1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _____
COMMISSION FILE NUMBER 1-12305
FIRSTFED AMERICA BANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-3331237
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
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(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 679-8181
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of August 3, 2001 there were 6,220,249 shares of the Registrant's
Common Stock outstanding.
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FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2001 (unaudited) and March 31, 2001 2
Consolidated Statements of Operations for the three months ended June 30, 2001
(unaudited) and 2000 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the three
months ended June 30, 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended June 30, 2001
(unaudited) and 2000 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Default Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, MARCH 31,
ASSETS 2001 2001
---- ----
(UNAUDITED)
Cash on hand and due from banks $ 23,495 $ 23,013
Short-term investments 28,295 200
----------- -----------
Total cash and cash equivalents 51,790 23,213
Mortgage loans held for sale 41,205 39,103
Investment in trading securities, at fair value 871 815
Investment securities available for sale, at fair value
(amortized cost of $21,323 and $6,405) 22,610 7,837
Mortgage-backed securities available for sale, at fair value
(amortized cost of $565,436 and $498,344) 567,459 501,230
Mortgage-backed securities held to maturity
(fair value of $1,736 and $2,154) 1,724 2,138
Stock in Federal Home Loan Bank of Boston, at cost 40,369 40,369
Loans receivable, net
(net of allowance for loan losses of $13,521 and $13,233) 940,300 977,174
Accrued interest receivable 8,346 7,928
Mortgage servicing rights 5,441 4,881
Office properties and equipment, net 23,504 24,038
Real estate owned 175 175
Bank-Owned Life Insurance 34,224 33,764
Goodwill 1,122 1,145
Prepaid expenses and other assets 8,522 7,255
----------- -----------
Total assets $ 1,747,662 $ 1,671,065
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 730,310 $ 707,416
FHLB advances and other borrowings 869,818 814,764
Advance payments by borrowers for taxes and insurance 5,400 5,868
Accrued interest payable 5,826 5,997
Other liabilities 22,711 25,462
----------- -----------
Total liabilities 1,634,065 1,559,507
----------- -----------
Stockholders' equity:
Common stock 87 87
Additional paid-in capital 85,715 85,585
Retained earnings 72,461 70,048
Accumulated other comprehensive income 2,022 2,551
Unallocated ESOP shares (3,098) (3,098)
Unearned stock incentive plan (2,924) (2,998)
Treasury stock (40,666) (40,617)
----------- -----------
Total stockholders' equity 113,597 111,558
----------- -----------
Total liabilities and stockholders' equity $ 1,747,662 $ 1,671,065
=========== ===========
See accompanying notes to consolidated financial statements.
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS
ENDED JUNE 30,
------------------------------
2001 2000
---- ----
(UNAUDITED)
Interest and dividend income:
Loans $ 18,938 $ 18,045
Investment securities 283 97
Mortgage-backed securities 8,156 8,605
Federal Home Loan Bank stock 629 603
----------- -----------
Total interest and dividend income 28,006 27,350
----------- -----------
Interest expense:
Deposits 6,708 6,213
Borrowed funds 12,175 12,358
----------- -----------
Total interest expense 18,883 18,571
----------- -----------
Net interest income before provision for loan losses 9,123 8,779
Provision for loan losses 300 300
----------- -----------
Net interest income after provision for loan losses 8,823 8,479
----------- -----------
Non-interest income:
Service charges on deposit accounts 452 341
Loan servicing income 327 374
Insurance commission income 254 245
Trust fee income 343 161
Earnings on Bank-Owned Life Insurance 460 400
Gain on sale of mortgage loans, net 873 18
Gain on sale of investment securities available for sale 750 --
Other income 507 427
----------- -----------
Total non-interest income 3,966 1,966
----------- -----------
Non-interest expense:
Compensation and employee benefits 4,643 4,308
Office occupancy and equipment 1,083 1,064
Data processing 499 396
Advertising and business promotion 267 333
Federal deposit insurance premiums 33 33
Other expense 930 864
----------- -----------
Total non-interest expense 7,455 6,998
----------- -----------
Income before income tax expense 5,334 3,447
Income tax expense 1,837 1,074
----------- -----------
Net income before cumulative effect of accounting change 3,497 2,373
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of $237 tax benefit (461) --
----------- -----------
Net income $ 3,036 $ 2,373
=========== ===========
Basic earnings per share before cumulative effect of accounting change $ 0.61 $ 0.40
Cumulative effect of accounting change (0.08) --
----------- -----------
Basic earnings per share $ 0.53 $0.40
=========== ===========
Diluted earnings per share before cumulative effect of accounting change $ 0.61 $ 0.40
Cumulative effect of accounting change (0.08) --
----------- -----------
Diluted earnings per share $ 0.53 $ 0.40
=========== ===========
Weighted average shares outstanding - basic 5,708,416 5,975,878
=========== ===========
Weighted average shares outstanding - diluted 5,764,100 5,975,878
=========== ===========
See accompanying notes to consolidated financial statements.
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2001
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
UNEARNED
1997
ACCUMULATED STOCK-
OTHER BASED
ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED INCOME ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS (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
Earned SIP stock awards - (5) - - - 74 - 69
Earned ESOP shares charged to
expense - 135 - - - - - 135
Cash dividends declared and
paid ($0.10 per share) - - (623) - - - - (623)
Common stock acquired for
certain employee benefit
plans (3,031 shares at
an average price of $16.09
per share) - - - - - - (49) (49)
Comprehensive income:
Net income - - 3,036 - - - - 3,036
Other comprehensive income,
net of tax
Unrealized holding gains
(losses) on available for
sale securities - - - (259) - - - -
Reclassification adjustment
for losses (gains) included
in net income - - - (750) - - - -
--------
Net unrealized (losses) gains - - - (1,009) - - - -
Tax effect - - - 480 - - - -
--------
Net-of-tax effect - - - (529) - - - (529)
--------
Total comprehensive income - - - - - - - 2,507
---- -------- -------- ------- -------- -------- --------- --------
Balance at June 30, 2001 $ 87 $ 85,715 $ 72,461 $ 2,022 $ (3,098) $ (2,924) $ (40,666) $113,597
==== ======== ======== ======= ======== ======== ========= ========
See accompanying notes to consolidated financial statements.
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JUNE 30,
------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 3,036 $ 2,373
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization (accretion) of:
Premium (discount) on investment and
mortgage-backed securities 20 (172)
Deferred loan origination fees (costs) (377) 2
Mortgage servicing rights 649 611
Goodwill 23 21
Provision for loan losses 300 300
Gains on sales of:
Mortgage loans (611) (18)
Investment securities available for sale (750) --
Net proceeds from sales of mortgage loans 136,294 11,839
Origination of mortgage loans held for sale (138,994) (13,294)
Earnings on Bank-Owned Life Insurance (460) (400)
Unrealized (gain) loss on trading securities 117 (65)
Depreciation of office properties and equipment 589 664
Appreciation in fair value of ESOP shares 135 23
Earned SIP shares 69 64
Increase or decrease in:
Accrued interest receivable (418) (618)
Fair value of commitments to originate and sell
mortgage loans held for sale (262) --
Other assets (526) 1,220
Accrued interest payable (171) 1,080
Other liabilities (2,751) (2,414)
--------- ---------
Net cash (used in) provided by operating activities $ (4,088) $ 1,216
--------- ---------
(Continued)
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS
ENDED JUNE 30,
-----------------------------
2001 2000
---- ----
Cash flows from investing activities:
Purchase of investment securities available-for-sale $ (14,921) $ --
Purchase of trading securities (173) (100)
Purchase of mortgage-backed securities available-for-sale (121,693) --
Payments received on mortgage-backed securities
available for sale 54,582 22,967
Proceeds from sale of investment securities
available-for-sale 753 --
Payments received on mortgage-backed securities
held to maturity 413 109
Purchase of Federal Home Loan Bank stock -- (2,684)
Net decrease (increase) in loans 36,951 (90,025)
Purchases of office properties and equipment (55) (561)
----------- -----------
Net cash used in investing activities (44,143) (70,294)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 22,894 14,288
Proceeds from FHLB advances and other borrowings 367,391 1,351,338
Repayments on FHLB advances and other borrowings (312,337) (1,291,503)
Net change in advance payments by borrowers for
taxes and insurance (468) (372)
Cash dividend paid (623) (476)
Payments to acquire common stock for treasury stock (49) (968)
----------- -----------
Net cash provided by financing activities 76,808 72,307
----------- -----------
Net increase in cash and cash equivalents 28,577 3,229
Cash and cash equivalents at beginning of year 23,213 20,970
----------- -----------
Cash and cash equivalents at end of quarter $ 51,790 $ 24,199
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 19,054 $ 17,491
=========== ===========
Income taxes $ 2,630 $ 2,671
=========== ===========
See accompanying notes to consolidated financial statements.
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of FIRSTFED AMERICA BANCORP, INC. (the "Company"), its wholly-owned
subsidiaries, First Federal Savings Bank of America (the "Bank"), FAB FUNDING
CORPORATION ("FAB FUNDING") and FIRSTFED INSURANCE AGENCY, LLC (the "Agency"),
and its 65% interest in FIRSTFED TRUST COMPANY, N.A. (the "Trust Company"). The
remaining 35% interest of the Trust Company is held by M/D Trust, LLC, a
minority owner. The Bank includes its wholly-owned subsidiaries, FIRSTFED
MORTGAGE CORPORATION, FIRSTFED INVESTMENT CORPORATION, and CELMAC INVESTMENT
CORPORATION.
The interim consolidated financial statements reflect all normal and
recurring adjustments which are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. The results of operations for the three
months ended June 30, 2001 are not necessarily indicative of the results of
operations that may be expected for all of fiscal year 2002.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report to Stockholders on Form 10-K for the
fiscal year ended March 31, 2001.
(2) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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 will be recognized in non-interest income each quarter, and pre-tax
income of $288,000, or approximately $0.03 per share, was recognized for the
first quarter of fiscal year 2002.
(3) IMPACT OF RECENT ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Accounting for Goodwill and Other Intangible Assets," which requires that
goodwill will no longer be amortized to earnings subsequent to adoption, but
will instead be periodically reviewed for impairment. The Company will adopt
SFAS No. 142 on April 1, 2002. At June 30, 2001, the Company had $1.1 million of
goodwill on its balance sheet with an annual amortization rate of approximately
$92,000.
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ITEM 2. 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. 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 service
charges on deposit accounts, loan servicing income, revenue from the Trust
Company and Agency operations, earnings on Bank-Owned Life Insurance ("BOLI"),
gains on sale of loans and investment securities, and other income. The
Company's non-interest expense consists of compensation and employee benefits,
office occupancy and equipment expense, data processing expense, advertising and
business promotion, federal deposit insurance premiums, 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.
Subject to applicable laws and regulations, the Company does not undertake
- and specifically disclaims any obligation - to publicly release the result of
any revisions which 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.
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RESULTS OF OPERATIONS
OVERVIEW
Net income was $3.5 million before the cumulative effect of adoption of
SFAS No. 133 for the first quarter of fiscal year 2002, an increase of $1.1
million, or 47.4%, from net income of $2.4 million for the first quarter of
fiscal year 2001. After the cumulative effect of adoption of SFAS No. 133, net
income was $3.0 million for the first quarter of fiscal year 2002. Income before
income tax expense increased $1.9 million, or 54.7%, to $5.3 million for the
first quarter of fiscal year 2002 as compared to the first quarter of fiscal
year 2001, the net result of increases in net interest income of $344,000,
non-interest income of $2.0 million and non-interest expense of $457,000.
Basic and diluted earnings per share ("EPS") was $0.61 before the
cumulative effect of adoption of SFAS No. 133 for the first quarter of fiscal
year 2002, an increase of 53% from $0.40 per share for the comparable quarter of
fiscal year 2001. After the cumulative effect of adoption of SFAS No. 133, EPS
was $0.53 for the first quarter of fiscal year 2002. The growth in EPS was
caused by the growth in net income, and a reduction in shares outstanding
primarily as a result of the Company's stock repurchases.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $344,000, or
3.9%, to $9.1 million for the first quarter of fiscal year 2002 from $8.8
million for the first quarter of fiscal year 2001, primarily due to growth in
loans receivable funded by increases in deposits and FHLB advances and other
borrowings. The net interest rate spread and net interest margin were 1.90% and
2.29% for the first quarter of fiscal year 2002, compared to 2.01% and 2.33%,
respectively, for the first quarter of fiscal year 2001.
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income is a function of both the relative amounts of interest earning
assets and interest-bearing liabilities, and the interest rates earned or paid
on them. Income from BOLI is excluded from interest income, and the BOLI cash
value balances are excluded from interest earning assets.
The following table sets forth certain information relating to the Company
for the three months ended June 30, 2001 and 2000. The average yields and costs
are derived by dividing interest 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.
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FOR THE THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------------
2001 2000
------------------------------------------- -----------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------------- -----------------------------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for sale (1) $1,004,677 $18,938 7.54% $931,318 $18,045 7.75%
Investment securities (2) 67,561 912 5.41 40,802 700 6.88
Mortgage-backed securities (3) 522,775 8,156 6.24 537,459 8,605 6.40
------------------------------------------- -----------------------------------------
Total interest-earning assets 1,595,013 28,006 7.02 1,509,579 27,350 7.25
--------------------------- ------------------------
Noninterest-earning assets 104,049 101,699
---------------- -----------------
Total assets $1,699,062 $1,611,278
================ =================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $ 637,521 6,708 4.22 $607,103 6,213 4.10
FHLB advances and other borrowings
841,228 12,175 5.81 815,656 12,358 6.08
------------------------------------------- -----------------------------------------
Total interest-bearing liabilities 1,478,749 18,883 5.12 1,422,759 18,571 5.24
--------------------------- ------------------------
Noninterest-bearing liabilities (5) 101,214 85,750
---------------- -----------------
Total liabilities 1,579,963 1,508,509
Stockholders' equity 119,099 102,769
---------------- -----------------
Total liabilities and
stockholders' equity $1,699,062 $1,611,278
================ =================
Net interest rate spread (6) $9,123 1.90% $8,779 2.01%
=========================== ========================
Net interest margin (7) 2.29% 2.33%
============= ===========
Ratio of interest-earning assets to
interest-bearing liabilities 107.86% 106.10%
================ =================
-----------
(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.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses remained unchanged at $300,000 for
the first quarters of fiscal years 2002 and 2001. The allowance for loan losses
was $13.5 million, or 1.42% of loans receivable at June 30, 2001, compared to
$13.2 million, or 1.34% of loans receivable at March 31, 2001.
The provision for loan losses is based on management's assessment of the
loan loss reserve level, the existing loan portfolio, current market conditions,
and the volume and mix of new originations. To the extent the
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Company experiences further increases in the overall balance of its loan
portfolio or increases its concentrations of loans which bear a higher degree of
risk than one-to-four family loans, the Company anticipates further increases in
its allowance for loan losses through continued provisions for loan losses.
For additional information on the amount of the allowance and the process
for evaluating its adequacy, see "Financial Condition - Asset Quality."
NON-INTEREST INCOME
Non-interest income increased $2.0 million, or 101.7% to $4.0 million for
the first quarter of fiscal year 2002 from $2.0 million for the first quarter of
fiscal year 2001. This increase was primarily attributable to increases of
$855,000 in gain on sale of mortgage loans, $750,000 in gain on sale of
investment securities available for sale, $182,000 in trust fee income and
$111,000 in service charges on deposit accounts.
The increase in gain on sale of mortgage loans included an increase of
$593,000 in net gain on sale of loans in the secondary market for the first
quarter of fiscal year 2002 as compared to the first quarter of fiscal year
2001, due to a higher volume of fixed rate loans originated for sale and more
favorable loan pricing, and a $262,000 change in fair value of derivative
instruments utilized in secondary market hedging activities following the
adoption of SFAS No. 133 on April 1, 2001. Management of the Company believes
that the adoption of SFAS No. 133 will introduce the potential for greater
volatility to quarterly earnings due to valuation changes and accelerated
recognition of gains or losses in the Company's mortgage banking activities.
However, such effects are expected to offset over time.
The increase in trust fee income was due to continued growth at the Trust
Company, which opened in February 2000. The increase in service charges on
deposit accounts was due primarily to a higher fee rate structure.
NON-INTEREST EXPENSE
Non-interest expense increased $457,000, or 6.5%, to $7.5 million for the
first quarter of fiscal year 2002 from $7.0 million for the first quarter of
fiscal year 2001. This increase was primarily attributable to increases of
$335,000 in compensation and benefits and $103,000 in data processing costs. The
increase in compensation and benefits was due primarily to the accounting impact
of an increase in the market price of FIRSTFED stock held by certain employee
benefits plans.
INCOME TAXES
Income tax expense increased $763,000, or 71.0%, to $1.8 million for the
first quarter of fiscal year 2002 from $1.1 million for the first quarter of
fiscal year 2001, due primarily to increased income before income tax expense.
The Company's effective tax rate increased to 34.4% for the first quarter of
fiscal year 2002, from 31.2% for the first quarter of fiscal year 2001.
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FINANCIAL CONDITION
OVERVIEW
Total assets at June 30, 2001 were $1.748 billion, an increase of $76.6
million, or 4.6%, compared to $1.671 billion at March 31, 2001. Asset growth was
primarily attributable to increases of $66.2 million in mortgage-backed
securities available for sale, $28.1 million in short-term investments, and
$14.8 million in investment securities available for sale, partially offset by a
decrease of $36.9 million in loans receivable, net. The decrease in loans
receivable, net, reflected high mortgage refinancing activity, partially offset
by growth in the commercial and consumer portfolios. Balance sheet growth was
primarily funded by increases of $55.1 million in FHLB advances and other
borrowings and $22.9 million in deposit balances during the first quarter of
fiscal year 2002. The increase in deposits included increases of $12.9 million
in certificate accounts and $10.0 million in demand and savings accounts.
Total stockholders' equity increased $2.0 million, or 1.8%, to $113.6
million at June 30, 2001, from $111.6 million at March 31, 2001. The increase
was due primarily to $3.0 million in net income, partially offset by $623,000 in
dividends paid to stockholders, and a $529,000 reduction in the fair market
value of available for sale securities, net of tax. The stockholders' equity to
assets ratio was 6.50% at June 30, 2001, compared to 6.68% at March 31, 2001.
Book value per share increased 1.5% to $19.86 at June 30, 2001 from $19.57 at
March 31, 2001. Return on average stockholders' equity increased to 10.22% for
the first quarter of fiscal year 2002 as compared to 9.26% for the first quarter
of fiscal year 2001.
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 and securities, FHLB advances, and other borrowings. 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.
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investments in trading securities, 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 June 30, 2001,
cash, short-term investments, mortgage loans held for sale, investments in
trading securities, investment securities available for sale, and
mortgage-backed securities available for sale totaled $683.9 million, or 39.1%
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 June 30, 2001, the Company had $869.8 million in
advances outstanding from the FHLB and other borrowings, and an additional
borrowing capacity from the FHLB of $127.4 million. The Company uses FHLB
advances and other borrowings to fund asset growth and other cash flow needs,
and may continue to do so in the future, depending on market conditions, the
pricing of deposit products, and the pricing of FHLB advances and other
borrowings.
At June 30, 2001, the Company had commitments to originate loans and unused
outstanding lines of credit and undistributed balances of construction loans
totaling $218.2 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 June 30, 2001
totaled $302.9 million. Based upon historical experience with deposit retention,
the Company expects that it will retain a majority of maturing certificate
accounts.
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At June 30, 2001, the Bank exceeded all of its regulatory capital
requirements. The Bank's tangible capital of $106.5 million, or 6.13%, of total
adjusted assets, was above the required level of $34.7 million or 2.0%; core
capital of $106.5 million, or 6.13% of total adjusted assets, was above the
required level of $69.4 million, or 4.0%; risk-based capital of $115.3 million,
or 12.99% of risk-weighted assets, was above the required level of $71.0 million
or 8.0%, and Tier 1 risk-based capital of $106.5 million, or 11.75% of
risk-weighted assets, was above the required level of $35.5 million or 4.0%. The
Bank is considered a "well capitalized" institution under the OTS prompt
corrective action regulations. The Trust Company is subject to similar
regulatory capital requirements, and exceeded all of its capital requirements at
June 30, 2001.
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 collateralized mortgage
obligations ("CMOs"). In addition, the Company engaged in two interest rate swap
agreements with a total notional principal amount of $50 million to
synthetically lengthen its liability maturities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period. At June 30,
2001, the Company's cumulative one year interest rate gap (which is the
difference between the amount of interest-earning assets and the amount of
interest-bearing liabilities maturing or repricing within one year) as a
percentage of total assets was a positive 7.99%. Accordingly, during a period of
falling interest rates, the Company's interest-earning assets would be expected
to reprice downward at a faster rate than its interest-bearing liabilities,
which, consequently, may negatively affect the Company's net interest income.
During a period of rising interest rates, the Company's interest-earning assets
would be expected to reprice upward at a faster rate than its interest-bearing
liabilities, which, consequently, may positively affect the Company's net
interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
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assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the cumulative one year interest rate gap. Finally, the ability of
some borrowers to service their adjustable-rate loans may decrease in the event
of an interest rate increase.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which generates estimates of the change in the
Company's net interest income ("NII") 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.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require certain
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the Company's
NPV model incorporates an assumption that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured, and that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
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 and may differ from actual results.
The Company follows a practice of selling certain fixed-rate and
adjustable-rate mortgage loans while generally retaining the servicing rights of
such loans. In conjunction with this 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.
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ASSET QUALITY
NON-PERFORMING ASSETS. At June 30, 2001, non-accrual loans totaled $628,000
and real estate owned ("REO") totaled $175,000. The Company ceases to accrue
interest on loans 90 days or more past due and charges off all accrued interest.
Foregone interest on non-accrual loans for the three months ended June 30, 2001
was $13,000.
The following table sets forth information regarding non-accrual loans and
REO:
AT JUNE 30, AT MARCH 31,
2001 2001
----------- ------------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family.................. $ 478 $ 431
Multi-family ....................... -- --
Commercial real estate.............. -- --
Construction and land............... -- --
------ ------
Total mortgage loans............ 478 431
------ ------
Commercial loans..................... 19 821
------ ------
Consumer loans:
Home equity lines.................. -- --
Second mortgages................... 78 56
Other consumer loans............... 53 24
------ ------
Total consumer loans............ 131 80
------ ------
Total nonaccrual loans.......... 628 1,332
Real estate owned, net (1).......... 175 175
------ ------
Total non-performing assets......... $ 803 $1,507
====== ======
Allowance for loan losses as a percent
percent of loans (2) 1.42% 1.34%
Allowance for loan losses as percent
of non-accrual loans (3) 2,153% 993%
Non-accrual loans as a percent
of loans (2)(3) 0.07% 0.13%
Non-performing assets as a percent
of total assets (4) 0.05% 0.09%
----------
(1) REO balances are shown net of related valuation allowances.
(2) Loans includes loans receivable, net, excluding allowance for loan losses.
(3) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Company as presenting
uncertainty with respect to the collectability of interest or principal.
(4) Non-performing assets consist of non-performing loans and REO.
The decrease in non-performing assets during the first quarter of fiscal
year 2002 was due primarily to a payment received on non-accrual commercial
loan.
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ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is based on
management's estimate of the credit losses inherent in the loan portfolio. The
level of the allowance is based on management's ongoing review of the existing
loan portfolio and current market conditions, as well as the volume and mix of
new originations. Management's methodology to estimate loss exposure inherent in
the portfolio also includes analysis of individual loans deemed to be impaired,
allowance allocations for various loan types based on payment status or loss
experience, and an unallocated allowance that is maintained based on
management's assessment of many factors including trends in loan delinquencies
and charge-offs, current type, mix and balance of the portfolio, performance of
individual loans in relation to contract terms, and the perceived risk in the
relatively new and rapidly growing commercial loan 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 totaled $13.5 million at June 30, 2001, an
increase of $288,000, or 2.2%, as compared to $13.2 million at March 31, 2001.
This increase in the allowance reflected management's assessment of the loan
portfolio and was based upon the greater of concentrations of loans that bear a
higher degree of risk than one-to-four family loans, including commercial and
consumer loans. 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 June 30, 2001, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the Section of Item 2 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not engaged in any legal proceedings of a material nature at
the present time. From time to time, the Company is a party to routine legal
proceedings within the normal 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP,
INC. (1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC. (1)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC. (1)
b) Reports on Form 8-K
None
-------------
(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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
-----------------------------------
Registrant
Date: August 10, 2001 /s/ Robert F. Stoico
-----------------------------------------
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2001 /s/ Edward A. Hjerpe III
-----------------------------------------
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
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