options ........ -- (67) (477) -- -- -- 549 -- -- -- 5 Purchase and retirement of common stock ......... -- (177) -- -- -- -- -- -- -- -- (177) Amortization of RRP ... -- -- -- -- -- 239 -- -- -- -- 239 ESOP expense .......... -- 121 -- -- 230 -- -- -- -- -- 351 ---- -------- -------- ------ ------- ----- --------- ------- ------- ------- -------- Balance at March 31, 2003 ....... $430 $205,792 $164,943 $11,221 $(9,174) $(793) $(157,284) $(2,502) $(7,674) $ -- $204,959 ==== ======== ======== ======= ======= ===== ========= ======= ======= ======= ======== Balance at December 31, 2003 .... $430 $208,523 $166,902 $4,059 $(8,486) $(280) $(150,571) $(2,768) $(7,674) $17,439 $227,574 Net income for the three months ended March 31, 2004 ....... -- -- 6,031 -- -- -- -- -- -- -- 6,031 Cash dividends declared ($0.105) .... -- -- (2,968) -- -- -- -- -- -- -- (2,968) Net change in unrealized gain on securities available for sale ... -- -- -- 3,268 -- -- -- -- -- -- 3,268 Decrease in cost of DDFP, net ......... -- 348 (73) -- -- -- -- (90) -- (164) 21 Exercise of stock options .............. -- 5 1 -- -- -- 456 -- -- -- 462 Tax benefit on options and awards ... -- 436 -- -- -- -- -- -- -- -- 436 Purchase and retirement of common stock ......... -- (102) -- -- -- -- -- -- -- -- (102) Amortization of RRP ... -- 16 -- -- -- 71 -- -- -- -- 87 ESOP expense .......... -- 304 -- -- 229 -- -- -- -- -- 533 ---- -------- -------- ------ ------- ----- --------- ------- ------- ------- -------- Balance at March 31, 2004 ....... $430 $209,530 $169,893 $7,327 $(8,257) $(209) $(150,115) $(2,858) $(7,674) $17,275 $235,342 ==== ======== ======== ======= ======= ===== ========= ======= ======= ======= ========
See accompanying notes to the unaudited consolidated financial statements. 5 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Three Months Ended March 31, ---------------------------- 2004 2003 ------------ ------------ Cash flows from operating activities: Net income .......................................................................... $ 6,031 $ 6,848 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation of premises and equipment .............................................. 350 372 Amortization of core deposit intangibles ............................................ 210 210 ESOP expense ........................................................................ 533 351 Amortization of RRP ................................................................. 87 239 DDFP credit ......................................................................... -- (459) Net amortization of premiums and accretion of discounts and deferred fees ........... 1,189 1,175 Loans originated for sale ........................................................... (5,298) (18,080) Proceeds from sales of mortgage loans held for sale ................................. 5,165 13,811 Net gain on sales of loans and securities available for sale ........................ (363) (893) Net gain on sale of real estate owned ............................................... -- (81) Decrease in interest and dividends receivable ....................................... 123 232 Tax benefit on stock options and RRP ................................................ 436 -- Decrease in other liabilities ....................................................... (2,941) (3,182) Decrease in other assets ............................................................ 847 2,012 ------------ ------------ Net cash provided by operating activities ..................................... 6,369 2,555 ------------ ------------ Cash flows from investing activities: Proceeds from sales/calls/maturities of investment securities available for sale .... 22,589 17,687 Purchases of investment securities available for sale ............................... (17,007) (15,579) Redemption (purchase) of FHLB-NY stock .............................................. 1,552 (1,246) Proceeds from sales of mortgage-backed securities available for sale ................ 74,947 50,036 Principal payments on mortgage-backed securities available for sale ................. 44,527 91,049 Purchases of mortgage-backed securities available for sale .......................... (85,880) (155,868) Principal repayments on loans ....................................................... 86,616 158,526 Origination of loans ................................................................ (95,770) (164,096) Purchases of mortgage loans ......................................................... (3,057) (3,299) Proceeds from sale of real estate owned ............................................. -- 153 Purchases of premises and equipment ................................................. (37) (727) ------------ ------------ Net cash provided by (used in) investing activities ........................... 28,480 (23,364) ------------ ------------ Cash flows from financing activities: Purchase of treasury stock .......................................................... -- (12,353) Decrease (increase) in cost of DDFP, net ............................................ 21 (90) Stock options exercised ............................................................. 462 72 Cash dividends paid ................................................................. (2,968) (2,881) Net increase in deposits ............................................................ 6,382 18,091 Proceeds from borrowed funds ........................................................ -- 50,000 Repayment of borrowed funds ......................................................... (41,043) (25,040) Net increase in advances by borrowers for taxes and insurance ....................... 261 363 Purchase and retirement of common stock ............................................. (102) (177) ------------ ------------ Net cash (used in) provided by financing activities ........................... (36,987) 27,985 ------------ ------------ Net (decrease) increase in cash and cash equivalents .......................... (2,138) 7,176 Cash and cash equivalents at beginning of period ....................................... 75,807 65,945 ------------ ------------ Cash and cash equivalents at end of period ............................................. $ 73,669 $ 73,121 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ........................................................................ $ 11,803 $ 14,165 Income taxes .................................................................... 10,300 4,803
See accompanying notes to the unaudited consolidated financial statements. 6 FIRST SENTINEL BANCORP, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X for First Sentinel Bancorp, Inc. ("First Sentinel" or the "Company") and its wholly-owned subsidiaries, First Sentinel Capital Trust I, First Sentinel Capital Trust II, and First Savings Bank, ("First Savings" or the "Bank"); the Bank's wholly-owned subsidiaries, Sentinel Investment Corp. and FSB Financial LLC; and Sentinel Investment Corp.'s majority-owned subsidiary, 1000 Woodbridge Center Drive, Inc. Certain disclosures have been omitted or condensed pursuant to such rules. These interim financial statements should be read in conjunction with the consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 2003, which was filed on March 15, 2004. In the opinion of management, all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial condition, results of operations, and changes in cash flows have been made at and for the three months ended March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004, are not necessarily indicative of results that may be expected for the entire fiscal year ending December 31, 2004. (B) STOCK-BASED COMPENSATION The Company applies the "intrinsic value based method" as described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation. No employee compensation cost for stock options is reflected in net income, as all options granted under the Company's stock option plans had exercise prices greater than or equal to the market value of the underlying common stock on the date of grant. 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. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions for stock-based compensation pursuant to Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based Compensation," amended by SFAS No. 148, "Accounting for Stock-based Compensation - - Transition and Disclosure" (in thousands, except per share data):
Three Months Ended March 31, ------------------------------------------ 2004 2003 ---------------- ----------------- Net income, as reported.................................. $ 6,031 $ 6,848 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects (RRP awards).......................... 57 155 Deduct: Total stock-based employee compensation expense determined under fair value based method for all options and RRP awards, net of related tax.................................... 62 162 --------------- ------------- Pro forma net income..................................... $ 6,026 $ 6,841 =============== ============= Net income per common share: Basic - as reported................................... $ 0.23 $ 0.26 =============== ============= Basic - pro forma..................................... $ 0.23 $ 0.26 =============== ============= Diluted - as reported................................. $ 0.22 $ 0.24 =============== ============= Diluted - pro forma.................................. . $ 0.22 $ 0.24 =============== =============
7 (C) EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income by the daily average number of common shares outstanding during the period. Common stock equivalents are not included in the calculation. Diluted earnings per share is computed similarly to that of basic earnings per share except that for stock options and RRP shares 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. With respect to the DDFP shares, such shares are included in diluted earnings per share and net income is adjusted to eliminate the DDFP credit. Calculation of Basic and Diluted Earnings Per Share - -------------------------------------------------------- (dollars in thousands, except share data)
Three Months Ended March 31, ----------------------------------- 2004 2003 ---------------- ---------------- Net income for basic earnings per share $ 6,031 $ 6,848 DDFP credit, net of related tax -- (298) ---------------- ---------------- Net income for diluted earnings per share $ 6,031 $ 6,550 ================ ================ Basic weighted-average common shares outstanding 26,334,868 25,961,344 Plus: Common stock held by DDFP 979,404 984,244 Plus: Dilutive stock options and awards 567,186 706,449 ---------------- ---------------- Diluted weighted-average common shares outstanding 27,881,458 27,652,037 ================ ================ Net income per common share: Basic $ 0.23 $ 0.26 ================ ================ Diluted $ 0.22 $ 0.24 ================ ================
(2) DIVIDENDS Based upon current operating results, the Company declared cash dividends of $0.105 per share on January 28, 2004, payable February 27, 2004, to stockholders of record on February 13, 2004. (3) COMMITMENTS AND CONTINGENCIES At March 31, 2004, the Company had the following commitments: (i) to originate loans of $102.1 million; (ii) unused equity lines of credit of $81.7 million; (iii) unused commercial lines of credit of $15.4 million; (iv) unused construction lines of credit of $77.2 million; and (v) letters of credit outstanding totaling $1.3 million. Further, certificates of deposits, which are scheduled to mature and/or rollover in one year or less, totaled $372.5 million at March 31, 2004. (4) ALLOWANCE FOR LOAN LOSSES The following table presents the activity in the allowance for loan losses (in thousands): Three Months Ended March 31, --------------------------------- 2004 2003 ---------------- -------------- Balance at beginning of period $ 12,768 $ 12,830 Provision charged to operations -- -- Net charge-offs (2) (2) ---------------- -------------- Balance at end of period $ 12,766 $ 12,828 =============== ============= 8 (6) COMPREHENSIVE INCOME Total comprehensive income, consisting of net income and the net change in unrealized gain/(loss) on securities available for sale, was $9.3 million and $8.3 million for the three months ended March 31, 2004 and 2003, respectively. 9 FIRST SENTINEL BANCORP, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS. 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; legislative and regulatory changes; and the inability to complete the merger with Provident Financial Services, Inc. ("PFS") as and when expected. The Company has no obligation to update any forward-looking statements at any time. PENDING MERGER WITH PROVIDENT FINANCIAL SERVICES, INC. On December 22, 2003, the Company announced that it had entered into a definitive agreement to merge with and into PFS in a cash and stock transaction valued at approximately $642.0 million. Under the terms of the agreement, 60% of the Company's common stock will be converted into PFS stock and the remaining 40% will be converted into cash. The Company's stockholders will have the option to receive for each share of the Company's common stock held either 1.092 shares of PFS common stock, $22.25 of cash, or some combination thereof, subject to an election and allocation procedure as set forth in the merger agreement. The merger agreement has been approved by the directors of both PFS and the Company. The transaction, which is expected to close on, or about June 30, 2004, is subject to customary closing conditions, including regulatory approvals and the approval of the Company's shareholders and PFS's shareholders. The merger agreement requires the Company to pay PFS a termination fee of $24.0 million if the agreement is terminated under certain circumstances following the Company's receipt of a superior acquisition proposal. CRITICAL ACCOUNTING POLICIES AND ESTIMATES. "Management's Discussion and Analysis of Financial Condition and Results of Operations", as well as other disclosures found elsewhere in this Form 10-Q, are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the Company's Audited Consolidated Financial Statements for the year ended December 31, 2003 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as supplemented by this report, contains a summary of the Company's significant accounting policies. Management believes the Company's policy with respect to the methodology for the determination of the allowance for loan losses involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could materially impact results of operations. This critical policy and its application is reviewed quarterly with the Audit Committee and the Board of Directors. The allowance for loan losses is established through a provision for loan losses based upon management's evaluation of the adequacy of the allowance, including an assessment of known and inherent risks in the loan portfolio, giving consideration to the size and composition of the portfolio, review of individual loans for adverse situations that may affect the borrowers' ability to repay, actual loan loss experience, level of delinquencies, detailed analysis of individual loans for which full collectibility may not be assured, the existence and estimated net realizable value of any underlying collateral and guarantees securing the loans, and current economic and market conditions. Although management uses the best information available, the level of the allowance for loan losses remains an estimate which is subject to significant judgment and short-term change. 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 make additional provisions for loan losses based upon information available to them at the time of their examination. Furthermore, the majority of the Company's loans are secured by real estate in the State of New Jersey. Accordingly, the collectibility of a substantial portion of the carrying value of the Company's loan portfolio is susceptible to changes in local market conditions and may be adversely affected should real estate values decline or the New Jersey area experience an adverse economic shock. Future adjustments to the allowance for loan losses may be necessary due to economic, operating, regulatory and other conditions beyond the Company's control. 10 The determination of the loans on which full collectibility is not reasonably assured, the estimates of the fair value of the underlying collateral and the assessments of economic and regulatory conditions are subject to assumptions and judgments by management. The allowance could differ materially as a result of changes in these assumptions and judgments. These evaluations are inherently subjective because, even though they are based on objective data, it is management's interpretation of that data that determines the amount of the appropriate allowance. Therefore, the Company periodically reviews the actual performance and charge-off history of its portfolio and compares that to the previously determined allowance coverage percentages. In doing so, the Company evaluates the impact the previously mentioned variables may have had on the portfolio to determine which changes, if any, should be made to the assumptions and analyses. Actual results could differ from the Company's estimates as a result of changes in economic or market conditions. Changes in estimates could result in a material change in the allowance for loan losses. While the Company believes that the allowance for loan losses has been established and maintained at levels adequate to reflect the risks inherent in its loan portfolio, future increases may be necessary if economic or market conditions decline substantially from the conditions that existed at the time of the initial determinations. EXECUTIVE SUMMARY. Net income for the three months ended March 31, 2004 was $6.0 million, or $0.22 per diluted share, compared with $6.8 million, or $0.24 per diluted share for the three months ended March 31, 2003. Annualized return on average equity was 10.41% for first quarter of 2004, compared with 12.80% for the same period in 2003, while the annualized return on average assets was 1.10% for the first quarter of 2004, compared with 1.21% for the first quarter of 2003. Net interest income declined $128,000 for the first quarter of 2004 versus the same period in 2003, as reduced interest income was largely offset by reduced interest expense. Interest-earning assets and interest-bearing liabilities experienced decreases in average balances, resulting in a decline in net interest-earning assets compared with the first quarter of 2003. The Company allowed these average balances to decline as it determined not to grow fixed-rate earning assets during a period of historically low interest rates. The impact of these declines was partially offset by an increase in the interest rate spread. Non-interest income declined $537,000, primarily as a result of lower net gains realized on sales on securities. Non-interest expense increased $408,000 compared with the first quarter of 2003, primarily as a result of increased compensation expense and costs related to the Company's pending merger with PFS. ASSETS. Total assets decreased $28.2 million from December 31, 2003, to $2.2 billion at March 31, 2004. The decrease in assets was primarily a result of the Company's decision not to pursue growth at historically low interest rate levels. Changes in asset composition during the quarter consisted primarily of decreases in mortgage-backed securities ("MBS") and investment securities available for sale, partially offset by an increase in loans receivable. MBS available for sale decreased $30.1 million, or 4.2%, to $692.7 million at March 31, 2004, from $722.8 million at December 31, 2003. Sales and principal repayments of $74.4 million and $44.5 million, respectively, exceeded purchases totaling $85.9 million for the three month period ended March 31, 2004. Purchases during the quarter consisted primarily of MBS issued by U.S. government-sponsored agencies. At March 31, 2004, approximately 65% of the Company's MBS had adjustable rates and the portfolio had a modified duration of 3.1 years. Investment securities available for sale decreased $4.6 million, or 4.3%, to $101.9 million at March 31, 2004, from $106.5 million at December 31, 2003. Sales, calls and maturities of $22.8 million exceeded purchases totaling $17.0 million for the three month period ended March 31, 2004. Purchases during the quarter consisted of securities issued by U.S. government-sponsored agencies. Proceeds from the sales, calls and maturities of investment securities and MBS available for sale were used to reduce borrowings and fund loan growth. Loans receivable, net, increased $12.1 million from December 31, 2003, to $1.2 billion at March 31, 2004. Total loan originations for the three months ended March 31, 2004, were $101.1 million, compared to $182.2 million for the same period in 2003, and $157.0 million for the trailing quarter. Adjustable-rate single-family first mortgage loans accounted for $14.0 million, or 13.8% of production, while fixed-rate single-family first mortgage loan originations totaled $9.3 million, or 9.2% of total originations for the first three months of 2004. Also during the first quarter of 2004, construction lending, primarily for single-family developments and commercial buildings, totaled $32.2 million, or 31.9% of total originations, while commercial real estate, commercial and multi-family loan originations were $22.3 million, or 22.1%. During the same period, consumer loan originations, including home equity loans and credit lines, were $23.3 million, or 23.0% of total originations. In addition, the Company purchased $3.1 million of primarily adjustable-rate single-family first mortgage loans through correspondents during the three months ended March 31, 2004. Purchased loans are underwritten internally and are extended at higher rates than those currently offered by the Bank. 11 Repayment of principal on loans totaled $86.6 million for the three months ended March 31, 2004, compared to $158.5 million for the same period in 2003, and $137.0 million for the trailing quarter. The decrease in loan originations and repayments was primarily attributable to reduced refinance activity, as longer-term interest rates have increased and most eligible borrowers have already realized the economic benefits of refinancing their mortgage debt. Loan sales for the first quarter of 2004 totaled $5.2 million, compared with $13.8 million for the same period in 2003. The Company generally sells fixed-rate, 30-year loan production as a means of managing interest rate risk. At March 31, 2004, $557.3 million, or approximately 50%, of the Company's mortgage loans had adjustable interest rates. Approximately $196.5 million of these adjustable-rate loans are scheduled to reprice within the next twelve months. Of the total loan portfolio at March 31, 2004, 1-4 family mortgage loans comprised 59.8%, home equity loans comprised 9.3%, and commercial real estate, multi-family and construction loans comprised 30.1%. The Company intends to continue to prudently expand its non-residential mortgage lending activities while maintaining its underwriting standards and commitment to community-based lending. While management intends to continue emphasizing the origination of loans, 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, as well as the Company's interest rate risk management practices. LIABILITIES. Total liabilities decreased $36.0 million, or 1.8%, to $1.9 billion at March 31, 2004, from $2.0 billion at December 31, 2003. Borrowed funds decreased $41.0 million, or 6.9%, to $550.5 million at March 31, 2004, from $591.5 million at December 31, 2003 as the Company repaid several maturing reverse repurchase agreements. Deposits increased $6.4 million from December 31, 2003, to $1.3 billion at March 31, 2004. Core deposits, consisting of checking, savings and money market accounts, grew by $16.5 million, or 2.0%, to $839.1 million and accounted for 62.3% of total deposits at March 31, 2004. Core deposit growth was partially offset by managed certificate of deposit run-off, as certificates declined by $10.1 million, or 2.0%, compared with year-end 2003. Decreases occurred primarily in the one-year and shorter maturity categories. The Company intends to continue its efforts to develop and maintain core deposit relationships while reducing higher-costing certificates of deposit. CAPITAL. Stockholders' equity increased $7.8 million, or 3.4%, to $235.3 million at March 31, 2004, from $227.6 million at December 31, 2003. The increase in equity was attributable to net income of $6.0 million for the three months ended March 31, 2004, an increase in the net unrealized gain on securities available for sale of $3.3 million and the amortization of stock-based compensation and benefit plans and related tax benefits of $1.5 million, partially offset by cash dividends of $3.0 million. Book value and tangible book value per share were $8.62 and $8.49, respectively, at March 31, 2004, compared with $8.35 and $8.21, respectively, at December 31, 2003, and $7.71 and $7.54, respectively, at March 31, 2003. The Federal Deposit Insurance Corporation requires that the Bank meet minimum leverage, Tier 1 and total risk-based capital requirements. At March 31, 2004, the Bank exceeded all regulatory capital requirements, as follows (dollars in thousands):
Required Actual ---------------------- ---------------------- Excess of Actual % of % of Over Regulatory Amount Assets Amount Assets Requirements ----------- ---------- ----------- ---------- ----------------------- Leverage Capital $87,534 4.00% $211,668 9.67% $ 124,134 Risk-based Capital: Tier 1 44,786 4.00% 211,668 18.90% 166,882 Total 89,572 8.00% 224,434 20.05% 134,862
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of funds are deposits; proceeds from principal and interest payments on loans and mortgage-backed securities; sales of loans, mortgage-backed securities and investments available for sale; maturities or calls of investment securities; and advances from the FHLB-NY and other borrowed funds. While maturities and scheduled amortization of loans and mortgage-backed securities are a predictable source of funds, deposit cash flows and mortgage prepayments are greatly influenced by interest rates, competition, and economic conditions. 12 The most significant sources of funds for the first three months of 2004 were principal repayments and prepayments of loans and mortgage-backed securities totaling $86.6 million and $44.5 million, respectively, proceeds from sales of MBS totaling $74.9 million, proceeds from sales, calls and maturities of investment securities of $22.6 million, a net increase in deposits totaling $6.4 million and proceeds from sales of mortgage loans of $5.2 million. 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. At March 31, 2004, the Company had unpledged investment securities and MBS available for sale with a market value of $357.5 million. The primary uses of funds for the first three months of 2004 were the origination of loans, including loans held for sale, totaling $101.1 million, purchases of mortgage-backed securities totaling $85.9 million, the repayment of borrowings of $41.0 million and purchases of investment securities totaling $17.0 million. The Company anticipates that it will have sufficient funds available to meet its current commitments. At March 31, 2004, the Company had commitments to originate loans of $102.1 million. The Company is obligated to pay $1.8 million under its lease agreements for branch and administrative facilities, of which $446,000 is due in the next twelve months. Certificates of deposit scheduled to mature in one year or less totaled $372.5 million at March 31, 2004. Based upon historical experience, management estimates that a significant portion of such deposits will remain with the Company. OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS The Company is a party to financial instruments with off-balance sheet risk in the normal course of its business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit, interest rate and liquidity risk in and are not recorded in the Company's consolidated financial statements. The Company's off-balance sheet arrangements consist primarily of lending commitments, operating lease commitments and letters of credit. Lending commitments include commitments to originate and purchase loans and commitments to fund unused lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company's exposure to credit risk is represented by the contractual amount of the instruments. Operating lease commitments are obligations under various non-cancelable operating leases on buildings and land used for office space and banking purposes. The leases generally have rent escalation provisions based upon certain defined indexes. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The guarantees generally extend for a term of up to one year and are fully collateralized. For each guarantee issued, if the customer fails to perform or defaults on a payment to the third party, the Company would have to perform under the guarantee. Commitments under standby letters of credit, both financial and performance, do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. Borrowed funds include fixed-term borrowings from the Federal Home Loan Bank and reverse repurchase agreements. The borrowings have defined terms and under certain circumstances are callable at the option of the lender. Subordinated debentures represent debentures issued by the Company to First Sentinel Capital Trust I and II, which were formed in connection with the issuance of preferred capital securities. 13 The following table shows the contractual obligations of the Company by expected payment period as of March 31, 2004:
CONTRACTUAL LESS THAN MORE THAN OBLIGATION TOTAL ONE YEAR 1-3 YEARS 3-5 YEARS 5 YEARS ---------- ----- -------- --------- --------- ------- Lending commitments $276,390 $276,390 $ -- $ -- $ -- Operating lease commitments ..... 1,804 446 661 320 377 Standby letters of credit .......... 1,316 429 887 -- -- Borrowed Funds .... 550,457 36,000 257,000 97,457 160,000 Subordinated debentures ...... 25,774 -- -- -- 25,774
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003. RESULTS OF OPERATIONS. For the quarter ended March 31, 2004, basic and diluted earnings per share were $0.23 and $0.22, respectively, compared with basic and diluted earnings per share of $0.26 and $0.24, respectively, for the quarter ended March 31, 2003. Net income for the three months ended March 31, 2004 totaled $6.0 million compared with $6.8 million for the first quarter of 2003. Annualized return on average equity declined to 10.41% for the first quarter of 2004, from 12.80% for the comparable 2003 period. Annualized return on average assets was 1.10% for the March 2004 quarter, compared to 1.21% for the same period in 2003. 14 CONSOLIDATED AVERAGE STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands)
Three Months Ended March 31, ------------------------------------------------------------------------ 2004 2003 ----------------------------------- ----------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ----------------------------------- ----------------------------------- ASSETS Interest-earning assets: Federal funds sold .............................. $ 24,857 $ 58 0.93% $ 34,354 $ 101 1.18% Investment securities available for sale (1) .... 127,297 1,249 3.92 131,618 1,644 5.00 Mortgage-backed securities available for sale ... 727,786 7,429 4.08 771,408 7,843 4.07 ---------- ------- ---- ---------- ------- ---- Total investments ............................. 879,940 8,736 3.97 937,380 9,588 4.09 Mortgage loans .................................. 1,108,135 16,206 5.85 1,103,789 17,353 6.29 Home equity loans ............................... 61,407 942 6.14 62,892 1,074 6.83 Home equity lines of credit ..................... 51,995 526 4.05 48,278 562 4.66 Other loans ..................................... 9,632 153 6.35 15,057 204 5.42 ---------- ------- ---- ---------- ------- ---- Total loans ................................... 1,231,169 17,827 5.79 1,230,016 19,193 6.24 ---------- ------- ---- ---------- ------- ---- Total interest-earning assets .................... 2,111,109 26,563 5.03% 2,167,396 28,781 5.31% Non-interest earning assets ...................... 86,968 95,069 ---------- ---------- Total assets ............................... $2,198,077 $2,262,465 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW and money market accounts ................... $ 526,594 $ 1,061 0.81% $ 491,108 $ 1,336 1.09% Savings accounts ................................ 220,824 458 0.83 225,574 722 1.28 Certificates of deposit ......................... 511,739 2,888 2.26 595,202 4,180 2.81 ---------- ------- ---------- ------- Total interest-bearing deposits ............... 1,259,157 4,407 1.40 1,311,884 6,238 1.90 Borrowed funds .................................. 585,217 6,796 4.65 601,673 7,532 5.01 Subordinated debentures ......................... 25,774 477 7.40 -- -- -- ---------- ------- ---------- ------- Total interest-bearing liabilities ............... 1,870,148 11,680 2.50 1,913,557 13,770 2.88 ------- ---- ------- ---- Non-interest bearing deposits .................... 79,049 73,082 Other liabilities ................................ 17,190 61,766 ---------- ---------- Total liabilities .......................... 1,966,387 2,048,405 Stockholders' equity ............................. 231,690 214,060 ---------- ---------- Total liabilities and stockholders' equity ................................. $2,198,077 $2,262,465 ========== ========== Net interest income/interest rate spread ........... $14,883 2.53% $15,011 2.43% ======= ==== ======= ==== Net interest-earning assets/net interest margin........................................... $ 240,961 2.82% $ 253,839 2.77% ========== ==== ========== ==== Ratio of interest-earning assets to interest-bearing liabilities ................. 1.13 X 1.13 X ========== ==========
(1) Includes FHLB-NY stock. 15 INTEREST INCOME. Interest income for the three months ended March 31, 2004, decreased by $2.2 million, or 7.7%, to $26.6 million, compared to $28.8 million for the same period in 2003. Interest on loans decreased $1.4 million, or 7.1%, to $17.8 million for the three months ended March 31, 2004, compared to $19.2 million for the same period in 2003. The average balance of the loan portfolio increased $1.2 million, or 0.1%, to $1.2 billion for the first quarter of 2004, compared with the first three months of 2003. Growth in average construction and commercial mortgages was partially offset by a decline in average 1-4 family mortgage loans attributable to prepayments and refinancings. Interest income on loans, however, decreased as the average yield on the portfolio decreased 45 basis points to 5.79% as a result of lower market interest rates. Interest on MBS and investment securities, including Fed funds sold and FHLB-NY stock, declined $852,000 for the quarter ended March 31, 2004, compared with the same period in 2003, as a result of a decrease in the average balance and a decline in market interest rates. The average balance of the investment and MBS portfolios totaled $879.9 million, with an annualized yield of 3.97% for the three months ended March 31, 2004, compared with an average balance of $937.4 million with an annualized yield of 4.09% for the three months ended March 31, 2003. INTEREST EXPENSE. Interest expense decreased $2.1 million, or 15.2%, to $11.7 million for the three months ended March 31, 2004, compared to $13.8 million for the same period in 2003. Interest expense on deposits decreased $1.8 million, or 29.4%, to $4.4 million for the three months ended March 31, 2004, compared to $6.2 million for the same period in 2003, as a result of lower market interest rates and a shift in deposit composition from higher-costing certificates of deposit into lower-priced core deposit accounts. Interest expense on certificates of deposit decreased $1.3 million, or 30.9%, for the first quarter of 2004 compared with 2003. The average balance of certificates of deposit declined $83.5 million, or 14.0%, to $511.7 million for the three months ended March 31, 2004, from $595.2 million for the same period in 2003. The average cost of certificates for the three-month period ended March 31, 2004, fell 55 basis points to 2.26%, compared to 2.81% for the same period in 2003. Interest expense on core deposits decreased $539,000, or 26.2%, to $1.5 million for the quarter ended March 31, 2004, compared with the same period in 2003 as the average cost of interest-bearing core deposits for the three-months ended March 31, 2004 declined 34 basis points to 0.81%, compared to 1.15% for the same period in 2003. The average balance of interest-bearing core deposits increased $30.7 million, or 4.3%, to $747.4 million for the three months ended March 31, 2004, from $716.7 million for the same period in 2003. In addition, average non-interest bearing deposits grew $6.0 million, or 8.2%, to $79.0 million for the three months ended March 31, 2004, versus the comparable 2003 period. Average deposits for the first quarter of 2004 were impacted by the sale in December 2003 of the Company's Lawrenceville, New Jersey branch which held $38.9 million in deposits. Interest on borrowed funds for the three months ended March 31, 2004, decreased $736,000, or 9.8%, to $6.8 million, compared to $7.5 million for the same period in 2003. The average balance of borrowed funds for the three months ended March 31, 2004, decreased to $585.2 million from $601.7 million for the same period in 2003. The average interest rate paid on borrowed funds declined to 4.65% for the three months ended March 31, 2004, compared with 5.01% for the same period in 2003. The decline in interest expense on borrowed funds was partially offset by the inclusion in interest expense in 2004 of $477,000 in costs on subordinated debentures as a result of the Company's adoption of revised FASB Interpretation No. 46, "Consolidation of Variable Interest Entities", ("FIN 46R") on December 31, 2003. FIN 46R required deconsolidation of the subsidiary trusts formed in connection with the Company's issuance of preferred capital securities. The distributions on preferred capital securities were included in non-interest expense prior to the deconsolidation, while subsequently the interest on debentures is included in interest expense. NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest income before provision for loan losses decreased $128,000, or 0.9%, to $14.9 million for the three months ended March 31, 2004, compared to the same period in 2003. The decrease was due to the changes in interest income and interest expense described above. The interest rate spread was 2.53% for the three months ended March 31, 2004, compared with 2.43% for the same period in 2003 and 2.42% for the trailing quarter. The net interest margin improved to 2.82% for the three months ended March 31, 2004, from 2.77% for the same period in 2003 and 2.72% for the fourth quarter of 2003. 16 PROVISION FOR LOAN LOSSES. The Company did not record a provision for loan losses during the quarters ended March 31, 2004 and 2003, as a result of a stable loan portfolio size and asset quality. Provisions for loan losses are made based on management's evaluation of risks inherent in the loan portfolio, giving consideration to on-going credit evaluations and changes in the balance and composition of the loan portfolio. Total loans receivable increased $12.1 million, or 1.0%, to $1.2 billion at March 31, 2004 from December 31, 2003, while non-performing loans declined to $1.3 million at March 31, 2004, compared with $1.8 million at December 31, 2003 and $1.4 million at March 31, 2003. The allowance for loan losses as a percentage of total loans was 1.03% at March 31, 2004, compared with 1.04% at December 31, 2003 and March 31, 2003. In management's opinion, the allowance for loan losses, totaling $12.8 million at March 31, 2004, adequately addresses the risks inherent in the portfolio. Management will continue to review the need for additions to its allowance for loan losses based upon its quarterly review of the loan portfolio, the level of delinquencies, and general market and economic conditions. The following table sets forth ratios regarding non-accrual loans, and loans which are 90 days or more delinquent, but on which the Company is accruing interest at the dates indicated. The Company discontinues accruing interest on delinquent loans when collection of interest is considered doubtful, generally when 90 days or more delinquent and when loan-to-value ratios exceed 55%, at which time all accrued but uncollected interest is reversed.
(dollars in thousands) Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, 2004 2003 2003 2003 2003 ------------------------------------------------------ Non-accrual mortgage loans ........................... $ 944 $1,176 $841 $1,291 $1,082 Non-accrual other loans .............................. -- 17 6 6 43 ------------------------------------------------------ Total non-accrual loans ........................... 944 1,193 847 1,297 1,125 Loans 90 days or more delinquent and still accruing .................................. 367 634 64 64 294 ------------------------------------------------------ Total non-performing loans ........................... 1,311 1,827 911 1,361 1,419 Total foreclosed real estate, net of related allowance ....................................... -- -- -- 50 -- ------------------------------------------------------ Total non-performing assets .......................... $1,311 $1,827 $911 $1,411 $1,419 ====================================================== Non-performing loans to loans receivable ............. 0.11% 0.15% 0.07% 0.11% 0.12% Non-performing assets to total assets ................ 0.06% 0.08% 0.04% 0.06% 0.06%
NON-INTEREST INCOME. Non-interest income decreased $537,000, or 22.2%, to $1.9 million for the three months ended March 31, 2004, from $2.4 million for the same period in 2003. The first quarter of 2004 included net gains on sales of loans and securities totaling $363,000, compared with $893,000 for the first quarter of 2003. During the quarter ended March 31, 2003, the Company recognized gains on the sale of higher coupon mortgage-backed securities that demonstrated a significant propensity to prepay, as well as several corporate debt obligations. The sale of loans and securities and related gains or losses are dependent on market conditions, as well as the Company's liquidity and risk management requirements. Also in non-interest income, a $142,000 increase in fees and service charges primarily attributable to prepayment fees on commercial mortgage loans was offset by a $145,000 decrease in other income, primarily attributable to a gain on sale of REO which took place in the first quarter of 2003, and reduced income from annuity sales in the first quarter of 2004. NON-INTEREST EXPENSE. Non-interest expense for the three months ended March 31, 2004, increased $408,000, or 5.8%, to $7.5 million, compared to $7.1 million for the same period in 2003. Compensation and benefits expense increased $533,000 for the quarter ended March 31, 2004 compared with the same period in 2003. The increase in compensation and benefits expense was primarily attributable to a credit of $459,000 resulting from changes in the fair value of stock held in rabbi trust for the DDFP for the quarter ended March 31, 2003. The DDFP was amended as to its structure and operation effective October 1, 2003, with no further changes in the fair value of stock held in the rabbi trust for the DDFP required to be recognized as periodic credits or charges to compensation expense subsequent to that date. Also included in compensation expense is a $182,000 increase in ESOP expense resulting from appreciation in the Company's stock price, which was largely offset by a $152,000 decrease in stock awards expense, the majority of which fully vested in December 2003. Merger-related charges associated with the Company's pending merger with PFS consisted of professional fees totaling $264,000 for the first quarter of 2004. These increases were partially offset by the classification of expense associated with the Company's subordinated debentures as interest expense in 2004. Prior to the Company's adoption of FIN 46R on December 31, 2003, the comparable expense, totaling $472,000 for the first quarter of 2003, was characterized as "Distributions on preferred capital securities" and included in non-interest expense. 17 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. There have been no material changes to information required regarding quantitative and qualitative disclosures about market risk from the end of the preceding fiscal year to the date of the most recent interim financial statements (March 31, 2004). Item 4. CONTROLS AND PROCEDURES. a.) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. ------------------------------------------------- Christopher Martin, the Company's Chief Executive Officer, and Thomas M. Lyons, the Company's Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of March 31, 2004. Based upon their evaluation, they each found the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosures. b.) CHANGES IN INTERNAL CONTROLS. ----------------------------- There were no changes in the Company's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. There are various claims and lawsuits in which the Registrant is periodically involved incidental to the Registrant's business. In the opinion of management, no material loss is expected from any such pending claims and lawsuits. Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. None. Item 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Item 5. OTHER INFORMATION. None. 18 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. a.) EXHIBITS
--------------------------------------------------------------------------------------------- Exhibit Number Description Reference --------------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of First Sentinel Bancorp, Inc. * 3.2 Bylaws of First Sentinel Bancorp, Inc. ** 3.3 Amendment to Bylaws of First Sentinel Bancorp, Inc. *** 4 Stock certificate of First Sentinel Bancorp, Inc. * 11 Statement re: Computation of per Share Earnings Page 8 31.1 Certification of Chief Executive Officer Filed herein 31.2 Certification of Chief Financial Officer Filed herein 32.1 Statement of Chief Executive Officer furnished pursuant to Furnished Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. herein Section 1350 32.2 Statement of Chief Financial Officer furnished pursuant to Furnished Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. herein Section 1350 ---------------------------------------------------------------------------------------------
* Previously filed and incorporated herein by reference to the Registration Statement on Form S-1 and exhibits thereto of First Sentinel Bancorp, Inc. (formerly First Source Bancorp, Inc.), and any amendments or supplements thereto filed with the SEC on December 19, 1997 and amended on February 9, 1998, SEC File No. 333-42757. ** Previously filed and incorporated herein by reference to the December 31, 2002 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. filed with the SEC on March 31, 2003, SEC File No. 000-23809. *** Previously filed and incorporated herein by reference to the December 31, 2003 Annual Report on Form 10-K of First Sentinel Bancorp, Inc. filed with the SEC on March 15, 2004, SEC File No. 000-23809. b.) REPORTS ON FORM 8-K 1) On January 20, 2004, the Company filed a report on Form 8-K which includes, under Item 12, a press release announcing the rescheduling of its fourth quarter and year-ended December 31, 2003 earnings release date from January 23, 2004 to January 29, 2004. 2) On January 30, 2004, the Company filed a report on Form 8-K which includes, under Item 12, a press release reporting the Company's financial results for the quarter and year ended December 31, 2003. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST SENTINEL BANCORP, INC. Date: May 10, 2004 By: /s/ CHRISTOPHER MARTIN ---------------------- Christopher Martin President and Chief Executive Officer Date: May 10, 2004 By: /s/ THOMAS M. LYONS ------------------- Thomas M. Lyons Executive Vice President and Chief Financial Officer 20 EX-31.1 2 c32262_31-1.txt EXHIBIT 31.1 I, Christopher Martin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Sentinel Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: MAY 10, 2004 /s/ CHRISTOPHER MARTIN ------------ ---------------------- Christopher Martin President and Chief Executive Officer EX-31.2 3 c32262_31-2.txt EXHIBIT 31.2 I, Thomas M. Lyons, certify that: 1. I have reviewed this quarterly report on Form 10-Q of First Sentinel Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) (paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986) c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal controls over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: MAY 10, 2004 /s/ THOMAS M. LYONS ------------ ------------------- Thomas M. Lyons Executive Vice President and Chief Financial Officer EX-32.1 4 c32262_32-1.txt EXHIBIT 32.1 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Christopher Martin, is the Chief Executive Officer of First Sentinel Bancorp, Inc. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2004 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. MAY 10, 2004 /s/ CHRISTOPHER MARTIN - ------------ ---------------------- Dated Christopher Martin, President and Chief Executive Officer EX-32.2 5 c32262_32-2.txt EXHIBIT 32.2 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Thomas M. Lyons, is the Chief Financial Officer of First Sentinel Bancorp, Inc. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2004 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. MAY 10, 2004 /s/ THOMAS M. LYONS - ------------ ------------------- Dated Thomas M. Lyons, Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----