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 SEPTEMBER 30, 2002
[ ] 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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes (X) No ( )
As of November 1, 2002, there were 8,392,554 shares of the Registrant's Common
Stock outstanding.
FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and March 31, 2002 2
Consolidated Statements of Operations for the three months and
six months ended September 30, 2002 (unaudited) and 2001 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for
the six months ended September 30, 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
September 30, 2002 (unaudited) and 2001 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Default Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATIONS 25
1
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
ASSETS 2002 2002
----------- -----------
(UNAUDITED)
Cash on hand and due from banks $ 42,407 $ 44,159
Short-term investments 1,130 100,890
----------- -----------
Total cash and cash equivalents 43,537 145,049
Mortgage loans held for sale 261,882 126,729
Investment securities available for sale, at fair value
(amortized cost of $40,991 and $81,602) 44,790 84,656
Mortgage-backed securities available for sale, at fair value
(amortized cost of $794,262 and $579,713) 805,325 578,618
Mortgage-backed securities held to maturity
(fair value of $1,043 and $1,235) 1,001 1,203
Stock in Federal Home Loan Bank of Boston, at cost 58,433 58,433
Loans receivable, net
(net of allowance for loan losses of $19,321 and $19,237) 1,138,528 1,125,750
Accrued interest receivable 11,613 11,124
Mortgage servicing rights 5,444 6,505
Office properties and equipment, net 38,307 37,775
Real estate owned 50 240
Bank-Owned Life Insurance 36,615 35,652
Investment in limited partnerships 782 470
Goodwill and other intangible assets 55,020 55,779
Prepaid expenses and other assets 21,692 26,465
----------- -----------
Total assets $ 2,523,019 $ 2,294,448
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 1,331,362 $ 1,317,263
FHLB advances and other borrowings 942,980 754,820
Company obligated, mandatorily redeemable securities 11,416 25,657
Advance payments by borrowers for taxes and insurance 5,488 6,163
Accrued interest payable 4,172 4,814
Other liabilities 49,570 30,384
----------- -----------
Total liabilities 2,344,988 2,139,101
----------- -----------
Stockholders' equity:
Common stock 107 106
Additional paid-in capital 122,500 119,149
Retained earnings 86,927 79,245
Accumulated other comprehensive income 8,484 1,401
Unallocated ESOP shares (2,323) (2,323)
Unearned stock incentive plan (118) (1,553)
Treasury stock (37,546) (40,678)
----------- -----------
Total stockholders' equity 178,031 155,347
----------- -----------
Total liabilities and stockholders' equity $ 2,523,019 $ 2,294,448
=========== ===========
See accompanying notes to consolidated financial statements.
2
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest and dividend income: (UNAUDITED)
Loans $ 21,575 $ 17,990 $ 42,443 $ 36,928
Mortgage-backed securities 10,011 8,556 18,940 16,712
Investment securities 824 405 2,169 688
Federal Home Loan Bank stock 553 570 1,099 1,199
----------- ----------- ----------- -----------
Total interest and dividend income 32,963 27,521 64,651 55,527
----------- ----------- ----------- -----------
Interest expense:
Deposits 7,289 6,637 14,856 13,345
Borrowed funds 10,547 11,656 21,064 23,831
----------- ----------- ----------- -----------
Total interest expense 17,836 18,293 35,920 37,176
----------- ----------- ----------- -----------
Net interest income before provision for loan losses 15,127 9,228 28,731 18,351
Provision for loan losses 150 300 250 600
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 14,977 8,928 28,481 17,751
----------- ----------- ----------- -----------
Non-interest income:
Service charges on deposit accounts 621 481 1,294 933
Trust fee income 352 347 713 690
Loan servicing (expense) income (915) 71 (869) 398
Insurance commission income 230 259 439 513
Earnings on Bank-Owned Life Insurance 480 445 963 905
Gain on sale of mortgage loans, net 6,900 588 10,987 1,461
Gain on sale of investment securities available for sale 40 253 1,571 1,003
Other income 1,867 16 3,450 523
----------- ----------- ----------- -----------
Total non-interest income 9,575 2,460 18,548 6,426
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 8,648 4,482 17,057 9,125
Office occupancy and equipment 2,099 1,080 4,063 2,163
Data processing 697 500 1,650 999
Advertising and business promotion 199 187 391 454
Federal deposit insurance premiums 59 34 161 67
Amortization of intangible assets 607 23 1,214 46
Other expense 3,015 874 6,064 1,781
----------- ----------- ----------- -----------
Total non-interest expense 15,324 7,180 30,600 14,635
----------- ----------- ----------- -----------
Income before income tax expense 9,228 4,208 16,429 9,542
Income tax expense 3,581 1,376 6,348 3,213
----------- ----------- ----------- -----------
Net income before cumulative effect
of accounting change 5,647 2,832 10,081 6,329
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of $237 tax benefit -- -- -- (461)
----------- ----------- ----------- -----------
Net income $ 5,647 $ 2,832 $ 10,081 $ 5,868
=========== =========== =========== ===========
Basic earnings per share before cumulative effect of
accounting change $ 0.70 $ 0.49 $ 1.27 $ 1.10
Cumulative effect of accounting change -- -- -- (0.08)
----------- ----------- ----------- -----------
Basic earnings per share $ 0.70 $ 0.49 $ 1.27 $ 1.02
=========== =========== =========== ===========
Diluted earnings per share before cumulative
effect of accounting change $ 0.68 $ 0.48 $ 1.23 $ 1.09
Cumulative effect of accounting change -- -- -- (0.08)
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.68 $ 0.48 $ 1.23 $ 1.01
=========== =========== =========== ===========
Weighted average shares outstanding - basic 8,015,398 5,771,113 7,946,333 5,739,936
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 8,270,873 5,841,682 8,212,198 5,803,159
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
UNEARNED
ACCUMULATED STOCK-
ADDITIONAL OTHER UNALLOCATED BASED TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP INCENTIVE TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME SHARES PLAN(SIP) STOCK EQUITY
------ ---------- -------- ------------- ----------- --------- -------- -------------
Balance at March 31, 2002 $106 $ 119,149 $ 79,245 $ 1,401 $(2,323) $(1,553) $(40,678) $ 155,347
Earned SIP stock awards -- (154) -- -- -- 1,435 -- 1,281
Earned ESOP shares
charged to expense -- 580 -- -- -- -- -- 580
Stock options exercised 1 1,142 -- -- -- -- -- 1,143
Cash dividends declared
and paid
(1st quarter at $0.14
per share;
2nd quarter at $0.15
per share) -- -- (2,399) -- -- -- -- (2,399)
Common stock acquired
for certain
employee benefit plans
(2,751 shares at an
average price
of $26.04 per share) -- -- -- -- -- -- (72) (72)
Common stock issued in
private placement
(202,430 shares at
$24.70 per share) -- 1,796 -- -- -- -- 3,204 5,000
Common stock issuance costs -- (13) -- -- -- -- -- (13)
Comprehensive income:
Net income -- -- 10,081 -- -- -- -- 10,081
Other comprehensive
income, net of tax
Unrealized holding
gains on
available for
sale securities -- -- -- 14,475 -- -- -- --
Reclassification
adjustment for gains
included in net
income -- -- -- (1,571) -- -- -- --
--------
Net unrealized gains -- -- -- 12,904 -- -- -- --
Tax effect -- -- -- (5,821) -- -- -- --
--------
Net-of-tax effect -- -- -- 7,083 -- -- -- 7,083
-----------
Total comprehensive income -- -- -- -- -- -- -- 17,164
--------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $107 $ 122,500 $ 86,927 $ 8,484 $(2,323) $ (118) $(37,546) $ 178,031
==================================================================================================
See accompanying notes to consolidated financial statements.
4
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
-------------------
2002 2001
----------- ---------
Cash flows from operating activities:
Net income $ 10,081 $ 5,868
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
(Accretion) amortization of:
Premiums/discounts, net (1,980) 91
Deferred loan origination costs (456) (706)
Mortgage servicing rights 2,994 1,587
Intangible assets 1,214 46
Provision for loan losses 250 600
Gains on sales of:
Mortgage loans (10,987) (1,461)
Investment securities available for sale (1,571) (750)
Mortgage-backed securities available for sale -- (253)
Office properties and equipment (13) (105)
Real estate owned (36) --
Net proceeds from sales of mortgage loans 990,138 248,692
Origination of mortgage loans held for sale (1,116,398) (239,780)
Earnings on Bank-Owned Life Insurance (963) (905)
Unrealized loss on investments in limited partnerships 63 401
Depreciation of office properties and equipment 2,122 649
Appreciation in fair value of ESOP shares 580 300
Earned SIP shares 1,281 1,284
Increase or decrease in:
Accrued interest receivable (489) (604)
Other assets (1,683) (2,079)
Accrued interest payable (642) (1,239)
Other liabilities 19,186 605
----------- ---------
Net cash (used in) provided by operating activities (107,309) 12,241
----------- ---------
Cash flows from investing activities:
Purchase of investment securities available for sale (1,476) (14,921)
Purchase of mortgage-backed securities available for sale (348,080) (217,880)
Payments received on mortgage-backed securities 128,643 107,581
Proceeds from sale of investment securities available for sale 42,093 753
Proceeds from sale of mortgage-backed securities available for sale 4,701 19,820
Maturities of investment securities available for sale 1,527 --
Net (increase) decrease in loans (13,035) 51,573
Purchase of office properties and equipment (2,897) (374)
Proceeds from sales of office properties and equipment 256 1,099
Proceeds from sales of real estate owned 266 --
Purchase of investments in limited partnerships (375) (173)
----------- ---------
Net cash used in investing activities (188,377) (52,522)
----------- ---------
Cash flows from financing activities:
Net increase in deposits 14,684 51,398
Proceeds from FHLB advances and other borrowings 2,408,659 717,915
Repayments on FHLB advances and other borrowings (2,232,153) (699,794)
Net change in advance payments by borrowers for taxes and insurance (675) (1,425)
Cash dividends paid (2,399) (1,493)
Common stock issued in private placement 5,000 --
Payments to acquire common stock for treasury stock and stock issuance costs (85) (56)
Stock options exercised 1,143 --
----------- ---------
Net cash provided by financing activities 194,174 66,545
----------- ---------
Net (decrease) increase in cash and cash equivalents (101,512) 26,264
Cash and cash equivalents at beginning of period 145,049 23,213
----------- ---------
Cash and cash equivalents at end of period $ 43,537 $ 49,477
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 36,562 $ 38,415
=========== =========
Income taxes $ 9,418 $ 5,021
=========== =========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans
$ 40 $ --
=========== =========
See accompanying notes to consolidated financial statements.
5
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying 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"),
People's Bancshares Capital Trust ("Capital Trust I"), People's Bancshares
Capital Trust II ("Capital Trust II"), and the Company's 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, People's Mortgage Corporation ("PMC"),
FIRSTFED INVESTMENT CORPORATION, and CELMAC INVESTMENT CORPORATION and several
inactive corporations.
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 was accounted for as a
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.
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 six
months ended September 30, 2002 are not necessarily indicative of the results of
operations that may be expected for all of fiscal year 2003.
Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America 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, 2002.
(2) GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," effective April 1, 2002. As of the date of adoption,
the Company had goodwill in the amount of $43.5 million, a core deposit
intangible asset of $11.7 million and a non-compete intangible asset of
$498,000, all of which will be subject to the transition provisions of SFAS No.
142. The Company has completed the transitional impairment testing provisions of
SFAS No. 142, and concluded that the amount of recorded goodwill was not
impaired as of April 1, 2002. The Company does not currently have any other
indefinite-lived intangible assets recorded in the consolidated balance sheet.
In addition, no material reclassifications or adjustments to the useful lives of
finite-lived intangible assets were made as a result of adopting the new
standard. The estimated amortization expense of intangible assets for fiscal
year 2003 is expected to increase to $2.4 million from $294,000 in fiscal year
2002 due to amortization of the identifiable 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. Total amortization expense associated with these intangible
assets was $607,000 and $23,000 in the second quarter of fiscal years 2003 and
2002, respectively, and $1.2 million and $46,000 in the first six months of
fiscal years 2003 and 2002,
6
respectively. The retroactive adoption of SFAS No. 142 would have resulted in an
insignificant effect on net income and diluted earnings per share for the six
months ended September 30, 2001.
The changes in the carrying amount of goodwill and other intangible
assets are as follows (in thousands):
TOTAL
NON-COMPETE IDENTIFIABLE
CORE DEPOSIT INTANGIBLE INTANGIBLE
GOODWILL INTANGIBLE ASSET ASSET ASSETS
-------- ---------------- ----- ------
Balance at March 31, 2002 $ 43,535 $ 11,746 $ 498 $ 12,244
Recorded during the period 95 -- -- --
Amortization expense -- (1,084) (130) (1,214)
Impairment recognized -- -- -- --
Adjustment of purchase accounting estimates 484 -- -- --
Change in deferred taxes related to purchase
accounting adjustments (124) -- -- --
-------- -------- ----- --------
Balance at September 30, 2002 $ 43,990 $ 10,662 $ 368 $ 11,030
======== ======== ===== ========
Estimated amortization expense for fiscal years ended March 31:
2003 $ -- $ 2,150 $ 260 $ 2,410
2004 -- 1,933 238 2,171
2005 -- 1,717 -- 1,717
2006 -- 1,500 -- 1,500
2007 -- 1,283 -- 1,283
The components of identifiable intangible assets at September 30,
2002 are as follows (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Core deposit intangible asset $11,926 $ 1,264 $10,662
Non-compete intangible asset 520 152 368
------- ------- -------
$12,446 $ 1,416 $11,030
======= ======= =======
(3) IMPACT OF RECENT ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("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. SFAS No. 144 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.
7
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses financial accounting and reporting of gains
and losses from extinguishment of debt. SFAS No. 145 requires gains and losses
resulting from the extinguishment of debt to be classified as extraordinary
items only if they meet the criteria in Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements," and amends SFAS No. 13, "Accounting for
Leases." SFAS No. 145 is effective for fiscal years beginning after May 15,
2002, with early application encouraged. The Company does not believe the
adoption of SFAS No. 145 will have a material impact on the Company's
Consolidated Financial Statements.
8
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 and securities,
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,
investment and mortgage-backed securities 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.
9
RESULTS OF OPERATIONS
OVERVIEW
Net income increased $2.8 million, or 99.4%, to $5.6 million for the
second quarter of fiscal year 2003 from $2.8 million for the second quarter of
fiscal year 2002. Diluted earnings per share ("EPS") increased 41.7% to $0.68
for the second quarter of fiscal year 2003 from $0.48 per share for the second
quarter of fiscal year 2002. Income before income tax expense increased $5.0
million, or 119%, to $9.2 million, as a result of increases in net interest
income of $5.9 million and non-interest income of $7.1 million, partially offset
by an increase in non-interest expense of $8.1 million.
For the first six months of fiscal year 2003, net income was $10.1
million, an increase of $4.2 million, or 71.8%, from $5.9 million for the first
six months of fiscal year 2002. Before the cumulative effect of the prior year
change in accounting for derivative instruments of $461,000 upon adoption of
SFAS No. 133, net income was $6.3 million for the first six months of fiscal
year 2002. Diluted EPS increased 21.8% to $1.23 for the first six months of
fiscal year 2003 from $1.01 for the first six months of fiscal year 2002. Before
the cumulative effect of the prior year change in accounting for derivative
instruments of $0.08 per share, diluted EPS was $1.09 for the first six months
of fiscal year 2002. Income before income tax expense increased $6.9 million, or
72.2%, to $16.4 million, as a result of increases in net interest income of
$10.4 million and non-interest income of $12.1 million, partially offset by an
increase in non-interest expense of $16.0 million.
Return on average stockholders' equity increased to 12.65% for the
second quarter of fiscal year 2003 and 12.02% for the first six months of fiscal
year 2003, compared to 9.56% and 9.89% for the respective periods of fiscal year
2002. Return on average assets increased to 0.92% for the second quarter of
fiscal year 2003 and 0.85% for the first six months of fiscal year 2003,
compared to 0.65% and 0.68% for the respective periods of fiscal year 2002.
The second quarter and first six months of the fiscal year 2002 did
not include results from People's, as well as People's Savings Bank of Brockton
and its mortgage banking subsidiary, PMC, all of which were acquired on February
28, 2002. In May 2002, the Company completed the systems conversion and
consolidation of three banking offices.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $5.9
million, or 63.9%, to $15.1 million for the second quarter of fiscal year 2003
from $9.2 million for the second quarter of fiscal year 2002. The net interest
rate spread and net interest margin were 2.49% and 2.71% for the second quarter
of fiscal year 2003, compared to 1.97% and 2.25%, respectively, for the second
quarter of fiscal year 2002.
For the first six months of fiscal year 2003, net interest income
before provision for loan losses increased $10.4 million, or 56.6%, to $28.7
million for the first six months of fiscal year 2003 from $18.4 million for the
first six months of fiscal year 2002. The net interest rate spread and net
interest margin were 2.46% and 2.67% for the first six months of fiscal year
2003, compared to 1.93% and 2.27%, respectively, for the first six months of
fiscal year 2002.
The increases in net interest income and the average balances of
interest-earning assets and interest-bearing liabilities during the second
quarter and year to date periods of fiscal year 2003, compared to the same
periods of fiscal year 2002, were due primarily to improved balance sheet
composition and growth resulting from the People's acquisition, as well as the
pre-payment of certain FHLB advances and other borrowings during March 2002. In
addition, a low market interest rate environment and related consumer
preferences resulted in the Company's
10
continued high origination volume of fixed-rate mortgages that are generally
sold in the secondary market and increases in mortgage loans held for sale.
However, the low market interest rate environment also led to increased
prepayment speeds on portfolio mortgage loans due primarily to refinancing
activity.
The following tables set forth certain information relating to the
Company for the periods indicated. 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 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.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2002 2001
-------------------------------- -----------------------------------
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) $1,302,078 $21,575 6.63% $ 961,078 $17,990 7.49%
Investment securities (2) 106,180 1,377 5.15 78,080 975 4.95
Mortgage-backed securities (3) 807,172 10,011 4.96 587,750 8,556 5.82
-------------------------------- ----------------------------------
Total interest-earning assets 2,215,430 32,963 5.95 1,626,908 27,521 6.77
----------------- -----------------
Noninterest-earning assets 219,657 103,103
---------- -----------
Total assets $2,435,087 $ 1,730,011
========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $1,139,713 7,289 2.54 $ 655,737 6,637 4.02
FHLB advances and other borrowings 904,050 10,547 4.63 855,994 11,656 5.40
--------------------------------- -----------------------------------
Total interest-bearing liabilities 2,043,763 17,836 3.46 1,511,731 18,293 4.80
------------------- ------------------
Noninterest-bearing liabilities (5) 214,191 100,787
---------- -----------
Total liabilities 2,257,954 1,612,518
Stockholders' equity 177,133 117,493
---------- -----------
Total liabilities and stockholders'
equity $2,435,087 $ 1,730,011
========== ===========
Net interest rate spread (6) $ 15,127 2.49% $ 9,228 1.97%
=================== ==================
Net interest margin (7) 2.71% 2.25%
==== ====
Ratio of interest-earning assets to interest-
bearing liabilities 108.40% 107.62%
========== ===========
11
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
2002 2001
------------------------------- --------------------------------
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) $1,258,202 $42,443 6.75% $ 982,759 $36,928 7.52%
Investment securities (2) 139,386 3,268 4.68 72,850 1,887 5.17
Mortgage-backed securities (3) 751,524 18,940 5.04 555,440 16,712 6.02
------------------------------- --------------------------------
Total interest-earning assets 2,149,112 64,651 6.02 1,611,049 55,527 6.89
---------------- -----------------
Noninterest-earning assets 223,342 103,572
---------- ----------
Total assets $2,372,454 $1,714,621
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $1,159,150 14,856 2.56 $ 646,679 13,345 4.12
FHLB advances and other borrowings 855,111 21,064 4.91 848,651 23,831 5.60
------------------------------- --------------------------------
Total interest-bearing liabilities 2,014,261 35,920 3.56 1,495,330 37,176 4.96
---------------- -----------------
Noninterest-bearing liabilities (5) 190,918 100,999
---------- ----------
Total liabilities 2,205,179 1,596,329
Stockholders' equity 167,275 118,292
---------- ----------
Total liabilities and stockholders'
equity $2,372,454 $1,714,621
========== ==========
Net interest rate spread (6) $28,731 2.46% $18,351 1.93%
================ =================
Net interest margin (7) 2.67% 2.27%
==== ====
Ratio of interest-earning assets to interest-
bearing liabilities 106.69% 107.74%
========= ==========
-----------
(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, investment securities available for sale
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 was $150,000 for the second
quarter of fiscal year 2003 compared to $300,000 for the second quarter of
fiscal year 2002, and $250,000 for the first six months of fiscal year 2003
compared to $600,000 for the first six months of fiscal year 2002, based on
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."
12
NON-INTEREST INCOME
Non-interest income increased $7.1 million, or 289%, to $9.6 million
for the second quarter of fiscal year 2003 from $2.5 million for the second
quarter of fiscal year 2002, including increases of $6.3 million in gain on sale
of mortgage loans, $140,000 in service charges on deposit accounts and $1.9
million in other non-interest income, partially offset by decreases of $986,000
in loan servicing income and $213,000 in gain on sale of investment securities
available for sale.
For the first six months of fiscal year 2003, non-interest income
increased $12.1 million, or 189%, to $18.5 million from $6.4 million for the
first six months of fiscal year 2002, including increases of $9.5 million in
gain on sale of mortgage loans, $568,000 in gain on sale of investment
securities available for sale, $361,000 in service charges on deposit accounts
and $2.9 million in other non-interest income, partially offset by a decrease of
$1.3 million in loan servicing income.
The increases in gain on sale of mortgage loans for the second
quarter and the year to date were due primarily to a higher volume of loans
originated for sale, which included loans sold by PMC during fiscal year 2003.
Changes in fair value of derivative instruments utilized in secondary market
hedging activities resulted in an addition to gain on sale of mortgage loans of
$269,000 for the second quarter of fiscal year 2003, compared to a reduction of
$237,000 for the second quarter of fiscal year 2002, and additions of $162,000
and $25,000 for the first six months of fiscal years 2003 and 2002,
respectively. Management of the Company believes that the adoption of SFAS No.
133 has introduced 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 as market conditions change.
The year to date increase in gain on sale of investment securities
available for sale included the sale during fiscal year 2003 of certain
investments acquired as part of the People's acquisition. The increases in
service charges on deposit accounts and other non-interest income were due
primarily to growth resulting from the People's acquisition. Changes in the fair
value of interest rate swaps resulted in an addition to other non-interest
income of $277,000 for the second quarter of fiscal year 2003, compared to a
reduction of $118,000 for the second quarter of fiscal year 2002, and an
addition of $440,000 for the first six months of fiscal year 2003, compared to a
reduction of $92,000 for the first six months of fiscal year 2002.
The decreases in loan servicing income were due primarily to
additions to the valuation reserve for mortgage servicing rights of $1.2 million
and $1.4 million for the second quarter and first six months of fiscal year
2003, respectively, compared to $240,000 for the second quarter and first six
months of fiscal year 2002. The valuation reserve adjustments were based on
estimated impairment due to a combination of faster than previously expected
actual payoff experience and faster prepayment forecasts for the applicable
periods. The balance of the valuation allowance amounted to $1.9 million at
September 30, 2002 and $490,000 at March 31, 2002. Amortization of mortgage
servicing rights, plus the addition to the valuation allowance, totaled $3.0
million and $1.6 million for the first six months of fiscal year 2003 and 2002,
respectively.
NON-INTEREST EXPENSE
Non-interest expense increased $8.1 million, or 113%, to $15.3
million for the second quarter of fiscal year 2003 from $7.2 million for the
second quarter of fiscal year 2002, including increases of $4.2 million in
compensation and benefits, $1.0 million in office occupancy and equipment
expenses, $197,000 in data processing costs, $584,000 in amortization of
intangible assets and $2.1 million in other non-interest expenses.
For the first six months of fiscal year 2003, non-interest expense
increased $16.0 million, or 109%, to $30.6
13
million from $14.6 million for the first six months of fiscal year 2002,
including increases of $7.9 million in compensation and benefits, $1.9 million
in office occupancy and equipment expenses, $651,000 in data processing costs,
$1.2 million in amortization of intangible assets and $4.3 million in other
non-interest expenses.
The increases in non-interest expenses were due primarily to growth
resulting from the acquisition of People's and PMC, costs related to banking
office and back office consolidation, and other non-recurring integration
expenses.
INCOME TAXES
Income tax expense increased $2.2 million, or 160%, to $3.6 million
for the second quarter of fiscal year 2003 from $1.4 million for the second
quarter of fiscal year 2002. For the first six months of fiscal year 2003,
income tax expense increased $3.1 million, or 97.6%, to $6.3 million from $3.2
million for the first six months of fiscal year 2002. The Company's effective
tax rate increased to 38.6% during the first six months of fiscal year 2003 from
33.7% for the first six months of fiscal year 2002, due primarily to the effects
of an increase in the statutory federal income tax rate based on a higher
taxable earnings threshold, increased state taxes and appreciation of FIRSTFED
stock contributed to the Company's Employee Stock Ownership Plan ("ESOP").
14
FINANCIAL CONDITION
OVERVIEW
Total assets increased $228.6 million, or 10.0%, to $2.523 billion
at September 30, 2002 from $2.294 billion at March 31, 2002. This growth was due
primarily to increases of $226.7 million in mortgage-backed securities available
for sale and $135.2 million in mortgage loans held for sale, partially offset by
decreases of $101.5 million in cash and cash equivalents and $39.9 million in
investment securities available for sale. The net increase in mortgage-backed
securities was due primarily to purchases of mortgage-backed securities
available for sale totaling $348.1 million, partially offset by payments
received of $128.6 million. The net decrease in investment securities available
for sale was due primarily to sales of $42.1 million, including the sale of
certain securities acquired as part of the People's acquisition. Corporate bond
investments acquired from People's have been reduced from $16.1 million at the
time of acquisition to $6.8 million at September 30, 2002. Trust preferred stock
investments have been reduced from $40.3 million at the time of acquisition to
$25.2 million at September 30, 2002. During October 2002, another $6.9 million
of corporate bond and trust preferred stock investments acquired in the People's
acquisition have been sold.
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:
SEPTEMBER 30, 2002 MARCH 31, 2002
------------------------ -----------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential $ 574,987 49.11% $ 635,297 54.77%
Commercial real estate 123,974 10.59 115,243 9.93
Construction and land 45,444 3.88 63,810 5.50
---------- ------ ---------- ------
Total mortgage loans 744,405 63.58 814,350 70.20
---------- ------ ---------- ------
Commercial Loans 260,135 22.22 200,016 17.24
---------- ------ ---------- ------
Consumer Loans:
Home equity lines 110,273 9.42 83,013 7.16
Second mortgages 42,357 3.62 48,901 4.22
Other consumer loans 13,666 1.16 13,713 1.18
---------- ------ ---------- ------
Total consumer loans 166,296 14.20 145,627 12.56
---------- ------ ---------- ------
Total loans receivable 1,170,836 100.00% 1,159,993 100.00%
====== ======
Less:
Allowance for loan losses (19,321) (19,237)
Undisbursed proceeds of
construction mortgages
in process (18,959) (21,818)
Purchase premium on
loans, net 5,445 5,869
Deferred loan origination
costs, net 527 943
---------- ----------
Loans receivable, net $1,138,528 $1,125,750
========== ==========
Balance sheet growth was primarily funded by increases of $188.2
million in FHLB advances and other borrowings and $14.1 million in deposit
balances during the first six months of fiscal year 2003. The increase in
deposits included an increase in combined demand and savings deposits of $42.9
million, or 6.4%, partially offset by a decrease in time deposits of $28.8
million, or 4.4%. The percentage of deposits to total assets was 52.8% at
15
September 30, 2002.
Total stockholders' equity increased $22.7 million, or 14.6%, to
$178.0 million at September 30, 2002, from $155.3 million at March 31, 2002. The
increase was due primarily to $10.1 million in net income, a $7.1 million
increase in the fair market value of available for sale securities, net of tax,
and a $5.0 million private placement of common stock issued from the Company's
treasury stock, partially offset by $2.4 million in dividends paid to
stockholders. Stockholders' equity to assets was 7.06% at September 30, 2002,
compared to 6.77% at March 31, 2002. Book value per share increased 9.3% to
$21.92 at September 30, 2002 from $20.06 at March 31, 2002. Tangible book value
per share increased 17.8% to $15.15 at September 30, 2002 from $12.86 at March
31, 2002.
At September 30, 2002 and March 31, 2002, mortgage loans sold to
others and serviced by the Bank on a fee basis under various agreements amounted
to $1.542 billion and $1.588 billion, respectively. Loans serviced for others
are not included in the Consolidated Balance Sheets.
16
ASSET QUALITY
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned ("REO") and other repossessed
assets. 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 was
$37,000 for the three months ended September 30, 2002 and $52,000 for the six
months ended September 30, 2002.
AT SEPTEMBER 30, AT MARCH 31,
2002 2002
---------------- ------------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family ............................ $1,501 $1,855
Commercial real estate ........................ 12 724
Construction and land ......................... 185 814
------ ------
Total mortgage loans ...................... 1,698 3,393
------ ------
Commercial loans ................................ 1,539 144
------ ------
Consumer loans:
Home equity lines ............................. -- 54
Second mortgages .............................. 56 77
Other consumer loans .......................... 27 36
------ ------
Total consumer loans ...................... 83 167
------ ------
Total non-accrual loans ................... 3,320 3,704
Non-performing investment ......................... -- 3,285
REO, net (1) ...................................... 50 240
Other repossessed assets .......................... -- 3
------ ------
Total non-performing assets ................... $3,370 $7,232
====== ======
Allowance for loan losses as a percent of loans (2) 1.67% 1.68%
Allowance for loan losses as a percent
of non-accrual loans (3) ........................ 582% 519%
Non-accrual loans as a percent of loans (2)(3) .... 0.29% 0.32%
Non-performing assets as a percent of total assets 0.13% 0.31%
(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.
The decrease in non-performing assets during the first six months of
fiscal year 2003 is primarily due to the sale of a non-performing investment
acquired in the People's acquisition.
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
17
volume and mix of new originations, and the current type, mix, changing risk
profiles and balance of the portfolio. In addition, the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance Corporation ("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 $19.3 million at September 30,
2002, an increase of $84,000, or 0.4%, as compared to $19.2 million at March 31,
2002. The following table sets forth activity in the Company's allowance for
loan losses for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 19,215 $ 13,521 $ 19,237 $ 13,233
Provision for loan losses 150 300 250 600
-------- -------- -------- --------
Charge-offs:
One-to-four family mortgage loans -- -- (10) --
Commercial loans -- (68) (86) (68)
Consumer Loans:
Home equity lines (14) (1) (23) (3)
Second mortgages -- -- -- --
Other consumer (32) (28) (51) (39)
-------- -------- -------- --------
Total (46) (97) (170) (110)
Recoveries 2 1 4 2
-------- -------- -------- --------
Balance at end of period $ 19,321 $ 13,725 $ 19,321 $ 13,725
======== ======== ======== ========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.02% 0.04% 0.03% 0.01%
Management was influenced by several key factors as a basis for 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 the past year. 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 at September 30, 2002, as compared to
September 30, 2001, including $308.9 million of loans receivable acquired and
$5.2 million of allowance for loan losses assumed as part of the People's
acquisition. 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 September 30, 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.
18
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 15 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, with the exception of loans originated by PMC,
which are sold servicing released; and (3) investing primarily in
adjustable-rate mortgage-backed securities and short-term fixed-rate CMOs. In
conjunction with its mortgage banking activities, the Company uses forward
contracts in order to reduce exposure to interest-rate risk, except for PMC,
where all loans are sold by obtaining commitments from investors on a loan by
loan basis. The amount of forward coverage of the "pipeline" of mortgages is
managed on a day-to-day basis, 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, from time to time, 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 in 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.
19
The following table sets forth the Company's estimated NPV and NPV ratios
as of September 30, 2002 and March 31, 2002, as calculated by the Company.
Certain estimates utilized in the Company's calculation as of September 30, 2002
were based on the most recently available OTS model as of June 30, 2002.
September 30, 2002 March 31, 2002
----------------------------------- -----------------------------------
Change in Estimated NPV Estimated NPV
Interest Rates Net Sensitivity Net Sensitivity
in Basis Portfolio NPV in Basis Portfolio NPV in Basis
Points Value Ratio Points Value Ratio Points
------ ----- ----- ------ ----- ----- ------
(Dollars in thousands)
+ 300 $144,918 5.82% (50) $136,524 6.10% (218)
+ 200 164,155 6.50 18 161,250 7.09 (120)
+ 100 173,335 6.79 47 181,372 7.85 (43)
Unchanged 161,951 6.32 - 193,892 8.28 -
- 100 127,062 4.96 (135) 186,886 7.93 (35)
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 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 Bank'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 and
the Bank acquired cash and cash equivalents as part of the People's acquisition.
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 Bank used cash acquired in the
People's acquisition to fund asset growth and repay certain FHLB advances and
other borrowings. However, the Bank expects to use 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 Bank'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 Bank's operating, financing, lending and investing activities
during any given period. At September 30, 2002, cash, short-term investments,
mortgage loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale totaled $1.156 billion, or 45.8%
of total assets.
The Bank 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 September 30, 2002, the Bank had $928.0
million in advances outstanding from the FHLB and other borrowings, and an
additional borrowing capacity from the FHLB of $250.5 million including the
$25.0 million line of credit. At September 30, 2002, the portfolio of putable
FHLB advances and reverse repurchase agreements totaled $422.5 million, with an
average interest rate of 4.52%, and an average life to maturity and estimated
average life of 7.1 years. The estimated 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.
20
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 had two subsidiary business trusts acquired as part of
the People's acquisition, Capital Trust I and Capital Trust II, of which the
Company owned all of the common securities. On July 1, 2002, the Company
completed the redemption, at par, of the Capital Trust I 9.76% trust preferred
securities totaling $13.8 million. At September 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.
At September 30, 2002, the Bank had commitments to originate loans
and unused outstanding lines of credit and undistributed balances of
construction loans totaling $529.4 million. The Bank 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 September 30, 2002 totaled $502.2 million. Based on its prior
experience and other factors, the Bank currently expects that it will retain a
majority of maturing certificate accounts.
The Company opened a new banking and insurance office in East
Greenwich, Rhode Island in October 2003, bringing its total banking and
insurance offices to 26. The Company continues to consider sites for new banking
and insurance 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 and insurance
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 September 30, 2002, the consolidated capital to total assets
ratio of the Company was 7.06%. The Company paid cash dividends to stockholders
of $0.14 per share and $0.15 per share during the first and second quarters,
respectively, of fiscal year 2003, and announced the declaration of a cash
dividend of $0.15 per share to stockholders for payment during the third quarter
of fiscal year 2003. The Company's primary source of funding for 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.
At September 30, 2002, the Bank exceeded all of its regulatory
capital requirements. The Bank's Tier 1 core capital of $131.0 million, or 5.36%
of total adjusted assets, was above the required level of $97.9 million, or
4.0%; risk-based capital of $142.0 million, or 10.73% of risk-weighted assets,
was above the required level of $105.8 million or 8.0%, and Tier 1 risk-based
capital of $131.0 million, or 9.57% of risk-weighted assets, was above the
required level of $52.9 million or 4.0%. The Bank also continued to exceed the
regulatory capital requirements for designation as a "well capitalized"
institution under the OTS prompt corrective action regulations of 5.0% for Tier
1 core capital, 10.0% for risk-based capital and 6% for Tier 1 risk-based
capital. The Trust Company is subject to similar regulatory capital
requirements, and exceeded all of its capital requirements at September 30,
2002.
21
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.
ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company evaluates the effectiveness of the design and operation of
its disclosure controls and procedures. Based on an evaluation of such controls
and procedures within 90 days of the filing date of this quarterly report, the
Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. The Company made no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
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.
On July 29, 2002, the Company issued $5.0 million of Company common
stock par value $0.01 ("Common Stock") to M/D Investment, LLC in a private
placement transaction. The Common Stock issued in connection with the private
placement has not been registered under the Securities Act of 1933, as amended
(the "Act"), pursuant to an exception under Regulation D or Section 4(2) of the
Act as an offer and sale of securities which does not involve a public offering.
No underwriter was used in this transaction. The aggregate offering price of the
Common Stock was $5.0 million. Under the terms of the transaction, M/D
Investment, LLC paid $24.70 per share for 202,430 shares of Common Stock. In
accordance with the parties' agreement, the per share purchase price was based
on the average closing price of the Company's Common Stock as reported on the
American Stock Exchange during the month of June 2002. The Common Stock issued
in the private placement contains customary restrictions for non-registered
common stock and was issued from the Company's treasury stock. M/D Investment,
LLC is a limited liability Rhode Island company, owned by certain members of the
Metcalf and Danforth families. The owners of M/D Investment, LLC also own a
minority interest in the Trust Company. Proceeds from the private placement will
be used for general corporate purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders was held July 25, 2002. The
following proposals were voted on by the stockholders:
WITHHELD/ BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
-------- --- ------- ------- ---------
1) Election of Directors:
B. Benjamin Cavallo 7,517,220 - 107,746 -
Gilbert C. Oliveira 7,584,208 - 40,758 -
Paul A, Raymond, DDS 7,574,999 - 49,967 -
2) Ratification of KPMG LLP as independent
auditors of the Company for the fiscal
year ending March 31, 2003 7,572,523 42,535 9,908 -
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., as amended (2)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC. (1)
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith)
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (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, 2002.
b) Reports on Form 8-K
A current report of Form 8-K was filed on July 30, 2002,
attaching the press release announcing the private placement
of 202,430 shares of the Company's common stock.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
Registrant
Date: November 14, 2002 /s/ Robert F. Stoico
--------------------------------------------
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2002 /s/ Edward A. Hjerpe, III
--------------------------------------------
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
24
CERTIFICATION
I, Robert F. Stoico, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIRSTFED AMERICA
BANCORP, INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Robert F. Stoico
------------------------------------
Chairman of the Board, President and
Chief Executive Officer
25
CERTIFICATION
I, Edward A. Hjerpe, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIRSTFED AMERICA
BANCORP, INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Edward A. Hjerpe, III
------------------------------------------
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
26