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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