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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2002
COMMISSION FILE NO.: 1-12305
FIRSTFED AMERICA BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3331237
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 679-8181
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
THE AMERICAN STOCK EXCHANGE
(NAME OF EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant was $199.3 million and is based upon the last sales price as listed
on The American Stock Exchange for June 5, 2002.
The number of shares of Common Stock outstanding as of June 5, 2002 is
8,169,809.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
March 31, 2002 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K.
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INDEX
PAGE
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PART I................................................................. 2
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II................................................................ 18
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item Quantitative and Qualitative Disclosures About Market
7A. Risk........................................................ 41
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III............................................................... 42
Item Directors and Executive Officers of the Registrant.......... 42
10.
Item Executive Compensation...................................... 42
11.
Item Security Ownership of Certain Beneficial Owners and
12. Management and Related Stockholder Matters.................. 42
Item Certain Relationships and Related Transactions.............. 42
13.
PART IV................................................................ 43
Item Exhibits, Financial Statement Schedules, and Reports on Form
14. 8-K......................................................... 43
1
PART I
ITEM 1. BUSINESS
GENERAL
FIRSTFED AMERICA BANCORP, INC. (also referred to as the "Company" or
"Registrant") was organized by the Board of Directors of First Federal Savings
Bank of America (the "Bank") for the purpose of acquiring all of the capital
stock of the Bank issued in connection with the Bank's conversion (the
"conversion") from mutual to stock form of ownership. The Company was
incorporated on September 6, 1996 under Delaware law and is a savings and loan
holding company subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). On January 15, 1997, the Bank completed its
conversion, and the Company concurrently issued 8.7 million shares of common
stock, raising $77.6 million of net proceeds. The Company utilized $43.4 million
of such net proceeds to acquire all of the outstanding stock of the Bank. At
March 31, 2002, the Company had consolidated total assets of $2.294 billion and
total stockholders' equity of $155.3 million.
The Bank was originally organized in 1946 and operated as First Federal
Savings and Loan Association of Fall River. In 1982, the Bank merged with First
Federal Savings and Loan Association of Attleboro, which was originally
organized in 1854 and became a federally chartered savings and loan association
in 1959. In 1983, the Bank became a federally chartered savings bank, changing
its name to First Federal Savings Bank of America. In 1984, the Bank added
mortgage-banking activities to its operations. On February 28, 2002, the Company
completed the acquisition of People's Bancshares, Inc. ("People's"), New
Bedford, Massachusetts, for $40.3 million in cash and 1.9 million shares of the
Company's common stock (the "People's acquisition"). The People's acquisition
included total assets of $968.7 million, 12 banking offices, and nine offices of
People's Mortgage Corporation ("PMC"), People's wholly-owned mortgage banking
subsidiary. In conjunction with the conversion of the acquired banking offices
to the Company's systems in May 2002, two of the People's banking offices and
one of the Bank's banking offices were closed and consolidated with nearby
banking offices in Massachusetts.
The Company conducts business from its administrative, operations, and
banking offices located in Swansea, Massachusetts and its 24 other banking
offices located in the municipalities of Fall River, Attleboro, Brockton,
Easton, New Bedford, Seekonk, Somerset, Stoughton, and Taunton, Massachusetts
and Pawtucket, Providence, East Providence, Middletown, Warwick, and Cranston,
Rhode Island, and its five loan origination centers located in Yarmouth, Auburn,
Agawam and Burlington, Massachusetts, and East Greenwich, Rhode Island. PMC, a
wholly-owned subsidiary of the Bank, also operates nine mortgage offices in
Andover, Easton, and Wellesley, Massachusetts, Portsmouth, Rhode Island, Hamden,
Connecticut and Chester, Lutherville, Severna Park, and Upper Marlborough,
Maryland. The Company plans to open a twenty-sixth banking office in East
Greenwich, Rhode Island in the second quarter of fiscal year 2002.
The Company's principal business has been and continues to be attracting
retail and business deposits in the areas surrounding its banking offices and
investing those deposits, together with funds generated from operations and
borrowings, primarily in residential, commercial, and consumer loans and
mortgage-backed securities ("MBS"). Through its banking offices and five loan
origination centers, the Company originates loans for investment and loans for
sale in the secondary market, generally retaining the servicing rights to loans
sold. Through its PMC mortgage offices, loans are generally originated for sale
in the secondary market with servicing rights released. Loan sales are made from
loans designated as being held for sale or originated for sale during the
period. The Company's revenues are derived principally from interest on its loan
portfolios, and interest and dividends on its investment and mortgage-backed
securities and loan servicing income. The Company's primary sources of funds are
deposits, principal and interest payments on loans and mortgage-backed
securities, proceeds from the sale of loans, Federal Home Loan Bank of Boston
("FHLB") advances and other borrowings.
In 1999, the Company formed the FIRSTFED INSURANCE AGENCY, LLC ("Agency").
In March 2000, the Agency purchased two local independent agencies,
Smith-Cochrane Insurance Agency, Inc.
2
and All Risk Insurance Agency of Swansea, bringing the total number of customers
of the Agency to over 4,000. In March 2002, the Agency entered into a joint
partnership with three Rhode Island insurance agencies, Atlantic Insurance
Partners, Riley Insurance and Allen Cochran Insurance, to form the Insurance
Group of Newport. The Agency offers a comprehensive insurance product line
including auto, home, life, accident and health insurance to consumers and
businesses. In February 2000, the Company formed the FIRSTFED TRUST COMPANY,
N.A. ("Trust Company") to provide investment and fiduciary services in the Rhode
Island and southeastern Massachusetts marketplace. The Trust Company is a joint
venture with certain members of the Metcalf and Danforth families of Rhode
Island. In addition to their 35% ownership interest, the families are also
significant clients of the Trust Company.
The Company's executive offices are located at ONE FIRSTFED PARK, Swansea
Mall Drive, Swansea, Massachusetts 02777. The telephone number is (508)
679-8181.
Information required by Guide 3 to be contained in the description of
business which is not contained in Item 1 is incorporated by reference to Items
6, 7 and 8 herein.
MARKET AREA AND COMPETITION
The Company is a community-oriented financial institution offering a
variety of financial products and services to meet the needs of the communities
it serves in Southeastern New England and, to a lesser degree, the Mid-Atlantic
region. The Company's deposit gathering is concentrated in the communities
surrounding its full service banking offices. The Company's main banking office
is located in Fall River, Massachusetts. Fall River is located in the
southeastern region of Massachusetts and is adjacent to Rhode Island. All of the
Company's banking offices are located within 30 miles of Fall River. The
Southeastern Massachusetts and Rhode Island suburbs are generally low to middle
income residential communities with individuals employed primarily in Fall
River, New Bedford, Brockton and Taunton, Massachusetts, Providence, Rhode
Island and areas along Interstates 195, 95 and 495 and Route 24.
While the economy in Southeastern New England has generally been positive
in recent years, the area has lagged behind the rest of New England and the rest
of the nation. Unemployment rates in the Providence-Fall River area and in New
Bedford are currently higher than the national and state averages but have
improved from the mid-1990s. Small businesses, service firms and tourism form
the backbone of the region's economy. Cuts to the defense industry and
uncertainty in the technology industry have resulted in decreased employment
opportunities in the region. However, many significant employers, such as The
Acushnet Company, Fidelity Investments, Textron, American Power Conversion, ON
Semiconductor and Hasbro are located in the region.
The Company faces significant competition in generating loans and in
attracting deposits, as well as in the Insurance Agency and Trust Company
businesses. The Company's primary market area is highly competitive and the
Company faces direct competition from a significant number of financial
institutions, many with a statewide or regional presence and, in some cases, a
national presence. Some of these financial institutions are significantly larger
and have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from local savings,
cooperative and commercial banks and credit unions. In addition, the Company
faces increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such instruments as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. In
Southeastern New England, the Company has experienced significant competition
from credit unions, which have a competitive advantage because they do not pay
state or federal income taxes. Such competitive advantage has placed increased
pressure on the Bank with respect to its loan and deposit pricing.
From the mid-1980s through the early 1990s, the Bank's operating strategy
was to control growth while building its loan servicing portfolio and the
resultant fee income. As part of this strategy, the Bank increased market share
through its mortgage banking activities. Interest-rate risk was managed by
generally retaining
3
adjustable rate one-to-four family loans and selling longer term fixed-rate
one-to-four family loans in the secondary market on a servicing retained basis.
Beginning in 1993, the Bank began to focus more heavily on building its loan and
deposit franchise and increasing its level of interest-earning assets and retail
deposits. At that time, the Bank began to expand its franchise in its existing
market area and other areas in Southeastern Massachusetts and Rhode Island
through the establishment of de novo banking offices and new loan origination
facilities. Since 1994, the Bank has opened nine banking offices in Seekonk,
Swansea and New Bedford, Massachusetts and Providence, East Providence,
Middletown, Pawtucket, Warwick and Cranston, Rhode Island and a loan origination
office in Burlington, Massachusetts. In addition, the Company opened a
centralized administrative and operations center in 1997 in Swansea,
Massachusetts. Pursuant to this expansion strategy, the Company seeks new
banking and loan production offices within its primary market area.
LENDING ACTIVITIES
Loan Portfolio Composition. The Company's loan portfolio consists
primarily of first mortgage loans secured by one-to-four family residences. At
March 31, 2002, total loans receivable was $1.160 billion, of which $629.1
million were one-to-four family residential mortgage loans, or 54.2% of the
Company's total loans receivable. At such date, the remainder of the loan
portfolio consisted of: $6.2 million of multi-family residential loans, or 0.5%
of total loans receivable; $115.2 million of commercial real estate loans, or
9.9% of total loans receivable; $63.8 million of construction and land loans, or
5.5% of total loans receivable; $200.0 million of commercial loans, or 17.2% of
total loans receivable; and $145.6 million of consumer loans, or 12.6% of total
loans receivable, consisting of $83.0 million of home equity lines of credit,
$48.9 million of second mortgages and $13.7 million of other consumer loans.
After including allowance for loan losses, undisbursed proceeds of construction
mortgages in process, and deferred loan origination fees, loans receivable, net
was $1.126 billion at March 31, 2002. At that same date, 60.0% of the Company's
residential mortgage loans and construction and land loans, excluding mortgage
loans held for sale, had adjustable interest rates, most of which are indexed to
the one-year Constant Maturity Treasury ("CMT") Index. The Company had $126.7
million of mortgage loans held for sale at March 31, 2002, consisting of
one-to-four family mortgage loans.
The Board of Directors establishes the Company's lending policies and loan
approval limits. The types of loans that the Company may originate are subject
to federal and state laws and regulations. Interest rates charged by the Company
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.
For additional information on the composition of the Company's loan
portfolio, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Loans Receivable."
The Company has established an allowance for loan losses relating to
specifically identified impaired loans and all other loans. For additional
information on the amount of the allowance and the process for evaluating its
adequacy, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Asset Quality."
Origination, Sale and Servicing of Loans. The Company's mortgage lending
activities are conducted primarily by its loan personnel operating at its 25
banking offices and five loan origination centers and nine PMC mortgage offices,
and also in a network of approximately 50 approved loan correspondents,
wholesale loan brokers and other financial institutions approved by the Company.
All loans originated by the Company either through internal sources or through
loan correspondents are underwritten by the Company pursuant to the Company's
policies and procedures. For the fiscal year ended March 31, 2002, the Company's
loan correspondents originated $256.1 million in loans. The Company originates
both adjustable-rate and fixed-rate loans. The Company's ability to originate
fixed or adjustable rate loans is dependent upon the relative customer demand
for such loans, which is affected by the current and expected future level of
interest rates.
4
Generally, adjustable-rate residential mortgage loans are originated by the
Company for investment in its own portfolio while longer-term fixed rate
residential mortgage loans are originated for sale. While the Company has in the
past, from time to time, retained fixed-rate one-to-four family loans and sold
adjustable-rate one-to-four family loans, it is the general policy of the
Company to sell substantially all of the one-to-four family fixed-rate mortgages
loans with maturities over 10 years that it originates and to retain
substantially all fixed-rate loans with maturities of up to and including 10
years and all adjustable-rate one-to-four family mortgage loans which it
originates. The one-to-four family loan products currently originated for sale
by the Company include a variety of mortgage loans which conform to the
underwriting standards specified by Fannie Mae and Freddie Mac ("conforming
loans") and loans which do not conform to Fannie Mae or Freddie Mac standards
due to loan amounts ("jumbo loans"), or which otherwise vary from agency
underwriting standards. The Company also sells all mortgage loans insured by the
Federal Housing Administration ("FHA") and the Veterans' Administration ("VA").
All one-to-four loans sold by the Company are sold pursuant to master
commitments negotiated with Fannie Mae, Freddie Mac, FHLB and other investors to
purchase loans meeting such investors defined criteria. Although the Company has
entered into master commitment contracts, such contracts generally do not
require the purchasers to buy or the Company to deliver a specific amount of
mortgage loans.
The Company currently sells substantially all longer-term fixed rate
conforming mortgage loans it originates to Fannie, Mae, Freddie Mac, FHLB and
private investors. All loans are sold either without recourse or with limited
recourse to the Company in the event of default or pre-payment. The Company
generally retains the servicing rights on the mortgage loans sold to Fannie Mae,
Freddie Mac and FHLB, but generally sells all VA, FHA, long-term jumbo loans and
non-conforming loans to institutional investors on a servicing released basis.
Loans originated by PMC are sold servicing released to individual investors.
Between the time the Company issues loan commitments and the time such
loans or the securities into which they are converted are sold, the Company is
exposed to movements in the market price due to changes in the market interest
rates. The Company manages this risk by utilizing forward cash sales of loan or
mortgage backed securities primarily to Fannie Mae, Freddie Mac and FHLB (such
forward sales of loans or mortgage-backed securities are collectively referred
to as "forward sale commitments") and in the case of PMC where all loans are
sold by obtaining commitments from individual investors on a loan by loan basis.
Generally, the Company attempts to cover between 85% and 90% of the principal
amount of the loans that it has committed to fund at specified interest rates
with forward sales commitments. However, the type, amount and delivery date of
forward sale commitments the Company will enter into is based upon anticipated
movements in market interest rates, bond market conditions and management's
estimates of closing volumes and the length of the origination or purchase
commitments. Differences between the volume and timing of actual loan
origination and purchases and management's estimates can expose the Company to
gains and losses. If the Company is not able to deliver the mortgage loans or
mortgage-backed securities during the appropriate delivery period called for by
the forward sale commitment, the Company may be required to pay a non-delivery
fee, repurchase the delivery commitments at current market prices or purchase
whole loans at a premium for delivery. The above activity is managed
continually; however, there can be no assurances that the Company will be
successful in its effort to minimize interest-rate risk between the time
origination or purchase commitments are issued and the ultimate sale of the
loan. At March 31, 2002, the Company had $56.2 million of forward sales
commitments.
At March 31, 2002, the Company was servicing its portfolio of $1.252
billion of loans receivable, net and mortgage loans held for sale and $1.588
billion of loans serviced for others, primarily consisting of conforming
fixed-rate loans sold by the Company. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults, making certain insurance and tax payments on
behalf of the borrowers and generally administering the loans. All of the loans
currently being serviced for others are loans, which have been sold by the
Company. The gross servicing fee income from loans originated and purchased is
generally .25 to .38 % of the total balance of the loan serviced.
During the fiscal years ended March 31, 2002 and March 31, 2001, the
Company originated $788.6 million and $368.5 million of residential mortgage
loans, respectively, of which $152.4 million and $248.8 million
5
respectively, were retained by the Company. The fixed-rate loans retained by the
Company consisted primarily of loans with terms of 10 years or less. The Company
recognizes, at the time of sale, the cash gain or loss on the sale of the loans
based on the difference between the net cash proceeds received and the carrying
value of the loans sold. The book value of mortgage servicing rights recognized
as an asset by the Company, at March 31, 2002, net of amortization and valuation
allowance, was $6.5 million.
One-to-Four Family Mortgage Lending. The Company offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans secured by one-to-four family
residences with maturities of up to 30 years. Substantially, all of such loans
are secured by properties located in Southern New England and the Mid-Atlantic
region. Loan originations are generally obtained from the Company's commissioned
loan representatives, banking offices, correspondent banking relationships and
wholesale brokers and their contacts with the local real estate industry,
existing or past customers, and members of the local communities. Of the
Company's $629.1 million of one-to-four family residential mortgage loans at
March 31, 2002, $251.4 million, or 40.0%, were fixed-rate loans and $377.7
million, or 60.0%, were adjustable-rate loans.
The Company currently offers a number of ARM loan programs with interest
rates which are fixed for a period of one, three, four, five, seven or ten years
and adjust annually thereafter. The Company's ARM loans generally provide for
periodic (not more than 2%) and overall (not more than 6%) caps on the increase
or decrease in the interest rate at any adjustment date and over the life of the
loan, respectively. The interest rate adjustment on these loans is generally
indexed to the one-year U.S. Treasury CMT Index.
The Company's policy is to originate one-to-four family residential
first-mortgage loans in amounts up to 80% of the lower of the appraised value or
the selling price of the property securing the loan and up to 100% of the
appraised value or selling price if private mortgage insurance is obtained with
the exception of FHA and VA loans. Mortgage loans originated by the Company
include due-on-sale clauses which provide the Company with the contractual right
to deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Company's consent. Due-on-sale clauses are
an important means of adjusting the rates on the Company's fixed-rate mortgage
loan portfolio and the Company has generally exercised its rights under these
clauses.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Company's exposure to
increases in interest rates. However, adjustable-rate loans may pose credit
risks not inherent in fixed-rate loans, primarily because as interest rates
rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
reduce the credit risk associated with its adjustable-rate loans but also limit
the interest rate sensitivity of its adjustable-rate mortgage loans.
In an effort to provide financing for first-time and moderate income home
buyers, the Company offers FHA and VA loans and also has its own first-time home
buyer program. These programs offer single-family residential mortgage loans to
qualified individuals. These loans are offered with terms of up to 30 years.
Such loans must be secured by a one-to-four family owner-occupied unit. These
loans are originated using modified underwriting guidelines with reduced down
payments and loan fees. Such loans are originated in amounts up to 100% of the
lower of the property's appraised value or the sales price. Private mortgage
insurance is normally required. The Company expects to achieve a lower rate of
return on loans originated under the first-time home buyer program when compared
to other residential mortgage loans because the Company typically charges: a
lower rate of interest; a lower mortgage origination fee; or lower closing costs
on such loan programs.
Multi-Family Lending. The Company originates adjustable-rate multi-family
mortgage loans generally secured by five to 12 unit residential apartment
buildings. In reaching its decision on whether to make a multi-family loan, the
Company considers the value of the underlying property as well as the
experience, financial strength and other qualifications of the borrower. Other
factors relating to the property to be considered are: the net operating income
of the mortgaged premises before debt service and depreciation; the debt service
ratio; and the ratio of the loan amount to appraised value. The maximum amount
of a multi-family loan is limited by the Company's loans-to-one borrower limit
which, at March 31, 2002, was $21.9 million. In making its assessment of the
creditworthiness of the borrower, the Company generally reviews the financial
6
statements, employment and credit history of the borrower, as well as other
related documentation. Generally, multi-family loans made to corporations,
partnerships and other business entities require personal guarantees by the
principals.
Loans secured by apartment buildings and other multi-family residential
properties generally involve a greater degree of risk than one-to-four family
residential mortgage loans. Because payments on loans secured by multi-family
properties are generally dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
prevailing conditions in the real estate market or the economy. The Company
seeks to minimize these risks through its underwriting policies.
Construction and Land Lending. The Company originates construction and
land loans primarily for the development of single-family residences. Such loans
are made principally to individuals building their primary residence. In the
case of construction and land mortgage loans to individuals building their
primary residence, such loans are originated in amounts up to 90% of the
appraised value of the property, as improved. Proceeds of construction and land
loans are disbursed as phases of the construction are completed.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied
residential real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Company may be confronted with a project, when completed, having
a value which is insufficient to assure full repayment.
Commercial Real Estate Lending. The Company originates commercial real
estate loans that are generally secured by properties such as manufacturing
facilities, office buildings, retail facilities, recreation facilities, or
apartment buildings located in the Company's primary market area. The Company's
commercial real estate underwriting policy provides that commercial real estate
loans may generally be made in amounts up to 80% of the appraised value of the
property. To a lesser extent, the Company originates construction, acquisition
and development loans to experienced developers known to the Company for the
construction of residential or commercial properties. Construction and land
loans to commercial developers are generally originated in amounts up to 70% of
the lesser of the appraised value of the property, as improved, or the sales
price. Generally, if the borrower is a corporation, partnership or other
business entity, personal guarantees by the principals are required. Commercial
real estate lending is limited by the Bank's regulatory loans-to-one borrower
limit which at March 31, 2002 was $21.9 million. In reaching its decision on
whether to make a commercial real estate loan, the Company considers the net
operating income of the property, the borrower's expertise, credit history, and
profitability and the value of the underlying property.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than one-to-four family residential mortgage
loans. Because payments on loans secured by commercial real estate are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to a greater extent to prevailing conditions in the
real estate market or the economy. The Company seeks to minimize these risks
through its underwriting standards.
Commercial Lending. The Company also originates commercial loans to
businesses generally operating in the Company's primary market area. Such loans
are generally secured by equipment, inventory, accounts receivable, and real
estate, in the case of owner-occupied commercial property where repayment is
significantly dependent on the underlying business. The Company offers
commercial loans in the form of term loans and lines of credit. When analyzing
commercial loans, the Company considers primarily the expertise and financial
resources of the borrower, the borrower's ability to repay the loan out of cash
flow, the Company's lending history with the borrower and the value of the
collateral.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower's ability to repay from the cash flow of the
underlying business. As a result, the availability of funds for the repayment of
commercial loans is substantially dependent on the success of the
7
business itself. Further, any collateral securing such loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on many
factors, including the success of the business.
Consumer Lending. The Company's consumer loans consist primarily of home
equity lines of credit and second mortgage loans, and, to a significantly lesser
extent, secured and unsecured personal loans and new and used automobile loans.
Such loans are generally originated in the Company's primary market area and
generally are secured by real estate, deposit accounts, personal property and
automobiles. These loans are typically shorter term and generally have higher
interest rates than one-to-four family mortgage loans.
The Company offers two types of home equity loans: a variable-rate
"open-end line of credit" and a fixed-rate "second mortgage." Substantially all
of the Company's home equity loans are secured by second liens on one-to-four
family residences located in the Company's primary market area. Home equity
lines of credit have variable rates of interest, which can generally adjust on a
monthly basis. The interest rate on such loans is indexed to the prime rate as
reported in The Wall Street Journal and generally have an 18% lifetime limit on
interest rates. Generally, the maximum combined loan-to-value ratio ("CLTV") on
home equity loans is 80%; however, fixed-rate second mortgage loans up to
$50,000 and lines of credit up to $25,000 can have an CLTV of up to 100% on the
property as long as other underwriting criteria are satisfied. Second mortgage
loans are generally offered with terms of up to 15 years and only with
fixed-rates of interest, which vary depending on the amortization period chosen
by the borrower. The underwriting standards employed by the Company for home
equity lines of credit and second mortgage loans include a determination of the
applicant's credit history and an assessment of the applicant's ability to meet
existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration.
The Company also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans are generally secured by deposit accounts, stocks or bonds.
Unsecured personal loans generally have a maximum borrowing limitation of $7,500
and generally allow a maximum debt ratio (the ratio of debt service to net
earnings) of 40%. Automobile loans have a maximum borrowing limitation of 95% of
the sale price of a new automobile and 80% of the lesser of the purchase price
or fair market value of a used automobile.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one-to-four family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
INVESTMENT ACTIVITIES
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements, federal
funds and Small Business Investment Company Program investments. Subject to
various restrictions, federally-chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally-chartered
savings institution is otherwise authorized to make directly. Historically, the
Company has maintained liquid assets at a level considered to be adequate to
meet its normal daily activities.
The investment policy of the Company, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Company's lending activities. The Company primarily
invests in mortgage-related securities (consisting of mortgage-backed
pass-through securities and collateralized mort-
8
gage obligations) guaranteed by government agencies or, if privately issued,
rated A or better by either Moody's or Standard & Poor's. The Company designates
investment securities as held to maturity, available for sale, or held for
trading. The Company generally invests in securities as part of a wholesale
investment strategy as well as to manage interest-rate risk and to maintain
liquidity levels deemed appropriate by management. At March 31, 2002, the
Company had short-term investments of $100.9 million, or 4.4% of assets,
consisting of overnight deposits. At March 31, 2002, the Company's investment
securities available for sale portfolio had a fair value of $84.7 million, or
3.7% of assets, and an amortized cost of $81.6 million. At March 31, 2002, the
Company had no investment securities held to maturity.
At March 31, 2002, the Company had invested $579.8 million, or 25.3% of
assets, in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and
Freddie Mac or by private mortgage security issuers. The portfolio consisted of
$578.6 million of mortgage-backed securities classified as available for sale,
or 99.8% of total mortgage-backed securities, and $1.2 million of
mortgage-backed securities classified as held to maturity, or 0.2% of total
mortgage-backed securities. Of the $579.8 million in mortgage-backed securities,
$407.5 million were adjustable-rate securities and $172.3 million were
fixed-rate securities.
Of the $407.5 million of adjustable-rate securities, $140.1 million were
Ginnie Mae one year CMT indexed ARMs with 1% maximum annual rate adjustments and
5% maximum lifetime rate adjustments, $89.8 million were Fannie Mae and Freddie
Mac one-year CMT and one-year LIBOR indexed ARMs with initial fixed-rate periods
of one to five years, and 2% maximum annual rate adjustments and 6% maximum
lifetime rate adjustments, $23.4 million were Fannie Mae and Freddie Mac
Eleventh District Cost of Funds ("COFI") indexed monthly resetting ARMs with no
annual rate caps, but with lifetime caps of 9.28% to 13.07%, $76.2 were Fannie
Mae and privately issued COFI and one-year average CMT indexed collateralized
mortgage obligations ("CMOs"), and $78.0 million were Ginnie Mae and privately
issued LIBOR indexed CMOs.
Of the $172.3 million of fixed-rate securities, $108.1 million were Ginnie
Mae, Fannie Mae and Freddie Mac pass-through securities with average lives of
approximately 4.4 years, and $64.2 million were Fannie Mae and AAA-rated
privately issued CMOs with average lives of approximately 2.5 years.
Investments in mortgage-backed securities involve a risk that actual
prepayments will differ from estimated prepayments over the life of the
security. Mortgage-backed securities may require adjustments to the amortization
of any premium or accretion of any discount relating to such instruments thereby
changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value and/or
interest rates of such securities may be adversely affected by changes in
interest rates.
SOURCES OF FUNDS
General. Deposits, loan and mortgage-backed security principal and
interest payments, proceeds from sales of loans, cash flows generated from
operations and FHLB advances and other borrowings are the primary sources of the
Company's funds for use in lending, investing and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the fiscal year ended
March 31, 2002, core deposits (defined as total deposits less certificate
accounts) represented 43.2% of total average deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Company's deposits are
obtained predominantly from the areas in which its banking offices are located.
The Company has historically relied primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its market area. While the Company does not actively
solicit certificate accounts in excess of $100,000 or use brokers to obtain
deposits, the Company may, from time to time, solicit such deposits or utilize
brokered deposits depending upon market conditions. The Company's average
certificate
9
balances increased to $441.5 million, or 56.8% of total average deposits, during
the year ended March 31, 2002 from $407.0 million, or 61.0% of total average
deposits, during the year ended March 31, 2001. The Company's cost of average
deposits decreased to 3.27% for the year ended March 31, 2002 from 3.93% for the
year ended March 31, 2001. At March 31, 2002, the weighted average remaining
maturity of the Company's certificate accounts was 9.5 months.
Borrowings. As part of its operating strategy, the Company utilizes
advances from the FHLB and reverse repurchase agreements with securities dealers
as alternatives to retail deposits to fund its operations. During the year ended
March 31, 2002, the Company used FHLB borrowings to a greater extent to fund its
purchase of mortgage-backed securities. FHLB advances are collateralized
primarily by certain of the Company's mortgage loans and mortgage-backed
securities. FHLB advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, fluctuates from time to time in accordance with the policies of the
Federal Housing Finance Board and the FHLB. At March 31, 2002, the Company had
$754.8 million in outstanding advances from the FHLB and other borrowings.
SUBSIDIARY ACTIVITIES
First Federal Savings Bank of America includes its wholly-owned
subsidiaries: People's Mortgage Corporation, a Massachusetts corporation;
FIRSTFED INVESTMENT CORPORATION, a Massachusetts security corporation; CELMAC
INVESTMENT CORPORATION, also a Massachusetts security corporation; and several
inactive corporations.
FAB FUNDING CORPORATION ("FAB FUNDING"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Company formed primarily to finance stock
purchases by the Company's Employee Stock Ownership Plan and related trust
("ESOP"). The financing from FAB FUNDING is collateralized by the shares of
stock of the Company purchased by the ESOP, which are released for distribution
to eligible employees of the Company as payments are made on the loan. Except
for the loan to the ESOP, FAB FUNDING has no significant operations.
FIRSTFED INSURANCE AGENCY, LLC, a Massachusetts limited liability
corporation, was formed in January 1999 and is jointly owned by the Company and
FAB FUNDING. The Agency offers a comprehensive insurance product line including
auto, home, life, accident and health insurance to consumers and businesses. The
Agency is licensed to sell insurance in Massachusetts, Rhode Island and
Connecticut and is subject to regulations of and periodic examinations by these
states.
FIRSTFED TRUST COMPANY, N.A., a nationally chartered organization
headquartered in Massachusetts, was formed in February 2000. The Trust Company
provides investment and fiduciary services in the Rhode Island and southeastern
Massachusetts marketplace and is 65% owned by the Company.
People's Bancshares Capital Trust ("Capital Trust I"), a Delaware Business
Trust formed in 1997, and People's Bancshares Capital Trust II ("Capital Trust
II"), a New York Common Law Trust formed in 2000, of which the Company acquired
all of the common securities as part of the People's acquisition. These trusts
have no independent assets or operations and exist for the sole purpose of
issuing trust preferred securities and investing the proceeds in an equivalent
amount of junior subordinated debentures issued by the Company. The junior
subordinated debentures, which are the sole assets of the trusts, are unsecured
obligations of the Company and generally are subordinate and junior in right of
payment to all present and future senior and subordinated indebtedness and
certain other financial obligations of the Company.
PERSONNEL
As of March 31, 2002, the Company had 592 authorized full-time employee
positions and 111 authorized part-time employee positions, for a total of
approximately 648 full-time equivalents. The employees are not represented by a
collective bargaining unit and the Company considers its relationship with its
employees to be good.
10
REGULATION AND SUPERVISION
GENERAL
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank, as a federally chartered savings association, is subject
to extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of
the Federal Home Loan Bank System and, with respect to deposit insurance, of the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Trust
Company, a nationally chartered trust company, is subject to extensive
regulation, examination and supervision by its federal regulator, the Office of
the Comptroller of the Currency ("OCC"), the agency that charters national
banks. The Trust Company does not accept deposits and is not insured by the
FDIC.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. Similarly, the Trust Company reports to, and is subject
to examination and supervision by, the OCC. This regulation and supervision
establishes a comprehensive framework of activities, in which an institution can
engage and is intended primarily to facilitate the institution's safety and
soundness. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including, with respect to the Bank,
policies regarding the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in the
applicable regulatory requirements and policies, whether by the OTS, the FDIC,
the OCC or the Congress, could have a material adverse impact on the Company,
the Bank, the Trust Company and their operations. Certain of the regulatory
requirements applicable to the Bank, the Trust Company and to the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank, the
Trust Company and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Regulation of the Bank and Trust
Company -- QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the Company, so long as the Bank continues to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect
11
of the acquisition on the risk to the deposit insurance funds, the convenience
and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
REGULATION OF THE BANK AND TRUST COMPANY
Business Activities. The activities of federal savings institutions, such
as the Bank, are governed by federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal associations, e.g., commercial, non-residential real property loans and
consumer loans, are limited to a specified percentage of the institution's
capital or assets.
The activities of the Trust Company are limited to providing fiduciary and
related services and are also subject to federal law and regulation. Generally,
the Trust Company is subject to all of the laws and regulations applicable to
national banks except where clearly inapplicable due to the Trust Company's
limited activities.
Capital Requirements. OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS rating system), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporated an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating
12
their risk-based capital requirements. The OTS deferred implementation of the
interest rate risk capital charge and recently removed the interest rate risk
components from its capital regulation. At March 31, 2002, the Bank met each of
its capital requirements.
The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. At March 31, 2002, the
Trust Company met each of its capital requirements.
Both the OTS and OCC have the discretion to establish higher capital
requirements in individual cases where deemed justified by the institution's
condition or risk profile.
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points of assessable deposits for the
riskiest.
In addition to the assessment for deposit insurance, FDIC-insured
institutions are required to make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
During 2001, FICO payments for SAIF members approximated 1.86 basis points. By
law, there was equal sharing of FICO payments between SAIF and Bank Insurance
Fund ("BIF") members, which began on January 1, 2000.
The Bank's assessment rate for fiscal 2002 ranged from 1.82 to 1.90 basis
points and the premium paid for this period was $158,000. Payments toward the
FICO bonds amounted to $144,000. The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would likely have
an adverse effect on the operating expenses and results of operations of the
Bank. Management cannot predict what insurance assessment rates will be in the
future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
The Trust Company does not accept deposits and is not insured by the FDIC.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An
13
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if secured by specified readily marketable collateral. At March 31, 2002, the
Bank's limit on loans to one borrower was $21.9 million, and the Bank's largest
aggregate outstanding balance of loans to one borrower was $8.0 million.
QTL Test. The HOLA requires savings institutions such as the Bank to meet
a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12-month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
commercial bank charter. As of March 31, 2002, the Bank maintained 70.19% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the OTS regulation, an
application to and the prior approval of the OTS is required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution must still provide prior notice to
the OTS of the capital distribution if, like the Bank, it is a subsidiary of a
holding company. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Under OCC regulations, a national trust company may not, without OCC
approval, pay dividends in excess of the total of the Bank's retained net income
for the year combined with retained net income for the prior two years.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries and off-balance sheet activity, as reported
in the Bank's latest quarterly thrift financial report. Assessments paid by the
Bank for the fiscal year ended March 31, 2002 totaled $295,000.
The Trust Company must pay semi-annual assessments to the OCC to fund its
operations. The OCC has adopted an assessment system applicable to national
trust companies with less than $1 billion in managed assets, such as the Trust
Company based on the amount of balance sheet assets and a flat fee. Assessments
paid by the Trust Company for the fiscal year ended March 31, 2002 totaled
$45,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited.
Transactions with affiliates must be on terms and under circumstances that are
at least as favorable to the institution as
14
those prevailing at the time for comparable transactions with non-affiliated
companies. The Trust Company is subject to similar restrictions. In addition,
savings institutions are prohibited from lending to any affiliate that is
engaged in activities that are not permissible for bank holding companies and no
savings institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees. The law limits both the individual and aggregate amount of
loans the Bank may make to insiders based, in part, on the Bank's capital
position and requires certain board approval procedures to be followed.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
The OCC has similar enforcement authority with respect to the Trust
Company.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank of Boston, is required to acquire and hold shares
of capital stock in that Federal Home Loan Bank in an amount at least equal to
1.0% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was
in compliance with this requirement with an investment in Federal Home Loan Bank
stock at March 31, 2002 of $58.4 million.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $41.3 million or less (subject to adjustment by the
Federal Reserve Board), the reserve requirement is 3%; and for accounts
aggregating greater than $41.3 million, the reserve requirement is $1.239
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $41.3
million. The first $5.7 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
15
ACQUISITION OF CONTROL
Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be
submitted to the OTS if any person (including a company), or group acting in
concert, seeks to acquire 10% or more of the outstanding voting stock of the
Company or Bank, unless the OTS has found that the acquisition will not result
in a change of control of the Company. Under the CIBCA, the OTS has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that so acquires control
would then be subject to regulation as a savings and loan holding company. A
similar notice must be submitted to the OCC with respect to a change of control
of the Trust Company.
FEDERAL SECURITIES LAWS
The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
Shares of the common stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed in any three-month period
the greater of (i) 1% of the outstanding shares of the Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provisions may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
The Company, the Bank, FAB FUNDING, PMC and the Trust Company are subject
to those rules of federal income taxation generally applicable to corporations
under the Code. The Bank is also, under Subchapter H of the Code, subject to
certain special rules applicable to banking institutions as to securities,
reserves for loan losses, and any common trust funds. The Agency is a
partnership and subject to the rules under Subchapter K of the Code. The
Company, the Bank, FAB FUNDING, and PMC, as members of an affiliated group of
corporations within the meaning of Section 1504 of the Code, will file a
consolidated federal income tax return, which has the effect of eliminating or
deferring the tax consequences of inter-company distributions, including
dividends, in the computation of consolidated taxable income for federal tax
purposes. The Trust Company files a separate corporate tax return and the Agency
files a partnership tax return.
In addition to regular corporate income tax, corporations are subject to an
alternative minimum tax, which generally is equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items, which are generally
applicable, include an amount equal to 75% of the amount by which a bank's
adjusted current earnings (generally alternative minimum taxable income computed
without regard to this preference and prior to reduction for net operating
losses) exceeds its alternative minimum taxable income without regard to this
preference. Alternative minimum tax paid can be credited against regular tax due
in later years.
STATE AND LOCAL TAXATION
Commonwealth of Massachusetts Taxation. The Company and its subsidiaries
doing business in Massachusetts are subject to an annual Massachusetts excise
tax. The tax rate is 10.50% on taxable income apportioned to Massachusetts. The
definition of Massachusetts's taxable income is defined as federal taxable
16
income subject to certain modifications. These modifications allow for a
deduction for 95% of dividends received from stock where the entity owns 15% or
more of the voting stock of the institution paying the dividend and to allow
deductions from certain expenses allocated to federally tax exempt obligations.
Combined reporting is not permitted under Massachusetts's General Law.
FIRSTFED INVESTMENT CORPORATION and CELMAC INVESTMENT CORPORATION meet
certain definitional tests relating to investments that are not subject to the
corporate excise tax, and are instead taxed on their gross income at the rate of
1.32%. The Agency is not subject to state tax because it is a partnership, but
its partners are liable for the tax based on their share of the income.
Rhode Island Taxation. Subsidiary corporations of the Company conducting
business in Rhode Island are subject to a Rhode Island excise tax and must file
separate Rhode Island state tax returns. The tax is based upon an apportioned
percentage of net income related to activities conducted within Rhode Island.
The tax rate is 9%.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
17
ITEM 2. PROPERTIES.
At March 31, 2002, the Company conducted business from a centralized
administrative, operations and banking office at ONE FIRSTFED PARK, Swansea,
Massachusetts, 27 other banking offices in Massachusetts and Rhode Island, and
14 loan centers in Massachusetts, Rhode Island, Connecticut and Maryland. The
net book value of properties and leasehold improvements amounted to $30.2
million at March 31, 2002. In May 2002, three banking offices were closed and
consolidated with nearby banking offices in Massachusetts. For additional
information regarding premises, equipment and leasehold obligations, see Note 8,
to the Consolidated Financial Statements. The Company believes that all of its
facilities are in good condition and are adequate for the Company's present
operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of stockholders was held on February 4, 2002 to vote on
the proposal to approve and adopt the Agreement and Plan of Merger, dated as of
October 1, 2001, by and between the Company and People's, pursuant to which
People's merged with and into the Company. The result of the vote was as
follows:
For: 4,429,622 Against: 826,497 Abstain: 17,509
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" opposite the
inside back cover in the Registrant's 2002 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The above-captioned information appears under "Selected Consolidated
Financial and Other Data" in the Registrant's 2002 Annual Report to Stockholders
on pages 10 and 11 and is incorporated herein by reference.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's primary business is attracting retail deposits from the
general public and investing those deposits and other borrowed funds in loans,
mortgage-backed securities, U.S. Government securities and other securities. The
Company originates commercial, consumer, and mortgage loans for investment, and
mortgage loans for sale in the secondary market. Mortgage loan sales are made
from mortgage loans held in the Company's portfolio designated as being held for
sale or originated for sale during the period. The Company's revenues are
derived principally from interest on its loans, and to a lesser extent,
dividends and interest on its investments and mortgage-backed securities, fees
and loan servicing income. The Company's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities,
proceeds from the sale of loans, FHLB advances, and other borrowings.
The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses and non-interest income including loan sale
activities, loan servicing income, and revenue from the Trust Company and Agency
operations. The Company's non-interest expense consists of compensation and
employee benefits, office occupancy and equipment expense, federal deposit
insurance premiums, advertising and business promotion, data processing expense,
and other expenses. Results of operations of the Company are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and the actions of regulatory authorities.
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information on the Company and its
business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions that may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
ACQUISITION
On February 28, 2002, the Company completed the People's acquisition for
$40.3 million in cash and 1.9 million shares of the Company's common stock. The
People's acquisition was accounted for as purchase in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
the total cost, including the fair value of stock options assumed and certain
merger costs, was $75.0 million. The Company recorded goodwill of $42.5 million
and other intangible assets of $12.4 million in connection with the acquisition.
The results of People's operations have been included in the consolidated
financial statements since March 1, 2002.
19
CRITICAL ACCOUNTING POLICIES
Certain aspects of the Company's accounting policies are based on
management's estimation techniques, valuation assumptions and other subjective
assessments. Management has identified five policies that, due to such
estimates, assumptions and judgments inherent in those policies, are critical to
an understanding of our financial statements. These policies involve
management's methodology for the determination of the Company's allowance for
loan losses, purchase accounting, valuation of goodwill and other intangible
assets, the valuation of derivatives and the valuation of mortgage servicing
rights. These policies and the estimates, assumptions and judgments are
described in greater detail in subsequent sections of Management's Discussion
and Analysis and in the Notes to Consolidated Financial Statements included
herein. Management believes that the estimates, assumptions and judgments used
in the preparation of the Company's Consolidated Financial Statements were
appropriate given the factual circumstances at the time. However, given the
sensitivity of the Company's Consolidated Financial Statements to these critical
accounting policies, the use of different estimates, assumptions and judgments
could have resulted in material variances from the reported results of
operations or financial condition.
IMPACT OF NEW ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities -- a Replacement of FASB Statement No. 125."
Certain disclosure provisions required by SFAS No. 140 were effective
immediately, with additional requirements related to SFAS No. 140 effective
beginning March 31, 2001. The adoption of SFAS No. 140 had no effect on the
Company's consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141 and SFAS No. 142. SFAS No. 141
requires that the purchase method of accounting be used for all business
combinations and specifies recognition criteria that acquired identifiable
intangible assets must meet to be recognized and reported separately from
goodwill. SFAS No. 142 requires goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead are to be tested for impairment
at least annually in accordance with the provisions of SFAS No. 142. SFAS No.
142 requires that intangible assets with finite useful lives will continue to be
amortized over their useful lives, and reviewed for impairment in accordance
with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted SFAS No. 141 as of July 1, 2001. Also as of July 1,
2001, the Company adopted the required transition provisions of SFAS No. 142
related to amortization of goodwill and other intangible assets for which the
acquisition date was after June 30, 2001. The remaining provisions of SFAS No.
142 were adopted on April 1, 2002. Accordingly, goodwill and other intangible
assets related to the People's acquisition are not amortized. Goodwill acquired
in business combinations completed before July 1, 2001 continued to be amortized
until March 31, 2002.
Upon full adoption of SFAS No. 142, the Company must evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and make any necessary reclassifications in order to conform with
the criteria in SFAS No. 141 for recognition of identifiable intangible assets
separate from goodwill. The Company must also reassess the useful lives and
residual values of all identifiable intangible assets acquired and make any
necessary amortization period adjustments by June 30, 2002. Goodwill impairment
must be measured for each reporting unit in a two-step process. First, the
carrying amount of the net assets (including goodwill) must be compared to the
fair value of a reporting unit (as defined) by September 30, 2002. Second, if
the carrying value of a reporting unit is greater than its fair value, the
Company must determine by March 31, 2003 the amount of impairment based on the
fair value of a reporting unit compared to the fair values assigned to all of
the recognized and unrecognized assets and liabilities of that unit. Impairment
must be measured as of the adoption date of April 1, 2002, with the related
loss, if necessary, recognized as the cumulative effect of a change in
accounting principle in the first quarter of fiscal year 2003.
20
On March 31, 2002, the Company had goodwill in the amount of $43.5 million,
a core deposit intangible asset of $11.7 million and non-compete intangible
asset of $498,000, all of which will be subject to the transition provisions of
SFAS No. 142. The Company has not completed its calculations under the
impairment testing provisions of SFAS 142; however, impairment losses, if any,
are not expected to be material. The estimated amortization expense for goodwill
and other intangible assets for fiscal year 2003 is expected to increase to $2.1
million from $294,000 in fiscal year 2002 due to amortization of the other
intangible assets recorded in connection with the People's acquisition,
partially offset by discontinuing all goodwill amortization, subject to the
results of the required testing for goodwill impairment.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extend that reporting to a component of an entity that either has
been disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less cost to sell. The Company adopted SFAS
No. 144 on April 1, 2002 with no material impact on its financial condition or
results of operations.
RESULTS OF OPERATIONS
OVERVIEW
Net income for the fiscal year ended March 31, 2002 was $12.4 million, or
$2.07 diluted earnings per share ("EPS"), compared to $9.2 million, or $1.56
diluted EPS for the fiscal year ended March 31, 2001 and $8.2 million, or $1.31
diluted EPS for the year ended March 31, 2000. Before an extraordinary loss on
early extinguishment of debt of $568,000, net of tax benefit, and the cumulative
effect of adoption of SFAS No. 133 of $461,000, net of tax benefit, net income
was $13.5 million for fiscal year 2002, or $2.25 diluted EPS. Pre-tax income
increased $7.4 million, or 55.5%, to $20.8 million during fiscal year 2002 as
compared to fiscal year 2001, the net result of increases in net interest income
of $3.0 million, non-interest income of $7.6 million and non-interest expense of
$3.2 million. Pre-tax income increased $1.5 million, or 12.7%, to $13.4 million
during fiscal year 2001 as compared to fiscal year 2000, the net result of
increases in net interest income of $2.6 million, non-interest income of $2.4
million and non-interest expense of $3.5 million.
Return on average stockholders' equity increased to 9.65% for fiscal year
2002, compared to 8.71% for fiscal year 2001 and 7.79% for fiscal year 2000.
Return on average assets increased to 0.70% for fiscal year 2002, compared to
0.56% for both fiscal years 2001 and 2000. Before the extraordinary loss and the
cumulative effect of accounting change in fiscal year 2002, the return on
average stockholders' equity was 10.45% and the return on average assets was
0.76%.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $3.0
million, or 8.8%, to $37.7 million for the year ended March 31, 2002 from $34.7
million for the year ended March 31, 2001, following an increase of $2.6
million, or 8.2%, from $32.1 million for the year ended March 31, 2000. The net
interest rate spread increased one basis point to 1.94% for the year ended March
31, 2002 from 1.93% for the year ended March 31, 2001, following a decrease of
13 basis points from 2.06% for the year ended March 31, 2000, while the net
interest margin increased two basis points to 2.27% for the year ended March 31,
2002 from 2.25% for the year ended March 31, 2001, following a decrease of 11
basis points from 2.36% for the year ended March 31, 2000.
21
The increases in net interest income and the average balances of
interest-earning assets and interest-bearing liabilities during fiscal year
2002, compared to fiscal years 2001 and 2000, were due to several key factors.
Declining market interest rates and related consumer preferences resulted in the
Company's shift to origination of fixed-rate mortgages that are generally sold
in the secondary market, from origination of adjustable-rate mortgages that are
generally retained for portfolio. In addition, prepayment speeds on mortgage
loans increased due primarily to refinancing activity. This economic
environment, combined with the Company's business development and cross-selling
efforts, contributed to growth in commercial and consumer loans and deposits.
The decline in FHLB advances and other borrowings reflected a greater reliance
on deposits for funding balance sheet growth, while borrowing costs also
declined. The growth in investment and mortgage-backed securities resulted from
management's strategy to maintain the Company's leverage in fiscal year 2002.
Lastly, the Company completed the People's acquisition on February 28, 2002.
The following table sets forth certain information relating to the Company
at fiscal year end 2002 and for fiscal years 2002, 2001 and 2000. The average
yields and costs are derived by dividing income or expense by the average
balance of interest earning assets or interest bearing liabilities,
respectively, for the periods shown. Average balances are derived from the best
available daily or monthly data, which management believes approximates the
average balances computed on a daily basis. The yields and the costs include
fees, premiums, and discounts which are considered adjustments to yields.
22
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------
2002 2001
AT ------------------------------- ---------------------
MARCH 31, 2002 AVERAGE
----------------------- AVERAGE YIELD/ AVERAGE
BALANCE YIELD/COST BALANCE INTEREST COST BALANCE INTEREST
---------- ---------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale(1)............ $1,252,480 7.00% $ 995,440 $71,511 7.18% $ 986,116 $77,116
Investment securities(2)............ 243,979 3.13 99,162 4,186 4.22 50,745 3,452
Mortgage-backed securities(3)....... 579,821 5.04 565,291 31,152 5.51 507,584 33,507
---------- ---- ---------- ------- ----- ---------- -------
Total interest-earning
assets....................... 2,076,280 5.80 1,659,893 106,849 6.44 1,544,445 114,075
---- ------- ----- -------
Non-interest-earning assets........... 218,168 118,615 99,692
---------- ---------- ----------
Total assets................... $2,294,448 $1,778,508 $1,644,137
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts............. $ 152,931 2.14 $ 59,262 1,281 2.16 $ 38,053 1,156
Savings accounts.................. 235,338 1.40 118,815 1,697 1.43 101,038 1,777
NOW accounts...................... 137,451 0.52 78,170 384 0.49 64,895 637
Certificate accounts (4).......... 649,843 3.50 441,549 22,068 5.00 406,979 22,682
---------- ---- ---------- ------- ----- ---------- -------
Total interest-bearing
deposits..................... 1,175,563 2.73 697,796 25,430 3.64 610,965 26,252
FHLB advances and other
borrowings........................ 780,477 5.08 839,831 43,696 5.20 842,701 53,143
---------- ---- ---------- ------- ----- ---------- -------
Total interest-bearing
liabilities.................. 1,956,040 3.78 1,537,627 69,126 4.50 1,453,666 79,395
---- ------- ----- -------
Non-interest-bearing liabilities(5)... 183,061 112,105 85,281
---------- ---------- ----------
Total liabilities.............. 2,139,101 1,649,732 1,538,947
Stockholders' Equity.................. 155,347 128,776 105,190
---------- ---------- ----------
Total liabilities and
stockholders' equity......... $2,294,448 $1,778,508 $1,644,137
========== ========== ==========
Net interest rate spread(6)........... 2.02% $37,723 1.94% $34,680
==== ======= ===== =======
Net interest margin(7)................ 2.27%
=====
Ratio of interest-earning assets to
Interest-bearing liabilities........ 103.18% 107.95% 106.24%
========== ========== ==========
FOR THE YEARS ENDED MARCH 31,
------------------------------------------
2001 2000
------- -------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale(1)............ 7.82% $ 809,945 $61,005 7.53%
Investment securities(2)............ 6.80 47,061 2,775 5.90
Mortgage-backed securities(3)....... 6.60 503,062 30,041 5.97
----- ---------- ------- ----
Total interest-earning
assets....................... 7.39 1,360,068 93,821 6.90
----- ------- ----
Non-interest-earning assets........... 98,808
----------
Total assets................... $1,458,876
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts............. 3.04 $ 33,377 780 2.34
Savings accounts.................. 1.76 99,014 1,743 1.76
NOW accounts...................... 0.98 56,973 558 0.98
Certificate accounts (4).......... 5.57 418,815 21,731 5.19
----- ---------- ------- ----
Total interest-bearing
deposits..................... 4.30 608,179 24,812 4.08
FHLB advances and other
borrowings........................ 6.31 667,352 36,959 5.54
----- ---------- ------- ----
Total interest-bearing
liabilities.................. 5.46 1,275,531 61,771 4.84
----- ------- ----
Non-interest-bearing liabilities(5)... 78,268
----------
Total liabilities.............. 1,353,799
Stockholders' Equity.................. 105,077
----------
Total liabilities and
stockholders' equity......... $1,458,876
==========
Net interest rate spread(6)........... 1.93% $32,050 2.06%
===== ======= ====
Net interest margin(7)................ 2.25% 2.36%
===== ====
Ratio of interest-earning assets to
Interest-bearing liabilities........ 106.63%
==========
---------------
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction mortgages in process, allowance for loan losses and includes
non-performing loans.
(2) Includes short-term investments, investments in trading securities,
investment securities available for sale and held to maturity, and FHLB
stock.
(3) Consists of mortgage-backed securities available for sale and held to
maturity.
(4) Includes the net effect of interest rate swaps.
(5) Consists primarily of business checking accounts.
(6) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
23
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to:
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated on a proportional
basis between changes in rate and volume.
YEAR ENDED MARCH 31, 2002 YEAR ENDED MARCH 31, 2001
COMPARED TO COMPARED TO
YEAR ENDED MARCH 31, 2001 YEAR ENDED MARCH 31, 2000
------------------------------ -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- -------------------
VOLUME RATE NET VOLUME RATE NET
------- --------- -------- -------- -------- -------
(IN THOUSANDS)
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale................ $ 727 $ (6,332) $ (5,605) $13,702 $ 2,409 $16,111
Investment securities................. 2,398 (1,664) 734 229 448 677
Mortgage-backed securities............ 3,552 (5,907) (2,355) 273 3,193 3,466
------ -------- -------- ------- ------- -------
Total interest-earning
assets...................... 6,677 (13,903) (7,226) 14,204 6,050 20,254
------ -------- -------- ------- ------- -------
Interest-bearing liabilities:
Money market accounts................. 523 (398) 125 119 257 376
Savings accounts...................... 284 (364) (80) 34 -- 34
NOW accounts.......................... 111 (364) (253) 79 -- 79
Certificate accounts.................. 1,826 (2,440) (614) (621) 1,572 951
------ -------- -------- ------- ------- -------
Total interest-bearing
deposits.................... 2,744 (3,566) (822) (389) 1,829 1,440
FHLB advances and other borrowings.... (179) (9,268) (9,447) 10,575 5,609 16,184
------ -------- -------- ------- ------- -------
Total interest-bearing
liabilities................. 2,565 (12,834) (10,269) 10,186 7,438 17,624
------ -------- -------- ------- ------- -------
Net change in net interest income....... $4,112 $ (1,069) $ 3,043 $ 4,018 $(1,388) $ 2,630
====== ======== ======== ======= ======= =======
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses amounted to $1.2 million for each
of the years ended March 31, 2002, 2001 and 2000, due to management's assessment
of the loan loss reserve level as influenced by several key factors. For
additional information on the amount of the allowance and the process for
evaluating its adequacy, see "Financial Condition -- Asset Quality -- Allowance
for Loan Losses."
NON-INTEREST INCOME
Non-interest income increased $7.6 million, or 85.1%, to $16.6 million for
the year ended March 31, 2002 from $9.0 million for the year ended March 31,
2001, following an increase of $2.4 million, or 37.1%, from $6.5 million for the
year ended March 31, 2000.
The increase during fiscal year 2002 as compared to fiscal year 2001 was
due primarily to increases of $4.9 million in gain (loss) on sale of mortgage
loans, net, $1.0 million of gain on sale of securities available for sale,
$449,000 in service charges on deposit accounts, $367,000 in trust fee income
and $927,000 in other non-interest income, partially offset by a decrease in
loan servicing income of $402,000. The increase in gain on sale of mortgage
loans was due primarily to a higher volume of fixed rate loans originated for
sale and more favorable loan pricing during fiscal year 2002 as compared to
fiscal year 2001. In addition, an increase in the gain of $179,000 for fiscal
year 2002 was recognized as a result of changes in fair value of derivative
instruments utilized in secondary market hedging activities following the
adoption of SFAS No. 133 on April 1, 2001. The increase in service charges on
deposit accounts reflects a higher fee rate structure and the increase in trust
fee income was due to continued growth at the Trust Company. The increase in
other non-interest income was due primarily to increases in other fee income,
and an increase in the fair value of investments in certain employee benefit
plans, which is offset by a corresponding increase in other non-interest
24
expense. Also, changes in the fair value of interest rate swaps resulted in an
addition to other non-interest income of $303,000 for fiscal year 2002 following
the adoption of SFAS No. 133. The decrease in loan servicing income included a
$240,000 addition to the valuation allowance for mortgage servicing rights
during the second quarter of fiscal year 2002 based on estimated impairment due
to a combination of faster than previously expected actual payoff experience and
faster prepayment forecasts in September 2001 versus June 2001. The balance of
the valuation allowance amounted to $490,000 at March 31, 2002 and $250,000 at
March 31, 2001. Amortization of mortgage servicing rights totaled $2.9 million
and $2.5 million for fiscal years 2002 and 2001, respectively.
The increase during fiscal year 2001 as compared to fiscal year 2000 was
due primarily to a $1.5 million increase in gain (loss) on sale of mortgage
loans, net and increases in trust fee income of $1.0 million, insurance
commission income of $602,000 and services charges on deposit accounts of
$278,000, partially offset by decreases in loan servicing income of $547,000 and
other non-interest income of $541,000. The increase in the Trust fee income was
due to the first full year of operations of the Trust Company, which opened in
February 2000. The increase in insurance commission income was due primarily to
additional business resulting from the purchase of two insurance agencies by the
Agency in March 2000. The decrease in loan servicing income was due primarily to
a decline in the Company's loans serviced for others during fiscal year 2001,
and a $237,000 reduction in the valuation reserve for mortgage servicing rights
during fiscal year 2000. The decrease in other non-interest income was due
primarily to reductions in the fair value of investments in certain employee
benefit plans.
NON-INTEREST EXPENSE
Total non-interest expense increased $3.2 million, or 11.1%, to $32.3
million for the year ended March 31, 2002 from $29.1 million for year ended
March 31, 2001, following an increase of $3.5 million, or 13.9%, from $25.5
million for year ended March 31, 2000.
The increase during fiscal year 2002 as compared to fiscal year 2001 was
due primarily to increases in compensation and benefits of $2.2 million, data
processing of $451,000, amortization of goodwill and other intangible assets of
$210,000 and other non-interest expense of $752,000. These increases were
partially offset by decreases in advertising and business promotion of $329,000.
Total non-interest expenses for fiscal year 2002 included costs associated with
the Company's new banking and insurance office in Middletown, Rhode Island that
opened in January 2002, and operating and acquisition related expenses
recognized in March 2002 following the People's acquisition. In addition, the
increases in compensation and benefits included the net accounting impact of
market price increases of FAB stock held by certain employee benefit plans.
The increase during fiscal year 2001 as compared to fiscal year 2000 was
due primarily to increases in compensation and benefits of $3.1 million, office
occupancy and equipment of $542,000, and data processing of $372,000. These
increases were partially offset by decreases in advertising and business
promotion of $121,000, deposit insurance premiums of $196,000 and other
non-interest expense of $107,000. The higher overall level of expenses reflected
costs associated with the Company's new retail banking and business banking
offices in downtown Providence, Rhode Island, both of which opened in early
fiscal year 2001, the expansion of the Agency's operations, the first full year
of the Trust Company's operations, and the net impact of increases in the cost
of certain employee benefit plans.
INCOME TAXES
Income tax expense increased $3.1 million, or 74.3%, to $7.4 million for
the year ended March 31, 2002 from $4.2 million for the year ended March 31,
2001, following an increase of $532,000, or 14.4%, from $3.7 million for the
year ended March 31, 2000. These increases were due primarily to increased
income before income tax expense. The Company's effective tax rate increased to
35.3% for the year ended March 31, 2002, compared to 31.5% for the year ended
March 31, 2001 and 31.1% for the year ended March 31, 2000, due primarily to the
effects of an increase in the statutory federal income tax rate based on a
higher taxable earnings threshold and increased state taxes.
25
EXTRAORDINARY LOSS
During March 2002, the Company pre-paid Federal Home Loan Bank advances and
other borrowings totaling $161.5 million, which resulted in an after-tax
extraordinary loss on early extinguishment of debt of $568,000, or $0.10 per
share. As part of the People's acquisition, the Company acquired $253.4 million
of cash and cash equivalents, net of acquisition related payments, which
provided the Company with the opportunity to pre-pay the selected borrowings and
improve balance sheet composition.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On April 1, 2001, the Company adopted SFAS No. 133 and recognized an
after-tax loss from the cumulative effect of adoption of $461,000, or $0.08 per
share, representing the initial adjustment to fair value of certain derivative
instruments, including a pre-tax adjustment of $743,000 related to interest rate
swaps designed to reduce its exposure to interest rate changes, partially offset
by a pre-tax adjustment of $45,000 related to commitments to originate and sell
mortgage loans for sale that hedge its secondary market activities. Changes to
the fair value of derivative instruments are recognized in non-interest income
each quarter, and a net addition to pre-tax income of $482,000, or approximately
$0.05 per share, was recognized for fiscal year 2002.
FINANCIAL CONDITION
OVERVIEW
Total assets were $2.294 billion at March 31, 2002, an increase of $623.4
million, or 37.3%, from $1.671 billion at March 31, 2001, following an increase
of $91.1 million, or 5.8%, from $1.580 billion at March 31, 2000. The growth
during fiscal year 2002 was primarily attributable to assets acquired of $968.7
million from the People's acquisition, less the net repayment and early
pre-payment of borrowings totaling $361.2 million. Overall, this growth included
increases of $148.6 million in loans receivable, net, $121.8 million in cash and
cash equivalents, $87.6 million in mortgage loans held for sale, $77.4 million
in mortgage-backed securities available for sale, $76.8 million in investment
securities available for sale and $54.6 million in goodwill and other intangible
assets, partially offset by an increase of $609.8 million in deposits. The
growth during fiscal year 2001 was primarily attributable to increases in loans
receivable, net of $88.4 million and mortgage loans held for sale of $35.7
million, partially offset by a decrease of $42.4 million in mortgage-backed
securities available for sale. Balance sheet growth was primarily funded by
increases of $42.7 million in deposit balances and $35.1 million in FHLB
advances and other borrowings during fiscal year 2001.
Total stockholders' equity was $155.3 million at March 31, 2002, an
increase of $43.8 million, or 39.3%, from $111.6 million at March 31, 2001,
following an increase of $9.9 million, or 9.7%, from $101.7 million at March 31,
2000. The increase during fiscal year 2002 was primarily attributable to $12.4
million in net income and $31.7 million of additional paid-in capital related to
the 1.9 million shares issued for the People's acquisition, partially offset by
$3.2 million in dividends paid to stockholders. The increase during fiscal year
2001 was primarily attributable to $9.2 million in net income, a $7.0 million
increase in the fair market value of available for sale securities, net of tax,
and $1.4 million in earned Stock-Based Incentive Plan awards, partially offset
by $6.3 million in treasury stock purchases and $2.4 million in dividends paid
to stockholders. Stockholders' equity to assets was 6.77% at March 31, 2002,
compared to 6.68% at March 31, 2001 and 6.44% at March 31, 2000. Book value per
share was $20.06 at March 31, 2002, compared to $19.57 at March 31, 2001 and
$16.88 at March 31, 2000.
26
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's short-term investments and investment
securities at the dates indicated:
AT MARCH 31,
--------------------------------------------------------------
2002 2001 2000
-------------------- ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- ------ --------- ------
(IN THOUSANDS)
Short-term investments............. $100,890 $100,890 $ 200 $ 200 $ 250 $ 250
======== ======== ====== ====== ====== ======
Investment securities:
Corporate bonds.................. $ 31,513 $ 31,539 $ -- $ -- $ -- $ --
Municipal bonds.................. 2,643 2,643 -- -- -- --
U.S. Government and agency
obligations................... 1,111 1,107 603 602 600 600
Trust preferred securities....... 40,698 40,258 -- -- -- --
Marketable equity securities..... 5,637 9,109 5,802 7,235 5,660 5,043
-------- -------- ------ ------ ------ ------
Total available for
sale................... 81,602 84,656 6,405 7,837 6,260 5,643
-------- -------- ------ ------ ------ ------
Total investment
securities............. $182,492 $185,546 $6,605 $8,037 $6,510 $5,893
======== ======== ====== ====== ====== ======
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities at the dates
indicated:
AT MARCH 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------- -------------------------------
AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR
COST OF TOTAL VALUE COST OF TOTAL VALUE COST OF TOTAL VALUE
--------- -------- -------- --------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities
and CMOs:
Available for sale:
Fixed-rate.............. $173,083 29.8% $171,922 $ 84,904 17.0% $ 85,186 $ 70,842 12.8% $ 69,000
Adjustable-rate......... 406,630 70.0 406,696 413,440 82.6 416,044 479,267 86.7 474,627
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total available for
sale.................... 579,713 99.8 578,618 498,344 99.6 501,230 550,109 99.5 543,627
-------- ----- -------- -------- ----- -------- -------- ----- --------
Held to maturity:
Fixed-rate.............. 421 0.1 447 569 0.1 569 732 0.1 732
Adjustable-rate......... 782 0.1 788 1,569 0.3 1,585 2,087 0.4 2,121
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total held to maturity.... 1,203 0.2 1,235 2,138 0.4 2,154 2,819 0.5 2,853
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total mortgage-backed
securities and CMOs..... $580,916 100.0% $579,853 $500,482 100.0% $503,384 $552,928 100.0% $546,480
======== ===== ======== ======== ===== ======== ======== ===== ========
27
The table below sets forth certain information regarding the fair value,
weighted average rates and contractual maturities of the Company's investment
securities and mortgage-backed securities as of March 31, 2002:
AT MARCH 31, 2002
-------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
----------------- ------------------ ------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE
VALUE RATE VALUE RATE VALUE RATE VALUE RATE VALUE RATE
------ -------- ------- -------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Investment securities
available for sale(1):
Corporate Bonds
Fixed rate........... $ -- --% $10,251 6.38% $ -- --% $ 11,660 8.03% $ 21,911 7.26%
Adjustable rate...... -- -- 4,675 4.50 4,953 2.64 -- -- 9,628 3.54
------ ------- ------- -------- --------
Total corporate
bonds................ -- -- 14,926 5.79 4,953 2.64 11,660 8.03 31,539 6.12
Municipal bonds........ 2,173 3.18 470 4.46 -- -- -- -- 2,643 3.41
U.S. Government agency
obligations.......... 121 5.55 986 5.40 -- -- -- -- 1,107 5.41
Trust preferred stocks
Fixed rate........... -- -- -- -- 527 9.75 33,153 9.25 33,680 9.26
Adjustable rate...... -- -- -- -- -- -- 6,578 3.76 6,578 3.76
------ ------- ------- -------- --------
Total trust preferred
stocks............... -- -- -- -- 527 9.75 39,731 8.34 40,258 8.36
------ ------- ------- -------- --------
Total investment
securities available
for sale............... $2,294 3.31% $16,382 5.73% $ 5,480 3.32% $ 51,391 8.27% $ 75,547 7.21%
====== ======= ======= ======== ========
Mortgage-backed
securities and CMOs
Held to maturity:
Fixed rate........... $ 1 7.00% $ 70 8.33% $ 376 9.03% $ -- --% $ 447 8.92%
Adjustable rate...... -- -- -- -- -- -- 788 6.72 788 6.72
------ ------- ------- -------- --------
Total mortgage-backed
securities held to
maturity............. 1 7.00 70 8.33 376 9.03 788 6.72 1,235 7.51
------ ------- ------- -------- --------
Available for sale:
Fixed rate........... 1,480 7.00 5,147 7.00 -- -- 165,295 6.40 171,922 6.43
Adjustable rate...... -- -- 10,000 3.12 35,112 3.93 361,584 5.12 406,696 4.97
------ ------- ------- -------- --------
Total mortgage-backed
securities available
for sale............. 1,480 7.00 15,147 4.44 35,112 3.93 526,879 5.52 578,618 5.40
------ ------- ------- -------- --------
Total mortgage-backed
securities and CMOs.... $1,481 7.00% $15,217 4.46% $35,488 3.99% $527,667 5.53% $579,853 5.41%
====== ======= ======= ======== ========
---------------
(1) Does not include $9,109 of marketable equity securities available for sale
at fair value at March 31, 2002.
28
LOANS RECEIVABLE
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated:
AT MARCH 31,
------------------------------------------------------------------------------
2002 2001 2000 1999
--------------------- --------------------- ------------------- --------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
---------- -------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential:
One-to-four
family............ $ 629,079 54.23% $ 677,512 67.19% $671,586 73.59% $583,692
Multi-family........ 6,218 .54 3,015 .30 2,568 .28 3,082
Commercial real
estate.............. 115,243 9.93 44,375 4.40 37,274 4.09 38,760
Construction and
land................ 63,810 5.50 72,225 7.16 39,205 4.30 31,671
---------- ------ ---------- ------ -------- ------ --------
Total mortgage
loans......... 814,350 70.20 797,127 79.05 750,633 82.26 657,205
---------- ------ ---------- ------ -------- ------ --------
Commercial Loans........ 200,016 17.24 94,681 9.39 70,484 7.72 56,196
---------- ------ ---------- ------ -------- ------ --------
Consumer Loans:
Home equity lines..... 83,013 7.16 45,191 4.48 31,351 3.44 25,482
Second mortgages...... 48,901 4.22 61,759 6.12 51,488 5.64 40,630
Other consumer
loans............... 13,713 1.18 9,665 .96 8,616 .94 7,872
---------- ------ ---------- ------ -------- ------ --------
Total consumer
loans......... 145,627 12.56 116,615 11.56 91,455 10.02 73,984
---------- ------ ---------- ------ -------- ------ --------
Total loans
receivable.... 1,159,993 100.00% 1,008,423 100.00% 912,572 100.00% 787,385
====== ====== ======
Less:
Allowance for loan
losses.............. (19,237) (13,233) (12,275) (12,016)
Undisbursed proceeds
of construction
mortgages in
process............. (21,818) (19,445) (11,983) (7,903)
Purchase premium on
loans, net.......... 5,869 -- -- --
Deferred loan
origination costs
(fees), net......... 943 1,429 446 (779)
---------- ---------- -------- --------
Loans receivable,
net................. 1,125,750 977,174 888,760 766,687
Mortgage loans held
for sale............ 126,729 39,103 3,417 52,334
---------- ---------- -------- --------
Loans receivable,
net and mortgage
loans held for
sale.............. $1,252,479 $1,016,277 $892,177 $819,021
========== ========== ======== ========
AT MARCH 31,
------------------------------
1999 1998
-------- -------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential:
One-to-four
family............ 74.13% $691,675 79.68%
Multi-family........ .39 3,899 .45
Commercial real
estate.............. 4.92 45,723 5.27
Construction and
land................ 4.02 27,145 3.13
------ -------- -------
Total mortgage
loans......... 83.46 768,442 88.53
------ -------- -------
Commercial Loans........ 7.14 26,689 3.07
------ -------- -------
Consumer Loans:
Home equity lines..... 3.24 26,252 3.02
Second mortgages...... 5.16 38,862 4.48
Other consumer
loans............... 1.00 7,828 .90
------ -------- -------
Total consumer
loans......... 9.40 72,942 8.40
------ -------- -------
Total loans
receivable.... 100.00% 868,073 100.00%
====== =======
Less:
Allowance for loan
losses.............. (10,937)
Undisbursed proceeds
of construction
mortgages in
process............. (7,164)
Purchase premium on
loans, net.......... --
Deferred loan
origination costs
(fees), net......... (1,420)
--------
Loans receivable,
net................. 848,552
Mortgage loans held
for sale............ 84,867
--------
Loans receivable,
net and mortgage
loans held for
sale.............. $933,419
========
29
The following table shows the remaining contractual maturity of the
Company's loans at March 31, 2002. The table does not include the effect of
future principal prepayments:
AT MARCH 31, 2002
-----------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION TOTAL
FAMILY FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER LOANS
-------- ------ ----------- ------------ ---------- -------- ----------
(IN THOUSANDS)
Amounts due:
One year or less................ $ 830 $ 3 $ 17,678 $61,055 $ 77,340 $ 93,699 $ 250,605
-------- ------ -------- ------- -------- -------- ----------
After one year:
More than one year to three
years....................... 4,778 12 19,041 -- 23,303 5,101 52,235
More than three years to five
years....................... 21,903 141 32,617 -- 49,192 7,836 111,689
More than five years to 10
years....................... 104,683 252 35,019 418 46,625 13,451 200,448
More than 10 years to 20
years....................... 82,218 1,269 7,372 2,337 1,687 22,437 117,320
More than 20 years............ 414,667 4,541 3,516 -- 1,869 3,103 427,696
-------- ------ -------- ------- -------- -------- ----------
Total due after one year...... 628,249 6,215 97,565 2,755 122,676 51,928 909,388
-------- ------ -------- ------- -------- -------- ----------
Total amount due.............. $629,079 $6,218 $115,243 $63,810 $200,016 $145,627 1,159,993
======== ====== ======== ======= ======== ========
Less:
Allowance for loan
losses................. (19,237)
Undisbursed proceeds of
construction mortgages
in process............. (21,818)
Purchase premium on
loans, net............. 5,869
Deferred loan origination
costs, net............. 943
----------
Loans receivable, net......... $1,125,750
==========
The following table sets forth, at March 31, 2002, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
2003, and whether such loans have fixed interest rates or adjustable interest
rates.
DUE AFTER MARCH 31, 2003
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
Mortgage loans:
One- to four-family.............................. $251,337 $376,912 $628,249
Multi-family..................................... 12 6,203 6,215
Commercial real estate........................... 57,656 39,909 97,565
Construction and land............................ 2,755 -- 2,755
-------- -------- --------
Total mortgage loans..................... 311,760 423,024 734,784
Commercial loans................................... 106,717 15,959 122,676
Consumer loans..................................... 51,928 -- 51,928
-------- -------- --------
Total loans.............................. $470,405 $438,983 $909,388
======== ======== ========
30
The following table sets forth the Company's loan originations for the
periods indicated:
FOR THE YEAR ENDED MARCH 31,
----------------------------------
2002 2001 2000
---------- -------- --------
(IN THOUSANDS)
Loans originated:
Mortgage loans:
One- to four-family........................ $ 712,927 $293,114 $366,511
Multi-family............................... 4,524 154 190
Commercial real estate..................... 41,658 19,176 6,524
Construction and land...................... 71,109 76,604 41,683
---------- -------- --------
Total mortgage loans.................... 830,218 389,048 414,908
---------- -------- --------
Commercial................................... 91,060 59,188 47,560
---------- -------- --------
Consumer loans:
Home equity lines.......................... 82,362 48,585 26,853
Second mortgages........................... 22,917 29,327 29,773
Other consumer loans....................... 6,452 8,042 7,081
---------- -------- --------
Total consumer loans.................... 111,731 85,954 63,707
---------- -------- --------
Total loans originated....................... $1,033,009 $534,190 $526,175
========== ======== ========
DEPOSITS
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize average month-end balances:
FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Business checking accounts... $ 79,144 10.2% --% $ 56,299 8.4% --% $ 51,997 7.9% --%
Money market accounts........ 59,262 7.6 2.16 38,053 5.7 3.04 33,377 5.1 2.34
Savings accounts............. 118,815 15.3 1.43 101,038 15.2 1.76 99,014 15.0 1.76
NOW accounts................. 78,170 10.1 0.49 64,895 9.7 0.98 56,973 8.6 0.98
-------- ----- -------- ----- -------- -----
Total core
deposits.......... 335,391 43.2 1.05 260,285 39.0 1.37 241,361 36.6 1.28
Certificate accounts......... 441,549 56.8 5.00 406,979 61.0 5.57 418,815 63.4 5.19
-------- ----- -------- ----- -------- -----
Total average
deposits.......... $776,940 100.0% 3.27% $667,264 100.0% 3.93% $660,176 100.0% 3.76%
======== ===== ======== ===== ======== =====
31
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 2002:
PERIOD TO MATURITY FROM MARCH 31, 2002 AT MARCH 31,
------------------------------------------------------------- ------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 2002 2001 2000
--------- --------- ----------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)
Certificate accounts:
0 to 2.00%................ $ 24,697 $ 740 $ -- $ -- $ -- $ 25,437 $ -- $ --
2.01 to 3.00%............. 256,582 13,654 -- -- -- 270,236 -- --
3.01 to 4.00%............. 60,761 24,685 3,609 514 1,064 90,633 -- 1,339
4.01 to 5.00%............. 79,658 12,321 2,871 683 7,815 103,348 25,010 137,876
5.01 to 6.00%............. 47,695 8,003 16,712 2,646 12,733 87,789 249,010 218,830
6.01 to 7.00%............. 58,740 9,884 747 2,558 -- 71,929 133,777 44,278
Over 7.01%................ -- -- -- 471 -- 471 -- 4,569
-------- ------- ------- ------ ------- -------- -------- --------
Total.............. $528,133 $69,287 $23,939 $6,872 $21,612 $649,843 $407,797 $406,892
======== ======= ======= ====== ======= ======== ======== ========
ASSET QUALITY
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more and all real estate owned ("REO"). The
procedures taken by the Company with respect to delinquencies vary depending on
the nature of the loan, term and cause of delinquency and whether the borrower
is habitually delinquent. When a borrower fails to make a required payment on a
loan, the Company takes a number of steps to have the borrower cure the
delinquency and restore the loan to current status. The Company generally sends
the borrower a written notice of non-payment after the loan is first past due.
The Company's guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment. When contact is made with the borrower at any
time prior to foreclosure, the Company will attempt to obtain full payment,
offer to provide budget and finance counseling services, work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan is not otherwise satisfied, additional letters and telephone calls are
generally made. If the loan is still not brought current or satisfied and it
becomes necessary for the Company to take legal action, which typically occurs
after a loan is 90 days or more delinquent, the Company will commence
foreclosure proceedings against any real property that secures the loan. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the property securing the loan
generally is sold at foreclosure and, if purchased by the Company, becomes REO.
Federal regulations and the Company's Credit Risk Review Policy require
that the Company utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Company has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Company currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the credit weaknesses make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories, but possess weaknesses, are required to be designated "Special
Mention."
32
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss", it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Company's Credit Risk Review Committee reviews and classifies the
Company's assets on a quarterly basis and the Board of Directors reviews the
reports on a quarterly basis. The Company classifies assets in accordance with
the management guidelines described above. At March 31, 2002, the Company had
$27.1 million of assets designated as Substandard, including $18.2 million of
trust preferred investment securities acquired in the People's acquisition, and
$8.9 million of loans. As of March 31, 2002, the Company had loans totaling
$17.1 million designated as Special Mention. These loans are designated as
Special Mention because of inherent weaknesses that currently exist, but might
be correctable in a twelve-month cycle. Accordingly, they require additional
monitoring.
33
The following table sets forth loans 60-89 days delinquent in the Company's
loan portfolio as of the dates indicated:
AT MARCH 31,
--------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
One-to-four family................... 10 $710 4 $210 2 $110
Multi-family......................... -- -- -- -- -- --
Commercial real estate............... 1 60 -- -- 2 46
Construction and land................ -- -- -- -- -- --
-- ---- -- ---- -- ----
Total mortgage loans......... 11 770 4 210 4 156
-- ---- -- ---- -- ----
Commercial Loans....................... -- -- 5 81 2 93
-- ---- -- ---- -- ----
Consumer Loans:
Home equity lines.................... 5 100 -- --
Second mortgages..................... -- -- -- -- -- --
Other consumer loans................. 19 78 1 1 1 6
-- ---- -- ---- -- ----
Total consumer loans......... 24 178 1 1 1 6
-- ---- -- ----
Total loans............................ 35 $948 10 $292 7 $255
== ==== == ==== == ====
Delinquent loans to loans receivable,
net.................................. 0.08% 0.03% 0.03%
34
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, non-performing investments, REO and other
repossessed assets. It is the policy of the Company to cease accruing interest
on loans 90 days or more past due and to charge off all accrued interest. For
fiscal years ended 2002 and 2001 the amount of additional interest income that
would have been recognized on non-accrual loans if such loans were performing in
accordance with their regular terms and amounts recognized were $110,000 and
$46,000, respectively.
AT MARCH 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family............................... $1,855 $ 431 $ 941 $ 971 $1,073
Multi-family..................................... -- -- -- -- 101
Commercial real estate........................... 724 -- -- 1,142 1,199
Construction and land............................ 814 -- -- 117 169
------ ------ ------ ------ ------
Total mortgage loans........................ 3,393 431 941 2,230 2,542
------ ------ ------ ------ ------
Commercial loans.................................... 144 821 345 280 74
------ ------ ------ ------ ------
Consumer loans:
Home equity lines................................ 54 -- -- 36 425
Second mortgages................................. 77 56 12 -- --
Other consumer loans............................. 36 24 12 4 7
------ ------ ------ ------ ------
Total consumer loans........................ 167 80 24 40 432
------ ------ ------ ------ ------
Total non-accrual loans..................... 3,704 1,332 1,310 2,550 3,048
Non-performing investments............................ 3,285 -- -- -- --
REO, net(1)........................................... 240 175 -- 344 595
Other repossessed assets.............................. 3 -- -- -- --
------ ------ ------ ------ ------
Total non-performing assets................. $7,232 $1,507 $1,310 $2,894 $3,643
====== ====== ====== ====== ======
Allowance for loan losses as a percent of loans(2).... 1.68% 1.34% 1.36% 1.54% 1.27%
Allowance for loan losses as a percent of
non-performing loans(3)............................. 519% 993% 937% 471% 359%
Non-accrual loans as a percent of loans(2)(3)......... 0.32% 0.13% 0.15% 0.33% 0.35%
Non-performing assets as a percent of total assets.... 0.31% 0.09% 0.08% 0.21% 0.28%
---------------
(1) REO balances are shown net of related valuation allowances.
(2) Loans include loans receivable, net, excluding allowance for loan losses.
(3) Non-accrual loans consist of all loans 90 days or more past due and other
loans that have been identified by the Company as presenting uncertainty
with respect to the collectibility of interest or principal.
The $5.7 million increase in non-performing assets during fiscal year 2002
was due primarily to assets acquired in the People's acquisition, including $1.7
million of non-accrual residential loans, $243,000 of commercial and commercial
real estate non-accrual loans, a $3.3 million non-performing investment and
$240,000 of real estate owned. The non-performing investment was sold in April
2002.
Impaired Loans. Impaired loans are commercial and commercial real estate
loans for which it is probable that the Company will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The
definition of "impaired loans" is not the same as the definition of "non-accrual
loans," although the two categories overlap. Non-accrual loans include impaired
loans and are those on which the accrual of interest is discontinued when
collectibility of principal or interest is uncertain or payments of principal or
interest have been contractually past due 90 days. The Company may choose to
place a loan on
35
non-accrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the loan.
Factors considered by management in determining impairment include payment
status and collateral value. Impairment is determined by the difference between
the present value of the expected cash flows related to the loan, using the
original contractual interest rate, and its recorded value, or, in the case of
collateral dependent loans, the difference between the fair value of the
collateral and the recorded amount of the loan. When foreclosure is probable,
impairment is measured based on the fair value of the collateral. Loans that
experience insignificant payment delays and insignificant shortfalls in payment
amounts generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record and the amount of the shortfall in relation to
the principal and interest owed.
At March 31, 2002 and 2001, total impaired loans of $868,000 and $1.1
million required impairment allowances of $144,000 and $193,000, respectively.
Impaired loans of $868,000 and $798,000 were on non-accrual at March 31, 2002
and 2001, respectively. During fiscal year-end 2002, the average recorded value
of impaired loans was $1.0 million. For these loans, $81,000 of interest income
was recognized while $98,000 of interest income would have been recognized under
the original terms.
Allowance for Loan Losses. The allowance for loan losses is based on
management's ongoing review and estimate of the credit losses inherent in the
loan portfolio. Management's methodology to estimate loss exposure inherent in
the portfolio includes analysis of individual loans deemed to be impaired,
performance of individual loans in relation to contract terms, and allowance
allocations for various loan types based on payment status or loss experience.
An unallocated allowance is also maintained within an established range based on
management's assessment of many factors including current market conditions,
trends in loan delinquencies and charge-offs, the volume and mix of new
originations, and the current type, mix, changing risk profiles and balance of
the portfolio. In addition, the OTS and the FDIC, 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
estimated loan losses based upon judgments different from those of management.
The allowance for loan losses was $19.2 million, or 1.68% of loans
receivable, at March 31, 2002, compared to $13.2 million, or 1.34% loans
receivable, at March 31, 2001. The increase of $6.0 million, or 15.2%, included
the allowance for loan losses of $5.2 million assumed with the People's
acquisition. Management was influenced by several key factors as a basis for
maintaining the level of the Company's provisions for loan losses, which
resulted in increases in the balance of the allowance for loan losses and as a
percent of the total loan portfolio during fiscal year 2002. Although the
Company's non-performing loans and charge-offs have remained low, there has been
a significant shift in the composition of the loan portfolio during fiscal year
2002 as compared to fiscal year 2001. The residential mortgage portfolio has
decreased due primarily to a low fixed rate environment, which resulted in high
refinancing activity, while the commercial and consumer loan portfolios have
shown significant growth. Commercial and consumer loans bear a higher degree of
risk than the one-to-four family mortgage loans that make up substantially all
of the Company's residential portfolio. In addition, management believes that
current economic conditions, including rising unemployment rates in its key
market area of southeastern New England, could have an adverse affect on asset
quality and result in higher non-performing loans and charge-offs.
The Company will continue to monitor and modify its allowances for loan
losses as conditions dictate. While management believes the Company's allowance
for loan losses was sufficient to absorb losses inherent in its loan portfolio
at March 31, 2002, no assurances can be given that the Company's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Company or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
36
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated:
AT OR FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period........... $13,233 $12,275 $12,016 $10,937 $ 8,788
Provision for loan losses................ 1,200 1,200 1,200 1,200 2,350
Allowance for loan losses acquired....... 5,196 -- -- -- --
Charge-offs:
Mortgage loans:
One to four family.................. (70) (99) (41) (12) (188)
Multi-family........................ -- -- -- -- --
Commercial real estate.............. -- -- (759) -- --
Construction and land............... -- -- -- -- --
Commercial loans:...................... (292) (58) (140) (74) --
Consumer Loans:
Home equity lines................... (10) (5) -- (30) --
Second mortgages.................... -- (73) -- (9) (15)
Other consumer...................... (121) (46) (18) (13) (9)
------- ------- ------- ------- -------
Total.......................... (493) (281) (958) (138) (212)
Recoveries............................... 101 39 17 17 11
------- ------- ------- ------- -------
Balance at end of period................. $19,237 $13,233 $12,275 $12,016 $10,937
======= ======= ======= ======= =======
Ratio of net charge-offs during the
period to average loans outstanding
during the period...................... 0.05% 0.02% 0.12% 0.01% 0.02%
The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. At March 31, 2002,
2001 and 2000, the Company classified (excluding REO) $8.9 million, $3.1 million
and $7.0 million of substandard loans, respectively. In the opinion of
management, the performing substandard loans evidence one or more weaknesses or
potential weaknesses, and depending on the regional economy and other factors,
may become non-performing assets in future periods.
37
The following tables set forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated:
AT MARCH 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgages:
Residential............ $ 3,350 17.41% 60.27% $ 2,664 20.13% 74.65% $ 2,529 20.60% 78.17%
Commercial............. 6,358 33.05 9.93 2,269 17.14 4.40 1,749 14.25 4.09
------- ------ ------ ------- ------ ------ ------- ------ ------
Total............ 9,708 50.46 70.20 4,933 37.27 79.05 4,278 34.85 82.26
Commercial............... 3,424 17.80 17.24 4,843 36.60 9.39 4,523 36.85 7.72
Consumer................. 2,231 11.60 12.56 1,869 14.13 11.56 1,647 13.42 10.02
Unallocated.............. 3,874 20.14 -- 1,588 12.00 -- 1,827 14.88 --
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance
for loan
losses......... $19,237 100.00% 100.00% $13,233 100.00% 100.00% $12,275 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
AT MARCH 31,
-----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgages:
Residential............ $ 2,517 20.95% 78.54% $ 2,959 27.05% 83.26%
Commercial............. 2,725 22.68 4.92 3,023 27.64 5.27
------- ------ ------ ------- ------ ------
Total............ 5,242 43.63 83.46 5,982 54.69 88.53
Commercial............... 3,111 25.89 7.14 1,309 11.97 3.07
Consumer................. 1,320 10.99 9.40 1,358 12.42 8.40
Unallocated.............. 2,343 19.49 -- 2,288 20.92 --
------- ------ ------ ------- ------ ------
Total allowance
for loan
losses......... $12,016 100.00% 100.00% $10,937 100.00% 100.00%
======= ====== ====== ======= ====== ======
38
MARKET RISK AND MANAGEMENT OF INTEREST-RATE RISK
The principal market risk affecting the Company is interest-rate risk. The
principal objective of the Company's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a monthly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.
The Company has primarily utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate and shorter-term (generally ten years or less) fixed-rate,
one-to-four family mortgage loans; (2) selling in the secondary market
longer-term, fixed-rate mortgage loans originated while generally retaining the
servicing rights on such loans; and (3) investing primarily in adjustable-rate
mortgage-backed securities and short-term fixed-rate CMOs. In conjunction with
its mortgage banking activity, the Company uses forward contracts in order to
reduce exposure to interest-rate risk. The amount of forward coverage of the
"pipeline" of mortgages is managed on a day-to-day basis by an operating
officer, within Board approved policy guidelines, based on the Company's
assessment of the general direction of interest rates and levels of mortgage
origination activity. In addition, the Company has engaged in interest rate swap
agreements to synthetically lengthen its liability maturities.
The Company's interest rate risk is monitored by management through the use
of a model that generates estimates of the change in the Company's net interest
income and net portfolio value ("NPV") over a range of interest rate scenarios.
NPV is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the estimated market value of
assets in the same scenario. The OTS produces a similar analysis for the Bank
using its own model, based upon data submitted on the Bank's quarterly Thrift
Financial Report, the results of which may vary from the Company's internal
model primarily due to differences in assumptions utilized between the Company's
internal model and the OTS model, including estimated loan prepayment rates,
reinvestment rates and deposit renewal rates.
The following table sets forth the Company's estimated NPV and NPV ratios
as of March 31, 2002 and 2001, as calculated by the Company.
MARCH 31, 2002 MARCH 31, 2001
---------------------------------------- -------------------------------
CHANGE IN ESTIMATED NPV ESTIMATED NPV
INTEREST RATES NET SENSITIVITY NET SENSITIVITY
IN BASIS PORTFOLIO NPV BOARD IN BASIS PORTFOLIO NPV IN BASIS
POINTS VALUE RATIO LIMITS POINTS VALUE RATIO POINTS
-------------- --------- ----- ------ ----------- --------- ----- -----------
(DOLLARS IN THOUSANDS)
+300 $136,524 6.10% 4.00% (218) $142,547 8.49% (128)
+200 161,250 7.09 4.25 (120) 157,685 9.24 (53)
+100 181,372 7.85 5.00 (43) 167,422 9.68 (9)
Unchanged 193,892 8.28 6.00 -- 170,823 9.77 --
-100 186,886 7.93 5.00 (35) 163,736 9.31 (46)
-200 166,515 7.05 4.25 (123) 150,633 8.54 (123)
-300 144,624 6.10 4.00 (218) 139,480 7.86 (191)
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented incorporates an assumption that the composition of the Company's
interest sensitive assets and liabilities
39
existing at the beginning of a period remains constant over the period being
measured, and that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the term to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Company's interest rate
risk exposure at a particular point in time, such measurements are not intended
to, and do not, provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, proceeds from the sale of
loans, FHLB advances, and other borrowings. In addition, the Company acquired
cash in People's acquisition during fiscal year 2002. While maturities and
scheduled amortization of loans are predictable sources of funds, deposit flows
and mortgage prepayments are influenced by general interest rates, economic
conditions and competition. During fiscal year 2002, the Company used cash
acquired in the People's acquisition to fund asset growth and repay certain FHLB
advances and other borrowings. However, the Company expects to use to deposits
and FHLB advances and other borrowings to fund asset growth in the future,
depending on market conditions, the pricing of deposit products, and the pricing
of FHLB advances and other borrowings.
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period. At March 31, 2002, cash, short-term
investments, mortgage loans held for sale, investment securities available for
sale, and mortgage-backed securities available for sale totaled $935.1 million,
or 40.8% of total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including a $25.0 million FHLB secured line of credit, FHLB advances,
and other borrowings. At March 31, 2002, the Company had $754.8 million in
advances outstanding from the FHLB and other borrowings, and an additional
borrowing capacity from the FHLB of $200.4 million including the $25.0 million
line of credit. At March 31, 2002, the portfolio of putable FHLB advances and
reverse repurchase agreements totaled $422.5 million, with an average interest
rate of 4.52%, an average life to maturity of 7.6 years and an expected average
life of 2.6 years. The expected average life calculated by the Bank may or may
not mirror the counter-party's actual decision to exercise its option to
terminate the advances. The FHLB is required by regulation to offer replacement
funding to the Bank if the FHLB terminates a putable advance prior to the
maturity date of the advance, provided that the Bank is able to satisfy the
FHLB's normal credit and collateral requirements. Such replacement funding would
be for the remaining maturity of the putable advance, and at a market interest
rate or a predetermined interest rate agreed upon between the Bank and the FHLB.
The Company has two subsidiary business trusts acquired as part of the
People's acquisition, Capital Trust I and Capital Trust II, of which the Company
owns all of the common securities. At March 31, 2002 Capital Trust I had $13.8
million of 9.76% trust preferred securities outstanding that mature in June 2027
unless the Company elects and obtains regulatory approval to accelerate the
maturity date to as early as June 2002. Capital Trust II had $10.0 million of
11.695% trust preferred securities outstanding that mature in July 2030 unless
the Company elects and obtains regulatory approval to accelerate the maturity
date to as early as July 2010. On May 28, 2002, the Company announced the
redemption of the Capital Trust I preferred securities, at par, on June 30,
2002.
At March 31, 2002, the Company had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $308.7 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate of deposit accounts scheduled to mature in less than one year from
March 31, 2002 totaled $528.1 million. The Company expects that it will retain a
majority of maturing certificate accounts.
The Company plans to open a new banking office in East Greenwich, Rhode
Island in the second quarter of fiscal year 2003, bringing total banking offices
to 26. The Company continues to consider sites for new
40
banking offices and loan origination centers in or adjacent to its market area.
In addition, the Company may, from time to time, consider expanding its market
share and/or market area through the acquisition of assets or other banking
institutions and may consider acquisitions of other types of financial services
companies. The establishment of additional banking offices, loan origination
centers, trust service operations, mergers and acquisitions, and additional
capital management strategies by the Company would result in additional capital
expenditures and other associated costs which the Company has not yet estimated.
At March 31, 2002, the consolidated capital to total assets ratio of the
Company was 6.77%. The Company paid one $0.10 dividend and three $0.14 dividends
to stockholders during the fiscal year 2002. The Company's primary source of
funding for these dividends, and payments for periodic stock repurchases, has
been dividends from the Bank. The Bank's ability to pay dividends and other
capital distributions to the Company is generally limited by OTS regulations.
As of March 31, 2002, the Bank exceeded all of its regulatory capital
requirements. The following table presents the Bank's capital position at March
31, 2002:
CAPITAL
-------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Tangible................................. $127,570 $ 44,598 $82,972 5.72% 2.00%
Core (Leverage).......................... 127,570 89,195 38,375 5.72 4.00
Tier 1 Risk-based........................ 127,570 58,781 68,789 9.19 4.00
Risk-based............................... 137,237 105,972 31,268 10.36 8.00
The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. The following table
presents the Trust Company's capital position at March 31, 2002:
CAPITAL
-------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)
Tangible..................................... $2,897 $ 22 $2,875 261.70% 2.00%
Core (Leverage).............................. 2,897 129 2,768 89.61 4.00
Risk-based................................... 2,897 89 2,808 261.70 8.00
At the time of conversion, the Bank was required to establish a liquidation
account in an amount equal to its retained earnings as of September 30, 1996,
which provides a liquidation preference to eligible account holders of the Bank
prior to conversion based on such account holder's qualifying deposits. The
liquidation account will be reduced to the extent that such account holders
reduce their qualifying deposits. In the unlikely event of a complete
liquidation of the Bank, each such account holder will be entitled to receive a
distribution from the liquidation account. The Bank is not permitted to declare
or pay dividends on its capital stock, or repurchase any of its outstanding
stock, if the effect thereof would cause its stockholders' equity to be reduced
below the amount required for the liquidation account or applicable regulatory
capital requirements. The balance of the liquidation account at March 31, 2002
was approximately $13.8 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the Section of Item 7 captioned, "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Financial
Condition -- Market Risk and Management of Interest-Rate Risk" for quantitative
and qualitative information about market risk and its potential effect on the
Company.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index on page F-1 and the Consolidated Financial Statements which
begin on F-3.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the section captioned
"Proposal 1 -- Election of Directors" in the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on July 25, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to Directors' and executive compensation is
incorporated herein by reference to the sections captioned "Proposal
1 -- Election of Directors -- Directors Compensation" and "Executive
Compensation" in the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 25, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the sections captioned
"Stock Ownership" and "Proposal 1 -- Election of Directors" in the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on July 25,
2002.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF
SECURITIES
REMAINING AVAILABLE
NUMBER OF WEIGHTED FOR FUTURE ISSUANCE
SECURITIES TO BE AVERAGE UNDER EQUITY
ISSUED UPON EXERCISE PRICE OF COMPENSATION
EXERCISE OF OUTSTANDING PLANS
OUTSTANDING OPTIONS, (EXCLUDING
OPTIONS, WARRANTS WARRANTS SECURITIES
AND RIGHTS AND RIGHTS REFLECTED IN COLUMN
PLAN CATEGORY (1) (A) (B) (A)(C)
----------------- ----------------- ----------------- -------------------
Equity compensation plans approved by security
holders..................................... 1,313,644 $17.02 171,769
--------- ------ -------
Total............................... 1,313,644 $17.02 171,769
========= ====== =======
---------------
(1) The Company does not maintain any equity compensation plans that have not
been approved by security holders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the section captioned "Transactions with
Management" in the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 25, 2002.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.
(2) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP,
INC.(1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC. (filed herewith)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC.(1)
10.1 Form of Employment Agreement between the Bank and Robert F.
Stoico(1)
10.2 Forms of Employment Agreement between the Company and Kevin
J. McGillicuddy and Employment Agreement between the Bank
and Kevin J. McGillicuddy(1)
10.3 Forms of Employment Agreement between the Company and
Frederick R. Sullivan and Employment Agreement between the
Bank and Frederick R. Sullivan(1)
10.4 Form of Employment Agreement between the Bank and Edward A.
Hjerpe, III(2)
10.5 Employment Agreement between the Company and Robert F.
Stoico(3)
10.6 Employment Agreement between the Company and Edward A.
Hjerpe, III(3)
10.7 First Federal Savings Bank of America Employee Stock
Ownership Plan and Trust(1)
10.8 FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based Incentive
Plan, as amended and restated(4)
10.9 First Federal Savings Bank of America 1997 Supplemental
Executive Retirement Plan(1)
10.10 FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option Plan(5)
11.0 Computation of earnings per share is incorporated by
reference to the Consolidated Statements of Operations on
page F-4.
13.0 Portions of the 2002 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference
to "Part I -- Subsidiary Activities" in "Item 1.
Business -- General"
23.1 Consent of Independent Auditors (filed herewith)
---------------
(1) Incorporated by reference into this document from the Exhibits to Form
S-1, Registration Statement, and any amendments thereto, filed on
September 27, 1996, Registration No. 333-12855.
(2) Incorporated by reference into this document from the Exhibits to the
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.
(3) Incorporated by reference into this document from the Exhibits to the
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
(4) Incorporated by reference into this document from the Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
(5) Incorporated by reference into this document from the Proxy Statement
for the 1998 Annual Meeting of Stockholders dated June 15, 1998.
(b) Reports on Form 8-K.
A current report of Form 8-K was filed on March 13, 2002 (File No.
1-12305), attaching the press release issued on March 1, 2002 announcing
that the merger between the Company and People's Bancshares, Inc. was
complete.
43
A current report on Form 8-K was filed on February 21, 2002 (File No.
1-12305), attaching the press release issued on February 20, 2002
announcing that the Company received approval from the Office of Thrift
Supervision and the Commonwealth of Massachusetts Board of Bank
Incorporation to acquire People's Bancshares, Inc. and announcing the
preliminary allocation of merger consideration with respect to the
merger of the Company and People's Bancshares, Inc.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
By: /s/ ROBERT F. STOICO
------------------------------------
Robert F. Stoico
President and Chief Executive
Officer
DATED: June 25, 2002
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ ROBERT F. STOICO President and Chief Executive June 25, 2002
--------------------------------------------------- Officer and Chairman of the
Robert F. Stoico Board (Principal Executive
Officer)
/s/ EDWARD A. HJERPE, III Executive Vice President, Chief June 25, 2002
--------------------------------------------------- Operating Officer and Chief
Edward A. Hjerpe, III Financial Officer (Principal
Accounting and Financial
Officer)
/s/ GILBERT C. OLIVEIRA Director June 25, 2002
---------------------------------------------------
Gilbert C. Oliveira
/s/ THOMAS A. RODGERS, JR. Director June 25, 2002
---------------------------------------------------
Thomas A. Rodgers, Jr.
/s/ RICHARD W. CEDERBERG Director June 25, 2002
---------------------------------------------------
Richard W. Cederberg
/s/ JOHN S. HOLDEN, JR. Director June 25, 2002
---------------------------------------------------
John S. Holden, Jr.
/s/ DR. PAUL A. RAYMOND Director June 25, 2002
---------------------------------------------------
Dr. Paul A. Raymond
/s/ ANTHONY L. SYLVIA Director June 25, 2002
---------------------------------------------------
Anthony L. Sylvia
/s/ B. BENJAMIN CAVALLO Director June 25, 2002
---------------------------------------------------
B. Benjamin Cavallo
45
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 31, 2002 and 2001... F-3
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 2002, 2001 and 2000....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended March 31, 2002, 2001, and
2000...................................................... F-5 to F-6
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2002, 2001 and 2000....................... F-7 to F-8
Notes to Consolidated Financial Statements.................. F-9 to F-42
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FIRSTFED AMERICA BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries, (the "Company") as of March 31, 2002 and
2001, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries at March 31, 2002 and 2001, and the
results of their operations and cash flows for each of the years in the
three-year period ended March 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
[KPMG LLP SIG LOGO]
Boston, Massachusetts
April 24, 2002
F-2
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
ASSETS
2002 2001
---------- ----------
Cash on hand and due from banks............................. $ 44,159 $ 23,013
Short-term investments...................................... 100,890 200
---------- ----------
Total cash and cash equivalents........................... 145,049 23,213
Mortgage loans held for sale................................ 126,729 39,103
Investment securities available for sale, at fair value
(amortized cost of $81,602 and $6,405).................... 84,656 7,837
Mortgage-backed securities available for sale, at fair value
(amortized cost of $579,713 and $498,344)................. 578,618 501,230
Mortgage-backed securities held to maturity (fair value of
$1,235 and $2,154)........................................ 1,203 2,138
Stock in Federal Home Loan Bank of Boston, at cost.......... 58,433 40,369
Loans receivable, net of allowance for loan losses of
$19,237 and $13,233....................................... 1,125,750 977,174
Accrued interest receivable................................. 11,124 7,928
Mortgage servicing rights................................... 6,505 4,881
Office properties and equipment, net........................ 37,775 24,038
Real estate owned, net...................................... 240 175
Bank-Owned Life Insurance................................... 35,652 33,764
Investment in limited partnerships, at fair value........... 470 815
Goodwill and other intangible assets........................ 55,779 1,145
Prepaid expenses and other assets........................... 26,465 7,255
---------- ----------
Total assets...................................... $2,294,448 $1,671,065
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $1,317,263 $ 707,416
FHLB advances and other borrowings........................ 754,820 814,764
Company obligated, mandatorily redeemable securities...... 25,657 --
Advance payments by borrowers for taxes and insurance..... 6,163 5,868
Accrued interest payable.................................. 4,814 5,997
Other liabilities......................................... 30,384 25,462
---------- ----------
Total liabilities................................. 2,139,101 1,559,507
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 10,606,589 and 8,707,152 shares issued in
2002 and 2001.......................................... 106 87
Additional paid-in capital................................ 119,149 85,585
Retained earnings......................................... 79,245 70,048
Accumulated other comprehensive income.................... 1,401 2,551
Unallocated ESOP shares................................... (2,323) (3,098)
Unearned 1997 stock-based incentive plan.................. (1,553) (2,998)
Treasury stock; at cost (2,577,687 and 2,571,285 shares at
2002 and 2001)......................................... (40,678) (40,617)
---------- ----------
Total stockholders' equity........................ 155,347 111,558
---------- ----------
Total liabilities and stockholders' equity........ $2,294,448 $1,671,065
========== ==========
See accompanying notes to consolidated financial statements.
F-3
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 2000
-------- ------- -------
Interest and dividend income:
Loans..................................................... $ 71,511 $77,116 $61,005
Mortgage-backed securities................................ 31,152 33,507 30,041
Investment securities..................................... 2,108 719 803
Federal Home Loan Bank stock.............................. 2,078 2,733 1,972
-------- ------- -------
Total interest and dividend income................. 106,849 114,075 93,821
-------- ------- -------
Interest expense:
Deposits.................................................. 25,430 26,252 24,812
Borrowed funds............................................ 43,696 53,143 36,959
-------- ------- -------
Total interest expense............................. 69,126 79,395 61,771
-------- ------- -------
Net interest income before provision for loan
losses........................................... 37,723 34,680 32,050
Provision for loan losses................................... 1,200 1,200 1,200
-------- ------- -------
Net interest income after provision for loan
losses........................................... 36,523 33,480 30,850
-------- ------- -------
Non-interest income:
Service charges on deposit accounts....................... 2,071 1,622 1,344
Trust fee income.......................................... 1,395 1,028 16
Loan servicing income..................................... 1,054 1,456 2,003
Insurance commission income............................... 1,130 1,048 446
Earnings on Bank-Owned Life Insurance..................... 1,889 1,637 1,552
Gain (loss) on sale of mortgage loans, net................ 5,525 583 (952)
Gain on sale of investments securities available for
sale.................................................... 1,003 -- --
Other income.............................................. 2,511 1,584 2,125
-------- ------- -------
Total non-interest income.......................... 16,578 8,958 6,534
-------- ------- -------
Non-interest expense:
Compensation and employee benefits........................ 19,951 17,786 14,732
Office occupancy and equipment............................ 4,409 4,447 3,905
Data processing........................................... 2,145 1,694 1,322
Advertising and business promotion........................ 709 1,038 1,159
Federal deposit insurance premiums........................ 158 138 334
Amortization of goodwill and other intangible assets...... 294 84 2
Other expense............................................. 4,618 3,866 4,055
-------- ------- -------
Total non-interest expense......................... 32,284 29,053 25,509
-------- ------- -------
Income before income tax expense................... 20,817 13,385 11,875
Income tax expense.......................................... 7,356 4,221 3,689
-------- ------- -------
Net income before extraordinary loss and cumulative
effect of accounting change...................... 13,461 9,164 8,186
Extraordinary loss on early extinguishment of debt, net of
$394 tax benefit.......................................... (568) -- --
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of $237 tax
benefit................................................... (461) -- --
-------- ------- -------
Net income......................................... $ 12,432 $ 9,164 $ 8,186
======== ======= =======
Basic EPS before extraordinary loss and cumulative effect of
accounting change......................................... $ 2.26 $ 1.57 $ 1.31
Extraordinary loss on early extinguishment of debt.......... (0.09) -- --
Cumulative effect of accounting change...................... (0.08) -- --
-------- ------- -------
Basic EPS................................................... $ 2.09 $ 1.57 $ 1.31
======== ======= =======
Diluted EPS before extraordinary loss and cumulative effect
of accounting change...................................... $ 2.25 $ 1.56 $ 1.31
Extraordinary loss on early extinguishment of debt.......... (0.10) -- --
Cumulative effect of accounting change...................... (0.08) -- --
======== ======= =======
Diluted EPS................................................. $ 2.07 $ 1.56 $ 1.31
======== ======= =======
Weighted average shares outstanding -- basic................ 5,949 5,854 6,256
======== ======= =======
Weighted average shares outstanding -- diluted.............. 5,993 5,864 6,256
======== ======= =======
See accompanying notes to consolidated financial statements.
F-4
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNEARNED
1997
ACCUMULATED STOCK-BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) SHARES SHARES STOCK EQUITY
------ ---------- -------- ------------- ----------- ----------- -------- -------------
Balance at March 31,
1999.................... $ 87 $ 85,407 $56,892 $ (150) $(4,647) $(5,869) $(28,759) $102,961
Earned SIP stock
awards................ -- (154) -- -- -- 1,431 -- 1,277
Earned ESOP shares
charged to expense.... -- 196 -- -- 775 -- 971
Cash dividends declared
and paid ($0.26 per
share)................ -- -- (1,808) -- -- -- -- (1,808)
Common stock repurchased
(428,801 shares at an
average price of
$12.24 per share)..... -- -- -- -- -- -- (5,271) (5,271)
Common stock acquired
for certain employee
benefit plans (24,086
shares at an average
price of $13.32 per
share)................ -- -- -- -- -- -- (320) (320)
Common stock sold for
certain employee
benefit plans (1,708
shares at an average
price of $16.57 per
share)................ -- -- -- -- -- -- 29 29
Comprehensive income
(loss):
Net income............ -- -- 8,186 -- -- -- -- 8,186
Other comprehensive
income, net of tax
Unrealized holding
gains (losses) on
available for sale
securities........ -- -- -- (6,981) -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- -- -- -- -- --
-------
Net unrealized
(losses) gains.... -- -- -- (6,981) -- -- -- --
Tax effect.......... -- -- -- 2,661 -- -- -- --
-------
Net-of-tax effect... -- -- -- (4,320) -- -- -- (4,320)
--------
Total
comprehensive
income.......... -- -- -- -- -- -- 3,866
---- -------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2000.................... 87 85,449 63,270 (4,470) (3,872) (4,438) (34,321) 101,705
Earned SIP stock
awards................ -- (154) -- -- -- 1,440 -- 1,286
Earned ESOP shares
charged to expense.... -- 290 -- -- 774 -- -- 1,064
Cash dividends declared
and paid ($0.37 per
share)................ -- -- (2,386) -- -- -- -- (2,386)
Common stock repurchased
(442,979 shares at an
average price of
$13.42 per share)..... -- -- -- -- -- -- (5,963) (5,963)
Common stock acquired
for certain employee
benefit plans (34,425
shares at an average
price of $12.64 per
share)................ -- -- -- -- -- -- (435) (435)
Common stock sold for
certain employee
benefit plans (6,966
shares at an average
price of $14.68 per
share)................ -- -- -- -- -- -- 102 102
Comprehensive income
(loss):
Net income............ -- -- 9,164 -- -- -- -- 9,164
Other comprehensive
income, net of tax
Unrealized holding
gains (losses) on
available for sale
securities........ -- -- -- 11,419 -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- -- -- -- -- --
-------
Net unrealized
(losses) gains.... -- -- -- 11,419 -- -- -- --
Tax effect.......... -- -- -- (4,398) -- -- -- --
-------
Net-of-tax effect... -- -- -- 7,021 -- -- -- 7,021
--------
Total
comprehensive
income.......... -- -- -- -- -- -- 16,185
---- -------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2001.................... $ 87 $ 85,585 $70,048 $ 2,551 $(3,098) $(2,998) $(40,617) $111,558
==== ======== ======= ======= ======= ======= ======== ========
(continued)
F-5
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNEARNED
1997
ACCUMULATED STOCK-BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) SHARES SHARES STOCK EQUITY
------ ---------- -------- ------------- ----------- ----------- -------- -------------
Balance at March 31,
2001.................... $ 87 $ 85,585 $70,048 $ 2,551 $(3,098) $(2,998) $(40,617) $111,558
Common stock issued for
People's acquisition,
less issuance costs... 19 31,656 -- -- -- -- -- 31,675
Fair value of People's
stock options
assumed............... -- 1,375 -- -- -- -- -- 1,375
Earned SIP stock
awards................ -- (155) -- -- -- 1,445 -- 1,290
Earned ESOP shares
charged to expense.... -- 617 -- -- 775 -- -- 1,392
Stock options
exercised............. -- 71 -- -- -- -- -- 71
Cash dividends declared
and paid ($0.52 per
share)................ -- -- (3,235) -- -- -- -- (3,235)
Common Stock acquired
for certain employee
benefit plans (3,651
shares at an average
price of $16.74 per
share)................ -- -- -- -- -- -- (61) (61)
Comprehensive income
(loss):
Net income............ -- -- 12,432 -- -- -- -- 12,432
Other comprehensive
income, net of
tax.................
Unrealized holding
gains (losses) on
available for sale
securities........ -- -- -- (1,356) -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- (1,003) -- -- -- --
-------
Net unrealized
(losses) gains.... -- -- -- (2,359) -- -- --
Tax effect.......... -- -- -- 1,209 -- -- -- --
-------
Net-of-tax effect... -- -- -- (1,150) -- -- -- (1,150)
--------
Total
comprehensive
income.......... -- -- -- -- -- -- -- 11,282
---- -------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2002.................... $106 $119,149 $79,245 $ 1,401 $(2,323) $(1,553) $(40,678) $155,347
==== ======== ======= ======= ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
F-6
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(IN THOUSANDS)
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income................................................ $ 12,432 $ 9,164 $ 8,186
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization (accretion) of:
Premiums (discounts), net.......................... 36 (413) 272
Deferred loan origination costs.................... (1,360) (454) (155)
Mortgage servicing rights.......................... 2,850 2,450 2,070
Goodwill........................................... 294 84 2
Provision for loan losses............................. 1,200 1,200 1,200
Provision for losses on mortgage servicing rights..... 240 -- --
(Gains) losses on sales of:
Office property and equipment...................... (97) (4) (30)
Real estate owned and other repossessed assets..... (24) (41) (56)
Mortgage loans..................................... (5,525) (583) 952
Investment and mortgage-backed securities
available-for-sale............................... (1,003) -- --
Net proceeds from sales of mortgage loans............. 647,495 119,710 250,326
Origination of mortgage loans held for sale........... (649,580) (155,855) (204,182)
Income from bank-owned life insurance................. (1,889) (1,637) (1,552)
Unrealized (gain) loss on investments in limited
partnerships....................................... 518 (128) (293)
Real estate owned valuation adjustments............... -- -- (43)
Depreciation of office properties and equipment....... 2,389 2,640 2,542
Appreciation in fair value of ESOP shares............. 617 290 195
Earned SIP shares..................................... 1,290 1,286 1,277
Increase or decrease in:
Accrued interest receivable........................ 2,111 (910) (649)
Other assets....................................... (6,244) (258) (2,256)
Accrued interest payable........................... (2,958) 1,377 1,562
Other liabilities.................................. 1,483 2,120 2,635
----------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... 4,275 (19,962) 62,003
----------- ----------- -----------
(continued)
See accompanying notes to consolidated financial statements.
F-7
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(IN THOUSANDS)
2002 2001 2000
----------- ----------- -----------
Cash flows from investing activities:
Cash acquired, net of payments for acquisition............ $ 253,396 $ -- $ --
Purchase of investment securities available for sale...... (14,921) (342) (600)
Purchase of mortgage-backed securities available for
sale.................................................... (224,094) (45,163) (249,028)
Payments received on mortgage-backed securities available
for sale................................................ 234,531 97,340 107,134
Proceeds from sale of investments securities available for
sale.................................................... 753 -- --
Proceeds from sale of mortgage-backed securities available
for sale................................................ 19,820 -- --
Payments received on mortgage-backed securities held to
maturity................................................ 933 680 2,784
Purchase of the Federal Home Loan Bank Stock.............. -- (9,441) (2,246)
Maturities of investment securities held to maturity...... -- -- 10,000
Maturities of investment securities available for sale.... -- 200 --
Net decrease (increase) in loans.......................... 160,288 (89,639) (123,349)
Proceeds from sale of office equipment.................... 1,009 46 104
Proceeds from sales of real estate owned.................. 315 345 674
Purchases of office properties and equipment.............. (1,869) (1,533) (2,548)
Purchase of investments in limited partnerships........... (173) (100) (200)
----------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... 429,988 (47,607) (257,275)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits....................... 52,320 42,734 (10,188)
Proceeds from FHLB advances and other borrowings.......... 1,535,343 3,799,213 2,867,106
Repayments on FHLB advances and other borrowings.......... (1,896,558) (3,764,111) (2,673,425)
Net change in advance payments by borrowers for taxes and
insurance............................................... (1,082) (116) 324
Cash dividends paid....................................... (3,235) (2,386) (1,808)
Payments to acquire common stock for treasury............. (61) (6,296) (5,562)
Stock options exercised................................... 71 -- --
Reduction in unearned ESOP shares......................... 775 774 775
----------- ----------- -----------
Net cash (used in) provided by financing
activities....................................... (312,427) 69,812 177,222
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 121,836 2,243 (18,050)
Cash and cash equivalents at beginning of year.............. 23,213 20,970 39,020
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 145,049 $ 23,213 $ 20,970
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 72,084 $ 78,018 $ 60,209
=========== =========== ===========
Income taxes............................................ $ 7,124 $ 4,456 $ 1,951
=========== =========== ===========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans.................. $ 149 $ 479 $ 231
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-8
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002, 2001 AND 2000
(1) ORGANIZATION
FIRSTFED AMERICA BANCORP, INC. (the "Company") is a holding company for
First Federal Savings Bank of America (the "Bank"), FAB FUNDING CORPORATION
("FAB FUNDING"), FIRSTFED INSURANCE AGENCY, LLC, the FIRSTFED TRUST COMPANY,
N.A. (the "Trust Company"), People's Bancshares Capital Trust ("Capital Trust
I") and People's Bancshares Capital Trust II ("Capital Trust II"). The Company
owns all of the issued and outstanding shares of common stock of the Bank, FAB
FUNDING, Capital Trust I and Capital Trust II. The FIRSTFED INSURANCE AGENCY,
LLC (the "Agency") is owned jointly by the Company and FAB FUNDING, with the
Company's ownership share being a substantial majority. The Company owns a 65%
interest in FIRSTFED TRUST COMPANY, N.A., with the remaining 35% interest being
held by M/D Trust, LLC, a minority owner.
The Bank provides a full range of banking services to individual and
business customers in Massachusetts, Rhode Island and, to a lesser degree, in
Connecticut. The Bank is subject to competition from other financial
institutions, mortgage banking companies and other financial service providers
doing business in the area. The Bank and the Company are subject to regulations
of, and periodic examinations by, the Office of Thrift Supervision ("OTS") and
the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") of the FDIC up to
$100,000. To provide protection for customers' retirement account balances in
excess of FDIC coverage, the Bank participates in the "Deposit Collateralization
Bailee Program" with the Federal Home Loan Bank of Boston. To participate, the
Company must pledge investment securities and mortgage loans as collateral with
the Federal Home Loan Bank of Boston.
As more fully described in note 4, the Bank converted from a mutual savings
bank to a capital stock savings bank on January 15, 1997.
The Agency was formed on January 7, 1999. The Agency offers a comprehensive
insurance product line including auto, home, life, accident and health insurance
to consumers and businesses. In March 2002, the Agency entered into a joint
partnership with three Rhode Island insurance agencies, Atlantic Insurance
Partners, Riley Insurance and Allen Cochran Insurance, to form the Insurance
Group of Newport. The Agency is licensed to sell insurance in Massachusetts,
Rhode Island and Connecticut and is subject to regulations of, and periodic
examinations by these states.
The Trust Company was formed on February 1, 2000 as a limited purpose
national bank, which provides comprehensive fiduciary products and services in
Massachusetts and Rhode Island. The Trust Company is subject to the regulations
of, and periodic examination by the Office of the Comptroller of the Currency
("OCC"), as well as the states in which it operates.
FAB FUNDING is a business corporation formed at the direction of the
Company under the laws of the Commonwealth of Massachusetts in October 1996. FAB
FUNDING was established to lend funds to a Bank sponsored employee stock
ownership plan and related trust for the purchase of stock in the initial public
offering.
Capital Trust I is a Delaware Business Trust formed in 1997, and Capital
Trust II is a New York Common Law Trust formed in 2000 (see note 11).
The Bank includes its wholly-owned subsidiaries: People's Mortgage
Corporation (a Massachusetts corporation), FIRSTFED INVESTMENT CORPORATION (a
Massachusetts security corporation), CELMAC INVESTMENT CORPORATION (a
Massachusetts security corporation) and several inactive corporations.
F-9
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets, and income and expense for the periods. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Certain amounts previously reported have been reclassified to
conform to the current year's presentation.
CASH AND DUE FROM BANKS
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserve is calculated based upon deposit levels and amounted
to $8.1 million at March 31, 2002.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at amortized
cost. Debt and equity securities that are bought and held principally for the
purpose of being resold in the near term are classified as trading and reported
at fair value, with unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of related income taxes.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income using a method that approximates the interest
method. If a decline in fair value below the amortized cost basis of an
investment or mortgage-backed security is judged to be other than temporary, the
cost basis of the investment is written down to fair value as a new cost basis
and the amount of the write-down is included as a charge against gain (loss) on
sale of investment securities. Gains and losses on the sale of investment and
mortgage-backed securities are recognized at the time of sale on a specific
identification basis.
MORTGAGE BANKING AND MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Considered in the calculation of cost are unamortized deferred loan
origination fees and costs and mortgage servicing rights. Generally, all longer
term (typically mortgage loans with terms greater than fifteen years) fixed-rate
residential single-family mortgage loans are originated for sale and shorter
term fixed-rate and most adjustable-rate loans are originated for portfolio.
Forward commitments to sell loans are contracts that the Company enters into for
the purpose of reducing the market risk associated with originating mortgage
loans held for sale should interest rates change. Forward commitments are
recorded at fair value, with adjustments included in other assets and the offset
recorded to gain/loss on sale of mortgage loans. Commitments to originate
interest rate-locked loans for sale are also recorded at the fair value, with
adjustments included in other assets and the offset recorded to gain/loss on
sale of mortgage loans.
Gain or loss on sale of mortgage loans is recognized at the time of sale.
Such gain or loss results from the combination of (1) the difference between the
net cash paid by the investor for the loan and the loan's carrying value; (2)
the calculated present value of the difference between the interest rate paid by
the borrower on the loan sold and the interest rate guaranteed to the investor,
adjusted for mortgage servicing fees and considering estimated loan prepayments;
and (3) any origination fees, net of applicable origination costs, retained by
the Bank.
F-10
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized mortgage servicing rights are recognized, based on the
allocated fair value of the rights to service mortgage loans for others.
Mortgage servicing rights are amortized to loan servicing fee income using a
method which approximates the level yield method in proportion to, and over the
period of, estimated net servicing income. Mortgage servicing rights are
assessed for impairment based on the fair value of those rights. Prepayment
experience on mortgage servicing rights is reviewed periodically and, when
actual repayments exceed estimated prepayments, the balance of the mortgage
servicing assets is reduced by a charge to earnings through a valuation
allowance. The risk characteristics of the underlying loans used to measure
impairment include loan type, interest rate, loan origination date, and term to
maturity.
LOANS
Loans are reported at the principal amount outstanding, adjusted for net
deferred loan origination fees or costs. Loan origination fees are offset with
related direct incremental loan origination costs and the resulting net amount
is deferred and amortized over the contractual life of the related loans using
the interest method. When loans are sold in the secondary market, the remaining
balance of the amount deferred is included in the determination of gain or loss
on sale.
Accrual of interest on loans is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest have
become contractually past due 90 days or more. When a loan is placed on
non-accrual, all income that has been accrued but remains unpaid is reversed
against current period income and all amortization of deferred loan fees is
discontinued. Interest received on non-accrual loans is either recorded as
income or applied against the principal balance depending on management's
evaluation of the collectibility of principal. Loans are removed from
non-accrual status when they have been current as to principal and interest for
a period of time, the borrower has demonstrated an ability to comply with the
repayment terms, and when, in management's opinion, the loans are considered
fully collectible.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Bank will not be able to collect all amounts due according
to the contractual terms of the loan agreement. The definition of "impaired
loans" is not the same as the definition of "non-accrual loans," although the
two categories overlap. Non-accrual loans include impaired loans and are those
on which the accrual of interest is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest have
been contractually past due 90 days. The Bank may choose to place a loan on
non-accrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if it is probable that the Bank will
collect all amounts due in accordance with the contractual terms of the loan.
Factors considered by management in determining impairment include payment
status and collateral value.
Impairment is determined by the difference between the present value of the
expected cash flows related to the loan, using the original contractual interest
rate, and its recorded value, or, as a practical expedient in the case of
collateral dependent loans, the difference between the fair value of the
collateral and the recorded amount of the loan. When foreclosure is probable,
impairment is measured based on the fair value of the collateral. Loans that
experience insignificant payment delays and insignificant shortfalls in payment
amounts generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to
the principal and interest owed.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's ongoing review and
estimate of the credit losses inherent in the loan portfolio. Loans (or portions
thereof) deemed to be uncollectible are charged against the allowance and
recoveries of amounts previously charged-off are added to the allowance. The
provisions for loan losses charged to earnings are added to the allowance to
bring it to the desired level.
F-11
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management's methodology to estimate loss exposure inherent in the
portfolio includes analysis of individual loans deemed to be impaired,
performance of individual loans in relation to contract terms, and allowance
allocations for various loan types based on payment status or loss experience.
An unallocated allowance is also maintained within an established range based on
management's assessment of many factors including current market conditions,
trends in loan delinquencies and charge-offs, the volume and mix of new
originations, and the current type, mix, changing risk profiles and balance of
the portfolio. In addition, the OTS and the FDIC, 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
estimated loan losses based upon judgments different from those of management.
While management believes the Company's allowance for loan losses was
sufficient to absorb losses inherent in its loan portfolio, no assurances can be
given that the Company's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Company or that future adjustments
to the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses.
OFFICE PROPERTIES AND EQUIPMENT
Land is carried at cost. Office properties and equipment are recorded at
cost less accumulated depreciation. Depreciation of office properties and
equipment is determined on the straight-line basis over the estimated useful
lives of the related assets (3 to 40 years). Expenditures for major additions
and improvements are capitalized while the costs of current maintenance and
repairs are charged to operating expenses.
REAL ESTATE OWNED
Real estate owned is acquired through foreclosure or by accepting a deed in
lieu of foreclosure. Real estate acquired in settlement of loans is recorded at
the lower of the carrying value of the loan or the fair value, less disposal
costs, of the property constructively or actually received, thereby establishing
a new cost basis. Subsequent write-downs are recorded if the cost basis exceeds
current net fair value. Related operating costs, net of rental income, are
reflected in operations when incurred. Realized gains and losses upon
disposition are recognized in income.
Management believes that the net carrying value of real estate acquired
through foreclosure reflects the lower of its cost basis or estimated net fair
value. Factors similar to those considered in the evaluation of the allowance
for loan losses, including regulatory requirements, are considered in the
evaluation of the net fair value of real estate acquired through foreclosure.
BANK OWNED LIFE INSURANCE
Bank owned life insurance ("BOLI") represents life insurance on certain
senior level employees. The Company is the beneficiary of the insurance
policies. Increases in the cash value of the policies, as well as insurance
proceeds received, are recorded in other income, and are not subject to income
taxes. BOLI is reported on the balance sheet at cash value.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and certain other intangible assets arise in business combinations
accounted for under the purchase method. Goodwill represents the difference
between the cost of an acquired company and the sum of the fair values of the
tangible and identifiable intangible assets acquired less the fair value of the
tangible liabilities assumed. Goodwill has historically been amortized on a
straight-line basis over a period not exceeding fifteen years, and other
intangible assets are amortized over their useful lives not exceeding ten
F-12
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years. Goodwill and other intangible assets are reviewed for possible impairment
when it is determined that events or changed circumstances may affect the
underlying basis of the asset. New accounting rules were recently issued for
goodwill and other intangible assets from business combinations consummated
after June 30, 2001. See Recent Accounting Developments.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Company's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Company's deferred tax asset is reviewed periodically
and adjustments to such asset are recognized as deferred income tax expense or
benefit based upon management's judgments relating to the realizability of such
asset.
PENSION
The Company accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the compensation
cost of an employee's benefit over that employee's approximate service period.
STOCK OPTIONS
The Company continues to follow APB Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES in its accounting for stock options. However, the Company
provides expanded disclosures of pro-forma net income and earnings per share and
other disclosure information in Note 15 to the consolidated financial statements
as if the fair value method had been applied.
INTEREST RATE RISK MANAGEMENT AGREEMENTS
The Company uses off-balance sheet financial instruments from time to time
as part of its interest rate risk management strategy. Interest rate swap
agreements are entered into as hedges against future interest rate fluctuations
on specifically identified assets or liabilities. The interest rate swap
agreements are marked to market in other income and included as a component of
other liabilities.
The net amounts to be paid or received on outstanding interest rate risk
management agreements are recognized on the accrual basis as an adjustment to
the related interest income or expense over the life of the agreements.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year adjusted for the weighted
average number of unallocated shares held by the Employee Stock Ownership Plan
("ESOP") and the unearned shares relating to the 1997 Stock-Based Incentive Plan
("SIP"). Diluted EPS reflects the effect to weighted average shares outstanding
of the number of additional shares outstanding if dilutive stock options and
dilutive SIP shares were converted into common stock using the treasury stock
method.
F-13
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the weighted average shares outstanding for the years
ended March 31, 2002, 2001 and 2000 follows (in thousands):
2002 2001 2000
----- ----- -----
Basic shares................................................ 5,949 5,854 6,256
Dilutive impact of stock options............................ 44 10 --
----- ----- -----
Diluted shares.............................................. 5,993 5,864 6,256
===== ===== =====
COMPREHENSIVE INCOME
Comprehensive income is defined as all changes to equity except investments
by and distribution to shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents consist of
cash on hand and due from banks and short-term investments. Short-term
investments have original maturities of 90 days or less.
TRUST ASSETS
Securities and other property held in a fiduciary or agency capacity are
not included in the consolidated balance sheets because they are not assets of
the Company. Trust assets under administration were $521.4 million at March 31,
2002 and $455.8 million at March 31, 2001. Income from trust activities is
reported on an accrual basis.
RECENT ACCOUNTING DEVELOPMENTS
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and recognized an after-tax loss from the cumulative effect of
adoption of $461,000, or $0.08 per share, representing the initial adjustment to
fair value of certain derivative instruments, including a pre-tax adjustment of
$743,000 related to interest rate swaps designed to reduce its exposure to
interest rate changes, partially offset by a pre-tax adjustment of $45,000
related to commitments to originate and sell mortgage loans for sale that hedge
its secondary market activities. Changes to the fair value of derivative
instruments are recognized in non-interest income each quarter, and a net
addition to pre-tax income of $482,000, or approximately $0.05 per share, was
recognized for fiscal year 2002.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities - a Replacement of FASB Statement No. 125."
Certain disclosure provisions required by SFAS No. 140 were effective
immediately, with additional requirements related to SFAS No. 140 effective
beginning March 31, 2001. The adoption of SFAS No. 140 had no effect on the
Company's consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations and
specifies recognition criteria that acquired identifiable intangible assets must
meet to be recognized and reported separately from goodwill. SFAS No. 142
requires goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead are to be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 requires that
intangible assets with finite
F-14
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
useful lives will continue to be amortized over their useful lives, and reviewed
for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144
after its adoption.
The Company adopted SFAS No. 141 as of July 1, 2001. Also as of July 1,
2001, the Company adopted the required transition provisions of SFAS No. 142
related to amortization of goodwill and other intangible assets for which the
acquisition date was after June 30, 2001. The remaining provisions of SFAS No.
142 were adopted on April 1, 2002. Accordingly, goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001 are not amortized. Goodwill acquired
in business combinations completed before July 1, 2001 continued to be amortized
until March 31, 2002.
Upon full adoption of SFAS No. 142, the Company must evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and make any necessary reclassifications in order to conform with
the criteria in SFAS No. 141 for recognition of identifiable intangible assets
separate from goodwill. The Company must also reassess the useful lives and
residual values of all identifiable intangible assets acquired and make any
necessary amortization period adjustments by June 30, 2002. Goodwill impairment
must be measured for each reporting unit in a two-step process. First, the
carrying amount of the net assets (including goodwill) must be compared to the
fair value of a reporting unit (as defined) by September 30, 2002. Second, if
the carrying value of a reporting unit is greater than its fair value, the
Company must determine by March 31, 2003 the amount of impairment based on the
fair value of a reporting unit compared to the fair values assigned to all of
the recognized and unrecognized assets and liabilities of that unit. Impairment
must be measured as of the adoption date of April 1, 2002, with the related
loss, if necessary, recognized as the cumulative effect of a change in
accounting principle in the first quarter of fiscal year 2003.
On March 31, 2002, the Company had goodwill in the amount of $43.5 million,
a core deposit intangible asset of $11.7 million and non-compete intangible
asset of $498,000, all of which will be subject to the transition provisions of
SFAS No. 142. The Company has not completed its calculations under the
impairment testing provisions of SFAS 142; however, based on evaluation results
to date, impairment losses, if any, are not expected to be material. The
estimated amortization expense for goodwill and other intangible assets for
fiscal year 2003 is expected to increase to $2.1 million from $294,000 in fiscal
year 2002 due to amortization of the other intangible assets recorded in
connection with the People's acquisition, partially offset by discontinuing all
goodwill amortization, subject to the results of the required testing for
goodwill impairment.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future net
cash flows that are expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized for the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extend that reporting to a component of an
entity that either has been disposed of (by sale, abandonment or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less cost to
sell. The Company adopted SFAS No. 144 on April 1, 2002 with no material impact
on its financial condition or results of operations.
F-15
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) ACQUISITIONS (DOLLARS IN THOUSANDS)
On February 28, 2002, the Company completed the acquisition of People's
Bancshares, Inc. ("People's"), New Bedford, Massachusetts, for $40.3 million in
cash and 1.9 million shares of the Company's common stock. The total acquisition
cost of People's, including the fair value of stock options assumed and certain
merger costs, was $75.0 million. The value of the common stock issued was
determined based on the average market price of the Company common stock over
the two-day period before and the two-day period after the definitive agreement
of the acquisition was announced (October 1, 2001). The acquisition was
accounted for as purchase in accordance with SFAS No. 141, "Business
Combinations." The results of People's operations have been included in the
consolidated financial statements since March 1, 2002.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed for People's at the date of acquisition:
FEBRUARY 28, 2002
-----------------
Assets:
Cash and cash equivalents................................. $295,177
Mortgage loans held for sale.............................. 84,910
Investment securities available for sale.................. 60,423
Mortgage-backed securities................................ 111,834
Stock in Federal Home Loan Bank of Boston................. 18,064
Loans receivable, net..................................... 308,924
Office properties and equipment, net...................... 15,169
Goodwill and other intangible assets...................... 54,917
Other assets.............................................. 19,320
--------
Total assets acquired.................................. 968,738
--------
Liabilities:
Deposits.................................................. 557,625
FHLB advances and other borrowings........................ 327,538
Other liabilities......................................... 8,582
--------
Total liabilities assumed.............................. 893,745
--------
Net assets acquired......................................... $ 74,993
========
The goodwill and other intangible assets included goodwill of $42.5
million, a core deposit intangible asset of $11.9 million to be amortized over
the average useful life of 10 years using the sum-of-the-years-digits method,
and a non-compete intangible asset of $520,000 to be amortized over the two-year
contract period on a straight-line basis. None of the goodwill is expected to be
deductible for income tax purposes. Fair value adjustments include a net premium
on loans of $5.9 million amortized to interest income over three to seven years
to approximate a constant yield to maturity, premium on deposits of $1.8 million
amortized to interest expense over two years on a sum-of-the-years-digits basis
and premium on borrowings of $22.0 million amortized to interest expense over
five to eight years to approximate a constant yield to maturity.
The following table summarizes on a pro forma basis the results of
operations of the Company assuming that the acquisition of People's had been
completed as of the beginning of the periods presented. The pro forma data gives
effect to actual operating results prior to the acquisitions and the
amortization of the purchase accounting adjustments that affected net interest
income and non-interest expense. In addition, an assumed interest charge related
to the funding of the cash purchase of People's was deducted from the operating
results in both 2002 and 2001. No effect has been given to cost savings or
revenue enhancements in this presentation. These proforma amounts do not purport
to be indicative of the results that would have
F-16
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
actually been obtained if the acquisitions had occurred as of the beginning of
the periods presented or that may be obtained in the future.
PROFORMA COMBINED FOR THE
YEARS ENDED MARCH 31,
--------------------------
2002 2001
----------- -----------
Net interest income before loan loss provision.............. $ 61,447 $ 65,914
Provision for loan loss..................................... 734 1,200
---------- ----------
Net interest income after loan loss provision............... 60,713 64,714
Non-interest income......................................... 26,931 17,610
Non-interest expense........................................ 69,190 57,016
---------- ----------
Income before income tax expense.......................... 18,454 25,308
Income tax expense.......................................... 6,727 8,252
---------- ----------
Net income before extraordinary loss and cumulative effect
of accounting change................................... 11,727 17,056
Extraordinary loss on early extinguishment of debt, net of
tax....................................................... (568) --
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax............ (461) --
---------- ----------
Net income............................................. $ 10,698 $ 17,056
========== ==========
Basic earnings per share before extraordinary loss and
cumulative effect of accounting change.................... $ 1.53 $ 2.20
Basic earnings per share.................................... $ 1.36 $ 2.20
Diluted earnings per share before extraordinary loss and
cumulative effect of accounting change.................... $ 1.52 $ 2.20
Diluted earnings per share.................................. $ 1.38 $ 2.20
Weighted average shares outstanding -- basic................ 7,683,507 7,750,334
Weighted average shares outstanding -- diluted.............. 7,728,023 7,760,048
In March 2000, the Agency purchased two local independent agencies,
Smith-Cochrane Insurance Agency, Inc. and All Risk Insurance Agency of Swansea
for a total of $1.1 million. Since these acquisitions were accounted for under
the purchase method of accounting, the results of the acquisitions are included
for the periods subsequent to the acquisition date. The unamortized balance of
goodwill recorded in connection with the acquisitions was $1.1 million at March
31, 2002. The Agency made a payment of $95,000 in March 2001, which was recorded
as goodwill, and will also make additional payments of $375,000 over two years,
which also will be recorded as goodwill.
(4) STOCKHOLDERS' EQUITY
The Company is a business corporation formed at the direction of the Bank
under the laws of Delaware on September 6, 1996. On January 15, 1997, (i) the
Bank converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank, (ii) the Bank issued all of its outstanding
capital stock to the Company and (iii) the Company consummated its initial
public offering of common stock, par value $.01 per share (the "Common Stock"),
by selling at a price of $10.00 per share 7,364,762 shares of Common Stock to
certain of the Bank's eligible account holders who had subscribed for such
shares (collectively, the "Conversion"), by selling 697,010 shares to the Bank's
Employee Stock Ownership Plan and related trust ("ESOP") and by contributing
645,380 shares of Common Stock to The FIRSTFED Charitable Foundation (the
"Foundation"). The Conversion resulted in net proceeds of $77.6 million, after
expenses of $3.0 million. Net proceeds of $43.4 million were invested in the
Bank to increase the Bank's tangible capital to 10% of the Bank's total adjusted
assets. The Company established the Foundation dedicated to the communities
served
F-17
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
by the Bank. In connection with the Conversion, the common stock contributed by
the Company to the Foundation at a value of $6.5 million was charged to expense.
Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, the Bank
established a liquidation account at the time of Conversion in an amount equal
to the retained earnings of the Bank as of the date of its latest balance sheet
date, September 30, 1996, contained in the final Prospectus used in connection
with the Conversion. In the unlikely event of a complete liquidation of the Bank
(and only in such an event), eligible depositors who continue to maintain
accounts at the Bank shall be entitled to receive a distribution from the
liquidation account. The total amount at the liquidation account is decreased if
the balances of eligible depositors decrease at the annual determination dates.
The liquidation account approximated $13.8 million (unaudited) at March 31,
2002.
The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory requirements.
In addition to the 25,000,000 authorized shares of common stock, the
Company authorized 1,000,000 shares of preferred stock with a par value of $0.01
per share (the "Preferred Stock"). The Board of Directors is authorized, subject
to any limitations by law, to provide for the issuance of the shares of
preferred stock in series, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restriction thereof. As of March 31, 2002, there
were no shares of preferred stock issued.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of risk-based core and tangible capital (as defined). As of March 31,
2002, the Bank meets all capital adequacy requirements to which it is subject.
As of March 31, 2002, the Bank was, by regulatory definition, "well
capitalized" based on its ratios of risk-based, core, tangible, and Tier 1
risk-based capital. There are no conditions or events since that notification
that management believes have changed the Bank's category. The Bank's actual and
required capital amounts and ratios are presented in the following table
(dollars in thousands). No deduction was taken from capital for interest-rate
risk.
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
As of March 31, 2002:
Risk-based capital............... $137,237 10.36% $105,972 8.0% $132,465 10.0%
Core capital..................... 127,570 5.72 89,195 4.0 111,493 5.0
Tangible capital................. 127,570 5.72 44,598 2.0 111,493 5.0
Tier 1 risk-based................ 127,570 9.19 58,781 4.0 85,274 6.0
F-18
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
As of March 31, 2001:
Risk-based capital............... $112,964 13.58% $ 66,536 8.0% $ 83,170 10.0%
Core capital..................... 103,942 6.27 66,310 4.0 82,888 5.0
Tangible capital................. 103,942 6.27 33,155 2.0 82,888 5.0
Tier 1 risk-based................ 103,942 12.33 34,620 4.0 51,254 6.0
The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. The Trust Company's
capital amounts and ratios are presented in the following table (dollars in
thousands).
CAPITAL
EXCESS ------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
------ -------- ------------ ------ --------
As of March 31, 2002:
Tangible capital........................ $2,897 $ 22 $2,875 261.70% 2.00%
Core capital............................ 2,897 129 2,768 89.61 4.00
Risk-based capital...................... 2,897 89 2,808 261.70 8.00
As of March 31, 2001:
Tangible capital........................ $2,781 $ 22 $2,759 257.50% 2.00%
Core capital............................ 2,781 120 2,661 92.58 4.00
Risk-based capital...................... 2,781 86 2,695 257.50 8.00
(5) INVESTMENT AND MORTGAGE-BACKED SECURITIES (DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
A summary of investment securities available for sale follows:
MARCH 31, 2002
----------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- -------
Investment securities:
Corporate bonds.................... 6.1% $31,513 $ 274 $(248) $31,539
Municipal bonds.................... 3.4 2,643 -- -- 2,643
U.S. Government Agency
obligations..................... 5.4 1,111 4 (8) 1,107
Trust preferred stocks............. 8.4 40,698 192 (632) 40,258
Marketable equity securities....... -- 5,637 3,472 -- 9,109
------- ------ ----- -------
Total investment
securities............... $81,602 $3,942 $(888) $84,656
======= ====== ===== =======
MARCH 31, 2001
---------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- ------
Investment securities:
U.S. Government Agency
obligations...................... 6.7% $ 603 $ 2 $ (3) $ 602
Marketable equity securities........ 5,802 1,603 (170) 7,235
------ ------ ----- ------
Total investment
securities................ $6,405 $1,605 $(173) $7,837
====== ====== ===== ======
F-19
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The remaining contractual maturities of investments in debt securities at
March 31, 2002 are summarized as follows:
AMORTIZED FAIR
MATURITY PERIOD COST VALUE
--------------- --------- -------
One year or less............................................ $ 2,296 $ 2,294
More than one year to five years............................ 16,262 16,382
More than five years to ten years........................... 5,475 5,480
More than five years........................................ 51,932 51,391
------- -------
Total.................................................. $75,965 $75,547
======= =======
A summary of mortgage-backed and collateralized mortgage obligation
securities available for sale follows:
MARCH 31, 2002
-----------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- --------
Mortgage-backed securities due:
One year or less.................. 7.0% $ 1,439 $ 41 $ -- $ 1,480
More than one year to five
years.......................... 7.0 5,005 142 -- 5,147
More than ten years............... 5.8 354,288 1,298 (1,969) 353,617
-------- ------ ------- --------
Total mortgage-backed
securities.............. 5.9 360,732 1,481 (1,969) 360,244
-------- ------ ------- --------
Collateralized mortgage obligations
due:
Five years or less................ 3.1 9,998 2 -- 10,000
More than five years to ten
years.......................... 3.9 35,224 53 (165) 35,112
More than ten years............... 4.9 173,759 725 (1,222) 173,262
-------- ------ ------- --------
Total collateralized
mortgage obligations.... 4.6 218,981 780 (1,387) 218,374
-------- ------ ------- --------
Total..................... 5.4% $579,713 $2,261 $(3,356) $578,618
======== ====== ======= ========
MARCH 31, 2001
-----------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- --------
Mortgage-backed securities due:
Five years or less................ 7.0% $ 12,029 $ 167 $ -- $ 12,196
More than ten years............... 6.7 272,689 3,369 (101) 275,957
-------- ------ ------- --------
Total mortgage-backed
securities.............. 6.7 284,718 3,536 (101) 288,153
-------- ------ ------- --------
Collateralized mortgage obligations
due:
Five years or less................ 6.5 9,997 62 -- 10,059
More than five years to ten
years.......................... 6.7 37,654 85 (233) 37,506
More than ten years............... 6.5 165,975 291 (754) 165,512
-------- ------ ------- --------
Total collateralized
mortgage obligations.... 6.6 213,626 438 (987) 213,077
-------- ------ ------- --------
Total..................... 6.6% $498,344 $3,974 $(1,088) $501,230
======== ====== ======= ========
F-20
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Adjustable-rate mortgage-backed securities and collateralized mortgage
obligations available for sale had total amortized costs and fair values of
$406,630 and $406,696 respectively, at March 31, 2002 and $413,440 and $416,044,
respectively, at March 31, 2002.
For the year ended March 31, 2002, proceeds from the sales of investment
securities available for sale amounted to $753, resulting in gross realized
gains of $750, and proceeds from the sale of mortgage-backed securities amounted
to $19,820, resulting in gross realized gains of $253. There were no sales of
investment or mortgage-backed securities for the years ended March 31, 2001 and
2000.
HELD TO MATURITY
A summary of mortgage-backed securities held to maturity follows:
MARCH 31, 2002
---------------------------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- ------
Mortgage-backed securities due:
Five years or less.................. 8.3% $ 67 $ 4 $-- $ 71
More than five years to ten years... 9.0 354 22 -- 376
More than ten years................. 6.7 782 6 -- 788
------ --- -- ------
Total mortgage-backed
securities held to
maturity.................. 7.5% $1,203 $32 $-- $1,235
====== === == ======
MARCH 31, 2001
---------------------------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- ------
Mortgage-backed securities due:
Five years or less.................. 8.7% $ 32 $-- $-- $ 32
More than five years to ten years... 8.9 537 -- -- 537
More than ten years................. 8.7 1,569 16 -- 1,585
------ --- -- ------
Total mortgage-backed
securities held to
maturity.................. 8.7% $2,138 $16 $-- $2,154
====== === == ======
Adjustable-rate mortgage-backed securities held to maturity had total
amortized cost and fair value of $782 and $788, respectively, at March 31, 2002
and $1,569 and $1,585, respectively, at March 31, 2001.
Maturities of mortgage-backed securities are based on contractual
maturities with scheduled amortization. Actual maturities will differ from
contractual maturities due to prepayments.
Mortgage-backed securities with a book value of approximately and $10,572
and $444 were pledged as collateral for certain deposits in the "Deposit
Collateralization Bailee Program" at the Federal Home Loan Bank of Boston at
March 31, 2002 and 2001, respectively.
As a member of the Federal Home Loan Bank ("FHLB") system, the Company is
required to maintain a minimum investment in FHLB stock. The current investment
exceeds the required level at March 31, 2002. Any excess may be redeemed by the
Company or called by the FHLB at par. At its discretion, the FHLB may declare
dividends on this stock.
F-21
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
The Company's lending activities are conducted principally in Southeastern
New England and, to a lesser degree, the Mid-Atlantic region. The Company grants
one-to-four family and multifamily residential loans, commercial real estate
loans, commercial loans and a variety of consumer loans. In addition, the
Company grants loans for the construction of residential homes, multifamily
properties and commercial real estate properties. The ability and willingness of
one-to four-family and multifamily residential and consumer borrowers to honor
their repayment commitments is generally dependent on real estate values and the
level of overall economic activity within the borrowers' geographic areas. The
ability and willingness of commercial, commercial real estate and construction
loan borrowers to honor their repayment commitments is generally dependent on
the health of the real estate economic sector in the borrowers' geographic areas
and the general economy.
The following is a comparative summary of loans receivable classified by
type at March 31:
2002 2001
---------- ----------
Mortgage loans:
Residential 1-4 family............................ $ 629,079 $ 677,512
Multi-family...................................... 6,218 3,015
Commercial real estate............................ 115,243 44,375
Construction and land............................. 63,810 72,225
---------- ----------
Total mortgage loans...................... 814,350 797,127
---------- ----------
Commercial loans.................................... 200,016 94,681
---------- ----------
Consumer loans and other loans:
Home equity lines................................. 83,013 45,191
Second mortgages.................................. 48,901 61,759
Other consumer loans.............................. 13,713 9,665
---------- ----------
Total consumer loans.............................. 145,627 116,615
---------- ----------
Total loans receivable.................... 1,159,993 1,008,423
---------- ----------
Less:
Allowance for loan losses......................... (19,237) (13,233)
Undisbursed proceeds of construction mortgages in
process........................................ (21,818) (19,445)
Purchase premium on loans, net.................... 5,869 --
Deferred loan origination costs, net.............. 943 1,429
---------- ----------
(34,243) (31,249)
---------- ----------
Loans receivable, net..................... $1,125,750 $ 977,174
========== ==========
At March 31, 2002 and 2001, mortgage loans sold to others and serviced by
the Bank on a fee basis under various agreements amounted to $1,588,000 and
$1,531,000, respectively. Loans serviced for others are not included in the
Consolidated Balance Sheets.
Loans placed on non-accrual status totaled approximately $3,704 and $1,332
at March 31, 2002 and 2001, respectively.
F-22
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information regarding the reduction of
interest income on non-accrual loans for the years ended March 31:
2002 2001 2000
---- ---- ----
Income in accordance with original items.................... $216 $127 $107
Income recognized........................................... 106 81 78
---- ---- ----
Foregone interest income during year........................ $110 $ 46 $ 29
==== ==== ====
At March 31, 2002 and 2001, total impaired loans of $868 and $1,138
required impairment allowances of $144 and $193, respectively. All impaired
loans have been measured using the fair value of the collateral method. The
average recorded value of impaired loans was $1,003 in 2002 and $847 in 2001.
The Company follows the same policy for recognition of income on impaired loans
as it does for all other loans. Impaired loans of $868 and $798 were on
non-accrual at March 31, 2002 and 2001, respectively.
The following table summarizes information regarding the reduction of
interest income on impaired loans for the years ended March 31:
2002 2001 2000
---- ---- ----
Income in accordance with original terms.................... $98 $77 $114
Income recognized........................................... 81 46 75
--- --- ----
Foregone interest income during the year.................... $17 $31 $ 39
=== === ====
At March 31, 2002, there were no commitments to lend additional funds to
those borrowers whose loans were classified as impaired or non-accrual.
An analysis of the allowance for loan losses for the years ended March 31
is as follows:
2002 2001 2000
------- ------- -------
Balance at beginning of year.......................... $13,233 $12,275 $12,016
Allowance for loan losses acquired.................... 5,196 -- --
Provision for loan losses............................. 1,200 1,200 1,200
Charge-offs........................................... (493) (281) (958)
Recoveries............................................ 101 39 17
------- ------- -------
Balance at end of year.............................. $19,237 $13,233 $12,275
======= ======= =======
In the ordinary course of business, the Company makes loans to its
directors, executive officers, and their related interests, at the same
prevailing terms as those of other borrowers. The following is a summary of
related party loan activity for the years ended March 31:
2002 2001 2000
------ ------ -----
Balance, beginning of year................................ $1,296 $ 888 $ 685
Originations.............................................. 146 630 313
Principal repayments...................................... (509) (222) (110)
------ ------ -----
Balance, end of year...................................... $ 933 $1,296 $ 888
====== ====== =====
Not included in the amounts stated above are unused portions of lines of
credit. These amounted to $308 and $235 at March 31, 2002 and 2001,
respectively.
F-23
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans with a book value of $10,398 and $9,841 were pledged as collateral
for the "Deposit Collateralization Bailee Program" with the Federal Home Loan
Bank of Boston at March 31, 2002 and March 31, 2001, respectively.
(7) SALE OF MORTGAGE LOANS (DOLLARS IN THOUSANDS)
The following summarizes mortgage loan sales and the components of gain or
(loss) on sale of mortgage loans for the years ended March 31:
2002 2001 2000
--------- --------- ---------
Gain (loss) on sale of mortgage loans:
Cash proceeds from sales of loans............. $ 647,233 $ 119,677 $ 250,265
Buy-up (down) fees received, net.............. 262 33 61
--------- --------- ---------
Net cash proceeds from sales of loans......... 647,495 119,710 250,326
Principal balance of loans sold............... (644,031) (119,719) (251,768)
Deferred origination (costs) fees recognized
at time of sale............................ (3,082) (451) (1,331)
Fair value of forward commitments to sell, net
of fair value of commitments to originate
mortgage loans held for sale............... 179 -- --
Change in unrealized loss on mortgage loans
held for sale.............................. 250 -- --
Capitalized mortgage servicing rights......... 4,714 1,043 1,821
--------- --------- ---------
Gain (loss) on sale of mortgage loans,
net...................................... $ 5,525 $ 583 $ (952)
========= ========= =========
The following is a summary of capitalized mortgage servicing rights for the
years ended March 31:
2002 2001 2000
------- ------- -------
Balance at beginning of year.................. $ 5,131 $ 6,538 $ 6,787
Capitalized mortgage servicing rights......... 4,714 1,043 1,821
Amortization.................................. (2,850) (2,450) (2,070)
------- ------- -------
Balance end of year........................... $ 6,995 $ 5,131 $ 6,538
======= ======= =======
An analysis of the valuation allowance related to mortgage servicing rights
for the years ended March 31 is as follows:
2002 2001 2000
---- ---- ----
Balance at beginning of year.......................... $250 $250 $250
Provision for losses.................................. 240 -- --
---- ---- ----
Balance at end of year................................ $490 $250 $250
==== ==== ====
F-24
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) OFFICE PROPERTIES AND EQUIPMENT (DOLLARS IN THOUSANDS)
Office properties and equipment consist of the following at March 31:
2002 2001
-------- --------
Land................................................... $ 3,678 $ 1,882
Office building and improvements....................... 31,941 20,368
Furniture, fixtures and equipment...................... 20,043 14,520
Construction in progress............................... 1,204 139
-------- --------
56,866 36,909
Less accumulated depreciation.......................... (19,091) (12,871)
-------- --------
$ 37,775 $ 24,038
======== ========
The Company leases certain office space under various non-cancelable
operating leases. A summary of future minimum rental payments under such leases
at March 31, 2002 follows:
MINIMUM RENTAL
YEAR ENDING MARCH 31, EXPENSE
--------------------- --------------
2003.................................................. $ 906
2004.................................................. 809
2005.................................................. 568
2006.................................................. 457
2007.................................................. 453
After 2007............................................ 3,226
Rent expense was $458, $330, and $181 for the years ended March 31, 2002,
2001 and 2000, respectively.
F-25
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) DEPOSITS (DOLLARS IN THOUSANDS)
Deposits at March 31 are as follows:
WEIGHTED
AVERAGE 2002 2001
RATES AT ------------------- -----------------
MARCH 31, 2002 AMOUNT % AMOUNT %
-------------- ---------- ----- -------- -----
Money market......................... 2.09% $ 152,931 11.6% $ 53,075 7.5%
Business checking.................... -- 141,700 10.8 71,419 10.1
Savings.............................. 1.40 235,338 17.9 102,884 14.5
NOW.................................. 0.50 137,451 10.4 72,241 10.2
---------- ----- -------- -----
667,420 50.7 299,619 42.3
---------- ----- -------- -----
Certificates:
Six months to one year............. 3.18 231,304 17.6 114,637 16.2
Over one year...................... 4.93 166,687 12.6 159,733 22.6
Jumbo.............................. 4.64 8,339 0.6 7,876 1.1
IRA & Keogh........................ 4.56 130,290 9.9 82,677 11.7
Business statement................. 2.21 67,373 5.1 760 0.1
7-91 day........................... 2.07 44,218 3.4 42,114 6.0
Purchase premium on time deposits.... 1,632 0.1 -- --
---------- ----- -------- -----
Total certificate
accounts................. 649,843 49.3 407,797 57.7
---------- ----- -------- -----
$1,317,263 100.0% $707,416 100.0%
========== ===== ======== =====
At March 31, 2002 and 2001, the weighted average stated interest rate of
deposits was 2.39% and 3.98%, respectively.
The remaining contractual maturities of certificate accounts at March 31
are summarized as follows:
2002 2001
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
Within twelve months.................................. $528,133 81.3% $313,336 76.8%
More than thirteen months to thirty-six months........ 93,226 14.3 88,936 21.8
Beyond thirty-six months.............................. 28,484 4.4 5,525 1.4
-------- ----- -------- -----
$649,843 100.0% $407,797 100.0%
======== ===== ======== =====
At March 31, 2002, the Company had certificate accounts in amounts of $100
or more maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- -------- ------------
Three months or less................................. $ 93,200 2.52%
Over 3 through 6 months.............................. 23,371 3.76
Over 6 through 12 months............................. 33,373 4.66
Over 12 months....................................... 21,784 4.81
--------
Total................................................ $171,728 3.40%
========
F-26
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, the Company accepts deposits from
brokerage companies on behalf of their clients. These monies are invested in
certificates of deposit. Brokered deposits amounted to $7,149 and $1,391 at
March 31, 2002 and 2001, respectively.
Interest expense on deposits consisted of the following for the years ended
March 31:
2002 2001 2000
------- ------- -------
Money market.......................................... $ 1,281 $ 1,156 $ 780
Regular and club...................................... 1,697 1,777 1,743
NOW................................................... 384 637 558
Certificates.......................................... 22,068 22,682 21,731
------- ------- -------
$25,430 $26,252 $24,812
======= ======= =======
(10) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (DOLLARS IN THOUSANDS)
At March 31, 2002 and 2001, advances from the Federal Home Loan Bank of
Boston ("FHLB") with a weighted average interest rate of 5.25% and 5.99%,
respectively, mature as follows:
YEAR ENDING MARCH 31, 2002 2001
--------------------- -------- --------
2002................................................. $ -- $275,854
2003................................................. 392,586 179,499
2004................................................. 62,257 39,785
2005................................................. 15,652 20,317
2006................................................. 95,966 218,787
After 2006........................................... 74,914 --
-------- --------
$641,375 $734,242
======== ========
The unamortized purchase premium on FHLB advances at March 31, 2002 was
$12,299.
In accordance with the FHLB collateral requirements, a portion of the
Bank's first mortgage loans on residential property and all otherwise
unencumbered deposits and securities issued, insured or guaranteed by the United
States government or an agency thereof, are pledged as collateral to secure such
advances.
The Bank has a $25,000 secured line of credit available and additional
borrowing capacity of $200,448 with the FHLB at March 31, 2002.
The Bank had other borrowings of $101,146 at March 31, 2002, including the
unamortized purchase premium of $7,472, and $80,522 at March 31, 2001, primarily
consisting of reverse repurchase agreements with securities dealers that were
collateralized by mortgage-backed securities. The following table shows
information pertaining to these agreements for the years ended March 31:
2002 2001 2000
-------- -------- --------
Reverse repurchase agreements...................... $ 90,972 $ 80,000 $171,467
Book value of pledged collateral................... 95,051 85,882 186,802
Fair value of pledged collateral................... 93,306 87,171 185,254
Maximum amount outstanding at any month end........ 151,522 172,003 191,538
Average amount outstanding during the year......... 118,471 140,451 105,559
Weighted average interest rate during the period... 4.02% 6.36% 5.51%
Weighted average interest rate at end of period.... 6.37 6.32 5.88
F-27
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows information pertaining to the maturity of these
agreements for the years ended March 31:
YEAR ENDING MARCH 31, 2002 2001
--------------------- ------- -------
2002................................................... $ -- $80,000
2008................................................... 11,153 --
2010................................................... 79,819 --
------- -------
$90,972 $80,000
======= =======
Included in FHLB advances and reverse repurchase agreements are putable
borrowings. All of the putable borrowings are exercisable at the discretion of
the counter-party. At March 31, 2002, the Bank had the following putable
borrowings:
CONTRACTUAL
ADVANCE MATURITY PUT EXERCISE INTEREST
DATE DATE DATE TYPE BALANCE RATE COUNTER-PARTY
-------- ----------- -------- -------- -------- -------- --------------------
03/13/98 03/13/08 06/13/02 Quarterly $ 36,000 3.51% FHLB
03/26/98 03/26/08 06/26/02 Quarterly 10,500 3.35% Salomon Smith Barney
03/26/98 03/26/08 06/26/02 Quarterly 11,000 3.59% FHLB
08/25/98 08/19/13 08/19/03 Quarterly 8,000 3.85% FHLB
08/27/98 08/19/13 08/19/03 Quarterly 18,000 3.85% FHLB
09/30/98 09/30/13 09/30/05 Quarterly 13,000 4.46% FHLB
01/19/99 01/20/09 01/21/03 One Time 15,000 4.98% FHLB
10/08/99 10/08/09 04/08/02 Quarterly 24,000 5.58% FHLB
11/08/99 11/09/09 11/08/02 Quarterly 74,000 3.95% FHLB
12/20/99 12/21/09 06/20/02 Quarterly 20,000 3.89% FHLB
02/16/00 02/16/10 05/19/02 Quarterly 10,000 6.47% FHLB
02/16/00 02/16/10 02/18/03 Quarterly 10,000 6.69% FHLB
08/14/00 08/16/10 08/14/03 Quarterly 35,000 4.32% Salomon Smith Barney
08/14/00 08/16/10 08/16/05 One Time 20,000 4.74% Salomon Smith Barney
08/14/00 08/18/10 08/18/05 One Time 18,000 4.72% Salomon Smith Barney
11/08/00 11/08/05 05/08/02 Quarterly 45,000 5.97% FHLB
12/20/00 12/20/10 06/20/02 Quarterly 15,000 4.95% FHLB
02/05/01 02/07/11 02/05/03 Quarterly 10,000 4.58% FHLB
03/05/01 03/07/11 06/05/02 Quarterly 30,000 3.99% FHLB
--------
$422,500
========
Other borrowings also included a $10,000 promissory note payable with
arms-length terms to an affiliate of M/D Trust, LLC, a related party. The note
is due February 1, 2012, with interest rate of 5.547% that is subject to
adjustment on February 14, 2007.
During March 2002, the Company pre-paid Federal Home Loan Bank advances
totaling $110,863 and reverse repurchase agreements totaling $50,863, which
resulted in an after-tax extraordinary loss on early extinguishment of debt of
$568,000, net of a $394 tax benefit.
(11) COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
The Company has two subsidiary business trusts acquired as part of the
People's acquisition, Capital Trust I and Capital Trust II, of which the Company
owns all of the common securities. These trusts have no
F-28
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
independent assets or operations and exist for the sole purpose of issuing trust
preferred securities and investing the proceeds in an equivalent amount of
junior subordinated debentures issued by the Company. The junior subordinated
debentures, which are the sole assets of the trusts, are unsecured obligations
of the Company and generally are subordinate and junior in right of payment to
all present and future senior and subordinated indebtedness and certain other
financial obligations of the Company. The principal amount of subordinated
debentures held by each trust equals the aggregate liquidation amount of its
trust preferred securities and its common securities. The subordinated
debentures bear interest at the same rate, and will mature on the same date, as
the corresponding trust preferred securities. Interest is cumulative and can be
deferred for up to five years. The effect of various contractual obligations of
the Company undertaken in connection with the issuance of trust preferred
securities is that the Company fully and unconditionally guarantees each trust's
obligations under the trust securities.
At March 31, 2002 Capital Trust I had $13.8 million of 9.76% trust
preferred securities outstanding that mature in June 2027 unless the Company
elects and obtains regulatory approval to accelerate the maturity date to as
early as June 2002. On May 28, 2002, the Company announced the redemption of the
Capital Trust I preferred securities, at par, on June 30, 2002. Capital Trust II
had $10.0 million of 11.695% trust preferred securities outstanding that mature
in July 2030 unless the Company elects and obtains regulatory approval to
accelerate the maturity date to as early as July 2010. The purchase premium on
the trust preferred securities was $1.9 million at March 31, 2002 and is being
amortized over the estimated life of the underlying securities.
(12) LITIGATION
Various legal proceedings are pending against the Company which have arisen
out to the normal course of business. In the opinion of management, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial position, the annual results of operations, or
liquidity of the Company.
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (IN THOUSANDS)
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage interest-rate risk exposure. These financial instruments primarily
include commitments to originate and sell loans, unadvanced lines of credit, and
interest rate swap agreements. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheet. The contract amounts of those instruments
reflect the extent of the Company's involvement in these particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and unadvanced
lines of credit is represented by the contractual amount of those instruments.
The Company uses similar credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
F-29
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2002 2001
------- -------
Financial instruments whose contractual amount represents
credit risk:
Commitments to originate loans to be sold.............. $90,585 $41,285
Commitments to originate loans to be held in
portfolio........................................... 11,327 17,633
Unadvanced home equity lines of credit................. 94,397 54,213
Unadvanced commercial lines of credit.................. 90,569 34,432
Unadvanced residential construction loans.............. 21,817 19,445
Financial instruments whose contractual amount exceeds
the amount of credit risk:
Commitments to sell residential mortgage loans......... 56,212 69,575
Financial instruments whose notional amount exceeds the
amount of credit risk:
Notional amounts -- interest rate swap agreements...... 25,000 50,000
At March 31, 2002 and 2001, commitments to originate loans to be sold with
maturities ranging from 12 years to 30 years had interest rates ranging from
5.25% to 8.63% and 4.95% to 7.88%, respectively. Commitments to originate loans,
unadvanced commercial lines of credit, unadvanced home equity lines of credit
and unadvanced residential construction loans are agreements to lend to a
customer provided 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 evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower.
The Company also enters into contracts to sell mortgage loans in the
secondary market. Risks arise from the possible inability of the Company to
originate loans to fulfill these contracts, in which case the Company would
normally purchase loans or securities in the open market to deliver against
these contracts. All loans are sold either without recourse or with limited
recourse to the Company in the event of default or early pre-payment.
In addition, the Company uses interest rate swap agreements as part of its
interest-rate risk management strategy. Swaps are agreements in which the
Company agrees with another party to exchange interest payments (e.g. fixed-rate
for floating-rate payments) computed on a notional amount. The credit risk
associated with swap agreements is the risk of default by the counterparty. To
minimize this risk, the Company enters into swap agreements only with highly
rated counterparties that management believes to be creditworthy. The notional
amounts of these agreements do not represent amounts exchanged by the parties
and, thus, are not a measure of the Company's potential loss exposure.
F-30
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) INCOME TAXES (DOLLARS IN THOUSANDS)
Income tax expense for the years ended March 31 is summarized as follows:
2002 2001 2000
------ ------ ------
Current income tax expense:
Federal income tax..................................... $6,581 $4,512 $2,642
State income tax....................................... 710 374 178
------ ------ ------
7,291 4,886 2,820
------ ------ ------
Deferred income tax (benefit) expense:
Federal income tax..................................... 57 (398) 841
State income tax....................................... 8 (267) 28
------ ------ ------
65 (665) 869
------ ------ ------
Income tax expense....................................... $7,356 $4,221 $3,689
====== ====== ======
The reasons for the differences between the effective tax rates and the
statutory federal income tax rate for the years ended March 31 were as follows:
2002 2001 2000
---- ----- ----
Statutory federal income tax rate........................... 35.0% 34.0% 34.0%
Items affecting federal income tax rate:
State tax, net of federal benefit...................... 2.4 0.5 1.1
Appreciation of stock contributed to ESOP.............. 0.4 0.7 0.3
Earnings on Bank-Owned Life Insurance.................. (3.5) (4.2) (4.4)
Other, net............................................. 1.0 0.5 0.1
---- ----- ----
Effective income tax rate................................. 35.3% 31.5% 31.1%
==== ===== ====
F-31
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31 are
presented below:
2002 2001
------- ------
Deferred tax assets:
Accrued interest income................................. $ 64 $ 31
Deferred loan fees, net................................. 116 142
Accrued stock awards.................................... 529 884
Accrued pension......................................... 784 --
Allowance for loan losses............................... 8,046 5,322
Purchase accounting..................................... 8,961 --
Other................................................... 754 49
------- ------
Gross deferred tax asset............................. 19,254 6,428
------- ------
Deferred tax liabilities:
Depreciation............................................ 1,181 610
Limited partnership..................................... 1,191 --
Mortgage servicing rights............................... 2,926 2,100
Other................................................... -- 58
Unrealized gain on investments available for sale....... 558 1,767
------- ------
Gross deferred tax liability......................... 5,856 4,535
------- ------
Deferred income tax assets, net...................... $13,398 $1,893
======= ======
The net deferred federal income tax asset of $10,012 at March 31, 2002 is
supported by the potential recovery of taxes previously paid by the Company in
the carryback period. Since there is no carryback provision for state purposes,
management believes the existing net deductible temporary differences which give
rise to the net deferred state income tax asset of $3,386 will reverse during
periods in which the Company generates net taxable income.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the base year
reserve of approximately $7,398 remains subject to recapture in the event that
the Company pays dividends in excess of its earnings and profits or redeems its
stock.
(15) PENSION PLAN AND OTHER BENEFITS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 15, 1997 the Company adopted the ESOP. The ESOP is
designed to provide retirement benefits for eligible employees of the Bank.
Because the ESOP invests primarily in the stock of the Company, it will also
give eligible employees an opportunity to be granted an ownership interest in
the Company. Employees are eligible to participate in the ESOP after reaching
age twenty-one, completing one year of service and working at least one thousand
hours of consecutive service during the previous year. Contributions are
allocated to eligible participants on the basis of compensation.
During January 1997, the Company issued a total of 697,010 shares to the
trust administering the ESOP at a total purchase price of $6,970. The purchase
was made from the proceeds of a $6,970 loan from FAB FUNDING CORPORATION, a
wholly-owned subsidiary of the Company, bearing interest at the prime rate. The
loan will be repaid over a period of approximately nine years, principally with
funds from the Company's future contributions to ESOP, subject to IRS
limitations. The Company recognized a charge to
F-32
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation and employee benefits expense of $1,391, $1,064 and $971, during
fiscal years 2002, 2001 and 2000, respectively.
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal and interest on the loan is
paid. Employees vest in their ESOP account at a rate of 20% annually commencing
after the completion of one year of credited service or immediately if service
was terminated due to death, retirement, disability, or change in control.
Dividends on allocated shares are credited to the participants' ESOP accounts.
At March 31, 2002, shares held in suspense to be released annually as the
loan is paid down amounted to 232,341. The fair value of unallocated ESOP shares
was $5,553 at March 31, 2002. Dividends on allocated ESOP shares are charged to
retained earnings, dividends on unallocated ESOP shares are charged to
compensation and employee benefits expense and ESOP shares committed-to-be
released are considered outstanding in determining earnings per share.
1997 STOCK-BASED INCENTIVE PLAN ("SIP")
On August 5, 1997, the Company's stockholders approved the SIP, which was
subsequently amended, restated and approved by the stockholders in 1998. The
objective of the SIP is to enable the Company to provide officers, key employees
and directors with a proprietary interest in the Company as an incentive to
encourage such persons to remain with the Company. The SIP acquired 348,286
shares in the open market at an average price of $20.78 per share. This
acquisition represents deferred compensation which is initially recorded as a
reduction in stockholders' equity and charged to compensation expense over the
vesting period of the award.
Awards are granted in the form of common stock held by the SIP and vest in
five annual installments commencing one year from the date of the award.
Recipients are entitled to all voting and other stockholder rights. As of March
31, 2002, 366 shares remain unallocated under the SIP. A summary of award
activity follows:
NUMBER OF
SHARES
---------
Balance at March 31, 1999................................. 278,423
Granted................................................. 3,000
Distributed............................................. (68,846)
Forfeited............................................... (291)
-------
Balance at March 31, 2000................................. 212,286
Granted................................................. 1,000
Distributed............................................. (69,318)
Forfeited............................................... --
-------
Balance at March 31, 2001................................. 143,968
Granted................................................. --
Distributed............................................. (69,273)
Forfeited............................................... (198)
-------
Balance at March 31, 2002................................. 74,497
=======
Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service period for the
portion of each award that vests equally over a five-year period. The Company
recognized $393, $765 and $1,253, in compensation and benefits expense for these
awards during fiscal years 2002, 2001 and 2000, respectively.
F-33
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS
The Company adopted a stock option plan in 1997 as part of the SIP (the
"1997 Plan") for officers, key employees and directors. The 1997 Plan was
subsequently amended and restated in 1998. Pursuant to the terms of the 1997
Plan, the number of common shares reserved for issuance is 870,715, of which
none remain unawarded. All options have been issued at not less than fair market
value at the date of the grant. Options are exercisable in accordance with the
terms of each individual's award agreement, however no option will be
exercisable more than 10 years after the date of the grant. All stock options
granted vest over a five year period from the date of the grant.
In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan").
Pursuant to the terms of the 1998 Plan, the number of common shares reserved for
issuance is 413,590, of which 171,403 remain unawarded. All options have been
issued at not less than fair market value at the date of the grant and expire in
10 years from the date of the grant. Options are exercisable in accordance with
the terms of each individual's award agreement, however no option will be
exercisable more than 10 years after the date of the grant. All stock options
granted vest over a five year period from the date of the grant.
In conjunction with the People's acquisition on February 28, 2002, the
Company assumed obligations under People's stock option plans. Pursuant to the
terms of these plans, the number of common shares reserved for issuance is
207,760, of which none remain unawarded. All options have been issued at not
less than fair market value at the date of the grant as adjusted for the
exchange ratio of 1.2644 as part of the People's acquisition. Options are
exercisable in accordance with the terms of each individual's award agreement,
however no option will be exercisable more than 10 years after the date of the
grant. All stock options granted have vested as of February 28, 2002.
A summary of option activity follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Balance at March 31, 1999........................... 857,350 $18.57
Granted........................................... 20,000 19.25
Expired........................................... (388) 18.50
Forfeited......................................... (579) 18.50
--------- ------
Balance at March 31, 2000........................... 876,383 18.58
Granted........................................... 235,494 12.94
Forfeited......................................... (2,000) 12.94
--------- ------
Balance at March 31, 2001........................... 1,109,877 17.39
Granted........................................... -- --
Assumed in acquisition............................ 207,760 15.06
Exercised......................................... (3,993) 18.68
--------- ------
Balance at March 31, 2002........................... 1,313,644 $17.02
========= ======
F-34
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of options outstanding and exercisable by price range as of March 31,
2002 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE
EXERCISE PRICES MARCH 31,2002 CONTRACTUAL LIFE PRICE MARCH 31,2002 PRICE
---------------- ------------- ---------------- -------- -------------- --------
$ 3.16 - $12.26 86,378 4.1 years $10.42 86,378 $10.42
$12.94 - $17.80 264,271 7.7 years 13.33 77,636 14.26
$18.50 780,753 5.3 years 18.50 623,345 18.50
$18.98 - $19.77 182,242 5.7 years 19.17 139,990 19.15
--------- -------
1,313,644 17.02 927,349 17.49
========= =======
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net income would have been reduced to the pro forma amounts indicated below:
2002 2001 2000
------- ------ ------
Net income as reported.................................. $12,432 $9,164 $8,186
Pro forma net income.................................... 11,188 8,869 8,046
Basic earning per share as reported..................... 2.09 1.57 1.31
Diluted earnings per share as reported.................. 2.07 1.56 1.31
Pro forma basic earnings per share...................... 1.88 1.51 1.29
Pro forma diluted earnings per share.................... 1.87 1.51 1.29
The fair value of stock options was determined by using the binomial option
pricing model. The following assumptions were inputs to the model:
2002 2001 2000
----- ----- -----
Expected dividend yield..................................... 1.76% 2.66% 1.95%
Risk-free interest rate..................................... 4.88% 5.05% 6.51%
Expected volatility......................................... 23.56% 18.49% 23.95%
Expected life in years...................................... 5.8 7.1 7.5
The per share weighted average fair value of stock options granted during
fiscal years 2001 and 2000 was $2.56 and $1.55, respectively,
PENSION PLAN
All eligible officers and employees of the Company, who have reached the
age of twenty-one and completed one year of service, are included in a
noncontributory, defined benefit pension plan (the "Pension Plan") provided by
the Company. The Pension Plan is administered by Pentegra (the "Fund"). The Fund
does not segregate the assets or liabilities of all participating employers and,
accordingly, disclosure of accumulated vested and nonvested benefits is not
possible. Contributions are based on each individual employer's experience.
According to the Fund's administrators, as of June 30, 2001, the date of the
latest actuarial valuation, the market value of the Fund's net assets exceeded
the actuarial present value of vested and nonvested benefits in the aggregate.
The Company's contribution to the pension plan was $ 978, $785 and $104 for
the years ended March 31, 2002, 2001 and 2000.
F-35
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS
On April 1, 1995, the Company adopted SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other than Pensions. Under SFAS No. 106, the Company
changed its method of accounting for postretirement benefits other than pensions
from the pay-as-you-go method to the method of accruing these costs over
employees' service periods. The effect of adopting SFAS No. 106 can be charged
to expense immediately or spread over no more than the lesser of twenty years or
the average life expectancy of the participants. The Company currently provides
postretirement benefits for a limited number of retirees. The Company is
amortizing the cumulative effect of this change of $71 over the average life
expectancy of the participants, which is 10 years.
SUPPLEMENTAL RETIREMENT PLAN
The Company has adopted a supplemental retirement plan which provides for
certain Company executives to receive benefits upon retirement subject to
certain limitations as set forth in the plan. The Company's expense under this
Plan was $294, $268 and $216 for the years ended March 31, 2002, 2001 and 2000,
respectively. At March 31, 2002, the Company holds restricted assets in an
irrevocable grantor's trust with a cost basis of $3,363 and a market value of
$3,098, of which $1,294 are common stock of the Company and are classified as
treasury stock, and the remaining $1,804 are included in other assets and offset
by an accrued liability of $3,908. These treasury shares are considered retired
in the computation of earnings per share.
EMPLOYEE TAX DEFERRED THRIFT PLAN
The Company has an employee tax deferred thrift plan (the "401k Plan")
under which employee contributions to the 401k Plan are matched within certain
limitations by the Company. Full-time employees are eligible to participate in
the 401k Plan. The amounts matched by the Company are included in compensation
and benefits expense. The amounts matched for the years ended March 31, 2002,
2001 and 2000 were $252, $204 and $192 respectively.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The Bank and the Company have entered into Employment Agreements with its
President and Chief Executive Officer, Executive Vice President and Chief
Operating Officer, two other Executive Vice Presidents and a Senior Vice
President. The agreements generally provide for the continued payment of
specified compensation and benefits for five years for the President and Chief
Executive and Executive Vice President and Chief Operating Officer, and for two
years for the other three executives. They also provide payments for the
remaining term of the agreement after the officers are terminated, unless the
termination is for "cause" as defined in the Employment Agreement. In the event
of a change in control, as defined in the agreements, payments will also be
provided to the officer upon voluntary or involuntary termination. In addition,
the Bank entered into change in control agreements with certain other executives
which provide for the payment, under certain circumstances, to the executive
upon the executives termination after a change in control, as defined in their
change in control agreements.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank established the First Federal Savings Bank of America Employee
Severance Compensation Plan (the "Plan") on January 15, 1997. The Plan provides
eligible employees with severance pay benefits in the event of a change in
control of the Bank or Company. Generally, employees are eligible to participate
in the Plan if they have completed at least one year of service with the Bank
and are not eligible to receive benefits under the executive officer employment
agreements. The Plan provides for the payment, under certain circumstances, of
lump-sum amounts upon termination following a change in control, as defined in
the Plan.
F-36
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS (DOLLARS IN THOUSANDS)
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include real estate acquired by
foreclosure, the deferred income tax asset, office properties and equipment, and
core deposit and other intangibles. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no actual market exists for some of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered.
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
CASH ON HAND AND DUE FROM BANKS
The fair values for cash on hand and due from banks approximate the
carrying amount as reported in the balance sheet.
SHORT-TERM INVESTMENTS
The fair values for short-term investments approximate the carrying amount
as reported because of the short-term nature of these financial instruments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values for investment and mortgage-backed securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
MORTGAGE LOANS HELD FOR SALE
Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to sell loans
have been considered in the value of mortgage loans held for sale.
LOANS
The fair values of loans are estimated using discounted cash flow analyses
and interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.
F-37
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED INTEREST RECEIVABLE
The fair value of accrued interest receivable approximates its carrying
amount as reported in the balance sheet because of the short-term nature of
these financial instruments.
STOCK IN FHLB OF BOSTON
The fair value for FHLB stock approximates the carrying amount as reported
in the balance sheet. If redeemed, the Company expects to receive an amount
equal to the par value of the stock.
DEPOSITS AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE
The fair values of demand deposits (e.g., NOW, business checking, savings
accounts, certain types of money market accounts and advance payments by
borrowers for taxes and insurance) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow technique that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FHLB ADVANCES
The fair value of FHLB overnight advances approximates their carrying value
due to their short term nature. All other advances are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on advances to a schedule of aggregated expected monthly maturities on
FHLB advances.
OTHER BORROWINGS
Other borrowings consist primarily of reverse repurchase agreements with
securities dealers. The fair value of other borrowings are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on reverse repurchase agreements to a schedule of aggregated expected
monthly maturities on other borrowings.
COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
The fair value of company obligated, mandatorily redeemable securities is
based on the quoted market price.
ACCRUED INTEREST PAYABLE
The fair value of accrued interest payable approximates its carrying amount
as reported in the balance sheet because of the short-term nature of these
financial instruments.
INTEREST RATE SWAP AGREEMENTS
The fair value of the off-balance sheet interest rate swap agreements is
the net of the present values of the pay fixed / receive floating payments,
discounted at current swap rates for the appropriate remaining term of the
existing swaps.
OTHER OFF-BALANCE SHEET INSTRUMENTS
Fair values for the Company's off-balance-sheet instruments are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit standing. The
difference between the fair value of commitments to originate loans and their
book value
F-38
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is considered to be immaterial based on a comparison to current offering rates
for similar loan products. The contractual value of commitments to sell loans
was considered in determining the fair value of loans held for sale. The
Company's commitments for unused lines and outstanding standby letters of credit
and unadvanced portions of loans are at floating rates, and therefore, there is
no fair value adjustment.
The carrying amounts and fair values of the Company's financial instruments
at March 31 are as follows:
2002 2001
------------------------ --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- -------- --------
Financial assets:
Cash on hand and due from banks............ $ 44,159 $ 44,159 $ 23,013 $ 23,013
Short-term investments..................... 100,890 100,890 200 200
Mortgage loans held for sale............... 126,729 126,830 39,103 39,103
Investment securities available for sale... 84,656 84,656 7,837 7,837
Mortgage-backed securities available....... 578,618 578,618 501,230 501,230
Mortgage-backed securities held to
maturity................................ 1,203 1,235 2,138 2,154
Stock in FHLB of Boston.................... 58,433 58,433 40,369 40,369
Loans receivable, net...................... 1,125,750 1,142,507 977,174 993,357
Accrued interest receivable................ 11,124 11,124 7,928 7,928
Financial liabilities:
Deposits................................... $1,317,263 $1,321,163 $707,416 $710,876
FHLB advances and other borrowings......... 754,820 758,657 814,764 828,768
Company obligated, mandatorily redeemable
securities.............................. 25,657 25,657 -- --
Advance payments by borrowers for taxes and
insurance............................... 6,163 6,163 5,868 5,868
Accrued interest payable................... 4,814 4,814 5,997 5,997
Financial instruments with off-balance sheet
notional amounts:
Interest rate swap agreements.............. (440) (440) -- (743)
Forward commitments to sell mortgage loans
held for sale........................... 356 356 -- (44)
Commitments to originate rate-locked loans
for sale................................ (132) (132) -- 89
F-39
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) PARENT COMPANY ONLY FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
The following are the condensed financial statements for FIRSTFED AMERICA
BANCORP, INC. (the "Parent Company") only at March 31:
Balance Sheet
2002 2001
-------- --------
ASSETS
Cash and amounts due from banks........................ $ 594 $ 153
Investment in trading securities....................... 36 815
Investment securities available for sale (amortized
cost of $5,636 and $5,798)........................... 8,703 6,062
Investment in subsidiaries, at equity.................. 184,278 111,753
Goodwill............................................... 2,771 --
Deferred tax asset..................................... 2,592 1,518
-------- --------
Total assets................................. $198,974 $120,301
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Company obligated, mandatory redeemable securities..... $ 26,393 $ --
Other borrowings....................................... 10,000 327
Accrued expenses and other liabilities................. 7,234 8,416
-------- --------
Total liabilities............................ 43,627 8,743
Stockholders' equity................................... 155,347 111,558
-------- --------
Total liabilities and stockholders' equity... $198,974 $120,301
======== ========
Statement of Operations
2002 2001 2000
-------- ------ ------
Income:
Dividends received from subsidiaries................. $ 34,850 $5,750 $5,550
Interest and dividend income......................... 187 152 119
Other non-interest income............................ -- 128 293
-------- ------ ------
35,037 6,030 5,962
-------- ------ ------
Expenses:
Interest expense..................................... 340 52 --
Non-interest expense................................. 712 468 355
Income tax (benefit) expense......................... (311) (103) 30
-------- ------ ------
741 417 385
-------- ------ ------
Income before equity in net income of subsidiaries..... 34,296 5,613 5,577
Equity in undistributed net income (loss) of
subsidiaries......................................... (21,864) 3,551 2,609
-------- ------ ------
Net income............................................. $ 12,432 $9,164 $8,186
======== ====== ======
F-40
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statement of Cash Flows
2002 2001 2000
-------- ------- --------
Net cash flows from operating activities:
Net income........................................ $ 12,432 $ 9,164 $ 8,186
Adjustments to reconcile net loss to net cash
provided by operating activities:
Equity in undistributed earnings of
subsidiaries................................. 21,864 (3,551) (2,609)
Appreciation in fair value of ESOP shares...... 617 290 196
Amortization of purchase premium on Company
obligated, mandatorily redeemable
securities................................... (19) -- --
Unrealized (gain) loss on investment in limited
partnership.................................. 4 (128) (293)
Decrease in prepaid expenses and other
assets....................................... (124) -- --
Decrease in accrued expenses and other
liabilities.................................. (1,265) (1,517) (681)
-------- ------- --------
Net cash provided by operating
activities.............................. 33,509 4,258 4,799
-------- ------- --------
Cash flow from investing activities:
Cash payment for acquisition, net of cash
acquired....................................... (41,711) -- --
Purchase of investment in limited partnership..... (40) (100) (200)
Purchase of investment securities available for
sale........................................... -- (142) --
Proceeds from the sale of investment in limited
partnership.................................... 815 -- --
Change in investment in subsidiaries.............. (645) 1,286 (196)
-------- ------- --------
Net cash (used in) provided by investing
activities..................................... (41,581) 1,044 (396)
-------- ------- --------
Cash flow from financing activities:
Net increase in short-term borrowings............. 10,000 327 --
Repayments on other borrowings.................... (327) -- --
Cash dividends paid............................... (3,235) (2,386) (1,808)
Stock options exercised........................... 71 -- --
Payments to acquire treasury shares............... (61) (6,296) (5,271)
Reduction in unearned 1997 stock-based incentive
plan shares.................................... 1,290 1,286 1,277
Reduction in allocated ESOP shares................ 775 774 774
-------- ------- --------
Net cash provided by (used in) financing
activities.............................. 8,513 (6,295) (5,028)
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................. 441 (993) (625)
Cash and cash equivalents at beginning of year...... 153 1,146 1,771
-------- ------- --------
Cash and cash equivalents at end of year............ $ 594 $ 153 $ 1,146
======== ======= ========
F-41
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis for the
year ended March 31 follows:
2002 QUARTERS 2001 QUARTERS
------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest and dividend income...... $25,904 $25,418 $27,521 $28,006 $28,855 $29,044 $28,826 $27,350
Interest expense.................. 16,056 15,894 18,293 18,883 20,066 20,670 20,088 18,571
------- ------- ------- ------- ------- ------- ------- -------
Net interest income............... 9,848 9,524 9,228 9,123 8,789 8,374 8,738 8,779
Provision for loan losses......... 300 300 300 300 300 300 300 300
Non-interest income............... 5,518 4,634 2,460 3,966 2,416 2,164 2,412 1,966
Non-interest expense.............. 10,191 7,458 7,180 7,455 7,266 7,142 7,647 6,998
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes........ 4,875 6,400 4,208 5,334 3,639 3,096 3,203 3,447
Income tax expense................ 1,741 2,402 1,376 1,837 1,174 966 1,007 1,074
------- ------- ------- ------- ------- ------- ------- -------
Net income before extraordinary
loss and cumulative effect of
accounting change............... 3,134 3,998 2,832 3,497 2,465 2,130 2,196 2,373
Extraordinary loss on early
extinguishment of debt, net of
$394 tax benefit................ (568) -- -- -- -- -- -- --
Cumulative effect of change in
accounting for derivative
instruments and hedging
activities, net of $237 tax
benefit......................... -- -- -- (461) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income........................ $ 2,566 $ 3,998 $ 2,832 $ 3,036 $ 2,465 $ 2,130 $ 2,196 $ 2,373
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share before
extraordinary loss and
cumulative effect of accounting
change.......................... $ 0.48 $ 0.69 $ 0.49 $ 0.61 $ 0.43 $ 0.37 $ 0.37 $ 0.40
Extraordinary loss on early
extinguishment of debt.......... (0.09) -- -- -- -- -- -- --
Cumulative effect of accounting
change.......................... -- -- -- (0.08) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Basic earnings per share.......... $ 0.39 $ 0.69 $ 0.49 $ 0.53 $ 0.43 $ 0.37 $ 0.37 $ 0.40
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share before
extraordinary loss and
cumulative effect of accounting
change.......................... $ 0.48 $ 0.68 $ 0.48 $ 0.61 $ 0.43 $ 0.37 $ 0.37 $ 0.40
Extraordinary loss on early
extinguishment of debt.......... (0.09) -- -- -- -- -- -- --
Cumulative effect of accounting
change.......................... -- -- -- (0.08) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Diluted earnings per share........ $ 0.39 $ 0.68 $ 0.48 $ 0.53 $ 0.43 $ 0.37 $ 0.37 $ 0.40
======= ======= ======= ======= ======= ======= ======= =======
F-42