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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO.: 1-12305
FIRSTFED AMERICA BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3331237
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 679-8181
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
THE AMERICAN STOCK EXCHANGE
(NAME OF EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 September 30, 2002, the aggregate market value of the voting stock
held by non-affiliates of the registrant, i.e., persons other than directors and
executive officers of the registrant was $187.2 million.
The number of shares of Common Stock outstanding as of June 5, 2003 is
8,653,419.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the fiscal year ended
March 31, 2003 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K.
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INDEX
PAGE
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PART I................................................................. 2
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
PART II................................................................ 18
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 41
Item 8. Financial Statements and Supplementary Data................. 41
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III............................................................... 41
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 42
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV................................................................ 42
Item 14. Controls and Procedures..................................... 42
Item 15. Principal Accountant Fees and Services...................... 43
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 43
Signatures.................................................. 45
Certifications.............................................. 46
1
PART I
ITEM 1. BUSINESS
GENERAL
FIRSTFED AMERICA BANCORP, INC. (also referred to as the "Company" or
"Registrant") was organized by the Board of Directors of First Federal Savings
Bank of America (the "Bank") for the purpose of acquiring all of the capital
stock of the Bank issued in connection with the Bank's conversion (the
"conversion") from mutual to stock form of ownership. The Company was
incorporated on September 6, 1996 under Delaware law and is a savings and loan
holding company subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). On January 15, 1997, the Bank completed its
conversion, and the Company concurrently issued 8.7 million shares of common
stock, raising $77.6 million of net proceeds. The Company utilized $43.4 million
of such net proceeds to acquire all of the outstanding stock of the Bank. At
March 31, 2003, the Company had consolidated total assets of $2.414 billion and
total stockholders' equity of $193.1 million.
The Bank was originally organized in 1946 and operated as First Federal
Savings and Loan Association of Fall River. In 1982, the Bank merged with First
Federal Savings and Loan Association of Attleboro, which was originally
organized in 1854 and became a federally chartered savings and loan association
in 1959. In 1983, the Bank became a federally chartered savings bank, changing
its name to First Federal Savings Bank of America. In 1984, the Bank added
mortgage-banking activities to its operations. On February 28, 2002, the Company
completed the acquisition of People's Bancshares, Inc. ("People's"), New
Bedford, Massachusetts, for $40.3 million in cash and 1.9 million shares of the
Company's common stock (the "People's acquisition"). The People's acquisition
included total assets of $968.7 million, 12 banking offices, and nine offices of
People's Mortgage Corporation ("PMC"), People's wholly-owned mortgage banking
subsidiary. In conjunction with the conversion of the acquired banking offices
to the Company's systems in May 2002, two of the People's banking offices and
one of the Bank's banking and insurance offices were closed and consolidated
with nearby banking and insurance offices in Massachusetts.
The Company conducts business from its administrative, operations, and
banking and insurance offices located in Swansea, Massachusetts and its 25 other
banking and insurance offices located in the municipalities of Attleboro,
Brockton, Dartmouth, Easton, Fall River, Mansfield, Mattapoisett, New Bedford,
Seekonk, Somerset, Stoughton, and Taunton, Massachusetts and Cranston, East
Greenwich, East Providence, Middletown, Pawtucket, Providence, and Warwick,
Rhode Island, and its five loan origination centers located in Agawam, Auburn,
Burlington, and Yarmouth, Massachusetts, and East Greenwich, Rhode Island. PMC,
a wholly-owned subsidiary of the Bank, also operates nine mortgage offices in
Andover, Easton, and Wellesley, Massachusetts, Portsmouth, Rhode Island, Hamden,
Connecticut and Chester, Lutherville, Severna Park, and Upper Marlborough,
Maryland.
In 1999, the Company formed the FIRSTFED INSURANCE AGENCY, LLC (the
"Agency"). In March 2000, the Agency purchased two local independent agencies,
Smith-Cochrane Insurance Agency, Inc. and All Risk Insurance Agency of Swansea,
bringing the total number of customers of the Agency to over 4,000. In March
2002, the Agency entered into a joint partnership with three Rhode Island
insurance agencies, Atlantic Insurance Partners, Riley Insurance and Allen
Cochran Insurance, to form the Insurance Group of Newport. The Agency offers a
comprehensive insurance product line including auto, home, life, accident and
health insurance to consumers and businesses. In February 2000, the Company
formed the FIRSTFED TRUST COMPANY, N.A. (the "Trust Company") to provide
investment and fiduciary services in the Rhode Island and southeastern
Massachusetts marketplace. The Trust Company is a joint venture with certain
members of the Metcalf and Danforth families of Rhode Island. In addition to
their 35% ownership interest, the families are also significant clients of the
Trust Company and hold one seat on its Board of Directors.
The Company's principal business has been and continues to be attracting
retail and business deposits in the areas surrounding its banking and insurance
offices and investing those deposits, together with funds
2
generated from operations and borrowings, primarily in residential, commercial,
and consumer loans and residential mortgage-backed securities ("MBS"). Through
its banking and insurance offices and five loan origination centers, the Company
originates loans for investment and loans for sale in the secondary market,
generally retaining the servicing rights to loans sold. Through its PMC mortgage
offices, loans are generally originated for sale in the secondary market with
servicing rights released. Loan sales are made from loans designated as being
held for sale or originated for sale during the period. The Company's revenues
are derived principally from interest on its loan portfolios, and interest and
dividends on its investment and mortgage-backed securities, gains on sale of
loans and investment securities, service charges on deposit accounts, loan
servicing income, revenue from the Trust Company and Agency operations, earnings
on bank-owned life insurance ("BOLI"), and other income. The Company's primary
sources of funds are deposits, principal and interest payments on loans and
mortgage-backed securities, proceeds from the sale of loans, Federal Home Loan
Bank of Boston ("FHLB") advances and other borrowings.
Information required by Guide 3 to be contained in the description of
business which is not contained in Item 1 is incorporated by reference from
Items 6, 7 and 8 herein.
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.
MARKET AREA AND COMPETITION
The Company is a community-oriented financial institution offering a
variety of financial products and services to meet the needs of the communities
it serves in Southeastern New England and, to a lesser degree, the Mid-Atlantic
region. The Company's deposit gathering is concentrated in the communities
surrounding its full service banking and insurance offices. The Company's main
banking and insurance office is located in Fall River, Massachusetts. Fall River
is located in the southeastern region of Massachusetts and is adjacent to Rhode
Island. All of the Company's banking and insurance offices are located within 30
miles of Fall River. The Southeastern Massachusetts and Rhode Island suburbs are
generally low to middle income residential communities with individuals employed
primarily in Fall River, New Bedford, Brockton and Taunton, Massachusetts,
Providence, Rhode Island and areas along Interstates 195, 95 and 495 and Route
24.
Declines in manufacturing employment and uncertainty in the technology
industry have resulted in rising unemployment rates and decreased employment
opportunities in Southeastern New England. Still, the economy in the region has
generally been positive in recent years, with both Massachusetts and Rhode
Island enjoying better unemployment rates than the national average.
Unemployment rates in the Providence-Fall
3
River area and in New Bedford are currently higher than the national and state
averages but have improved from the mid-1990s. Small businesses, service firms
and tourism form the backbone of the region's economy. However, many significant
employers, such as The Acushnet Company, American Power Conversion, CVS
Corporation, Fidelity Investments, GTECH, Hasbro, ON Semiconductor, Raytheon and
Textron are located in the region.
The Company faces significant competition in generating loans and in
attracting deposits, as well as in the Insurance Agency and Trust Company
businesses. The Company's primary market area is highly competitive and the
Company faces direct competition from a significant number of financial
institutions, many with a statewide or regional presence and, in some cases, a
national presence. Some of these financial institutions are significantly larger
and have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from local savings,
cooperative and commercial banks and credit unions. In addition, the Company
faces increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such instruments as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. In
Southeastern New England, the Company has experienced significant competition
from credit unions, which have a competitive advantage because they do not pay
state or federal income taxes. Such competitive advantage has placed increased
pressure on the Bank with respect to its loan and deposit pricing.
The Company has a strategy to expand its franchise in its existing market
area and other areas in Massachusetts and Rhode Island through the establishment
of de novo banking and insurance offices and new loan origination facilities.
LENDING ACTIVITIES
Loan Portfolio Composition. The Company's loan portfolio consists
primarily of first mortgage loans secured by residential and commercial real
estate properties. At March 31, 2003, total loans receivable was $1.273 billion,
of which $601.1 million were residential mortgage loans, or 47.2% of the
Company's total loans receivable. At such date, the remainder of the loan
portfolio consisted of: $143.0 million of commercial real estate loans, or 11.2%
of total loans receivable; $61.7 million of construction and land loans, or 4.8%
of total loans receivable; $283.1 million of commercial loans, or 22.2% of total
loans receivable; and $184.3 million of consumer loans, or 14.5% of total loans
receivable, consisting of $140.2 million of home equity lines of credit, $32.9
million of second mortgages and $11.2 million of other consumer loans. After
including allowance for loan losses, undisbursed proceeds of construction
mortgages in process, and deferred loan origination fees, loans receivable, net
was $1.241 billion at March 31, 2003. At that same date, 44.1% of the Company's
residential mortgage loans and construction and land loans, excluding mortgage
loans held for sale, had adjustable interest rates, most of which are indexed to
the one-year Constant Maturity Treasury ("CMT") Index. The Company had $245.7
million of mortgage loans held for sale at March 31, 2003, consisting of one-
to-four family mortgage loans.
The Board of Directors establishes the Company's lending policies and loan
approval limits. The types of loans that the Company may originate are subject
to federal and state laws and regulations. Interest rates charged by the Company
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.
For additional information on the composition of the Company's loan
portfolio, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Loans Receivable."
The Company has established an allowance for loan losses relating to
specifically identified impaired loans and all other loans. For additional
information on the amount of the allowance and the process for
4
evaluating its adequacy, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition -- Asset Quality."
Origination, Sale and Servicing of Loans. The Company's mortgage lending
activities are conducted primarily by its loan personnel operating at its 26
banking and insurance offices, five loan origination centers and nine PMC
mortgage offices, and also in a network of approximately 50 active loan
correspondents, wholesale loan brokers and other financial institutions approved
by the Company. All loans originated by the Company either through internal
sources or through loan correspondents are underwritten by the Company pursuant
to the Company's policies and procedures. For the fiscal year ended March 31,
2003, the Company's loan correspondents originated $294.6 million in loans. The
Company originates both adjustable-rate and fixed-rate loans. The Company's
ability to originate fixed or adjustable rate loans is dependent upon the
relative customer demand for such loans, which is affected by the current and
expected future level of interest rates.
Generally, adjustable-rate residential mortgage loans are originated by the
Company for investment in its own portfolio while longer-term fixed rate
residential mortgage loans are originated for sale. All loans originated by PMC
are originated for sale. While the Company has in the past, from time to time,
retained fixed-rate one-to-four family loans and sold adjustable-rate
one-to-four family loans, it is the general policy of the Company to sell
substantially all of the one-to-four family fixed-rate mortgages loans with
maturities over 15 years that it originates and to retain substantially all
fixed-rate loans with maturities of up to and including 15 years and all
adjustable-rate one-to-four family mortgage loans that it originates. The
one-to-four family loan products currently originated for sale by the Company
include a variety of mortgage loans which conform to the underwriting standards
specified by Fannie Mae and Freddie Mac ("conforming loans") and loans which do
not conform to Fannie Mae or Freddie Mac standards due to loan amounts ("jumbo
loans"), or which otherwise vary from agency underwriting standards. The Company
also sells all mortgage loans insured by the Federal Housing Administration
("FHA") and the Veterans' Administration ("VA"). All one-to-four loans sold by
the Company are sold pursuant to master commitments negotiated with Fannie Mae,
Freddie Mac, FHLB and other investors. Although the Company has entered into
master commitment contracts, such contracts generally do not require the
purchasers to buy or the Company to deliver a specific amount of mortgage loans.
The Company currently sells substantially all longer-term fixed rate
conforming mortgage loans it originates to Fannie Mae, Freddie Mac, FHLB and
private investors. All loans are sold either without recourse or with limited
recourse to the Company in the event of default or pre-payment. The Company
generally retains the servicing rights on the mortgage loans sold to Fannie Mae,
Freddie Mac and FHLB, but generally sells all VA, FHA, long-term jumbo loans and
non-conforming loans to institutional investors on a servicing released basis.
Loans originated by PMC are sold servicing released to individual investors.
Between the time the Company issues loan commitments and the time such
loans or the securities into which they are converted are sold, the Company is
exposed to movements in the market price due to changes in the market interest
rates. The Company manages this risk by utilizing forward cash sales of loan or
mortgage backed securities primarily to Fannie Mae, Freddie Mac and FHLB (such
forward sales of loans or mortgage-backed securities are collectively referred
to as "forward sale commitments") and in the case of PMC where all loans are
sold by obtaining best effort commitments from individual investors on a loan by
loan basis. Generally, the Company attempts to cover between 85% and 90% of the
principal amount of the loans that it has committed to fund at specified
interest rates with forward sales commitments. However, the type, amount and
delivery date of forward sale commitments the Company will enter into is based
upon anticipated movements in market interest rates, bond market conditions and
management's estimates of closing volumes and the length of the origination or
purchase commitments. Differences between the volume and timing of actual loan
origination and purchases and management's estimates can expose the Company to
gains and losses. If the Company is not able to deliver the mortgage loans or
mortgage-backed securities during the appropriate delivery period called for by
the forward sale commitment, the Company may be required to pay a non-delivery
fee, repurchase the delivery commitments at current market prices or purchase
whole loans at a premium for delivery. The above activity is managed
continually; however, there can be no assurances that the Company will be
successful in its effort to minimize interest-rate risk between the time
origination or purchase
5
commitments are issued and the ultimate sale of the loan. At March 31, 2003, the
Company had $296.9 million of forward sales commitments.
At March 31, 2003, the Company was servicing its portfolio of $1.487
billion of loans receivable, net and mortgage loans held for sale and $1.412
billion of loans serviced for others, primarily consisting of conforming
fixed-rate loans sold by the Company. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in the
event of unremedied defaults, making certain insurance and tax payments on
behalf of the borrowers and generally administering the loans. All of the loans
currently being serviced for others are loans, which have been sold by the
Company. The gross servicing fee income from loans originated and purchased is
generally .25 to .38% of the total balance of the loan serviced.
During the fiscal years ended March 31, 2003 and March 31, 2002, the
Company originated $3.186 billion and $788.6 million of residential mortgage
loans, respectively, of which $300.1 million and $152.4 million, respectively,
were retained by the Company. The fixed-rate loans retained by the Company
consisted primarily of loans with terms of 15 years or less. The Company
recognizes, at the time of sale, the cash gain or loss on the sale of the loans
based on the difference between the net cash proceeds received and the carrying
value of the loans sold. The book value of mortgage servicing rights recognized
as an asset by the Company, at March 31, 2003, net of amortization and valuation
allowance, was $6.0 million.
Residential Mortgage Lending. The Company offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans secured by one-to-four family residences
with maturities of up to 30 years. Substantially all of such loans are secured
by properties located in Southern New England and the Mid-Atlantic region. Loan
originations are generally obtained from the Company's commissioned loan
representatives, banking and insurance offices, correspondent banking
relationships and wholesale brokers and their contacts with the local real
estate industry, existing or past customers, and members of the local
communities.
The Company currently offers a number of ARM loan programs with interest
rates which are fixed for a period of one, three, four, five, seven or ten years
and adjust annually thereafter. The Company's ARM loans generally provide for
periodic (not more than 2%) and overall (not more than 6%) caps on the increase
or decrease in the interest rate at any adjustment date and over the life of the
loan, respectively. The interest rate adjustment on these loans is generally
indexed to the one-year U.S. Treasury CMT Index.
The Company's policy is to originate one-to-four family residential
first-mortgage loans in amounts up to 80% of the lower of the appraised value or
the selling price of the property securing the loan and up to 100% of the
appraised value or selling price if private mortgage insurance is obtained with
the exception of FHA and VA loans. Mortgage loans originated by the Company
include due-on-sale clauses which provide the Company with the contractual right
to deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Company's consent. Due-on-sale clauses are
an important means of adjusting the rates on the Company's fixed-rate mortgage
loan portfolio and the Company has generally exercised its rights under these
clauses.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Company's exposure to
increases in interest rates. However, adjustable-rate loans may pose credit
risks not inherent in fixed-rate loans, primarily because as interest rates
rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
reduce the credit risk associated with its adjustable-rate loans but also limit
the interest rate sensitivity of its adjustable-rate mortgage loans.
In an effort to provide financing for first-time and moderate income home
buyers, the Company offers FHA and VA loans and also has its own first-time home
buyer program. These programs offer single-family residential mortgage loans to
qualified individuals. These loans are offered with terms of up to 30 years.
Such loans must be secured by a one-to-four family owner-occupied unit. These
loans are originated using modified underwriting guidelines with reduced down
payments and loan fees. Such loans are originated in amounts up to 100% of the
lower of the property's appraised value or the sales price. Private mortgage
insurance is normally required. The Company expects to achieve a lower rate of
return on loans originated under the first-
6
time home buyer program when compared to other residential mortgage loans
because the Company typically charges: a lower rate of interest; a lower
mortgage origination fee; or lower closing costs on such loan programs.
The Company originates adjustable-rate multi-family mortgage loans
generally secured by five to 12 unit residential apartment buildings. In
reaching its decision on whether to make a multi-family loan, the Company
considers the value of the underlying property as well as the experience,
financial strength and other qualifications of the borrower. Other factors
relating to the property to be considered are: the net operating income of the
mortgaged premises before debt service and depreciation; the debt service ratio;
and the ratio of the loan amount to appraised value. The maximum amount of a
multi-family loan is limited by the Company's loans-to-one borrower limit,
which, at March 31, 2003, was $25.3 million. In making its assessment of the
creditworthiness of the borrower, the Company generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation. Generally, multi-family loans made to corporations,
partnerships and other business entities require personal guarantees by the
principals.
Loans secured by apartment buildings and other multi-family residential
properties generally involve a greater degree of risk than one-to-four family
residential mortgage loans. Because payments on loans secured by multi-family
properties are generally dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
prevailing conditions in the real estate market or the economy. The Company
seeks to minimize these risks through its underwriting policies.
Construction and Land Lending. The Company originates construction and
land loans primarily for the development of single-family residences. Such loans
are made principally to individuals building their primary residence. In the
case of construction and land mortgage loans to individuals building their
primary residence, such loans are originated in amounts up to 90% of the
appraised value of the property, as improved. Proceeds of construction and land
loans are disbursed as phases of the construction are completed.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied
residential real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Company may be confronted with a project, when completed, having
a value which is insufficient to assure full repayment.
Commercial Real Estate Lending. The Company originates commercial real
estate loans that are generally secured by properties such as manufacturing
facilities, office buildings, retail facilities, recreation facilities or
apartment buildings generally located in the Company's primary market area. The
Company's commercial real estate underwriting policy provides that commercial
real estate loans may generally be made in amounts up to 75% of the appraised
value of the property. The Company also originates construction, acquisition and
development loans to experienced developers known to the Company for the
construction of residential or commercial properties. Construction and land
loans to commercial developers are generally originated in amounts up to 75% of
the lesser of the appraised value of the property, as improved, or the sales
price. Generally, if the borrower is a corporation, partnership or other
business entity, personal guarantees by the principals are required. Commercial
real estate lending is limited by the Bank's regulatory loans-to-one borrower
limit, which at March 31, 2003 was $25.3 million. In reaching its decision on
whether to make a commercial real estate loan, the Company considers the net
operating income of the property, the borrower's expertise, credit history,
financial strength and liquidity, and the value of the underlying property.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than one-to-four family residential mortgage
loans. Because payments on loans secured by commercial real estate are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to a greater extent to prevailing conditions in the
real estate market or the economy. The Company seeks to minimize these risks
through its thorough analysis and stringent underwriting standards.
Commercial Lending. The Company also originates commercial loans to
businesses generally operating in the Company's primary market area. Such loans
are generally secured by equipment, inventory, accounts
7
receivable, and real estate, in the case of owner-occupied commercial property
where repayment is significantly dependent on the underlying business. The
Company offers commercial loans in various forms, including term loans and lines
of credit. When analyzing commercial loans, the Company considers primarily the
expertise and financial resources of the borrower, the borrower's ability to
repay the loan from cash flow, the Company's lending history with the borrower
and the value of the collateral.
Commercial loans are of higher risk and typically are made on the basis of
the borrower's ability to repay from the cash flow of the underlying business.
As a result, the availability of funds for the repayment of commercial loans is
substantially dependent on the success of the business itself. Further, any
collateral securing such loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on many factors, including the success
of the business.
Consumer Lending. The Company's consumer loans consist primarily of home
equity lines of credit and second mortgage loans, and, to a significantly lesser
extent, secured and unsecured personal loans and new and used automobile loans.
Such loans are generally originated in the Company's primary market area and
generally are secured by real estate, deposit accounts, personal property and
automobiles. These loans are typically shorter term and generally have higher
interest rates than one-to-four family mortgage loans.
The Company offers two types of home equity loans: a variable-rate
"open-end line of credit" and a fixed-rate "second mortgage." Substantially all
of the Company's home equity loans are secured by second liens on one-to-four
family residences located in the Company's primary market area. Home equity
lines of credit have variable rates of interest, which can generally adjust on a
monthly basis. The interest rate on such loans is indexed to the prime rate as
reported in The Wall Street Journal and generally have an 18% lifetime limit on
interest rates. Generally, the maximum combined loan-to-value ratio ("CLTV") on
home equity loans is 80%; however, fixed-rate second mortgage loans up to
$50,000 and lines of credit up to $25,000 can have an CLTV of up to 100% on the
property as long as other underwriting criteria are satisfied. Second mortgage
loans are generally offered with terms of up to 15 years and only with
fixed-rates of interest, which vary depending on the amortization period chosen
by the borrower. The underwriting standards employed by the Company for home
equity lines of credit and second mortgage loans include a determination of the
applicant's credit history and an assessment of the applicant's ability to meet
existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration.
The Company also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans are generally secured by deposit accounts, stocks or bonds.
Unsecured personal loans generally have a maximum borrowing limitation of $7,500
and generally allow a maximum debt ratio (the ratio of debt service to gross
earnings) of 40%. Automobile loans have a maximum borrowing limitation of 95% of
the sale price of a new automobile and 80% of the lesser of the purchase price
or fair market value of a used automobile.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one-to-four family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
INVESTMENT ACTIVITIES
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements, federal
funds and Small Business Investment Company Program investments. Subject to
various restrictions, federally-chartered
8
savings institutions may also invest their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally-chartered savings institution is otherwise
authorized to make directly. Historically, the Company has maintained liquid
assets at a level considered to be adequate to meet its normal daily activities.
The investment policy of the Company, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Company's lending activities. The Company primarily
invests in mortgage-related securities (consisting of mortgage-backed
pass-through securities and collateralized mortgage obligations) guaranteed by
government agencies or, if privately issued, rated A or better by either Moody's
or Standard & Poor's. The Company designates investment securities as held to
maturity, available for sale, or held for trading. The Company generally invests
in securities as part of a wholesale investment strategy as well as to manage
interest-rate risk and to maintain liquidity levels deemed appropriate by
management. At March 31, 2003, the Company had short-term investments of $2.0
million, or 0.1% of assets, consisting of overnight deposits. At March 31, 2003,
the Company's investment securities available for sale portfolio had a fair
value of $22.7 million, or 0.9% of assets, and an amortized cost of $16.7
million. At March 31, 2003, the Company had no investment securities held to
maturity.
At March 31, 2003, the Company had invested $635.9 million, or 26.3% of
assets, in mortgage-backed securities issued by Ginnie Mae, Fannie Mae and
Freddie Mac or by private mortgage security issuers. Of this total, $393.2
million were adjustable-rate securities and $242.7 million were fixed-rate
securities.
Of the $393.2 million of adjustable-rate securities, $157.8 million were
Fannie Mae and Freddie Mac one-year CMT and one-year LIBOR indexed ARMs with
initial fixed-rate periods of one to five years, and generally 2% maximum annual
rate adjustments and 6% maximum lifetime rate adjustments, $154.4 million were
Ginnie Mae one year CMT indexed ARMs with 1% maximum annual rate adjustments and
5% maximum lifetime rate adjustments, $40.2 million were Ginnie Mae and
privately issued LIBOR indexed CMOs, $32.5 million were Fannie Mae and privately
issued COFI and one-year average CMT indexed collateralized mortgage obligations
("CMOs"), and $8.3 million were Fannie Mae and Freddie Mac Eleventh District
Cost of Funds ("COFI") indexed monthly resetting ARMs with no annual rate caps,
but with lifetime caps of 9.57% to 13.03%.
Of the $242.7 million of fixed-rate securities, $194.6 million were Fannie
Mae and AAA-rated privately issued CMOs with average lives of approximately 3.5
years, and $48.1 million were Ginnie Mae, Fannie Mae and Freddie Mac
pass-through securities with average lives of approximately 3.1 years.
Investments in mortgage-backed securities involve a risk that actual
prepayments will differ from estimated prepayments over the life of the
security. Mortgage-backed securities may require adjustments to the amortization
of any premium or accretion of any discount relating to such instruments thereby
changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value and/or
interest rates of such securities may be adversely affected by changes in
interest rates.
SOURCES OF FUNDS
General. Deposits, loan and mortgage-backed security principal and
interest payments, proceeds from sales of loans, cash flows generated from
operations and FHLB advances and other borrowings are the primary sources of the
Company's funds for use in lending, investing and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the fiscal year ended
March 31, 2003, core deposits (defined as total deposits less certificate
accounts) represented 53.2% of total average deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Company's deposits are
obtained predominantly from the areas in which its banking and insurance offices
are located. The Company has historically relied primarily on customer service
and long-standing relationships
9
with customers to attract and retain these deposits; however, market interest
rates and rates offered by competing financial institutions significantly affect
the Company's ability to attract and retain deposits. The Company uses
traditional means of advertising its deposit products, including radio and print
media and generally does not solicit deposits from outside its market area.
While the Company does not actively solicit certificate accounts in excess of
$100,000 or use brokers to obtain deposits, the Company may, from time to time,
solicit such deposits or utilize brokered deposits depending upon market
conditions. The Company's average certificate balances increased to $621.7
million, or 46.8% of total average deposits, during the year ended March 31,
2003 from $441.5 million, or 56.8% of total average deposits, during the year
ended March 31, 2002. The Company's cost of average deposits decreased to 2.02%
for the year ended March 31, 2003 from 3.27% for the year ended March 31, 2002.
At March 31, 2003, the weighted average remaining maturity of the Company's
certificate accounts was approximately 12 months.
Borrowings. As part of its operating strategy, the Company utilizes
advances from the FHLB and reverse repurchase agreements with securities dealers
as complements to retail deposits to fund its operations. FHLB advances are
collateralized primarily by certain of the Company's mortgage loans and
mortgage-backed securities. FHLB advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the Federal Housing Finance Board and the FHLB. At March
31, 2003, the Company had $712.3 million in outstanding advances from the FHLB
and other borrowings.
SUBSIDIARY ACTIVITIES
First Federal Savings Bank of America includes its wholly-owned
subsidiaries: People's Mortgage Corporation, a Massachusetts corporation;
FIRSTFED INVESTMENT CORPORATION, a Massachusetts security corporation; and
CELMAC INVESTMENT CORPORATION, also a Massachusetts security corporation.
FAB FUNDING CORPORATION ("FAB FUNDING"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Company formed primarily to finance stock
purchases by the Company's Employee Stock Ownership Plan and related trust
("ESOP"). The financing from FAB FUNDING is collateralized by the shares of
stock of the Company purchased by the ESOP, which are released for distribution
to eligible employees of the Company as payments are made on the loan. Except
for the loan to the ESOP, FAB FUNDING has no significant operations.
FIRSTFED INSURANCE AGENCY, LLC, a Massachusetts limited liability
corporation, was formed in January 1999 and is jointly owned by the Company and
FAB FUNDING. The Agency offers a comprehensive insurance product line including
auto, home, life, accident and health insurance to consumers and businesses. The
Agency is licensed to sell insurance in Massachusetts, Rhode Island and
Connecticut and is subject to regulations of and periodic examinations by these
states.
FIRSTFED TRUST COMPANY, N.A., a nationally chartered organization
headquartered in Massachusetts, was formed in February 2000. The Trust Company
provides investment and fiduciary services in the Rhode Island and southeastern
Massachusetts marketplace and is 65% owned by the Company.
People's Bancshares Capital Trust ("Capital Trust I"), a Delaware Business
Trust formed in 1997, and People's Bancshares Capital Trust II ("Capital Trust
II"), a New York Common Law Trust formed in 2000, of which the Company acquired
all of the common securities as part of the People's acquisition. These trusts
have no independent assets or operations and exist for the sole purpose of
issuing trust preferred securities and investing the proceeds in an equivalent
amount of junior subordinated debentures issued by the Company. The junior
subordinated debentures, which are the sole assets of the trusts, are unsecured
obligations of the Company and generally are subordinate and junior in right of
payment to all present and future senior and subordinated indebtedness and
certain other financial obligations of the Company. On July 1, 2002, the trust
preferred securities of Capital Trust I were redeemed by the Company.
10
PERSONNEL
As of March 31, 2003, the Company had 621 authorized full-time employee
positions and 118 authorized part-time employee positions, for a total of
approximately 680 full-time equivalents. The employees are not represented by a
collective bargaining unit and the Company considers its relationship with its
employees to be good.
REGULATION AND SUPERVISION
GENERAL
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank, as a federally chartered savings association, is subject
to extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of
the Federal Home Loan Bank System and, with respect to deposit insurance, of the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Trust
Company, a nationally chartered trust company, is subject to extensive
regulation, examination and supervision by its federal regulator, the Office of
the Comptroller of the Currency ("OCC"), the agency that charters national
banks. The Trust Company does not accept deposits and is not insured by the
FDIC.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. Similarly, the Trust Company reports to, and is subject
to examination and supervision by, the OCC. This regulation and supervision
establishes a comprehensive framework of activities, in which an institution can
engage and is intended primarily to facilitate the institution's safety and
soundness. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including, with respect to the Bank,
policies regarding the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in the
applicable regulatory requirements and policies, whether by the OTS, the FDIC,
the OCC or the Congress, could have a material adverse impact on the Company,
the Bank, the Trust Company and their operations. Certain of the regulatory
requirements applicable to the Bank, the Trust Company and to the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank, the
Trust Company and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Regulation of the Bank and Trust
Company -- QTL Test." The Gramm-Leach-Bliley Act of 1999 provided that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the Company, so long as the Bank continues to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible
11
for financial holding companies under the Bank Holding Company Act, subject to
the prior approval of the OTS, and certain activities authorized by OTS
regulation for multiple holding companies.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors. Acquisitions may
also be subject to approval by state banking agencies.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
REGULATION OF THE BANK AND TRUST COMPANY
Business Activities. The activities of federal savings institutions, such
as the Bank, are governed by federal laws and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal associations, e.g., commercial, non-residential real property loans and
consumer loans, are limited to a specified percentage of the institution's
capital or assets.
The activities of the Trust Company are limited to providing fiduciary and
related services and are also subject to federal law and regulation. Generally,
the Trust Company is subject to all of the laws and regulations applicable to
national banks except where clearly inapplicable due to the Trust Company's
limited activities.
Capital Requirements. OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS rating system), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital
12
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock, the allowance for loan and lease losses limited to a maximum of
1.25% of risk-weighted assets and up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair market
values. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital. At March 31, 2003, the Bank met each
of its capital requirements.
The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. At March 31, 2003, the
Trust Company met each of its capital requirements.
Both the OTS and OCC have the discretion to establish higher capital
requirements in individual cases where deemed justified by the institution's
condition or risk profile.
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points of
assessable deposits for the healthiest institutions to 27 basis points of
assessable deposits for the riskiest. The Bank's assessment rate for fiscal year
2003 was zero basis points of assessable deposits.
In addition to the assessment for deposit insurance, FDIC-insured
institutions are required to make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
During 2002, FICO payments for SAIF members approximated 1.75 basis points. By
law, there was equal sharing of FICO payments between SAIF and Bank Insurance
Fund ("BIF") members, which began on January 1, 2000. The Bank's FICO payment
assessment rate for fiscal year 2003 ranged from 1.68 to 1.76 basis points and
the premium paid for this period was $276,000. Payments toward the FICO bonds
amounted to $234,000.
The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot
predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
The Trust Company does not accept deposits and is not insured by the FDIC.
13
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily marketable collateral. At March 31,
2003, the Bank's limit on loans to one borrower was $25.3 million, and the
Bank's largest aggregate exposure of loans to one borrower was $18.0 million.
QTL Test. The Home Owners' Loan Act requires savings institutions such as
the Bank to meet a qualified thrift lender test. Under the test, a savings
association is required to either qualify as a "domestic building and loan
association" under the Internal Revenue Code or maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12-month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
commercial bank charter. As of March 31, 2003, the Bank maintained 72.04% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the OTS regulation, an
application to and the prior approval of the OTS is required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution must still provide prior notice to
the OTS of the capital distribution if, like the Bank, it is a subsidiary of a
holding company. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Under OCC regulations, a national trust company may not, without OCC
approval, pay dividends in excess of the total of the Trust Company's retained
net income for the year combined with retained net income for the prior two
years.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries and off-balance sheet activity, as reported
in the Bank's latest quarterly thrift financial report. Assessments paid by the
Bank for the fiscal year ended March 31, 2003 totaled $375,000.
The Trust Company must pay semi-annual assessments to the OCC to fund its
operations. The OCC has adopted an assessment system applicable to national
trust companies with less than $1 billion in managed assets, such as the Trust
Company based on the amount of balance sheet assets and a flat fee. Assessments
paid by the Trust Company for the fiscal year ended March 31, 2003 totaled
$48,000.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and
14
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in federal law. The purchase of
low quality assets from affiliates is generally prohibited. Transactions with
affiliates must be on terms and under circumstances that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. The Trust Company is subject to
similar restrictions. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The recently enacted Sarbanes-Oxley Act generally prohibits loans by the
Company to its executive officers and directors. However, the act contains
specific exceptions for loans by the Bank to executive officers and directors in
compliance with federal banking laws. Under such laws, the Bank's authority to
extend credit to executive officers, directors and 10% shareholders
("insiders"), as well as entities such persons control, is limited. Such loans
are required to be made on terms substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
There is an exception for loans made pursuant to a benefit or compensation
program that is widely available to all employees of the institution and does
not give preference to insiders over other employees. The law limits both the
individual and aggregate amount of loans the Bank may make to insiders based, in
part, on the Bank's capital position and requires certain board approval
procedures to be followed.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
The OCC has similar enforcement authority with respect to the Trust
Company.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank of Boston, is required to acquire and hold shares
of capital stock in that Federal Home Loan Bank in an amount at least equal to
1.0% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was
in compliance with this requirement with an investment in Federal Home Loan Bank
stock at March 31, 2003 of $58.4 million.
In the past several years, Congress has enacted legislation that has
changed the structure of the Federal Home Loan Banks' funding obligations,
revised the capital structure of the Federal Home Loan Banks and implemented
entirely voluntary membership for the Federal Home Loan Banks. Management cannot
predict the effect that these changes may have with respect to its Federal Home
Loan Bank membership. The Federal Home Loan Bank of Boston has adopted a revised
capital structure that is scheduled to be implemented in December 2003.
15
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $42.1 million or less (subject to adjustment by the
Federal Reserve Board), the reserve requirement is 3%; and for accounts
aggregating greater than $42.1 million, the reserve requirement is $1.083
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $42.1
million. The first $6.0 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
ACQUISITION OF CONTROL
Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be
submitted to the OTS if any person (including a company), or group acting in
concert, seeks to acquire 10% or more of the outstanding voting stock of the
Company or Bank, unless the OTS has found that the acquisition will not result
in a change of control of the Company. Under the CIBCA, the OTS has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that so acquires control
would then be subject to regulation as a savings and loan holding company. A
similar notice must be submitted to the OCC with respect to a change of control
of the Trust Company.
FEDERAL SECURITIES LAWS
The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
Shares of the common stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed in any three-month period
the greater of (i) 1% of the outstanding shares of the Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provisions may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
The Company, the Bank, FAB FUNDING and the Trust Company are subject to
those rules of federal income taxation generally applicable to corporations
under the Code. The Bank is also, under Subchapter H of the Code, subject to
certain special rules applicable to banking institutions as to securities,
reserves for loan losses, and any common trust funds. The Agency is a
partnership and subject to the rules under Subchapter K of the Code. The
Company, the Bank and FAB FUNDING, as members of an affiliated group of
corporations within the meaning of Section 1504 of the Code, will file a
consolidated federal income tax return, which has the effect of eliminating or
deferring the tax consequences of inter-company distributions, including
dividends, in the computation of consolidated taxable income for federal tax
purposes. The Trust Company files a separate corporate tax return and the Agency
files a partnership tax return.
16
In addition to regular corporate income tax, corporations are subject to an
alternative minimum tax, which generally is equal to 20% of alternative minimum
taxable income (taxable income, increased by tax preference items and adjusted
for certain regular tax items). The preference items, which are generally
applicable, include an amount equal to 75% of the amount by which a bank's
adjusted current earnings (generally alternative minimum taxable income computed
without regard to this preference and prior to reduction for net operating
losses) exceeds its alternative minimum taxable income without regard to this
preference. Alternative minimum tax paid can be credited against regular tax due
in later years.
STATE AND LOCAL TAXATION
Commonwealth of Massachusetts Taxation. The Company and its subsidiaries
doing business in Massachusetts are subject to an annual Massachusetts excise
tax. The tax rate is 10.50% on taxable income apportioned to Massachusetts. The
definition of Massachusetts's taxable income is defined as federal taxable
income subject to certain modifications. These modifications allow for a
deduction for 95% of dividends received from stock where the entity owns 15% or
more of the voting stock of the institution paying the dividend and to allow
deductions from certain expenses allocated to federally tax exempt obligations.
Combined reporting is not permitted under Massachusetts's General Law.
FIRSTFED INVESTMENT CORPORATION and CELMAC INVESTMENT CORPORATION meet
certain definitional tests relating to investments that are not subject to the
corporate excise tax, and are instead taxed on their gross income at the rate of
1.32%. The Agency is not subject to state tax because it is a partnership, but
its partners are liable for the tax based on their share of the income.
Rhode Island Taxation. Subsidiary corporations of the Company conducting
business in Rhode Island are subject to a Rhode Island excise tax and must file
separate Rhode Island state tax returns. The tax is based upon an apportioned
percentage of net income related to activities conducted within Rhode Island.
The tax rate is 9%.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
AVAILABLE INFORMATION
A copy of the Company's Annual Report on Form 10-K, without exhibits, for
the year ended March 31, 2003, as filed with the Securities and Exchange
Commission, will be furnished without charge to persons who are shareholders as
of the close of business on June 5, 2003 upon written request to Cecilia R.
Viveiros, Corporate Secretary, FIRSTFED AMERICA BANCORP, INC., ONE FIRSTFED
PARK, Swansea, Massachusetts 02777. The Company's Annual Report to Shareholders
and Form 10-K may also be found at the Company's website at
www.firstfedamerica.com.
17
ITEM 2. PROPERTIES.
At March 31, 2003, the Company conducted business from a centralized
administrative, operations, and banking and insurance office at ONE FIRSTFED
PARK, Swansea, Massachusetts, 25 other banking and insurance offices in
Massachusetts and Rhode Island, and 14 loan centers in Massachusetts, Rhode
Island, Connecticut and Maryland. The net book value of properties and leasehold
improvements amounted to $29.7 million at March 31, 2003. For additional
information regarding premises, equipment and leasehold obligations, see Note 9,
to the Consolidated Financial Statements. The Company believes that all of its
facilities are in good condition and are adequate for the Company's present
operations.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of the Company's business, there are various
outstanding legal proceedings. In the opinion of management, based on
consultation with legal counsel, the financial position of the Company will not
be affected materially as a result of the outcome of such legal proceedings.
In January 2003, a claim was filed against the Trust Company, of which the
Company owns a 65% equity interest, seeking recovery of approximately $1 million
in unidentifiable damages resulting from the foreclosure of a property the
mortgage of which was held by an account holder of the Trust Company. The
account holder has agreed to indemnify the Trust Company for any expenses or
losses incurred in connection with the action, including legal expenses. While
no assurances can be provided that the Trust Company will prevail and ultimate
liability, if any, that might arise from the disposition of these claims cannot
presently be determined, the Company believes, based on consultation with the
Trust Company's counsel, the action to be without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" opposite the
inside back cover in the Registrant's 2003 Annual Report to Shareholders and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The above-captioned information appears under "Selected Consolidated
Financial and Other Data" in the Registrant's 2003 Annual Report to Shareholders
on pages 10 and 11 and is incorporated herein by reference.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's primary business is attracting retail deposits from the
general public and investing those deposits and other borrowed funds in loans,
mortgage-backed securities, U.S. Government securities and other securities. The
Company originates commercial, consumer, and mortgage loans for investment, and
mortgage loans for sale in the secondary market. 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 gains on sale of loans and investment securities,
service charges on deposit accounts, loan servicing income, revenue from the
Trust Company and Agency operations, earnings on bank-owned life insurance
("BOLI"), 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, amortization of
intangible assets, 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.
ACQUISITION
On February 28, 2002, the Company completed the People's acquisition for
$40.3 million in cash and 1.9 million shares of the Company's common stock. The
People's acquisition was accounted for as purchase in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
the total cost, including the fair value of stock options assumed and certain
merger costs, was $75.0 million. The Company recorded goodwill of $42.4 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.
CRITICAL ACCOUNTING POLICIES
Certain aspects of the Company's accounting policies are based on
management's estimation techniques, valuation assumptions and other subjective
assessments. Management has identified four policies that, due to such
estimates, assumptions and judgments inherent in those policies, are critical to
an understanding of our financial statements. These policies involve
management's methodology for the determination of the Company's allowance for
loan losses, valuation of goodwill, valuation of derivatives and valuation of
mortgage servicing rights. Management believes that the estimates, assumptions
and judgments used in the preparation of the Company's Consolidated Financial
Statements were appropriate given the factual circumstances at the time.
However, given the sensitivity of the Company's Consolidated Financial
Statements to these critical accounting policies, the use of different
estimates, assumptions and judgments could have resulted in material variances
from the reported results of operations or financial condition. The following is
a description of the critical accounting policies and an explanation of the
methods and assumptions underlying their application:
Allowance for Loan Losses. The allowance for loan losses is based on
management's ongoing review and estimate of the credit losses inherent in the
loan portfolio. Loans (or portions thereof) deemed to be uncollectible are
charged against the allowance and recoveries of amounts previously charged-off
are added to the allowance. The provisions for loan losses charged to earnings
are added to the allowance to bring it to the desired level.
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
19
allowance allocations for various loan types based on payment status or loss
experience. An unallocated allowance is also maintained within an established
range based on management's assessment of many factors including current market
conditions, trends in loan delinquencies and charge-offs, the volume and mix of
new originations, and the current type, mix, changing risk profiles and balance
of the portfolio. In addition, the OTS, as an integral part of their examination
process, periodically reviews the Company's allowance for loan losses. The OTS
and the FDIC may require the Company to make additional provisions for estimated
loan losses based upon judgments different from those of management.
While management believes the Company's allowance for loan losses was
sufficient to absorb losses inherent in its loan portfolio, no assurances can be
given that the Company's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Company or that future adjustments
to the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses.
Valuation of Goodwill. Goodwill is evaluated for impairment at least
annually, and may include a number of fair value techniques, including market
capitalization, discounted future cash flows and multiples of revenues or
earnings. The Company performed its initial and first annual impairment tests
during fiscal year 2003 and concluded that the amount of recorded goodwill was
not impaired. Absent any impairment indicators, the Company expects to perform
its next annual impairment test during the third quarter of fiscal 2004.
Valuation of Derivatives. The Company adopted SFAS No. 133, " Accounting
for Derivative Instruments and Hedging Activities" on April 1, 2001. Forward
commitments to sell loans are contracts that the Company enters into for the
purpose of reducing the market risk associated with originating mortgage loans
held for sale should interest rates change. Forward commitments are recorded at
fair value, with adjustments included in other assets and the offset included as
a component of gain (loss) on sale of mortgage loans. Commitments to originate
interest rate-locked loans for sale are also recorded at the fair value, with
adjustments included in other assets and the offset included as a component of
gain (loss) on sale of mortgage loans. Mortgage loans held for sale with
servicing rights released and related commitments to originate mortgage loans
are hedged with forward commitments to sell to secondary market investors. The
relationship between the hedging instruments and hedged items are formally
documented, including risk management objective and strategy for undertaking
hedge transactions. The Company assesses, both at hedge inception and on an
ongoing basis, whether the commitments to sell are highly effective in
offsetting changes to the fair value of the loans held for sale and commitments
to originate. The Company discontinues hedge accounting when it is determined
that the hedge is no longer highly effective in offsetting the changes in fair
value. Management of the Company believes that the adoption of SFAS No. 133 has
introduced 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 Company also uses off-balance sheet financial instruments from time to
time as part of its interest rate risk management strategy. Interest rate swap
agreements are entered into as hedges against future interest rate fluctuations
on specifically identified assets or liabilities. The interest rate swap
agreements are marked to market in other income and included as a component of
other liabilities. The net amounts to be paid or received on outstanding
interest rate risk management agreements are recognized on the accrual basis as
an adjustment to the related interest income or expense over the life of the
agreements.
Valuation of Mortgage Servicing Rights. Capitalized mortgage servicing
rights are recognized, based on the allocated fair value of the rights to
service mortgage loans for others. Mortgage servicing rights are amortized to
loan servicing fee income using a method which approximates the level yield
method in proportion to, and over the period of, estimated net servicing income.
Mortgage servicing rights are assessed for impairment based on the fair value of
those rights. Prepayment experience on mortgage servicing rights is reviewed
quarterly and, when actual repayments exceed estimated prepayments, the balance
of the mortgage servicing assets is reduced by a charge to earnings through a
valuation allowance. The risk characteristics of the underlying loans used to
measure impairment include loan type, interest rate, loan origination date, and
term to maturity.
20
RESULTS OF OPERATIONS
OVERVIEW
Net income for the fiscal year ended March 31, 2003 was $23.0 million, or
$2.79 diluted earnings per share ("EPS"), compared to $12.4 million, or $2.07
diluted EPS for the fiscal year ended March 31, 2002 and $9.2 million, or $1.56
diluted EPS for the fiscal year ended March 31, 2001. Before the cumulative
effect of adoption of SFAS No. 133 of $461,000, net of tax benefit, net income
was $12.9 million for fiscal year 2002, or $2.15 diluted EPS. Income before
income tax expense increased $17.8 million, or 89.6%, to $37.7 million during
fiscal year 2003 as compared to fiscal year 2002, the net result of increases in
net interest income of $20.0 million, non-interest income of $25.2 million and
non-interest expense of $28.1 million, partially offset by a decrease in
provision for loan losses of $675,000. Income before income tax expense
increased $6.5 million, or 48.3%, to $12.9 million during fiscal year 2002 as
compared to fiscal year 2001, the net result of increases in net interest income
of $3.0 million, non-interest income of $7.4 million and non-interest expense of
$3.9 million.
Return on average stockholders' equity increased to 12.96% for fiscal year
2003, compared to 9.65% for fiscal year 2002 and 8.71% for fiscal year 2001.
Return on average assets increased to 0.95% for fiscal year 2003, compared to
0.70% for fiscal year 2002 and 0.56% for fiscal year 2001.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $20.0
million, or 53.0%, to $57.7 million for the year ended March 31, 2003 from $37.7
million for the year ended March 31, 2002, following an increase of $3.0
million, or 8.8%, from $34.7 million for the year ended March 31, 2001. The net
interest rate spread increased 45 basis points to 2.39% for the year ended March
31, 2003 from 1.94% for the year ended March 31, 2002, following an increase of
one basis point from 1.93% for the year ended March 31, 2001. The net interest
margin increased 35 basis points to 2.62% for the year ended March 31, 2003 from
2.27% for the year ended March 31, 2002, following an increase of two basis
points from 2.25% for the year ended March 31, 2001.
The increases in net interest income and the average balances of
interest-earning assets and interest-bearing liabilities during fiscal year
2003, compared to fiscal years 2002 and 2001, were due primarily to improved
balance sheet composition and growth resulting from the People's acquisition, as
well as the prepayment and repayment of certain FHLB advances and other
borrowings during March 2002 and fiscal year 2003. In addition, a low market
interest rate environment and related consumer preferences resulted in the
Company's 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 and mortgage-backed securities due
primarily to refinancing activity. During the fourth quarter of fiscal year
2003, net interest income was reduced by $1.5 million due to adjustments to
amortization of People's purchase premiums based on actual mortgage loan
prepayments and time deposit maturity experience in the year following the
People's acquisition that was faster than previously estimated.
The following table sets forth certain information relating to the Company
at fiscal year end 2003 and for fiscal years 2003, 2002 and 2001. 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.
21
FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------
2003 2002
------------------------------- ---------------------
AT MARCH 31, 2003 AVERAGE
----------------------- AVERAGE YIELD/ AVERAGE
BALANCE YIELD/COST BALANCE INTEREST COST BALANCE INTEREST
---------- ---------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale(1)............ $1,487,076 5.70% $1,367,232 $84,766 6.20% $ 995,440 $71,511
Investment securities(2)............ 83,163 6.56 119,562 5,452 4.56 99,162 4,186
Mortgage-backed securities(3)....... 635,899 5.40 718,484 34,331 4.78 565,291 31,152
---------- ---- ---------- ------- ----- ---------- -------
Total interest-earning
assets....................... 2,206,138 5.65 2,205,278 124,549 5.65 1,659,893 106,849
---- ------- ----- -------
Non-interest-earning assets........... 208,340 217,360 118,615
---------- ---------- ----------
Total assets................... $2,414,478 $2,422,638 $1,778,508
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts............. $ 248,600 1.38 $ 171,965 3,439 2.00 $ 59,262 1,281
Savings accounts.................. 266,985 1.17 245,805 3,123 1.27 118,815 1,697
NOW accounts...................... 156,960 0.40 144,698 635 0.44 78,170 384
Certificate accounts(4)........... 567,044 3.48 621,689 19,715 3.17 441,549 22,068
---------- ---- ---------- ------- ----- ---------- -------
Total interest-bearing
deposits..................... 1,239,589 2.17 1,184,157 26,912 2.27 697,796 25,430
FHLB advances and other
borrowings........................ 723,577 5.52 867,862 39,924 4.60 839,831 43,696
---------- ---- ---------- ------- ----- ---------- -------
Total interest-bearing
liabilities.................. 1,963,166 3.40 2,052,019 66,836 3.26 1,537,627 69,126
---- ------- ----- -------
Non-interest-bearing liabilities(5)... 258,228 192,836 112,105
---------- ---------- ----------
Total liabilities.............. 2,221,394 2,244,855 1,649,732
Stockholders' Equity.................. 193,084 177,783 128,776
---------- ---------- ----------
Total liabilities and
stockholders' equity......... $2,414,478 $2,422,638 $1,778,508
========== ========== ==========
Net interest rate spread(6)........... 2.25% $57,713 2.39% $37,723
==== ======= ===== =======
Net interest margin(7)................ 2.62%
=====
Ratio of interest-earning assets to
interest-bearing liabilities........ 112.38% 107.47% 107.95%
========== ========== ==========
FOR THE YEARS ENDED MARCH 31,
------------------------------------------
2002 2001
------- -------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale(1)............ 7.18% $ 986,116 $77,116 7.82%
Investment securities(2)............ 4.22 50,745 3,452 6.80
Mortgage-backed securities(3)....... 5.51 507,584 33,507 6.60
----- ---------- ------- ----
Total interest-earning
assets....................... 6.44 1,544,445 114,075 7.39
----- ------- ----
Non-interest-earning assets........... 99,692
----------
Total assets................... $1,644,137
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts............. 2.16 $ 38,053 1,156 3.04
Savings accounts.................. 1.43 101,038 1,777 1.76
NOW accounts...................... 0.49 64,895 637 0.98
Certificate accounts(4)........... 5.00 406,979 22,682 5.57
----- ---------- ------- ----
Total interest-bearing
deposits..................... 3.64 610,965 26,252 4.30
FHLB advances and other
borrowings........................ 5.20 842,701 53,143 6.31
----- ---------- ------- ----
Total interest-bearing
liabilities.................. 4.50 1,453,666 79,395 5.46
----- ------- ----
Non-interest-bearing liabilities(5)... 85,281
----------
Total liabilities.............. 1,538,947
Stockholders' Equity.................. 105,190
----------
Total liabilities and
stockholders' equity......... $1,644,137
==========
Net interest rate spread(6)........... 1.94% $34,680 1.93%
===== ======= ====
Net interest margin(7)................ 2.27% 2.25%
===== ====
Ratio of interest-earning assets to
interest-bearing liabilities........ 106.24%
==========
---------------
(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.
22
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to:
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated on a proportional
basis between changes in rate and volume.
YEAR ENDED MARCH 31, 2003 YEAR ENDED MARCH 31, 2002
COMPARED TO COMPARED TO
YEAR ENDED MARCH 31, 2002 YEAR ENDED MARCH 31, 2001
------------------------------ ------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------- -------------------
VOLUME RATE NET VOLUME RATE NET
-------- --------- ------- ------- --------- --------
(IN THOUSANDS)
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale............... $24,031 $(10,776) $13,255 $ 727 $ (6,332) $ (5,605)
Investment securities................ 911 355 1,266 2,398 (1,664) 734
Mortgage-backed securities........... 7,682 (4,503) 3,179 3,552 (5,907) (2,355)
------- -------- ------- ------ -------- --------
Total interest-earning
assets..................... 32,624 (14,924) 17,700 6,677 (13,903) (7,226)
------- -------- ------- ------ -------- --------
Interest-bearing liabilities:
Money market accounts................ 2,261 (103) 2,158 523 (398) 125
Savings accounts..................... 1,633 (207) 1,426 284 (364) (80)
NOW accounts......................... 295 (44) 251 111 (364) (253)
Certificate accounts................. 7,271 (9,624) (2,353) 1,826 (2,440) (614)
------- -------- ------- ------ -------- --------
Total interest-bearing
deposits................... 11,460 (9,978) 1,482 2,744 (3,566) (822)
FHLB advances and other borrowings... 1,421 (5,193) (3,772) (179) (9,268) (9,447)
------- -------- ------- ------ -------- --------
Total interest-bearing
liabilities................ 12,881 (15,171) (2,290) 2,565 (12,834) (10,269)
------- -------- ------- ------ -------- --------
Net change in net interest income...... $19,743 $ 247 $19,990 $4,112 $ (1,069) $ 3,043
======= ======== ======= ====== ======== ========
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses amounted to $525,000 for the year
ended March 31, 2003, compared to $1.2 million for each of the years ended March
31, 2002 and 2001. The decrease in the loss provision during fiscal year 2003
was based on management's assessment of the loan loss allowance level as
influenced by several key factors, including stable trends in loan delinquencies
and charge-offs, changes in portfolio composition and current economic
conditions. For additional information on the amount of the allowance and the
process for evaluating its adequacy, see "Financial Condition -- Asset
Quality -- Allowance for Loan Losses."
NON-INTEREST INCOME
Non-interest income increased $25.2 million, or 154.4%, to $41.5 million
for the year ended March 31, 2003 from $16.3 million for the year ended March
31, 2002, following an increase of $7.4 million, or 82.2%, from $9.0 million for
the year ended March 31, 2001.
The increase during fiscal year 2003 as compared to fiscal year 2002 was
due primarily to increases of $21.5 million in gain on sale of mortgage loans,
$4.2 million in gain on sale of investment securities available for sale, $1.3
million in service charges on deposit accounts and $714,000 in other income,
partially offset by a decrease of $2.6 million in loan servicing income. The
increase in gain on sale of mortgage loans was due primarily to a higher volume
of loans originated for sale, which included loans sold by PMC, during the
fiscal year 2003 as compared to fiscal year 2002. Changes in fair value of
derivative instruments utilized in secondary market hedging activities, as
required by SFAS No. 133, resulted in a reduction to the gain of $657,000 for
fiscal year 2003 compared to an addition to the gain of $179,000 for fiscal year
2002. The increase in gain on sale of investment securities available was due to
increased sales volumes and market prices of mortgage-
23
backed securities and other investment securities during fiscal year 2003,
including certain investments acquired as part of the People's acquisition. The
increase in service charges on deposit accounts was due primarily to growth
resulting from the People's acquisition and subsequent increases in deposit
accounts. The increase in other non-interest income was due primarily to
increases in other fee income, and a decrease in the fair value of investments
in certain employee benefit plans, which is offset by a corresponding decrease
in other non-interest expense. Also, changes in the fair value of interest rate
swaps resulted in additions to other non-interest income of $440,000 for fiscal
year 2003, compared to $303,000 for fiscal year 2002. The decrease in loan
servicing income was due primarily to additions to the valuation allowance for
mortgage servicing rights of $2.6 million for fiscal year 2003, compared to
$240,000 for fiscal year 2002. The valuation allowance 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. Amortization of mortgage servicing rights totaled $3.1 million and $2.9
million for fiscal years 2003 and 2002, respectively.
The increase during fiscal year 2002 as compared to fiscal year 2001 was
due primarily to increases of $5.0 million in gain on sale of mortgage loans,
net, $1.0 million of gain on sale of securities available for sale, $449,000 in
service charges on deposit accounts, $367,000 in trust fee income and $607,000
in other non-interest income, partially offset by a decrease in loan servicing
income of $402,000. The increase in gain on sale of mortgage loans was due
primarily to a higher volume of fixed rate loans originated for sale and more
favorable loan pricing during fiscal year 2002 as compared to fiscal year 2001.
In addition, an increase in the gain of $179,000 for fiscal year 2002 was
recognized as a result of changes in fair value of derivative instruments
utilized in secondary market hedging activities following the adoption of SFAS
No. 133 on April 1, 2001. The increase in service charges on deposit accounts
reflects a higher fee rate structure and the increase in trust fee income was
due to continued growth at the Trust Company. The increase in other non-
interest income was due primarily to increases in other fee income, and an
increase in the fair value of investments in certain employee benefit plans,
which is offset by a corresponding increase in other non-interest expense. Also,
changes in the fair value of interest rate swaps resulted in an addition to
other non-interest income of $303,000 for fiscal year 2002 following the
adoption of SFAS No. 133. The decrease in loan servicing income included a
$240,000 addition to the valuation allowance for mortgage servicing rights
during the second quarter of fiscal year 2002 based on estimated impairment due
to a combination of faster than previously expected actual payoff experience and
faster prepayment forecasts for the applicable periods. Amortization of mortgage
servicing rights totaled $2.9 million and $2.5 million for fiscal years 2002 and
2001, respectively.
NON-INTEREST EXPENSE
Total non-interest expense increased $28.1 million, or 85.1%, to $61.1
million for the year ended March 31, 2003 from $33.0 million for year ended
March 31, 2002, following an increase of $3.9 million, or 13.6%, from $29.1
million for year ended March 31, 2001.
The increase during fiscal year 2003 as compared to fiscal year 2002 was
due primarily to increases in compensation and benefits of $16.7 million, office
occupancy and equipment expenses of $4.0 million, data processing costs of
$872,000, advertising and business promotion of $633,000, amortization of
intangible assets of $2.1 million and $4.8 million in other non-interest
expenses, partially offset by a decrease in prepayment penalties on early
extinguishment of debt of $962,000. The increases in non-interest expenses were
due to several factors, including growth resulting from the acquisition of
People's and PMC and expenses associated with increased loan origination
volumes, as well as costs related to banking office and back office
consolidation during the first quarter of fiscal year 2003, and other
non-recurring integration expenses. As of March 31, 2003, the Company's
full-time equivalent employee positions totaled 680, compared to 648 at March
31, 2002 and 329 at March 31, 2001.
The increase in amortization of intangible assets for fiscal year 2003 as
compared to fiscal year 2002 was due to amortization of the identifiable
intangible assets recorded in connection with the People's acquisition,
partially offset by discontinuing all goodwill amortization. In accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill related to the
People's acquisition was not amortized, amortization of other goodwill related
to business combinations completed before July 1, 2001 was discontinued
effective April 1, 2002, and goodwill is required to be reviewed for impairment
at least annually. The Company performed
24
transitional and annual impairment tests during fiscal year 2003, and concluded
that the amount of recorded goodwill was not impaired. These goodwill impairment
tests utilized several fair value techniques, including market capitalization
and discounted future cash flows.
The increase during fiscal year 2002 as compared to fiscal year 2001 was
due primarily to increases in compensation and benefits of $2.2 million, data
processing of $451,000, prepayment penalties on early extinguishment of debt of
$962,000, amortization of goodwill and other intangible assets of $210,000 and
other non-interest expense of $516,000. These increases were partially offset by
decreases in advertising and business promotion of $329,000. Total non-interest
expenses for fiscal year 2002 included costs associated with the Company's new
banking and insurance office in Middletown, Rhode Island that opened in January
2002, and operating and acquisition related expenses recognized in March 2002
following the People's acquisition. As part of the People's acquisition, the
Company acquired $253.4 million of cash and cash equivalents, net of acquisition
related payments, which provided the Company with the opportunity to improve
balance sheet composition by pre-paying Federal Home Loan Bank advances and
other borrowings totaling $161.7 million during March 2002. In addition, the
increases in compensation and benefits included the net accounting impact of
market price increases of FAB stock held by certain employee benefit plans.
INCOME TAXES
Income tax expense increased $7.7 million, or 109.9%, to $14.6 million for
the year ended March 31, 2003 from $7.0 million for the year ended March 31,
2002, following an increase of $2.7 million, or 64.9%, from $4.2 million for the
year ended March 31, 2001. The Company's effective tax rate increased to 38.8%
for the year ended March 31, 2003, compared to 35.1% for the year ended March
31, 2002 and 31.5% for the year ended March 31, 2001, 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 a consistent
earnings rate from BOLI relative to the increase in pre-tax income.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
On April 1, 2001, the Company adopted SFAS No. 133 and recognized an
after-tax loss from the cumulative effect of adoption of $461,000, or $0.08 per
share, representing the initial adjustment to fair value of certain derivative
instruments, including a pre-tax adjustment of $743,000 related to interest rate
swaps designed to reduce its exposure to interest rate changes, partially offset
by a pre-tax adjustment of $45,000 related to commitments to originate and sell
mortgage loans for sale that hedge its secondary market activities. Changes to
the fair value of derivative instruments are recognized in non-interest income
each quarter, and a net addition to pre-tax income of $482,000, or approximately
$0.05 per share, was recognized for fiscal year 2002.
FINANCIAL CONDITION
OVERVIEW
Total assets were $2.414 billion at March 31, 2003, an increase of $120.0
million, or 5.2%, from $2.294 billion at March 31, 2002, following an increase
of $623.4 million, or 37.3%, from $1.671 billion at March 31, 2001. The growth
during fiscal year 2003 was primarily attributable to increases of $118.3
million in mortgage loans held for sale, $115.6 million in loans receivable,
net, and $56.3 million in mortgage-backed securities available for sale,
partially offset by decreases of $89.5 million in cash and cash equivalents and
$61.9 million in investment securities available for sale. The growth during
fiscal year 2002 was primarily attributable to assets acquired of $968.7 million
from the People's acquisition, less the net repayment and early pre-payment of
borrowings totaling $361.2 million. Overall, this growth during fiscal year 2002
included increases of $148.6 million in loans receivable, net, $121.8 million in
cash and cash equivalents, $88.4 million in mortgage loans held for sale, $77.4
million in mortgage-backed securities available for sale, $76.8 million in
investment securities available for sale and $54.6 million in goodwill and other
intangible assets, partially offset by an increase of $609.8 million in
deposits.
Total stockholders' equity was $193.1 million at March 31, 2003, an
increase of $37.7 million, or 24.3%, from $155.3 million at March 31, 2002,
following an increase of $43.8 million, or 39.3%, from $111.6 million
25
at March 31, 2001. The increase during fiscal year 2003 was primarily
attributable to $23.0 million in net income, an $8.4 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 $5.2 million in dividends paid to stockholders. The
increase during fiscal year 2002 was primarily attributable to $12.4 million in
net income and $31.7 million of additional paid-in capital related to the 1.9
million shares issued for the People's acquisition, partially offset by $3.2
million in dividends paid to stockholders. Stockholders' equity to assets was
8.00% at March 31, 2003, compared to 6.77% at March 31, 2002 and 6.68% at March
31, 2001. Book value per share was $23.26 at March 31, 2003, compared to $20.06
at March 31, 2002 and $19.57 at March 31, 2001. Tangible book value per share
was $16.79 at March 31, 2003, compared to $12.86 at March 31, 2002 and $19.37 at
March 31, 2001.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's short-term investments and investment
securities at the dates indicated:
AT MARCH 31,
-----------------------------------------------------------------
2003 2002 2001
------------------- ---------------------- ------------------
AMORTIZED FAIR AMORTIZED AMORTIZED FAIR
COST VALUE COST FAIR VALUE COST VALUE
--------- ------- --------- ---------- --------- ------
(IN THOUSANDS)
Short-term investments............ $ 2,000 $ 2,000 $100,890 $100,890 $ 200 $ 200
======= ======= ======== ======== ====== ======
Investment securities:
Corporate bonds................. $ 1,956 $ 2,124 $ 31,513 $ 31,539 $ -- $ --
Municipal bonds................. 1,482 1,482 2,643 2,643 -- --
U.S. Government and agency
obligations.................. 980 1,000 1,111 1,107 603 602
Trust preferred securities...... 6,780 7,191 40,698 40,258 -- --
Marketable equity securities.... 5,461 10,933 5,637 9,109 5,802 7,235
------- ------- -------- -------- ------ ------
Total available for sale..... 16,659 22,730 81,602 84,656 6,405 7,837
------- ------- -------- -------- ------ ------
Total investment
securities................. $18,659 $24,730 $182,492 $185,546 $6,605 $8,037
======= ======= ======== ======== ====== ======
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities at the dates
indicated:
AT MARCH 31,
---------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- ------------------------------- -------------------------------
AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR
COST OF TOTAL VALUE COST OF TOTAL VALUE COST OF TOTAL VALUE
--------- -------- -------- --------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
MBS and CMOs:
Available for sale:
Fixed-rate.............. $239,862 38.4% $242,435 $173,083 29.8% $171,922 $ 84,904 17.0% $ 85,186
Adjustable-rate......... 383,979 61.5 392,530 406,630 70.0 406,696 413,440 82.6 416,044
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total available for
sale.................... 623,841 99.9 634,965 579,713 99.8 578,618 498,344 99.6 501,230
-------- ----- -------- -------- ----- -------- -------- ----- --------
Held to maturity:
Fixed-rate.............. 298 -- 298 421 0.1 447 569 0.1 569
Adjustable-rate......... 636 0.1 658 782 0.1 788 1,569 0.3 1,585
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total held to maturity.... 934 0.1 956 1,203 0.2 1,235 2,138 0.4 2,154
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total MBS and CMOs........ $624,775 100.0% $635,921 $580,916 100.0% $579,853 $500,482 100.0% $503,384
======== ===== ======== ======== ===== ======== ======== ===== ========
26
The table below sets forth certain information regarding the fair value,
weighted average rates and contractual maturities of the Company's investment
securities and mortgage-backed securities as of March 31, 2003:
AT MARCH 31, 2003
-------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
----------------- ------------------ ------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE
VALUE RATE VALUE RATE VALUE RATE VALUE RATE VALUE RATE
------ -------- ------- -------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Investment securities
available for sale(1):
Corporate Bonds
Fixed rate........... $ -- --% $ -- --% $ -- --% $ 2,124 7.50% $ 2,124 7.50%
Adjustable rate...... -- -- -- -- -- -- -- -- -- --
------ ------- ------- -------- --------
Total corporate
Bonds................ -- -- -- -- -- -- 2,124 7.50 2,124 7.50
Municipal bonds........ 1,332 2.81 150 4.09 -- -- -- -- 1,482 2.94
U.S. Government agency
obligations.......... 584 4.23 416 6.69 -- -- -- -- 1,000 5.25
Trust preferred
securities
Fixed rate........... -- -- -- -- 551 9.75 6,640 9.60 7,191 9.61
Adjustable rate...... -- -- -- -- -- -- -- -- -- --
------ ------- ------- -------- --------
Total trust preferred
securities........... -- -- -- -- 551 9.75 6,640 9.60 7,191 9.61
------ ------- ------- -------- --------
Total investment
securities available
for sale............... $1,916 3.24% $ 566 6.00% $ 551 9.75% $ 8,764 9.09% $ 11,797 8.02%
====== ======= ======= ======== ========
MBS and CMOs
Held to maturity:
Fixed rate........... $ -- --% $ 92 8.13% $ 206 9.30% $ -- --% $ 298 8.94%
Adjustable rate...... -- -- -- -- -- -- 658 4.71 658 4.71
------ ------- ------- -------- --------
Total MBS held to
maturity............. -- -- 92 8.13 206 9.30 658 4.71 956 6.03
------ ------- ------- -------- --------
Available for sale:
Fixed rate........... 666 7.00 1,175 7.00 13,346 5.00 227,248 4.82 242,435 4.85
Adjustable rate...... -- -- 9,975 2.59 29,402 3.43 353,153 4.66 392,530 4.51
------ ------- ------- -------- --------
Total MBS available for
sale................. 666 7.00 11,150 3.05 42,748 3.92 580,401 4.72 634,965 4.64
------ ------- ------- -------- --------
Total MBS and CMOs....... $ 666 7.00% $11,242 3.09% $42,954 3.94% $581,059 4.72% $635,921 4.64%
====== ======= ======= ======== ========
---------------
(1) Does not include $10,933 of marketable equity securities available for sale
at fair value at March 31, 2003.
Maturities of mortgage-backed securities available for sale and held for
maturity are based on contractual maturities with scheduled amortization. Actual
maturities will differ from contractual maturities due to prepayments.
27
LOANS RECEIVABLE
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated:
AT MARCH 31,
--------------------------------------------------------------------------------
2003 2002 2001 2000
--------------------- --------------------- --------------------- --------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
---------- -------- ---------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential........ $ 601,063 47.21% $ 635,297 54.77% $ 680,527 67.49% $674,154
Commercial real
estate........... 142,974 11.23 115,243 9.93 44,375 4.40 37,274
Construction and
land............. 61,698 4.85 63,810 5.50 72,225 7.16 39,205
---------- ------ ---------- ------ ---------- ------ --------
Total
mortgage
loans...... 805,735 63.29 814,350 70.20 797,127 79.05 750,633
---------- ------ ---------- ------ ---------- ------ --------
Commercial Loans..... 283,137 22.24 200,016 17.24 94,681 9.39 70,484
---------- ------ ---------- ------ ---------- ------ --------
Consumer Loans:
Home equity
lines............ 140,189 11.01 83,013 7.16 45,191 4.48 31,351
Second mortgages... 32,914 2.58 48,901 4.22 61,759 6.12 51,488
Other consumer
loans............ 11,158 0.88 13,713 1.18 9,665 .96 8,616
---------- ------ ---------- ------ ---------- ------ --------
Total
consumer
loans...... 184,261 14.47 145,627 12.56 116,615 11.56 91,455
---------- ------ ---------- ------ ---------- ------ --------
Total loans
receivable... 1,273,133 100.00% 1,159,993 100.00% 1,008,423 100.00% 912,572
====== ====== ======
Less:
Allowance for loan
losses........... (19,335) (19,237) (13,233) (12,275)
Undisbursed
proceeds of
construction
mortgages in
process.......... (17,752) (21,818) (19,445) (11,983)
Purchase premium on
loans, net....... 3,377 5,869 -- --
Deferred loan
origination costs
(fees), net...... 1,908 943 1,429 446
---------- ---------- ---------- --------
Loans receivable,
net.............. 1,241,331 1,125,750 977,174 888,760
Mortgage loans held
for sale......... 245,745 127,477 39,103 3,417
---------- ---------- ---------- --------
Loans receivable,
net and
mortgage loans
held for
sale........... $1,487,076 $1,253,227 $1,016,277 $892,177
========== ========== ========== ========
AT MARCH 31,
------------------------------
2000 1999
-------- -------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential........ 73.87% $586,774 74.52%
Commercial real
estate........... 4.09 38,760 4.92
Construction and
land............. 4.30 31,671 4.02
------ -------- ------
Total
mortgage
loans...... 82.26 657,205 83.46
------ -------- ------
Commercial Loans..... 7.72 56,196 7.14
------ -------- ------
Consumer Loans:
Home equity
lines............ 3.44 25,482 3.24
Second mortgages... 5.64 40,630 5.16
Other consumer
loans............ .94 7,872 1.00
------ -------- ------
Total
consumer
loans...... 10.02 73,984 9.40
------ -------- ------
Total loans
receivable... 100.00% 787,385 100.00%
====== ======
Less:
Allowance for loan
losses........... (12,016)
Undisbursed
proceeds of
construction
mortgages in
process.......... (7,903)
Purchase premium on
loans, net....... --
Deferred loan
origination costs
(fees), net...... (779)
--------
Loans receivable,
net.............. 766,687
Mortgage loans held
for sale......... 52,334
--------
Loans receivable,
net and
mortgage loans
held for
sale........... $819,021
========
28
The following table shows the remaining contractual maturity of the
Company's loans at March 31, 2003. The table does not include the effect of
future principal prepayments:
AT MARCH 31, 2003
-----------------------------------------------------------------------------
COMMERCIAL CONSTRUCTION TOTAL
RESIDENTIAL REAL ESTATE AND LAND COMMERCIAL CONSUMER LOANS
----------- ----------- ------------ ---------- -------- ----------
(IN THOUSANDS)
Amounts due:
One year or less.................. $ 1,851 $ 24,966 $46,859 $135,494 $142,015 $ 351,185
-------- -------- ------- -------- -------- ----------
After one year:
More than one year to three
years......................... 3,762 22,805 -- 31,213 6,488 64,268
More than three years to five
years......................... 16,257 48,338 -- 54,104 5,810 124,509
More than five years to 10
years......................... 93,058 43,448 -- 55,882 10,797 203,185
More than 10 years to 20
years......................... 208,726 2,307 14,839 5,462 17,182 248,516
More than 20 years.............. 277,409 1,110 -- 982 1,969 281,470
-------- -------- ------- -------- -------- ----------
Total due after one year........ 599,212 118,008 14,839 147,643 42,246 921,948
-------- -------- ------- -------- -------- ----------
Total amount due................ $601,063 $142,974 $61,698 $283,137 $184,261 1,273,133
======== ======== ======= ======== ========
Less:
Allowance for loan
losses................... (19,335)
Undisbursed proceeds of
construction mortgages in
process.................. (17,752)
Purchase premium on
loans, net............... 3,377
Deferred loan origination
costs, net............... 1,908
----------
Loans receivable, net........... $1,241,331
==========
The following table sets forth, at March 31, 2003, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
2004, and whether such loans have fixed interest rates or adjustable interest
rates.
DUE AFTER MARCH 31, 2004
--------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
Mortgage loans:
Residential........................................ $342,319 $256,893 $599,212
Commercial real estate............................. 85,700 32,308 118,008
Construction and land.............................. -- 14,839 14,839
-------- -------- --------
Total mortgage loans....................... 428,019 304,040 732,059
Commercial loans..................................... 97,472 50,171 147,643
Consumer loans....................................... 42,246 -- 42,246
-------- -------- --------
Total loans................................ $567,737 $354,211 $921,948
======== ======== ========
29
The following table sets forth the Company's loan originations for the
periods indicated:
FOR THE YEAR ENDED MARCH 31,
----------------------------------
2003 2002 2001
---------- ---------- --------
(IN THOUSANDS)
Loans originated:
Mortgage loans:
Residential................................ $3,131,184 $ 717,451 $293,268
Commercial real estate..................... 81,594 41,658 19,176
Construction and land...................... 60,362 71,109 76,604
---------- ---------- --------
Total mortgage loans.................... 3,273,140 830,218 389,048
---------- ---------- --------
Commercial................................... 120,759 91,060 59,188
---------- ---------- --------
Consumer loans:
Home equity lines.......................... 177,298 82,362 48,585
Second mortgages........................... 14,431 22,917 29,327
Other consumer loans....................... 5,329 6,452 8,042
---------- ---------- --------
Total consumer loans.................... 197,058 111,731 85,954
---------- ---------- --------
Total loans originated....................... $3,590,957 $1,033,009 $534,190
========== ========== ========
Mortgage loans sold to others and serviced by the Bank on a fee basis under
various agreements decreased $176.2 million, or 11.1%, to $1.412 billion at
March 31, 2003 from $1.588 billion at March 31, 2002, due primarily to
refinancing activity. Loans serviced for others are not included in the
Consolidated Balance Sheets. Mortgage servicing rights decreased $534,000, or
8.2%, to $6.0 million at March 31, 2003, from $6.5 million at March 31, 2002,
including adjustments for estimated impairment. The valuation allowance related
to the impairment of mortgage servicing rights increased $2.6 million to $3.1
million at March 31, 2003, from $490,000 at March 31, 2002. Mortgage servicing
rights were 0.42% of loans serviced for others at March 31, 2003, compared to
0.41% at March 31, 2002.
DEPOSITS
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize average month-end balances:
FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
---------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Business checking
accounts................. $ 144,955 10.9% --% $ 79,144 10.2% --% $ 56,299 8.4% --%
Money market accounts...... 171,965 12.9 2.00 59,262 7.6 2.16 38,053 5.7 3.04
Savings accounts........... 245,805 18.5 1.27 118,815 15.3 1.43 101,038 15.2 1.76
NOW accounts............... 144,698 10.9 0.44 78,170 10.1 0.49 64,895 9.7 0.98
---------- ----- -------- ----- -------- -----
Total core
deposits........ 707,423 53.2 1.02 335,391 43.2 1.05 260,285 39.0 1.37
Certificate accounts....... 621,689 46.8 3.17 441,549 56.8 5.00 406,979 61.0 5.57
---------- ----- -------- ----- -------- -----
Total average
deposits........ $1,329,112 100.0% 2.02% $776,940 100.0% 3.27% $667,264 100.0% 3.93%
========== ===== ======== ===== ======== =====
30
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 2003:
PERIOD TO MATURITY FROM MARCH 31, 2003 AT MARCH 31,
------------------------------------------------------------- ------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 2003 2002 2001
--------- --------- ----------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)
Certificate accounts:
0 to 2.00%................ $150,079 $ 2,921 $ -- $ -- $ -- $153,000 $ 25,437 $ --
2.01 to 3.00%............. 194,471 47,873 1,183 -- -- 243,527 270,236 --
3.01 to 4.00%............. 31,764 13,974 15,789 2,334 17,148 81,009 90,633 --
4.01 to 5.00%............. 12,444 2,925 1,512 8,281 8,377 33,539 103,348 25,010
5.01 to 6.00%............. 8,402 16,902 2,704 12,922 49 40,979 87,789 249,010
Over 6.01%................ 11,058 782 3,150 -- -- 14,990 72,400 133,777
-------- ------- ------- ------- ------- -------- -------- --------
Total.............. $408,218 $85,377 $24,338 $23,537 $25,574 $567,044 $649,843 $407,797
======== ======= ======= ======= ======= ======== ======== ========
ASSET QUALITY
Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more and all real estate owned ("REO"). The
procedures taken by the Company with respect to delinquencies vary depending on
the nature of the loan, term and cause of delinquency and whether the borrower
is habitually delinquent. When a borrower fails to make a required payment on a
loan, the Company takes a number of steps to have the borrower cure the
delinquency and restore the loan to current status. The Company generally sends
the borrower a written notice of non-payment after the loan is first past due.
The Company's guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment. When contact is made with the borrower at any
time prior to foreclosure, the Company will attempt to obtain full payment,
offer to provide budget and finance counseling services, work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan is not otherwise satisfied, additional letters and telephone calls are
generally made. If the loan is still not brought current or satisfied and it
becomes necessary for the Company to take legal action, which typically occurs
after a loan is 90 days or more delinquent, the Company will commence
foreclosure proceedings against any real property that secures the loan. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the property securing the loan
generally is sold at foreclosure and, if purchased by the Company, becomes REO.
Federal regulations and the Company's Credit Risk Review Policy require
that the Company utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Company has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Company currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the credit weaknesses make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories, but possess weaknesses, are required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by
31
management. General valuation allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies one or more
assets, or portions thereof, as "Loss", it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
The Company's Credit Risk Review Committee reviews and classifies the
Company's assets on a quarterly basis and the Board of Directors reviews the
reports on a quarterly basis. The Company classifies assets in accordance with
the management guidelines described above. The Company also engages external
loan review consultants on at least a semi-annual basis to review commercial
loan classifications. At March 31, 2003, the Company had $14.5 million of assets
designated as Substandard, including $1.6 million of trust preferred investment
securities acquired in the People's acquisition, and $12.7 million of loans. As
of March 31, 2003, the Company had loans totaling $10.5 million designated as
Special Mention. These loans are designated as Special Mention because of
inherent weaknesses that currently exist, but might be correctable in a
twelve-month cycle. Accordingly, they require additional monitoring.
The following table sets forth loans 60-89 days delinquent in the Company's
loan portfolio as of the dates indicated:
AT MARCH 31,
--------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
One-to-four family................... 4 $292 10 $710 4 $210
Commercial real estate............... -- -- 1 60 -- --
-- ---- -- ---- -- ----
Total mortgage loans......... 4 292 11 770 4 210
-- ---- -- ---- -- ----
Commercial Loans....................... 3 332 -- -- 5 81
-- ---- -- ---- -- ----
Consumer Loans:
Home equity lines.................... 1 1 5 100 -- --
Second mortgages..................... 2 48 -- -- -- --
Other consumer loans................. 3 36 19 78 1 1
-- ---- -- ---- -- ----
Total consumer loans......... 6 85 24 178 1 1
-- ---- -- ---- -- ----
Total loans............................ 13 $709 35 $948 10 $292
== ==== == ==== == ====
Delinquent loans to loans receivable,
net.................................. 0.06% 0.08% 0.03%
32
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, non-performing investments, REO and other
repossessed assets. It is the policy of the Company to cease accruing interest
on loans 90 days or more past due and to charge off all accrued interest. For
fiscal years ended 2003 and 2002 the amount of additional interest income that
would have been recognized on non-accrual loans if such loans were performing in
accordance with their regular terms and amounts recognized were $103,000 and
$110,000, respectively.
AT MARCH 31,
------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family............................... $1,699 $1,855 $ 431 $ 941 $ 971
Commercial real estate........................... 96 724 -- -- 1,142
Construction and land............................ -- 814 -- -- 117
------ ------ ------ ------ ------
Total mortgage loans........................ 1,795 3,393 431 941 2,230
------ ------ ------ ------ ------
Commercial loans.................................... 1,388 144 821 345 280
------ ------ ------ ------ ------
Consumer loans:
Home equity lines................................ -- 54 -- -- 36
Second mortgages................................. 107 77 56 12 --
Other consumer loans............................. 15 36 24 12 4
------ ------ ------ ------ ------
Total consumer loans........................ 122 167 80 24 40
------ ------ ------ ------ ------
Total non-accrual loans..................... 3,305 3,704 1,332 1,310 2,550
Non-performing investments............................ -- 3,285 -- -- --
REO, net(1)........................................... 194 240 175 -- 344
Other repossessed assets.............................. -- 3 -- -- --
------ ------ ------ ------ ------
Total non-performing assets................. $3,499 $7,232 $1,507 $1,310 $2,894
====== ====== ====== ====== ======
Allowance for loan losses as a percent of loans(2).... 1.53% 1.68% 1.34% 1.36% 1.54%
Allowance for loan losses as a percent of
non-performing loans(3)............................. 585% 519% 993% 937% 471%
Non-accrual loans as a percent of loans(2)(3)......... 0.26% 0.32% 0.13% 0.15% 0.33%
Non-performing assets as a percent of total assets.... 0.14% 0.31% 0.09% 0.08% 0.21%
---------------
(1) REO balances are shown net of related valuation allowances.
(2) Loans include loans receivable, net, excluding allowance for loan losses.
(3) Non-accrual loans consist of all loans 90 days or more past due and other
loans that have been identified by the Company as presenting uncertainty
with respect to the collectibility of interest or principal.
The $3.7 million decrease in non-performing assets during fiscal year 2003
was due primarily to the sale, in April 2002, of a $3.3 million non-performing
investment acquired in the People's acquisition. The $5.7 million increase in
non-performing assets during fiscal year 2002 was due primarily to assets
acquired in the People's acquisition, including $1.7 million of non-accrual
residential loans, $243,000 of commercial and commercial real estate non-accrual
loans, a $3.3 million non-performing investment and $240,000 of real estate
owned.
Impaired Loans. Impaired loans are commercial and commercial real estate
loans for which it is probable that the Company will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The
definition of "impaired loans" is not the same as the definition of "non-accrual
loans," although the two categories overlap. Non-accrual loans include impaired
loans and are those on which the accrual of interest is discontinued when
collectibility of principal or interest is uncertain or payments of
33
principal or interest have been contractually past due 90 days. The Company may
choose to place a loan on non-accrual status due to payment delinquency or
uncertain collectibility, while not classifying the loan as impaired, if it is
probable that the Company will collect all amounts due in accordance with the
contractual terms of the loan. Factors considered by management in determining
impairment include payment status and collateral value. Impairment is determined
by the difference between the present value of the expected cash flows related
to the loan, using the original contractual interest rate, and its recorded
value, or, in the case of collateral dependent loans, the difference between the
fair value of the collateral and the recorded amount of the loan. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. Loans that experience insignificant payment delays and insignificant
shortfalls in payment amounts generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed.
At March 31, 2003 and 2002, total impaired loans of $1.5 million and
$868,000 required impairment allowances of $506,000 and $144,000, respectively.
Impaired loans of $1.5 million and $868,000 were on non-accrual at March 31,
2003 and 2002, respectively. During fiscal year-end 2003, the average recorded
value of impaired loans was $1.2 million. For these loans, $21,000 of interest
income was recognized while $112,000 of interest income would have been
recognized under the original terms.
Allowance for Loan Losses. The allowance for loan losses is based on
management's ongoing review and estimate of the credit losses inherent in the
loan portfolio. Management's methodology to estimate loss exposure inherent in
the portfolio includes analysis of individual loans deemed to be impaired,
performance of individual loans in relation to contract terms, and allowance
allocations for various loan types based on payment status or loss experience.
An unallocated allowance is also maintained within an established range based on
management's assessment of many factors including current market conditions,
trends in loan delinquencies and charge-offs, the volume and mix of new
originations, and the current type, mix, changing risk profiles and balance of
the portfolio. In addition, the OTS, as an integral part of their examination
process, periodically reviews the Company's allowance for loan losses. The OTS
and the FDIC may require the Company to make additional provisions for estimated
loan losses based upon judgments different from those of management.
The allowance for loan losses was $19.3 million, or 1.53% of loans
receivable, at March 31, 2003, compared to $19.2 million, or 1.68% of loans
receivable, at March 31, 2002. The following table sets forth activity in the
Company's allowance for loan losses for the periods indicated:
AT OR FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period..................... $19,237 $13,233 $12,275 $12,016 $10,937
Provision for loan losses.......................... 525 1,200 1,200 1,200 1,200
Allowance for loan losses acquired................. -- 5,196 -- -- --
Charge-offs:
Mortgage loans:
One to four family............................. (70) (70) (99) (41) (12)
Commercial real estate......................... -- -- -- (759) --
Commercial loans................................. (230) (292) (58) (140) (74)
Consumer loans:
Home equity lines.............................. (42) (10) (5) -- (30)
Second mortgages............................... -- -- (73) -- (9)
Other consumer................................. (105) (121) (46) (18) (13)
------- ------- ------- ------- -------
Total..................................... (447) (493) (281) (958) (138)
Recoveries......................................... 20 101 39 17 17
------- ------- ------- ------- -------
Balance at end of period........................... $19,335 $19,237 $13,233 $12,275 $12,016
======= ======= ======= ======= =======
Ratio of net charge-offs during the period to
average loans outstanding during the period...... 0.04% 0.05% 0.02% 0.12% 0.01%
34
The following table sets forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated:
AT MARCH 31,
---------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgages:
Residential............ $ 2,397 12.40% 52.06% $ 3,350 17.41% 60.27% $ 2,664 20.13% 74.65%
Commercial............. 4,429 22.90 11.23 3,576 18.59 9.93 2,269 17.14 4.40
------- ------ ------ ------- ------ ------ ------- ------ ------
Total............ 6,826 35.30 63.29 6,926 36.00 70.20 4,933 37.27 79.05
Commercial............... 8,772 45.37 22.24 6,206 32.26 17.24 4,843 36.60 9.39
Consumer................. 2,888 14.94 14.47 2,231 11.60 12.56 1,869 14.13 11.56
Unallocated.............. 849 4.39 -- 3,874 20.14 -- 1,588 12.00 --
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance
for loan
losses......... $19,335 100.00% 100.00% $19,237 100.00% 100.00% $13,233 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
AT MARCH 31,
-----------------------------------------------------------------
2000 1999
------------------------------- -------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgages:
Residential............ $ 2,529 20.60% 78.17% $ 2,517 20.95% 78.54%
Commercial............. 1,749 14.25 4.09 2,725 22.68 4.92
------- ------ ------ ------- ------ ------
Total............ 4,278 34.85 82.26 5,242 43.63 83.46
Commercial............... 4,523 36.85 7.72 3,111 25.89 7.14
Consumer................. 1,647 13.42 10.02 1,320 10.99 9.40
Unallocated.............. 1,827 14.88 -- 2,343 19.49 --
------- ------ ------ ------- ------ ------
Total allowance
for loan
losses......... $12,275 100.00% 100.00% $12,016 100.00% 100.00%
======= ====== ====== ======= ====== ======
35
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 remaining essentially flat during
fiscal year 2003. Although the Company's non-performing loans and charge-offs
have remained low, there continued to be a significant shift in the composition
of the loan portfolio during fiscal year 2003 as compared to fiscal years 2002
and 2001. The residential mortgage portfolio has decreased, due primarily to a
low fixed rate environment that 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, the unallocated allowance decreased $3.0
million, or 78.1%, to $849,000 at March 31, 2003 from $3.9 million at March 31,
2002, due primarily to increases in allowance allocations to commercial loans
and mortgages during fiscal year 2003. These changes resulted from the Company's
internal credit risk review and asset classification processes following the
People's acquisition, and the subsequent systems conversion in May 2002.
The Company's internal asset classification system classifies assets
depending on risk of loss characteristics. At March 31, 2003, 2002 and 2001, the
Company classified (excluding REO) $12.7 million, $8.9 million and $3.1 million
of substandard loans, respectively. In the opinion of management, the performing
substandard loans evidence one or more weaknesses or potential weaknesses, and
depending on the regional economy and other factors, may become non-performing
assets in future periods. Management also believes that current economic
conditions, including rising unemployment rates in its key market areas, could
have an adverse affect on asset quality and result in higher non-performing
loans and charge-offs.
The Company will continue to monitor and modify its allowances for loan
losses as conditions dictate. While management believes the Company's allowance
for loan losses was sufficient to absorb losses inherent in its loan portfolio
at March 31, 2003, 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.
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) the origination and retention of certain adjustable-rate
and shorter-term (generally 15 years or less) fixed-rate, one-to-four family
mortgage loans; (2) selling mortgage loans originated for sale in the secondary
market with either servicing rights retained or servicing rights 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, including mortgage loans sold with servicing rights released, where all
such 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
36
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.
The following table sets forth the Company's estimated NPV and NPV ratios
as of March 31, 2003 and 2002, as calculated by the Company.
MARCH 31, 2003 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 $179,199 7.57% 123 $136,524 6.10% (218)
200 181,195 7.54 120 161,250 7.09 (120)
100 172,562 7.09 75 181,372 7.85 (43)
Unchanged 155,172 6.34 -- 193,892 8.28 --
(100) 126,481 5.17 (117) 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
Liquidity. 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, FHLB advances and
other borrowings, and retained earnings 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 March 31, 2003, cash, short-term investments,
mortgage loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale totaled $959.0 million, or 39.7%
of total assets.
37
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 March 31, 2003, the Bank had $712.3 million in advances
outstanding from the FHLB and other borrowings, and an additional borrowing
capacity from the FHLB of $354.1 million including the $25.0 million line of
credit. At March 31, 2003, the portfolio of putable FHLB advances and putable
reverse repurchase agreements totaled $407.5 million, with an average effective
interest rate of 4.50%, and an average life to maturity and estimated average
life of 6.6 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. 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 March 31, 2003, Capital Trust II had $10.0 million of
11.695% trust preferred securities outstanding, with an average interest cost of
10.29%, 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 March 31, 2003, the Bank had commitments to originate loans and unused
outstanding lines of credit and undistributed balances of construction loans
totaling $573.1 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 March 31, 2003
totaled $408.2 million. Based on its prior experience and other factors, the
Bank 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 2002, 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.
Contractual Obligations and Commitments. The Company has entered into
contractual obligations and commitments. The following table presents, as of
March 31, 2003, the Company's contractual obligations and commitments:
PAYMENTS DUE BY PERIOD
--------------------------------------------
LESS THAN AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
----------------------- -------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
FHLB advances and other borrowings....... $696,763 $57,530 $201,747 $106,444 $331,042
Company obligated, mandatorily redeemable
securities............................. 10,000 -- -- -- 10,000
Operating lease obligations.............. 7,125 1,171 1,715 1,081 3,158
-------- ------- -------- -------- --------
Total Contractual obligations............ $713,888 $58,701 $203,462 $107,525 $344,200
======== ======= ======== ======== ========
38
AMOUNT OF COMMITMENT EXPIRATION - PER PERIOD
TOTAL --------------------------------------------
AMOUNTS LESS THAN AFTER 5
OTHER COMMITMENTS COMMITTED 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
----------------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Lines of Credit........................... $291,924 $136,024 $20,002 $5,704 $130,194
Commitments to originate loans............ 281,145 281,145 -- -- --
Forward commitments to sell loans......... 296,943 296,943 -- -- --
-------- -------- ------- ------ --------
Total Commitments......................... $870,012 $714,112 $20,002 $5,704 $130,194
======== ======== ======= ====== ========
Other liabilities are short term in nature, except for liabilities related
to employee benefit plans, as described in Note 16 to the Consolidated Financial
Statements. Refer to Note 14, Financial Instruments with Off-balance Sheet Risk,
for more information regarding the nature and business purpose of all
off-balance sheet arrangements.
Capital Resources. At March 31, 2003, the consolidated capital to total
assets ratio of the Company was 8.00%. During fiscal year 2003, the Company paid
cash dividends to stockholders of $0.14 per share during the first quarter and
$0.15 per share during the second and third quarters, and $0.18 per share during
the fourth quarter. The Company also paid a cash dividend of $0.20 per share to
stockholders during the first quarter of fiscal year 2004. The Company's primary
source of funding for these dividends, and payments for periodic stock
repurchases, has been dividends from the Bank. The Bank's ability to pay
dividends and other capital distributions to the Company is generally limited by
OTS regulations.
As of March 31, 2003, the Bank exceeded all of its regulatory capital
requirements. The following table presents the Bank's capital position at March
31, 2003:
CAPITAL }
------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Tangible...................................... $142,297 $46,771 $95,526 6.08% 2.0%
Tier 1 Core (Leverage)........................ 142,297 93,541 48,756 6.08 4.0
Tier 1 Risk-based............................. 135,705 61,687 74,018 9.85 4.0
Total Risk-based.............................. 151,759 110,191 41,568 11.02 8.0
The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. The following table
presents the Trust Company's capital position at March 31, 2003:
CAPITAL
------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)
Tier 1 Core (Leverage)........................... $2,980 $135 $2,845 88.19% 4.0%
Tier 1 Risk-based................................ 2,980 48 2,932 246.48 4.0
Total Risk-based................................. 2,980 97 2,883 246.48 8.0
At the time of conversion, the Bank was required to establish a liquidation
account in an amount equal to its retained earnings as of September 30, 1996,
which provides a liquidation preference to eligible account holders of the Bank
prior to conversion based on such account holder's qualifying deposits. The
liquidation account will be reduced to the extent that such account holders
reduce their qualifying deposits. In the unlikely event of a complete
liquidation of the Bank, each such account holder will be entitled to receive a
distribution from the liquidation account. The Bank is not permitted to declare
or pay dividends on its capital stock, or repurchase any of its outstanding
stock, if the effect thereof would cause its stockholders' equity to be reduced
below the amount required for the liquidation account or applicable regulatory
capital requirements. The balance of the liquidation account at March 31, 2003
was approximately $12.4 million.
39
IMPACT OF NEW 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.
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. In the fourth quarter of fiscal 2002,
under the provisions of SFAS No. 4, the Company recorded an extraordinary loss
from a prepayment penalty on early extinguishment of debt of $962,000, less a
tax benefit of $394,000. The Company retroactively adopted SFAS No. 145
effective April 1, 2001, and has reclassified the prepayment penalty on early
extinguishment of debt as a component of non-interest expense.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 expands on the
accounting guidance of SFAS No. 5, "Accounting for Contingencies," SFAS No. 57,
"Related Party Disclosures," and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," and incorporates without change the provisions of
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others (an interpretation of FASB Statement No. 5)," which is being superseded.
Interpretation No. 45 expands on existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit.
Interpretation No. 45 also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements.
Interpretation No. 45's initial recognition and measurement provisions apply on
a prospective basis to guarantees issued or modified after December 31, 2002,
and the disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
Interpretation No. 45 on January 1, 2003 with no material impact on the
Company's Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. The Company does not expect to
40
change to the fair value based method of accounting for stock-based employee
compensation, and does not believe the adoption of SFAS No. 148 will have a
material impact on the Company's Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." Interpretation No.
46 addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The consolidating requirements apply
immediately to variable interest entities obtained or created after January 31,
2003. The consolidating requirements apply to entities existing as of January
31, 2003 for the interim period beginning after June 30, 2003. The Company does
not believe the adoption of Interpretation No. 46 will have a material impact on
the Company's Consolidated Financial Statements.
In April of 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 requires
derivatives contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative
contains a financing component, and (3) amends the definition of an underlying
to conform it to language used in FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, and (4) amends certain other existing
pronouncements. This Statement is effective for contracts entered into or
modified after June 30, 2003. The Company does not believe the adoption of SFAS
No. 149 will have a material impact on the Company's Consolidated Financial
Statements.
In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer clarifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires an issuer to clarify a financial instrument within the scope of
the statement as a liability if the financial instrument embodies an obligation
of the issuer. SFAS No. 150 is effective for financial instruments entered into
on or modified after May 31, 2003, and is effective for the interim period
beginning after June 30, 2003 for financial instruments existing before May 31,
2003. The effect of adoption of SFAS No. 150 is to be reported as a cumulative
effect of change in accounting principle. The Company does not believe the
adoption of SFAS No. 150 will have a material impact on the Company's
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the Section of Item 7 captioned, "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Financial
Condition -- Market Risk and Management of Interest-Rate Risk" for quantitative
and qualitative information about market risk and its potential effect on the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index on page F-1 and the Consolidated Financial Statements which
begin on F-3.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the section captioned
"Proposal 1 -- Election of Directors" in the Registrant's Proxy Statement for
the Annual Meeting of Shareholders to be held on July 31, 2003.
41
The Registrant has adopted a Code of Ethics that applies to its principal
executive officer and principal financial officer. A copy of the Code of Ethics,
as filed with the Securities and Exchange Commission, will be furnished without
charge to any persons upon written request to Phillip Campbell, Vice President,
Director of Marketing, Corporate Planning and Investor Relations, FIRSTFED
AMERICA BANCORP, INC., ONE FIRSTFED PARK, Swansea, Massachusetts 02777. The Code
of Ethics may also be found at the Company's website at www.firstfedamerica.com.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to Directors' and executive compensation is
incorporated herein by reference to the sections captioned "Proposal
1 -- Election of Directors -- Directors Compensation" and "Executive
Compensation" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on July 31, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the sections captioned
"Stock Ownership" and "Proposal 1 -- Election of Directors" in the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held on July 31,
2003.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF
SECURITIES
NUMBER OF WEIGHTED REMAINING AVAILABLE
SECURITIES TO BE AVERAGE EXERCISE FOR FUTURE ISSUANCE
ISSUED UPON PRICE OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION
OUTSTANDING OPTIONS, PLANS (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED
AND RIGHTS RIGHTS IN COLUMN (A)
PLAN CATEGORY (1) (A) (B) (C)
----------------- ----------------- ----------------- --------------------
Equity compensation plans approved by security
holders....................................... 1,097,581 $17.28 180,105
--------- ------ -------
Total......................................... 1,097,581 $17.28 180,105
========= ====== =======
---------------
(1) The Company does not maintain any equity compensation plans that have not
been approved by security holders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the section captioned "Transactions with
Management" in the Registrant's Proxy Statement for the Annual Meeting of
Shareholders to be held on July 31, 2003.
PART IV
ITEM 14. 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 annual report, the
Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. The Company
42
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.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information relating to Principal Accountant Fees and Services is
incorporated by reference to the section captioned "Proposal 2 -- Ratification
of Independent Auditors" in the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to he held on July 31, 2003
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(2) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP,
INC.(1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.(2)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC.(1)
4.1 The Registrant will furnish upon request copies of all
long-term instruments of the Registrant and its consolidated
subsidiaries.
10.1 Employment Agreement between the Bank and Robert F. Stoico
(filed herewith)
10.2 Employment Agreement between the Company and Kevin J.
McGillicuddy and Employment Agreement between the Bank and
Kevin J. McGillicuddy (filed herewith)
10.3 Employment Agreement between the Company and Frederick R.
Sullivan and Employment Agreement between the Bank and
Frederick R. Sullivan (filed herewith)
10.4 Employment Agreement between the Bank and Edward A. Hjerpe,
III (filed herewith)
10.5 Employment Agreement between the Company and Robert F.
Stoico(3)
10.6 Employment Agreement between the Company and Edward A.
Hjerpe, III(3)
10.7 First Federal Savings Bank of America Employee Stock
Ownership Plan and Trust(1)
10.8 FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based Incentive
Plan, as amended and restated(4)
10.9 First Federal Savings Bank of America 1997 Supplemental
Executive Retirement Plan(1)
10.10 FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option Plan(5)
10.11 First Federal Savings Bank of America Incentive and Salary
Deferral Plan (filed herewith)
11.0 Computation of earnings per share is incorporated by
reference to the Consolidated Statements of Operations on
page F-4.
13.0 Portions of the 2003 Annual Report to Shareholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference
to "Part I -- Subsidiary Activities" in "Item 1.
Business -- General"
23.1 Consent of Independent Auditors (filed herewith)
99.1 Certification of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
43
99.2 Certification of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
99.3 Code of Ethics (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.
(3) Incorporated by reference into this document from the Exhibits to the
Annual Report on Form 10-K for the fiscal year ended March 31, 1999.
(4) Incorporated by reference into this document from the Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
(5) Incorporated by reference into this document from the Proxy Statement
for the 1998 Annual Meeting of Shareholders dated June 15, 1998.
(b) Reports on Form 8-K.
None.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
By: /s/ ROBERT F. STOICO
------------------------------------
Robert F. Stoico
President and Chief Executive
Officer
DATED: June 24, 2003
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ ROBERT F. STOICO President and Chief Executive June 24, 2003
--------------------------------------------------- Officer and Chairman of the
Robert F. Stoico Board (Principal Executive
Officer)
/s/ EDWARD A. HJERPE, III Executive Vice President, Chief June 24, 2003
--------------------------------------------------- Operating Officer and Chief
Edward A. Hjerpe, III Financial Officer (Principal
Accounting and Financial
Officer)
/s/ GILBERT C. OLIVEIRA Director June 24, 2003
---------------------------------------------------
Gilbert C. Oliveira
/s/ THOMAS A. RODGERS, JR. Director June 24, 2003
---------------------------------------------------
Thomas A. Rodgers, Jr.
/s/ RICHARD W. CEDERBERG Director June 24, 2003
---------------------------------------------------
Richard W. Cederberg
/s/ JOHN S. HOLDEN, JR. Director June 24, 2003
---------------------------------------------------
John S. Holden, Jr.
/s/ DR. PAUL A. RAYMOND Director June 24, 2003
---------------------------------------------------
Dr. Paul A. Raymond
/s/ ANTHONY L. SYLVIA Director June 24, 2003
---------------------------------------------------
Anthony L. Sylvia
/s/ B. BENJAMIN CAVALLO Director June 24, 2003
---------------------------------------------------
B. Benjamin Cavallo
45
CERTIFICATION
I, Robert F. Stoico, certify that:
1. I have reviewed this annual report on Form 10-K of FIRSTFED AMERICA
BANCORP, INC.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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
annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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.
/s/ ROBERT F. STOICO
--------------------------------------
Chairman of the Board, President and
Chief Executive Officer
Date: June 24, 2003
46
CERTIFICATION
I, Edward A. Hjerpe, III, certify that:
1. I have reviewed this annual report on Form 10-K of FIRSTFED AMERICA
BANCORP, INC.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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
annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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.
/s/ EDWARD A. HJERPE, III
--------------------------------------
Executive Vice President, Chief
Operating
Officer and Chief Financial Officer
Date: June 24, 2003
47
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of March 31, 2003 and 2002... F-3
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 2003, 2002 and 2001............................. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended March 31, 2003, 2002 and
2001...................................................... F-5 to F-6
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2003, 2002 and 2001....................... F-7 to F-8
Notes to Consolidated Financial Statements.................. F-9 to F-45
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FIRSTFED AMERICA BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries, (the "Company") as of March 31, 2003 and
2002, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries at March 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
[KPMG LLP SIG LOGO]
Boston, Massachusetts
April 23, 2003
F-2
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
ASSETS
2003 2002
---------- ----------
Cash on hand and due from banks............................. $ 53,529 $ 44,159
Short-term investments...................................... 2,000 100,890
---------- ----------
Total cash and cash equivalents........................... 55,529 145,049
Mortgage loans held for sale................................ 245,745 127,477
Investment securities available for sale, at fair value
(amortized cost of $16,659 and $81,602)................... 22,730 84,656
Mortgage-backed securities available for sale, at fair value
(amortized cost of $623,841 and $579,713)................. 634,965 578,618
Mortgage-backed securities held to maturity (fair value of
$956 and $1,235).......................................... 934 1,203
Stock in Federal Home Loan Bank of Boston, at cost.......... 58,433 58,433
Loans receivable, net of allowance for loan losses of
$19,335 and $19,237....................................... 1,241,331 1,125,750
Accrued interest receivable................................. 7,588 10,376
Mortgage servicing rights, net of valuation allowance of
$3,095 and $490........................................... 5,971 6,505
Office properties and equipment, net........................ 38,298 37,775
Bank-owned life insurance................................... 37,513 35,652
Goodwill and other intangible assets........................ 53,659 55,779
Deferred income tax assets, net............................. 8,690 13,398
Prepaid expenses and other assets........................... 3,092 13,777
---------- ----------
Total assets...................................... $2,414,478 $2,294,448
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $1,427,107 $1,317,263
FHLB advances and other borrowings........................ 712,253 754,820
Company obligated, mandatorily redeemable securities...... 11,324 25,657
Advance payments by borrowers for taxes and insurance..... 5,974 6,163
Accrued interest payable.................................. 3,607 4,814
Other liabilities......................................... 61,129 30,384
---------- ----------
Total liabilities................................. 2,221,394 2,139,101
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 10,818,840 and 10,606,589 shares issued in
2003 and 2002.......................................... 108 106
Additional paid-in capital................................ 125,306 119,149
Retained earnings......................................... 97,100 79,245
Accumulated other comprehensive income.................... 9,777 1,401
Unallocated ESOP shares................................... (1,549) (2,323)
Unearned 1997 stock-based incentive plan.................. (112) (1,553)
Treasury stock; at cost (2,375,257 and 2,577,687 shares at
2003 and 2002)......................................... (37,546) (40,678)
---------- ----------
Total stockholders' equity........................ 193,084 155,347
---------- ----------
Total liabilities and stockholders' equity........ $2,414,478 $2,294,448
========== ==========
See accompanying notes to consolidated financial statements.
F-3
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2003 2002 2001
-------- -------- --------
Interest and dividend income:
Loans..................................................... $ 84,766 $ 71,511 $ 77,116
Mortgage-backed securities................................ 34,331 31,152 33,507
Investment securities..................................... 3,370 2,108 719
Federal Home Loan Bank stock.............................. 2,082 2,078 2,733
-------- -------- --------
Total interest and dividend income................. 124,549 106,849 114,075
-------- -------- --------
Interest expense:
Deposits.................................................. 26,912 25,430 26,252
Borrowed funds............................................ 39,924 43,696 53,143
-------- -------- --------
Total interest expense............................. 66,836 69,126 79,395
-------- -------- --------
Net interest income before provision for loan
losses........................................... 57,713 37,723 34,680
Provision for loan losses................................... 525 1,200 1,200
-------- -------- --------
Net interest income after provision for loan
losses........................................... 57,188 36,523 33,480
-------- -------- --------
Non-interest income:
Service charges on deposit accounts....................... 3,360 2,071 1,622
Trust fee income.......................................... 1,431 1,395 1,028
Loan servicing (expense) income........................... (1,557) 1,054 1,456
Insurance commission income............................... 1,238 1,130 1,048
Earnings on bank-owned life insurance..................... 1,861 1,889 1,637
Gain on sale of mortgage loans, net....................... 27,104 5,589 583
Gain on sale of investments securities available for
sale.................................................... 5,189 1,003 --
Other income.............................................. 2,905 2,191 1,584
-------- -------- --------
Total non-interest income.......................... 41,531 16,322 8,958
-------- -------- --------
Non-interest expense:
Compensation and employee benefits........................ 36,613 19,951 17,786
Office occupancy and equipment............................ 8,406 4,409 4,447
Data processing........................................... 3,017 2,145 1,694
Advertising and business promotion........................ 1,342 709 1,038
Prepayment penalties on early extinguishment of debt...... -- 962 --
Amortization of intangible assets......................... 2,410 294 84
Other expense............................................. 9,281 4,520 4,004
-------- -------- --------
Total non-interest expense......................... 61,069 32,990 29,053
-------- -------- --------
Income before income tax expense................... 37,650 19,855 13,385
Income tax expense.......................................... 14,614 6,962 4,221
-------- -------- --------
Net income before cumulative effect of accounting
change........................................... 23,036 12,893 9,164
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of $237 tax
benefit................................................... -- (461) --
-------- -------- --------
Net income......................................... $ 23,036 $ 12,432 $ 9,164
======== ======== ========
Basic EPS before cumulative effect of accounting change..... $ 2.86 $ 2.17 $ 1.57
Cumulative effect of accounting change...................... -- (0.08) --
-------- -------- --------
Basic EPS................................................... $ 2.86 $ 2.09 $ 1.57
======== ======== ========
Diluted EPS before cumulative effect of accounting change... $ 2.79 $ 2.15 $ 1.56
Cumulative effect of accounting change...................... -- (0.08) --
-------- -------- --------
Diluted EPS................................................. $ 2.79 $ 2.07 $ 1.56
======== ======== ========
Weighted average shares outstanding -- basic................ 8,041 5,949 5,854
======== ======== ========
Weighted average shares outstanding -- diluted.............. 8,270 5,993 5,864
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNEARNED
1997
ACCUMULATED STOCK-BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) SHARES SHARES STOCK EQUITY
------ ---------- -------- ------------- ----------- ----------- -------- -------------
Balance at March 31,
2000.................... $ 87 $ 85,449 $63,270 $(4,470) $(3,872) $(4,438) $(34,321) $101,705
Earned SIP stock
awards................ -- (154) -- -- -- 1,440 -- 1,286
Earned ESOP shares
charged to expense.... -- 290 -- -- 774 -- -- 1,064
Cash dividends declared
and paid ($0.37 per
share)................ -- -- (2,386) -- -- -- -- (2,386)
Common stock repurchased
(442,979 shares at an
average price of
$13.42 per share)..... -- -- -- -- -- -- (5,963) (5,963)
Common stock acquired
for certain employee
benefit plans (34,425
shares at an average
price of $12.64 per
share)................ -- -- -- -- -- -- (435) (435)
Common stock sold for
certain employee
benefit plans (6,966
shares at an average
price of $14.68 per
share)................ -- -- -- -- -- -- 102 102
Comprehensive income
(loss):
Net income............ -- -- 9,164 -- -- -- -- 9,164
Other comprehensive
income, net of tax
Unrealized holding
gains on available
for sale
securities, net of
tax............... -- -- -- 7,021 -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- -- -- -- -- --
-------
Net unrealized
gains............. -- -- -- 7,021 -- -- -- 7,021
--------
Total
comprehensive
income.......... -- -- -- -- -- -- 16,185
---- -------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2001.................... 87 85,585 70,048 2,551 (3,098) (2,998) (40,617) 111,558
Common stock issued for
People's acquisition,
less issuance costs... 19 31,656 -- -- -- -- -- 31,675
Fair value of People's
stock options
assumed............... -- 1,375 -- -- -- -- -- 1,375
Earned SIP stock
awards................ -- (155) -- -- -- 1,445 -- 1,290
Earned ESOP shares
charged to expense.... -- 617 -- -- 775 -- -- 1,392
Stock options
exercised............. -- 71 -- -- -- -- -- 71
Cash dividends declared
and paid ($0.52 per
share)................ -- -- (3,235) -- -- -- -- (3,235)
Common stock acquired
for certain employee
benefit plans (3,651
shares at an average
price of $16.74 per
share)................ -- -- -- -- -- -- (61) (61)
Comprehensive income
(loss):
Net income............ -- -- 12,432 -- -- -- -- 12,432
Other comprehensive
income, net of tax
Unrealized holding
losses on available
for sale securities,
net of tax.......... -- -- -- (661) -- -- -- --
Reclassification
adjustment for
gains included in
net income, net of
tax............... -- -- -- (489) -- -- -- --
-------
Net unrealized
losses............ -- -- -- (1,150) -- -- -- (1,150)
--------
Total
comprehensive
income.......... -- -- -- -- -- -- -- 11,282
---- -------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2002.................... $106 $119,149 $79,245 $ 1,401 $(2,323) $(1,553) $(40,678) $155,347
==== ======== ======= ======= ======= ======= ======== ========
(continued)
F-5
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED MARCH 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNEARNED
1997
ACCUMULATED STOCK-BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) SHARES SHARES STOCK EQUITY
------ ---------- -------- ------------- ----------- ----------- -------- -------------
Balance at March 31,
2002.................... $106 $119,149 $79,245 $ 1,401 $(2,323) $(1,553) $(40,678) $155,347
Earned SIP stock
awards................ -- (154) -- -- -- 1,441 -- 1,287
Earned ESOP shares
charged to expense.... -- 1,206 -- -- 774 -- -- 1,980
Stock options
exercised............. 2 3,322 -- -- -- -- -- 3,324
Cash dividends declared
and paid ($0.62 per
share)................ -- -- (5,181) -- -- -- -- (5,181)
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............ -- -- 23,036 -- -- -- -- 23,036
Other comprehensive
income, net of tax
Unrealized holding
gains on available
for sale securities,
net of tax.......... -- -- -- 11,230 -- -- -- --
Reclassification
adjustment for
gains included in
net income, net of
tax............... -- -- -- (2,854) -- -- -- --
-------
Net unrealized
gains............. -- -- -- 8,376 -- -- -- 8,376
--------
Total
comprehensive
income.......... -- -- -- -- -- -- -- 31,412
---- -------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2003.................... $108 $125,306 $97,100 $ 9,777 $(1,549) $ (112) $(37,546) $193,084
==== ======== ======= ======= ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
F-6
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income................................................ $ 23,036 $ 12,432 $ 9,164
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Amortization (accretion) of:
Premiums (discounts), net.......................... (1,916) 36 (413)
Deferred loan origination costs.................... 1,114 1,360 454
Mortgage servicing rights.......................... 3,146 2,850 2,450
Intangible assets.................................. 2,410 294 84
Provision for loan losses............................. 525 1,200 1,200
Provision for losses on mortgage servicing rights..... 2,605 240 --
Gains on sales of:
Mortgage loans..................................... (27,104) (5,589) (583)
Investment and mortgage-backed securities
available-for-sale............................... (5,189) (1,003) --
Office property and equipment...................... (8) (97) (4)
Real estate owned and other repossessed assets..... (36) (24) (41)
Net proceeds from sales of mortgage loans............. 2,749,763 647,559 119,710
Origination of mortgage loans held for sale........... (2,842,115) (649,580) (155,855)
Income from bank-owned life insurance................. (1,861) (1,889) (1,637)
Unrealized loss (gain) on investments in limited
partnerships....................................... 241 518 (128)
Depreciation of office properties and equipment....... 4,281 2,389 2,640
Appreciation in fair value of ESOP shares............. 1,206 617 290
Earned SIP shares..................................... 1,287 1,290 1,286
Increase or decrease in:
Accrued interest receivable........................ 2,788 2,111 (910)
Other assets....................................... 3,962 (6,244) (258)
Accrued interest payable........................... (1,207) (2,958) 1,377
Other liabilities.................................. 30,745 1,483 2,120
----------- ----------- -----------
Net cash (used in) provided by operating
activities....................................... (52,327) 6,995 (19,054)
----------- ----------- -----------
(continued)
See accompanying notes to consolidated financial statements.
F-7
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED MARCH 31, 2003, 2002 AND 2001
(IN THOUSANDS)
2003 2002 2001
----------- ----------- -----------
Cash flows from investing activities:
Cash acquired, net of payments for acquisition............ $ -- $ 253,396 $ --
Purchase of investment securities available for sale...... (1,725) (14,921) (342)
Purchase of mortgage-backed securities available for
sale.................................................... (482,909) (224,094) (45,163)
Payments received on mortgage-backed securities........... 347,897 235,464 98,020
Proceeds from sale of investments securities available for
sale.................................................... 66,702 753 --
Proceeds from sale of mortgage-backed securities available
for sale................................................ 91,944 19,820 --
Purchase of the Federal Home Loan Bank Stock.............. -- -- (9,441)
Maturities of investment securities available for sale.... 3,011 -- 200
Net (increase) decrease in loans.......................... (119,881) 157,568 (90,547)
Proceeds from sale of office equipment.................... 679 1,009 46
Proceeds from sales of real estate owned.................. 250 315 345
Purchases of office properties and equipment.............. (5,475) (1,869) (1,533)
Purchase of investments in limited partnerships........... (375) (173) (100)
----------- ----------- -----------
Net cash (used in) provided by investing
activities....................................... (99,882) 427,268 (48,515)
----------- ----------- -----------
Cash flows from financing activities:
Net increase in deposits.................................. 111,133 52,320 42,734
Proceeds from FHLB advances and other borrowings.......... 6,593,829 1,535,343 3,799,213
Repayments on FHLB advances and other borrowings.......... (6,645,916) (1,896,558) (3,764,111)
Net change in advance payments by borrowers for taxes and
insurance............................................... (189) (1,082) (116)
Cash dividends paid....................................... (5,181) (3,235) (2,386)
Payments to acquire common stock for treasury stock and
stock issuance costs.................................... (85) (61) (6,296)
Common stock issued in private placement.................. 5,000 -- --
Stock options exercised................................... 3,324 71 --
Reduction in unearned ESOP shares......................... 774 775 774
----------- ----------- -----------
Net cash provided by (used in) financing
activities....................................... 62,689 (312,427) 69,812
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents........ (89,520) 121,836 2,243
Cash and cash equivalents at beginning of year.............. 145,049 23,213 20,970
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 55,529 $ 145,049 $ 23,213
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 68,043 $ 72,084 $ 78,018
=========== =========== ===========
Income taxes............................................ $ 11,883 $ 7,124 $ 4,456
=========== =========== ===========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans.................. $ 168 $ 149 $ 479
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-8
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003, 2002 AND 2001
(1) ORGANIZATION
FIRSTFED AMERICA BANCORP, INC. (the "Company") is a holding company for
First Federal Savings Bank of America (the "Bank"), FAB FUNDING CORPORATION
("FAB FUNDING"), FIRSTFED INSURANCE AGENCY, LLC, the FIRSTFED TRUST COMPANY,
N.A. (the "Trust Company"), People's Bancshares Capital Trust ("Capital Trust
I") and People's Bancshares Capital Trust II ("Capital Trust II"). The Company
owns all of the issued and outstanding shares of common stock of the Bank, FAB
FUNDING, Capital Trust I and Capital Trust II. The FIRSTFED INSURANCE AGENCY,
LLC (the "Agency") is owned jointly by the Company and FAB FUNDING, with the
Company's ownership share being a substantial majority. The Company owns a 65%
interest in FIRSTFED TRUST COMPANY, N.A., with the remaining 35% interest being
held by M/D Trust, LLC, a minority owner.
The Bank provides a full range of banking services to individual and
business customers in Massachusetts, Rhode Island and, to a lesser degree, in
Connecticut. The Bank is subject to competition from other financial
institutions, mortgage banking companies and other financial service providers
doing business in the area. The Bank and the Company are subject to regulations
of, and periodic examinations by, the Office of Thrift Supervision ("OTS") and
the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") of the FDIC up to
$100,000.
As more fully described in note 5, the Bank converted from a mutual savings
bank to a capital stock savings bank on January 15, 1997.
The Agency was formed on January 7, 1999. The Agency offers a comprehensive
insurance product line including auto, home, life, accident and health insurance
to consumers and businesses. In March 2002, the Agency entered into a joint
partnership with three Rhode Island insurance agencies, Atlantic Insurance
Partners, Riley Insurance and Allen Cochran Insurance, to form the Insurance
Group of Newport. The Agency is licensed to sell insurance in Massachusetts,
Rhode Island and Connecticut and is subject to regulations of, and periodic
examinations by these states.
The Trust Company was formed on February 1, 2000 as a limited purpose
national bank, which provides comprehensive fiduciary products and services in
Massachusetts and Rhode Island. The Trust Company is subject to the regulations
of, and periodic examination by the Office of the Comptroller of the Currency
("OCC"), as well as the states in which it operates.
FAB FUNDING is a business corporation formed at the direction of the
Company under the laws of the Commonwealth of Massachusetts in October 1996. FAB
FUNDING was established to lend funds to a Bank sponsored employee stock
ownership plan and related trust for the purchase of stock in the initial public
offering.
Capital Trust I is a Delaware Business Trust formed in 1997, and Capital
Trust II is a New York Common Law Trust formed in 2000 (see note 12).
The Bank includes its wholly-owned subsidiaries: People's Mortgage
Corporation ("PMC"), a Massachusetts corporation, FIRSTFED INVESTMENT
CORPORATION, a Massachusetts security corporation, and CELMAC INVESTMENT
CORPORATION, a Massachusetts security corporation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets, and income and expense for the periods. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to
F-9
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
change relate to the determination of the allowance for loan losses, valuation
of goodwill, valuation of derivatives and valuation of mortgage servicing
rights.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Certain amounts previously reported have been reclassified to
conform to the current year's presentation.
CASH AND DUE FROM BANKS
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserve is calculated based upon deposit levels and amounted
to $6.7 million at March 31, 2003.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at amortized
cost. Debt and equity securities that are bought and held principally for the
purpose of being resold in the near term are classified as trading and reported
at fair value, with unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of related income taxes.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income using a method that approximates the interest
method. If a decline in fair value below the amortized cost basis of an
investment or mortgage-backed security is judged to be other than temporary, the
cost basis of the investment is written down to fair value as a new cost basis
and the amount of the write-down is included as a charge against gain (loss) on
sale of investment securities. Gains and losses on the sale of investment and
mortgage-backed securities are recognized at the time of sale on a specific
identification basis.
MORTGAGE BANKING AND MORTGAGE LOANS HELD FOR SALE
The Company sells mortgage loans originated for sale in the secondary
market with either servicing rights retained or servicing rights released.
Mortgage loans held for sale without effective fair value hedges are carried at
the lower of aggregate cost or market. Mortgage loans held for sale by PMC with
effective fair value hedges are carried at fair value. Changes in the carrying
value of mortgage loans held for sale are included as a component of gain (loss)
on sale of mortgage loans. Considered in the calculation of cost are unamortized
deferred loan origination fees and costs, and mortgage servicing rights when
applicable. Forward commitments to sell loans are contracts that the Company
enters into for the purpose of reducing the market risk associated with
originating mortgage loans held for sale should interest rates change. Forward
commitments are recorded at fair value, with adjustments included in other
assets and the offset included as a component of gain (loss) on sale of mortgage
loans. Commitments to originate interest rate-locked loans for sale are also
recorded at the fair value, with adjustments included in other assets and the
offset included as a component of gain (loss) on sale of mortgage loans.
Mortgage loans held for sale with servicing rights released and related
commitments to originate mortgage loans are hedged with forward commitments to
sell to secondary market investors. The relationship between the hedging
instruments and hedged items are formally documented, including risk management
objective and strategy for undertaking hedge transactions. The Company assesses,
both at hedge inception and on an ongoing basis, whether the commitments to sell
are highly effective in offsetting changes to the fair value of the loans held
for sale and commitments to originate. The Company discontinues hedge accounting
when it is determined that the hedge is no longer highly effective in offsetting
the changes in fair value.
Gain or loss on sale of mortgage loans is recognized at the time of sale.
Such gain or loss results from the combination of (1) the difference between the
net cash paid by the investor for the loan and the loan's
F-10
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
carrying value; (2) the calculated present value of the difference between the
interest rate paid by the borrower on the loan sold and the interest rate
guaranteed to the investor, adjusted for mortgage servicing fees and considering
estimated loan prepayments; and (3) any origination fees, net of applicable
origination costs, retained by the Company.
Capitalized mortgage servicing rights are recognized, based on the
allocated fair value of the rights to service mortgage loans for others.
Mortgage servicing rights are amortized to loan servicing fee income using a
method which approximates the level yield method in proportion to, and over the
period of, estimated net servicing income. Mortgage servicing rights are
assessed for impairment based on the fair value of those rights. Prepayment
experience on mortgage servicing rights is reviewed quarterly and, when actual
repayments exceed estimated prepayments, the balance of the mortgage servicing
assets is reduced by a charge to earnings through a valuation allowance. The
risk characteristics of the underlying loans used to measure impairment include
loan type, interest rate, loan origination date, and term to maturity.
LOANS
Loans are reported at the principal amount outstanding, adjusted for net
deferred loan origination fees or costs. Loan origination fees are offset with
related direct incremental loan origination costs and the resulting net amount
is deferred and amortized over the contractual life of the related loans using
the interest method. When loans are sold in the secondary market, the remaining
balance of the amount deferred is included in the determination of gain or loss
on sale.
Accrual of interest on loans is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest have
become contractually past due 90 days or more. When a loan is placed on
non-accrual, all income that has been accrued but remains unpaid is reversed
against current period income and all amortization of deferred loan fees is
discontinued. Interest received on non-accrual loans is either recorded as
income or applied against the principal balance depending on management's
evaluation of the collectibility of principal. Loans are removed from
non-accrual status when they have been current as to principal and interest for
a period of time, the borrower has demonstrated an ability to comply with the
repayment terms, and when, in management's opinion, the loans are considered
fully collectible.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Bank will not be able to collect all amounts due according
to the contractual terms of the loan agreement. The definition of "impaired
loans" is not the same as the definition of "non-accrual loans," although the
two categories overlap. Non-accrual loans include impaired loans and are those
on which the accrual of interest is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest have
been contractually past due 90 days. The Bank may choose to place a loan on
non-accrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if it is probable that the Bank will
collect all amounts due in accordance with the contractual terms of the loan.
Factors considered by management in determining impairment include payment
status and collateral value.
Impairment is determined by the difference between the present value of the
expected cash flows related to the loan, using the original contractual interest
rate, and its recorded value, or, as a practical expedient in the case of
collateral dependent loans, the difference between the fair value of the
collateral and the recorded amount of the loan. When foreclosure is probable,
impairment is measured based on the fair value of the collateral. Loans that
experience insignificant payment delays and insignificant shortfalls in payment
amounts generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to
the principal and interest owed.
F-11
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's ongoing review and
estimate of the credit losses inherent in the loan portfolio. Loans (or portions
thereof) deemed to be uncollectible are charged against the allowance and
recoveries of amounts previously charged-off are added to the allowance. The
provisions for loan losses charged to earnings are added to the allowance to
bring it to the desired level.
Management's methodology to estimate loss exposure inherent in the
portfolio includes analysis of individual loans deemed to be impaired,
performance of individual loans in relation to contract terms, and allowance
allocations for various loan types based on payment status or loss experience.
An unallocated allowance is also maintained within an established range based on
management's assessment of many factors including current market conditions,
trends in loan delinquencies and charge-offs, the volume and mix of new
originations, and the current type, mix, changing risk profiles and balance of
the portfolio. In addition, the OTS, as an integral part of their examination
process, periodically reviews the Company's allowance for loan losses. The OTS
and the FDIC may require the Company to make additional provisions for estimated
loan losses based upon judgments different from those of management.
While management believes the Company's allowance for loan losses was
sufficient to absorb losses inherent in its loan portfolio, no assurances can be
given that the Company's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Company or that future adjustments
to the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses.
OFFICE PROPERTIES AND EQUIPMENT
Land is carried at cost. Office properties and equipment are recorded at
cost less accumulated depreciation. Depreciation of office properties and
equipment is determined on the straight-line basis over the estimated useful
lives of the related assets (3 to 40 years). Expenditures for major additions
and improvements are capitalized while the costs of current maintenance and
repairs are charged to operating expenses. Office properties and equipment are
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.
REAL ESTATE OWNED
Real estate owned is acquired through foreclosure or by accepting a deed in
lieu of foreclosure. Real estate acquired in settlement of loans is recorded at
the lower of the carrying value of the loan or the fair value, less disposal
costs, of the property constructively or actually received, thereby establishing
a new cost basis. Subsequent write-downs are recorded if the cost basis exceeds
current net fair value. Related operating costs, net of rental income, are
reflected in operations when incurred. Realized gains and losses upon
disposition are recognized in income.
Management believes that the net carrying value of real estate acquired
through foreclosure reflects the lower of its cost basis or estimated net fair
value. Factors similar to those considered in the evaluation of the allowance
for loan losses, including regulatory requirements, are considered in the
evaluation of the net fair value of real estate acquired through foreclosure.
F-12
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BANK OWNED LIFE INSURANCE
Bank owned life insurance ("BOLI") represents life insurance on certain
senior level employees. The Company is the beneficiary of the insurance
policies. Increases in the cash value of the policies, as well as insurance
proceeds received, are recorded in other income, and are not subject to income
taxes. BOLI is reported on the balance sheet at cash value.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and certain other intangible assets arise in business combinations
accounted for under the purchase method. Goodwill represents the difference
between the cost of an acquired company and the sum of the fair values of the
tangible and identifiable intangible assets acquired less the fair value of the
tangible liabilities assumed. Other intangible assets are amortized over their
estimated useful lives, not exceeding ten years, and are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Goodwill is evaluated for impairment at least
annually, and may include a number of fair value techniques, including market
capitalization, discounted future cash flows and multiples of revenues or
earnings. The Company performed its annual impairment test during the fourth
quarter of fiscal year 2003 and concluded that the amount of recorded goodwill
was not impaired. Absent any impairment indicators, the Company expects to
perform its next impairment test during the third quarter of fiscal 2004.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Company's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Company's deferred tax asset is reviewed periodically
and adjustments to such asset are recognized as deferred income tax expense or
benefit based upon management's judgments relating to the realizability of such
asset.
PENSION
The Company accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the compensation
cost of an employee's benefit over that employee's approximate service period.
STOCK OPTIONS
The Company continues to follow the intrinsic value method for accounting
for stock options. Accordingly, no compensation expense has been recognized in
the financial statements. Had the Company determined compensation expense based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below (dollars in thousands, except per share data):
2003 2002 2001
------- ------- ------
Net income as reported................................. $23,036 $12,432 $9,164
Pro forma net income................................... 22,619 11,188 8,869
Basic earning per share as reported.................... 2.86 2.09 1.57
Diluted earnings per share as reported................. 2.79 2.07 1.56
Pro forma basic earnings per share..................... 2.81 1.88 1.51
Pro forma diluted earnings per share................... 2.74 1.87 1.51
F-13
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of stock options was determined by using the trinomial
option pricing model. The following assumptions were inputs to the model:
2003 2002 2001
----- ----- -----
Expected dividend yield................................. 2.86% 1.76% 2.66%
Risk-free interest rate................................. 3.13% 4.88% 5.05%
Expected volatility..................................... 18.44% 23.56% 18.49%
Expected life in years.................................. 6.8 5.8 7.1
The per share weighted average fair value of stock options granted during
fiscal year 2001 was $2.56.
INTEREST RATE RISK MANAGEMENT AGREEMENTS
The Company uses off-balance sheet financial instruments from time to time
as part of its interest rate risk management strategy. Interest rate swap
agreements are entered into as hedges against future interest rate fluctuations
on specifically identified assets or liabilities. The interest rate swap
agreements are marked to market in other income and included as a component of
other liabilities.
The net amounts to be paid or received on outstanding interest rate risk
management agreements are recognized on the accrual basis as an adjustment to
the related interest income or expense over the life of the agreements.
TRANSFERS AND SERVICING OF ASSETS AND EXTINGUISHMENT OF LIABILITIES
The Company accounts and reports for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial components approach that focuses on control. This approach
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. After a transfer of financial assets, the Company
recognizes all financial and servicing assets it controls and liabilities it has
incurred, and derecognizes financial assets it no longer controls and
liabilities that have been extinguished. This financial components approach
focuses on control of the assets and liabilities that exist after the transfer.
Many of these assets and liabilities are components of financial assets that
existed prior to the transfer. If a transfer does not meet the criteria for a
sale, the Company accounts for a transfer as a secured borrowing with a pledge
of collateral.
EARNINGS PER SHARE
Basic EPS is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year adjusted for the weighted
average number of unallocated shares held by the Employee Stock Ownership Plan
("ESOP") and the unearned shares relating to the 1997 Stock-Based Incentive Plan
("SIP"). Diluted EPS reflects the effect to weighted average shares outstanding
of the number of additional shares outstanding if dilutive stock options and
dilutive SIP shares were converted into common stock using the treasury stock
method.
A reconciliation of the weighted average shares outstanding for the years
ended March 31, 2003, 2002 and 2001 follows (in thousands):
2003 2002 2001
----- ----- -----
Basic shares................................................ 8,041 5,949 5,854
Dilutive impact of stock options............................ 229 44 10
----- ----- -----
Diluted shares.............................................. 8,270 5,993 5,864
===== ===== =====
F-14
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPREHENSIVE INCOME
Comprehensive income is defined as all changes to equity except investments
by and distribution to shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. The following is a reconciliation of comprehensive income
for years ended March 31, 2003, 2002 and 2001 (in thousands):
2003 2002 2001
------- ------- -------
Net income.............................................. $23,036 $12,432 $ 9,164
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale
securities:
Unrealized holding gains (losses) arising during
the period, net of taxes of $9,914, ($695) and
$4,398, respectively............................. 11,230 (661) 7,021
Less: reclassification adjustment for gains
included in net income, net of taxes of $2,335
and $514, respectively........................... (2,854) (489) --
------- ------- -------
Comprehensive income.................................... $31,412 $11,282 $16,185
======= ======= =======
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents consist of
cash on hand and due from banks and short-term investments. Short-term
investments have original maturities of 90 days or less.
TRUST ASSETS
Securities and other property held in a fiduciary or agency capacity are
not included in the consolidated balance sheets because they are not assets of
the Company. Trust assets under administration were $473.7 million at March 31,
2003 and $521.4 million at March 31, 2002. Income from trust activities is
reported on an accrual basis.
RECENT ACCOUNTING DEVELOPMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
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
F-15
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. In the fourth quarter of fiscal 2002,
under the provisions of SFAS No. 4, the Company recorded an extraordinary loss
from a prepayment penalty on early extinguishment of debt of $962,000, less a
tax benefit of $394,000. The Company retroactively adopted SFAS No. 145
effective April 1, 2001, and has reclassified the prepayment penalty on early
extinguishment of debt as a component of non-interest expense.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 expands on the
accounting guidance of SFAS No. 5, "Accounting for Contingencies," SFAS No. 57,
"Related Party Disclosures," and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," and incorporates without change the provisions of
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others (an interpretation of FASB Statement No. 5)," which is being superseded.
Interpretation No. 45 expands on existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit.
Interpretation No. 45 also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements.
Interpretation No. 45's initial recognition and measurement provisions apply on
a prospective basis to guarantees issued or modified after December 31, 2002,
and the disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
Interpretation No. 45 on January 1, 2003 with no material impact on the
Company's Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 does not
permit the use of the original SFAS No. 123 prospective method of transition for
changes to the fair value based method made in fiscal years beginning after
December 15, 2003. The Company does not expect to change to the fair value based
method of accounting for stock-based employee compensation, and does not believe
the adoption of SFAS No. 148 will have a material impact on the Company's
Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." Interpretation No.
46 addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The consolidating requirements apply
immediately to variable interest entities obtained or created after January 31,
2003. The consolidating requirements apply to entities existing as of January
31, 2003 for the interim period beginning after June 30, 2003. The Company does
not believe the adoption of Interpretation No. 46 will have a material impact on
the Company's Consolidated Financial Statements.
In April of 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 requires
derivatives contracts with comparable characteristics be accounted for
similarly. In particular, SFAS No. 149 (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative
contains a financing component, and (3) amends the definition of an underlying
to conform it to language used in FASB Interpretation No. 45, Guarantor's
Accounting and
F-16
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and (4) amends certain other existing pronouncements.
This Statement is effective for contracts entered into or modified after June
30, 2003. The Company does not believe the adoption of SFAS No. 149 will have a
material impact on the Company's Consolidated Financial Statements.
In May of 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer clarifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires an issuer to clarify a financial instrument within the scope of
the statement as a liability if the financial instrument embodies an obligation
of the issuer. SFAS No. 150 is effective for financial instruments entered into
on or modified after May 31, 2003, and is effective for the interim period
beginning after June 30, 2003 for financial instruments existing before May 31,
2003. The effect of adoption of SFAS No. 150 is to be reported as a cumulative
effect of change in accounting principle. The Company does not believe the
adoption of SFAS No. 150 will have a material impact on the Company's
Consolidated Financial Statements.
(3) ACQUISITIONS
On February 28, 2002, the Company completed the acquisition of People's
Bancshares, Inc. ("People's"), New Bedford, Massachusetts, for $40.3 million in
cash and 1.9 million shares of the Company's common stock. The total acquisition
cost of People's, including the fair value of stock options assumed and certain
merger costs, was $75.0 million. The value of the common stock issued was
determined based on the average market price of the Company common stock over
the two-day period before and the two-day period after the definitive agreement
of the acquisition was announced (October 1, 2001). The acquisition was
accounted for as a purchase in accordance with SFAS No. 141, "Business
Combinations." The results of People's operations have been included in the
consolidated financial statements since March 1, 2002.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed for People's at the date of acquisition (in
thousands):
FEBRUARY 28, 2002
-----------------
Assets:
Cash and cash equivalents................................. $295,177
Mortgage loans held for sale.............................. 84,910
Investment securities available for sale.................. 60,423
Mortgage-backed securities................................ 111,834
Stock in Federal Home Loan Bank of Boston................. 18,064
Loans receivable, net..................................... 308,924
Office properties and equipment, net...................... 15,169
Goodwill and other intangible assets...................... 54,917
Other assets.............................................. 19,320
--------
Total assets acquired.................................. 968,738
--------
Liabilities:
Deposits.................................................. 557,625
FHLB advances and other borrowings........................ 327,538
Other liabilities......................................... 8,582
--------
Total liabilities assumed.............................. 893,745
--------
Net assets acquired......................................... $ 74,993
========
F-17
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The goodwill and other intangible assets included goodwill of $42.5
million, a core deposit intangible asset of $11.9 million to be amortized over
the average useful life of 10 years using the sum-of-the-years-digits method,
and a non-compete intangible asset of $520,000 to be amortized over the two-year
contract period on a straight-line basis. None of the goodwill is expected to be
deductible for income tax purposes. Fair value adjustments include a net premium
on loans of $5.9 million amortized to interest income over three to seven years
to approximate a constant yield to maturity, premium on deposits of $1.8 million
amortized to interest expense over two years on a sum-of-the-years-digits basis
and premium on borrowings of $22.0 million amortized to interest expense over
five to eight years to approximate a constant yield to maturity.
The following table summarizes on a pro forma basis the results of
operations of the Company assuming that the acquisition of People's had been
completed as of the beginning of the periods presented. The pro forma data gives
effect to actual operating results prior to the acquisitions and the
amortization of the purchase accounting adjustments that affected net interest
income and non-interest expense. In addition, an assumed interest charge related
to the funding of the cash purchase of People's was deducted from the operating
results in both 2002 and 2001. No effect has been given to cost savings or
revenue enhancements in this presentation. These proforma amounts do not purport
to be indicative of the results that would have actually been obtained if the
acquisitions had occurred as of the beginning of the periods presented or that
may be obtained in the future (in thousands, except per share data):
PROFORMA COMBINED FOR THE
YEARS ENDED MARCH 31,
-------------------------
2002 2001
--------- ---------
Net interest income before loan loss provision.............. $61,447 $65,914
Provision for loan loss..................................... 734 1,200
------- -------
Net interest income after loan loss provision............... 60,713 64,714
Non-interest income......................................... 26,931 17,610
Non-interest expense........................................ 70,152 57,016
------- -------
Income before income tax expense.......................... 17,492 25,308
Income tax expense.......................................... 6,333 8,252
------- -------
Net income before cumulative effect of accounting
change................................................ 11,159 17,056
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of tax............ (461) --
------- -------
Net income............................................. $10,698 $17,056
======= =======
Basic earnings per share before cumulative effect of
accounting change......................................... $ 1.45 $ 2.20
Basic earnings per share.................................... $ 1.39 $ 2.20
Diluted earnings per share before cumulative effect of
accounting change......................................... $ 1.44 $ 2.20
Diluted earnings per share.................................. $ 1.38 $ 2.20
Weighted average shares outstanding -- basic................ 7,684 7,750
Weighted average shares outstanding -- diluted.............. 7,728 7,760
In March 2000, the Agency purchased two local independent agencies,
Smith-Cochrane Insurance Agency, Inc. and All Risk Insurance Agency of Swansea
for a total of $1.1 million. Since these acquisitions were accounted for under
the purchase method of accounting, the results of the acquisitions are included
for the periods subsequent to the acquisition date. The Agency made additional
payments of $95,000 in March 2001, $95,000 in April 2002 and $280,000 in March
2003, which were recorded as goodwill. The goodwill recorded in connection with
the acquisitions was $1.4 million at March 31, 2003.
F-18
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) 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
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. In addition, the Company performed its annual impairment test during the
fourth quarter of fiscal year 2003 and concluded that the amount of recorded
goodwill was not impaired. 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. Amortization expense of intangible assets for fiscal year 2003
increased 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. The
retroactive adoption of SFAS No. 142 would have resulted in an insignificant
effect on net income and diluted earnings per share for the year ended March 31,
2002.
The changes in the carrying amount of goodwill and other intangible assets
are as follows (in thousands):
CORE TOTAL
DEPOSIT NON-COMPETE IDENTIFIABLE
INTANGIBLE INTANGIBLE INTANGIBLE
GOODWILL ASSET ASSET ASSETS
-------- ---------- ----------- ------------
Balance at March 31, 2002.................. $43,535 $11,746 $ 498 $12,244
Recorded during the period................. 375 -- -- --
Amortization expense....................... -- (2,150) (260) (2,410)
Impairment recognized...................... -- -- -- --
Adjustment of purchase accounting
estimates................................ (79) -- -- --
Change in deferred taxes related to
purchase accounting adjustments.......... (6) -- -- --
------- ------- ----- -------
Balance at March 31, 2003.................. $43,825 $ 9,596 $ 238 $ 9,834
======= ======= ===== =======
Estimated amortization expense for fiscal
years ended March 31:
2004.................................. $ -- $ 1,933 $ 238 $ 2,171
2005.................................. -- 1,717 -- 1,717
2006.................................. -- 1,500 -- 1,500
2007.................................. -- 1,283 -- 1,283
2008.................................. -- 1,066 -- 1,066
After 2008............................ -- 2,097 -- 2,097
The components of identifiable intangible assets at March 31, 2003 are as
follows (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Core deposit intangible asset.................. $11,926 $2,330 $9,596
Non-compete intangible asset................... 520 282 238
------- ------ ------
$12,446 $2,612 $9,834
======= ====== ======
F-19
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) STOCKHOLDERS' EQUITY
The Company is a business corporation formed at the direction of the Bank
under the laws of Delaware on September 6, 1996. On January 15, 1997, (i) the
Bank converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank, (ii) the Bank issued all of its outstanding
capital stock to the Company and (iii) the Company consummated its initial
public offering of common stock, par value $.01 per share (the "Common Stock"),
by selling at a price of $10.00 per share 7,364,762 shares of Common Stock to
certain of the Bank's eligible account holders who had subscribed for such
shares (collectively, the "Conversion"), by selling 697,010 shares to the Bank's
Employee Stock Ownership Plan and related trust ("ESOP") and by contributing
645,380 shares of Common Stock to The FIRSTFED Charitable Foundation (the
"Foundation"). The Conversion resulted in net proceeds of $77.6 million, after
expenses of $3.0 million. Net proceeds of $43.4 million were invested in the
Bank to increase the Bank's tangible capital to 10% of the Bank's total adjusted
assets. The Company established the Foundation dedicated to the communities
served by the Bank. In connection with the Conversion, the common stock
contributed by the Company to the Foundation at a value of $6.5 million was
charged to expense.
Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, the Bank
established a liquidation account at the time of Conversion in an amount equal
to the retained earnings of the Bank as of the date of its latest balance sheet
date, September 30, 1996, contained in the final Prospectus used in connection
with the Conversion. In the unlikely event of a complete liquidation of the Bank
(and only in such an event), eligible depositors who continue to maintain
accounts at the Bank shall be entitled to receive a distribution from the
liquidation account. The total amount at the liquidation account is decreased if
the balances of eligible depositors decrease at the annual determination dates.
The liquidation account approximated $12.4 million (unaudited) at March 31,
2003.
The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory requirements.
In addition to the 25,000,000 authorized shares of common stock, the
Company authorized 1,000,000 shares of preferred stock with a par value of $0.01
per share (the "Preferred Stock"). The Board of Directors is authorized, subject
to any limitations by law, to provide for the issuance of the shares of
preferred stock in series, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restriction thereof. As of March 31, 2003, there
were no shares of preferred stock issued.
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of tangible, core, Tier 1 risk-based, and total risk-based capital (as
defined). As of March 31, 2003, the Bank meets all capital adequacy requirements
to which it is subject.
F-20
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 2003, the Bank was, by regulatory definition, "well
capitalized" based on its ratios of tangible, core, Tier 1 risk-based, and total
risk-based capital. There are no conditions or events since that notification
that management believes have changed the Bank's category. The Bank's actual and
required capital amounts and ratios are presented in the following table
(dollars in thousands). No deduction was taken from capital for interest-rate
risk.
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- --------- ------
As of March 31, 2003:
Tangible capital...................... $142,297 6.08% $ 46,771 2.0% $116,927 5.0%
Tier 1 core (leverage) capital........ 142,297 6.08 93,541 4.0 116,927 5.0
Tier 1 risk-based capital............. 135,705 9.85 61,687 4.0 89,235 6.0
Total risk-based capital.............. 151,759 11.02 110,191 8.0 137,739 10.0
As of March 31, 2002:
Tangible capital...................... $127,570 5.72% $ 44,598 2.0% $111,493 5.0%
Tier 1 core (leverage) capital........ 127,570 5.72 89,195 4.0 111,493 5.0
Tier 1 risk-based capital............. 127,570 9.19 58,781 4.0 85,274 6.0
Total risk-based capital.............. 137,237 10.36 105,972 8.0 132,465 10.0
The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. The Trust Company's
capital amounts and ratios are presented in the following table (dollars in
thousands).
CAPITAL RATIO
EXCESS -----------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
------ -------- ------------ ------ --------
As of March 31, 2003:
Tier 1 core (leverage) capital.............. $2,980 $135 $2,845 88.19% 4.0%
Tier 1 risk-based capital................... 2,980 48 2,932 246.48 4.0
Total risk-based capital.................... 2,980 97 2,883 246.48 8.0
As of March 31, 2002:
Tier 1 core (leverage) capital.............. $2,897 $129 $2,768 89.61% 4.0%
Tier 1 risk-based capital................... 2,897 44 2,853 261.70 4.0
Total risk-based capital.................... 2,897 89 2,808 261.70 8.0
F-21
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) INVESTMENT AND MORTGAGE-BACKED SECURITIES (DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE
A summary of investment securities available for sale follows:
MARCH 31, 2003
------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- -------
Investment securities:
Corporate bonds........................ 7.5% $ 1,956 $ 168 $ -- $ 2,124
Municipal bonds........................ 2.9 1,482 -- -- 1,482
U.S. Government Agency obligations..... 5.3 980 20 -- 1,000
Trust preferred securities............. 9.6 6,780 411 -- 7,191
Marketable equity securities........... 5,461 5,472 -- 10,933
------- ------ ----- -------
Total investment securities.... $16,659 $6,071 $ -- $22,730
======= ====== ===== =======
MARCH 31, 2002
------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- -------
Investment securities:
Corporate bonds........................ 6.1% $31,513 $ 274 $(248) $31,539
Municipal bonds........................ 3.4 2,643 -- -- 2,643
U.S. Government Agency obligations..... 5.4 1,111 4 (8) 1,107
Trust preferred securities............. 8.4 40,698 192 (632) 40,258
Marketable equity securities........... -- 5,637 3,472 -- 9,109
------- ------ ----- -------
Total investment securities......... $81,602 $3,942 $(888) $84,656
======= ====== ===== =======
The remaining contractual maturities of investments in debt securities at
March 31, 2003 are summarized as follows:
AMORTIZED FAIR
MATURITY PERIOD COST VALUE
--------------- --------- -------
One year or less............................................ $ 1,909 $ 1,916
More than one year to five years............................ 553 566
More than five years to ten years........................... 539 551
More than ten years......................................... 8,197 8,764
------- -------
Total.................................................. $11,198 $11,797
======= =======
F-22
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of mortgage-backed and collateralized mortgage obligation
securities available for sale follows:
MARCH 31, 2003
-------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- --------
Mortgage-backed securities due:
One year or less...................... 7.0% $ 641 $ 25 $ -- $ 666
More than one year to five years...... 7.0 1,131 44 -- 1,175
More than five years to ten years..... 5.0 13,085 261 -- 13,346
More than ten years................... 5.0 343,069 9,476 -- 352,545
-------- ------- ----- --------
Total mortgage-backed
securities.................. 5.0 357,926 9,806 -- 367,732
-------- ------- ----- --------
Collateralized mortgage obligations due:
Five years or less.................... 2.6 10,000 -- (25) 9,975
More than five years to ten years..... 3.4 28,887 515 -- 29,402
More than ten years................... 4.3 227,028 1,080 (252) 227,856
-------- ------- ----- --------
Total collateralized mortgage
obligations................. 4.2 265,915 1,595 (277) 267,233
-------- ------- ----- --------
Total......................... 4.6% $623,841 $11,401 $(277) $634,965
======== ======= ===== ========
MARCH 31, 2002
-------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- --------
Mortgage-backed securities due:
One year or less...................... 7.0% $ 1,439 $ 41 $ -- $ 1,480
More than one year to five years...... 7.0 5,005 142 -- 5,147
More than ten years................... 5.8 354,288 1,298 (1,969) 353,617
-------- ------ ------- --------
Total mortgage-backed
securities.................. 5.9 360,732 1,481 (1,969) 360,244
-------- ------ ------- --------
Collateralized mortgage obligations due:
Five years or less.................... 3.1 9,998 2 -- 10,000
More than five years to ten years..... 3.9 35,224 53 (165) 35,112
More than ten years................... 4.9 173,759 725 (1,222) 173,262
-------- ------ ------- --------
Total collateralized mortgage
obligations................. 4.6 218,981 780 (1,387) 218,374
-------- ------ ------- --------
Total......................... 5.4% $579,713 $2,261 $(3,356) $578,618
======== ====== ======= ========
Adjustable-rate mortgage-backed securities and collateralized mortgage
obligations available for sale had total amortized costs and fair values of
$383,979 and $392,530, respectively, at March 31, 2003 and $406,630 and
$406,696, respectively, at March 31, 2002.
For the year ended March 31, 2003, proceeds from the sales of investment
securities available for sale amounted to $66,702, resulting in gross realized
gains of $3,086, and proceeds from the sale of mortgage-backed securities
amounted to $91,944, resulting in gross realized gains of $2,103. For the year
ended March 31, 2002, proceeds from the sales of investment securities available
for sale amounted to $753, resulting in gross realized gains of $750, and
proceeds from the sale of mortgage-backed securities amounted to $19,820,
resulting in gross realized gains of $253. There were no sales of investment or
mortgage-backed securities for the year ended March 31, 2001.
F-23
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HELD TO MATURITY
A summary of mortgage-backed securities held to maturity follows:
MARCH 31, 2003
------------------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- -----
Mortgage-backed securities due:
Five years or less......................... 8.1% $ 92 $ -- $ -- $ 92
More than five years to ten years.......... 9.3 206 -- -- 206
More than ten years........................ 4.7 636 22 -- 658
---- ----- ----- ----
Total mortgage-backed securities
held to maturity................. 6.0% $934 $ 22 $ -- $956
==== ===== ===== ====
MARCH 31, 2002
-------------------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ------
Mortgage-backed securities due:
Five years or less........................ 8.3% $ 67 $ 4 $ -- $ 71
More than five years to ten years......... 9.0 354 22 -- 376
More than ten years....................... 6.7 782 6 -- 788
------ --- ----- ------
Total mortgage-backed securities
held to maturity................ 7.5% $1,203 $32 $ -- $1,235
====== === ===== ======
Adjustable-rate mortgage-backed securities held to maturity had total
amortized cost and fair value of $636 and $658, respectively, at March 31, 2003
and $782 and $788, respectively, at March 31, 2002.
Maturities of mortgage-backed securities available for sale and held for
maturity are based on contractual maturities with scheduled amortization. Actual
maturities will differ from contractual maturities due to prepayments.
As a member of the Federal Home Loan Bank ("FHLB") system, the Company is
required to maintain a minimum investment in FHLB stock. The current investment
exceeds the required level at March 31, 2003. Any excess may be redeemed by the
Company or called by the FHLB at par. At its discretion, the FHLB may declare
dividends on this stock.
F-24
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
The Company's lending activities are conducted principally in Southeastern
New England and, to a lesser degree, the Mid-Atlantic region. The Company grants
one-to-four family and multifamily residential loans, commercial real estate
loans, commercial loans and a variety of consumer loans. In addition, the
Company grants loans for the construction of residential homes, multifamily
properties and commercial real estate properties. The ability and willingness of
one-to four-family and multifamily residential and consumer borrowers to honor
their repayment commitments is generally dependent on real estate values and the
level of overall economic activity within the borrowers' geographic areas. The
ability and willingness of commercial, commercial real estate and construction
loan borrowers to honor their repayment commitments is generally dependent on
the health of the real estate economic sector in the borrowers' geographic areas
and the general economy.
The following is a comparative summary of loans receivable classified by
type at March 31:
2003 2002
---------- ----------
Mortgage loans:
Residential........................................ $ 601,063 $ 635,297
Commercial real estate............................. 142,974 115,243
Construction and land.............................. 61,698 63,810
---------- ----------
Total mortgage loans....................... 805,735 814,350
---------- ----------
Commercial loans..................................... 283,137 200,016
---------- ----------
Consumer loans and other loans:
Home equity lines.................................. 140,189 83,013
Second mortgages................................... 32,914 48,901
Other consumer loans............................... 11,158 13,713
---------- ----------
Total consumer loans............................... 184,261 145,627
---------- ----------
Total loans receivable..................... 1,273,133 1,159,993
---------- ----------
Less:
Allowance for loan losses.......................... (19,335) (19,237)
Undisbursed proceeds of construction mortgages in
process......................................... (17,752) (21,818)
Purchase premium on loans, net..................... 3,377 5,869
Deferred loan origination costs, net............... 1,908 943
---------- ----------
(31,802) (34,243)
---------- ----------
Loans receivable, net...................... $1,241,331 $1,125,750
========== ==========
At March 31, 2003 and 2002, mortgage loans sold to others and serviced by
the Bank on a fee basis under various agreements amounted to $1,412,000 and
$1,588,000, respectively. Loans serviced for others are not included in the
Consolidated Balance Sheets.
Loans placed on non-accrual status totaled approximately $3,305 and $3,704
at March 31, 2003 and 2002, respectively.
F-25
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information regarding the reduction of
interest income on non-accrual loans for the years ended March 31:
2003 2002 2001
---- ---- ----
Income in accordance with original items.................... $146 $216 $127
Income recognized........................................... 43 106 81
---- ---- ----
Foregone interest income during year........................ $103 $110 $ 46
==== ==== ====
At March 31, 2003 and 2002, total impaired loans of $1,484 and $868
required impairment allowances of $506 and $144, respectively. All impaired
loans have been measured using the fair value of the collateral method. The
average recorded value of impaired loans was $1,176 in 2003 and $1,003 in 2002.
The Company follows the same policy for recognition of income on impaired loans
as it does for non-accrual loans. Impaired loans of $1,484 and $868 were on
non-accrual at March 31, 2003 and 2002, respectively.
The following table summarizes information regarding the reduction of
interest income on impaired loans for the years ended March 31:
2003 2002 2001
---- ---- ----
Income in accordance with original terms.................... $112 $98 $77
Income recognized........................................... 21 81 46
---- --- ---
Foregone interest income during the year.................... $ 91 $17 $31
==== === ===
At March 31, 2003, there were no commitments to lend additional funds to
those borrowers whose loans were classified as impaired or non-accrual.
An analysis of the allowance for loan losses for the years ended March 31
is as follows:
2003 2002 2001
------- ------- -------
Balance at beginning of year............................ $19,237 $13,233 $12,275
Allowance for loan losses acquired...................... -- 5,196 --
Provision for loan losses............................... 525 1,200 1,200
Charge-offs............................................. (447) (493) (281)
Recoveries.............................................. 20 101 39
------- ------- -------
Balance at end of year................................ $19,335 $19,237 $13,233
======= ======= =======
In the ordinary course of business, the Company makes loans to its
directors, executive officers, and their related interests, at the same
prevailing terms as those of other borrowers. The following is a summary of
related party loan activity for the years ended March 31:
2003 2002 2001
------ ------ ------
Balance, beginning of year................................. $ 933 $1,296 $ 888
Originations............................................... 1,099 146 630
Principal repayments....................................... (702) (509) (222)
------ ------ ------
Balance, end of year....................................... $1,330 $ 933 $1,296
====== ====== ======
Not included in the amounts stated above are unused portions of lines of
credit. These amounted to $937 and $308 at March 31, 2003 and 2002,
respectively.
F-26
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) SALE OF MORTGAGE LOANS (DOLLARS IN THOUSANDS)
The following is a summary of the components of gain on sale of mortgage
loans for the years ended March 31:
2003 2002 2001
----------- --------- ---------
Gain (loss) on sale of mortgage loans:
Net cash proceeds from sales of loans........ $ 2,749,763 $ 647,559 $ 119,710
Principal balance of loans sold.............. (2,705,609) (644,031) (119,719)
Deferred origination costs, net, recognized
at time of sale........................... (21,610) (3,082) (451)
Fair value of forward commitments to sell,
net of fair value of commitments to
originate mortgage loans held for sale.... (4,029) 179 --
Change in unrealized loss on mortgage loans
held for sale............................. 3,372 250 --
Capitalized mortgage servicing rights........ 5,217 4,714 1,043
----------- --------- ---------
Gain on sale of mortgage loans, net....... $ 27,104 $ 5,589 $ 583
=========== ========= =========
The following is a summary of mortgage servicing rights, net of valuation
allowance, for the years ended March 31:
2003 2002 2001
------ ------ ------
Balance at beginning of year....................... $6,505 $4,881 $6,288
Capitalized mortgage servicing rights.............. 5,217 4,714 1,043
Amortization....................................... (3,146) (2,850) (2,450)
Provision for losses............................... (2,605) (240) --
------ ------ ------
Balance end of year................................ $5,971 $6,505 $4,881
====== ====== ======
An analysis of the valuation allowance related to mortgage servicing rights
for the years ended March 31 is as follows:
2003 2002 2001
------ ---- ----
Balance at beginning of year.......................... $ 490 $250 $250
Provision for losses.................................. 2,605 240 --
------ ---- ----
Balance at end of year................................ $3,095 $490 $250
====== ==== ====
F-27
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated amortization of the gross carrying value of mortgage servicing
rights at March 31, 2003 follows:
YEAR ENDING MARCH 31,
---------------------
2004.................................................. $2,907
2005.................................................. 2,477
2006.................................................. 2,089
2007.................................................. 1,245
2008.................................................. 348
------
Gross carrying value of mortgage servicing rights..... 9,066
Less: valuation allowance............................. 3,095
------
Net carrying value of mortgage servicing rights..... $5,971
======
(9) OFFICE PROPERTIES AND EQUIPMENT (DOLLARS IN THOUSANDS)
Office properties and equipment consist of the following at March 31:
2003 2002
-------- --------
Land.................................................... $ 3,562 $ 3,678
Office building and improvements........................ 32,797 31,941
Furniture, fixtures and equipment....................... 20,756 20,043
Construction in progress................................ 841 1,204
-------- --------
57,956 56,866
Less accumulated depreciation........................... (19,658) (19,091)
-------- --------
$ 38,298 $ 37,775
======== ========
The Company leases certain office space under various non-cancelable
operating leases. A summary of future minimum rental payments under such leases
at March 31, 2003 follows:
MINIMUM
RENTAL
YEAR ENDING MARCH 31, PAYMENTS
--------------------- --------
2004...................................................... $1,170
2005...................................................... 958
2006...................................................... 758
2007...................................................... 541
2008...................................................... 540
After 2008................................................ 3,158
------
Total future minimum rental payments.................... $7,125
======
Rent expense was $1,214, $458, and $330 for the years ended March 31, 2003,
2002 and 2001, respectively.
F-28
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) DEPOSITS (DOLLARS IN THOUSANDS)
Deposits at March 31 are as follows:
WEIGHTED
AVERAGE 2003 2002
RATES AT ------------------- -------------------
MARCH 31, 2002 AMOUNT % AMOUNT %
-------------- ---------- ----- ---------- -----
Money market........................ 1.91% $ 248,600 17.4% $ 152,931 11.6%
Business checking................... -- 187,518 13.2 141,700 10.8
Savings............................. 0.96 266,985 18.7 235,338 17.9
NOW................................. 0.25 156,960 11.0 137,451 10.4
---------- ----- ---------- -----
860,063 60.3 667,420 50.7
---------- ----- ---------- -----
Certificates:
Six months to one year............ 2.15 181,559 12.7 231,304 17.6
Over one year..................... 3.69 156,399 11.0 166,687 12.6
Jumbo............................. 2.40 62,198 4.3 8,339 0.6
IRA & Keogh....................... 3.38 126,376 8.9 130,290 9.9
Business statement................ -- -- -- 67,373 5.1
7-91 day.......................... 1.63 40,168 2.8 44,218 3.4
Purchase premium on time deposits... 344 -- 1,632 0.1
---------- ----- ---------- -----
Total certificate
accounts................ 567,044 39.7 649,843 49.3
---------- ----- ---------- -----
$1,427,107 100.0% $1,317,263 100.0%
========== ===== ========== =====
At March 31, 2003 and 2002, the weighted average stated interest rate of
deposits was 1.67% and 2.39%, respectively.
The remaining contractual maturities of certificate accounts at March 31
are summarized as follows:
2003 2002
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
Less than one year.................................... $408,218 72.0% $528,133 81.3%
One to two years...................................... 85,377 15.1 69,287 10.7
Two to three years.................................... 24,338 4.3 23,939 3.7
Three to four years................................... 23,537 4.1 6,872 1.0
Four to five years.................................... 25,574 4.5 21,612 3.3
-------- ----- -------- -----
Total................................................. $567,044 100.0% $649,843 100.0%
======== ===== ======== =====
At March 31, 2003, the Company had certificate accounts in amounts of $100
or more maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- -------- ------------
Three months or less................................. $ 76,535 2.33%
Over 3 through 6 months.............................. 17,154 2.37
Over 6 through 12 months............................. 15,497 2.82
Over 12 months....................................... 39,519 4.18
--------
Total................................................ $148,705 2.88%
========
F-29
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, the Company accepts deposits from
brokerage companies on behalf of their clients. These monies are invested in
certificates of deposit. Brokered deposits amounted to $6,735 and $7,149 at
March 31, 2003 and 2002, respectively.
Interest expense on deposits consisted of the following for the years ended
March 31:
2003 2002 2001
------- ------- -------
Money market.......................................... $ 3,439 $ 1,281 $ 1,156
Regular and club...................................... 3,123 1,697 1,777
NOW................................................... 635 384 637
Certificates.......................................... 19,715 22,068 22,682
------- ------- -------
$26,912 $25,430 $26,252
======= ======= =======
(11) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (DOLLARS IN THOUSANDS)
At March 31, 2003 and 2002, advances from the Federal Home Loan Bank of
Boston ("FHLB") with a weighted average interest rate of 5.00% and 5.25%,
respectively, mature as follows:
YEAR ENDING MARCH 31, 2003 2002
--------------------- -------- --------
2003................................................. $ -- $392,586
2004................................................. 57,507 62,257
2005................................................. 54,765 15,652
2006................................................. 146,937 95,966
2007................................................. 12,891 16,670
After 2007........................................... 331,012 58,244
-------- --------
$603,112 $641,375
======== ========
The unamortized purchase premium on FHLB advances was $8,941 and $12,299 at
March 31, 2003 and March 31, 2002, respectively.
In accordance with the FHLB collateral requirements, a portion of the
Bank's first mortgage loans on residential property and all otherwise
unencumbered deposits and securities issued, insured or guaranteed by the United
States government or an agency thereof, are pledged as collateral to secure such
advances.
The Bank has a $25,000 secured line of credit available and additional
borrowing capacity of $354,067 with the FHLB at March 31, 2003.
The Bank had other borrowings of $100,200 at March 31, 2003, including the
unamortized purchase premium of $6,550, and $101,146 at March 31, 2002,
including the unamortized purchase premium of $7,472, primarily consisting of
reverse repurchase agreements with securities dealers that were collateralized
by mortgage-backed securities. The following table shows information pertaining
to these agreements for the years ended March 31:
2003 2002 2001
-------- -------- --------
Reverse repurchase agreements...................... $ 90,050 $ 90,972 $ 80,000
Book value of pledged collateral................... 94,739 95,051 85,882
Fair value of pledged collateral................... 96,504 93,306 87,171
Maximum amount outstanding at any month end........ 106,308 151,522 172,003
Average amount outstanding during the year......... 90,762 118,471 140,451
Weighted average interest rate during the period... 4.93% 4.02% 6.36%
Weighted average interest rate at end of period.... 6.37 6.37 6.32
F-30
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows information pertaining to the maturity of these
agreements for the years ended March 31:
YEAR ENDING MARCH 31, 2003 2002
--------------------- ------- -------
2008................................................... $11,044 $11,153
2010................................................... 79,006 79,819
------- -------
$90,050 $90,972
======= =======
Included in FHLB advances and reverse repurchase agreements are putable
borrowings. All of the putable borrowings are exercisable at the discretion of
the counter-party. At March 31, 2003, the Bank had the following putable
borrowings:
CONTRACTUAL EFFECTIVE
ADVANCE MATURITY PUT EXERCISE INTEREST
DATE DATE DATE TYPE BALANCE RATE COUNTER-PARTY
-------- ----------- -------- -------- -------- --------- --------------------
03/13/98 03/13/08 06/13/03 Quarterly $ 36,000 3.51% FHLB
03/26/98 03/26/08 06/26/03 Quarterly 10,500 3.35% Salomon Smith Barney
03/26/98 03/26/08 06/26/03 Quarterly 11,000 3.59% FHLB
08/25/98 08/19/13 08/19/03 Quarterly 8,000 3.85% FHLB
08/27/98 08/19/13 08/19/03 Quarterly 18,000 3.85% FHLB
09/30/98 09/30/13 09/30/05 Quarterly 13,000 4.46% FHLB
10/08/99 10/08/09 05/08/03 Quarterly 24,000 5.58% FHLB
11/08/99 11/09/09 05/08/03 Quarterly 74,000 3.95% FHLB
12/20/99 12/21/09 06/20/03 Quarterly 20,000 3.89% FHLB
02/16/00 02/16/10 05/18/03 Quarterly 10,000 6.47% FHLB
02/16/00 02/16/10 05/18/03 Quarterly 10,000 6.69% FHLB
08/14/00 08/16/10 08/14/03 Quarterly 35,000 4.32% Salomon Smith Barney
08/14/00 08/16/10 08/16/05 One Time 20,000 4.74% Salomon Smith Barney
08/18/00 08/18/10 08/18/05 One Time 18,000 4.72% Salomon Smith Barney
11/08/00 11/08/05 05/08/03 Quarterly 45,000 5.97% FHLB
12/20/00 12/20/10 06/20/03 Quarterly 15,000 4.95% FHLB
02/05/01 02/07/11 05/05/03 Quarterly 10,000 4.58% FHLB
03/05/01 03/07/11 06/05/03 Quarterly 30,000 3.99% FHLB
--------
$407,500
========
Other borrowings also included a $10,000 promissory note payable with
arms-length terms to an affiliate of M/D Trust, LLC, a related party. The note
is due February 1, 2012, with interest rate of 5.547% that is subject to
adjustment on February 14, 2007.
During March 2002, the Company pre-paid Federal Home Loan Bank advances
totaling $110,863 and reverse repurchase agreements totaling $50,863, which
resulted in a prepayment penalty on early extinguishment of debt of $962.
F-31
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
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 March 31, 2003, Capital Trust II had $10.0 million of
11.695% trust preferred securities outstanding, with an average interest cost of
10.29%, that mature in July 2030 unless the Company elects and obtains
regulatory approval to accelerate the maturity date to as early as July 2010.
The purchase premium on the trust preferred securities was $1.3 million at March
31, 2003 and is being amortized over the estimated life of the underlying
securities.
These trusts have no independent assets or operations and exist for the
sole purpose of issuing trust preferred securities and investing the proceeds in
an equivalent amount of junior subordinated debentures issued by the Company.
The junior subordinated debentures, which are the sole assets of the trusts, are
unsecured obligations of the Company and generally are subordinate and junior in
right of payment to all present and future senior and subordinated indebtedness
and certain other financial obligations of the Company. The principal amount of
subordinated debentures held by each trust equals the aggregate liquidation
amount of its trust preferred securities and its common securities. The
subordinated debentures bear interest at the same rate, and will mature on the
same date, as the corresponding trust preferred securities. Interest is
cumulative and can be deferred for up to five years. The effect of various
contractual obligations of the Company undertaken in connection with the
issuance of trust preferred securities is that the Company fully and
unconditionally guarantees each trust's obligations under the trust securities.
(13) LITIGATION
In the normal course of the Company's business, there are various
outstanding legal proceedings. In the opinion of management, based on
consultation with legal counsel, the financial position of the Company will not
be affected materially as a result of the outcome of such legal proceedings.
In January 2003, a claim was filed against the Trust Company, of which the
Company owns a 65% equity interest, seeking recovery of approximately $1 million
in unidentifiable damages resulting from the foreclosure of a property the
mortgage of which was held by an account holder of the Trust Company. The
account holder has agreed to indemnify the Trust Company for any expenses or
losses incurred in connection with the action, including legal expenses. While
no assurances can be provided that the Trust Company will prevail and ultimate
liability, if any, that might arise from the disposition of these claims cannot
presently be determined, the Company believes, based on consultation with the
Trust Company's counsel, the action to be without merit.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (IN THOUSANDS)
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage interest-rate risk exposure. These financial instruments primarily
include commitments to originate and sell loans, unadvanced lines of credit, and
interest rate swap agreements. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheet. The contract amounts of those instruments
reflect the extent of the Company's involvement in these particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and unadvanced
lines of credit is represented by the contractual amount of those instruments.
The Company uses similar credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
F-32
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2003 2002
-------- -------
Financial instruments whose contractual amount
represents credit risk:
Commitments to originate loans to be sold............. $198,360 $90,585
Commitments to originate loans to be held in
portfolio.......................................... 82,785 11,327
Unadvanced home equity lines of credit................ 143,652 94,397
Unadvanced commercial lines of credit................. 130,416 90,569
Unadvanced residential construction loans............. 17,857 21,817
Financial instruments whose contractual amount exceeds
the amount of credit risk:
Commitments to sell residential mortgage loans........ 296,943 56,212
Financial instruments whose notional amount exceeds the
amount of credit risk:
Notional amounts -- interest rate swap agreements..... -- 25,000
At March 31, 2003 and 2002, commitments to originate loans to be sold with
maturities ranging from 12 years to 30 years had interest rates ranging from
3.25% to 9.75% and 5.25% to 8.63%, respectively. Commitments to originate loans,
unadvanced commercial lines of credit, unadvanced home equity lines of credit
and unadvanced residential construction loans are agreements to lend to a
customer provided there is no violation of any condition established in the
contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower.
The Company also enters into contracts to sell mortgage loans in the
secondary market. Risks arise from the possible inability of the Company to
originate loans to fulfill these contracts, in which case the Company would
normally purchase loans or securities in the open market to deliver against
these contracts. All loans are sold either without recourse or with limited
recourse to the Company in the event of default or early pre-payment.
In addition, the Company has engaged in interest rate swap agreements, from
time to time, as part of its interest-rate risk management strategy. Swaps are
agreements in which the Company agrees with another party to exchange interest
payments (e.g. fixed-rate for floating-rate payments) computed on a notional
amount. The credit risk associated with swap agreements is the risk of default
by the counterparty. To minimize this risk, the Company enters into swap
agreements only with highly rated counterparties that management believes to be
creditworthy. The notional amounts of these agreements do not represent amounts
exchanged by the parties and, thus, are not a measure of the Company's potential
loss exposure.
F-33
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) INCOME TAXES (DOLLARS IN THOUSANDS)
Income tax expense for the years ended March 31 is summarized as follows:
2003 2002 2001
------- ------ ------
Current income tax expense:
Federal income tax.................................... $13,982 $6,326 $4,512
State income tax...................................... 2,341 685 374
------- ------ ------
16,323 7,011 4,886
------- ------ ------
Deferred income tax (benefit) expense:
Federal income tax.................................... (1,284) (57) (398)
State income tax...................................... (425) 8 (267)
------- ------ ------
(1,709) (49) (665)
------- ------ ------
Income tax expense...................................... $14,614 $6,962 $4,221
======= ====== ======
The reasons for the differences between the effective tax rates and the
statutory federal income tax rate for the years ended March 31 were as follows:
2003 2002 2001
---- ----- ----
Statutory federal income tax rate........................... 35.0% 35.0% 34.0%
Items affecting federal income tax rate:
State tax, net of federal benefit...................... 5.3 2.2 0.5
Appreciation of stock contributed to ESOP.............. 0.4 0.4 0.7
Earnings on Bank-Owned Life Insurance.................. (1.7) (3.5) (4.2)
Other, net............................................. (0.2) 1.0 0.5
---- ----- ----
Effective income tax rate................................. 38.8% 35.1% 31.5%
==== ===== ====
F-34
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31 are
presented below:
2003 2002
------- -------
Deferred tax assets:
Accrued interest income................................ $ 22 $ 64
Deferred loan fees, net................................ 81 116
Accrued stock awards................................... 34 529
Accrued pension........................................ 1,676 784
Allowance for loan losses.............................. 8,088 8,046
Purchase accounting.................................... 7,756 8,961
Capital loss available................................. 2,554 --
Other.................................................. 823 754
------- -------
Gross deferred tax asset............................ 21,034 19,254
------- -------
Deferred tax liabilities:
Depreciation........................................... 1,238 1,181
Limited partnership.................................... 1,191 1,191
Mortgage servicing rights.............................. 2,498 2,926
Unrealized gain on investments available for sale...... 7,417 558
------- -------
Gross deferred tax liability........................ 12,344 5,856
------- -------
Deferred income tax assets, net..................... $ 8,690 $13,398
======= =======
The net deferred federal income tax asset of $6,227 at March 31, 2003 is
supported by the potential recovery of taxes previously paid by the Company in
the carryback period. Since there is no carryback provision for state purposes,
management believes the existing net deductible temporary differences which give
rise to the net deferred state income tax asset of $2,463 will reverse during
periods in which the Company generates net taxable income.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the base year
reserve of approximately $7,398 remains subject to recapture in the event that
the Company pays dividends in excess of its earnings and profits or redeems its
stock.
(16) PENSION PLAN AND OTHER BENEFITS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
EMPLOYEE STOCK OWNERSHIP PLAN
Effective January 15, 1997 the Company adopted the ESOP. The ESOP is
designed to provide retirement benefits for eligible employees of the Bank.
Because the ESOP invests primarily in the stock of the Company, it will also
give eligible employees an opportunity to be granted an ownership interest in
the Company. Employees are eligible to participate in the ESOP after reaching
age twenty-one, completing one year of service and working at least one thousand
hours of consecutive service during the previous year. Contributions are
allocated to eligible participants on the basis of compensation.
During January 1997, the Company issued a total of 697,010 shares to the
trust administering the ESOP at a total purchase price of $6,970. The purchase
was made from the proceeds of a $6,970 loan from FAB FUNDING CORPORATION, a
wholly-owned subsidiary of the Company, bearing interest at the prime rate. The
loan is being repaid over a period of approximately nine years, principally with
funds from the Company's future contributions to ESOP, subject to IRS
limitations. The Company recognized a charge to
F-35
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compensation and employee benefits expense for ESOP of $1,983, $1,391 and
$1,064, during fiscal years 2003, 2002 and 2001, respectively.
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal and interest on the loan is
paid. Employees vest in their ESOP account at a rate of 20% annually commencing
after the completion of one year of credited service or immediately if service
was terminated due to death, retirement, disability, or change in control.
Dividends on allocated shares are credited to the participants' ESOP accounts.
At March 31, 2003, shares held in suspense to be released annually as the
loan is paid down amounted to 154,895. The fair value of unallocated ESOP shares
was $4,377 at March 31, 2003. Dividends on allocated ESOP shares are charged to
retained earnings, dividends on unallocated ESOP shares are charged to
compensation and employee benefits expense and ESOP shares committed-to-be
released are considered outstanding in determining earnings per share.
1997 STOCK-BASED INCENTIVE PLAN ("SIP")
On August 5, 1997, the Company's stockholders approved the SIP, which was
subsequently amended, restated and approved by the stockholders in 1998. The
objective of the SIP is to enable the Company to provide officers, key employees
and directors with a proprietary interest in the Company as an incentive to
encourage such persons to remain with the Company. The SIP acquired 348,286
shares in the open market at an average price of $20.78 per share. This
acquisition represents deferred compensation which is initially recorded as a
reduction in stockholders' equity and charged to compensation expense over the
vesting period of the award.
Awards are granted in the form of common stock held by the SIP and vest in
five annual installments commencing one year from the date of the award.
Recipients are entitled to all voting and other stockholder rights. As of March
31, 2003, 564 shares remained available for issuance for awards under the SIP. A
summary of award activity follows:
NUMBER OF
SHARES
---------
Balance at March 31, 2000................................... 212,286
Granted................................................... 1,000
Distributed............................................... (69,318)
-------
Balance at March 31, 2001................................... 143,968
Granted................................................... --
Distributed............................................... (69,474)
Forfeited................................................. (198)
-------
Balance at March 31, 2002................................... 74,296
Granted................................................... --
Distributed............................................... (69,458)
-------
Balance at March 31, 2003................................... 4,838
=======
Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service period for the
portion of each award that vests equally over a five-year period. The Company
recognized $103, $393 and $765, in compensation and benefits expense for these
awards during fiscal years 2003, 2002 and 2001, respectively.
F-36
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLANS
The Company adopted a stock option plan in 1997 as part of the SIP (the
"1997 Plan") for officers, key employees and directors. The 1997 Plan was
subsequently amended and restated in 1998. Pursuant to the terms of the 1997
Plan, the number of common shares reserved for issuance was 870,715, of which
3,938 shares remained available for issuance as of March 31, 2003. All options
have been issued at not less than fair market value at the date of the grant.
Options are exercisable in accordance with the terms of each individual's award
agreement, however no option will be exercisable more than 10 years after the
date of the grant. All stock options granted vest over a five year period from
the date of the grant.
In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan").
Pursuant to the terms of the 1998 Plan, the number of common shares reserved for
issuance was 413,590, of which 175,603 shares remained available for issuance as
of March 31, 2003. All options have been issued at not less than fair market
value at the date of the grant and expire in 10 years from the date of the
grant. Options are exercisable in accordance with the terms of each individual's
award agreement, however no option will be exercisable more than 10 years after
the date of the grant. All stock options granted vest over a five year period
from the date of the grant.
In conjunction with the People's acquisition on February 28, 2002, the
Company assumed obligations under People's stock option plans. Pursuant to the
terms of these plans, the number of common shares reserved for issuance was
207,761, of which none remain unawarded. All options have been issued at not
less than fair market value at the date of the grant as adjusted for the
exchange ratio of 1.2644 as part of the People's acquisition. Options are
exercisable in accordance with the terms of each individual's award agreement,
however no option will be exercisable more than 10 years after the date of the
grant. All stock options granted under People's stock option plans have vested
as of February 28, 2002.
A summary of option activity follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Balance at March 31, 2000.................... 876,383 $18.58
Granted.................................... 235,494 12.94
Forfeited.................................. (2,000) 12.94
--------- ------
Balance at March 31, 2001.................... 1,109,877 17.39
Granted.................................... -- --
Assumed in acquisition..................... 207,761 15.06
Exercised.................................. (3,993) 18.68
--------- ------
Balance at March 31, 2002.................... 1,313,645 17.02
Granted.................................... -- --
Exercised.................................. (213,251) 15.72
Forfeited.................................. (2,813) 12.94
--------- ------
Balance at March 31, 2003.................... 1,097,581 $17.28
========= ======
F-37
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of options outstanding and exercisable by price range as of March
31, 2003 follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE
EXERCISE PRICES MARCH 31, 2003 CONTRACTUAL LIFE PRICE MARCH 31, 2003 PRICE
--------------- -------------- ---------------- -------- -------------- --------
$4.53 - $15.82 256,076 7.1 years $12.93 120,140 $12.92
$18.50 701,324 4.3 years 18.50 701,324 18.50
$18.98 - $19.77 140,181 5.4 years 19.16 119,295 19.14
--------- --------- -------
1,097,581 17.28 940,759 17.87
========= =======
PENSION PLAN
All eligible officers and employees of the Company, who have reached the
age of twenty-one and completed one year of service, are included in a
noncontributory, defined benefit pension plan (the "Pension Plan") provided by
the Company. The Pension Plan is administered by Pentegra (the "Fund"). The Fund
does not segregate the assets or liabilities of all participating employers and,
accordingly, disclosure of accumulated vested and nonvested benefits is not
possible. Contributions are based on each individual employer's experience.
According to the Fund's administrators, as of June 30, 2002, the date of the
latest actuarial valuation, the market value of the Fund's net assets exceeded
the actuarial present value of vested and nonvested benefits in the aggregate.
The Company's contribution to the pension plan was $2,061, $978 and $785
for the years ended March 31, 2003, 2002 and 2001.
POSTRETIREMENT BENEFITS
On April 1, 1995, the Company adopted SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other than Pensions. Under SFAS No. 106, the Company
changed its method of accounting for postretirement benefits other than pensions
from the pay-as-you-go method to the method of accruing these costs over
employees' service periods. The effect of adopting SFAS No. 106 can be charged
to expense immediately or spread over no more than the lesser of twenty years or
the average life expectancy of the participants. The Company currently provides
postretirement benefits for a limited number of retirees. The Company is
amortizing the cumulative effect of this change of $71 over the average life
expectancy of the participants, which is 10 years.
SUPPLEMENTAL RETIREMENT PLAN
The Company has adopted a supplemental retirement plan which provides for
certain Company executives to receive benefits upon retirement subject to
certain limitations as set forth in the plan. The Company's expense under this
Plan was $331, $359 and $313 for the years ended March 31, 2003, 2002 and 2001,
respectively. At March 31, 2003, the Company holds restricted assets in an
irrevocable grantor's trust with a cost basis of $3,851 and a market value of
$3,206, of which $1,365 are common stock of the Company and are classified as
treasury stock, and the remaining $1,841 are included in other assets and offset
by an accrued liability of $4,383. These treasury shares are considered retired
in the computation of earnings per share.
EMPLOYEE TAX DEFERRED THRIFT PLAN
The Company has an employee tax deferred thrift plan (the "401k Plan")
under which employee contributions to the 401k Plan are matched within certain
limitations by the Company. Full-time employees
F-38
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are eligible to participate in the 401k Plan. The amounts matched by the Company
are included in compensation and benefits expense. The amounts matched for the
years ended March 31, 2003, 2002 and 2001 were $721, $252 and $204 respectively.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
The Bank and the Company have entered into Employment Agreements with its
President and Chief Executive Officer, Executive Vice President and Chief
Operating Officer, two other Executive Vice Presidents and a Senior Vice
President. The agreements generally provide for the continued payment of
specified compensation and benefits for five years for the President and Chief
Executive and Executive Vice President and Chief Operating Officer, and for two
years for the other three executives. They also provide payments for the
remaining term of the agreement after the officers are terminated, unless the
termination is for "cause" as defined in the Employment Agreement. In the event
of a change in control, as defined in the agreements, payments will also be
provided to the officer upon voluntary or involuntary termination. In addition,
the Bank entered into change in control agreements with certain other executives
which provide for the payment, under certain circumstances, to the executive
upon the executives termination after a change in control, as defined in their
change in control agreements.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The First Federal Savings Bank of America Employee Severance Compensation
Plan (the "Plan") provides eligible employees with severance pay benefits in the
event of a change in control of the Bank or Company. Generally, employees are
eligible to participate in the Plan if they have completed at least one year of
service with the Bank and are not eligible to receive benefits under the
executive officer employment agreements. The Plan provides for the payment,
under certain circumstances, of lump-sum amounts upon termination following a
change in control, as defined in the Plan.
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS (DOLLARS IN THOUSANDS)
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include real estate acquired by
foreclosure, the deferred income tax asset, office properties and equipment, and
core deposit and other intangibles. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no actual market exists for some of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions and changes in the loan,
debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered.
F-39
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:
CASH ON HAND AND DUE FROM BANKS
The fair values for cash on hand and due from banks approximate the
carrying amount as reported in the balance sheet.
SHORT-TERM INVESTMENTS
The fair values for short-term investments approximate the carrying amount
as reported because of the short-term nature of these financial instruments.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values for investment and mortgage-backed securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
MORTGAGE LOANS HELD FOR SALE
Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to sell loans
have been considered in the value of mortgage loans held for sale.
LOANS
The fair values of loans are estimated using discounted cash flow analyses
and interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.
ACCRUED INTEREST RECEIVABLE
The fair value of accrued interest receivable approximates its carrying
amount as reported in the balance sheet because of the short-term nature of
these financial instruments.
STOCK IN FHLB OF BOSTON
The fair value for FHLB stock approximates the carrying amount as reported
in the balance sheet. If redeemed, the Company expects to receive an amount
equal to the par value of the stock.
DEPOSITS AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES AND INSURANCE
The fair values of demand deposits (e.g., NOW, business checking, savings
accounts, certain types of money market accounts and advance payments by
borrowers for taxes and insurance) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow technique that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FHLB ADVANCES
The fair value of FHLB overnight advances approximates their carrying value
due to their short term nature. All other advances are estimated using a
discounted cash flow technique that applies interest rates
F-40
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
currently being offered on advances to a schedule of aggregated expected monthly
maturities on FHLB advances.
OTHER BORROWINGS
Other borrowings consist primarily of reverse repurchase agreements with
securities dealers. The fair value of other borrowings are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on reverse repurchase agreements to a schedule of aggregated expected
monthly maturities on other borrowings.
COMPANY OBLIGATED, MANDATORILY REDEEMABLE SECURITIES
The fair value of company obligated, mandatorily redeemable securities is
based on the quoted market price, or the market price of comparable securities.
ACCRUED INTEREST PAYABLE
The fair value of accrued interest payable approximates its carrying amount
as reported in the balance sheet because of the short-term nature of these
financial instruments.
INTEREST RATE SWAP AGREEMENTS
The fair value of the off-balance sheet interest rate swap agreements is
the net of the present values of the pay fixed/receive floating payments,
discounted at current swap rates for the appropriate remaining term of the
existing swaps.
OTHER OFF-BALANCE SHEET INSTRUMENTS
Fair values for the Company's off-balance-sheet instruments are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counter parties' credit standing. The
difference between the fair value of commitments to originate loans and their
book value is considered to be immaterial based on a comparison to current
offering rates for similar loan products. The contractual value of commitments
to sell loans was considered in determining the fair value of loans held for
sale. The Company's commitments for unused lines and outstanding standby letters
of credit and unadvanced portions of loans are at floating rates, and therefore,
there is no fair value adjustment.
F-41
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
at March 31 are as follows:
2003 2002
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
Financial assets:
Cash on hand and due from banks............ $ 53,529 $ 53,529 $ 44,159 $ 44,159
Short-term investments..................... 2,000 2,000 100,890 100,890
Mortgage loans held for sale............... 245,745 247,031 127,477 127,578
Investment securities available for sale... 22,730 22,730 84,656 84,656
Mortgage-backed securities available....... 634,965 634,965 578,618 578,618
Mortgage-backed securities held to
maturity................................ 934 956 1,203 1,235
Stock in FHLB of Boston.................... 58,433 58,433 58,433 58,433
Loans receivable, net...................... 1,241,331 1,269,522 1,125,750 1,142,507
Accrued interest receivable................ 7,588 7,588 10,376 10,376
Financial liabilities:
Deposits................................... $1,427,107 $1,434,193 $1,317,263 $1,321,163
FHLB advances and other borrowings......... 712,253 777,033 754,820 758,657
Company obligated, mandatorily redeemable
securities.............................. 11,324 12,418 25,657 25,657
Advance payments by borrowers for taxes and
insurance............................... 5,974 5,974 6,163 6,163
Accrued interest payable................... 3,607 3,607 4,814 4,814
Financial instruments with off-balance sheet
notional amounts:
Interest rate swap agreements.............. -- -- (440) (440)
Forward commitments to sell mortgage loans
held for sale........................... (4,197) (4,197) 356 356
Commitments to originate rate-locked loans
for sale................................ 392 392 (132) (132)
F-42
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) PARENT COMPANY ONLY FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
The following are the condensed financial statements for FIRSTFED AMERICA
BANCORP, INC. (the "Parent Company") only at March 31. The Parent Company's
Statements of Changes in Stockholders' Equity are identical to the Consolidated
Statements of Changes in Stockholders' Equity, and are therefore not presented
here.
Balance Sheets
2003 2002
-------- --------
ASSETS
Cash and amounts due from banks......................... $ 363 $ 594
Investment securities available for sale (amortized cost
of $5,459 and $5,636)................................. 10,657 8,703
Investment in subsidiaries, at equity................... 202,434 184,278
Investment in limited partnerships...................... 283 36
Goodwill................................................ 3,372 2,771
Other assets............................................ 328 2,592
-------- --------
Total assets.................................. $217,437 $198,974
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Company obligated, mandatorily redeemable securities.... $ 11,633 $ 26,393
Other borrowings........................................ 10,000 10,000
Other liabilities....................................... 2,720 7,234
-------- --------
Total liabilities..................................... 24,353 43,627
Stockholders' equity.................................... 193,084 155,347
-------- --------
Total liabilities and stockholders' equity.... $217,437 $198,974
======== ========
Statements of Income
2003 2002 2001
------- -------- ------
Income:
Dividends received from subsidiaries.................. $15,178 $ 34,850 $5,750
Interest and dividend income.......................... 243 187 152
Other non-interest income............................. 260 -- 128
------- -------- ------
15,681 35,037 6,030
------- -------- ------
Expenses:
Interest expense...................................... 2,104 340 52
Non-interest expense.................................. 553 712 468
Income tax benefit.................................... (760) (311) (103)
------- -------- ------
1,897 741 417
------- -------- ------
Income before equity in net income of subsidiaries...... 13,784 34,296 5,613
Equity in undistributed net income (loss) of
subsidiaries.......................................... 9,252 (21,864) 3,551
------- -------- ------
Net income.............................................. $23,036 $ 12,432 $9,164
======= ======== ======
F-43
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Statements of Cash Flows
2003 2002 2001
-------- -------- -------
Net cash flows from operating activities:
Net income.......................................... $ 23,036 $ 12,432 $ 9,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net (income) loss of
subsidiaries................................... (9,252) 21,864 (3,551)
Appreciation in fair value of ESOP shares........ 1,206 617 290
Amortization of purchase premium on Company
obligated, mandatorily redeemable securities... (192) (19) --
Gain on sale of investment securities available
for sale....................................... (264) -- --
Unrealized loss (gain) on investment in limited
partnership.................................... 3 4 (128)
Decrease (increase) in other assets.............. 1,165 (124) --
Decrease in other liabilities.................... (5,142) (1,265) (1,517)
-------- -------- -------
Net cash provided by operating activities... 10,560 33,509 4,258
-------- -------- -------
Cash flow from investing activities:
Cash payment for acquisition, net of cash
acquired......................................... -- (41,711) --
Purchase of investment securities available for
sale............................................. -- -- (142)
Proceeds from the sale of investment securities
available for sale............................... 440 -- --
Purchase of investment in limited partnership....... (250) (40) (100)
Proceeds from the sale of investment in limited
partnership...................................... -- 815 --
Change in investment in subsidiaries................ (1,532) (645) 1,286
-------- -------- -------
Net cash (used in) provided by investing
activities....................................... (1,342) (41,581) 1,044
-------- -------- -------
Cash flow from financing activities:
Proceeds from other borrowings...................... 8,354 10,000 327
Repayments on other borrowings...................... (8,354) (327) --
Repayment Company obligated, mandatorily redeemable
securities....................................... (14,568) -- --
Cash dividends paid................................. (5,181) (3,235) (2,386)
Common stock issued in private placement............ 5,000 -- --
Stock options exercised............................. 3,324 71 --
Payments to acquire common stock for treasury and
stock issuance costs............................. (85) (61) (6,296)
Reduction in unearned SIP shares.................... 1,287 1,290 1,286
Reduction in allocated ESOP shares.................. 774 775 774
-------- -------- -------
Net cash (used in) provided by financing
activities................................ (9,449) 8,513 (6,295)
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents............................... (231) 441 (993)
Cash and cash equivalents at beginning of year........ 594 153 1,146
-------- -------- -------
Cash and cash equivalents at end of year.............. $ 363 $ 594 $ 153
======== ======== =======
F-44
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis for the
year ended March 31 follows:
2003 QUARTERS 2002 QUARTERS
------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest and dividend income...... $27,536 $32,362 $32,963 $31,688 $25,904 $25,418 $27,521 $28,006
Interest expense.................. 14,244 16,672 17,836 18,084 16,056 15,894 18,293 18,883
------- ------- ------- ------- ------- ------- ------- -------
Net interest income............... 13,292 15,690 15,127 13,604 9,848 9,524 9,228 9,123
Provision for loan losses......... 125 150 150 100 300 300 300 300
Non-interest income............... 13,436 11,078 8,824 8,193 5,262 4,634 2,460 3,966
Non-interest expense.............. 16,633 15,367 14,573 14,496 10,897 7,458 7,180 7,455
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes........ 9,970 11,251 9,228 7,201 3,913 6,400 4,208 5,334
Income tax expense................ 3,941 4,325 3,581 2,767 1,347 2,402 1,376 1,837
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Net income before cumulative
effect of accounting change..... 6,029 6,926 5,647 4,434 2,566 3,998 2,832 3,497
Cumulative effect of change in
accounting for derivative
instruments and hedging
activities, net of $237 tax
benefit......................... -- -- -- -- -- -- -- (461)
------- ------- ------- ------- ------- ------- ------- -------
Net income........................ $ 6,029 $ 6,926 $ 5,647 $ 4,434 $ 2,566 $ 3,998 $ 2,832 $ 3,036
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Basic earnings per share before
cumulative effect of accounting
change.......................... $ 0.73 $ 0.85 $ 0.70 $ 0.57 $ 0.39 $ 0.69 $ 0.49 $ 0.61
Cumulative effect of accounting
change.......................... -- -- -- -- -- -- -- (0.08)
------- ------- ------- ------- ------- ------- ------- -------
Basic earnings per share.......... $ 0.73 $ 0.85 $ 0.70 $ 0.57 $ 0.39 $ 0.69 $ 0.49 $ 0.53
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Diluted earnings per share before
cumulative effect of accounting
change.......................... $ 0.71 $ 0.82 $ 0.68 $ 0.55 $ 0.39 $ 0.68 $ 0.48 $ 0.61
Cumulative effect of accounting
change.......................... -- -- -- -- -- -- -- (0.08)
------- ------- ------- ------- ------- ------- ------- -------
Diluted earnings per share........ $ 0.71 $ 0.82 $ 0.68 $ 0.55 $ 0.39 $ 0.68 $ 0.48 $ 0.53
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F-45