<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended MARCH 31, 1997
Commission File No.: 1-12305
FIRSTFED AMERICA BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 04-3331237
(State or other jurisdiction (IRS Employer Identification)
of incorporation or organization)
ONE NORTH MAIN STREET, FALL RIVER,MASSACHUSETTS 02720
(Address of principal executive offices)
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)
Securities registered pursuant to Section 12(g) of the Act: NONE
THE AMERICAN STOCK EXCHANGE
(Name of exchange on which registered)
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. X .
-----
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 is $126.4 million and is based upon the last sales price as listed
on The American Stock Exchange for June 11, 1997.
The number of shares of Common Stock outstanding as of June 11, 1997 is
8,707,152.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
MARCH 31, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
<PAGE>
<TABLE>
<CAPTION>
INDEX
PAGE
<S> <C>
PART I ................................................................................................ 1
Item 1. Business ................................................................................ 1
Additional Item. Executive Officers of the Registrant ............................................ 41
Item 2. Properties .............................................................................. 42
Item 3. Legal Proceedings ....................................................................... 43
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 44
PART II ............................................................................................... 44
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 44
Item 6. Selected Financial Data ................................................................. 44
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................................. 44
Item 8. Financial Statements and Supplementary Data ............................................. 44
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................. 44
PART III .............................................................................................. 45
Item 10. Directors and Executive Officers of the Registrant ..................................... 45
Item 11. Executive Compensation ................................................................. 45
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 45
Item 13. Certain Relationships and Related Transactions ......................................... 45
PART IV ............................................................................................... 46
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................... 46
SIGNATURES ............................................................................................ 49
</TABLE>
<PAGE>
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 from mutual to
stock form, which was completed on January 15, 1997. At March 31, 1997, the
Company had consolidated total assets of $979.7 million and total
stockholders' equity of $122.2 million. The Company was incorporated 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").
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. The Bank conducts business from
its administrative/branch and operations offices located in Fall River,
Massachusetts and its 12 other branch offices located in the municipalities of
Fall River, Attleboro, New Bedford, Seekonk, Somerset and Taunton, Massachusetts
and Pawtucket, East Providence and Warwick, Rhode Island, and the Bank's five
loan origination centers located in Yarmouth, Auburn, Agawam and Burlington,
Massachusetts and East Greenwich, Rhode Island.
The Bank's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, primarily in adjustable-rate and shorter-term fixed-
rate one- to four-family residential mortgage loans. Through its 13 branch
offices and five loan origination offices, the Bank originates loans for
investment and loans for sale in the secondary market, generally retaining the
servicing rights to all loans sold. To a lesser extent, the Bank invests in
multi-family, commercial real estate, construction and land, commercial and
consumer loans. Loan sales are made from loans designated as being held for sale
or originated for sale during the period. The Bank's revenues are derived
principally from interest on its mortgage loans, and to a lesser extent,
interest and dividends on its investment and mortgage-backed securities and loan
servicing income. The Bank's primary sources of funds are deposits, principal
and interest payments on loans and mortgage-backed securities, Federal Home Loan
Bank ("FHLB") advances and proceeds from the sale of loans. The Company's Board
of Directors has also authorized management to establish a trust services
department to provide future trust services to customers. The establishment of
additional branch offices and trust services by the Company would result in
additional capital expenditures and other costs associated with the
establishment of such branch offices and services which the Company has not yet
currently estimated.
The Company's and Bank's executive offices are located at One North Main
Street, Fall River, Massachusetts 02720. The telephone number is (508) 679-8181.
Information required by Guide 3 to be contained in the description of
business which is not contained in Item 1 is incorporated by reference from Item
7 herein.
1
<PAGE>
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution offering a variety of
financial products and services to meet the needs of the communities it serves.
The Bank's deposit gathering is concentrated in the communities surrounding its
13 full service branch offices located in the Southeastern Massachusetts
municipalities of Fall River, Attleboro, New Bedford, Seekonk, Somerset and
Taunton and the Rhode Island municipalities of Pawtucket, East Providence and
Warwick. The Bank also maintains loan origination centers in the municipalities
of Yarmouth, Auburn, Agawam and Burlington, Massachusetts and East Greenwich,
Rhode Island. The Bank primarily invests in loans secured by first or second
mortgages on properties located in Southeastern Massachusetts and Rhode Island
and, to a lesser extent, other areas of Massachusetts and Connecticut.
The Bank's main 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 Bank's 13 branch 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 and New Bedford, Massachusetts and Providence, Rhode Island and areas
along Interstates 195, 95 and 495 and Route 24.
Southeastern New England has generally lagged behind the rest of the nation
in coming out of the recession of the early 1990s and unemployment rates in Fall
River and New Bedford are currently higher than the national average. Small
businesses, service firms and tourism form the backbone of the region's economy.
Cuts to the defense industry, changes in the costume jewelry industry and
uncertainty in the technology industry have resulted in decreased employment
opportunities in the region. However, many manufacturers, such as The Acushnet
Company, Textron, American Power Conversion, Globe Manufacturing, Electric Boat
and Hasbro are still located in the region.
With the economic downturn experienced during the late 1980s and early
1990s, the market value of many one- to four-family residences declined
throughout the region. Loan demand diminished and competition for such loans
increased. During and subsequent to the recession of the late 1980s and early
1990s, a number of bank closings and mergers also occurred. These events also
served to raise regional unemployment, principally in Fall River and New
Bedford, Massachusetts. Nonetheless, the region's economy has stabilized and a
number of recent initiatives to improve the region's economy have been
introduced, including proposed improvements to the rail transportation system.
The Bank faces significant competition both in generating loans and in
attracting deposits. The Bank's primary market area is highly competitive and
the Bank faces direct competition from a significant number of financial
institutions, many with a state-wide or regional presence and, in some cases, a
national presence. Many of these financial institutions are significantly
larger and have greater financial resources than the Bank. The Bank'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
savings, cooperative and commercial banks and credit unions, particularly in
Fall River and New Bedford. In addition, the Bank 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 the areas of Fall River and Rhode Island, the
Bank has experienced significant competition from credit unions which have a
competitive advantage as they do not pay state or federal income taxes.
2
<PAGE>
Such competitive advantage has placed increased pressure on the Bank with
respect to its loan and deposit pricing.
From the mid-1980s through the early 1990s, the Bank's operating strategy
was to control growth while building its loan servicing portfolio and the
resultant fee income. As part of this strategy, the Bank increased market share
through its mortgage banking activities. Interest rate risk was managed by
generally retaining all adjustable rate one- to four-family loans and selling
all longer term fixed-rate one- to four-family loans in the secondary market on
a servicing retained basis. Beginning in 1993, the Bank began to focus more
heavily on building its loan and deposit franchise and increasing its level of
interest-earning assets and retail deposits. At that time, the Bank began to
expand its franchise in its existing market area and other areas in Southeastern
Massachusetts and Rhode Island through the establishment of de novo branch
-------
offices and new loan origination facilities. In this regard, since 1994, the
Bank has opened five new branch offices in Seekonk and New Bedford,
Massachusetts and East Providence, Pawtucket and Warwick, Rhode Island and one
new loan origination office in Burlington, Massachusetts. In addition, the Bank
plans to open a new centralized administrative and operations center and branch
office in late 1997 in Swansea, Massachusetts. Pursuant to this expansion
strategy, the Bank is currently seeking new branches within its primary market
areas as well as considering sites for loan production offices within its
existing market area and Connecticut.
LENDING ACTIVITIES
Loan Portfolio Composition. The Bank's loan portfolio consists primarily of
---------------------------
first mortgage loans secured by one- to four-family residences. At March 31,
1997, loans receivable, net totaled $796.4 million, of which $666.9 million were
one- to four-family residential mortgage loans, or 82.1% of the Bank's total
loans receivable. At such date, the remainder of the loan portfolio consisted
of: $4.4 million of multi-family residential loans, or 0.5% of total loans
receivable; $33.1 million of commercial real estate loans, or 4.1% of total
loans receivable; $23.9 million of construction and land loans, or 3.0% of total
loans receivable; $20.1 million of commercial loans, or 2.5% of total loans
receivable; and $64.1 million of consumer loans, or 7.9% of total loans
receivable, consisting of $25.0 million of home equity lines of credit, $32.1
million of second mortgages and $7.0 million of other consumer loans. The Bank
had $23.3 million of mortgage loans held for sale at March 31, 1997 consisting
of one- to four-family fixed-rate mortgage loans. At that same date, 50.9% of
the Bank'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 types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank 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.
3
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------- ------------------- ----------------- --------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- -------- ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Residential:
One- to four-family.................. $666,942 82.08% $531,849 81.63% $405,747 79.20% $335,374 78.84%
Multi-family......................... 4,416 .54 4,703 .72 5,157 1.00 5,257 1.24
Commercial real estate................. 33,057 4.07 23,368 3.59 19,968 3.90 14,849 3.49
Construction and land.................. 23,919 2.95 25,297 3.88 26,337 5.14 20,142 4.73
-------- ------ -------- ------ -------- ------ -------- -------
Total mortgage loans................ 728,334 89.64 585,217 89.82 457,209 89.24 375,622 88.30
-------- ------ -------- ------ -------- ------ -------- -------
COMMERCIAL.............................. 20,062 2.47 14,473 2.22 12,756 2.49 10,269 2.41
-------- ------ -------- ------ -------- ------ -------- -------
CONSUMER LOANS:
Home equity lines.................... 25,021 3.08 27,995 4.30 29,373 5.73 30,409 7.15
Second mortgages..................... 32,122 3.95 18,064 2.77 9,111 1.78 5,438 1.28
Other consumer loans................. 6,985 .86 5,813 .89 3,874 .76 3,672 .86
-------- ------ -------- ------ -------- ------ -------- -------
Total consumer loans............... 64,128 7.89 51,872 7.96 42,358 8.27 39,519 9.29
-------- ------ -------- ------ -------- ------ -------- -------
Total loans receivable.................. 812,524 100.00% 651,562 100.00% 512,323 100.00% 425,410 100.00%
====== ====== ====== =======
Less:
Allowance for loan losses............ (8,788) (5,607) (4,239) (3,964)
Undisbursed proceeds of
construction mortgages in process... (5,274) (6,568) (5,511) (6,758)
Deferred loan origination fees,
net................................. (2,107) (1,795) (2,596) (2,915)
-------- -------- -------- --------
Loans receivable, net................... 796,355 637,592 499,977 411,773
Mortgage loans held for sale............ 23,331 17,747 6,816 15,779
-------- -------- -------- --------
Loans receivable, net and
mortgage loans held for sale.......... $819,686 $655,339 $506,793 $427,552
======== ======== ======== ========
<CAPTION>
----------------------
1993
----------------------
PERCENT
AMOUNT OF TOTAL
------ --------
<S> <C>
MORTGAGE LOANS:
Residential:
One- to four-family............... $263,911 76.42%
Multi-family...................... 3,948 1.14
Commercial real estate.............. 11,932 3.46
Construction and land............... 13,091 3.79
-------- -------
Total mortgage loans............ 292,882 84.81
-------- -------
COMMERCIAL........................... 7,396 2.14
-------- -------
CONSUMER LOANS:
Home equity lines................. 33,492 9.70
Second mortgages.................. 7,371 2.13
Other consumer loans.............. 4,215 1.22
-------- -------
Total consumer loans............ 45,078 13.05
-------- -------
Total loans receivable.............. 345,356 100.00%
=======
Less:
Allowance for loan losses......... (3,524)
Undisbursed proceeds of
construction mortgages in
process......................... (810)
Deferred loan origination
fees, net........................ (2,854)
--------
Loans receivable, net............... 338,168
Mortgage loans held for sale........ 20,253
--------
Loans receivable, net and
mortgage loans held for
sale............................. $358,421
========
</TABLE>
4
<PAGE>
Loan Maturity. The following table shows the remaining contractual maturity
-------------
of the Bank's loans at March 31, 1997. The table does not include the effect of
future principal prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION TOTAL
FAMILY FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER LOANS
--------- ------- ------------ ------------ ----------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less.......................... $ 383 $ 2 $ 2,842 $ 7,933 $ 8,380 $28,128 $ 47,668
-------- ------ ------- ------- ------- ------- --------
After one year:
More than one year to three years....... 2,812 65 6,007 10 3,266 3,984 16,144
More than three years to five Years .... 6,732 54 19,992 44 5,479 6,700 39,001
More than five years to 10 years........ 102,407 764 2,092 439 2,644 16,585 124,931
More than 10 years to 20 years.......... 204,359 2,187 1,540 8,473 293 8,700 225,552
More than 20 years...................... 350,249 1,344 584 7,020 - 31 359,228
-------- ------ ------- ------- ------- ------- --------
Total due after one year................ 666,559 4,414 30,215 15,986 11,682 36,000 764,856
-------- ------ ------- ------- ------- ------- --------
Total amount due........................ $666,942 $4,416 $33,057 $23,919 $20,062 $64,128 812,524
======== ====== ======= ======= ======= =======
Less:
Allowance for loan losses............................................................................. (8,788)
Undisbursed proceeds of construction mortgages in process............................................. (5,274)
Deferred loan origination fees, net................................................................... (2,107)
--------
Loans receivable, net....................................................................................... $796,355
========
</TABLE>
5
<PAGE>
The following table sets forth, at March 31, 1997, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
1998, and whether such loans have fixed interest rates or adjustable interest
rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1998
--------------------------------
FIXED ADJUSTABLE TOTAL
---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.................. $334,273 $332,286 $666,559
Multi-family......................... 395 4,019 4,414
Commercial real estate............... 22,970 7,245 30,215
Construction and land................ 789 15,197 15,986
-------- -------- --------
Total mortgage loans................ 358,427 358,747 717,174
Commercial loans...................... 6,210 5,472 11,682
Consumer loans........................ 36,000 - 36,000
-------- -------- --------
Total loans $400,637 $364,219 $764,856
======== ======== ========
</TABLE>
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
----------------------------------------
activities are conducted primarily by its loan personnel operating at its 13
branch offices and five loan origination centers and through a network of
approximately 65 active loan correspondents, wholesale loan brokers and other
financial institutions approved by the Bank. All loans originated by the Bank,
either through internal sources or through loan correspondents are underwritten
by the Bank pursuant to the Bank's policies and procedures. For the fiscal year
ended March 31, 1997, the Bank's loan correspondents originated $274.9 million
in loans. The Bank originates both adjustable-rate and fixed-rate loans. The
Bank'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, all loans originated by the Bank are originated for investment
with the exception of longer-term fixed-rate one- to four-family mortgage loans.
While the Bank 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 Bank to sell substantially all of the one- to four-family
fixed-rate mortgage loans with maturities over 12 years that it originates and
to retain substantially all fixed-rate loans with maturities of up to 12 years
and all adjustable-rate one- to four-family mortgage loans which it originates.
The one- to four-family loan products currently originated for sale by the Bank
include a variety of mortgage loans which conform to the underwriting standards
specified by the Federal National Mortgage Association ("FNMA") and Federal Home
Loan Mortgage Corporation ("FHLMC") ("conforming loans") and, to a lesser
extent, loans which do not conform to FNMA or FHLMC standards due to loan
amounts ("jumbo loans"), or due to the substandard credit quality of the
borrowers ("B and C loans"). The Bank also sells all mortgage loans insured by
FHA and VA. All one- to four-family loans sold by the Bank are sold pursuant to
master commitments negotiated with FNMA, FHLMC and other investors to purchase
loans meeting such investors' defined criteria. Although the Bank has entered
into such master commitment contracts, such contracts generally do not require
the purchasers to buy or the Bank to deliver a specific amount of mortgage
loans. The Bank currently sells all longer-term fixed-rate conforming mortgage
loans it originates to FNMA and FHLMC. Sales of loans are made without recourse
to the Bank in the event of default by the borrower, except, in the case of VA
loans, which are subject to limitations on the VA's loan guarantees. The Bank
6
<PAGE>
generally retains the servicing rights on the mortgage loans sold to FNMA and
FHLMC but generally sells all VA, FHA, jumbo loans and B and C loans to
institutional investors on a servicing released basis.
Between the time the Bank issues loan commitments and the time such loans
or the securities into which they are converted are sold, the Bank is exposed to
movements in the market price due to changes in market interest rates. The Bank
attempts to manage this risk by utilizing forward cash sales of loans or
mortgage-backed securities primarily to FNMA and FHLMC (such forward sales of
loans or mortgage-backed securities are collectively referred to as "forward
sale commitments"). Generally, the Bank attempts to cover between 70% and 100%
of the principal amount of the loans that it has committed to fund at specified
interest rates with forward sale commitments. However, the type, amount and
delivery date of forward sale commitments the Bank will enter into is based upon
anticipated movements in market interest rates, bond market conditions and
management's estimates as to closing volumes and the length of the origination
or purchase commitments. Differences between the volume and timing of actual
loan originations and purchases and management's estimates can expose the Bank
to losses. If the Bank 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 Bank 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 Bank will be successful in its
efforts to eliminate the risk of interest rate fluctuation between the time
origination or purchase commitments are issued and the ultimate sale of the
loan. At March 31, 1997, the Bank had $17.2 million of forward sale commitments.
At March 31, 1997, the Bank was servicing its portfolio of $819.7 million
of loans receivable, net and mortgage loans held for sale and $1.2 billion of
loans for others, primarily consisting of conforming fixed-rate loans sold by
the Bank. 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 Bank. 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, 1997 and March 31, 1996, the Bank
originated $421.1 million and $375.1 million of fixed-rate and adjustable-rate
one- to four-family loans, respectively, of which $203.5 million and $190.9
million, respectively, were retained by the Bank. The fixed-rate loans retained
by the Bank consisted primarily of loans with terms of 12 years or less. The
Bank 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. On April 1, 1996, the Bank implemented
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS No. 122") pursuant to which the value of
servicing rights are recognized as an asset of the Bank. The book value of this
asset at March 31, 1997, net of amortization, was $1.6 million. Management has
determined that the fair value of the rights exceeds their carrying value and,
therefore, no valuation allowance was established.
The Bank has, in the past, from time to time, purchased loans or
participations in loans, primarily one- to four-family mortgage loans, and had
$8.0 million of purchased loans at March 31, 1997. Purchases of loans from
correspondent financial institutions are underwritten pursuant to the Bank's
policies and are closed in the name of the correspondent financial institution
but immediately purchased by the Bank for its mortgage banking activities. At
March 31, 1997, the Bank had $23.3 million in mortgage loans held for sale
consisting of fixed-rate one- to four-family loans.
7
<PAGE>
The following table sets forth the Bank's loan originations, purchases,
participations, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
--------------------------------------
1997 1996 1995
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance(1) .......................................... $ 655,339 $ 506,793 $ 427,552
Loans originated:
Mortgage loans:
One- to four-family .................................... 421,088 375,063 230,433
Multi-family ........................................... 189 40 68
Commercial real estate ................................. 17,809 6,839 8,408
Construction and land .................................. 27,316 29,519 33,270
---------- --------- ----------
Total mortgage loans ............................... 466,402 411,461 272,179
---------- --------- ----------
Commercial ................................................ 11,316 8,660 8,289
---------- --------- ----------
Consumer loans:
Home equity lines ....................................... 5,516 10,695 8,253
Second mortgages ........................................ 21,636 13,868 6,252
Other consumer loans .................................... 2,956 2,688 1,085
---------- --------- ----------
Total consumer loans ............................... 30,108 27,251 15,590
---------- --------- ----------
Total loans originated .................................... 507,826 447,372 296,058
---------- --------- ----------
Total ............................................. 1,163,165 954,165 723,610
Less:
Principal repayments and other, net ....................... (124,482) (112,546) (73,931)
Loan charge-offs, net ..................................... (569) (1,258) (378)
Proceeds from sale of mortgage loans ...................... (217,591) (184,207) (141,043)
Transfer of mortgage loans to REO ......................... (837) (815) (1,465)
---------- --------- ----------
Loans receivable, net and mortgage loans held for sale ........ 819,686 655,339 506,793
Mortgage loans held for sale ............................... (23,331) (17,747) (6,816)
---------- --------- ----------
Ending balance, loans receivable, net ......................... $ 796,355 $ 637,592 $ 499,977
========== ========= ===========
</TABLE>
______________
(1) Includes mortgage loans held for sale.
8
<PAGE>
One- to Four-Family Mortgage Lending. The Bank 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 property located in the Bank's primary market area. Loan originations are
generally obtained from the Bank's commissioned loan representatives,
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. At March 31, 1997, residential one- to four-family
mortgage loans totaled $666.9 million, or 82.1% of the Bank's total loans
receivable. Of the Bank's mortgage loans secured by residential mortgage loans
and construction and land loans, $339.0 million, or 49.1%, were fixed-rate loans
and $351.8 million, or 50.9%, were adjustable-rate loans.
The Bank's fixed-rate mortgage loans currently are made for terms from
seven to 30 years. The Bank sells substantially all fixed-rate residential
mortgage loans that it originates with maturities greater than 12 years and
retains the servicing on all loans sold to FNMA and FHLMC. The Bank generally
retains for its portfolio shorter-term, fixed-rate loans with maturities of 12
years or less and all adjustable-rate one- to four-family loans.
The Bank currently offers a number of ARM loan programs with interest rates
which are fixed for a period of one, three, four, five or seven years and adjust
annually thereafter. The Bank'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 indexed to the one-
year U.S. Treasury CMT Index.
The Bank's policy is to originate one- to four-family residential 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 95% 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 Bank include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the
Bank 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 Bank's exposure to
increases in interest rates. However, adjustable-rate loans generally 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
help to 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 Bank 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 97% of the
lower of the property's appraised value or the sale price. Private mortgage
insurance is normally required. With respect to loans originated under the first
time home buying program, because the Bank typically charges a lower rate of
interest, lower mortgage origination fees or a discount on closing costs on such
loan programs, the Bank expects to achieve a lower rate of return on such loans,
as compared to other residential mortgage loans.
9
<PAGE>
Commercial Real Estate Lending. The Bank originates commercial real estate
-------------------------------
loans that are generally secured by owner-occupied properties used for business
purposes such as light manufacturing, small office buildings or retail
facilities located in the Bank's primary market area. The Bank's commercial real
estate underwriting policy provides that commercial real estate loans may be
made in amounts up to 80% of the appraised value of the property. Commercial
real estate lending is limited by the regulatory loans-to-one borrower limit
which at March 31, 1997 was $18.3 million. The Bank currently originates
commercial real estate loans, generally with terms of up to five years and
amortizations of 20 years with the outstanding balance due and payable at the
end of the loan term. The Bank's adjustable-rate loans generally have interest
rates that adjust daily and are indexed to the Bank's prime rate of interest. In
reaching its decision on whether to make a commercial real estate loan, the Bank
considers the net operating income of the property, the borrower's expertise,
credit history and profitability and the value of the underlying property. The
Bank has generally required that the properties securing commercial real estate
loans have debt service coverage ratios (the ratio of earnings before debt
service to debt service) of at least 1.25x. In addition, environmental impact
surveys are generally required for all commercial real estate loans in excess of
$500,000. Generally, all commercial real estate loans made to corporations,
partnerships and other business entities require personal guarantees by the
principals. On an exception basis, the Bank may not require a personal guarantee
on such loans depending on the creditworthiness of the borrower and the amount
of the down payment and other mitigating circumstances. The Bank's commercial
real estate loan portfolio at March 31, 1997 was $33.1 million, or 4.1% of total
loans receivable. At March 31, 1997, the largest commercial real estate loan in
the Bank's portfolio had an outstanding principal balance of $1.2 million.
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 properties
are often dependent on successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to the then
prevailing conditions in the real estate market or the economy. The Bank seeks
to minimize these risks through its underwriting standards.
Commercial Lending. The Bank also originates commercial loans to businesses
-------------------
operating in the Bank's primary market area. Such loans are generally secured by
equipment, leases, inventory and accounts receivable. The Bank offers commercial
loans in the form of term loans and lines of credit. Term loans are generally
offered with either fixed or adjustable rates of interest and terms of up to ten
years. All term loans fully amortize during the term of such loan. Business
lines of credit generally have terms of one-year and are indexed to the Bank's
prime rate of interest or the prime rate as published in the Wall Street
------------
Journal. These lines of credit are renewable annually.
- --------
In making commercial loans, the Bank considers primarily the financial
resources of the borrower, the borrower's ability to repay the loan out of net
operating income, the Bank's lending history with the borrower and the value of
the collateral. Generally, if the borrower is a corporation, partnership or
other business entity, personal guarantees by the principals are required.
However, personal guarantees may not be required on such loans depending on the
creditworthiness of the borrower and other mitigating circumstances. The Bank's
largest commercial loan at March 31, 1997 was a $2.0 million line of credit of
which no funds were advanced at March 31, 1997. At such date, the Bank had $9.4
million of unadvanced commercial lines of credit. At March 31, 1997, the Bank
had $20.1 million of commercial loans which amounted to 2.5% of the Bank's total
loans receivable.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis
10
<PAGE>
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
loans may be 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 the success of the
business.
Multi-Family Lending. The Bank originates adjustable-rate multi-family
---------------------
mortgage loans generally secured by five to 12 unit residential apartment
buildings located in the Bank's primary market area. Such loans adjust annually,
have a 25 year term and are indexed to the one year FHLB advance rate. As a
result of uncertain market conditions in its primary market area, the Bank
currently originates multi-family loans on a limited and highly selective basis.
In reaching its decision on whether to make a multi-family loan, the Bank
considers the value of the underlying property as well as the 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. Pursuant to the Bank's current underwriting policies, a multi-
family mortgage loan may only be made in an amount up to 60% of the appraised
value of the underlying property. The maximum amount of a multi-family loan is
limited by the Bank's loans-to-one borrower limit which, at March 31, 1997, was
$18.3 million.
When evaluating the qualifications of the borrower for a multi-family loan,
the Bank considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property, and the Bank's
lending experience with the borrower. The Bank's underwriting guidelines require
that the borrower be able to demonstrate strong management skills and the
ability to maintain the property from current rental income. The borrower is
required to present evidence of the ability to repay the mortgage and a history
of making mortgage payments on a timely basis. In making its assessment of the
creditworthiness of the borrower, the Bank generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation. All multi-family loans made to corporations, partnerships
and other business entities require personal guarantees by the principal
borrowers. The Bank's multi-family loan portfolio at March 31, 1997, totaled
$4.4 million, or 0.5% of total loans receivable. At March 31, 1997, the Bank had
no multi-family loans with an outstanding carrying balance in excess of
$250,000.
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 often dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to the
then prevailing conditions in the real estate market or the economy. The Bank
seeks to minimize these risks through its underwriting policies.
Construction and Land Lending. The Bank originates construction and land
------------------------------
loans primarily for the development of single-family residences. Such loans are
made principally to individuals building their primary residence and, to a
lesser extent, to licensed and experienced developers known to the Bank in its
primary market area for the construction of single-family developments. The Bank
generally does not originate loans secured by raw land. 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. Construction and land loans to commercial
developers are originated in amounts up to 70% of the lesser of the appraised
value of the property, as improved, or the sales price. Proceeds of construction
and land loans are disbursed as phases of the construction are completed.
Generally, if the borrower is a corporation, partnership or other business
entity, personal guarantees by the principals are required. The Bank's largest
construction and land loan at March 31, 1997 was a performing loan with a
11
<PAGE>
$480,000 carrying balance secured by a home located in Harvard, Massachusetts.
At March 31, 1997, the Bank had $23.9 million of construction and land loans
which amounted to 3.0% of the Bank's total loans receivable.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied 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 Bank may
be confronted with a project, when completed, having a value which is
insufficient to assure full repayment.
Consumer Lending. Consumer loans at March 31, 1997 amounted to $64.1
-----------------
million, or 7.9% of the Bank's total loans receivable, and consisted 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 Bank'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 Bank offers "open-end line of credit" and "second mortgage" home equity
loans. Substantially all of the Bank's home equity loans are secured by second
mortgages on one- to four-family residences located in the Bank's primary market
area. At March 31, 1997, these loans totaled $57.1 million, or 7.0% of the
Bank's total loans and 89.1% of consumer loans. Home equity lines of credit
generally have variable rates of interest which adjust on a monthly basis. The
interest rate on such loans is indexed to the prime rate as reported in the
Wall Street Journal. Adjustable-rate home equity loans generally have an 18%
- --------------------
lifetime limit on interest rates. Generally, the maximum combined loans-to-value
ratio ("LTV") on home equity loans is 80%; however, with respect to second
mortgage loans up to $25,000, the Bank will allow an LTV of up to 100% if the
Bank holds the first mortgage lien on the property and other underwriting
criteria are satisfied. At March 31, 1997, the Bank had $50.0 million of home
equity lines of credit of which $25.0 million, or 3.1% of total loans
receivable, was drawn upon such loans at such date. Second mortgage loans are
generally offered with terms of up to 15 years and only with fixed-rates of
interest which rates will vary depending on the amortization period chosen by
the borrower. At March 31, 1997, second mortgage loans totaled $32.1 million, or
4.0% of the Bank's total loans receivable and 50.1% of consumer loans. The
underwriting standards employed by the Bank for home equity lines 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 Bank 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.
Personal loans are secured by deposits or readily marketable collateral.
Unsecured personal loans generally have a maximum borrowing limitation of
$10,000 and generally allow a maximum debt ratio (the ratio of debt service to
net earnings) of 40%. Automobile loans have a maximum borrowing limitation of
95% of the sale price of a new automobile and 80% of the lesser of the purchase
price or fair market value of a used automobile. At March 31, 1997, personal
loans totaled $4.0 million, or 0.5% of the Bank's total loans receivable and
6.2% of consumer loans; and automobile loans totaled $3.0 million, or 0.4% of
total loans receivable and 4.7% of consumer loans.
12
<PAGE>
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. At March 31, 1997, consumer
loans 90 days or more delinquent totaled $278,000.
Loan Approval Procedures and Authority. The Board of Directors establishes
---------------------------------------
the lending policies and loan approval limits of the Bank. In connection with
one- to four-family mortgage loans, the Board of Directors has authorized the
following persons and committees to approve loans up to the amounts indicated:
owner-occupied mortgages that meet the general underwriting standards of FNMA
and FHLMC, with an 80% or lower LTV ratio and which do not exceed FNMA and FHLMC
maximum limits, may be approved by the Bank's underwriters; all other mortgage
loans in amounts up to $300,000 must be approved by the Bank's Director of
Residential Loan Production. The Senior Vice President of the Mortgage Banking
Group or Senior Vice President of Banking Group must approve mortgage loans in
excess of $300,000 and up to $500,000. The Bank's Retail Loan Committee must
approve loans in excess of $500,000 and up to $750,000. Approval of the Board of
Directors' Executive Committee is required for any loan in excess of $750,000.
With respect to multi-family and construction and land loans, the Board of
Directors has authorized the following persons and committees to approve loans
up to the amounts indicated: mortgage loans in amounts up to $250,000 must be
approved by the Bank's Director of Residential Loan Production; mortgage loans
in excess of $250,000 and up to $400,000 require the approval of either the
Bank's Senior Vice President of Mortgage Banking Group or Senior Vice President
of Banking Group; mortgage loans in excess of $400,000 and up to $500,000
require the approval of the Bank's Retail Loan Committee; loans in excess of
$500,000 require the approval of the Board of Directors' Executive Committee.
In connection with consumer loans, the Board of Directors authorized the
following persons and committees to approve loans up to the amounts indicated:
consumer loans up to $100,000 and which meet certain lending criteria may be
approved by the Bank's Consumer Loan Manager; any consumer loan up to $250,000
may be approved by either the Bank's Senior Vice President of Mortgage Banking
Group, Senior Vice President of Banking Group, Director of Residential Loan
Production or Director of Commercial Services; loans in excess of $250,000 and
up to $400,000 must be approved by the Bank's Retail Loan Committee; and loans
in excess of $400,000 must be approved by the Board of Directors' Executive
Committee.
With respect to commercial and commercial real estate loans to borrowers
with total credit exposure of up to $500,000, the Board of Directors has
authorized the approval of these loans by various employees of the Bank with
progressively higher levels of responsibility as the amount of aggregate credit
exposure increases. Loans to borrowers with total credit exposure in excess of
$500,000 and up to $800,000 require the approval of the Commercial Loan
Committee and loans to borrowers with total credit exposure in excess of
$800,000 require the approval of the Board of Directors' Executive Committee.
Pursuant to OTS regulations, loans to one borrower cannot, subject to
certain exceptions, exceed 15% of the Bank's unimpaired capital and surplus. At
March 31, 1997, the loans to one borrower limit was $18.3 million.
13
<PAGE>
DELINQUENT LOANS, CLASSIFIED ASSETS AND REAL ESTATE OWNED
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 Bank with respect to delinquencies vary
depending on the nature of the loan, period and cause of delinquency and
whether the borrower is habitually delinquent. When a borrower fails to
make a required payment on a loan, the Bank takes a number of steps to have
the borrower cure the delinquency and restore the loan to current status.
The Bank generally sends the borrower a written notice of non-payment after
the loan is first past due. The Bank'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
Bank 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 not
otherwise satisfied, additional letters and telephone calls generally are
made. If the loan is still not brought current or satisfied and it becomes
necessary for the Bank to take legal action, which typically occurs after a
loan is 90 days or more delinquent, the Bank 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 Bank,
becomes REO.
Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential 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 weaknesses present 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 designed "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 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
14
<PAGE>
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Although management believes that, based on information
currently available to it at this time, its allowance for loan losses is
adequate, actual losses are dependent upon future events and, as such, further
additions to the level of allowances for loan losses may become necessary.
The Bank's Asset Classification Committee reviews and classifies the Bank's
assets on a quarterly basis and the Board of Directors reviews the results of
the reports on a quarterly basis. The Bank classifies assets in accordance with
the management guidelines described above. At March 31, 1997, the Bank had $3.7
million of loans designated as Substandard. At that same date the Bank had
$927,000 of loans designated as Loss, which were offset by specific reserves
equal to the amount of the Loss classification. As of March 31, 1997, the Bank
had four loans totaling $216,000, designated as Special Mention. These loans are
designated as Special Mention because such loans were originated to facilitate
the sale of REO. At March 31, 1997, the largest loan designated as Special
Mention had a carrying balance of $108,000, and was secured by a one- to four-
family home. In addition, at March 31, 1997, the Bank had $2.6 million of
commercial real estate and commercial loans on its "Watch List." Loans on this
list require close attention due to such weaknesses as delinquency, untimely
receipt of financial statements or collateral dissipation.
15
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as of
the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 1997 AT MARCH 31, 1996
--------------------------------------------------- ---------------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------------ ------------------------- -------------------------- -----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
----------- ----------- ------------ ----------- ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family.... 12 $ 525 33 $1,908 24 $1,589 31 $2,469
Multi-family........... 1 202 2 268 - - 3 334
Commercial real estate. - - 1 976 1 231 - -
Construction and land.. - - 2 232 1 37 - -
-- ------ -- ------ -- ------ -- ------
Total mortgage loans.. 13 727 38 3,384 26 1,857 34 2,803
-- ------ -- ------ -- ------ -- ------
COMMERCIAL LOANS......... 1 23 - - - - 1 87
-- ------ -- ------ -- ------ -- ------
CONSUMER LOANS:
Home equity lines...... 6 180 4 114 16 231 12 956
Second mortgages....... 3 34 3 95 - - 12 196
Other consumer loans... 10 57 9 69 4 12 4 3
-- ------ -- ------ -- ------ -- ------
Total consumer loans.. 19 271 16 278 20 243 28 1,155
-- ------ -- ------ -- ------ -- ------
Total loans.............. 33 $1,021 54 $3,662 46 $2,100 63 $4,045
== ====== == ====== == ====== == ======
Delinquent loans to
loans receivable, net.... 0.13% 0.46% 0.33% 0.63%
<CAPTION>
AT MARCH 31, 1996
--------------------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------------- -----------------------
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family.... 20 $1,044 29 $2,501
Multi-family........... 1 76 1 51
Commercial real estate. - - 1 85
Construction and land.. - - - -
-- ------ -- ------
Total mortgage loans.. 21 1,120 31 2,637
-- ------ -- ------
COMMERCIAL LOANS......... 1 3 - -
-- ------ -- ------
CONSUMER LOANS:
Home equity lines...... 11 354 12 386
Second mortgages....... 2 46 - -
Other consumer loans... 4 12 5 10
-- ------ -- ------
Total consumer loans.. 17 412 17 396
-- ------ -- ------
Total loans.............. 39 $1,535 48 $3.033
== ====== == ======
Delinquent loans to loans
receivable, net......... 0.31% 0.61%
</TABLE>
16
<PAGE>
Non-Performing Assets. The following table sets forth information regarding
---------------------
non-accrual loans and REO. At March 31, 1997, REO totaled $665,000 consisting of
seven one- to four-family properties. It is the policy of the Bank to cease
accruing interest on loans 90 days or more past due and to reverse all accrued
interest.
<TABLE>
<CAPTION>
AT MARCH 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family....................... $ 1,908 $ 2,469 $ 2,501 $3,649 $4,345
Multi-family.............................. 268 334 51 - -
Commercial real estate(1)................. 976 - 85 - 277
Construction and land..................... 232 - - 26 -
------- ------- ------- ------ ------
Total mortgage loans................ 3,384 2,803 2,637 3,675 4,622
------- ------- ------- ------ ------
Commercial loans........................... - 87 - 15 1
------- ------- ------- ------ ------
Consumer loans:
Home equity lines......................... 114 956 386 483 262
Second mortgages.......................... 95 196 - 34 120
Other consumer loans...................... 69 3 10 14 -
------- ------- ------- ------ ------
Total consumer loans................ 278 1,155 396 531 382
------- ------- ------- ------ ------
Total nonaccrual loans.............. 3,662 4,045 3,033 4,221 5,005
Real estate owned, net(2)................... 665 643 296 939 464
------- ------- ------- ------ ------
Total non-performing assets............... $ 4,327 $ 4,688 $ 3,329 $5,160 $5,469
======= ======= ======= ====== ======
Allowance for loan losses as a percent of
loans(3)................................... 1.09% 0.87% 0.84% 0.95% 1.03%
Allowance for loan losses as a percent
of non-performing loans(4)................. 239.98% 138.62% 139.76% 93.91% 70.41%
Non-performing loans as a percent of
loans(3)(4)................................ 0.45% 0.63% 0.60% 1.02% 1.46%
Non-performing assets as a percent of
total assets(5)............................ 0.44% 0.65% 0.59% 1.10% 1.37%
</TABLE>
___________________
(1) Consists of one restructured commercial real estate loan at March 31, 1997.
(2) REO balances are shown net of related valuation allowances.
(3) Loans includes loans receivable, net, excluding allowance for loan losses.
(4) Non-performing loans consist of those loans 90 days or more past due and
other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectability of interest or principal.
(5) Non-performing assets consist of non-performing loans and REO.
17
<PAGE>
Impaired Loans. The Bank adopted a new accounting method for measuring
--------------
loan impairment on April 1, 1995. Adoption of this accounting standard did not
have a material effect on the comparability of the above tables. 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 definition of "nonaccrual loans," although the two categories
overlap. Nonaccrual 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 nonaccrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
as impaired, if (i) it is not probable that the Bank will collect all amounts
due in accordance with the contractual terms of the loan or (ii) the loan is not
a commercial or a commercial real estate loan. Factors considered by management
in determining impairment include payment status and collateral value. The
amount of impairment for these types of impaired loans 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 expendient in the case of collateralized 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. Residential mortgage and consumer loans are measured for
impairment collectively. 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, 1997 and March 31, 1996, total impaired loans were $1.5
million and $991,000, respectively. At March 31, 1997, impaired loans of $1.3
million required an impairment allowance of $762,000. At March 31, 1997,
impaired loans of $164,000 did not require an impairment allowance. All impaired
loans are commercial real estate loans which have been measured using the fair
value of the collateral method. During the fiscal year ended March 31, 1997, the
average recorded value of impaired loans was $1.0 million. For these loans,
$112,000 of interest income was recognized while $232,000 of interest income
would have been recognized under the original terms.
Allowance for Loan Losses. The allowance for loan losses is established
-------------------------
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon judgments different from those
of management. As of March 31, 1997, the Bank's allowance for loan losses was
1.09% of total loans receivable as compared to 0.87% as of March 31, 1996. The
Bank had non-accrual loans of $3.7 million and $4.0 million at March 31, 1997
and March 31, 1996, respectively. The Bank will continue to monitor and modify
its allowances for loan losses as conditions dictate. While management believes
the Bank's allowance for loan losses is sufficient to cover losses inherent in
its loan portfolio at this time, no assurances can be given that the Bank's
level of allowance for loan losses will be sufficient to cover future loan
losses incurred by the Bank or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
18
<PAGE>
The following table sets forth activity in the Bank's allowance for loan losses
for the years set forth in the following table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year................ $5,607 $4,239 $3,964 $3,524 $1,795
Provision for loan losses................... 3,750 2,626 653 1,035 2,102
Charge-offs:
Mortgage loans:
One- to four-family................... 331 218 168 324 240
Multi-family.......................... 82 - - 55 -
Commercial real estate................ - 967 25 121 18
Construction and land................. - - - 25 10
Commercial loans....................... 87 - 15 38 40
Consumer loans:
Home equity lines..................... 116 68 113 20 31
Second mortgages...................... 10 - - - -
Other consumer loans.................. 11 35 79 45 69
------ ------ ------ ------ ------
Total.............................. 637 1,288 400 628 408
Recoveries.................................. 68 30 22 33 35
------ ------ ------ ------ ------
Balance at end of year...................... $8,788 $5,607 $4,239 $3,964 $3,524
====== ====== ====== ====== ======
Ratio of net charge-offs during
the year to average loans
outstanding during the year............... 0.07% 0.23% 0.08% 0.14% 0.11%
==== ==== ==== ==== ====
</TABLE>
19
<PAGE>
The following tables set forth the Bank'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.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ---------------------------- --------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential ............ $2,769 31.51% 85.57% $2,175 38.79% 86.23% $1,223 28.85% 85.34%
Commercial ............. 2,239 25.48 4.07 1,195 21.31 3.59 1,265 29.84 3.90
------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................ 5,008 56.99 89.64 3,370 60.10 89.82 2,488 58.69 89.24
Commercial ............... 932 10.60 2.47 621 11.08 2.22 600 14.16 2.49
Consumer ................. 1,151 13.10 7.89 829 14.79 7.96 473 11.16 8.27
Unallocated .............. 1,697 19.31 - 787 14.03 - 678 15.99 -
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses ........ $8,788 100.00% 100.00% $5,607 100.00% 100.00% $4,239 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
-------------------------------------------------------------
1994 1993
---------------------------- ------------------------------
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)
<S> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential ............ $1,144 28.86% 84.81% $1,149 32.60% 81.35%
Commercial ............. 1,063 26.82 3.49 941 26.70 3.46
------ ------ ------ ------ ------ ------
Total ................ 2,207 55.68 88.30 2,090 59.30 84.81
Commercial ............... 426 10.75 2.41 383 10.87 2.14
Consumer ................. 454 11.45 9.29 559 15.86 13.05
Unallocated .............. 877 22.12 - 492 13.97 -
------ ------ ------ ------ ------ ------
Total allowance for
loan losses ........ $3,964 100.00% 100.00% $3,524 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
20
<PAGE>
Real Estate Owned. At March 31, 1997, the Bank had $665,000 of REO
-----------------
consisting of seven properties. When the Bank acquires property through
foreclosure or deed in lieu of foreclosure, it is initially recorded at the
lower of the recorded investment in the corresponding loan or the fair value of
the related assets at the date of foreclosure, less costs to sell. Thereafter,
if there is a further deterioration in value, the Bank provides for a specific
valuation allowance and charges operations for the diminution in value. It is
the policy of the Bank to obtain an appraisal on all real estate subject to
foreclosure proceedings prior to the time of foreclosure. It is the Bank's
policy to require appraisals on a periodic basis on foreclosed properties and to
conduct inspections on foreclosed properties.
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 and
federal funds. Subject to various restrictions, federally-chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally-chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations.
Historically, the Bank has maintained liquid assets above the minimum OTS
requirements and at a level considered to be adequate to meet its normal daily
activities.
The investment policy of the Bank, 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 Bank's lending activities. Generally, the Bank's investment
policy is more restrictive than the OTS regulations allow and, accordingly, the
Bank has invested primarily in U.S. government securities, which qualify as
liquid assets under the OTS regulations, federal funds and U.S. government
sponsored agency issued mortgage-backed securities. As required by SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), the Bank has established an investment portfolio of securities that are
categorized as held to maturity, available for sale, or held for trading. The
Bank generally invests in securities as a method of maintaining liquidity at
levels deemed appropriate by management as well as to deploy conversion proceeds
and to manage interest rate risk. The Bank does not currently maintain a
portfolio of securities categorized as held for trading. Short-term investments,
at March 31, 1997, consisted primarily of overnight deposits totaling $39.4
million or 4.0% of assets. As of the same date, the Bank's investment and
mortgage-backed securities held to maturity portfolio totaled $36.4 million, or
3.7% of assets, and the Bank's investment and mortgage-backed securities
available for sale portfolio totaled $32.6 million, or 3.3% of assets. The
Bank's portfolio of investment securities available for sale totaled $888,000,
which consisted of marketable equity securities. As of March 31, 1997, the
Bank's investment securities held to maturity portfolio consisted of $21.0
million in U.S. Government and related obligations with a weighted average
remaining maturity of 12 months.
At March 31, 1997, the Bank had invested $47.1 million in mortgage-backed
securities, or 4.8% of total assets, which were insured by either the Government
National Mortgage Association ("GNMA"), FNMA or FHLMC. The portfolio consisted
of $15.4 million, or 32.7% of total mortgage-backed securities, classified as
held to maturity and $31.7 million, or 67.3% of total mortgage-backed
securities, classified as available for sale. Of the $47.1 million, $13.5
million were adjustable-rate with maximum interest rate adjustments of 2%
annually or 6% over the life of the security. The fixed rate mortgage-backed
securities with a fair value of $31.7 million have balloon payments at the end
of seven years. Investments in mortgage-backed securities involve a risk that
actual prepayments will differ from estimated prepayments over the life of the
security. Fixed-rate mortgage-backed securities may require adjustments to the
amortization of any
21
<PAGE>
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 of such
securities may be adversely affected by changes in interest rates.
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's short-term investments and investment
securities at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------------
1997 1996 1995
------------------- ------------------ -----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---------- ------- --------- ------- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Short-term investments ............... $ 39,410 $39,410 $ - $ - $ - $ -
======== ======= ======= ======= ======= =======
Investment securities:
Available for sale: (1) ............ $ 5 $ 888 $ 55 $ 725 $ 55 $ 518
-------- ------- ------- ------- ------- -------
Held to maturity:
U.S. Government and agency
obligations ..................... 20,991 20,958 22,986 23,061 19,988 19,877
Federal Home Loan Bank note ...... - - 1,000 999 1,000 974
Other investment securities ...... - - 1 1 - -
-------- ------- ------- ------- ------- -------
Total held to maturity .......... 20,991 20,958 23,987 24,061 20,988 20,851
-------- ------- ------- ------- ------- -------
Total investment securities ........ $ 20,996 $21,846 $24,042 $24,786 $21,043 $21,369
======== ======= ======= ======= ======= =======
</TABLE>
______________
(1) Consists of marketable equity securities.
22
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------------------------------
1997 1996
---------------------------------- ---------------------------------
AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR
COST OF TOTAL VALUE COST OF TOTAL VALUE
------------ -------------------- ---------------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Available for sale:
Fixed-rate:
FNMA(1)........................................... $20,200 42.53% $19,980 $ - -% $ -
FHLMC(1).......................................... 11,859 24.97 11,752 - - -
------- ----- ------- ------ ------ ------
Total fixed-rate................................ 32,059 67.50 31,732 - - -
------- ----- ------- ------ ------ ------
Total mortgage-backed securities available 32,059 67.50 31,732 - - -
for sale............................................. ------- ----- ------- ------ ------ ------
Held to maturity:
Fixed-rate:
GNMA.............................................. 1,644 3.46 1,719 1,901 26.23 1,998
FHLMC............................................. 309 0.65 324 401 5.53 423
------- ----- ------ ------ ------ ------
Total fixed-rate................................ 1,953 4.11 2,043 2,302 31.76 2,421
------- ----- ------- ------ ------ ------
Adjustable-rate:
FHLMC............................................. 13,482 28.39 13,535 4,946 68.24 4,965
------- ------ ------- ------ ------ ------
Total mortgage-backed securities held 15,435 32.50 15,578 7,248 100.00 7,386
to maturity.......................................... ------- ----- ------ ----- ------ ------
Total mortgage-backed securities...................... $47,494 100.00% $47,310 $7,248 100.00% $7,386
======= ====== ======= ====== ====== ======
<CAPTION>
--------------------------------
1995
--------------------------------
AMORTIZED PERCENT FAIR
COST OF TOTAL VALUE
----------- --------- ----------
<S> <C> <C> <C>
Mortgage-backed securities:
Available for sale:
Fixed-rate:
FNMA(1)........................................... $ - -% $ -
FHLMC(1).......................................... - - -
------ ------ ------
Total fixed-rate................................ - - -
------ ------ ------
Total mortgage-backed securities available
for sale............................................. - - -
------ ------ ------
Held to maturity:
Fixed-rate:
GNMA.............................................. 2,199 81 2,283
FHLMC............................................. 522 19 535
------ ------ ------
Total fixed-rate................................ 2,721 100 2,818
------ ------ ------
Adjustable-rate:
FHLMC............................................. - - -
------ ------ ------
Total mortgage-backed securities held
to maturity.......................................... 2,721 100.00 2,818
------ ------ ------
Total mortgage-backed securities...................... $2,721 100.00% $2,818
====== ====== ======
</TABLE>
__________________
(1) These mortgage-backed securties have a balloon payment at the end of seven
years.
23
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED MARCH 31,
---------------------------------------------------
1997 1996 1995
--------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance....................................................... $ 7,248 $2,721 $3,437
Mortgage-backed securities purchased:
Held to maturity..................................................... 9,996 4,960 -
Available for sale................................................... 32,061 - -
Principal repayments of held to maturity securities................... (1,805) (433) (716)
Accretion of premium.................................................. (6) - -
------- ------ ------
Ending balance.......................................................... $47,494 $7,248 $2,721
======= ====== ======
</TABLE>
24
<PAGE>
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment securities and mortgage-backed securities as of March 31, 1997.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
---------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS
------------------- ------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----------- ---------- ---------- --------- ----------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS.................... $39,410 6.38% $ - -% $ - -% $ - -%
======= ==== ======= ==== ======== === ========= =====
INVESTMENT SECURITIES(1):
Held to maturity:
U.S. Government and agency
obligations........................ $10,496 5.71% $10,495 6.14% $ - -% $ - -%
------- ---- ------- ---- ------- ---- --------- -----
Total investment securities held
to maturity............................. $10,496 5.71% $10,495 6.14% $ - -% $ - -%
======= ==== ======= ==== ======== ==== ========= =====
MORTGAGE-BACKED SECURITIES:
Available for sale:
Fixed rate:
FNMA................................ $ - -% $ - -% $19,980 7.00% $ - -%
FHLMC............................... - - - - 11,752 7.00 - -
-------- ------ ------- ---- ------- ---- ------- -----
Total mortgage-backed securities
available for sale...................... - - - - 31,732 7.00 - -
-------- ------ ------- ---- ------- ---- ------- -----
Held to maturity:
Adjustable-rate:
FHLMC.............................. - - - - - - 13,482 6.58
Fixed-rate:
GNMA............................... - - 33 8.00 269 8.22 1,342 8.78
FHLMC.............................. - - - - 205 8.27 104 11.35
-------- ------ ------ ---- ----- ---- ------- -----
Total fixed-rate................ - - 33 8.00 474 8.24 1,446 8.96
-------- ------ ------ ---- ------- ---- ------- -----
Total mortgage-backed securities
held to maturity......................... - - 33 8.00 474 8.24 14,928 6.81
-------- ------ ------ ---- ------- ---- ------- -----
Total mortgage-backed securities......... $ - -% $ 33 8.00% $32,206 7.02% $14,928 6.81%
======== ====== ====== ==== ======= ==== ======= =====
<CAPTION>
TOTAL
------------------------
WEIGHTED
CARRYING AVERAGE
VALUE YIELD
---------- ----------
<S> <C> <C>
SHORT-TERM INVESTMENTS...................................... $39,410 6.38%
======= ====
INVESTMENT SECURITIES(1):
Held to maturity:
U.S. Government and agency obligations................ $20,991 5.92%
------- ----
Total investment securities held to maturity............... $20,991 5.92%
======= ====
MORTGAGE-BACKED SECURITIES
Available for sale:
Fixed rate:
FNMA.................................................. $19,980 7.00%
FHLMC................................................. 11,752 7.00
------- ----
Total mortgage-backed securities available for sale........ 31,732 7.00
------- ----
Held to maturity:
Adjustable-rate:
FHLMC................................................ 13,482 6.58
Fixed-rate:
GNMA................................................. 1,644 8.67
FHLMC................................................ 309 9.31
------ -----
Total fixed-rate.................................. 1,953 8.77
------ -----
Total mortgage-backed securities held to maturity........... 15,435 6.86
------ -----
Total mortgage-backed securities........................... $47,167 6.95%
======= ====
</TABLE>
______________________
(1) Does not include $888,000 marketable equity securities available for sale at
fair value at March 31, 1997.
25
<PAGE>
SOURCES OF FUNDS
General. Deposits, loan and mortgage-backed security repayments and
-------
prepayments, proceeds from sales of loans, cash flows generated from operations
and FHLB advances are the primary sources of the Bank's funds for use in
lending, investing and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts with a range of
--------
interest rates and terms. The Bank's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the fiscal year ended
March 31, 1997, core deposits represented 29.4% 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
Bank's deposits are obtained predominantly from the areas in which its branch
offices are located. The Bank has historically relied primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Bank's ability to attract and
retain deposits. The Bank 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 Bank does not actively solicit
certificate accounts in excess of $100,000 or use brokers to obtain deposits,
the Bank will solicit, from time to time, such deposits or utilize brokered
deposits depending upon market conditions. In recent years, the Bank, in
connection with its growth strategy, has significantly increased its deposit
base by establishing new branch offices in and around its primary market area,
primarily in Rhode Island, and competitively pricing its deposit products to
attract and retain deposit accounts and build its market share of deposits. The
majority of the recent deposit growth has been in certificate accounts with
maturities of three years or less which generally bear yields higher than the
Bank's core deposits. As a result, the Bank's certificate accounts increased
from $333.0 million, or 66.3% of total average deposits, at March 31, 1996 to
$453.5 million, or 70.6% of total average deposits, at March 31, 1997. The
Bank's cost of average interest-bearing deposits increased from 4.96% for the
fiscal year ended March 31, 1996 to 5.01% for the fiscal year ended March 31,
1997. At March 31, 1997, the weighted average remaining maturity of the Bank's
certificate accounts was 10.7 months. Further increases in short-term
certificate of deposit accounts, which tend to be more sensitive to movements in
market interest rates than core deposits, may result in the Bank's deposit base
being less stable than if it had a large amount of core deposits which, in turn,
may result in further increases in the Bank's cost of deposits.
The following table presents the deposit activity of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------
1997 1996 1995
----------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits............................................ $109,952 $120,527 $66,117
Interest credited on deposit account.................... 30,274 23,116 13,897
-------- -------- -------
Total increase in deposit accounts...................... $140,226 $143,643 $80,014
======== ======== =======
</TABLE>
26
<PAGE>
At March 31, 1997, the Bank had $57.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
------------------------------------------------- --------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............................. $12,156 5.48%
Over 3 through 6 months.......................... 14,754 5.43
Over 6 through 12 months......................... 13,483 5.83
Over 12 months................................... 16,913 6.28
-------
Total............................................ $57,306 5.79
=======
</TABLE>
27
<PAGE>
The following table sets forth the distribution of the Bank'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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- ------- ------- -------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Business checking accounts........... $38,428 5.99% -% $35,587 7.08% -% $28,783 7.23% -%
Money market accounts................ 28,967 4.51 2.83 27,194 5.41 2.83 33,011 8.30 2.83
Savings accounts..................... 82,536 12.85 2.50 76,511 15.23 2.50 81,525 20.49 2.50
NOW accounts......................... 38,801 6.04 1.98 30,088 5.99 1.98 24,154 6.07 1.98
-------- ------ ------- ------ -------- ------
Total........................... 188,732 29.39 1.92 169,380 33.71 1.82 167,473 42.09 2.02
-------- ------ ------- ------ -------- ------
Certificate accounts(1):
Less than six months................ 184,111 28.67 5.62 125,491 24.98 5.66 96,932 24.37 5.16
Over six through 12 months.......... 94,439 14.71 5.85 64,743 12.89 5.91 40,981 10.30 5.75
Over 12 through 36 months........... 84,341 13.13 6.18 61,698 12.28 6.37 27,622 6.94 6.39
Over 36 months...................... 12,479 1.94 6.45 14,558 2.90 6.74 7,850 1.97 6.78
IRA and KEOGH....................... 78,084 12.16 5.91 66,487 13.24 6.17 56,998 14.33 5.12
-------- ------ -------- ------ --------- ------
Total certificate accounts....... 453,454 70.61 5.83 $332,977 66.29 5.95 230,383 57.91 5.56
-------- ------ -------- ------- --------- ------
Total average deposits............ $642,186 100.00% 4.76% $502,357 100.00% 4.59% $397,856 100.00% 4.27%
======== ======= ========= ====== ======== ======
</TABLE>
____________________________________________
(1) Based on remaining contractual maturity of certificates.
28
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MARCH 31, 1997 At March 31,
----------------------------------------------------------------- ----------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1997 1996 1995
----------- --------- ----------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%.............. $ 260 $ - $ - $ - $ - $ 260 $ 253 $ 19,822
4.01 to 5.00%........... 18,556 185 - - - 18,741 31,913 74,008
5.01 to 6.00%........... 325,839 62,135 4,363 1,495 2,451 396,283 178,891 91,477
6.01 to 7.00%........... 17,246 47,748 9,610 5,671 2,276 82,551 140,863 66,856
7.01 to 8.00%........... 8,733 6,625 7,400 4,217 - 26,975 40,027 28,198
8.01 to 9.00%........... - - 4 - - 4 4 4
Over 9.01% ............. - - - - - - - 169
-------- ------- ------- ------- ------ -------- -------- --------
Total................. $370,634 $116,693 $21,377 $11,383 $4,727 $524,814 $391,951 $280,534
======== ======== ======= ======= ====== ======== ======== ========
</TABLE>
29
<PAGE>
Borrowings. The Bank utilizes advances from the FHLB as an alternative to
----------
retail deposits to fund its operations as part of its operating strategy. During
the fiscal year ended March 31, 1997, the Bank determined to utilize FHLB
borrowings to a greater extent to fund its asset growth, primarily its
origination of adjustable-rate one- to four-family loans. These FHLB advances
are collateralized primarily by certain of the Bank's mortgage loans and
mortgage-backed securities and secondarily by the Bank's investment in capital
stock of the FHLB. 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 OTS
and the FHLB. At March 31, 1997, the Bank had $111.1 million in outstanding
advances from the FHLB and had no other borrowings as compared to $75.1 million
at March 31, 1996.
The following table sets forth certain information regarding the Bank's
borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED MARCH 31,
----------------------------------
1997 1996 1995
---------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding.................................................... $131,523 $50,321 $71,005
======== ======= =======
Maximum amount outstanding at any month-end during the period.................. $177,580 $75,141 $99,724
======== ======= =======
Balance outstanding at end of period........................................... $111,062 $75,141 $66,592
======== ======= =======
Weighted average interest rate during the period............................... 6.25% 6.46% 6.26%
==== ==== ====
Weighted average interest rate at end of period................................ 6.13% 5.94% 6.96%
==== ==== ====
</TABLE>
SUBSIDIARY ACTIVITIES
FIRSTFED MORTGAGE CORPORATION ("FMC"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Bank. FMC does not currently conduct any
activities other than holding a parcel of real estate located in Swansea,
Massachusetts (the "Swansea Property"). The Swansea Property is the primary
asset of FMC and is the site of the Bank's proposed centralized administrative
and operations center and branch office, which is anticipated to open for
operations in late 1997. The Bank has budgeted approximately $10.5 million for
the construction and furniture, fixtures and equipment of the facility and the
branch office, of which $3.1 million has been incurred as of March 31,1997.
FAB FUNDING CORPORATION ("FAB FUNDING"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Company formed primarily to finance stock
purchases by the Banks 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 Bank as payments are made on the loan. Except for the loan to
the ESOP, FAB FUNDING has no significant operations.
30
<PAGE>
PERSONNEL
As of March 31, 1997, the Company had 254 authorized full-time employee
positions and 44 authorized part-time employee positions, for a total of
approximately 276 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
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act").
The Bank 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 FHLB System and its deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") managed
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 savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions and their holding companies 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 and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by
the Company of another savings institution or savings bank that meets the QTL
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 be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC
Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation and no multiple savings and loan
31
<PAGE>
holding company may acquire more than 5% of the voting stock of a company
engaged in impermissible activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; or 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 must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving 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, HOLA does 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.
FEDERAL SAVINGS INSTITUTION REGULATION
Capital Requirements. The OTS capital regulations require savings
---------------------
institutions to meet three minimum capital standards: a 1.5% tangible discussed
below also establish, in effect, a minimum 2% tangible capital standard, a 4%
leverage (core) capital ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the risk-
based capital standard itself, a 4% Tier I risk-based capital standard. Core
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 OTS regulations also require that, in meeting the tangible,
leverage (core) 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 I (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%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a
32
<PAGE>
maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
-----
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At March 31, 1997, the Bank
met each of its capital requirements, and it is anticipated that the Bank will
not be subject to the interest rate risk component.
The following table presents the Bank's capital position at March 31,
1997 relative to fully phased-in regulatory requirements.
<TABLE>
<CAPTION>
EXCESS CAPITAL
---------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
---------- --------- ------------ --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Tangible ........ $100,924 $14,640 $86,284 10.34% 1.50%
Core (Leverage) . 100,924 29,280 71,644 10.34 3.00
Risk-based ...... 107,627 42,544 65,083 20.24 8.00
</TABLE>
Prompt Corrective Regulatory Action. Under the OTS prompt corrective action
-----------------------------------
regulations, 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 is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMELS rating). A savings institution that has
a ratio of total capital to risk weighted assets of less than 8%, a ratio of
Tier I (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 I
capital ratio of less than 3% or a leverage ratio
33
<PAGE>
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 banking regulator 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. Deposits of the Bank are presently insured
-----------------------------
by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF") (the deposit
insurance fund that covers most commercial bank deposits), are statutorily
required to be recapitalized to a 1.25% of insured reserve deposits ratio. Until
recently, members of the SAIF and BIF were paying average deposit insurance
premiums of between 24 and 25 basis points. The BIF met the required reserve in
1995, whereas the SAIF was not expected to meet or exceed the required level
until 2002 at the earliest. This situation was primarily due to the statutory
requirement that SAIF members make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted
a new assessment rate schedule of from 0 to 27 basis points under which 92% of
BIF members paid an annual premium of only $2,000. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the previously existing
assessment rate schedule applicable to SAIF member institutions of 23 to 31
basis points. As long as the premium differential continued, it may have had
adverse consequences for SAIF members, including reduced earnings and an
impaired ability to raise funds in the capital markets. In addition, SAIF
members, such as the Bank could have been placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other
things, imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF. As required by the Funds Act, the
FDIC imposed a special assessment of 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special
Assessment"). The SAIF Special Assessment was recognized by the Bank as an
expense in the quarter ended September 30, 1996 and is generally tax deductible.
The SAIF Special Assessment recorded by the Bank amounted to $2.9 million on a
pre-tax basis and $1.7 million on an after-tax basis.
The Funds Act also spread the obligations for payment of the FICO bonds
across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on
January 1, 1999, provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC voted to effectively lower SAIF
assessments to 0 to 27 basis points as of January 1, 1997, a range comparable to
that of BIF members. SAIF members will also continue
34
<PAGE>
to make the FICO payments described above. The FDIC also lowered the SAIF
assessment schedule for the fourth quarter of 1996 to 18 to 27 basis points.
Management cannot predict the level of FDIC insurance assessments on an on-going
basis, whether the savings association charter will be eliminated or whether the
BIF and SAIF will eventually be merged.
The Bank's assessment rate for fiscal 1997 ranged from 6.48 to 23 basis
points, excluding the SAIF special assessment rate of 65.7 basis points, and the
regular premium paid for this period was $1.0 million. A significant increase in
SAIF insurance premiums would likely have an adverse effect on the operating
expenses and results of operations of the Bank.
Under the FDI Act, 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.
Thrift Rechartering Legislation. The Funds Act provides that the BIF and
--------------------------------
SAIF will merge on January 1, 1999 if there are no more savings associations as
of that date. That legislation also required that the Department of Treasury
submit a report to Congress that makes recommendations regarding a common
financial institutions charter, including whether the separate charters for
thrifts and banks should be abolished. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The bills would require
federal savings institutions to convert to a national bank or some type of state
charter by a specified date, under some bills, or they would automatically
become national banks. Converted federal thrifts would generally be required to
conform their activities to those permitted for the charter selected and
divestiture of nonconforming assets would be required over a two year period,
subject to two possible one year extensions. State chartered thrifts would
become subject to the same federal regulations as applies to state commercial
banks. A more recent bill considered by the House Banking Committee would allow
savings institutions to continue to exercise their current powers after
converting to a bank charter. Holding companies for savings institutions would
become subject to the same regulation as holding companies that control
commercial banks, with a limited grandfather provision for savings and loan
holding company activities. The Bank is unable to predict whether such
legislation would be enacted and, if so, the extent to which the legislation
would restrict or disrupt its operations.
Loans to One Borrower. Under the HOLA, savings institutions are generally
----------------------
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions 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 such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At March 31, 1997,
the Bank's limit on loans to one borrower was $18.3 million. At March 31, 1997,
the Bank's largest aggregate outstanding balance of loans to one borrower was
$2.1 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
--------
the QTL test, a savings and loan association is required to 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
35
<PAGE>
of each 12 month period. Recent legislation has expanded the extent to which
education loans, credit card loans and small business loans may be considered
"qualified thrift investments."
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
March 31, 1997, the Bank maintained 91.9% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
------------------------------------
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier I Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. 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. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided that the payment does not cause the
institution to be undercapitalized within the meaning of the prompt corrective
action regulation. However, institutions in a holding company structure would
still have a prior notice requirement. At March 31, 1997, the Bank was a Tier I
Bank.
Liquidity. The Bank is required to maintain an average daily balance of
----------
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 5% but may be changed from time to time
by the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions. OTS regulations also
require each member savings institution to maintain an average daily balance of
short-term liquid assets at a specified percentage (currently 1%) of the total
of its net withdrawable deposit accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity and short-term liquidity ratios for March 31,
1997 were 13.4% and 12.4% respectively, which exceeded the applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements.
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, as reported in the Bank's latest quarterly
thrift financial report. The assessments paid by the Bank for the fiscal year
ended March 31, 1997 totaled $156,000.
Branching. OTS regulations permit nationwide branching by federally
----------
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate
36
<PAGE>
networks and to geographically diversify their loan portfolios and lines of
business. The OTS authority preempts any state law purporting to regulate
branching by federal savings institutions.
Transactions with Related Parties. The Bank's authority to engage in
----------------------------------
transactions with related parties or "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 Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of
covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the savings institution's capital and
surplus. Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Recent legislation created 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. Regulation O also places individual and aggregate
limits on the 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.
Enforcement. Under the FDI Act, 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. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS 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.
Standards for Safety and Soundness. The federal banking agencies have
-----------------------------------
adopted Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule to implement safety and soundness standards
required under the FDI Act. 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. The
standards set forth in the Guidelines address internal controls and information
systems; internal audit system; credit underwriting; loan documentation;
interest rate risk exposure; asset growth; asset quality, earnings and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by
37
<PAGE>
the Guidelines, the agency may require the institution to submit to the agency
an acceptable plan to achieve compliance with the standard, as required by the
FDI Act. The final rule establishes deadlines for the submission and review of
such safety and soundness compliance plans when such plans are required.
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). During fiscal 1997, the Federal
Reserve Board regulations generally required that reserves be maintained against
aggregate transaction accounts as follows: for accounts aggregating $49.3
million or less (subject to adjustment by the Federal Reserve Board) the reserve
requirement is 3%; and for accounts aggregating greater than $49.3 million, the
reserve requirement is $1.48 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 $49.3 million. The first $4.4 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a
--------
consolidated basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank was last audited by the Internal
Revenue Service ("IRS") in 1983 and has never been audited by the Massachusetts
Department of Revenue ("DOR"). For its 1997 fiscal year, the Bank is subject to
a maximum federal income tax rate of 34%.
Bad Debt Reserve. For fiscal years beginning prior to December 31, 1995,
-----------------
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
-----
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
38
<PAGE>
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS. Any
Section 481(a) adjustment required to be taken into income with respect to such
change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's current taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank is
not permitted to make additions to its tax bad debt reserves. In addition, the
Bank is required to recapture over a six-year period the excess of the balance
of its tax bad debt reserves as of December 31, 1995 over the balance of such
reserves as of December 31, 1987. The Bank has previously accrued taxes for the
"excess" balance of its tax bad debt reserve. Thus, no additional tax liability
has been recorded as a result of the 1996 Act.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
--------------
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levies a 65.7-cent fee on
---------------------------------
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment must be reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this legislation
is deductible under Section 162 of the Code in the year of payment.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
----------------------------------
minimum taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset
by net operating loss carryovers of which the Bank currently has none. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). In addition, for taxable years
beginning after December 31, 1986 and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid.
39
<PAGE>
STATE AND LOCAL TAXATION
Commonwealth of Massachusetts Taxation. On July 27, 1995, the Governor of
---------------------------------------
Massachusetts approved legislation to reduce the tax rate applicable to
financial institutions, including savings banks, from 12.54% on their net
income to 10.50% on their net income apportioned to Massachusetts. The reduced
rate is to be phased-in over a five year period whereby the rate was 12.13% for
1995 and 11.72% for 1996, and will be 11.32% for 1997, 10.91% for 1998 and
10.50% for 1999. Net income for years beginning before January 1, 1999 includes
gross income as defined under the provisions of the Code, plus interest from
bonds, notes and evidences of indebtedness of any state, including
Massachusetts, less the deductions, excluding the deductions for dividends
received, state taxes, and net operating losses, as defined under the provisions
of the Code. For taxable years beginning on or after January 1, 1999, the
definition of state taxable income is modified to allow a deduction for 95% of
dividends received from stock where the Company 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. Subsidiary
corporations of the Company conducting business in Massachusetts must file
separate Massachusetts state tax returns and are taxed as financial
institutions, with certain modifications and grandfathering for taxable years
before 1996. The net worth or tangible property of such grandfathered
subsidiaries is taxed at a rate of 0.26%. Such grandfathered subsidiaries may
file consolidated tax returns on the net earnings portion of the corporate tax.
Corporations which qualify as "securities corporations," as defined by the
Massachusetts tax code, are taxed at a special rate of 0.33% of their gross
income if they qualify as a "bank-holding company" under the Massachusetts tax
code. The Company is expected to qualify for this reduced tax rate provided that
it is exclusively engaged in activities of a "securities corporation." The
Company believes that it will qualify as a securities corporation because a
separate subsidiary was formed to make the loan to the Bank's Employee Stock
Ownership Plan and related trust and all of the Company's other activities
qualify as activities permissible for a securities corporation. If the Company
fails to so qualify, however, it will be taxed as a financial institution at a
rate of 10.50% beginning in fiscal 1998 rather than at the phased-in rates.
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.
40
<PAGE>
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------
The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.
<TABLE>
<CAPTION>
AGE AT
NAME MARCH 31, 1997 POSITION
---------------------- --------------- ----------------------------
<S> <C> <C>
Kevin J. McGillicuddy 57 Senior Vice President of the
Company and the Bank
Frederick R. Sullivan 55 Senior Vice President of the
Company and the Bank
Terrence M. Tyrrell 47 Senior Vice President of the
Company and the Bank
Nelson J. Braga 38 Vice President of the Bank
Joseph J. Bustin 56 Vice President of the Bank
Philip G. Campbell 48 Vice President of the Bank
Christine F. Chicca 50 Vice President of the Bank
Sheila M. Rioux 56 Vice President of the Bank
Robert A. Skurka 45 Vice President of the Bank
Gary J. Vierra 36 Vice President of the Bank
Anthony L. Weatherford 46 Vice President of the Bank
Cecilia R. Viveiros 34 Corporate Secretary of the
Company and the Bank
</TABLE>
41
<PAGE>
ITEM 2. PROPERTIES.
- -------------------
The Company currently conducts its business through an administrative and
full service branch office and an operations office located in Fall River and 12
other full service branch offices and five loan origination centers, most of
which are located in Southeastern Massachusetts and Rhode Island. In September
1996, the Company began development of the Swansea Property for the purpose of
constructing a new centralized administrative and operations center and branch
office. The development and construction costs for the Swansea Property are
estimated to be approximately $10.5 million, of which $3.1 million has been
incurred as of March 31, 1997. Once this project is completed, in late 1997, the
Company believes that the Company's facilities will be adequate to meet the then
present and immediately foreseeable needs of the Company.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR LEASEHOLD
LEASED LEASED DATE OF IMPROVEMENTS
OR OR LEASE AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 1997
- -------------------------------- ----- --------- --------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/CORPORATE/
BRANCH OFFICE:
1 North Main Street Owned 1956 - $ 535
Fall River, MA 02720
OPERATIONS CENTER:
186 South Main Street Leased 1987 November 1997(1) 7
Fall River, MA 02721
Route 118 (Swansea Mall Drive)(2) Owned 1994 - 3,535
Swansea, MA 02777
BRANCH OFFICES:
27 Park Street Owned 1990 - 1,751
Attleboro, MA 02703
33 Sullivan Drive Owned 1979 - 407
Fall River, MA 02721
1450 Plymouth Avenue Owned 1972 - 365
Fall River, MA 02721
278 Union Street Owned 1972 - 467
New Bedford, MA 02740
254 Rockdale Avenue Owned 1983 - 13
New Bedford, MA 02740
265 Newport Avenue Owned 1996 - 721
Pawtucket, RI 02860
741 Willett Avenue Owned 1995 - 707
East Providence, RI 02915
1519 Newman Avenue Owned 1994 - 506
Seekonk, MA 02771
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR LEASEHOLD
LEASED LEASED DATE OF IMPROVEMENTS
OR OR LEASE AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 1997
- -------------------------------- ----- --------- --------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
149 Grand Army Highway Owned 1963 - 123
Somerset, MA 02725
2 Washington Street Owned 1976 - 862
Taunton, MA 02780
2100 Warwick Avenue Owned 1996 - 660
Warwick, RI 02889
975 Ashley Boulevard (3) Leased 1996 - 1,092
New Bedford, MA 02745
LOAN ORIGINATION CENTERS:
12 White's Path, Unit 7 Leased 1992 October 1998 (4) -
Yarmouth, MA 02664
62 Auburn Street Leased 1990 June 1997 -
Auburn, MA 01501
1325 Springfield Street Leased 1992 June 1997 (4) -
Agawam, MA 01089
10 Wall Street Leased 1994 December 1997 (4) -
Burlington, MA 01803
333 Main Street Leased 1990 September 1998 (4) -
East Greenwich, RI 02818 -------
Total......................................................................... $11,751
=======
</TABLE>
_____________________________________
(1) The original lease expires in August, 1997. The Company and landlord have
agreed to a three month extension whereby the Company will vacate the
premises by November, 1997.
(2) The Company's current expansion plans include the development of a new
centralized administrative and operations center and branch office on this
property which is expected to become operational in late 1997. Total
development and construction costs for the property are estimated to be
approximately $10.5 million. Net book value includes the $434,000 cost of
the land and $3.1 million in construction and development costs as of March
31, 1997.
(3) In 1996, the Company entered into a lease agreement for the land. The
lease has a commencement date of November 1, 1996 and a term of 20 years
with four five-year renewal options. Subsequent to entering into the lease
agreement, the Company constructed a branch office location which structure
the Company owns. This branch office opened for business on February 25,
1997.
(4) The Company has options to renew this lease which range from 1 to 10 years.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
43
<PAGE>
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 1997 Annual Report to Stockholders is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The above-captioned information appears under Selected Consolidated
Financial and Other Data of the Company in the Registrant's 1997 Annual Report
to Stockholders on pages 10 and 11 is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
The above-captioned information appears under "Managements Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1997 Annual Report to Stockholders on pages 13 through 28 and is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The Consolidated Financial Statements of FIRSTFED AMERICA BANCORP, INC. and
its subsidiaries, together with the report thereon by KPMG Peat Marwick LLP
appears in the Registrant's 1997 Annual Report to Stockholders on pages F-1
through F-27 and are incorporated herein by reference.
Quarterly data is not presented for the fiscal year ended March 31, 1997 as
the Company did not have a full quarter of operations.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
44
<PAGE>
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 "Additional Item- Executive
Officers of the Registrant" contained herein and the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 5, 1997,
at pages 5 and 6.
ITEM 11. EXECUTIVE COMPENSATION.
- --------------------------------
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on August 5, 1997, at pages 8 through 16 (excluding the
Compensation Committee Report on Executive Compensation and Stock Performance
Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on August 5, 1997,
at pages 4 through 6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on August 5, 1997, at page 16.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- --------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated
by reference to the following indicated pages of the 1997 Annual
Report to Stockholders:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report....................................... F-1
Consolidated Balance Sheets as of
March 31, 1997 and 1996.......................................... F-2
Consolidated Statements of Operations for the Fiscal Years Ended
March 31, 1997, 1996 and 1995.................................... F-3
Consolidated Statements of Changes in Stockholders' Equity for
the Fiscal Years Ended March 31, 1997, 1996 and 1995............. F-4
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1997, 1996 and 1995.............................. F-5
Notes to Consolidated Financial Statements......................... F-6 - F-27
</TABLE>
46
<PAGE>
The remaining information appearing in the 1997 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) 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.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of FIRSTFED AMERICA
BANCORP, INC.*
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.*
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC.*
10.1 Forms of Employment Agreement between Company and
Robert F. Stoico and Employment Agreement between the
Bank and Robert F. Stoico*
10.2 Forms of Employment Agreement between Company and Kevin
J. McGillicuddy and Employment Agreement between the
Bank and Kevin J. McGillicuddy*
10.3 Forms of Employment Agreement between Company and
Frederick R. Sullivan and Employment Agreement between
the Bank and Frederick R. Sullivan*
10.4 Forms of Employment Agreement between Company and
Terrence M. Tyrrell and Employment Agreement between the
Bank and Terrence M. Tyrrell*
10.5 Form of Change in Control Agreement between the Bank and
Certain Executive Officers*
10.6 First Federal Savings Bank of America Employee Severance
Compensation Plan*
10.7 First Federal Savings Bank of America Employee Stock
Ownership Plan and Trust*
10.8 FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based
Incentive Plan**
10.9 First Federal Savings Bank of America 1996 Supplemental
Executive Retirement Plan*
11.0 Computation of earnings per share (not applicable)***
13.0 Portions of the 1997 Annual Report to Stockholders
(filed herewith)
21.0 Subsidiary information is incorporated herein by
reference to "Part I - Subsidiary Activities" and
"Item 1. Business - General"
27.0 Financial Data Schedule (filed herewith)
99.0 Proxy Statement for 1997 Annual Meeting (filed herewith)
_____________________________
* Incorporated herein 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.
** Incorporated herein by reference into this document from the
Proxy Statement for the 1997 Annual Meeting of Stockholders
dated June 20, 1997.
*** Not applicable as the Company did not have a full quarter of
earnings in fiscal 1997.
47
<PAGE>
(b) Reports on Form 8-K.
None.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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 30, 1997
-------------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Robert F. Stoico President and Chief Executive Officer June 30, 1997
- ------------------------------ and Chairman of the Board -------------
Robert F. Stoico (Principal Executive Officer)
/s/ Terrence M. Tyrrell Senior Vice President June 30, 1997
- ------------------------------ -------------
Terrence M. Tyrrell (Principal Accounting and Financial Officer)
/s/ Gilbert C. Oliveira Director June 30, 1997
- ------------------------------ -------------
Gilbert C. Oliveira
/s/ Thomas A. Rodgers, Jr. Director June 30, 1997
- ------------------------------ -------------
Thomas A. Rodgers, Jr.
/s/ Richard W. Cederberg Director June 30, 1997
- ------------------------------ -------------
Richard W. Cederberg
/s/ John S. Holden, Jr. Director June 30, 1997
- ------------------------------ -------------
John S. Holden, Jr.
/s/ Dr. Paul A. Raymond Director June 30, 1997
- ------------------------------ -------------
Dr. Paul A. Raymond
/s/ Anthony L. Sylvia Director June 30, 1997
- ------------------------------ -------------
Anthony L. Sylvia
</TABLE>
49
<PAGE>
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
FIRSTFED AMERICA BANCORP, INC. (the "Company") was incorporated on September
6, 1996 and is the holding company for First Federal Savings Bank of America
(the "Bank"). On January 15, 1997, the Bank completed its conversion (the
"conversion") from a mutual savings bank to a stock form of ownership, while
the Company concurrently issued 8,707,152 shares of common stock, including
645,380 shares contributed to The FIRSTFED Charitable Foundation (the "Founda-
tion"), raising $77.6 million of net proceeds. The Company utilized $43.4 mil-
lion of such net proceeds to acquire all of the outstanding stock of the Bank.
The Company's current business operations primarily consist of the invest-
ment of the portion of net conversion proceeds it retained and the holding of
the stock of the Bank. Accordingly, the Company's business operations are pri-
marily conducted through the Bank. As a result, references to the Company in
the following discussion generally refer to the consolidated operations of the
Company and Bank. The Company operates its main banking and administrative of-
fice, and its operations center, in Fall River, Massachusetts and its twelve
other branch offices located in the municipalities of Fall River, Attleboro,
Taunton, New Bedford, Somerset, and Seekonk, Massachusetts as well as East
Providence, Pawtucket, and Warwick, Rhode Island. The Company also operates
five loan origination centers, four in Massachusetts and one in Rhode Island.
The Company's primary business is attracting retail deposits from the general
public and investing those deposits and other borrowed funds in loans, mort-
gage-backed securities, U.S. Government securities and other securities. The
Company originates loans for investment and loans for sale in the secondary
market, generally retaining the servicing rights for loans sold. Loan sales
are made from loans held in the Company's portfolio designated as being held
for sale or originated for sale during the period. The Company's revenues are
derived principally from interest on its loans, and to a lesser extent, divi-
dends and interest on its investments and mortgage-backed securities, fees and
loan servicing income. The Company's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities, Fed-
eral Home Loan Bank of Boston ("FHLB") advances and proceeds from the sale of
loans.
The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and in-
vestment 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, investment and loan sale activities and
loan servicing income. The Company's noninterest expense consists of compensa-
tion and employee benefits, office occupancy and equipment expense, federal
deposit insurance premiums, advertising and business promotion, data process-
ing expense, and other expenses. Results of operations of the Company are also
significantly affected by general economic and competitive conditions, partic-
ularly changes in interest rates, government policies and the actions of regu-
latory authorities. The Company had no material assets, liabilities or opera-
tions prior to January 15, 1997, and accordingly, the results of operations
and other data discussed below occurring prior to that date reflect only those
of the Bank and its subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, proceeds from the sale of
loans, and FHLB advances. While maturities and scheduled amortization of loans
are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and competi-
tion. The Bank is required to maintain minimum levels of liquid assets as de-
fined by Office of Thrift Supervision ("OTS") regulations. This requirement,
which may be varied at the direction of the OTS depending upon economic condi-
tions and deposit flows, is based upon a percentage of the Bank's deposits and
short-term borrowings ("liquidity ratio"). The Bank's current regulatory re-
quired liquidity ratio is 5%. At March 31, 1997 and 1996, the Bank's liquidity
ratio was 13.40% and 6.31%, respectively. Management's current strategy is to
maintain liquidity relatively close to the minimum requirement so that it may
invest any excess liquidity in higher yielding interest-earning assets or use
such funds to repay higher cost FHLB advances.
13
<PAGE>
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale and investment and mortgage-backed securities available
for sale. The levels of these assets are dependent on the Company's operating,
financing, lending and investing activities during any given period. At March
31, 1997, cash, short-term investments, mortgage loans held for sale and in-
vestment and mortgage-backed securities available for sale totaled $109.5 mil-
lion, or 11.2% of total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances. At March 31, 1997, the Company had $111.1
million in advances outstanding from the FHLB, and at March 31, 1997, the Com-
pany had an additional overall borrowings capacity from the FHLB of $430.4
million. During fiscal year 1997, the Company used growth in deposits as well
as increases in FHLB advances to continue to fund loan originations. Since the
conversion, the Company has repaid a portion of its maturing FHLB advances
with net conversion proceeds. Depending on market conditions, the pricing of
deposit products and FHLB advances, the Company may continue to rely on FHLB
advances to fund asset growth.
At March 31, 1997, the Company had commitments to originate loans and unused
outstanding lines of credit and undistributed balances of construction loans
totaling $93.2 million. The Company anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificate
accounts which are scheduled to mature in less than one year from March 31,
1997, totaled $370.6 million. The Company expects that substantially all of
the maturing certificate accounts will be retained by the Company at maturity.
The Company is presently engaged in an evaluation of its present data
processing provider, the conclusion of which may entail capital outlays the
amounts of which are not presently estimable. Additionally, in connection with
the Company's strategy to expand its operations and facilities, the Company
opened a new branch office in New Bedford, Massachusetts in March 1997 and is
planning to a open a branch office and centralized operations facility in
Swansea, Massachusetts in late 1997 and enlarge its downtown Fall River branch
office in mid 1997. The Company has budgeted approximately $15.5 million of
capital expenditures related to this planned expansion activity, of which $6.4
million has been incurred to date. The Company is also seeking sites for other
branch offices in its market area and for a new loan origination center in
Connecticut. The Company's Board of Directors has also authorized management
to establish a trust services function to provide future trust services to
customers. The establishment of additional branch offices, loan origination
centers, and trust services by the Company would result in additional capital
expenditures and other costs associated with the establishment of such branch
offices, loan originations centers, and services which the Company has not yet
currently estimated.
Additionally, the Company's Board of Directors has recently adopted the 1997
Stock-based Incentive Plan which is to become effective upon the earlier of
stockholder approval or January 16, 1998. Such plan is scheduled to be pre-
sented to stockholders for approval at the 1997 annual meeting of the stock-
holders, presently scheduled for August 5, 1997. Such plan provides for the
granting of stock awards to directors, officers, and employees of the Company
and its affiliates equal to 4% of the common stock outstanding. It is antici-
pated that a trust will be established to purchase stock in the open market to
fund stock awards under the plan and that such purchases by the trust will be
funded by contributions from the Company and/or Bank. Assuming the closing
price of the Company's common stock at May 30, 1997, the aggregate amount to
be contributed to the plan trust would total $5.2 million.
At March 31, 1997, the consolidated capital to total assets ratio of the
Company and Bank was 12.47%. As of March 31, 1997, the Bank exceeded all of
its regulatory capital requirements with tangible, core and risk-based capital
ratios of 10.34%, 10.34%, and 20.24%, respectively, as compared to the minimum
regulatory requirements of 1.5%, 3.0%, and 8.0%, respectively.
On August 20, 1996, the provisions repealing the current thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection
Act of 1996". The new rules eliminate the 8% of taxable income method for de-
ducting additions to the tax bad debt reserves for all thrifts beginning after
December 31, 1995. These rules also require that all thrift institutions re-
capture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The
14
<PAGE>
Company has previously recorded a deferred tax liability equal to the bad debt
recapture, and as such, the new rules will have no effect on net income or
federal tax expense. The unrecaptured base year reserves will not be subject
to recapture as long as the institution continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves continues
to be subject to the provisions of present law that require recapture in the
case of certain excess distributions to shareholders. The tax effect of pre-
1988 bad debt reserves subject to recapture in the case of certain excess dis-
tributions is approximately $3.3 million.
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 hold-
ers reduce their qualifying deposits. In the unlikely event of a complete liq-
uidation of the Bank, each such account holder will be entitled to receive a
distribution from the liquidation account. The Bank is not permitted to de-
clare or pay dividends on its capital stock, or repurchase any of its out-
standing 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, 1997 was approximately $31.1 million.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes
in the relative purchasing power of money over time due to inflation. The im-
pact of inflation is reflected in the increased cost of the Company's opera-
tions. Unlike industrial companies, nearly all of the assets and liabilities
of the Company are monetary in nature. As a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same direc-
tion or to the same extent as the price of goods and services.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Company's interest rate risk management func-
tion 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 per-
formance 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 mon-
itors 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.
In recent years, the Company has primarily utilized the following strategies
to manage interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate and shorter-term (generally twelve years or less) fixed-rate,
one- to four-family mortgage loans; (2) selling in the secondary market long-
er-term, fixed-rate mortgage loans originated while generally retaining the
servicing rights on such loans; (3) investing primarily in short-term U.S.
Government securities or short-term fixed or adjustable rate mortgage-backed
securities; and (4) attempting to reduce the overall interest rate sensitivity
of liabilities by emphasizing longer-term deposits and utilizing FHLB advances
to replace rate sensitive deposits and fund asset growth.
The matching of assets and liabilities may be analyzed by examining the ex-
tent to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap
is defined as the difference between the amount of interest-earning assets ma-
turing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that same time period. At
March 31, 1997, the Company's cumulative one year interest
15
<PAGE>
rate gap (which is the difference between the amount of interest-earning as-
sets and interest-bearing liabilities maturing or repricing within one year)
as a percentage of total assets, was a negative 7.08%. Accordingly, during a
period of rising interest rates, the Company would be in a worse position to
invest in higher yielding assets as compared to an institution with a positive
gap position which, consequently, may result in the cost of its interest-bear-
ing liabilities increasing at a rate faster than its yield on interest-earning
assets than if it had a positive gap. During a period of falling interest
rates, the Company's interest-bearing liabilities would tend to reprice down-
ward at a faster rate than its interest-earning assets as compared to an in-
stitution with a positive gap which, consequently, may tend to positively af-
fect the growth of the Company's net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1997, which are antici-
pated by the Company, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP table"). Except as stated be-
low, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table
sets forth an approximation of the projected repricing of assets and liabili-
ties at March 31, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within a three month period and
subsequent selected time intervals. The loan amounts in the table reflect
principal balances expected to be redeployed and/or repriced as a result of
contractual amortization and anticipated prepayments of adjustable-rate loans
and fixed-rate loans, and as a result of contractual rate adjustments on ad-
justable-rate loans. Annual prepayment rates for one- to four-family and mul-
ti-family mortgage loans, and mortgage-backed securities are assumed to range
from 10.55% to 25.53% for adjustable-rates and 3.95% to 36.88% for fixed-
rates, respectively. Money market deposit accounts, savings accounts and NOW
accounts are assumed to have annual decay rates of 67.7%, 2.4% and 3.4%, re-
spectively. These assumptions may or may not be indicative of actual prepay-
ments and withdrawals experienced by the Company. The table does not necessar-
ily indicate the impact of general interest rate movements on the Company's
net interest income because the actual repricing dates of various assets and
liabilities are subject to customer discretion and competitive and other pres-
sures and, therefore, actual experience may vary from that indicated.
16
<PAGE>
The following table shows the gap position of the Company at March 31, 1997:
<TABLE>
<CAPTION>
3 MORE THAN MORE THAN MORE THAN MORE THAN MORE
MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO THAN TOTAL
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 5 YEARS AMOUNT
-------- ----------- ----------- --------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term invest-
ments................. $ 39,410 $ -- $ -- $ -- $ -- $ -- $ 39,410
Investment securities.. 3,886 2,995 4,494 10,504 -- -- 21,879
Loans receivable(1).... 125,427 63,506 114,197 199,567 171,939 152,283 826,919
Mortgage-backed securi-
ties.................. 714 855 2,142 20,603 7,195 15,658 47,167
Stock in FHLB-Boston... 9,531 -- -- -- -- -- 9,531
-------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets................ 178,968 67,356 120,833 230,674 179,134 167,941 $944,906
-------- -------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABIL-
ITIES:
Money market accounts.. 4,656 3,919 6,075 11,043 2,781 937 29,411
Savings accounts....... 512 509 2,160 3,913 3,730 75,770 86,594
NOW accounts........... 355 352 695 2,665 2,489 35,325 41,881
Certificate accounts... 103,800 114,882 112,897 100,982 8,381 -- 440,942
IRA and KEOGH ac-
counts................ 9,336 8,794 21,621 36,391 7,730 -- 83,872
FHLB advances.......... 10,000 21,000 15,000 64,014 1,000 48 111,062
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities........... 128,659 149,456 158,448 219,008 26,111 112,080 $793,762
-------- -------- -------- -------- -------- -------- --------
Interest-earning assets
less interest-bearing
liabilities............ $ 50,309 $(82,100) $(37,615) $ 11,666 $153,023 $ 55,861 $151,144
======== ======== ======== ======== ======== ======== ========
Cumulative interest-rate
sensitivity gap........ $ 50,309 $(31,791) $(69,406) $(57,740) $ 95,283 $151,144
======== ======== ======== ======== ======== ========
Cumulative interest-rate
gap as a percentage of
total assets at March
31, 1997............... 5.13% (3.24)% (7.08)% (5.89)% 9.73% 15.43%
Cumulative interest rate
gap as a percentage of
total interest-earning
assets at March 31,
1997................... 5.32% (3.36)% (7.35)% (6.11)% 10.08% 16.00%
Cumulative interest-
earning assets as a
percentage of
cumulative interest-
bearing liabilities at
March 31, 1997......... 139.10% 88.57% 84.10% 91.19% 113.98% 119.04%
</TABLE>
- --------
(1) Includes total loans receivable and mortgage loans held for sale, net of
non-performing loans and undisbursed proceeds of construction mortgages in
process.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different de-
grees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans,
have features which restrict changes in interest rates both on a short-term
basis and over the life of the asset. Further, in the event of change in in-
terest rates, prepayment and early withdrawal levels would likely deviate sig-
nificantly from those assumed in calculating the table. Finally, the ability
of many borrowers to make payments on their adjustable-rate loans may decrease
in the event of an interest rate increase.
The Company's interest rate sensitivity is monitored by management through
the use of a model which internally generates estimates of the change in the
Company's 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 market value of assets
in the same scenario. The OTS also produces a similar analysis using its own
model, based upon data submitted on the Bank's quarterly Thrift Financial Re-
port, the results of which may vary from the Company's internal model primar-
ily due to differences in assumptions utilized between the Company's internal
model and the OTS model, including estimated loan prepayment rates, reinvest-
ment rates and deposit decay rates. The following table sets forth the
Company's NPV as of March 31, 1997, as calculated by the Company.
17
<PAGE>
<TABLE>
<CAPTION>
NPV AS %
OF PORTFOLIO
CHANGE IN NET PORTFOLIO VALUE VALUE OF ASSETS
INTEREST RATES ------------------------- -----------------
IN BASIS POINTS % NPV
(RATE SHOCK) $ AMOUNT $ CHANGE CHANGE RATIO CHANGE (1)
--------------- -------- -------- ------ ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400.................................. 104,164 (51,753) (33) 11.02% (435)
300.................................. 116,536 (39,381) (25) 12.12 (325)
200.................................. 130,199 (25,718) (16) 13.29 (208)
100.................................. 143,630 (12,287) (8) 14.40 (97)
Static............................... 155,917 -- -- 15.37 --
(100)................................ 164,681 8,764 6 16.02 65
(200)................................ 167,912 11,995 8 16.19 82
(300)................................ 167,168 11,251 7 16.05 68
(400)................................ 168,421 12,504 8 16.06 69
</TABLE>
- --------
(1) Expressed in basis points.
As in the case with the Gap Table, certain short-comings are inherent in the
methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in mar-
ket interest rates. In this regard, the NPV model presented assumes that the
composition of the Company's interest sensitive assets and liabilities exist-
ing at the beginning of a period remains constant over the period being mea-
sured and also assumes that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements and net interest income models provide an indication of the
Company's interest rate risk exposure at a particular point in time, such mea-
surements are not intended to and do not provide a precise forecast of the ef-
fect of changes in market interest rates on the Company's net interest income
and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest in-
come also depends upon the relative amounts of interest-earning assets and in-
terest-bearing liabilities and the interest rate earned or paid on them.
The following table sets forth certain information relating to the Company
at fiscal year end 1997 and for fiscal years 1997, 1996, and 1995. The average
yields and costs are derived by dividing income or expense by the average bal-
ance of interest earning assets or interest bearing liabilities, respectively,
for the periods shown. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and the costs include fees, premiums and
discounts which are considered adjustments to yields.
18
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
AT --------------------------------------------------------------------------------
MARCH 31, 1997 1997 1996 1995
---------------- -------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- ------ -------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Loans receivable, net
and mortgage loans
held for sale(1)..... $819,686 7.69% $759,185 $57,941 7.63% $548,558 $43,757 7.98% $471,050 $35,871 7.62%
Investment
securities(2)........ 70,820 6.16 53,199 3,360 6.32 30,808 1,966 6.38 21,922 1,355 6.18
Mortgage-backed
securities(3)........ 47,167 6.83 16,085 958 5.96 4,411 321 7.28 3,033 261 8.61
-------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
earning assets...... 937,673 7.53 828,469 62,259 7.51 583,777 46,044 7.89 496,005 37,487 7.56
---- ------- ---- ------- ---- ------- ----
Noninterest-earning
assets................ 42,063 35,895 25,570 23,146
-------- -------- -------- --------
Total assets......... $979,736 $864,364 $609,347 $519,151
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Money market
accounts............. $ 29,411 2.83 $ 28,967 828 2.86 $ 27,194 783 2.88 $ 33,011 885 2.68
Savings accounts...... 86,594 2.50 82,536 2,061 2.50 76,511 1,915 2.50 81,525 2,037 2.50
NOW accounts.......... 41,881 1.98 38,801 763 1.97 30,088 599 1.99 24,153 479 1.98
Certificate accounts.. 524,814 5.83 453,454 26,625 5.87 332,977 19,834 5.96 230,383 10,489 4.55
-------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total................ 682,700 5.04 603,758 30,277 5.01 466,770 23,131 4.96 369,072 13,890 3.76
FHLB advances......... 111,062 6.13 131,523 8,220 6.25 50,321 3,251 6.46 71,005 4,447 6.26
-------- ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-
bearing
liabilities......... 793,762 5.19 735,281 38,497 5.24 517,091 26,382 5.10 440,077 18,337 4.17
---- ------- ---- ------- ---- ------- ----
Non-interest-bearing
liabilities(4)........ 63,820 63,516 48,015 40,415
-------- -------- -------- --------
Total liabilities.... 857,582 798,797 565,106 480,492
-------- -------- -------- --------
Stockholders' Equity... 122,154 65,567 44,241 38,659
-------- -------- -------- --------
Total liabilities and
stockholders'
equity............... $979,736 $864,364 $609,347 $519,151
======== ======== ======== ========
Net interest rate
spread(5)............. 2.34% $23,762 2.27% $19,662 2.79% $19,150 3.39%
==== ======= ==== ======= ==== ======= ====
Net interest
margin(6)............. 2.87% 3.37% 3.86%
==== ==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 118.13% 112.67% 112.90% 112.71%
======== ======== ======== ========
</TABLE>
- --------
(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 and investment securities available for
sale and held to maturity and FHLB stock.
(3) Consists of mortgage-backed securities available for sale and held to ma-
turity.
(4) Consists primarily of business checking accounts.
(5) 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.
(6) Net interest margin represents net interest income as a percentage of av-
erage interest-earning assets.
19
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing lia-
bilities 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 multi-
plied by prior rate); (ii) changes attributable to changes in rate (changes in
rate multiplied by prior volume); and (iii) the net change. The changes at-
tributable to the combined impact of volume and rate have been allocated on a
proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1995
---------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- --------------------
VOLUME RATE NET VOLUME RATE NET
------------------- ------- ---------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities... $ 1,414 $ (20) $ 1,394 $ 566 $ 45 $ 611
Loans receivable, net
and mortgage loans held
for sale............... 16,148 (1,964) 14,184 6,127 1,759 7,886
Mortgage-backed
securities............. 705 (68) 637 105 (45) 60
--------- --------- ------- --------- --------- -------
Total interest-earning
assets................. 18,267 (2,052) 16,215 6,798 1,759 8,557
--------- --------- ------- --------- --------- -------
INTEREST-BEARING
LIABILITIES:
Money market accounts... 51 (6) 45 (164) 62 (102)
Savings accounts........ 146 -- 146 (122) -- (122)
NOW accounts............ 171 (7) 164 118 2 120
Certificate accounts.... 7,078 (287) 6,791 5,511 3,834 9,345
--------- --------- ------- --------- --------- -------
Total.................. 7,446 (300) 7,146 5,343 3,898 9,241
FHLB advances........... 5,078 (109) 4,969 (1,334) 138 (1,196)
--------- --------- ------- --------- --------- -------
Total interest-bearing
liabilities............ 12,524 (409) 12,115 4,009 4,036 8,045
--------- --------- ------- --------- --------- -------
Net change in net
interest income........ $ 5,743 $ (1,643) $ 4,100 $ 2,789 $ (2,277) $ 512
========= ========= ======= ========= ========= =======
</TABLE>
ASSET QUALITY
The following table sets forth information regarding non-accrual loans and
real estate owned ("REO"). At March 31, 1997, REO totaled $665,000. 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 1997 and
1996, the difference between the amount of interest income which would have
been recognized on non-accrual loans if such loans were performing in accor-
dance with their regular terms and amounts recognized was $130,000 and
$124,000, respectively.
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS:
Mortgage loans:
One- to four-family................. $1,908 $2,469 $2,501 $3,649 $4,345
Multi-family........................ 268 334 51 -- --
Commercial real estate(1)........... 976 -- 85 -- 277
Construction and land............... 232 -- -- 26 --
------ ------ ------ ------ ------
Total mortgage loans.......... 3,384 2,803 2,637 3,675 4,622
------ ------ ------ ------ ------
Commercial loans..................... -- 87 -- 15 1
------ ------ ------ ------ ------
Consumer loans:
Home equity lines.................... 114 956 386 483 262
Second mortgages..................... 95 196 -- 34 120
Other consumer loans................. 69 3 10 14 --
------ ------ ------ ------ ------
Total consumer loans.......... 278 1,155 396 531 382
------ ------ ------ ------ ------
Total nonaccrual loans........ 3,662 4,045 3,033 4,221 5,005
Real estate owned, net(2)............. 665 643 296 939 464
------ ------ ------ ------ ------
Total non-performing assets.......... $4,327 $4,688 $3,329 $5,160 $5,469
====== ====== ====== ====== ======
Allowance for loan losses as a percent
of loans(3).......................... 1.09% 0.87% 0.84% 0.95% 1.03%
Allowance for loan losses as a percent
of non-performing loans(4)........... 239.98% 138.62% 139.76% 93.91% 70.41%
Non-performing loans as a percent of
loans(3)(4).......................... 0.45% 0.63% 0.60% 1.02% 1.46%
Non-performing assets as a percent of
total assets(5)...................... 0.44% 0.65% 0.59% 1.10% 1.37%
</TABLE>
- --------
(1) Consists of a restructured/impaired commercial real estate loan at March
31, 1997.
(2) REO balances are shown net of related valuation allowances.
(3) Loans includes loans receivable, net, excluding allowance for loan losses.
(4) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Company as presenting uncer-
tainty with respect to the collectability of interest or principal.
(5) Non-performing assets consist of non-performing loans and REO.
The Bank adopted a new accounting method for measuring loan impairment on
April 1, 1995 pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 114, Accounting by Creditors for Impairment of a Loan. Adoption of this
accounting standard did not have a material effect on the comparability of the
above table.
At March 31, 1997 and March 31, 1996, total impaired loans were $1.5 million
and $991,000, re-
20
<PAGE>
spectively. At March 31, 1997, impaired loans of $1.3 million required an im-
pairment allowance of $762,000. At March 31, 1997 impaired loans of $164,000
did not require an impairment allowance. For a description of which loans
qualify as impaired loans under SFAS No. 114, see Note 1 to Consolidated Fi-
nancial Statements included elsewhere herein. All impaired loan have been mea-
sured using the fair value of the collateral method. During fiscal year 1997,
the average recorded value of impaired loans was $1.0 million. For these
loans, $112,000 of interest income was recognized while $232,000 of interest
income would have been recognized under the original terms.
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risks inherent in its loan
portfolio and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses in loans
receivable which are deemed probable and estimable based on information cur-
rently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
trends. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to make additional provisions
for estimated loan losses based upon judgments different from those of manage-
ment. As of March 31, 1997, the Company's allowance for loan losses was 1.09%
of total loans receivable and 239.98% of total non-performing loans as com-
pared to 0.87% and 138.62%, respectively as of March 31, 1996. The Company had
non-accrual loans of $3.7 million and $4.0 million at March 31, 1997 and March
31, 1996, respectively. The allowance for loan losses totaled $8.8 million at
March 31, 1997 as compared to $5.6 million at March 31, 1996. The increase in
the allowance of $3.2 million reflects management's assessment of the loan
portfolio and growth in the balance of such portfolio. The Company will con-
tinue to monitor and modify its allowance for loan losses as conditions dic-
tate. While management believes the Company's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no as-
surances 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.
The following table sets forth activity in the Company's allowance for loan
losses for the years indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.......... $5,607 $4,239 $3,964 $3,524 $1,795
Provision for loan losses............. 3,750 2,626 653 1,035 2,102
Charge-offs:
Mortgage loans:
One- to four- family................. 331 218 168 324 240
Multi-family......................... 82 -- -- 55 --
Commercial real estate............... -- 967 25 121 18
Construction and land................ -- -- -- 25 10
Commercial loans...................... 87 -- 15 38 40
Consumer Loans:
Home equity lines.................... 116 68 113 20 31
Second mortgages..................... 10 -- -- -- --
Other consumer....................... 11 35 79 45 69
------ ------ ------ ------ ------
Total............................... 637 1,288 400 628 408
Recoveries............................ 68 30 22 33 35
------ ------ ------ ------ ------
Balance at end of year................ $8,788 $5,607 $4,239 $3,964 $3,524
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the year...................... 0.07% 0.23% 0.08% 0.14% 0.11%
====== ====== ====== ====== ======
</TABLE>
The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. At March 31,
1997, 1996, and 1995, the Company classified (excluding REO) $3.7 million,
$4.9 million, and $5.1 million of substandard loans, respectively. Included in
these amounts were $3.0 million, $4.0 million, and $3.0 million in non-per-
forming loans, respectively. In the opinion of management, the performing sub-
standard 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.
COMPARISON OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS
ENDED MARCH 31, 1997 AND MARCH 31, 1996
FINANCIAL CONDITION
Assets at March 31, 1997 totaled $979.7 million, an increase of $256.1 mil-
lion or 35.4%, compared to
21
<PAGE>
$723.6 million at March 31, 1996. Most of the growth in assets was in loans
receivable, which increased from $637.6 million to $796.4 million or 24.9%,
mortgage-backed securities available for sale, which increased from zero to
$31.7 million, short-term investments, which increased from zero to $39.4 mil-
lion, mortgage-backed securities held to maturity, which increased from $7.2
million to $15.4 million and mortgage loans held for sale which increased from
$17.7 million to $23.3 million. The increase in loans receivable was attribut-
able to strong growth in residential mortgages, consumer loans, and commercial
loans, primarily due to an aggressive advertising promotion of the loan prod-
ucts, the expansion of the residential lending activities further into the
state of Connecticut, the addition of new correspondent lenders to the Bank's
wholesale residential loan origination activities, and increases in business
development staffing. Cash on hand and due from banks increased from $13.3
million at March 31, 1996 to $14.1 million at March 31, 1997. Office proper-
ties and equipment, net increased by $5.9 million from $8.3 million at March
31, 1996 to $14.2 million at March 31, 1997. The increase in office properties
and equipment, net, took place over the entire fiscal year ending March 31,
1997 as a result of the Bank's capital outlays to remodel existing, older
banking offices as well as to buy, build, and equip the Bank's new banking of-
fice locations which have significantly expanded the Bank's branch network. In
fiscal year 1997, capital outlays also took place to fund progress payments on
the new Swansea branch office/operations center. The increase in short-term
investments and securities was primarily funded by net proceeds of $77.6 mil-
lion from the stock conversion.
Deposit accounts increased from $583.8 million at March 31, 1996 to $724.0
million at March 31, 1997, an increase of 24.0%. The increase in deposits re-
sulted primarily from the inflow of deposits from the opening of three branch
offices, the Company's competitive deposit pricing strategy and increased mar-
keting efforts. The growth in deposits was primarily attributable to a $132.8
million or 33.9% increase in certificate accounts, which grew from $392.0 mil-
lion to $524.8 million, coupled with an increase in other deposits of $7.4
million or 3.8%. The increase in certificate accounts was due primarily to the
Company's competitive pricing of such deposits in order to attract new ac-
counts and increase market share. FHLB advances increased from $75.1 million
at March 31, 1996 to $111.1 million at March 31, 1997, an increase of $36.0
million. The increase in FHLB advances and deposits partially funded the
growth in loans receivable.
Total stockholders' equity at March 31, 1997 was $122.2 million or 12.47% of
assets compared to $46.4 million or 6.41% of assets at March 31, 1996. The in-
crease is due to the addition of conversion proceeds of $77.6 million, the is-
suance of common stock to the Foundation of $6.5 million, $774,000 charged to
expense related to the reduction in the unallocated Employee Stock Ownership
Plan ("ESOP") shares, and a $376,000 increase in additional paid-in capital
related to the appreciation in the fair value of allocated ESOP shares offset
by $7.0 million of shares acquired by the ESOP and a net loss of $2.4 million.
Non-performing assets decreased to $4.3 million or .44% of total assets at
March 31, 1997, compared to $4.7 million or .65% of total assets at March 31,
1996. The allowance for loan losses was increased from $5.6 million at March
31, 1996 to $8.8 million at March 31, 1997 due to loan portfolio growth. The
allowances for loan losses amounted to 1.09% of loans at March 31, 1997, com-
pared to .87% of loans at March 31, 1996. See "Asset Quality" included else-
where herein.
RESULTS OF OPERATIONS
GENERAL
For fiscal year 1997, the Company experienced a $2.4 million net loss, com-
pared to net income of $4.6 million for the year ended March 31, 1996. The de-
crease in net income was primarily attributable to pre-tax charges totaling
$10.7 million. Included in the $10.7 million of pre-tax charges were the im-
pact of the establishment of the Foundation, increased compensation expense to
implement the ESOP, and a non-recurring assessment to recapitalize the Savings
Association Insurance Fund of the FDIC ("SAIF"). The one-time special Founda-
tion contribution pre-tax charge to income was $6.5 million, the ESOP pre-tax
charge to income was $1.3 million and the SAIF recapitalization pre-tax charge
to income was $2.9 million. Excluding these items, pre-tax income for fiscal
year 1997 totaled $7.8 million compared to $8.0 million from fiscal year 1996.
Net interest income for fiscal years 1997 and 1996 amounted to $23.8 million
and $19.7 million, respectively, primarily as a result of the increase in loan
interest income.
22
<PAGE>
INTEREST INCOME
Total interest income for fiscal year 1997 was $62.3 million. This is an in-
crease of $16.3 million or 35.2% from the $46.0 million total interest income
for fiscal year 1996. Most of the increase in total interest income was due to
higher average balances of interest-earning assets, which averaged $828.5 mil-
lion for fiscal year 1997, compared to the average balance of $583.8 million
during fiscal year 1996. Interest income from loans receivable, increased
$14.1 million or 32.4% to $57.9 million for fiscal year 1997. This increase
resulted from the net effect of a $210.6 million increase in the average bal-
ance of loans receivable, offset by a 35 basis point decrease in yield. Addi-
tionally, the average balance of investment securities and the average balance
of mortgage-backed securities increased from $30.8 million and $4.4 million,
respectively for fiscal year 1996 to average balances of $53.2 million and
$16.1 million respectively for fiscal year 1997. These increases in interest-
earning assets were funded by deposit growth and FHLB advances during fiscal
year 1997 and for a portion of fiscal year 1997 by net proceeds from the con-
version. The increase in total interest income was offset partially by a de-
crease in the average yield on total interest-earning assets from 7.89% for
fiscal year 1996 to 7.51% for fiscal year 1997. This yield reduction resulted
primarily from a substantial portion of the asset growth being in the form of
adjustable-rate mortgages, which generally are originated at discounted rates
for the initial term.
INTEREST EXPENSE
Interest expense for fiscal year 1997 amounted to $38.5 million, an increase
of $12.1 million, from fiscal year 1996 total of $26.4 million, an increase of
45.9%. The primary reason for this increase was due to significantly higher
average balances for interest-bearing deposits totaling $603.8 million during
fiscal year 1997, compared to average balances for interest-bearing deposits
of $466.8 million during fiscal year 1996, an increase of $137.0 million. In
addition to net proceeds from the conversion, the growth in deposits and FHLB
advances were utilized to fund the growth in loans receivable, short-term in-
vestments, and mortgage-backed securities. The average cost of interest-bear-
ing deposits increased for the year ended March 31, 1997 to 5.01% as compared
to 4.96% for the year ended March 31, 1996 as new deposit costs exceeded the
average cost of existing deposits. The Company has maintained an aggressive
deposit pricing strategy in the past year as it seeks to increase market
share, resulting in a strong deposit inflow. The Company's outstanding FHLB
advances also experienced higher average balances, increasing by $81.2 million
from $50.3 million for the year ending March 31, 1996, to $131.5 million for
fiscal year 1997. The average cost of borrowed funds decreased for the year
ended March 31, 1997 to 6.25% as compared to 6.46% for fiscal year 1996 due to
the lower cost of new FHLB advances as compared to the average cost for the
existing FHLB advances.
NET INTEREST INCOME
Net interest income before the provision for loan losses increased by $4.1
million, or 20.9%, as the increase in the average balance of interest-earning
assets more than offset higher interest expense and a decrease in the net in-
terest rate spread, from 2.79% for fiscal year 1996 to 2.27% for fiscal year
1997. The decrease in the net interest rate spread was due to an increase in
the average balance of higher cost certificate accounts and a decrease in the
yield on loans receivable. The Company's net interest margin decreased from
3.37% for fiscal year 1996 to 2.87% for fiscal year 1997.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses amounted to $3.8 million for fiscal
year 1997, as compared to a provision of $2.6 million for fiscal year 1996.
This increase in the provision for loan losses is a result of management's re-
view and evaluation of the loan portfolio. Also, management considered the
24.9% growth in the overall balance of the Company's loan portfolio from
$637.6 million at March 31, 1996 to $796.4 million at March 31, 1997. To the
extent the Company experiences further increases in the overall balance of its
loan portfolio or increases its concentrations of loans which bear a higher
degree of risk than one- to four-family loans, the Company anticipates that
further increases in its allowance for loan losses may continue to be neces-
sary through continued provisions for loan losses. While management of the
Company believes that the current level of its allowance for loan losses is
sufficient based on information currently available at this time, no assur-
ances can be made that future events, conditions or regulatory directives will
not result in increased provisions for loan losses or additions to the
Company's allowance for loan losses which may adversely affect net income.
23
<PAGE>
NONINTEREST INCOME
Noninterest income decreased $178,000, or 3.9% from $4.6 million for fiscal
year 1996 to $4.4 million for fiscal year 1997. Noninterest income consists of
loan servicing income, gains and losses on the sale of mortgages, and other
noninterest income. Other noninterest income for fiscal year 1997 decreased to
$2.1 million from $2.8 million for fiscal year 1996. This decline in other
noninterest income primarily reflects the reversal of a reserve during fiscal
year 1996 which increased noninterest income in such fiscal year by $813,000.
The reserve had been established in fiscal year 1994 in connection with the
reconciliation of certain loans being serviced for others and during fiscal
year 1996 it was determined to be no longer necessary. Partially offsetting
this reduction in other noninterest income was a decrease in the loss on sale
of mortgages loans which was $841,000 for fiscal year 1996 as compared to
$478,000 for fiscal year 1997, an improvement of $363,000. The improvement in
the loss on loan sale activity during fiscal year 1997 was primarily due to
the adoption of SFAS No. 122 Accounting for Mortgage Servicing Rights, ("SFAS
No. 122") on April 1, 1996, which resulted in the inclusion in income of $1.8
million, reflecting the recognition of mortgage servicing rights on loans
originated and sold during the period.
NONINTEREST EXPENSE
Total noninterest expense increased to $27.3 million for fiscal year 1997
compared to $13.7 million for fiscal year 1996. The increase in noninterest
expense is primarily attributable to three charges totaling $10.7 million. The
Company incurred a non-recurring charge of $6.5 million as a result of the im-
pact of the Company's contribution of common stock to the Foundation which was
established and funded as part of the January 15, 1997 conversion. Also, com-
pensation and employee benefits expense increased $1.3 million due to the im-
plementation of the ESOP. Further, in fiscal year 1997, the Company recognized
a non-recurring charge of $2.9 million related to the SAIF special assessment.
Exclusive of the $1.3 million charge for the ESOP, the compensation and em-
ployee benefits expense increased to $8.6 million for fiscal year 1997 com-
pared to $7.4 million for fiscal year 1996, an increase of $1.2 million, or
17.5%. This increase corresponds to the Company's franchise expansion strategy
whereby it added four new branch facilities in the period from October 1995 to
March 1997 and increased the number of personnel by a total of 29. Office oc-
cupancy and equipment expense increased to $2.0 million for fiscal year 1997
compared to $1.5 million for fiscal year 1996, an increase of $501,000, or
33.3%. This increase is related to the ongoing operation of three new branch
offices located in East Providence, Pawtucket, and Warwick, Rhode Island and a
fourth new branch office on Ashley Boulevard in New Bedford, Massachusetts.
Advertising and business promotion increased from $916,000 to $1.1 million
mainly as a result of the promotion of the new banking offices and to bolster
marketing efforts of the network of existing branch locations.
Federal deposit insurance premiums, exclusive of the SAIF special assess-
ment, remained consistent at $1.0 million for both fiscal years 1997 and 1996.
As a result of the September 1996 recapitalization of the SAIF, the deposit
insurance rate has dropped and the Bank continues to qualify for the lowest
cost FDIC risk assessment classification for its particular portion of the fi-
nancial services industry, thereby paying FDIC insurance premiums on insured
deposits at a rate of 6.48 basis points. Data processing expense increased by
$149,000, or 26.1%, from $570,000 to $719,000, as a result of increased
processing costs related to having more customer accounts as market share in-
creases. Other expense increased to $3.2 million during fiscal year 1997 from
$2.3 million during fiscal year 1996 primarily as a result of increased ac-
counting, consulting, and professional fees due to operating as a publicly
held company and increased operating expenses due to the growth in assets. The
Company intends to open additional branch offices and loan centers in 1997 and
1998, anticipates the completion of a new administrative facility in 1997, ex-
pects to establish a trust services function in the future, and is presently
in the process of evaluating its present data processing provider. These ac-
tivities will result in further increases in the Company's noninterest expense
in the future and on an ongoing basis.
INCOME TAXES
Income tax benefit was $449,000 for fiscal year 1997 (resulting in an effec-
tive tax benefit rate of 15.6%), compared to an income tax expense of $3.4
million for fiscal year 1996 (resulting in an effective tax rate of 42.1%).
The change in income tax expense was primarily due to decreased pre-tax income
(loss) as a result of the non-recurring Foundation contribu-
24
<PAGE>
tion of $6.5 million. For state income tax purposes, the Company did not re-
ceive a tax benefit for the contribution as a result of limitations imposed by
the Internal Revenue Code and Massachusetts tax laws. Further, the Company's
effective tax rate for fiscal year 1997 increased by approximately 4.4% as a
result of non-deductible expenses recorded for the appreciation in the fair
value of the allocated ESOP shares.
COMPARISON OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS
ENDED MARCH 31, 1996 AND MARCH 31, 1995.
FINANCIAL CONDITION
Total assets increased by $163.6 million, or 29.2%, from $560.0 million at
March 31, 1995 to $723.6 million at March 31, 1996. The growth in assets is
primarily attributable to a $137.6 million increase in loans receivable, net
and a $10.9 million increase in mortgage loans held for sale. Cash on hand and
due from banks, investment securities available for sale and investment secu-
rities held to maturity increased by a total of $6.6 million from $31.4 mil-
lion at March 31, 1995 to $38.0 million at March 31, 1996. The $137.6 million
increase in loans receivable, net was primarily attributable to the increased
balances of one- to four-family mortgage loans, primarily consisting of
shorter term fixed-rate loans, which reflects management's determination to
retain fixed-rate one- to four-family loans with maturities of 15 years or
less. The increase was also attributable to increased loan origination volume
in fiscal year 1996 due to favorable market interest rates. As a result, the
portfolio of fixed-rate residential mortgage loans and construction and land
loans increased by $112.2 million between March 31, 1995 and March 31, 1996
while adjustable-rate residential mortgage loans and construction and land
loans increased by $12.4 million during the same period. The declining inter-
est rate environment during most of 1995 and the beginning of 1996 resulted in
increased originations of fixed-rate loans while demand for adjustable-rate
loans diminished. Market interest rates began declining at the beginning of
fiscal year 1996 and continued to decline until the middle of the last quarter
of fiscal year ended March 31, 1996. The mortgage-backed securities portfolio
increased by $4.5 million, from a balance of $2.7 million at March 31, 1995 to
a balance of $7.2 million at March 31, 1996 primarily due to a $5.0 million
purchase of an adjustable-rate mortgage-backed security. The growth in assets
was funded primarily by deposits which increased by $143.6 million, or 32.6%,
to $583.8 million at March 31, 1996 as compared to $440.1 million as of March
31, 1995 due primarily to the favorable impact of the Company's continuing ex-
pansion strategy and competitive pricing strategy to attract new deposit ac-
counts. Deposit growth occurred primarily in higher cost certificate of de-
posit accounts which increased from $280.5 million at March 31, 1995, or 54.1%
of total liabilities, to $392.0 million at March 31, 1996, or 57.9% of total
liabilities. FHLB advances, which increased by $8.5 million to $75.1 million
at March 31, 1996 as compared to $66.6 million at March 31, 1995, also funded
asset growth. Retained earnings at March 31, 1996 totaled $46.4 million, or
6.41% of total assets, compared to $41.7 million, or 7.45%, at March 31, 1995.
RESULTS OF OPERATIONS
GENERAL
Net income for fiscal year ended March 31, 1996 decreased by $358,000, or
7.2%, from $5.0 million for the year ended March 31, 1995 to $4.6 million for
the year ended March 31, 1996. The decrease was primarily attributable to a
higher provision for loan losses in fiscal year 1996 and an increase in nonin-
terest expenses which were partially offset by higher noninterest income re-
sulting from reduced losses on the sale of mortgage loans, net, an increase in
other income, an increase in net interest income and reduced income tax ex-
pense.
INTEREST INCOME
Total interest income for fiscal year ended March 31, 1996 increased by $8.5
million to $46.0 million as compared to $37.5 million for fiscal year 1995.
The increase in interest income for fiscal year 1996 was primarily attribut-
able to increased average balances of interest-earning assets, primarily due
to an increase in the average balance of loans, which increased by $77.5 mil-
lion, or 16.5%, from $471.1 million for fiscal year 1995 to $548.6 million for
fiscal year 1996. The increase in loans receivable primarily reflects in-
creased one- to four-family loan originations and the Company's determination
to retain fixed-rate one- to four-family loans with terms of 15 years or less
which it generally originates for sale. As a result, interest income on loans
increased by $7.9 million to $43.8 million, or 22.0%, for fiscal
25
<PAGE>
year 1996 as compared to $35.9 million for fiscal year 1995. The increase in
interest income was also the result of higher average yields on interest-earn-
ing assets which increased from 7.56% for fiscal year 1995 to 7.89% for fiscal
year 1996 due to the retention of fixed-rate one- to four-family loans which
generally bear higher rates than adjustable-rate loans. Interest income on in-
vestment and mortgage-backed securities also increased by $671,000 due to in-
creased average balances.
INTEREST EXPENSE
Interest expense increased by $8.0 million, or 43.9%, for fiscal year 1996
to $26.4 million as compared to $18.3 million for fiscal year 1995 primarily
due to increased average balances of deposit accounts resulting from the
growth in the Company's certificate accounts. The growth in higher cost cer-
tificate accounts resulted in an increase of $9.2 million, or 66.5%, in inter-
est expense on deposit accounts. The Company's competitive deposit pricing
strategy resulted in an increase in the average cost of deposits of 120 basis
points from an average cost of 3.76% for fiscal year 1995 to an average cost
of 4.96% for fiscal year 1996. Average balances increased by $97.7 million
from an average balance of $369.1 million for the year ended March 31, 1995 to
an average balance of $466.8 million for the year ended March 31,1996. The in-
crease in interest expense on deposits was offset partially by a decrease in
interest expense on FHLB advances of $1.1 million, or 26.9%, due to a decrease
in the average balance of FHLB advances from $71.0 million for fiscal year
1995 to $50.3 million for fiscal year 1996. Interest expense on FHLB advances
decreased despite an increase in the average cost of FHLB advances of 20 basis
points, from 6.26% for fiscal year 1995 to 6.46% for fiscal year 1996.
NET INTEREST INCOME
Net interest income before provision for loan losses increased by $512,000,
or 2.7%, from $19.2 million to $19.7 million for fiscal year 1996. Net inter-
est income increased despite a decrease in the net interest spread which de-
creased from 3.39% for fiscal year 1995 to 2.79% for fiscal year 1996. The de-
crease in the net interest spread was due primarily to increased average bal-
ance of higher cost certificate accounts and the Company's competitive pricing
strategy to attract and retain certain certificate of deposit accounts. The
net interest margin for fiscal year 1996 decreased to 3.37% from 3.86% for
fiscal year 1995 primarily due to the increase in the average cost of certifi-
cate accounts. The impact of the reduced net interest margin was offset by an
increase in the average balance of interest earning assets in fiscal year 1996
versus fiscal year 1995 and, as a result, net interest income improved for
fiscal year 1996 versus fiscal year 1995.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses amounted to $2.6 million for the
year ended March 31, 1996, as compared to a provision of $653,000 for the year
ended March 31, 1995. The increase in the provision for loan losses was due
primarily to management's review and evaluation of the loan portfolio and in-
creased charge-off activity. In particular, management considered the increase
in loan charge offs which increased from $400,000 to $1.3 million primarily
due to charge offs related to one commercial real estate loan which management
determined to restructure and partially charge off as a result of the borrow-
ers becoming unable to repay the loan under its original terms due to vacancy
and cash flow problems. As a result, the Company's allowance for loan losses
to loans at March 31, 1996 was 0.87% as compared to 0.84% at March 31, 1995.
NONINTEREST INCOME
Total noninterest income increased by $2.1 million, or 83.0%, from $2.5 mil-
lion for fiscal year 1995 to $4.6 million for fiscal year 1996. The increase
was primarily attributable to a $1.1 million reduction in losses on the sale
of mortgage loans, which decreased from a $1.9 million loss for fiscal year
1995 to an $841,000 loss for fiscal year 1996, as well as an increase in other
income of $1.0 million from $1.8 million for fiscal year 1995 to $2.8 million
for fiscal year 1996. The decrease in losses on the sale of mortgage loans in
fiscal year 1996 was primarily due to a less volatile market interest rate en-
vironment in fiscal year 1996 and the amount of the Company's sales of loans
which were not hedged by forward loan sale commitments during fiscal year
1995. During the year ended fiscal year 1996, the Company maintained a higher
ratio of loans for sale hedged with forward sale commitments than in the pre-
vious fiscal year. The $1.0 million increase in other income was composed pri-
marily of an $813,000 benefit due to the reversal in fiscal year 1996 period
of a reserve that management had established in fiscal year 1994 pertaining to
the Company's reconciliation of certain
26
<PAGE>
loans serviced for others; such reserve was subsequently determined not to be
needed and the previously established reserve was recovered.
NONINTEREST EXPENSE
Total noninterest expense for the year ended March 31, 1996 increased by
$1.5 million, or 12.1%, from $12.2 million for fiscal year 1995 to $13.7 mil-
lion for fiscal year 1996. The increase of $1.5 million, or 12.1%, was in part
attributable to an increase of $258,000, or 3.6%, in compensation and employee
benefits expense, an increase of $219,000, or 17.0%, in office occupancy and
equipment expense, an increase of $225,000, or 32.6%, in advertising and busi-
ness promotion expense as well as a $190,000, or 22.2%, increase in federal
deposit insurance premiums expense. The increase in compensation and employee
benefits and office occupancy and equipment expenses was primarily due to in-
creased personnel and facilities in connection with the Company's expansion
strategy and the opening of two new branch facilities in fiscal year 1996. The
increase in federal deposit insurance resulted from higher average balances of
deposit accounts in fiscal year 1996. Data processing expense decreased by
$52,000 from $622,000 for fiscal year 1995 to $570,000 for fiscal year 1996
primarily due to contract adjustments negotiated with the Company's service
bureau. Other noninterest expense was $1.6 million for the year ended March
31, 1995 as compared to $2.3 million for the year ended March 31, 1996. The
increase in other noninterest expense was primarily due to higher costs re-
lated to the servicing of a greater number of loan and deposit accounts.
INCOME TAXES
Income tax expense was $3.4 million for the year ended March 31, 1996 (re-
sulting in an effective tax rate of 42.1%), compared to $3.9 million in income
tax expense for the year ended March 31, 1995 (resulting in an effective tax
rate of 43.7%). The $499,000 decrease in income tax expense is due to de-
creased pre-tax income.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities ("SFAS 125"). SFAS 125 establishes, among other things, new
criteria for determining whether a transfer of financial assets in exchange
for cash or other consideration should be accounted for as a sale or as a
pledge of collateral in a secured borrowing. SFAS 125 also establishes new ac-
counting requirements for pledged collateral. SFAS 125 is effective for most
transactions occurring after December 31, 1996 and must be applied prospec-
tively. However, SFAS No. 127, Deferral of the Effective Date of Certain Pro-
visions of SFAS 125, requires the deferral of implementation as it relates to
repurchase agreements, dollar-rolls, securities lending and similar transac-
tions in the years beginning after December 31, 1997. The Company has deter-
mined that the adoption of SFAS 125 did not have a material impact on its con-
solidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based Compen-
sation ("SFAS 123"). The Statement encourages companies to adopt a new ac-
counting method based on the estimated fair value of employee stock options
and other stock awards under which compensation cost is measured at the grant
date based on the value of the award and is recognized over the service peri-
od. The Company continues to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, however, the Company upon issuance of such awards, will
be required to provide expanded disclosures of proforma net income and earn-
ings per share and other disclosure information in the footnotes to the con-
solidated financial statements as if the fair value method had been applied.
At March 31, 1997, the Company has not adopted any stock option or other stock
award plans.
In February 1997, the FASB issued SFAS No. 128, Earning per Share. SFAS 128
establishes standards for computing and presenting earnings per share (EPS).
SFAS 128 replaces the presentation of primary EPS with a presentation of basic
EPS. SFAS 128 also requires dual presentation of basic and diluted EPS on the
face of the statement of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstand-
ing for the period. Diluted EPS reflects the potential dilution that could oc-
cur if securities or other contracts to issue common stock were exercised
27
<PAGE>
or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
fully diluted EPS pursuant to Opinion 15.
SAS 128 effective for financial statements issued for period ending after De-
cember 15, 1997, including interim periods; earlier application is not
permitted. The Company will make the required disclosures in future financial
statements.
28
<PAGE>
[LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE]
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, 1997
and 1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 1997. 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 generally accepted auditing
standards. 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, 1997 and 1996, and the
results of their operations and cash flows for each of the years in the three-
year period ended March 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in note 1, the Company changed its method in accounting for
mortgage servicing rights effective April 1, 1996.
[LOGO OF KPMG PEAT MARWICK LLP APPEARS HERE]
Boston, Massachusetts
May 16, 1997
F-1
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Cash on hand and due from banks.............................. $ 14,130 13,277
Short-term investments....................................... 39,410 --
Mortgage loans held for sale................................. 23,331 17,747
Investment securities available for sale (amortized cost of
$5 and $55) (note 4)........................................ 888 725
Mortgage-backed securities available for sale (amortized cost
of $32,059 and $0)
(note 4).................................................... 31,732 --
Investment securities held to maturity (fair value of $20,958
and $24,061) (note 5)....................................... 20,991 23,987
Mortgage-backed securities held to maturity (fair value of
$15,578 and $7,386)
(note 5).................................................... 15,435 7,248
Stock in Federal Home Loan Bank of Boston, at cost (notes 5
and 10)..................................................... 9,531 6,630
Loans receivable, net of allowance for loan losses of $8,788
and $5,607
(notes 6 and 10)............................................ 796,355 637,592
Accrued interest receivable.................................. 4,722 3,711
Office properties and equipment, net (note 8)................ 14,215 8,329
Mortgage servicing rights (note 7)........................... 1,630 --
Real estate owned, net....................................... 665 643
Deferred income tax asset, net (note 12)..................... 4,511 1,960
Income tax receivable (note 12).............................. 263 --
Prepaid expenses and other assets............................ 1,927 1,723
-------- -------
Total assets............................................. $979,736 723,572
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9).......................................... $723,976 583,750
FHLB advances (note 10).................................... 111,062 75,141
Advance payments by borrowers for taxes and insurance...... 5,580 4,167
Accrued interest payable................................... 717 304
Accrued income taxes (note 12)............................. -- 691
Other liabilities.......................................... 16,247 13,101
-------- -------
Total liabilities........................................ 857,582 677,154
-------- -------
Commitments and contingencies (notes 3, 6, 8, 10, 11 and 12)
Stockholders' equity (notes 2 and 3):
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued................................... -- --
Common stock, $.01 par value, 25,000,000 shares authorized;
8,707,152 shares issued and outstanding................... 87 --
Additional paid-in capital................................. 84,334 --
Retained earnings (notes 2 and 3).......................... 43,603 46,033
Unrealized gain on investments available for sale, net of
tax (note 4).............................................. 326 385
Unallocated ESOP shares (note 14).......................... (6,196) --
-------- -------
Total stockholders' equity............................... 122,154 46,418
-------- -------
Total liabilities and stockholders' equity............... $979,736 723,572
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Interest and dividend income:
Loans............................................... $57,941 43,757 35,871
Investment securities............................... 2,805 1,519 837
Mortgage-backed securities.......................... 958 321 261
Federal Home Loan Bank stock........................ 555 447 518
------- ------ ------
Total interest and dividend income................ 62,259 46,044 37,487
------- ------ ------
Interest expense:
Deposits (note 10).................................. 30,277 23,131 13,890
Borrowed funds...................................... 8,220 3,251 4,447
------- ------ ------
Total interest expense............................ 38,497 26,382 18,337
------- ------ ------
Net interest income before provision for loan
losses........................................... 23,762 19,662 19,150
Provision for loan losses (note 6).................... 3,750 2,626 653
------- ------ ------
Net interest income after provision for loan
losses........................................... 20,012 17,036 18,497
------- ------ ------
Noninterest income:
Loan servicing income............................... 2,760 2,628 2,539
Loss on sale of mortgage loans, net (note 7)........ (478) (841) (1,879)
Gain on sale of investments securities available for
sale............................................... 51 -- --
Other income........................................ 2,081 2,805 1,849
------- ------ ------
Total noninterest income.......................... 4,414 4,592 2,509
------- ------ ------
Noninterest expense:
Compensation and employee benefits (note 14)........ 9,933 7,366 7,108
Office occupancy and equipment...................... 2,005 1,504 1,285
Advertising and business promotion.................. 1,080 916 691
Federal deposit insurance premiums.................. 1,014 1,044 854
SAIF special assessment (note 3).................... 2,880 -- --
Contribution to The FIRSTFED Charitable Foundation
(note 2)........................................... 6,454 -- --
Data processing..................................... 719 570 622
Other............................................... 3,220 2,272 1,633
------- ------ ------
Total noninterest expense......................... 27,305 13,672 12,193
------- ------ ------
Income (loss) before income tax expense........... (2,879) 7,956 8,813
Income tax expense (benefit) (note 11)................ (449) 3,353 3,852
------- ------ ------
Net income (loss)................................. $(2,430) 4,603 4,961
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
SHARES OF ADDITIONAL INVESTMENTS UNALLOCATED TOTAL
PREFERRED COMMON COMMON PAID-IN RETAINED AVAILABLE ESOP STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL EARNINGS FOR SALE, NET SHARES EQUITY
--------- --------- ------ ---------- -------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1994................... -- -- $-- -- 36,469 -- -- 36,469
Change in accounting
for investment
securities as of
April 1, 1994......... -- -- -- 198 -- 198
Net income............. -- -- -- -- 4,961 -- -- 4,961
Change in net
unrealized gain on
investments available
for sale, net of
taxes................. -- -- -- -- -- 69 -- 69
--- ----- --- ------ ------ --- ------ -------
Balance at March 31,
1995................... -- -- -- -- 41,430 267 -- 41,697
Net income............. -- -- -- -- 4,603 -- -- 4,603
Change in net
unrealized gain on
investments available
for sale, net of
taxes................. -- -- -- -- -- 118 -- 118
--- ----- --- ------ ------ --- ------ -------
Balance at March 31,
1996................... -- -- -- -- 46,033 385 -- 46,418
Stock issued pursuant
to initial common
stock offering........ -- 8,062 81 77,510 -- -- -- 77,591
Issuance of 645,380
shares of common stock
to The FIRSTFED
Charitable Foundation
charged to expense.... -- 645 6 6,448 -- -- -- 6,454
Common stock acquired
by ESOP............... -- -- -- -- -- -- (6,970) (6,970)
Reduction in
unallocated ESOP
shares charged to
expense............... -- -- -- -- -- -- 774 774
Appreciation in fair
value of allocated
ESOP shares charged to
expense............... -- -- -- 376 -- -- -- 376
Change in net
unrealized gain on
investments available
for sale, net......... -- -- -- -- -- (59) -- (59)
Net loss............... -- -- -- -- (2,430) -- -- (2,430)
--- ----- --- ------ ------ --- ------ -------
Balance at March 31,
1997................... -- 8,707 $87 84,334 43,603 326 (6,196) 122,154
=== ===== === ====== ====== === ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ (2,430) 4,603 4,961
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Contribution of shares to the Foundation...... 6,454 -- --
Amortization (accretion) of:
Premium on investment and mortgage-backed
securities held to maturity................. (7) 2 (6)
Deferred loan origination fees............... 175 (626) (639)
Mortgage servicing rights.................... 150 -- --
Provisions for:
Loan losses.................................. 3,750 2,626 653
Deferred income taxes........................ (2,496) (710) 1,134
(Gains) losses on sales of:
Real estate owned............................ (59) (1) (142)
Mortgage loans............................... 478 841 1,879
Investment securities available-for-sale..... (51) -- --
Net proceeds from sales of mortgage loans..... 215,333 183,366 139,164
Origination of loans held for sale............ (223,175) (195,138) (132,082)
Real estate owned valuation write-downs....... 186 65 45
Depreciation of office properties and
equipment.................................... 967 671 344
Appreciation in fair value of ESOP shares..... 376 -- --
Increase or decrease in:
Accrued interest receivable.................. (1,011) (847) (217)
Income tax receivable........................ (263) (145) (61)
Prepaid expenses and other assets............ (204) (226) (208)
Accrued interest payable..................... 413 (97) 110
Accrued income taxes and other liabilities... 2,455 6,172 (1,172)
--------- -------- --------
Net cash provided by operating activities... 1,041 556 13,763
--------- -------- --------
Cash flows from investing activities:
Purchase of mortgage-backed securities
available-for-sale............................ $ (32,061) -- --
Purchases of investment securities held to
maturity...................................... (10,991) (10,001) (10,988)
Payments received on mortgage-backed securities
held to maturity.............................. 1,805 433 716
Purchases of mortgage-backed securities held to
maturity...................................... (9,996) (4,960) --
Purchase of the Federal Home Loan Bank Stock... (2,901) -- --
Maturities of investment securities............ 14,000 7,000 --
Net increase in loans.......................... (163,525) (140,430) (90,320)
Proceeds from sale of investment securities
available for sale............................ 101 -- --
Proceeds from sales of real estate owned....... 688 404 2,205
Purchases of office properties and equipment... (6,853) (2,560) (992)
--------- -------- --------
Net cash used in investing activities....... (209,733) (150,114) (99,379)
--------- -------- --------
Cash flows from financing activities:
Net increase in deposits....................... 140,226 143,643 80,014
FHLB overnight advances........................ 543,817 297,905 650,958
Repayments on FHLB advances.................... (507,896) (289,356) (643,908)
Net change in advance payments by borrowers for
taxes and insurance........................... 1,413 752 (623)
Net proceeds from common stock issued pursuant
to initial public offering.................... 77,591 -- --
Payments to acquire common stock for ESOP...... (6,970) -- --
Reduction in unearned ESOP shares.............. 774 -- --
--------- -------- --------
Net cash provided by financing activities... 248,955 152,944 86,441
--------- -------- --------
Net increase in cash and cash equivalents....... 40,263 3,386 825
Cash and cash equivalents at beginning of year.. 13,277 9,891 9,066
--------- -------- --------
Cash and cash equivalents at end of year........ $ 53,540 13,277 9,891
========= ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest...................................... $ 38,084 26,505 18,323
========= ======== ========
Income taxes.................................. $ 3,227 4,325 4,219
========= ======== ========
Supplemental disclosures of noncash investing
activities:
Property acquired in settlement of loans....... $ 837 815 1,465
========= ======== ========
Transfer of investment securities to investment
securities available for sale................. $ -- -- 55
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)
As more fully described in note 2, First Federal Savings Bank of America
(the "Bank") converted from a mutual savings bank to a capital stock savings
bank on January 15, 1997. As part of the conversion, FIRSTFED AMERICA BANCORP,
INC. (the "Company") was formed, acquired all of the Bank's conversion stock,
and issued its common stock in a subscription offering.
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 Company is supervised by the Board of
Governors of the Federal Reserve System. The Bank is 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. To provide protection for customers' retirement account balances in
excess of FDIC coverage, the Bank participates in the "Deposit
Collateralization Bailee Program" with the Federal Home Loan Bank of Boston.
To participate, the Bank must pledge investment securities and mortgage loans
as collateral with the Federal Home Loan Bank of Boston.
In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets, and income and expense for the periods. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the
allowance for loan losses.
Substantially all of the Bank's loans are secured by real estate located in
Massachusetts, Rhode Island and Connecticut. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio and
the recovery of a substantial portion of the carrying amount of real estate
owned are susceptible to changes in market conditions in this area.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries: First Federal Savings Bank of America and
FAB FUNDING CORPORATION ("FAB FUNDING").
First Federal Savings Bank of America includes its wholly-owned subsidiary,
FIRSTFED MORTGAGE CORPORATION. Currently, the principal activity of FIRSTFED
MORTGAGE CORPORATION is to retain a parcel of commercial real estate which is
being developed as a centralized administrative and operations center and
branch office.
FAB FUNDING is a business corporation formed at the direction of the Company
under the laws of the Commonwealth of Massachusetts on October 8, 1996. FAB
FUNDING was established to lend funds to a Company sponsored employee stock
ownership plan and related trust for the purchase of stock in the initial
public offering.
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 $3,778 at March 31, 1997.
F-6
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 selling them in the near term are classified as trading and
reported at fair value, with unrealized gains and losses included in earnings;
and 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 which 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 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.
Loans
Loans are reported at the principal amount outstanding, reduced by net
deferred loan origination fees. Mortgage loans held for sale are carried at
the lower of aggregate cost or market value considering loan production, sales
commitments and deferred fees. Generally, all longer term (typically mortgage
loans with terms in excess of fifteen years) fixed-rate residential single-
family mortgage loans are originated for sale and adjustable-rate loans are
originated both for portfolio and for sale. Occasionally, the Bank generates
fixed-rate loans which are designated for portfolio at the time of
origination.
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 which 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. Accrual is generally not
resumed until the loan is brought current, the loan becomes well secured and
in the process of collection and, in either case, when concern no longer
exists as to the collectibility of principal or interest.
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 "nonaccrual loans,"
although the two categories overlap. Nonaccrual 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 nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired, if (i) it is not
probable that the Bank will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is not a commercial or a
commercial real estate loan. Factors considered by management in determining
impairment include payment status and collateral value. The amount of
impairment for these types of impaired loans is determined by the
F-7
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 expendient in the case of collateralized 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. Residential mortgage and consumer loans are
measured for impairment collectively. Loans that experience insignificant
payment delays and insignificant shortfalls in payment amounts generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.
Allowance for Loan Losses
The allowance for loan losses is available for future credit losses inherent
in the portfolio. The level of the allowance is based on management's ongoing
review of the composition and growth of the loan portfolio, net charge-off
experience, current and expected economic conditions, and other pertinent
factors. 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.
While management believes that the allowance for loan losses is adequate to
absorb probable loan losses, future additions to the allowance may be
necessary based on changes in the above factors. In addition, various
regulatory agencies periodically review the Bank's allowance for loan losses.
Such agencies may require the recognition of additions to the allowance based
on their judgments about information available to them at the time of their
examination.
Gain or Loss on Sale of Mortgage Loans
Gain or loss on sale of mortgage loans is recognized at the time of sale.
Such gain or loss results from the combination of (1) the difference between
the net cash paid by the investor for the loan and the loan's carrying value;
(2) the calculated present value of the difference between the interest rate
paid to the Bank by the borrower on the loan sold and the interest rate
guaranteed to the investor, adjusted for normal servicing fees and considering
estimated loan prepayments (deferred premium on sale of loans); and (3) any
origination fees, net of applicable origination costs, retained by the Bank.
Premiums on sale of loans are amortized using the interest method over the
life of the related loans, adjusted for actual and estimated future
prepayments. Actual prepayment experience is reviewed periodically and the
deferred premium is adjusted, if necessary.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, which
amends SFAS No. 65, Accounting for Certain Mortgage Banking Activities, on
April 1, 1996. The Statement requires that a mortgage banking enterprise
recognize as separate assets, rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. As a result of adopting
SFAS No. 122, the net loss on sale of loans decreased $1,780 for the year
ended March 31, 1997.
Mortgage servicing rights are amortized to loan servicing fee income using a
method which approximates the level yield method in proportion to, and over
the period of, estimated net servicing income. Mortgage servicing rights are
assessed for impairment based on the fair value of those rights. Prepayment
experience on mortgage servicing rights is reviewed periodically and, when
actual repayments exceed estimated prepayments, the balance of the mortgage
servicing assets is recognized by a charge to earnings through a valuation
allowance. The risk characteristics of the underlying loans used to measure
impairment included loan type, interest rate, loan origination date, and term
to maturity.
F-8
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Office Properties and Equipment
Land is carried at cost. Office properties and equipment are recorded at
cost less accumulated depreciation. Depreciation of office properties and
equipment is determined on the straight-line basis over the estimated useful
lives of the related assets (3 to 40 years). Expenditures for major additions
and improvements are capitalized while the costs of current maintenance and
repairs are charged to operating expenses.
Real Estate Owned
Real estate owned is acquired through foreclosure or by accepting a deed in
lieu of foreclosure. Real estate acquired in settlement of loans is recorded
at the lower of the carrying value of the loan or the fair value, less
disposal costs, of the property constructively or actually received, thereby
establishing a new cost basis. Subsequent write-downs are recorded if the cost
basis exceeds current net fair value. Related operating costs, net of rental
income, are reflected in operations when incurred. Realized gains 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 agency requirements, are considered in
the evaluation of the net fair value of real estate acquired through
foreclosure.
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.
Employee Benefits
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, Accounting for Stock-Based Compensation. The Statement
encourages companies to adopt a new accounting method based on the estimated
fair value of employee stock options and other stock awards under which
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period. The Company intends to
continue to follow APB Opinion No. 25, Accounting for Stock Issued to
Employees. However, the Company, upon issuance of such awards will be required
to provide expanded disclosures of pro-forma net income and earnings per share
and other disclosure information in the footnotes to the consolidated
financial statements as if the fair value method had been applied. At March
31, 1997, the Company had not adopted any stock option or other stock award
plans.
Earnings Per Share
Earnings per share is not presented for the period of January 15, 1997 (the
date of conversion to a stock savings bank) through March 31, 1997 as the
earnings per share calculation for the seventy-six day period was
F-9
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
not meaningful. Earnings per share is not presented for the periods prior to
the conversion to stock form, as the Bank was a mutual savings bank and no
stock was outstanding.
Recent Accounting Developments
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities ("SFAS 125").
SFAS 125 establishes, among other things, new criteria for determining whether
a transfer of financial assets in exchange for cash or other consideration
should be accounted for as a sale or as a pledge of collateral in a secured
borrowing. SFAS 125 also establishes new accounting requirements for pledged
collateral. SFAS 125 is effective for most transactions occurring after
December 31, 1996 and must be applied prospectively. However, SFAS 127,
Deferral of the Effective Date of Certain Provisions of SFAS 125, requires the
deferral of implementation as it relates to repurchase agreements, dollar-
rolls, securities lending and similar transactions in the years beginning
after December 31, 1997. The Company has determined that the adoption of SFAS
125 did not have a material impact on its consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, Earning per Share. SFAS 128
establishes standards for computing and presenting earnings per share ("EPS").
SFAS 128 replaces the presentation of primary EPS with a presentation of basic
EPS. SFAS 128 also requires dual presentation of basic and diluted EPS on the
face of the statement of operations for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15.
SFAS 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. The Company will make the required disclosures in future financial
statements.
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.
(2) CONVERSION TO STOCK FORM OF OWNERSHIP
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
F-10
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 FIRSTFED Charitable 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 $31.1 million
(unaudited) at March 31, 1997.
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, 1997,
there were no shares of preferred stock issued.
(3) STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of risk-based, core and tangible capital (as defined). Management
believes, as of March 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject.
As of March 31, 1997, the most recent notification from the OTS categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized" the Bank must
maintain minimum total risk-based capital, core capital and tangible ratios as
set forth in the table. As of March 31, 1997, the Bank is categorized as "well
capitalized" based on its ratios of risk-based core and tangible capital.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
F-11
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank's actual and required capital amounts and ratios are presented in
the table. No deduction was taken from capital for interest-rate risk.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------- ------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1997:
Risk-based capital...... $107,627 20.24% $42,544 8.0% $ 53,181 10.0%
Core capital............ 100,924 10.34 29,280 3.0 48,800 5.0
Tangible capital........ 100,924 10.34 14,640 1.5 48,800 5.0
As of March 31, 1996:
Risk-based capital...... $ 51,145 12.51% $32,709 8.0% $ 40,887 10.0%
Core capital............ 46,033 6.37 21,692 3.0 36,153 5.0
Tangible capital........ 46,033 6.37 10,846 1.5 36,153 5.0
</TABLE>
The Bank's deposits are insured by the SAIF of the FDIC. On September 30,
1996, the President of the United States signed into law the Deposit Insurance
Funds Act of 1996 (the "Act"). Among other provisions, the Act empowers the
Board of Directors of the FDIC to impose a special assessment on "SAIF-
assessable deposits" as of March 31, 1995 of depository institutions to
recapitalize the SAIF. The Bank was assessed a rate of 65.7 cents per $100 of
SAIF-assessable deposits. The Bank recorded a charge to SAIF special
assessment expense of $2,880 on September 30, 1996.
(4) INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE (DOLLARS IN
THOUSANDS)
A summary of investment securities available for sale follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Investment securities:
Marketable equity se-
curities............. $ 5 883 -- 888
======= === ==== ======
Mortgage-backed securi-
ties due:
After 5 years but
within 10 years...... 7.0% $32,059 -- (327) 31,732
=== ======= === ==== ======
Mortgage-backed securities at March 31, 1997 are fixed-rate securities with
seven-year original maturities.
<CAPTION>
MARCH 31, 1996
--------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Investment securities:
Marketable equity securities....... $ 55 670 -- 725
------- --- ---- ------
Total investment securities available
for sale............................ $ 55 670 -- 725
======= === ==== ======
</TABLE>
There were no mortgage-backed securities available for sale at March 31,
1996.
F-12
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The composition by issuer of mortgage backed securities available for sale
follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------
AMORTIZED FAIR
COST VALUE
--------- ------
<S> <C> <C>
FHLMC....................................................... $11,859 11,752
FNMA........................................................ 20,200 19,980
------- ------
$32,059 31,732
======= ======
</TABLE>
During the year ended March 31, 1997, realized gains on investment securities
available for sale were $51. Proceeds from the sale of investment securities
available for sale during 1997 amounted to $101. There were no sales of
investment securities available for sale for the years ended March 31, 1996 and
1995.
(5) INVESTMENT AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY (DOLLARS IN
THOUSANDS)
A summary of investment securities held to maturity follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
United States Government
and related obligations
due:
Within one year......... 5.7% $10,496 5 (20) 10,481
After one year but
within five years...... 6.1 10,495 3 (21) 10,477
------- --- --- ------
Total investment securi-
ties held to maturity.... 5.9% $20,991 8 (41) 20,958
=== ======= === === ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
United States Government
and related obligations
due:
Within one year......... 6.2% $12,996 77 (2) 13,071
After one year but
within five years...... 5.7 9,990 29 (29) 9,990
------- --- --- ------
6.0 22,986 106 (31) 23,061
------- --- --- ------
Federal Home Loan Bank
note due April 1996...... 4.4 1,000 -- (1) 999
Other investment securi-
ties..................... 8.0 1 -- -- 1
------- --- --- ------
Total investment securi-
ties held to maturity.... 5.9% $23,987 106 (32) 24,061
=== ======= === === ======
</TABLE>
Adjustable-rate mortgage-backed securities totaled $13,482 and $4,946 at
March 31, 1997 and 1996, respectively.
F-13
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of mortgage-backed securities held to maturity by issuer follows:
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
FHLMC due:
After five years but
within ten years........ 8.3% $ 205 4 (1) 208
After ten years.......... 6.6 13,586 72 (7) 13,651
------- --- --- ------
6.7 13,791 76 (8) 13,859
------- --- --- ------
GNMA due:
Less than five years..... 8.0 33 -- -- 33
After five years but
within ten years........ 8.2 269 6 -- 275
After ten years.......... 8.8 1,342 69 -- 1,411
------- --- --- ------
8.7 1,644 75 -- 1,719
------- --- --- ------
Total mortgage-backed
securities held to
maturity.............. 6.9% $15,435 151 (8) 15,578
=== ======= === === ======
<CAPTION>
MARCH 31, 1996
-----------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
FHLMC due:
After five years but
within ten years........ 8.7% $ 141 6 -- 147
After ten years.......... 6.5 5,206 35 -- 5,241
------- --- --- ------
6.5 5,347 41 -- 5,388
------- --- --- ------
GNMA due:
Less than five years..... 8.0 46 1 -- 47
After five years but
within ten years........ 8.1 61 1 -- 62
After ten years.......... 8.7 1,794 95 -- 1,889
------- --- --- ------
8.7 1,901 97 -- 1,998
------- --- --- ------
Total mortgage-backed
securities held to
maturity.............. 7.1% $ 7,248 138 -- 7,386
=== ======= === === ======
</TABLE>
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities due to prepayments.
There were no sales of investment and mortgage-backed securities held to
maturity in the years ended March 31, 1997, 1996 and 1995.
GNMA mortgage-backed securities with a book value of approximately $1,416
and $1,736 were pledged as collateral for certain deposits in the "Deposit
Collateralization Bailee Program" at the Federal Home Loan Bank of Boston at
March 31, 1997 and 1996, respectively.
As a member of the Federal Home Loan Bank ("FHLB") system, the Bank is
required to maintain a minimum investment in FHLB stock. The current
investment exceeds the required level at March 31, 1997. Any excess may be
redeemed by the Bank or called by the FHLB at par. At its discretion, the FHLB
may declare dividends on this stock.
F-14
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
The Bank's lending activities are conducted principally in Massachusetts,
Rhode Island, and to a lesser degree in Connecticut. The Bank grants single
and multifamily residential loans, commercial real estate loans, commercial
loans and a variety of consumer loans. In addition, the Bank grants loans for
the construction of residential homes, multifamily properties and for
commercial real estate properties. The ability and willingness of single 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:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Mortgage loans:
Residential 1-4 family................................ $666,942 531,849
Multi-family.......................................... 4,416 4,703
Commercial real estate................................ 33,057 23,368
Construction and land................................. 23,919 25,297
-------- -------
Total mortgage loans................................ 728,334 585,217
-------- -------
Commercial loans........................................ 20,062 14,473
-------- -------
Consumer loans and other loans:
Home equity lines..................................... 25,021 27,995
Second mortgages...................................... 32,122 18,064
Other consumer loans.................................. 6,985 5,813
-------- -------
Total consumer loans................................ 64,128 51,872
-------- -------
Total loans receivable.............................. 812,524 651,562
-------- -------
Less:
Allowance for loan losses............................. (8,788) (5,607)
Undisbursed proceeds of construction mortgages in
process.............................................. (5,274) (6,568)
Deferred loan origination fees, net................... (2,107) (1,795)
-------- -------
(16,169) (13,970)
-------- -------
Loans receivable, net............................... $796,355 637,592
======== =======
</TABLE>
Included in residential mortgage loans and construction and land loans at
March 31, 1997 and 1996, respectively were $351,771 and $267,073 of loans at
variable interest rates.
The weighted average interest rate on the mortgage loan portfolio was
approximately 7.45% at March 31, 1997 compared with 7.43% at March 31, 1996.
Loans serviced for others approximated $1,192,000, $1,086,000, and
$1,011,000 at March 31, 1997, 1996 and 1995, respectively.
Loans placed on nonaccrual status totaled approximately $3,662 and $4,045 at
March 31, 1997 and 1996, respectively.
F-15
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information regarding the reduction of
interest income on nonaccrual loans for the years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original items...................... $337 358 272
Income recognized............................................. 207 234 95
---- --- ---
Foregone interest income during year.......................... $130 124 177
==== === ===
</TABLE>
At March 31, 1997, there were no commitments to lend additional funds to
those borrowers whose loans were classified as impaired or nonaccrual.
At March 31, 1997 and 1996, total impaired loans were $1,464 and $991,
respectively. At March 31, 1997, impaired loans of $1,300 required an
impairment allowance of $762. At March 31, 1997, impaired loans of $164 did
not require an impairment allowance. No valuation allowance was deemed
necessary at March 31, 1996. All impaired loans have been measured using the
fair value of the collateral method. The average recorded value of impaired
loans was $1,021 during 1997 and $580 in 1996. The Bank follows the same
policy for recognition of income on impaired loans as it does for all other
loans. Impaired loans of $976 were on nonaccrual at March 31, 1997. None of
the impaired loans were on nonaccrual at March 31, 1996.
The following table summarizes information regarding the reduction of
interest income on impaired loans for the years ended March 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income in accordance with original terms........................... $232 195
Income recognized.................................................. 112 128
---- ---
Foregone interest income during the year........................... $120 67
==== ===
</TABLE>
An analysis of the allowance for loan losses for the years ended March 31 is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Balance at beginning of year.......................... $5,607 4,239 3,964
Provision for loan losses........................... 3,750 2,626 653
Charge-offs......................................... (637) (1,288) (400)
Recoveries.......................................... 68 30 22
------ ------ -----
Balance at end of year................................ $8,788 5,607 4,239
====== ====== =====
</TABLE>
In the ordinary course of business, the Bank 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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- ----
<S> <C> <C> <C>
Balance, beginning of year................................ $ 778 796 693
Originations............................................ 169 182 163
Payments................................................ (198) (200) (60)
----- ---- ---
Balance, end of year...................................... $ 749 778 796
===== ==== ===
</TABLE>
F-16
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Not included in the amounts stated above are unused portions of lines of
credit. These amounted to $189 and $196 at March 31, 1997 and 1996,
respectively.
Loans with a book value of $8,245 were pledged as collateral for the
"Deposit Collateralization Bailee Program" with the Federal Home Loan Bank of
Boston at March 31, 1997
(7) SALE OF MORTGAGE LOANS (DOLLARS IN THOUSANDS)
The following summarizes mortgage loan sales and the components of loss on
sale of mortgage loans for the years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Loss on sale of mortgage loans:
Cash proceeds from sales of loans.......... $215,479 183,323 139,583
Buy-up (buy-down) fees paid (received),
net....................................... (146) 43 (419)
-------- -------- --------
Net cash proceeds from sales of loans.... 215,333 183,366 139,164
Principal balance of loans sold............ (217,689) (183,571) (141,169)
Deferred origination (costs) fees recog-
nized at time of sale..................... 425 (422) 126
Change in unrealized loss on mortgage loans
held for sale............................. (327) (214) --
Capitalized mortgage servicing rights...... 1,780 -- --
-------- -------- --------
Loss on sale of mortgage loans, net...... $ (478) (841) (1,879)
======== ======== ========
</TABLE>
A summary of the activity of the mortgage servicing rights for the year
ended March 31, 1997 follows:
<TABLE>
<S> <C> <C>
Balance at April 1, 1996......................................... $ --
Capitalized mortgage servicing rights............................ 1,780
Amortization..................................................... (150)
------ ---
Balance at March 31, 1997........................................ $1,630
======
</TABLE>
The Bank has determined that the fair value of mortgage servicing rights at
March 31, 1997 exceeds their carrying amount. Therefore, a valuation allowance
for the mortgage servicing rights was not established.
(8) OFFICE PROPERTIES AND EQUIPMENT (DOLLARS IN THOUSANDS)
Office properties and equipment consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Land........................................................ $ 1,384 1,234
Office building and improvements............................ 7,371 5,688
Furniture, fixtures and equipment........................... 6,174 4,768
Construction in progress.................................... 4,803 1,189
------- ------
19,732 12,879
Less accumulated depreciation............................... (5,517) (4,550)
------- ------
$14,215 8,329
======= ======
</TABLE>
Construction in progress at March 31, 1997 represents costs incurred for the
development of a new centralized administrative and operations center and
branch office in Swansea, the construction of a new branch in New Bedford, and
renovation of existing branches located in Somerset, Taunton, Fall River and
New Bedford.
F-17
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank leases certain office space under various noncancellable operating
leases. A summary of future minimum rental payments under such leases at March
31, 1997 follows:
<TABLE>
<CAPTION>
MINIMUM RENTAL
YEAR ENDING MARCH 31, EXPENSE
--------------------- --------------
<S> <C>
1998........................................................ $153
1999........................................................ 110
2000........................................................ 87
2001........................................................ 28
2002........................................................ 28
After 2002.................................................. 408
</TABLE>
Rent expense was $197, $182, and $172 for the years ended March 31, 1997,
1996 and 1995, respectively.
(9) DEPOSITS (DOLLARS IN THOUSANDS)
Deposits at March 31 are as follows:
<TABLE>
<CAPTION>
WEIGHTED 1997 1996
AVERAGE -------------- --------------
RATES AMOUNT % AMOUNT %
---------- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Money market...................... (2.83;2.83) $ 29,411 4.0 $ 28,614 4.9
Business checking................. ( -; -) 41,276 5.7 48,517 8.3
Savings........................... (2.50;2.50) 86,594 12.0 78,420 13.4
NOW............................... (1.98;1.98) 41,881 5.8 36,248 6.2
-------- ----- -------- -----
199,162 27.5 191,799 32.8
-------- ----- -------- -----
Certificates:
Six months to one year.......... (5.68;5.63) 249,461 34.5 153,082 26.2
Over one year................... (6.15;6.39) 167,326 23.1 133,480 22.9
Jumbo........................... (5.51;5.68) 9,043 1.2 11,196 2.0
IRA & Keogh..................... (5.91;6.24) 83,872 11.6 72,530 12.4
Business statement.............. (5.01;4.62) 1,329 0.2 11,335 1.9
7-91 day........................ (4.86;4.75) 13,783 1.9 10,328 1.8
-------- ----- -------- -----
Total certificate accounts.... 524,814 72.5 391,951 67.2
-------- ----- -------- -----
$723,976 100.0 $583,750 100.0
======== ===== ======== =====
Weighted average stated
interest rate of deposits....... (4.76;4.59)
</TABLE>
The remaining contractual maturities of certificate accounts at March 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
AMOUNT % AMOUNT %
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Within twelve months........................... $370,634 70.6 $287,579 73.4
Thirteen months to thirty-six months........... 138,070 26.3 80,301 20.5
Beyond thirty-six months....................... 16,110 3.1 24,071 6.1
-------- ----- -------- -----
$524,814 100.0 $391,951 100.0
======== ===== ======== =====
</TABLE>
Certificates of deposit in denominations of $100 or more totaled
approximately $57,306 and $53,600 at March 31, 1997 and 1996, respectively.
F-18
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the ordinary course of business, the Bank accepts deposits from brokerage
companies on behalf of their clients. These monies are invested in
certificates of deposit. Brokered deposits amounted to $1,966 and $2,350 at
March 31, 1997 and 1996, respectively.
Interest expense on deposits consisted of the following for the years ended
March 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Money market........................................... $ 828 783 885
Regular and club....................................... 2,061 1,915 2,037
NOW.................................................... 763 599 479
Certificates........................................... 26,625 19,834 10,489
------- ------ ------
$30,277 23,131 13,890
======= ====== ======
</TABLE>
(10) FEDERAL HOME LOAN BANK ADVANCES (DOLLARS IN THOUSANDS)
At March 31, 1997 and 1996, advances from the Federal Home Loan Bank of
Boston ("FHLB") with a weighted average interest rate of 6.13% and 5.94%,
respectively, mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, 1997 1996
--------------------- -------- ------
<S> <C> <C>
1997....................................................... $ -- 48,092
1998....................................................... 46,000 9,000
1999....................................................... 32,700 10,000
2000....................................................... 31,314 7,000
2001....................................................... 1,000 1,000
2002 and thereafter........................................ 48 49
-------- ------
$111,062 75,141
======== ======
</TABLE>
In accordance with the Federal Home Loan Bank of Boston's collateral
requirements, a portion of first mortgage loans on residential property and
all 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 $12,700 secured line of credit available and additional
borrowing capacity of $417,700 with the FHLB at March 31, 1997.
(11) LITIGATION
Various legal proceedings are pending against the Company which have arisen
out to the normal course of business. In the opinion of management, the
ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial position, the annual results of
operations, or liquidity of the Company.
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments primarily include commitments to originate and
sell loans and unadvanced lines of credit. 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 Bank involvement in these particular
classes of financial instruments.
F-19
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank'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 Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amount represents
credit risk:
Commitments to originate loans to be sold................. $18,079 15,977
Commitments to originate loans to be held in portfolio.... 35,430 70,215
Unadvanced home equity lines of credit.................... 24,958 23,986
Unadvanced commercial lines of credit..................... 9,416 8,107
Unadvanced residential construction loans................. 5,274 6,568
Financial instruments whose contractual amount exceeds the
amount of credit risk:
Commitments to sell residential mortgage loans............ 17,158 23,635
</TABLE>
At March 31, 1997 and 1996, commitments to originate loans to be sold with
maturities ranging from 20 years to 30 years had interest rates ranging from
6.25% to 8.75% and 7.25% to 9.74%, 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 many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension
of credit, is based on management's credit evaluation of the borrower.
In addition, the Bank enters into contracts to sell mortgage loans in the
secondary market. Risks arise from the possible inability of the Bank's to
originate loans to fulfill these contracts, in which case the Bank would
normally purchase loans or securities in the open market to deliver against
these contracts. All loans are sold without recourse.
(13) INCOME TAXES (DOLLARS IN THOUSANDS)
Income tax expense for the years ended March 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Current income tax expense:
Federal income tax................................... $ 1,414 2,861 1,963
State income tax..................................... 633 1,202 755
------- ----- -----
2,047 4,063 2,718
------- ----- -----
Deferred income tax (benefit) expense:
Federal income tax................................... (2,407) (586) 810
State income tax..................................... (89) (124) 324
------- ----- -----
(2,496) (710) 1,134
------- ----- -----
Income tax expense (benefit)........................... $ (449) 3,353 3,852
======= ===== =====
</TABLE>
F-20
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate......................... 34.0% 34.0% 34.0%
Items affecting federal income tax rate:
State tax, net of federal benefit....................... (12.4) 8.9 8.1
Appreciation of stock contributed to ESOP............... (4.4) -- --
Other, net.............................................. (1.6) (.8) 1.6
----- ---- ----
Effective income tax rate................................. 15.6% 42.1% 43.7%
===== ==== ====
</TABLE>
The following is an analysis of income taxes receivable (payable) at March
31:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Federal income taxes payable.................................. $ (95) (897)
State income taxes receivable................................. 358 206
------ -----
Total current receivable (payable), net..................... $ 263 (691)
====== =====
Deferred income tax asset, net................................ $4,511 1,960
====== =====
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Deferred tax assets:
Accrued interest income....................................... $ 96 118
Write-down of equity investments.............................. 63 63
Deferred loan fees, net....................................... 382 536
Deferred compensation and pension cost........................ -- 245
Allowance for loan losses..................................... 3,422 1,919
Contribution to the Foundation carryforward................... 2,145 --
------ -----
Gross deferred tax asset.................................... 6,108 2,881
------ -----
Deferred tax liabilities:
Depreciation.................................................. 636 621
Mortgage servicing rights..................................... 670 --
Other......................................................... 61 15
Unrealized gain on investments available for sale............. 230 285
------ -----
Deferred income tax asset, net.............................. $4,511 1,960
====== =====
</TABLE>
Based on the Company's historical and current pretax earnings, management
believes it is more likely than not that the Company will realize the net
deferred tax asset existing at March 31, 1997. The primary sources of recovery
of the net federal deferred tax asset of $4,511 are federal income taxes paid
in the previous three years that are available for carryback and the
expectation that the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income.
Deferred state tax assets, net of related federal tax, totaled $633 at March
31, 1997. Since there is no carryback provision for state income tax
F-21
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
purposes, the Company needs to generate approximately $5,750 of future net
taxable income to realize the state deferred tax asset.
It should be noted, however, that factors beyond management's control, such
as the general economy and real estate values, can affect future levels of
taxable income, and no assurance can be given that sufficient taxable income
will be generated to fully absorb gross deductible temporary differences.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts beginning after
December 31, 1995. These rules also require that thrift institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Company had previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
The unrecaptured base year reserves will not be subject to recapture as long
as the institution continues to carry on the business of banking. In addition,
the balance of the pre-1988 bad debt reserves continues to be subject to
provisions of present law that require recapture in the case of certain excess
distributions to shareholders. The tax effect of pre-1988 bad debt reserves
subject to recapture in the case of certain excess distributions is
approximately $3.3 million.
(14) PENSION PLAN AND OTHER BENEFITS (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE
DATA)
Employee Stock Ownership Plan
Effective January 15, 1997 the Company adopted an Employee Stock Ownership
Plan ("ESOP"). The Plan is designed to provide retirement benefits for
eligible employees of the Bank. Because the Plan invests primarily in the
stock of the Company, it does also give eligible employees an opportunity to
acquire an ownership interest in the Company. Employees are eligible to
participate in the Plan 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
ESOP at a total purchase price of $6,970. The purchase was made from the
proceeds of a $6,970 loan from FAB FUNDING CORPORATION, a wholly-owned
subsidiary of the Company, bearing interest at the prime rate. The loan will
be repaid by contributions the Bank makes to the ESOP. The Bank recorded a
charge to compensation and employee benefits expense of $1,280 related to the
ESOP, including $376 related to the appreciation in the fair value of
allocated ESOP shares. The loan will be repaid over a period of approximately
nine years, principally with funds from the Bank's future contributions to
ESOP, subject to IRS limitations.
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 released shares are credited to the participants' ESOP
accounts or paid out proportionally or applied towards payment of the loan.
Dividends on unreleased shares will generally be applied towards payment of
the loan.
At March 31, 1997, shares held in suspense to be released annually as the
loan is paid down amounted to 619,564. The fair value of unallocated ESOP
shares was $8,442 at March 31, 1997. Dividends on allocated
F-22
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
employers' experience. According to the Fund's administrators, as of June 30,
1996, 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 $154, $360 and $289 for
the years ended March 31, 1997, 1996 and 1995.
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 $167 over
the average life expectancy of the participants, which is 7 years.
Supplemental Retirement Plan
In 1986, the Internal Revenue Service issued regulations which limit the
benefits of certain individuals under qualified retirement plans. During 1993,
the Company 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 $144, $130 and $121 for the years ended March 31, 1997, 1996, and 1995,
respectively. At March 31, 1997, the Company holds restricted assets in a
irrevocable grantor's trust with a cost basis of $815 and a market value of
$936, which are included in other assets and offset by an accrued liability of
$815.
Employee Tax Deferred Thrift Plan
The Company has an employee tax deferred thrift plan (the "Thrift Plan")
under which employee contributions to the Thrift Plan are matched within
certain limitations by the Company. All employees who meet specified age and
length of service requirements are eligible to participate in the Thrift Plan.
The amounts matched by the Company are included in compensation and benefits
expense. The amounts matched for the years ended March 31, 1997, 1996 and 1995
were $110, $104 and $95, respectively.
Executive Officer Employment Agreements and Change in Control Agreements
The Company and Bank entered into employment agreements with its Chairman,
President and Chief Executive Officer, and the three Senior Vice Presidents.
The employment agreements generally provide for the
F-23
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
continued payment of specified compensation and benefits for three years for
the Chairman, President and Chief Executive officer and two years for the
Senior Vice Presidents. The agreements 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 agreements. The agreements also
provide for payments to the officer upon voluntary or involuntary termination
of the officer following a change in control, as defined in the agreements. In
addition the Bank entered into change in control agreements with certain other
executives which provide for the payment, under certain circumstances, to the
officer upon the officer's termination after a change of control, as defined
in their change of control agreements.
Employee Severance Compensation Plan
The Company established an 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 Company and are not eligible to receive benefits under the executive
officer employment agreements, or change in control agreements. The Plan
provides for the payment, under certain circumstances, of lump-sum amounts
upon termination following a change of control, as defined in the Plan.
(15) 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 market exists for some of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk
characteristics and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions and changes in the
loan, debt and interest rate markets could significantly affect the estimates.
Further, the income tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on the fair value
estimates and have not been considered.
The following methods and assumptions were used by the Company in estimating
fair values of its financial instruments:
Cash on Hand and Due from Banks
The fair values for cash on hand and due from banks approximate those
assets' carrying amounts 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.
F-24
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 amount as reported in the
balance sheet. If redeemed, the Company will 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 Federal Home Loan Bank overnight advances approximates
their carrying value due to their short term nature. All other advances are
estimated using a discounted cash flow technique that applies interest rates
currently being offered on advances to a schedule of aggregated expected
monthly maturities on FHLB advances.
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.
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 counterparties' 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-25
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash on hand and due from banks........ $ 14,130 14,130 $ 13,277 13,277
Short-term investments................. 39,410 39,410 -- --
Mortgage loans held for sale........... 23,331 23,331 17,747 17,747
Investment securities available for
sale.................................. 888 888 725 725
Mortgage-backed securities available
for sale.............................. 31,732 31,732 -- --
Investment securities held to
maturity.............................. 20,991 20,958 23,987 24,061
Mortgage-backed securities held to
maturity.............................. 15,435 15,578 7,248 7,386
Stock in FHLB of Boston................ 9,531 9,531 6,630 6,630
Loans receivable, net.................. 796,355 789,824 637,592 631,952
Accrued interest receivable............ 4,722 4,722 3,711 3,711
Financial liabilities:
Deposits............................... $723,976 725,139 $583,750 586,239
FHLB advances.......................... 111,062 110,686 75,141 74,997
Advance payments by borrowers for taxes
and insurance......................... 5,580 5,580 4,167 4,167
Accrued interest payable............... 717 717 304 304
</TABLE>
(16) PARENT COMPANY ONLY FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)
The following are the condensed financial statements for FIRSTFED AMERICA
BANCORP, INC. (the "Parent Company") only at March 31:
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS 1997
------ --------
<S> <C>
Cash and interest bearing deposit in subsidiary bank............ $ 17,467
--------
Total cash and cash equivalents............................. 17,467
--------
Investment in subsidiaries, at equity........................... 102,880
Accrued interest receivable..................................... 82
Deferred income tax asset....................................... 2,145
--------
Total assets................................................ $122,574
========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
Accrued income taxes............................................ $ 18
Accrued expenses and other liabilities.......................... 402
--------
Total liabilities........................................... 420
--------
Preferred stock, $.01 par value, 1,000,000 shares authorized;
none issued.................................................... --
Common stock, $.01 par value; 25,000,000 shares authorized;
8,707,152 issued and outstanding............................... 87
Additional paid-in capital...................................... 84,334
Retained earnings............................................... 43,603
Unrealized gain on investments available for sale, net of tax... 326
Unallocated ESOP shares......................................... (6,196)
--------
Total stockholders' equity.................................. 122,154
--------
Total liabilities and stockholders' equity.................. $122,574
========
</TABLE>
F-26
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
Interest income............................................. $ 233
--------
Net interest income....................................... 233
Contribution to The FIRSTFED Charitable Foundation.......... 6,454
Other non-interest expense.................................. 70
--------
Total non-interest expense.............................. 6,524
--------
Loss before income taxes.................................. (6,291)
Income tax benefit.......................................... (2,125)
--------
Loss before equity in net income of subsidiaries.......... (4,166)
Equity in net income of subsidiaries........................ 1,736
--------
Net loss.................................................. $ (2,430)
========
<CAPTION>
1997
--------------
(IN THOUSANDS)
<S> <C>
STATEMENT OF CASH FLOWS
Net cash flows from operating activities:
Net loss.................................................. $ (2,430)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Contribution of shares to the Foundation................ 6,454
Equity in undistributed earnings of subsidiaries........ (1,736)
Appreciation in fair value of ESOP shares............... 376
(Increase) in accrued interest receivable............... (82)
(Increase) in deferred federal taxes.................... (2,145)
Increase in accrued income taxes........................ 18
Increase in accrued expenses and other liabilities...... 402
--------
Net cash provided by operating activities............. 857
--------
Cash flow from investing activities:
Change in investment in subsidiaries.................. (54,785)
--------
Net cash used in investing activities................. (54,785)
--------
Cash flow from financing activities:
Net proceeds from common stock issued pursuant to initial
public offering.......................................... 77,591
Payments to acquire common stock for ESOP................. (6,970)
Reduction in allocated ESOP shares........................ 774
--------
Net cash provided by financing activities............. 71,395
--------
Net increase in cash and cash equivalents............. 17,467
Cash and cash equivalents at beginning of year.............. --
--------
Cash and cash equivalents at end of year.................... $ 17,467
========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes............................................ $ 1
========
</TABLE>
F-27
<PAGE>
Selected Consolidated Financial and
Other Data of the Company
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. Prior to January 15, 1997, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of
the Bank.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $979,736 $723,572 $560,038 $469,433 $399,752
Short-term investments 39,410 -- -- -- --
Investment securities available for sale (1) 888 725 518 -- --
Mortgage-backed securities available for sale (1) 31,732 -- -- -- --
Investment securities held to maturity (1) 20,991 23,987 20,988 10,049 12,151
Mortgage-backed securities held to maturity (1) 15,435 7,248 2,721 3,437 4,828
Mortgage loans held for sale 23,331 17,747 6,816 15,779 20,253
Loans receivable, net (2) 796,355 637,592 499,977 411,773 339,825
Deposits 723,976 583,750 440,107 360,093 329,418
FHLB advances 111,062 75,141 66,592 59,542 33,882
Stockholders' equity 122,154 46,418 41,697 36,469 29,554
----------------------------------------------------------------------
For the Year Ended March 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
(in thousands)
Selected Operating Data:
Interest and dividend income $ 62,259 $ 46,044 $ 37,487 $ 33,206 $ 33,994
----------------------------------------------------------------------
Interest expense 38,497 26,382 18,337 14,196 17,361
Net interest income before provision
for loan losses 23,762 19,662 19,150 19,010 16,663
----------------------------------------------------------------------
Provision for loan losses 3,750 2,626 653 1,035 2,102
Net interest income after provision
for loan losses 20,012 17,036 18,497 17,975 14,531
Total noninterest income 4,414 4,592 2,509 4,470 7,651
----------------------------------------------------------------------
Total noninterest expense (3) 27,305 13,672 12,193 12,790 12,688
Income (loss) before income tax expense
and cumulative effect of
change in accounting for income taxes (2,879) 7,956 8,813 9,655 9,494
Income tax expense (credit) (449) 3,353 3,852 4,253 4,430
----------------------------------------------------------------------
Net income before cumulative effect of change in
accounting for income taxes (2,430) 4,603 4,961 5,420 5,064
Cumulative effect of change in accounting
for income taxes -- -- -- 1,495 --
----------------------------------------------------------------------
Net income (loss) ($2,430) $ 4,603 $ 4,961 $ 6,915 $ 5,064
======================================================================
</TABLE>
<PAGE>
Selected Consolidated Financial Ratios
and Other Data (4)
<TABLE>
<CAPTION>
At or For the Year Ended
At March 31,
1997 1996 1995 1994 1993
------------------------------------------------------------------
% % % % %
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return (loss) on average assets -0.28 0.76 0.96 1.51 1.18
Return (loss) on average stockholders' equity -3.71 10.40 12.83 20.51 18.69
Average stockholders' equity to average assets 7.58 7.26 7.45 7.35 6.33
Stockholders' equity to total assets at end of period 12.47 6.41 7.45 7.77 7.40
Average interest rate spread (5) 2.27 2.79 3.39 3.85 3.70
Net interest margin (6) 2.87 3.37 3.86 4.37 4.12
Average interest-earning assets to average
interest-bearing liabilities 112.67 112.90 112.71 115.88 110.00
Total noninterest expense to average assets (3) 3.16 2.24 2.35 2.79 2.96
Efficiency ratio (3)(7) 96.91 56.37 56.30 54.47 52.25
Regulatory Capital Ratios (Bank Only):
Tangible capital 10.34 6.36 7.40 7.77 7.40
Core capital 10.34 6.36 7.40 7.77 7.40
Risk-based capital 20.24 12.48 14.13 14.56 13.93
Asset Quality Ratios:
Non-performing loans as a
percent of loans (8)(9) 0.45 0.63 0.60 1.02 1.46
Non-performing assets as a
percent of total assets (9) 0.44 0.65 0.59 1.10 1.37
Allowance for loan losses as a
percent of loans (2)(8) 1.09 0.87 0.84 0.95 1.03
Allowance for loan losses as a
percent of non-performing loans (2)(9) 239.98 138.62 139.76 93.91 70.41
Book value per common share $ 14.03 NA NA NA NA
Market value per common share $ 13.63 NA NA NA NA
Number of full-service customer facilities 13 10 9 8 8
Number of loan origination centers 5 5 5 5 4
</TABLE>
(1) The Company classified its investment and mortgage-backed securities as
"held for investment" until April 1, 1994, at which time a portion of the
Company's portfolio was classified as "available for sale." The Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), as of April 1, 1994. Investment securities at March 31, 1997 do not
include $9.5 million of Federal Home Loan Bank of Boston (FHLB) stock.
(2) The allowance for loan losses at March 31, 1997, 1996, 1995, 1994 and 1993
was $8.8 million, $5.6 million, $4.2 million, $4.0 million and $3.5 million,
respectively.
(3) For the year ended March 31, 1997, noninterest expense includes $6.5 million
for the establishment of The Foundation, $1.3 million increased compensation
expense from the ESOP and $2.9 million assessment to recapitalize the
Savings Association Insurance Fund of the FDIC.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period ratios.
With the exception of end of period ratios, all ratios are based on average
monthly balances during the indicated periods and are annualized where
appropriate.
(5) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of noninterest expenses divided
by the sum of net interest income and noninterest income.
(8) Loans include loans receivable, net excluding the allowance for loan losses.
(9) Non-performing assets consists of non-performing loans and real estate owned
("REO"). Non-performing loans consists of all loans 90 days or more past due
and other loans which have been identified by the Company as presenting
uncertainty with respect to the collectability of interest or principal. It
is the Company's policy to cease accruing interest on all such loans.
<PAGE>
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held on Tuesday, August 5, 1997,
at 2:00 p.m. The meeting will take place at The Westin Hotel, One West
Exchange Street, Providence, RI.
STOCK LISTING
FIRSTFED AMERICA BANCORP, INC. became a public company on January 15, 1997.
FIRSTFED AMERICA BANCORP, INC. Common Stock is traded on the American Stock
Exchange with the symbol "FAB."
COMMON STOCK INFORMATION
Initial Public Offering Price: $10.00 per share.
Public Trading from January 15, 1997 to March 31, 1997:
<TABLE>
<S> <C>
High............ $15.375
Low............. $12.875
</TABLE>
As of March 31, 1997, the Company had 8,707,152 shares outstanding and
approximately 1,700 stockholders of record, not including persons or entities
holding stock in nominee or street name through brokers or banks.
10-K REPORT
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge upon written request to
FIRSTFED AMERICA BANCORP, INC., Investor Relations, One North Main Street,
Fall River, MA 02720.
TRANSFER AGENT INDEPENDENT AUDITOR
Registrar and Transfer Company KPMG Peat Marwick LLP
10 Commerce Drive 99 High Street
Cranford, NJ 07016 Boston, MA 02110
Shareholder Inquiries: 908-272-8511
REGULATORY COUNSEL INVESTOR RELATIONS
Muldoon, Murphy & Faucette Philip G. Campbell
5101 Wisconsin Avenue N.W. Vice President, Director of
Washington, D.C. 20016 Marketing,
Corporate Planning and Investor
Relations
FIRSTFED AMERICA BANCORP, INC.
One North Main Street
Fall River, MA 02720
Tel: 508-679-8181
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRSTFED AMERICA BANCORP, INC. AT AND FOR THE FISCAL
YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 14,130
<INT-BEARING-DEPOSITS> 39,410
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,620
<INVESTMENTS-CARRYING> 36,426
<INVESTMENTS-MARKET> 36,536
<LOANS> 796,355<F1>
<ALLOWANCE> 8,788
<TOTAL-ASSETS> 979,736
<DEPOSITS> 723,976
<SHORT-TERM> 46,000
<LIABILITIES-OTHER> 22,544
<LONG-TERM> 65,062
0
0
<COMMON> 87
<OTHER-SE> 122,067
<TOTAL-LIABILITIES-AND-EQUITY> 979,736
<INTEREST-LOAN> 57,941
<INTEREST-INVEST> 3,763
<INTEREST-OTHER> 555
<INTEREST-TOTAL> 62,259
<INTEREST-DEPOSIT> 30,277
<INTEREST-EXPENSE> 38,497
<INTEREST-INCOME-NET> 23,762
<LOAN-LOSSES> 3,750
<SECURITIES-GAINS> 51
<EXPENSE-OTHER> 27,305
<INCOME-PRETAX> (2,879)
<INCOME-PRE-EXTRAORDINARY> (2,879)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,430)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.53
<LOANS-NON> 3,662
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,464
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,607
<CHARGE-OFFS> 637
<RECOVERIES> 68
<ALLOWANCE-CLOSE> 8,788
<ALLOWANCE-DOMESTIC> 8,788
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,697
<FN>
<F1>
LOANS HELD TO MATURITY
</FN>
</TABLE>
<PAGE>
EXHIBIT 99.0
FIRSTFED AMERICA BANCORP, INC.
One North Main Street
Fall River, Massachusetts 02720
(508) 679-8181
June 20, 1997
Fellow Shareholders:
You are cordially invited to attend the 1997 annual meeting of
shareholders (the "Annual Meeting") of FIRSTFED AMERICA BANCORP, INC. (the
"Company"), the holding company for First Federal Savings Bank of America (the
"Bank"), Fall River, Massachusetts, which will be held on August 5, 1997 at 2:00
p.m., Eastern Time, at The Westin Hotel, One West Exchange Street, Providence,
Rhode Island 02903.
The attached Notice of the Annual Meeting and the Proxy Statement
describe the business to be transacted at the Annual Meeting. Directors and
officers of the Company as well as a representative of KPMG Peat Marwick LLP,
the Company's independent auditors, will be present at the Annual Meeting to
respond to any questions that our shareholders may have regarding the business
to be transacted.
The Board of Directors of the Company has determined that matters to be
considered at the Annual Meeting are in the best interests of the Company and
its shareholders. FOR THE REASONS SET FORTH IN THE PROXY STATEMENT, THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE NOMINEES AS
DIRECTORS SPECIFIED UNDER PROPOSAL 1, AND THAT YOU VOTE "FOR" APPROVAL OF THE
FIRSTFED AMERICA BANCORP, INC. 1997 STOCK-BASED INCENTIVE PLAN (THE "PLAN") AS
SPECIFIED UNDER PROPOSAL 2, AND THAT YOU VOTE "FOR" PROPOSAL 3, THE RATIFICATION
OF INDEPENDENT AUDITORS.
PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD PROMPTLY. YOUR
COOPERATION IS APPRECIATED SINCE A MAJORITY OF THE COMMON STOCK MUST BE
REPRESENTED, EITHER IN PERSON OR BY PROXY, TO CONSTITUTE A QUORUM FOR THE
CONDUCT OF BUSINESS AT THE ANNUAL MEETING.
On behalf of the Board of Directors and all of the employees of the
Company and the Bank, I thank you for your continued interest and support.
Sincerely yours,
/s/ Robert F. Stoico
Robert F. Stoico
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
One North Main Street
Fall River, Massachusetts 02720
----------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held on August 5, 1997
----------------------------------
NOTICE IS HEREBY GIVEN that the annual meeting of shareholders (the
"Annual Meeting") of FIRSTFED AMERICA BANCORP, INC. (the "Company"), the holding
company for First Federal Savings Bank of America (the "Bank"), will be held on
August 5, 1997 at 2:00 p.m., Eastern Time, at The Westin Hotel, One West
Exchange Street, Providence, Rhode Island 02903.
The purpose of the Annual Meeting is to consider and vote upon the
following matters:
1. The election of two directors to a three-year term of office;
2. The approval of the FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based
Incentive Plan;
3. The ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending March
31, 1998; and
4. Such other matters as may properly come before the meeting and at
any adjournments thereof, including whether or not to adjourn the
meeting.
The Board of Directors has established June 11, 1997, as the record
date for the determination of shareholders entitled to receive notice of and to
vote at the Annual Meeting and at any adjournments thereof. Only record holders
of the common stock of the Company as of the close of business on such record
date will be entitled to vote at the Annual Meeting or any adjournments thereof.
In the event there are not sufficient votes for a quorum or to approve the
foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be
adjourned in order to permit further solicitation of proxies by the Company. A
list of shareholders entitled to vote at the Annual Meeting will be available at
FIRSTFED AMERICA BANCORP, INC., One North Main Street, Fall River, Massachusetts
02720, for a period of ten days prior to the Annual Meeting and will also be
available at the Annual Meeting itself.
By Order of the Board of Directors
/s/ Cecilia R. Viveiros
Cecilia R. Viveiros
Corporate Secretary
Fall River, Massachusetts
June 20, 1997
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
-----------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
August 5, 1997
-----------------------
Solicitation and Voting of Proxies
This Proxy Statement is being furnished to shareholders of FIRSTFED
AMERICA BANCORP, INC. (the "Company") in connection with the solicitation by the
Board of Directors ("Board of Directors" or "Board") of proxies to be used at
the annual meeting of shareholders (the "Annual Meeting"), to be held on August
5, 1997, at 2:00 p.m., Eastern Time, at The Westin Hotel, One West Exchange
Street, Providence, Rhode Island, 02903, and at any adjournments thereof. The
1997 Annual Report to Stockholders, including the consolidated financial
statements of the Company for the fiscal year ended March 31, 1997, accompanies
this Proxy Statement which is first being mailed to record holders on or about
June 20, 1997.
Regardless of the number of shares of common stock owned, it is
important that record holders of a majority of the shares be represented by
proxy or in person at the Annual Meeting. Shareholders are requested to vote by
completing the enclosed proxy card and returning it signed and dated in the
enclosed postage-paid envelope. Shareholders are urged to indicate their vote in
the spaces provided on the proxy card. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS OF THE COMPANY WILL BE VOTED BY THE BOARD OF DIRECTORS IN ACCORDANCE
WITH THE DIRECTIONS GIVEN THEREIN. WHERE NO INSTRUCTIONS ARE INDICATED, SIGNED
PROXY CARDS WILL BE VOTED "FOR" THE ELECTION OF THE NOMINEES FOR DIRECTOR NAMED
IN THIS PROXY STATEMENT, "FOR" THE APPROVAL OF THE FIRSTFD AMERICA BANCORP, INC.
1997 STOCK-BASED INCENTIVE PLAN (THE "INCENTIVE PLAN") AND "FOR" THE
RATIFICATION OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS OF THE COMPANY FOR
THE FISCAL YEAR ENDING MARCH 31, 1998.
Other than the matters listed on the attached Notice of Annual Meeting
of Shareholders, the Board of Directors knows of no additional matters that will
be presented for consideration at the Annual Meeting. EXECUTION OF A PROXY,
HOWEVER, CONFERS ON THE DESIGNATED PROXY HOLDERS DISCRETIONARY AUTHORITY TO VOTE
THE SHARES IN ACCORDANCE WITH THEIR BEST JUDGMENT ON SUCH OTHER BUSINESS, IF
ANY, THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING AND AT ANY ADJOURNMENTS
THEREOF, INCLUDING WHETHER OR NOT TO ADJOURN THE ANNUAL MEETING.
A proxy may be revoked at any time prior to its exercise by filing a
written notice of revocation with the Corporate Secretary of the Company, by
delivering to the Company a duly executed proxy bearing a later date, or by
attending the Annual Meeting and voting in person. However, if you are a
shareholder whose shares are not registered in your own name, you will need
appropriate documentation from your record holder to attend the Annual Meeting
and vote personally at the Annual Meeting.
The cost of solicitation of proxies on behalf of management will be
borne by the Company. In addition to the solicitation of proxies by mail,
Kissel-Blake Inc., a proxy solicitation firm, will assist the Company in
soliciting proxies for the Annual Meeting and will be paid a fee of $4,000,
plus out-of-pocket expenses. Proxies may also be solicited personally or by
telephone by directors, officers and other employees of the Company and its
subsidiary, First Federal Savings Bank of America (the "Bank"), without
additional compensation therefor. The Company will also request persons, firms
and corporations holding shares in their names, or in the name of their
nominees, which are beneficially owned by others,
<PAGE>
to send proxy material to, and obtain proxies from, such beneficial owners, and
will reimburse such holders for their reasonable expenses in doing so.
Voting Securities
The securities which may be voted at the Annual Meeting consist of
shares of common stock of the Company ("Common Stock"), with each share
entitling its owner to one vote on all matters to be voted on at the Annual
Meeting, except as described below.
The close of business on June 11, 1997, has been fixed by the Board of
Directors as the record date (the "Record Date") for the determination of
shareholders of record entitled to notice of and to vote at the Annual Meeting
and at any adjournments thereof. The total number of shares of Common Stock
outstanding on the Record Date was 8,707,152 shares.
As provided in the Company's Certificate of Incorporation, for voting
purposes, holders of Common Stock who beneficially own in excess of 10% of the
outstanding shares of Common Stock (the "Limit") are not entitled to any vote in
respect of the shares held in excess of the Limit and are not treated as
outstanding for voting purposes. A person or entity is deemed to beneficially
own shares owned by an affiliate of, as well as, by persons acting in concert
with, such person or entity. The Company's Certificate of Incorporation
authorizes the Board of Directors (i) to make all determinations necessary to
implement and apply the Limit, including determining whether persons or entities
are acting in concert, and (ii) to demand that any person who is reasonably
believed to beneficially own stock in excess of the Limit to supply information
to the Company to enable the Board of Directors to implement and apply the
Limit.
The presence, in person or by proxy, of the holders of at least a
majority of the total number of shares of Common Stock entitled to vote (after
subtracting any shares in excess of the Limit pursuant to the Company's
Certificate of Incorporation) is necessary to constitute a quorum at the Annual
Meeting. In the event that there are not sufficient votes for a quorum or to
approve or ratify any proposal at the time of the Annual Meeting, the Annual
Meeting may be adjourned in order to permit the further solicitation of proxies.
As to the election of directors (Proposal 1), the proxy card being
provided by the Board of Directors enables a shareholder to vote "FOR" the
election of the nominees proposed by the Board, or to "WITHHOLD" authority to
vote for one or more of the nominees being proposed. Under Delaware law and the
Company's Bylaws, directors are elected by a plurality of votes cast, without
regard to either (i) broker non-votes or (ii) proxies as to which authority to
vote for one or more of the nominees being proposed is withheld.
As to the proposed approval of the Incentive Plan (Proposal 2)
submitted for shareholder action, the proxy card being provided by the Board of
Directors enables a shareholder to check the appropriate box on the proxy card
to (i) vote "FOR" the item, (ii) vote "AGAINST" the item, or (iii) "ABSTAIN"
from voting on such item.
As to the ratification of KPMG Peat Marwick LLP as independent auditors
of the Company (Proposal 3) and all other matters that may properly come before
the Annual Meeting, by checking the appropriate box, a shareholder may (i) vote
"FOR" the item, (ii) vote "AGAINST" the item, or (iii) "ABSTAIN" from voting on
such item.
2
<PAGE>
Under the Company's Bylaws and Delaware law, an affirmative vote of the
holders of a majority of the votes cast at the Annual Meeting on Proposal 2 and
Proposal 3 is required to constitute shareholder approval of each such Proposal.
Shares underlying broker non-votes or in excess of the Limit will not be counted
as present and entitled to vote or as votes cast and will have no effect on the
vote. For further information on the vote required to implement Proposal 2
during the first year following the conversion from mutual to stock form of the
Company's subsidiary, the Bank, which was completed on January 15, 1997 (the
"Conversion"), see the discussion under Proposal 2 herein. For purposes of the
rules and regulations of the Securities and Exchange Commission ("SEC"), shares
as to which the "ABSTAIN" box has been selected on the proxy card with respect
to Proposal 2 have the effect of a vote against Proposal 2 and shares underlying
broker non-votes or in excess of the Limit are not counted as entitled to vote
on Proposal 2 and have no effect on the vote on the Proposal.
Proxies solicited hereby are to be returned to the Company's transfer
agent, Registrar and Transfer Company ("RTC"). The Board of Directors has
designated RTC to act as the inspector of election and tabulate the votes at the
Annual Meeting. RTC is not otherwise employed by, or a director of, the Company
or any of its affiliates. After the final adjournment of the Annual Meeting, the
proxies will be returned to the Company.
Security Ownership of Certain Beneficial Owners
The following table sets forth information as to those persons believed
by management to be beneficial owners of more than 5% of the Company's
outstanding shares of Common Stock on the Record Date or as disclosed in certain
reports received to date regarding such ownership filed by such persons with the
Company and with the SEC, in accordance with Sections 13(d) and 13(g) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). Other than those
persons listed below, the Company is not aware of any person, as such term is
defined in the Exchange Act, that owns more than 5% of the Company's Common
Stock as of the Record Date.
3
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address Beneficial Percent of
Title of Class of Beneficial Owner Ownership Class
- ------------------- ---------------------------------------------- ----------------- ---------------
<S> <C> <C> <C>
Common Stock Wellington Management Company, LLP 1,086,100(1) 12.5%
75 State Street
Boston, Massachusetts 02109
Common Stock First Federal Savings Bank of America Employee 697,010(2) 8.0%
Stock Ownership Plan ("ESOP")
One North Main Street
Fall River, Massachusetts 02720
Common Stock The FIRSTFED Charitable Foundation 645,380(3) 7.4%
One North Main Street
Fall River, Massachusetts 02720
</TABLE>
- -------------------------
(1) Based upon information filed in a Schedule 13G on May 5, 1997,
Wellington Management Company, LLP, in its capacity as an investment
advisor, may be deemed the beneficial owner of 1,086,100 shares.
(2) Shares of Common Stock were acquired by the ESOP in the Bank's
Conversion. The ESOP Committee administers the ESOP. First Bankers
Trust, N.A. has been appointed as the trustee for the ESOP ("ESOP
Trustee"). The ESOP Trustee must vote all allocated shares held in the
ESOP in accordance with the instructions of the participants. At June
11, 1997, 77,446 shares had been allocated under the ESOP and 619,564
shares remain unallocated. Under the ESOP, unallocated shares and
allocated shares as to which voting instructions are not given by
participants are to be voted by the ESOP Trustee in a manner calculated
to most accurately reflect the instructions received from participants
regarding the allocated stock so long as such vote is in accordance
with the fiduciary provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
(3) The FIRSTFED Charitable Foundation (the "Foundation") was established
and funded by the Company in connection with the Bank's Conversion with
an amount of the Company's Common Stock equal to 8.0% of the total
amount of Common Stock issued in the Conversion. The Foundation is a
Delaware non-stock corporation and is dedicated to the promotion of
charitable purposes within the communities in which the Bank operates.
The Foundation is governed by a board of directors with 7 members, all
of whom are directors of the Company and the Bank. Pursuant to the
terms of the contribution of Common Stock, as mandated by the Office of
Thrift Supervision ("OTS"), all shares of Common Stock held by the
Foundation must be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by shareholders of
the Company.
Interest of Certain Persons in Matters to be Acted Upon
Upon obtaining shareholder approval, the Company and the Bank intend to
grant to directors, officers and employees of the Bank and the Company, stock
options and awards in the form of shares of Common Stock under the Incentive
Plan being presented for approval in Proposal 2.
4
<PAGE>
PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
The Board of Directors of the Company currently consists of seven (7)
directors and is divided into three classes. Each of the seven members of the
Board of Directors also presently serves as a director of the Bank. Directors
are elected for staggered terms of three years each, with the term of office of
only one of the three classes of directors expiring each year. Directors serve
until their successors are elected and qualified.
The two nominees proposed for election at the Annual Meeting are Thomas
A. Rodgers, Jr. and Anthony L. Sylvia. No person being nominated as a director
is being proposed for election pursuant to any agreement or understanding
between any such person and the Company.
In the event that any such nominee is unable to serve or declines to
serve for any reason, it is intended that proxies will be voted for the election
of the balance of those nominees named and for such other persons as may be
designated by the present Board of Directors. The Board of Directors has no
reason to believe that any of the persons named will be unable or unwilling to
serve. UNLESS AUTHORITY TO VOTE FOR THE DIRECTORS IS WITHHELD, IT IS INTENDED
THAT THE SHARES REPRESENTED BY THE ENCLOSED PROXY CARD WILL BE VOTED "FOR" THE
ELECTION OF ALL NOMINEES PROPOSED BY THE BOARD OF DIRECTORS.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ALL
NOMINEES NAMED IN THIS PROXY STATEMENT.
Information with Respect to Nominees, Continuing Directors and Certain Executive
Officers
The following table sets forth, as of the Record Date, the names of
nominees and continuing directors and the Named Executive Officers (as defined
below), their ages, a brief description of their recent business experience,
including present occupations and employment, the year in which each became a
director of the Bank and the year in which their terms (or, in the case of
nominees, their proposed terms) as director of the Company expire. This table
also sets forth the amount of Common Stock and the percent thereof beneficially
owned by each director, each Named Executive Officer and all directors and
executive officers as a group as of the Record Date.
<TABLE>
<CAPTION>
Amount and
Expiration Nature of Ownership
Name and Principal Occupation at Director of Term as Beneficial as a Percent
Present and for Past Five Years Age Since(1) Director Ownership(2)(3) of Class(4)
- -------------------------------------------- ----- ------------ ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
NOMINEES
Thomas A. Rodgers, Jr. 83 1963 2000 21,500 *
Chairman and Chief Executive Officer of
Globe Manufacturing Co., Inc.
Anthony L. Sylvia 65 1984 2000 9,000 *
President and Treasurer of The Baker
Manufacturing Co., Inc.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Amount and
Expiration Nature of Ownership
Name and Principal Occupation at Director of Term as Beneficial as a Percent
Present and for Past Five Years Age Since(1) Director Ownership(2)(3) of Class(4)
- -------------------------------------------- ----- ------------ ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C>
CONTINUING DIRECTORS
Robert F. Stoico 56 1980 1998 42,644 *
Chairman of the Board of the Company
and President and Chief Executive
Officer of the Company and the Bank
Gilbert C. Oliveira 72 1960 1999 27,000 *
Chairman of the Board of the Bank and
President and Treasurer of Gilbert C.
Oliveira Insurance Agency, Inc.
Richard W. Cederberg 68 1982 1999 8,000 *
Retired, former Chairman of Larson Tool
and Stamping Company
John S. Holden, Jr. 67 1982 1998 5,200 *
President and Treasurer of Automatic
Machine Products Co.
Paul A. Raymond, DDS 53 1981 1999 5,370 *
Dentist in town of Swansea,
Massachusetts
NAMED EXECUTIVE OFFICERS
(who are not also directors)
Kevin J. McGillicuddy 57 -- -- 5,659 *
Senior Vice President of the Company
and the Bank
Frederick R. Sullivan 55 -- -- 9,318 *
Senior Vice President of the Company
and the Bank
Terrence M. Tyrrell 47 -- -- 14,695 *
Senior Vice President of the Company
and the Bank
All directors and executive officers as a
group (18 persons).......................... -- -- -- 171,650 2.0%
</TABLE>
- ------------------
* Does not exceed 1.0% of the Company's voting securities.
(1) Includes years of service as a director of the Bank.
(2) Each person effectively exercises sole (or shares with spouse or other
immediate family members) voting or dispositive power as to shares
reported.
(3) Does not include options and awards intended to be granted under the
Incentive Plan, which is subject to shareholder approval. For a discussion
of the options and awards that are intended to be granted under the
Incentive Plan, see Proposal 2.
(4) As of the Record Date, there were 8,707,152 shares of Common Stock
outstanding.
6
<PAGE>
Meetings of the Board of Directors and Committees of the Board of Directors
The Board of Directors of the Company and the Board of Directors of the
Bank conduct business through meetings of the Board of Directors and through
activities of their committees. The Board of Directors of the Company and Bank
generally meet on a monthly basis and may have additional meetings as needed.
During the fiscal year ended March 31, 1997, the Board of Directors of the
Company, which was formed on September 6, 1996, held eight meetings primarily
related to organizational and other matters in connection with the formation of
the Company and the acquisition of the Bank through the Conversion. The Board of
Directors of the Bank held 20 meetings during fiscal 1997. All of the directors
of the Company and Bank attended at least 75% of the total number of the
Company's Board meetings held and committee meetings on which such directors
served during the fiscal year ended March 31, 1997. The Board of Directors of
the Company and Bank maintain committees, the nature and composition of which
are described below:
Audit Committee. The Audit and Compliance Committee of the Company
consists of Messrs. Holden, Sylvia and Raymond. The Audit and Compliance
Committee of the Bank consists of Messrs. Holden, Sylvia and Gerhard S.
Lowenstein. These committees generally meet on a quarterly basis and are
responsible for the review of audit reports and management's actions regarding
the implementation of audit findings and to review compliance with all relevant
laws and regulations. The internal audit function, which is outsourced to The
Harcourt Group, Ltd., reports to the Audit and Compliance Committees of the Bank
and Company. Due to the timing of the Conversion, the Audit and Compliance
Committee of the Company did not meet in fiscal 1997. The Audit and Compliance
Committee of the Bank, on occasion, will conduct its meetings as part of a full
board meeting. Including these joint meetings, the Committee met twice in fiscal
1997.
Nominating Committee. The Company's Nominating Committee for the 1997
Annual Meeting consists of Messrs. Stoico, Oliveira and Raymond. The committee
considers and recommends the nominees for director to stand for election at the
Company's annual meeting of shareholders. The Company's Certificate of
Incorporation and Bylaws provide for shareholder nominations of directors. These
provisions require such nominations to be made pursuant to timely notice in
writing to the Secretary of the Company. The shareholder's notice of nomination
must contain all information relating to the nominee which is required to be
disclosed by the Company's Bylaws and by the Exchange Act. See "Additional
Information - Notice of Business to be Conducted at a Special or Annual
Meeting." The Nominating Committee met one time in 1997.
Compensation Committee. The Compensation Committee of the Company
consists of Messrs. Stoico, Oliveira and Rodgers. The Management and Personnel
Committee of the Bank consists of Messrs. Stoico, Oliveira, Rodgers and Willard
E. Olmsted. Such Committees are responsible for all matters regarding
compensation and fringe benefits for officers and employees of the Company and
the Bank and meet on an as needed basis. See "Executive Compensation -
Compensation Committee Report on Executive Compensation." The Compensation
Committee of the Company and the Management and Personnel Committee of the Bank
met once and twice in fiscal 1997, respectively.
7
<PAGE>
Directors' Compensation
Directors' Fees. Directors of the Company do not receive compensation
for serving as Directors of the Company or on a Committee. Directors of the Bank
are currently paid an annual retainer of $10,000, except that the Chairman of
the Board of the Bank receives an annual retainer of $25,000. Directors of the
Bank also receive a fee of $400 for each regular and special board meeting which
they attend. In addition, members of the Board's Executive Committee receive an
annual retainer of $5,000 and a fee of $350 for each Executive Committee meeting
which they attend.
Incentive Plan. The Company is presenting the Incentive Plan to
shareholders for approval, under which all directors of the Company and the Bank
are eligible to receive awards and have been allocated awards to be effective
the earlier of the date the Incentive Plan is approved by shareholders pursuant
to OTS regulations at the Annual Meeting or January 16, 1998. See Proposal 2 for
a summary of the material terms of the Incentive Plan and "New Plan Benefits"
for a discussion of the terms of the awards under the Incentive Plan to Company
and Bank directors.
Executive Compensation
The report of the Compensation Committee and the stock performance
graph shall not be deemed incorporated by reference by any general statement
incorporating by reference this proxy statement into any filing under the
Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act,
except as to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.
Compensation Committee Report on Executive Compensation. Under rules
established by the SEC, the Company is required to provide certain data and
information in regard to the compensation and benefits provided to the Company's
Chief Executive Officer and certain other executive officers of the Company and
the Bank for the fiscal year ended March 31, 1997. Because the Company had no
significant assets, liabilities or operations until January 15, 1997, the
following discussion addresses compensation information relating to the Chief
Executive Officer and the executive officers of the Bank for fiscal 1997 and
sets forth the joint report of the Compensation Committee of the Company and
Management and Personnel Committee of the Bank (collectively the "Compensation
Committee"). The disclosure requirements for the Chief Executive Officer and
other executive officers include the use of tables and a report explaining the
rationale and considerations that led to fundamental compensation decisions
affecting those individuals. In fulfillment of this requirement, the
Compensation Committee, at the direction of the Board of Directors, has prepared
the following report for inclusion in this proxy statement.
General Policy. The Company and the Bank intend to begin a process
during fiscal 1998 to revise the current Executive Compensation Policies of the
Company and Bank to reflect the status of the Bank as a stock institution and
the Company as a publicly held entity and to ensure competitive compensation
levels in comparison to similarly situated publicly held financial institutions.
It is anticipated that the new policies will incorporate the consolidated
financial results of the Company as well
8
<PAGE>
as other factors related to the performance of the Company's stock. However, for
fiscal 1997, the following policy was utilized to determine compensation levels.
The Compensation Committee's responsibility is to recommend the amount
and composition of executive compensation paid to the executive officers. The
Board of Directors has the responsibility to review the report of the
Compensation Committee and approve such compensation. It is the policy of the
Compensation Committee to review executive compensation not less than annually
and more often if deemed necessary by the Compensation Committee. The process
which the Compensation Committee utilized for fiscal 1997, includes, but is not
limited to, reviews of the results of compensation surveys and the utilization
of compensation experts or consultants. It is the goal of the Compensation
Committee to utilize whatever means necessary to obtain adequate and up-to-date
information upon which to base their recommendations to the full Board.
In preparing its analysis, with respect to comparative compensation
data, the Compensation Committee generally considers the following factors in
selecting peer institutions: asset size, off-balance sheet assets, earnings,
type of business operations, corporate structure and geographic location. With
respect to analyzing comparative data for executive officers at peer
institutions, the Compensation Committee considers the scope and similarity of
officer positions, experience and the complexity of individual officer
responsibilities.
In making its compensation determinations, the Compensation Committee
also considers the evaluations of executive officers performed by the Chief
Executive Officer and recommendations made by the Chief Executive Officer,
except in the case of its compensation deliberations regarding the Chief
Executive Officer. The performance of the Chief Executive Officer and other
executive officers are evaluated by the Compensation Committee and a
recommendation is made to the Board. Upon review, the Board sets all executive
compensation. The Chief Executive Officer, a member of the Board of Directors,
abstains from voting on matters related to his compensation.
Compensation Committee Considerations for Fiscal 1997. While the
Company has in the past participated in a number of salary surveys, the Board,
in light of the pending conversion to a public company, decided to engage the
services of an outside consultant. Accordingly, KPMG Peat Marwick LLP ("KPMG")
was engaged to assist the Compensation Committee and the Board in its executive
compensation deliberations for fiscal 1997.
KPMG's report to the Compensation Committee and the full Board included
an analysis of the level of compensation of the Bank's executive officers in
comparison to peer institutions selected by KPMG. The report set forth the
methodology utilized for the selection of the peer group, a recommended
philosophy of compensation and recommended compensation ranges and adjustments.
After review of the report and review of the performance of the Company and the
Executive Officers, the compensation levels recommended by the report were
recommended by the Compensation Committee and approved by the Board of
Directors.
9
<PAGE>
Compensation of the Chief Executive Officer. The Chief Executive
Officer was evaluated on his performance in managing the Company during fiscal
1997, including the effort related to the Conversion and the franchise expansion
into the State of Rhode Island. Certain quantitative and qualitative factors
were reviewed to determine the Chief Executive Officer's compensation. No
specific formula was used in determining the Chief Executive Officer's base
salary for fiscal 1997. In reaching its determination regarding the Chief
Executive Officer's salary, the Compensation Committee utilized the report of
KPMG and recommended to the Board of Directors a base salary substantially
equivalent to the amount recommended by KPMG. Such report analyzed the Chief
Executive Officer's base salary and bonus in comparison to peer institutions
with specific consideration given to the level of the Bank's banking and
mortgage banking operations in comparison to peer institutions with an upward
adjustment to reflect such greater level of operations. The Committee's
determination of the Chief Executive Officer's bonus for fiscal 1997 also was
not determined by a formula or quantitative methodology but was discretionary.
In reaching its determination regarding the recommended level of the Chief
Executive Officer's cash bonus for fiscal 1997, the Committee considered KPMG's
report and recommended to the Board an amount of bonus substantially equivalent
to the amount recommended by KPMG in its report.
The Compensation Committee of the Board of Directors
of the Company
Robert F. Stoico Gilbert C. Oliveira
Thomas A. Rodgers, Jr.
The Management and Personnel Committee
of the Board of Directors of the Bank
Robert F. Stoico Gilbert C. Oliveira
Thomas A. Rodgers, Jr. Willard E. Olmsted
10
<PAGE>
Stock Performance Graph. The following graph shows a comparison of
total shareholder return on the Company's Common Stock, based on the market
price of the Common Stock with the cumulative total return of companies on the
American Stock Exchange and the MG Index for Savings and Loans for the period
beginning on January 15, 1997, the day the Company's Common Stock began trading,
through May 30, 1997. The graph was derived from a limited period of time and,
as a result, may not be indicative of possible future performance of the
Company's Common Stock. The data was supplied by Media General Financial
Services.
Comparative Total Returns
FIRSTFED AMERICA BANCORP, INC., The American Stock
Exchange and The MG Index For Savings and Loans
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Summary
1/15/97 1/31/97 2/28/97 3/31/97 4/30/97 5/30/97
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FIRSTFED AMERICA BANCORP, INC. 100.00 146.30 146.30 136.30 140.00 148.10
American Stock Exchange 100.00 100.00 100.88 97.14 94.53 112.15
MG Index For Savings and Loans 100.00 100.00 108.88 107.75 104.23 103.54
</TABLE>
Notes:
A. The lines represent monthly index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. If the monthly interval, based on the fiscal year-end is not a trading
day, the preceding trading day is used.
D. The index level for all series was set to 100,000 on 1/15/97, the first
day of trading for FIRSTFED AMERICA BANCORP, INC. Common Stock. For
FIRSTFED AMERICA BANCORP, INC. the index commenced with the initial public
offering price of $10.00 per share.
- --------------------------------------------------------------------------------
11
<PAGE>
Summary Compensation Table. The following table shows, for the years
ended March 31, 1997 and 1996, the cash compensation paid, as well as certain
other compensation paid or accrued for that year to the Chief Executive Officer
of the Company and the Bank and all other executive officers of the Company and
the Bank who earned and/or received salary and bonus in excess of $100,000 in
fiscal year 1997 ("Named Executive Officers").
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Compensation
-------------------------------------
Annual Compensation(1) Awards Payouts
----------------------------------------------------------------------------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Principal Fiscal Compensation Awards Options/SARs Payouts Compensation
Positions Year Salary($) Bonus($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert F. Stoico 1997 $328,941 $100,000 - - - - $239,216
President and Chief 1996 282,045 75,000 - - - - 149,364
Executive Officer
Kevin J. McGillicuddy 1997 105,677 15,000 - - - - 44,310
Senior Vice President 1996 96,846 8,000 - - - - 771
Frederick R. Sullivan 1997 105,677 15,000 - - - - 43,518
Senior Vice President 1996 99,923 8,000 - - - - 16,167
Terrence M. Tyrrell 1997 98,446 15,000 - - - - 37,555
Senior Vice President 1996 91,846 8,000 - - - - 11,625
</TABLE>
- -----------------------------------------
(1) Under Annual Compensation, the column titled "Salary" includes directors'
fees for the named President and Chief Executive Officer.
(2) For fiscal years 1997 and 1996, there were no (a) perquisites over the
lesser of $50,000 or 10% of the individual's total salary and bonus for the
year; (b) payments of above-market preferential earnings on deferred
compensation; (c) payments of earnings with respect to long-term incentive
plans prior to settlement or maturation; (d) tax payment reimbursements; or
(e) preferential discounts on stock.
(3) No stock awards were granted or earned in fiscal years 1997 or 1996.
See Proposal 2.
(4) No stock options or SARs were granted or earned in fiscal years 1997 or
1996. See Proposal 2.
(5) For fiscal years 1997 and 1996, there were no payouts or awards under any
long-term incentive plan.
(6) Includes employer contributions of $8,709, $3,174, $3,174 and $2,955 and
$17,500, $14,900, $15,000 and $10,700 to the Bank's Thrift and Retirement
Plans for Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell, respectively,
for fiscal year 1997. Also includes $69,562, $26,236, $25,344 and $23,900
representing the value of shares allocated under the ESOP for the benefit of
Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell, respectively, as of
March 31, 1997. Also includes employer contributions of $143,445 contributed
to Mr. Stoico pursuant to the Bank's Supplemental Retirement Plan for fiscal
year 1997.
12
<PAGE>
Employment Agreements. The Bank and the Company have entered into
employment agreements (collectively, the "Employment Agreement(s)" or
"Agreement(s)") with Messrs. Stoico, McGillicuddy, Sullivan and Tyrrell
(individually, the "Executive"). The Employment Agreements are intended to
ensure that the Bank and the Company will be able to maintain a stable and
competent management base. The continued success of the Bank and the Company
depends to a significant degree on the skills and competence of Messrs. Stoico,
McGillicuddy, Sullivan and Tyrrell.
The Employment Agreements provide for a three-year term for Mr. Stoico
and a two-year term for Messrs. McGillicuddy, Sullivan and Tyrrell. The Bank
Employment Agreements provide that, commencing on the first anniversary date and
continuing each anniversary date thereafter, the Board of Directors may extend
the agreement for an additional year so that the remaining term shall be three
years, in the case of Mr. Stoico, and two years, in the cases of Messrs.
McGillicuddy, Sullivan and Tyrrell, unless written notice of non-renewal is
given by the Board of the Bank after conducting a performance evaluation of the
Executive. The terms of the Company Employment Agreements are extended on a
daily basis unless written notice of non-renewal is given by the Board of the
Company. In addition to the base salary, the Agreements provide for, among other
things, participation in stock benefits plans and other fringe benefits
applicable to similarly situated executive personnel.
The Employment Agreements provide for termination by the Bank or the
Company for cause as defined in the Agreements at any time. In the event the
Bank or the Company chooses to terminate the Executive's employment for reasons
other than for cause, or in the event of the Executive's resignation from the
Bank and the Company upon: (i) failure to re-elect the Executive to his current
offices; (ii) a material change in the Executive's functions, duties or
responsibilities; (iii) a relocation of the Executive's principal place of
employment by more than 25 miles; (iv) liquidation or dissolution of the Bank or
the Company; or (v) a breach of the Agreement by the Bank or the Company, the
Executive or, in the event of death, his beneficiary would be entitled to
receive an amount equal to the remaining base salary payments due to the
Executive and the contributions that would have been made on the Executive's
behalf to any employee benefit plans of the Bank or the Company during the
remaining term of the Agreement. The Bank and the Company would also continue
and pay for the Executive's life, health and disability coverage for the
remaining term of the Employment Agreement. Upon any termination of the
Executive, the Executive is subject to a covenant not to compete with the
Company or the Bank for one year.
Under the Agreements, if voluntary or involuntary termination follows a
change in control of the Bank or the Company (as defined in the Employment
Agreements), the Executive or, in the event of the Executive's death, his
beneficiary, would be entitled to a severance payment equal to the greater of:
(i) the payments due for the remaining terms of the Agreements; or (ii) three
times the average of the five preceding taxable years' annual compensation. The
Bank and the Company would also continue the Executive's life, health, and
disability coverage for thirty-six months in the case of Mr. Stoico and twenty-
four months in the cases of Messrs. McGillicuddy, Sullivan and Tyrrell.
Notwithstanding that both Agreements provide for a severance payment in the
event of a change in control, the Executive would only be entitled to receive a
severance payment under one Agreement. In the event of a change in control,
based upon the Executive's base salary and incentive bonus for fiscal year 1997
as reported in the Summary Compensation Table, Messrs. Stoico, McGillicuddy,
Sullivan and Tyrrell would receive approximately $1.3 million, $362,000,
$362,000 and $340,000, respectively, in severance payments, in addition to other
cash and noncash benefits.
13
<PAGE>
Payments to Executive under the Bank's Agreement will be guaranteed by
the Company in the event that payments or benefits are not paid by the Bank.
Payment under the Company Agreement would be made by the Company. All reasonable
costs and legal fees paid or incurred by the Executive pursuant to any dispute
or question of interpretation relating to the Agreements shall be paid by the
Bank or Company, respectively, if the Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement. The Employment
Agreements also provide that the Bank and Company shall indemnify the Executive
to the fullest extent allowable under federal and Delaware law, respectively.
Change in Control Agreements. The Bank entered into Change in Control
Agreements (the "CIC Agreements") with eight (8) executive officers of the Bank
and the Bank's corporate secretary (individually, the "Executive"). Each CIC
agreement provides for a two-year term. Commencing on the first anniversary date
and continuing on each anniversary thereafter, the CIC Agreements may be renewed
by the Board of the Bank for an additional year. The Bank's CIC Agreement
provides that in the event voluntary or involuntary termination following a
change in control of the Bank or the Company (as defined in the agreement), the
Executive would be entitled to receive a severance payment equal to two times
the Executive's average compensation for the twelve months preceding
termination. The Bank would also continue and pay for the Executive's life,
health and disability coverage for twenty-four (24) full calendar months
following termination. Payments to the Executive under the Bank's CIC Agreements
will be guaranteed by the Company in the event that payments or benefits are not
paid by the Bank. If a change in control occurs, based upon two times fiscal
1997 base salary and incentive bonus and pursuant to the CIC Agreements, the
Executives would receive, in the aggregate, $1.0 million, in addition to other
cash and noncash benefits.
Incentive Plan. The Company is presenting to shareholders for approval
the Incentive Plan under which all eligible employees of the Company and Bank
are eligible to receive awards. See Proposal 2 for a summary of the material
terms of the Incentive Plan.
Thrift Plan. The Bank maintains the Financial Institutions Thrift Plan
(the "Thrift Plan") to encourage eligible employees to save and invest on a
regular, long-term basis. The Thrift Plan permits eligible employees to make
monthly contributions of 2% - 15% of their base monthly salary on an after-tax
basis. Employees become eligible to participate in the Thrift Plan on the first
day of the first full month following commencement of employment with the Bank.
After the completion of a 12 consecutive month period of employment with the
Bank in which they complete 1,000 hours of employment, the Bank makes monthly
employer contributions to each participant's account in the Thrift Plan equal to
50% of the participant's contribution up to 6% of the participant's annual base
salary. Participants are 100% vested in the amounts credited to their Thrift
Plan accounts.
Retirement Plan. The Bank participates in the Financial Institutions
Retirement Fund (the "Retirement Plan") to provide retirement benefits for
eligible employees. Employees become eligible to participate in the Retirement
Plan after the completion of 12 consecutive months of employment with the Bank
and the attainment of age 21. The Retirement Plan excludes hourly paid employees
from participation. Benefits under the Retirement Plan are based on the
participant's years of service and salary. A participant may elect early
retirement as early as age 45. However, such participant's normal retirement
benefits will be reduced by an early retirement factor based on age at early
retirement.
Participants generally have no vested interest in Retirement Plan
benefits prior to the completion of five years of service with the Bank.
Following the completion of five years of vesting service, or in the event of a
participant's attainment of age 65, death or termination of employment due to
disability, a participant becomes 100% vested in his/her accrued benefit under
the Retirement Plan. The table below
14
<PAGE>
reflects the pension benefit payable, and any payment due under the Supplemental
Executive Retirement Plan, discussed below, to a participant assuming various
levels of earnings and years of service. The amounts of benefits paid under the
Retirement Plan are not reduced for any social security benefit payable to
participants. As of January 1, 1997, Messrs. Stoico, McGillicuddy, Sullivan and
Tyrrell had credited years of service of 24 years, 23 months, 8 years and 16
years, respectively.
<TABLE>
<CAPTION>
Years of Benefit Service
----------------------------------------------------------------------
Final Average
Earnings(1) 15 20 25 30 35
- ----------------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$50,000 $15,000 $20,000 $25,000 $30,000 $35,000
$75,000 $22,500 $30,000 $37,500 $45,000 $52,500
$100,000 $30,000 $40,000 $50,000 $60,000 $70,000
$125,000 $37,500 $50,000 $62,500 $75,000 $87,500
$150,000 $45,000 $60,000 $75,000 $90,000 $105,000
$200,000(2) $60,000 $80,000 $100,000 $120,000 $140,000
$250,000(2) $75,000 $100,000 $125,000 $150,000 $175,000
$300,000(2) $90,000 $120,000 $150,000 $180,000 $210,000
$350,000(2) $105,000 $140,000 $175,000 $210,000 $245,000
$400,000(2) $120,000 $160,000 $200,000 $240,000 $280,000
</TABLE>
- -------------------------
(1) The compensation utilized for formula purposes includes the salary
reported in the "Summary Compensation Table."
(2) The maximum amount of annual compensation which can be considered in
computing benefits under Section 401(a)(17) of the Internal Revenue
Code of 1986, as amended (the "Code"), is $160,000 for plan years
beginning on or after January 1, 1997.
Supplemental Retirement Plan. The Bank currently maintains a
Supplemental Retirement Plan under which it annually credits a specified amount
of money to the account of plan participants. Benefits under the Plan become
payable following a participant's termination of employment. In addition,
participants may direct the Bank to defer a percentage of their annual pay into
a subaccount under the Supplemental Retirement Plan. The Bank intends the
benefits provided under the Supplemental Retirement Plan to make participants
whole for reductions in benefits payable under the terms of the Thrift Plan and
Retirement Plan maintained by the Bank, as a result of limitations imposed by
the Code, and provide additional retirement benefits for participants.
15
<PAGE>
Participants generally vest in the amounts credited to the Supplemental
Retirement Plan after completing five years of employment with the Bank.
However, participants vest immediately upon death or disability. In connection
with the Conversion, the Supplemental Retirement Plan was amended to permit
participants to direct that all or a portion of the amounts then existing
(and/or future amounts) credited to their accounts be converted into stock units
based on the value of the Common Stock. The Plan is also being amended to
provide for benefits equivalent to those a participant would have received under
the ESOP but for limitations imposed by the Code. The Bank currently maintains
an irrevocable grantor's trust (also known as a "rabbi trust") to hold assets of
the Bank for the exclusive purpose of paying benefits under the Supplemental
Retirement Plan. However, in the event of the insolvency of the Bank, the assets
of the trust are first subject to the claims of the Bank's creditors. The assets
of this trust may be used to acquire shares of Common Stock to satisfy the
obligations of the Bank for the payment of benefits under the Supplemental
Retirement Plan. As of March 31, 1997, only Mr. Stoico participated in the
Supplemental Retirement Plan.
Employee Stock Ownership Plan and Trust. The Bank established an ESOP
and related trust for eligible employees effective February 1, 1996. Employees
employed with the Bank as of February 1, 1996 and employees of the Company or
the Bank employed after such date, who have been credited with at least 1,000
hours during a twelve month period and who have attained the age of 21 are
eligible to become participants. The ESOP purchased 8% of the Common Stock
issued in the Conversion, including the issuance of shares to the Foundation. In
order to fund the ESOP's purchase of the Common Stock, the ESOP borrowed funds
from a third-party lender, FAB FUNDING CORPORATION, a wholly-owned subsidiary of
the Company equal to 100% of the aggregate purchase price of the Common Stock.
The trustee of the ESOP will repay the loan principally from the Company's or
the Bank's contribution's to the ESOP over a period of nine years. FAB FUNDING
CORPORATION holds the Common Stock purchased by the ESOP as collateral for the
loan. Participant's become 100% vested in their ESOP benefits after five (5)
years of service as well as upon attainment of their normal retirement age
(generally age 65), death, disability and a change in control.
Transactions With Certain Related Persons
The Bank makes all loans to its executive officers, directors and
employees on the same terms and conditions offered to the general public. The
Bank's policy provides that all loans made by the Bank to its executive officers
and directors be made in the ordinary course of business, on substantially the
same terms, including collateral, as those prevailing at the time for comparable
transactions with other persons and may not involve more than the normal risk of
collectibility or present other unfavorable features. All such loans were made
by the Bank in the ordinary course of business, with no favorable terms and such
loans do not involve more than the normal risk of collectibility or present
unfavorable terms.
16
<PAGE>
PROPOSAL 2. APPROVAL OF THE FIRSTFED AMERICA BANCORP, INC.
1997 STOCK-BASED INCENTIVE PLAN
The Board of Directors of the Company is presenting for shareholder
approval the FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based Incentive Plan, in
the form attached hereto as Appendix A. The purpose of the Incentive Plan is to
attract and retain qualified personnel in key positions, provide officers,
employees and non-employee directors ("Outside Directors") of the Company and
any of its affiliates, including the Bank, with a proprietary interest in the
Company as an incentive to contribute to the success of the Company, promote the
attention of management to other shareholder's concerns and reward employees for
outstanding performance. The following is a summary of the material terms of the
Incentive Plan which is qualified in its entirety by the complete provisions of
the Incentive Plan attached as Appendix A.
General
The Incentive Plan authorizes the granting of options to purchase
Common Stock of the Company ("Options"), Option-related awards and awards of
Common Stock (collectively, "Awards"). Subject to certain adjustments to prevent
dilution of Awards to participants, the maximum number of shares of Common Stock
reserved for Awards under the Incentive Plan is 1,219,001 shares. The maximum
number of shares reserved for purchase pursuant to the exercise of Options and
Option-related Awards which may be granted under the Incentive Plan is 870,715
shares. The maximum number of the shares reserved for the award of shares of
Common Stock ("Stock Awards") is 348,286 shares. All officers, other employees
and Outside Directors of the Company and its affiliates, including the Bank, are
eligible to receive Awards under the Incentive Plan. The Incentive Plan will be
administered by a committee (the "Committee") consisting of at least three
members of the Board of Directors who are not employees of the Company or its
affiliates. Authorized but unissued shares or shares previously issued and
reacquired by the Company may be used to satisfy Awards under the Incentive
Plan. If authorized but unissued shares are used to satisfy the grant of Stock
Awards and the exercise of Options granted under the Incentive Plan, it will
result in an increase in the number of shares outstanding and will have a
dilutive effect on the holdings of existing shareholders. It is currently
anticipated that a trust (the "Incentive Plan Trust") will be established which
will purchase previously issued shares to fund the Company's obligation for
Stock Awards which such stock will be purchased by the Incentive Plan trustee
with contributions from the Company or Bank.
Types of Awards
General. The Incentive Plan authorizes the grant of Awards in the form
of: (i) Options intended to qualify as incentive stock options under Section 422
of the Code (Options which afford tax benefits to the recipients upon compliance
with certain conditions and which do not result in tax deductions to the
Company), referred to as "Incentive Stock Options"; (ii) Options that do not so
qualify (Options which do not afford income tax benefits to recipients, but
which may provide tax deductions to the Company), referred to as "Non-statutory
Stock Options"; (iii) limited rights which are exercisable only upon a "change
in control" of the Company or Bank (as defined in the Incentive Plan) ("Limited
Rights"); (iv) Stock Awards; and (v) Stock Appreciation Rights. Each type of
Award may be subject to vesting requirements or other conditions imposed by the
Committee.
Options. The Incentive Plan provides for the granting of Options for up
to 870,715 shares of Common Stock. The Committee has the authority to determine
the date or dates on which each Option shall become exercisable and any other
conditions applicable to the exercisability of an Option; provided,
17
<PAGE>
however, any Option granted prior to January 15, 1998 may not become exercisable
in annual installments of greater than 20% of the number of shares underlying
the Option awarded, commencing at least one year from the date of grant, and the
exercisability of such Options may not be accelerated except in the case of
death or disability. The Board of Directors intends to amend the Incentive Plan
in the future to provide the Committee with the authority to provide for the
acceleration of the exercisability of Options in certain circumstances. See
"Amendments." The exercise price of all Options shall be determined by the
Committee but shall be at least 100% of the fair market value of the underlying
Common Stock at the time of grant. The exercise price of any Option may be paid
in cash or in Common Stock at the discretion of the Committee. See "Alternative
Option Payments." The term of Options shall be determined by the Committee, but
in no event shall an Option be exercisable more than ten years from the date of
grant (or five years from date of grant for a 10% owner). Awards of Options have
been made to Outside Directors and certain officers under the Incentive Plan
which shall become effective and be considered to be granted upon the effective
date of the Incentive Plan. See "New Plan Benefits" and "Shareholder Approval
and Effective Date of Plan" below for a description of such Awards and the
effective date of the Incentive Plan.
All Options granted under the Incentive Plan to officers and employees
will be qualified as Incentive Stock Options to the extent permitted under
Section 422 of the Code. Incentive Stock Options, at the discretion of the
Committee with the concurrence of the holder, may be converted into Non-
Statutory Stock Options. The exercise price of all Incentive Stock Options must
be at least 100% of the fair market value of the underlying Common Stock at the
time of grant, except as provided below. In order to qualify as Incentive Stock
Options under Section 422 of the Code, the Option must be granted to an
employee, the exercise price must not be less than 100% of the fair market value
on the date of grant, the term of the Option may not exceed ten years from the
date of grant, and no more than $100,000 of options may become exercisable in
any fiscal year. Incentive Stock Options granted to any person who is the
beneficial owner of more than 10% of the outstanding voting stock may be
exercised only for a period of five years from the date of grant and the
exercise price must be at least equal to 110% of the fair market value of the
underlying Common Stock on the date of grant.
Each Outside Director of the Company or its affiliates will be eligible
to receive Non-statutory Stock Options to purchase shares of Common Stock.
Additionally, officers and employees are eligible to receive Non-Statutory Stock
Options to the extent they are ineligible to receive Incentive Stock Options.
Unless otherwise determined by the Committee, upon termination of an
optionee's services for any reason other than death, disability, retirement or
termination for cause, all then exercisable Options shall remain exercisable for
a period of three months following termination and all unexerciseable Options
shall be cancelled. In the event of the death or disability of an optionee, all
unexercisable Options held by such optionee will become fully exercisable and
remain exercisable for up to one year thereafter. In the event of termination
for cause, all exercisable and unexercisable Options held by the optionee shall
be cancelled. In the event of the retirement of an optionee, the Committee shall
have the discretion to allow unexercisable Options to continue to vest or become
exercisable in accordance with their original terms, provided that the optionee
is engaged as a consultant, advisor or advisory director of the Company or any
of its affiliates.
Limited Rights. The Incentive Plan also provides the Committee with the
ability to grant a Limited Right concurrently with any Option. Limited Rights
are related to specific Options granted and become exercisable only upon a
change in control of the Bank or the Company. Upon exercise, the holder will be
entitled to receive in lieu of purchasing the stock underlying the Option, a
lump sum cash payment equal to the difference between the exercise price of the
related Option and the fair market value of the
18
<PAGE>
shares of Common Stock subject to the Option on the date of exercise of the
right less any applicable tax withholding.
Stock Awards. The Incentive Plan authorizes the granting of Stock
Awards to employees and Outside Directors, in an amount not to exceed 348,286
shares of Common Stock in the aggregate. The Committee has the authority to
determine the dates on which Stock Awards granted will vest or any other
conditions which must be satisfied prior to vesting; provided, however, that any
Stock Award granted prior to January 15, 1998 may not vest at a rate greater
than 20% per year, commencing at least one year from the date of grant and the
vesting of any Stock Award may not be accelerated except in the case of death or
disability. The Board of Directors intends to award the Incentive Plan in the
future to provide the Committee with the discretion to accelerate vesting of
Stock Awards in certain circumstances. See "Amendments." Awards of Stock Awards
have been made to Outside Directors and certain officers under the Incentive
Plan which shall become effective and considered to be granted upon the
effective date of the Incentive Plan. See "New Plan Benefits" and "Shareholder
Approval and Effective Date of Plan" below for a description of such Awards and
the effective date of the Incentive Plan.
When Stock Awards are distributed in accordance with the Incentive
Plan, the recipients will also receive amounts equal to accumulated cash and
stock dividends (if any) with respect thereto plus earnings thereon minus any
required tax withholding amounts. Prior to vesting, recipients of Stock Awards
may direct the voting of shares of Common Stock granted to them and held in the
Incentive Plan Trust. Shares of Common Stock held by the Incentive Plan trust
which have not been allocated or for which voting has not been directed are
voted by the trustee in the same proportion as the awarded shares are voted in
accordance with the directions given by all recipients of Awards.
Unless otherwise determined by the Committee, upon termination of the
services of a holder of a Stock Award for any reason other than death,
disability, retirement or termination for cause, all such holder's rights in
unvested Stock Awards shall be cancelled. In the event of the death or
disability of the holder of the Stock Award, all unvested Stock Awards held by
such individual will become fully vested. In the event of termination for cause
of a holder of a Stock Award, all unvested Stock Awards held by such individual
shall be cancelled. In the event of retirement of the holder of a Stock Award,
the Committee shall have the discretion to determine that all unvested Stock
Awards shall continue to vest in accordance with their original terms, provided
the holder is engaged as a consultant, advisor or advisory director of the
Company or any of its affiliates.
Stock Appreciation Rights. The Incentive Plan authorizes the Committee
to grant Stock Appreciation Rights ("SARs") which entitles the holder to receive
a payment, equal in value to the excess of the fair market value of a specified
number of shares of Common Stock on the date the SAR is exercised over the grant
price of such SAR, as determined by the Committee.
Tax Treatment
Options. An optionee will generally not be deemed to have recognized
taxable income upon grant or exercise of any Incentive Stock Option, provided
that shares transferred in connection with the exercise are not disposed of by
the optionee for at least one year after the date the shares are transferred in
connection with the exercise of the Option and two years after the date of grant
of the Option. If certain holding periods are satisfied, upon disposal of the
shares, the aggregate difference between the per share Option exercise price and
the fair market value of the Common Stock is recognized as income taxable at
long term capital gains rates. No compensation deduction may be taken by the
Company as a result of the grant or exercise of Incentive Stock Options,
assuming these holding periods are met.
19
<PAGE>
In the case of the exercise of a Non-statutory Stock Option, an
optionee will be deemed to have received ordinary income upon exercise of the
Option in an amount equal to the aggregate amount by which the per share
exercise price is exceeded by the fair market value of the Common Stock. In the
event shares received through the exercise of an Incentive Stock Option are
disposed of prior to the satisfaction of the holding periods (a "disqualifying
disposition"), the exercise of the Option will be treated as the exercise of a
Non-statutory Stock Option, except that the optionee will recognize the ordinary
income for the year in which the disqualifying disposition occurs. The amount of
any ordinary income deemed to have been received by an optionee upon the
exercise of a Non-statutory Stock Option or due to a disqualifying disposition
will be a deductible expense of the Company for federal income tax purposes,
subject to the limitations imposed by Code Section 162(m) (discussed below).
Limited Rights. In the case of Limited Rights, the holder would have to
include the amount paid to him upon the exercise of the Limited Right in his
gross income for federal income tax purposes in the year in which the payment is
made and the Company would be entitled to a deduction for federal income tax
purposes of the amount paid to the extent that the amount paid is not in excess
of the limitation imposed by Section 280G of the Code.
Stock Awards. When shares of Common Stock, as Stock Awards, are
distributed, the recipient is deemed to receive ordinary income equal to the
fair market value of such shares at the date of distribution plus any dividends
and earnings on such shares (provided such date is more than six months after
the date of grant) and the Company is permitted a commensurate compensation
expense deduction for income tax purposes.
Stock Appreciation Rights. In the case of SARs, the holder would have
to include the amount paid to him upon the exercise of the SARs in his gross
income for federal income tax purposes in the year in which the payment is made
and the Company would be entitled to a deduction for federal income tax purposes
of the amount paid.
Performance Awards.
General. The Incentive Plan provides the Committee with the ability to
condition or restrict the vesting or exercisability of any Award upon the
achievement of performance targets or goals as set forth under the Incentive
Plan. Any Award subject to such conditions or restrictions is considered to be a
"Performance Award." Subject to the express provisions of the Plan and as
discussed in this paragraph, the Committee has discretion to determine the terms
of any Performance Award, including the amount of the award, or a formula for
determining such, the performance criteria and level of achievement related to
these criteria which determine the amount of the award granted, issued,
retainable and/or vested, the period as to which performance shall be measured
for determining achievement of performance (a "performance period"), the timing
of delivery of any awards earned, forfeiture provisions, the effect of
termination of employment for various reasons, and such further terms and
conditions, in each case not inconsistent with the Plan, as may be determined
from time to time by the Committee. The performance criteria upon which
Performance Awards are granted, issued, retained and/or vested may be based on
financial performance and/or personal performance evaluations, except that for
any Performance Award that is intended by the Committee to satisfy the
requirements for "performance based compensation" under Code Section 162(m), the
performance criteria shall be a measure based on one or more Qualifying
Performance Criteria (as defined below). Notwithstanding satisfaction of any
performance goals, the number of Shares granted, issued, retainable and/or
vested under a Performance Award may be adjusted by the Committee on the basis
of such further considerations as the Committee in its sole discretion shall
determine. However, the Committee may not increase the amount earned upon
satisfaction of any
20
<PAGE>
performance goal by any Participant who is a "covered employee" within the
meaning of Section 162(m) of the Code.
Qualifying Performance Criteria and Section 162(m) Limits. Subject to
shareholder approval of the Plan, the Performance Criteria for any Performance
Award that is intended to satisfy the requirements for "performance based
compensation" under the Code Section 162(m) shall be based upon any one or more
of the following Performance Criteria, either individually, alternatively or in
any combination, applied to either the Company as a whole or to a business unit
or subsidiary, either individually, alternatively or in any combination, and
measured either on an absolute basis or relative to a pre-established target, to
previous years' results or to a designated comparison group, in each case as
preestablished by the Committee under the terms of the Award: net income, as
adjusted for non-recurring items; cash earnings; earnings per share; cash
earnings per share; return on equity; return on assets; assets; stock price;
total shareholder return; capital; net interest income; market share; cost
control or efficiency ratio; and asset growth.
Maximum Awards. The aggregate amount of Options granted under the Plan
during any 60 month period to any one Participant may not exceed 25% of the
total amount of options available to be granted under the Incentive Plan. The
aggregate amount of shares of Common Stock issuable under a Stock Award granted
under the Plan for any 60 month period to any one Participant may not exceed 25%
of the total amount of Stock Awards available to be granted under the Incentive
Plan.
Payout Alternatives
The Committee has the discretion to determine the form of payment it
shall use in distributing payments for all Awards. If the Committee requests any
or all participants to make an election as to form of payment, it shall not be
considered bound by the election. Any shares of Common Stock tendered in payment
of an obligation arising under the Incentive Plan or applied to tax withholding
amounts shall be valued at the fair market value of the Common Stock. The
Committee may use treasury stock, authorized but unissued stock or it may direct
the market purchase of shares of Common Stock to satisfy its obligations under
the Incentive Plan.
Alternate Option Payments
Subject to the terms of the Incentive Plan, the Committee also has
discretion to determine the form of payment for the exercise of an Option. The
Committee may indicate acceptable forms in the Award Agreement covering such
Options or may reserve its decision to the time of exercise. No Option is to be
considered exercised until payment in full is accepted by the Committee. The
Committee may permit the following forms of payment for Options: (a) in cash or
by certified or cashiers check; or (b) by tendering previously acquired shares
of Common Stock. Any shares of Common Stock tendered in payment of the exercise
price of an Option shall be valued at the fair market value of the Common Stock
on the date prior to the date of exercise.
Amendments
The Board of Directors or Committee may amend the Incentive Plan in any
respect, at any time, provided that no amendment may affect the rights of the
holder of an Award without his or her permission. Applicable OTS regulations
provide that any stock based benefit plan, such as the Incentive Plan, that is
adopted by a converted institution within the first year after conversion may
not implement such a plan unless it provides for the grant of options or stock
awards which shall vest or become
21
<PAGE>
exercisable in installments at a rate greater than 20% per year, except in the
case of death or disability. The Board of Directors intends to amend the
Incentive Plan after January 15, 1998 to provide the Committee with the
authority to accelerate vesting of exercisability of Awards upon the occurrence
of a change in control of the Company or the Bank (as defined in the Incentive
Plan) and other circumstances. It is intended that any such amendment shall be
submitted to shareholders for approval to the extent required by applicable OTS
regulations.
Adjustments
In the event of any change in the outstanding shares of Common Stock of
the Company by reason of any stock dividend or split, recapitalization, merger,
consolidation, spin-off, reorganization, combination or exchange of shares, or
other similar corporate change, or other increase or decrease in such shares
without receipt or payment of consideration by the Company, or in the event an
extraordinary capital distribution is made, including the payment of an
extraordinary dividend, the Committee may make such adjustments to previously
granted Awards, to prevent dilution, diminution or enlargement of the rights of
the holder; provided, however, that in the case of an extraordinary dividend,
the Committee may be required to obtain OTS approval prior to any such
adjustment. All Awards under this Incentive Plan shall be binding upon any
successors or assigns of the Company.
Nontransferability
Unless determined otherwise by the Committee, Awards under the
Incentive Plan shall not be transferable by the recipient other than by will or
the laws of intestate succession or pursuant to a domestic relations order. With
the consent of the Committee, an Award recipient may permit transferability or
assignment for valid estate planning purposes as permitted under the Code or
Rule 16b-3 under the Exchange Act and a participant may designate a person or
his or her estate as beneficiary of any Award to which the recipient would then
be entitled, in the event of the death of the participant.
Shareholder Approval and Effective Date of Plan
The Incentive Plan complies with the applicable regulations of the OTS.
However, the OTS has not in any way endorsed or approved the Incentive Plan.
Pursuant to OTS regulations, the Incentive Plan may not be implemented prior to
January 15, 1998 unless it is approved by a majority of the votes eligible to be
cast by the Company's shareholders at a duly called meeting of shareholders
which may be held no sooner than six months after the completion of the
Conversion.
The Incentive Plan provides that it shall become effective upon the
earlier of: (i) the date that it is approved by a majority of votes eligible to
be cast by the Company's shareholders at a duly called meeting of shareholders;
or (ii) January 16, 1998. Accordingly, if the Incentive Plan is not approved by
a majority of the votes eligible to be cast by shareholders at the Annual
Meeting, the Incentive Plan and any grants thereunder shall become effective on
January 16, 1998 without further shareholder approval unless it is terminated by
the Board of Directors. In the absence of the approval of the Incentive Plan by
a majority of shares cast at the Annual Meeting, the Options granted under the
Incentive Plan would not qualify as Incentive Stock Options under the Code and
the Common Stock of the Company may no longer be eligible for listing on the
American Stock Exchange.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED
PROXY CARD, IF EXECUTED AND RETURNED, WILL BE VOTED "FOR" THE APPROVAL OF THE
FIRSTFED AMERICA BANCORP, INC. 1997 STOCK-BASED INCENTIVE PLAN.
22
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
THE FIRSTFED AMERICA BANCORP, INC. 1997 STOCK-BASED INCENTIVE PLAN.
New Plan Benefits
The following table provides certain information with respect to all
Awards which are intended to be granted and become effective upon the effective
date of the Incentive Plan, specifying the amounts to be granted to the named
executive officers individually, all current executive officers as a group, all
current directors of the Company and the Bank who are not executive officers as
a group, and all employees, including all current officers who are not executive
officers, as a group.
All Awards granted to the officers and directors of the Company and the
Bank reflected in the table below become vested or exercisable in equal annual
installments of 20% each year commencing one year from the effective date of
grant. All such Awards will immediately vest and become exercisable upon
termination of employment due to death or disability. Additionally, on or after
January 16, 1998, the Board of Directors intends to amend the Incentive Plan to
provide the Committee with the authority to accelerate the vesting of Awards,
including previously granted Awards, upon a change in control of the Company or
the Bank (as defined in the Incentive Plan) and other circumstances. The
Incentive Plan generally defines that a change in control will be deemed to
occur when a person or group of persons acting in concert acquires beneficial
ownership of 20% or more of any class of equity security, such as the Common
Stock of the Company or the Bank, or in the event of a tender offer or exchange
offer, merger or other form of business combination, sale of assets or contested
election of directors which results in a change in the composition of a majority
of the incumbent Board of Directors of the Company or the Bank. To the extent
required by applicable OTS regulation, the Company will present any such
amendment to shareholders for approval. The Company is not otherwise required to
obtain shareholder approval of such an amendment to the Incentive Plan.
23
<PAGE>
<TABLE>
<CAPTION>
NEW PLAN BENEFITS
Stock Option Awards(1) Stock Awards
---------------------------- ----------------------------
Dollar Number Dollar Number
Name and Position Value (2) of Units (3) Value (4) of Units (3)
- -------------------------------------------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Robert F. Stoico
Chairman of the Board of the Company and
President and Chief Executive Officer of the
Company and the Bank - 217,680 $1,273,428 87,072
Kevin J. McGillicuddy
Senior Vice President of the Company and the
Bank - 43,536 254,680 17,414
Frederick R. Sullivan
Senior Vice President of the Company and the
Bank - 43,536 254,680 17,414
Terrence M. Tyrrell
Senior Vice President of the Company and the
Bank - 43,536 254,680 17,414
All current executive officers as a group
(12 persons) - 452,776 2,852,489 195,042
All current directors of the Company and Bank
(who are not executive officers) as a group (10
persons)(5) - 261,220 1,528,166 104,490
Other employees (27 persons) - 26,122 191,017 13,061
</TABLE>
- ---------------------
(1) All Options awarded include the grant of Limited Rights.
(2) The "dollar value" for Options to be granted pursuant to the Incentive
Plan on the date of grant will be zero, as the exercise price for such
Options will be the fair market value on the date of grant which is
intended to be the date shareholder approval is obtained.
(3) 130,605 Options and 35,696 Stock Awards remain unallocated under the
Incentive Plan.
(4) Based upon $14.625, the closing price of the Common Stock, as reported
on the American Stock Exchange on June 6, 1997.
(5) Each Director of the Company and each Director of the Bank shall be
granted Options to purchase 26,122 shares and Stock Awards which provide
for 10,449 shares of Common Stock.
24
<PAGE>
PROPOSAL 3. RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Company's independent auditors for the fiscal year ended March 31,
1997 were KPMG Peat Marwick LLP. The Company's Board of Directors has
reappointed KPMG Peat Marwick LLP to continue as independent auditors for the
Bank and the Company for the fiscal year ending March 31, 1998, subject to
ratification of such appointment by the shareholders.
Representatives of KPMG Peat Marwick LLP will be present at the Annual
Meeting. They will be given an opportunity to make a statement if they desire to
do so and will be available to respond to appropriate questions from
shareholders present at the Annual Meeting.
UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED
PROXY CARD WILL BE VOTED FOR RATIFICATION OF THE APPOINTMENT OF KPMG PEAT
MARWICK LLP AS THE INDEPENDENT AUDITORS OF THE COMPANY.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" RATIFICATION OF
THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE INDEPENDENT AUDITORS OF THE
COMPANY.
ADDITIONAL INFORMATION
Shareholder Proposals
To be considered for inclusion in the Company's proxy statement and
form of proxy relating to the 1998 Annual Meeting of Shareholders, a shareholder
proposal must be received by the Secretary of the Company at the address set
forth on the Notice of Annual Meeting of Shareholders not later than April 7,
1998. Any such proposal will be subject to 17 C.F.R. Section 240.14a-8 of the
Rules and Regulations under the Exchange Act.
Notice of Business to be Conducted at a Special or Annual Meeting
The Bylaws of the Company set forth the procedures by which a
shareholder may properly bring business before a meeting of shareholders.
Pursuant to the Bylaws, only business brought by or at the direction of the
Board of Directors may be conducted at an annual meeting. The Bylaws of the
Company provide an advance notice procedure for a shareholder to properly bring
business before an annual meeting. The shareholder must give written advance
notice to the Secretary of the Company not less than ninety (90) days before the
date originally fixed for such meeting; provided, however, that in the event
that less than one hundred (100) days notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be received not later than the close of business on the tenth
day following the date on which the Company's notice to shareholders of the
annual meeting date was mailed or such public disclosure was made. The advance
notice by shareholders must include the shareholder's name and address, as they
appear on the Company's record of shareholders, a brief description of the
proposed business, the reason for conducting such business at the annual
meeting, the class and number of shares of the Company's capital stock that are
beneficially owned by such shareholder and any material interest of such
shareholder in the proposed business. In the case of nominations to the Board of
Directors, certain information regarding the nominee must be provided.
25
<PAGE>
Nothing in this paragraph shall be deemed to require the Company to include in
its proxy statement or the proxy relating to any Annual Meeting any shareholder
proposal which does not meet all of the requirements for inclusion established
by the SEC in effect at the time such proposal is received.
Other Matters Which May Properly Come Before the Meeting
The Board of Directors knows of no business which will be presented for
consideration at the Annual Meeting other than as stated in the Notice of Annual
Meeting of Shareholders. If, however, other matters are properly brought before
the Annual Meeting, it is the intention of the persons named in the accompanying
proxy to vote the shares represented thereby on such matters in accordance with
their best judgment.
Whether or not you intend to be present at the Annual Meeting, you are
urged to return your proxy card promptly. If you are then present at the Annual
Meeting and wish to vote your shares in person, your original proxy may be
revoked by voting at the Annual Meeting. However, if you are a shareholder whose
shares are not registered in your own name, you will need appropriate
documentation from your recordholder to vote personally at the Annual Meeting.
A COPY OF THE FORM 10-K (WITHOUT EXHIBITS) FOR THE FISCAL YEAR ENDED
MARCH 31, 1997, AS FILED WITH THE SEC, WILL BE FURNISHED WITHOUT CHARGE TO
SHAREHOLDERS OF RECORD UPON WRITTEN REQUEST TO PHILIP G. CAMPBELL, FIRSTFED
AMERICA BANCORP, INC., ONE NORTH MAIN STREET, FALL RIVER, MASSACHUSETTS 02720.
By Order of the Board of Directors
/s/ Cecilia R. Viveiros
Cecilia R. Viveiros
Corporate Secretary
Fall River, Massachusetts
June 20, 1997
YOU ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING IN
PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL
MEETING, YOU ARE REQUESTED TO SIGN, DATE AND PROMPTLY
RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
26
<PAGE>
APPENDIX A
FIRSTFED AMERICA BANCORP, INC.
1997 STOCK-BASED INCENTIVE PLAN
1. DEFINITIONS.
-----------
(a) "Affiliate" means any "subsidiary corporation" of the Holding Company,
as such term is defined in Section 424(f) of the Code.
(b) "Award" means, individually or collectively, a grant under the Plan of
Non-statutory Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Limited Rights and Stock Awards.
(c) "Award Agreement" means an agreement evidencing and setting forth the
terms of an Award granted under the Plan, in such form as the Committee may,
from time to time, approve.
(d) "Bank" means First Federal Savings Bank of America, Fall River,
Massachusetts.
(e) "Board of Directors" means the board of directors of the Holding
Company.
(f) "Change in Control" means a change in control of the Bank or Holding
Company of a nature that (i) would be required to be reported in response to
Item 1 of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Sections 13 or 15(d) of the Exchange Act; (ii) results in a "change
of control" or "acquisition of control" within the meaning of the regulations
promulgated by the Office of Thrift Supervision ("OTS") (or its predecessor
agency) found at 12 C.F.R. Part 574, as in effect on the date hereof; provided,
however, that in applying the definition of change in control as set forth under
such regulations the Board of Directors shall substitute its judgment for that
of the OTS; or (iii) without limitation Change in Control shall be deemed to
have occurred at such time as (A) any "person" (as the term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Bank or the Holding Company representing 20% or
more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company and any securities
purchased by any tax-qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board of Directors on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by a nominating committee
serving under the Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity; or (D) a solicitation
of
<PAGE>
shareholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank or
similar transaction with one or more corporations, as a result of which the
outstanding shares of the class of securities then subject to the plan are
exchanged for or converted into cash or property or securities not issued by the
Bank or the Holding Company; or (E) a tender offer is made for 20% or more of
the voting securities of the Bank or the Holding Company.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
(h) "Committee" means the committee designated by the Board of Directors
to administer the Plan pursuant to Section 2 of the Plan.
(i) "Common Stock" means the Common Stock of the Holding Company, par
value, $.01 per share.
(j) "Date of Grant" means the effective date of an Award.
(k) "Disability" means any mental or physical condition with respect to
which the Participant qualifies for and receives benefits for under a long-term
disability plan of the Holding Company or an Affiliate, or in the absence of
such a long-term disability plan or coverage under such a plan, "disability"
shall mean a physical or mental condition which, in the sole discretion of the
Committee, is reasonably expected to be of indefinite duration and to
substantially prevent the Participant from fulfilling his duties or
responsibilities to the Holding Company or an Affiliate.
(l) "Effective Date" means the date the Plan is approved by stockholders,
as defined by applicable OTS regulation, or January 16, 1998, whichever is
earlier.
(m) "Employee" means any person employed by the Holding Company or an
Affiliate. Directors who are employed by the Holding Company or an Affiliate
shall be considered Employees under the Plan.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(o) "Exercise Price" means the price at which a share of Common Stock may
be purchased by a Participant pursuant to an Option.
(p) "Extraordinary Dividend" means a distribution to stockholders by the
Holding Company of earnings or stockholders' equity which: (i) exceeds net
earnings for the period for which the distribution is paid or (ii) such
distribution or any portion thereof will be treated by the stockholders
receiving such distribution as a return of capital for federal income tax
purposes
A-2
<PAGE>
(q) "Fair Market Value" means the market price of Common Stock, determined
by the Committee as follows:
(i) If the Common Stock was traded on the date in question on The
Nasdaq Stock Market then the Fair Market Value shall be equal
to the last transaction price quoted for such date by The
Nasdaq Stock Market;
(ii) If the Common Stock was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the
closing price reported by the applicable composite
transactions report for such date; and
(iii) If neither of the foregoing provisions is applicable, then the
Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee
shall be based on the prices reported in The Wall Street Journal. Such
-----------------------
determination shall be conclusive and binding on all persons.
(r) "Holding Company" means FIRSTFED AMERICA BANCORP, INC.
(s) "Incentive Stock Option" means an Option granted to a Participant
pursuant to Section 7 of the Plan that is intended to meet the requirements of
Section 422 of the Code.
(t) "Limited Right" means an Award granted to a Participant pursuant to
Section 8 of the Plan.
(u) "Non-statutory Stock Option" means a stock option granted to a
Participant pursuant to the terms of the Plan but which is not intended to be
and is not identified as an Incentive Stock Option or a stock option granted
under the Plan which is intended to be and is identified as an Incentive Stock
Option but which does not meet the requirements of Section 422 of the Code.
(v) "Option" means an Incentive Stock Option or Non-statutory Stock
Option.
(w) "Outside Director" means a member of the Board of Directors of the
Holding Company or an Affiliate, who is not also an Employee of the Holding
Company or an Affiliate.
(x) "Participant" means any person who holds an outstanding Award pursuant
to the Plan.
A-3
<PAGE>
(y) "Performance Award" means an Award granted to a Participant pursuant
to Section 11 of the Plan.
(z) "Performance Goal" means an objective for the Holding Company or any
Affiliate or any unit thereof or any individual that may be established by the
Committee for a Performance Award to become vested, earned or exercisable.
Performance Goals applicable to Performance Awards are intended to constitute
"performance-based" compensation within the meaning of Section 162(m) of the
Code and shall be based on one or more of the following criteria:
(i) net income, as adjusted for non-recurring items
(ii) cash earnings
(iii) earnings per share
(iv) cash earnings per share
(v) return on equity
(vi) return on assets
(vii) assets
(viii) stock price
(ix) total shareholder return
(x) capital
(xi) net interest income
(xii) market share
(xiii) cost control or efficiency ratio
(xiv) asset growth
(aa) "Plan" means the FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based
Incentive Plan.
(bb) "Retirement" means a termination of employment (i) from the Holding
Company or an Affiliate at an age and with employment service that would entitle
the individual to a pension under the Financial Institutions Retirement Fund as
adopted by First Federal Savings Bank of America ("Pension Plan") if the
individual were a participant in such Pension Plan or (ii) under circumstances
designated as a Retirement by the Committee. "Retirement" with respect to an
Outside Director means the termination of service from the Board of Directors of
the Holding Company and any Affiliate following written notice to the Board of
Directors of such Outside Director's intention to retire.
(cc) "Stock Appreciation Right" means an Award granted to a Participant,
alone or in connection with a related Option, pursuant to Section 10 of the
Plan.
(dd) "Stock Award" means an Award granted to a Participant pursuant to
Section 9 of the Plan.
A-4
<PAGE>
(ee) "Termination for Cause" shall mean, in the case of an Outside
Director, removal from the Board of Directors or, in the case of an Employee,
termination of employment, because of a material loss to the Holding Company or
an Affiliate caused by the Participant's intentional failure to perform stated
duties, personal dishonesty, willful violation of any law, rule, regulation
(other than traffic violations or similar offenses) or final cease and desist
order, as determined by the Board of Directors. No act, or failure to act, on a
Participant's part shall be "willful" unless done, or omitted to be done, not in
good faith and without reasonable belief that the action or omission was in the
best interest of the Holding Company or an Affiliate.
(ff) "Trust" means a trust established by the Board of Directors in
connection with this Plan to hold Plan assets for the purposes set forth herein.
(gg) "Trustee" means any person or entity approved by the Board of
Directors to hold legal title to any of the Trust assets for the purposes set
forth under the Plan.
2. ADMINISTRATION.
--------------
(a) The Plan shall be administered by the Committee. The Committee shall
consist of two or more disinterested directors of the Holding Company, who shall
be appointed by the Board of Directors. A member of the Board of Directors
shall be deemed to be "disinterested" only if he satisfies (i) such requirements
as the Securities and Exchange Commission may establish for non-employee
directors administering plans intended to qualify for exemption under Rule 16b-3
(or its successor) under the Exchange Act and (ii) such requirements as the
Internal Revenue Service may establish for outside directors acting under plans
intended to qualify for exemption under Section 162(m)(4)(C) of the Code. The
Board of Directors may also appoint one or more separate committees of the Board
of Directors, each composed of one or more directors of the Holding Company or
an Affiliate who need not be disinterested and who may grant Awards and
administer the Plan with respect to Employees and Outside Directors who are not
considered officers or directors of the Holding Company under Section 16 of the
Exchange Act.
(b) The Committee shall (i) select the Employees and Outside Directors who
are to receive Awards under the Plan, (ii) determine the type, number, vesting
requirements and other features and conditions of such Awards, (iii) interpret
the Plan and (iv) make all other decisions relating to the operation of the
Plan. The Committee may adopt such rules or guidelines as it deems appropriate
to implement the Plan. The Committee's determinations under the Plan shall be
final and binding on all persons.
(c) Each Award shall be evidenced by a written agreement ("Award
Agreement") containing such provisions as may be approved by the Committee. Each
Award Agreement shall constitute a binding contract between the Holding Company
or an Affiliate and the Participant, and every Participant, upon acceptance of
the Award Agreement, shall be bound by the terms and restrictions of the Plan
and the Award Agreement. The terms of each
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<PAGE>
Award Agreement shall be in accordance with the Plan, but each Award Agreement
may include such additional provisions and restrictions determined by the
Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular,
the Committee shall set forth in each Award Agreement (i) the type of Award
granted (ii) the Exercise Price of an Option or Stock Appreciation Right,
(iii) the number of shares subject to the Award; (iv) the expiration date of the
Award, (v) the manner, time, and rate (cumulative or otherwise) of exercise or
vesting of such Award, and (vi) the restrictions, if any, placed upon such
Award, or upon shares which may be issued upon exercise of such Award. The
Chairman of the Committee and such other directors and officers as shall be
designated by the Committee are hereby authorized to execute Award Agreements on
behalf of the Company or an Affiliate and to cause them to be delivered to the
recipients of Awards.
(d) The Committee may delegate all authority for: (i) the determination of
forms of payment to be made by or received by the Plan and (ii) the execution of
any Award Agreement. The Committee may rely on the descriptions,
representations, reports and estimates provided to it by the management of the
Holding Company or an Affiliate for determinations to be made pursuant to the
Plan, including the attainment of Performance Goals. However, only the
Committee or a portion of the Committee may certify the attainment of a
Performance Goal.
3. TYPES OF AWARDS AND RELATED RIGHTS.
-----------------------------------
The following Awards may be granted under the Plan:
(a) Non-statutory Stock Options
(b) Incentive Stock Options
(c) Limited Rights
(d) Stock Awards
(e) Stock Appreciation Rights
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 17 hereof, the maximum number
of shares reserved for Awards under the Plan is 1,218,983, which number shall
not exceed 14% of the outstanding shares of the Common Stock determined
immediately as of the Effective Date. Subject to adjustment as provided in
Section 17 hereof, the maximum number of shares reserved hereby for purchase
pursuant to the exercise of Options and Option-related Awards granted under the
Plan is 870,715, which number shall not exceed 10% of the outstanding shares of
Common Stock as of the Effective Date. The maximum number of the shares
reserved for Stock Awards is 348,268, which number shall not exceed 4% of the
outstanding shares of Common Stock as of the Effective Date. The shares of
Common Stock issued under the Plan may be either authorized but unissued shares
or authorized shares previously
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issued and acquired or reacquired by the Trust or the Holding Company,
respectively. To the extent that Options and Stock Awards are granted under the
Plan, the shares underlying such Awards will be unavailable for any other use
including future grants under the Plan except that, to the extent that Stock
Awards or Options terminate, expire, or are forfeited without having vested or
without having been exercised (in the case of Limited Rights, exercised for
cash), new Awards may be made with respect to these shares.
5. ELIGIBILITY.
-----------
Subject to the terms of the Plan, all Employees and Outside Directors shall
be eligible to receive Awards under the Plan. In addition, the Committee may
grant eligibility to consultants and advisors of the Holding Company or an
Affiliate.
6. NON-STATUTORY STOCK OPTIONS.
---------------------------
The Committee may, subject to the limitations of this Plan and the
availability of shares of Common Stock reserved but unawarded under this Plan,
grant Non-statutory Stock Options upon such terms and conditions as it may
determine. Non-statutory Stock Options granted under this Plan are subject to
the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Non-statutory Stock Option
--------------
shall be determined by the Committee on the Date of Grant. Such Exercise Price
shall not be less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. Shares of Common Stock underlying a Non-statutory Stock Option
may be purchased only upon full payment of the Exercise Price in a manner
provided for in Section 14 of the Plan.
(b) Terms of Non-statutory Stock Options. The term during which each Non-
------------------------------------
statutory Stock Option may be exercised shall be determined by the Committee,
but in no event shall a Non-statutory Stock Option be exercisable in whole or in
part more than ten (10) years from the Date of Grant. Subject to Section 23 of
the Plan, the Committee shall determine the date on which each Non-statutory
Stock Option shall become exercisable and any terms or conditions which must be
satisfied prior to each Non-statutory Stock Option becoming exercisable. Any
such terms or conditions shall be determined by the Committee as of the Date of
Grant. The shares of Common Stock underlying each Non-statutory Stock Option
installment may be purchased in whole or in part by the Participant at any time
during the term of such Non-statutory Stock Option after such installment
becomes exercisable.
(c) Non-Transferability. Unless otherwise determined by the Committee in
-------------------
accordance with this Section 6(c), Non-statutory Stock Options shall not be
transferred, assigned, hypothecated, or disposed of in any manner by a
Participant other than by will or the laws of intestate succession. The
Committee may, however, in its sole discretion, permit transferability or
assignment of a Non-statutory Stock Option if such transfer or assignment is, in
its sole determination, for valid estate planning purposes and such transfer or
assignment is permitted under the Code and Rule 16b-3 under the Exchange Act.
For purposes of this
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Section 6(c), a transfer for valid estate planning purposes includes, but is not
limited to: (a) a transfer to a revocable intervivos trust as to which the
Participant is both the settlor and trustee, (b) a transfer for no consideration
to: (i) any member of the Participant's Immediate Family, (ii) any trust solely
for the benefit of members of the Participant's Immediate Family, (iii) any
partnership whose only partners are members of the Participant's Immediate
Family, and (iv) any limited liability corporation or corporate entity whose
only members or equity owners are members of the Participant's Immediate Family,
or (c) The FIRSTFED Charitable Foundation. For purposes of this Section 6(c),
"Immediate Family" includes, but is not necessarily limited to, a Participant's
parents, spouse, children, grandchildren and great-grandchildren. Nothing
contained in this Section 6(c) shall be construed to require the Committee to
give its approval to any transfer or assignment of any Non-statutory Stock
Option or portion thereof, and approval to transfer or assign any Non-statutory
Stock Option or portion thereof does not mean that such approval will be given
with respect to any other Non-statutory Stock Option or portion thereof. The
transferee or assignee of any Non-statutory Stock Option shall be subject to all
of the terms and conditions applicable to such Non-statutory Stock Option
immediately prior to the transfer or assignment and shall be subject to any
conditions proscribed by the Committee with respect to such Non-statutory Stock
Option.
(d) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death, Retirement or Termination for Cause,
the Participant's Non-statutory Stock Options shall be exercisable only as to
those shares that were immediately exercisable by the Participant at the date of
termination and only for a period of three (3) months following termination. In
the event of a Participant's Retirement, the Participant's Non-statutory Stock
Options shall be exercisable only as to those shares that were immediately
exercisable by the Participant at the date of Retirement and remain exercisable
for a period of three (3) years; provided however, that upon the Participant's
Retirement, the Committee, in its discretion, may determine that all
unexercisable Non-statutory Stock Options shall continue to become exercisable
in accordance with the Award Agreement if the Participant is immediately engaged
by the Holding Company or an Affiliate as a consultant or advisor or continues
to serve the Holding Company or an Affiliate as a director or advisory director.
Unless otherwise determined by the Committee, in the event of the termination of
a Participant's employment or service due to Disability or death, all Non-
statutory Stock Options held by such Participant shall immediately become
exercisable and remain exercisable for a period of three (3) years. Unless
otherwise determined by the Committee, in the event of a Participant's
Termination for Cause, all rights under the Participant's Non-statutory Stock
Options shall expire immediately upon the effective date of such Termination for
Cause.
(e) Maximum Individual Award. No individual Employee shall be granted an
------------------------
amount of Non-statutory Stock Options which exceeds 25% of all Options eligible
to be granted under the Plan within any 60 month period and no individual
Outside Director shall be granted an amount of Non-statutory Stock Options which
exceeds 5% of all Options eligible to be granted under the Plan within any 60
month period.
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7. INCENTIVE STOCK OPTIONS.
-----------------------
The Committee may, subject to the limitations of the Plan and the
availability of shares of Common Stock reserved but unawarded under this Plan,
grant Incentive Stock Options to an Employee. Incentive Stock Options granted
pursuant to the Plan shall be subject to the following terms and conditions:
(a) Exercise Price. The Exercise Price of each Incentive Stock Option
--------------
shall be not less than 100% of the Fair Market Value of the Common Stock on the
Date of Grant. However, if at the time an Incentive Stock Option is granted,
the Employee owns or is treated as owning, for purposes of Section 422 of the
Code, Common Stock representing more than 10% of the total combined voting
securities of the Holding Company ("10% owner"), the Exercise Price shall not be
less than 110% of the Fair Market Value of the Common Stock on the Date of
Grant. Shares of Common Stock may be purchased only upon payment of the full
Exercise Price in a manner provided for in Section 14 of the Plan.
(b) Amounts of Incentive Stock Options. To the extent the aggregate Fair
----------------------------------
Market Value of shares of Common Stock with respect to which Incentive Stock
Options that are exercisable for the first time by an Employee during any
calendar year under the Plan and any other stock option plan of the Holding
Company or an Affiliate exceeds $100,000, or such higher value as may be
permitted under Section 422 of the Code, such Options in excess of such limit
shall be treated as Non-statutory Stock Options. Fair Market Value shall be
determined as of the Date of Grant with respect to each such Incentive Stock
Option.
(c) Terms of Incentive Stock Options. The term during which each
--------------------------------
Incentive Stock Option may be exercised shall be determined by the Committee,
but in no event shall an Incentive Stock Option be exercisable in whole or in
part more than ten (10) years from the Date of Grant. If at the time an
Incentive Stock Option is granted to an Employee who is a 10% Owner, the
Incentive Stock Option granted to such Employee shall not be exercisable after
the expiration of five (5) years from the Date of Grant. Subject to Section 23
of the Plan, the Committee shall determine the date on which each Incentive
Stock Option shall become exercisable and any terms or conditions which must be
satisfied prior to the Incentive Stock Option becoming exercisable. Any such
terms or conditions shall be determined by the Committee as of the Date of
Grant. The shares of Common Stock underlying each Incentive Stock Option
installment may be purchased in whole or in part at any time during the term of
such Incentive Stock Option after such installment becomes exercisable.
(d) Transferability. No Incentive Stock Option shall be transferable
---------------
except by will or the laws of descent and distribution and is exercisable,
during his lifetime, only by the Employee to whom it is granted. The
designation of a beneficiary does not constitute a transfer.
(e) Termination of Employment. Unless otherwise determined by the
-------------------------
Committee, upon the termination of an Employee's employment for any reason other
than Disability,
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<PAGE>
death, Retirement or Termination for Cause, the Employee's Incentive Stock
Options shall be exercisable only as to those Incentive Stock Options that were
immediately exercisable by the Employee at the date of termination and only for
a period of three (3) months following such termination. In the event of an
Employee's Retirement, the Employee's Incentive Stock Options shall be
exercisable only as to those shares that were immediately exercisable by the
Employee at the date of Retirement and remain exercisable for a period of three
(3) years; provided however, that upon the Employee's Retirement, the Committee,
in its discretion, may determine that all unexercisable Incentive Stock Options
shall continue to become exercisable in accordance with the Award Agreement if
the Employee is immediately engaged by the Holding Company or an Affiliate as a
consultant or advisor or continues to serve the Holding Company or an Affiliate
as a director or advisory director. Unless otherwise determined by the
Committee, in the event of the termination of an Employee's service for
Disability or death, all unvested Incentive Stock Options held by such Employee
shall immediately become exercisable and shall remain exercisable for three (3)
years after such termination. Unless otherwise determined by the Committee, in
the event of an Employee's Termination for Cause, all rights under such
Employee's Incentive Stock Options shall expire immediately upon the effective
date of such Termination for Cause. Any Option which, by operation of this
provision, does not meet the requirements of Section 422 of the Code, shall be
considered a Non-statutory Stock Option.
(f) Maximum Individual Award. No individual Employee shall be granted an
------------------------
amount of Incentive Stock Options which exceeds 25% of all Options eligible to
be granted under the Plan within any 60 month period.
8. LIMITED RIGHTS.
--------------
Simultaneously with the grant of any Option, the Committee may grant a
Limited Right with respect to all or some of the shares of Common Stock covered
by such Option. Limited Rights granted under this Plan are subject to the
following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
---------------
whole or in part before the expiration of six (6) months from the Date of Grant
of the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control. The Limited Right may be exercised only when the underlying
Option is eligible to be exercised, and only when the Fair Market Value of the
underlying shares on the day of exercise is greater than the Exercise Price of
the underlying Option. Upon exercise of a Limited Right, the underlying Option
shall cease to be exercisable and shall be terminated. Upon exercise or
termination of an Option, any related Limited Rights shall terminate. The
Limited Right is transferable only when the underlying Option is transferable
and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
-------
receive from the Holding Company or an Affiliate an amount of cash equal to the
difference between the Exercise Price of the underlying Option and the Fair
Market Value of the Common Stock
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<PAGE>
subject to such Option on the date the Limited Right is exercised, multiplied by
the number of shares with respect to which such Limited Right is being
exercised.
9. STOCK AWARDS.
------------
The Committee may, subject to the limitations of the Plan, make Stock
Awards which shall consist of the grant of some number of shares of Common Stock
to a Participant. Stock Awards shall be made subject to the following terms and
conditions:
(a) Payment of the Stock Award. Stock Awards may only be made in whole
--------------------------
shares of Common Stock. Stock Awards may only be granted from shares reserved
under the Plan and available for award at the time the Stock Award is made to
the Participant.
(b) Terms of the Stock Awards. Subject to Section 23 of the Plan, the
-------------------------
Committee shall determine the dates on which Stock Awards granted to a
Participant shall vest and any terms or conditions which must be satisfied prior
to the vesting of any installment or portion of the Stock Award. Any such
terms, or conditions shall be determined by the Committee as of the Date of
Grant.
(c) Termination of Employment or Service. Unless otherwise determined by
------------------------------------
the Committee, upon the termination of a Participant's employment or service for
any reason other than Disability, death, Retirement or Termination for Cause,
the Participant's unvested Stock Awards as of the date of termination shall be
forfeited and any rights the Participant had to such unvested Stock Awards shall
become null and void. In the event of a Participant's Retirement, the
Participant's unvested Stock Awards as of the date of Retirement shall be
forfeited and any rights the Participant had to such unvested Stock Awards shall
become null and void; provided however, that upon the Participant's Retirement,
the Committee, in its discretion, may determine that all unvested Stock Awards
shall continue to vest in accordance with the Award Agreement if the Participant
is immediately engaged by the Holding Company or an Affiliate as a consultant or
advisor or continues to serve the Holding Company or an Affiliate as a director
or advisory director. Unless otherwise determined by the Committee, in the
event of a termination of the Participant's service due to Disability, death all
unvested Stock Awards held by such Participant shall immediately vest. Unless
otherwise determined by the Committee, or in the event of the Participant's
Termination for Cause, all unvested Stock Awards held by such Participant as of
the effective date of such Termination for Cause shall be forfeited and any
rights such Participant had to such unvested Stock Awards shall become null and
void.
(d) Non-Transferability. Except to the extent permitted by the Code, the
-------------------
rules promulgated under Section 16(b) of the Exchange Act or any successor
statutes or rules:
(i) The recipient of a Stock Award shall not sell, transfer, assign,
pledge, or otherwise encumber shares subject to the Stock Award
until full vesting of such shares has occurred. For purposes of
this section, the separation
A-11
<PAGE>
of beneficial ownership and legal title through the use of any
"swap" transaction is deemed to be a prohibited encumbrance.
(ii) Unless determined otherwise by the Committee and except in the
event of the Participant's death or pursuant to a domestic
relations order, a Stock Award is not transferable and may be
earned in his lifetime only by the Participant to whom it is
granted. Upon the death of a Participant, a Stock Award is
transferable by will or the laws of descent and distribution.
The designation of a beneficiary shall not constitute a transfer.
(iii) If a recipient of a Stock Award is subject to the provisions of
Section 16 of the Exchange Act, shares of Common Stock subject to
such Stock Award may not, without the written consent of the
Committee (which consent may be given in the Award Agreement), be
sold or otherwise disposed of within six (6) months following the
date of grant of the Stock Award.
(e) Accrual of Dividends. Whenever shares of Common Stock underlying a
--------------------
Stock Award are distributed to a Participant or beneficiary thereof under the
Plan, such Participant or beneficiary shall also be entitled to receive, with
respect to each such share distributed, a payment equal to any cash dividends
and the number of shares of Common Stock equal to any stock dividends, declared
and paid with respect to a share of the Common Stock if the record date for
determining shareholders entitled to receive such dividends falls between the
date the relevant Stock Award was granted and the date the relevant Stock Award
or installment thereof is issued. There shall also be distributed an
appropriate amount of net earnings, if any, of the Trust with respect to any
dividends paid out on the shares related to the Stock Award.
(f) Voting of Stock Awards. After a Stock Award has been granted but for
----------------------
which the shares covered by such Stock Award have not yet been vested, earned
and distributed to the Participant pursuant to the Plan, the Participant shall
be entitled to vote or to direct the Trustee to vote, as the case may be, such
shares of Common Stock which the Stock Award covers subject to the rules and
procedures adopted by the Committee for this purpose and in a manner consistent
with the Trust agreement.
(g) Maximum Individual Award. No individual Employee shall be granted an
------------------------
amount of Stock Awards which exceeds 25% of all Stock Awards eligible to be
granted under the Plan within any 60 month period and no individual Outside
Director shall be granted an amount of Stock Awards which exceeds 5% of all
Stock Awards eligible to be granted under the Plan within any 60 month period.
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<PAGE>
10. STOCK APPRECIATION RIGHTS
-------------------------
The Committee may, subject to the limitation of the Plan, grant a Stock
Appreciation Right ("SAR") to any Participant. A Stock Appreciation Right shall
entitle the Participant to the right to receive a payment, equal in value to
the excess of the Fair Market Value of a specified number of shares of Common
Stock on the date the SAR is exercised over the grant price of such SAR, which
shall not be less than 100% of the Fair Market Value on the date of grant of
such SAR, as determined by the Committee, provided that, in the case of a SAR
granted retroactively in tandem with or as substitution for another award
granted under any plan of the Company or an Affiliate, the grant price may be
the same as the exercise or designated price of such other award.
(a) Maximum Individual Award. No individual Employee or Outside Director
------------------------
shall be granted a number of Stock Appreciation Rights which exceeds the maximum
number of Options such individual may be granted under the Plan, pursuant to
Section 6(e) hereof, within any 60 month period.
11. PERFORMANCE AWARDS
------------------
(a) The Committee may determine to make any Award under the Plan contingent
upon the achievement of a Performance Goal or any combination of Performance
Goals. Each Performance Award shall be evidenced in the Award Agreement, which
shall set forth the Performance Goals applicable to the Award, the maximum
amounts payable and such other terms and conditions as are applicable to the
Performance Award. Each Performance Award shall be granted and administered to
comply with the requirements of Section 162(m) of the Code and in a manner
consistent with the provisions of Section 23 of the Plan.
(b) Any Performance Award shall be made not later than 90 days after the
start of the period for which the Performance Award relates and shall be made
prior to the completion of 25% of such period. All determinations regarding the
achievement of any Performance Goals will be made by the Committee. The
Committee may not increase during a year the amount of a Performance Award that
would otherwise be payable upon achievement of the Performance Goals but may
reduce or eliminate the payments as provided for in the Award Agreement.
(c) Nothing contained in the Plan will be deemed in any way to limit or
restrict the Committee from making any Award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.
(d) A Participant who receives a Performance Award payable in Common Stock
shall have no rights as a shareholder until the Company Stock is issued pursuant
to the terms of the Award Agreement. The Common Stock may be issued without
cash consideration.
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<PAGE>
(e) A Participant's interest in a Performance Award may not be sold,
assigned, transferred, pledged, hypothecated, or otherwise encumbered.
(f) No Award or portion thereof that is subject to the attainment or
satisfaction of a condition or Performance Goal shall be distributed or
considered to be earned or vested until the Committee certifies in writing that
the conditions or Performance Goal to which the distribution, earning or vesting
of such Award is subject has been achieved.
12. DEFERRED PAYMENTS
-----------------
Notwithstanding any other provision of this Plan, any Participant may
elect, with the concurrence of the Committee and consistent with any rules and
regulations established by the Committee, to defer the delivery of the proceeds
of the exercise of any Non-statutory Stock Option not transferred under the
provisions of Section 6(c), Stock Appreciation Rights, and Stock Awards.
(a) Election Timing. The election to defer the delivery of the proceeds
---------------
from any eligible Non-statutory Stock Option or Stock Appreciation Right must be
made at least six (6) months prior to the date such Award is exercised or at
such other time as the Committee may specify. The election to defer the
delivery of any Stock Award must be made no later than the last day of the
calendar year preceding the calendar year in which the Participant would
otherwise have an unrestricted right to receive such Award. Deferrals of
eligible Awards shall only be allowed for exercises of Options and lapses of
restrictions on Stock Awards that occur while the Participant is in active
service with the Holding Company or an Affiliate. Any election to defer the
proceeds from an eligible Award shall be irrevocable as long as the Participant
remains an Employee or Outside Director of the Holding Company or an Affiliate.
(b) Stock Option Deferral. The deferral of the proceeds of Non-statutory
---------------------
Stock Options may be elected by a Participant subject to the rules and
regulations established by the Committee. The proceeds from such an exercise
shall be credited to a deferred stock option account established for the
Participant. The proceeds shall be credited to the deferred stock option
account as a number of deferred shares or share units equivalent in value to
those proceeds. Deferred share units shall be valued at the Fair Market Value
on the date of exercise. Subsequent to exercise, the deferred shares or share
units shall be valued at the Fair Market Value of Common Stock; provided,
however, that at the discretion of the Committee, the Participant may elect to
have the value of his deferred stock option account valued on some other basis
of measurement approved by the Committee. Unless the Participant's deferred
stock option account is valued using a basis of measurement other than Common
Stock, deferred share units shall accrue dividends at the rate paid upon the
Common Stock credited in the form of additional deferred share units. Deferred
shares or share units shall be distributed in shares of Common Stock or cash, at
the discretion of the Committee, upon the termination of service of the
Participant or at such other date, as may be approved by the Committee, over a
period of no more than ten (10) years.
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<PAGE>
(c) Stock Appreciation Right Deferral. The deferral of the proceeds of
---------------------------------
Stock Appreciation Rights may be made by a Participant subject to the rules and
regulations established by the Committee. Upon exercise, the Committee will
credit the Participant's deferred stock option account with a number of deferred
shares or share units equivalent in value to the difference between the Fair
Market Value of a share of Common Stock on the exercise date and the Exercise
Price of the Stock Appreciation Right multiplied by the number of shares
exercised. Deferred shares or share units shall be valued at the Fair Market
Value on the date of exercise. Subsequent to exercise, the deferred shares or
share units shall be valued at the Fair Market Value of Common Stock; provided,
however, that at the discretion of the Committee, the Participant may elect to
have the value of his deferred stock option account valued on some other basis
of measurement approved by the Committee. Unless the Participant's deferred
stock option account is valued using a basis of measurement other than Common
Stock, deferred shares or share units shall accrue dividends at the rate paid
upon the Common Stock credited in the form of additional deferred shares or
share units. Deferred shares or share units shall be distributed in shares of
Common Stock or cash, at the discretion of the Committee, upon the Participant's
termination of service or at such other date, as may be approved by the
Committee, over a period of no more than ten (10) years.
(d) Stock Award Deferrals. The deferral of Stock Awards may be elected by
---------------------
a Participant subject to the rules and regulations established by the Committee.
Upon the lapsing of restrictions on such an Award, the Committee shall credit to
a deferred stock award account established for the Participant a number of
deferred shares or share units equivalent in value to the number of deferred
Stock Awards multiplied by the Fair Market Value of Common Stock. Deferred
shares or share units shall be valued at the Fair Market Value on the date all
restriction on the Stock Award lapse or are waived. Subsequent to the lapsing
of all restrictions, the deferred shares or share units shall be valued at the
Fair Market Value of Common Stock; provided, however, that at the discretion of
the Committee, the Participant may elect to have the value of his deferred stock
award account valued on some other basis of measurement approved by the
Committee. Unless the Participant's deferred stock award account is valued
using a basis of measurement other than Common Stock, deferred shares or share
units shall accrue dividends at the rate paid upon the Common Stock credited in
the form of additional deferred share units. Deferred share units shall be
distributed in shares of Common Stock or cash, at the discretion of the
Committee, upon the termination of service of the Participant or at such other
date, as may be approved by the Committee, over a period of no more than ten
(10) years.
(e) Accelerated Distributions. The Committee may, at its sole discretion,
-------------------------
allow for the early payment of a Participant's deferred stock option account
and/or deferred stock award account in the event of an "unforeseeable emergency"
or in the event of the death or Disability of the Participant. An
"unforeseeable emergency" means an unanticipated emergency caused by an event
beyond the control of the Participant that would result in severe financial
hardship if the distribution were not permitted. Such distributions shall be
limited to the amount necessary to sufficiently address the financial hardship.
Any distributions under this provision, shall be consistent with the Code and
the regulations
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<PAGE>
promulgated thereunder. Additionally, the Committee may use its discretion to
cause stock option deferral accounts and/or deferred stock award accounts to be
distributed when continuing the program is no longer in the best interest of the
Holding Company or any Affiliate.
(f) Assignability. No rights to deferred stock option accounts or deferred
-------------
stock award accounts may be assigned or subject to any encumbrance, pledge or
charge of any nature except that a Participant may designate a beneficiary
pursuant to any rules established by the Committee.
(g) Unfunded Status. No Participant or other person shall have any
---------------
interest in any fund or in any specific asset of the Holding Company or an
Affiliate by reason of any amount credited hereunder. Any amounts payable
hereunder shall be paid from the general assets of the Holding Company or its
Affiliates and no Participant or other person shall have any rights to such
assets beyond the rights afforded general creditors of the Holding Company and
its Affiliates. However, the Holding Company or any Affiliate shall have the
right to establish a reserve, trust or make any investment for the purpose of
satisfying the obligations created under this Section 12 of the Plan; provided,
however, that no Participant or other person shall have any interest in such
reserve, trust or investment.
13. PAYOUT ALTERNATIVES
-------------------
(a) Payments due to a Participant upon the exercise or redemption of an
Option or Stock Award shall be made in the form of shares of Common Stock.
Payments due to a Participant upon the exercise or redemption of a Stock
Appreciation Right or Limited Right shall be made in the form of cash.
(b) Any shares of Common Stock tendered in satisfaction of an obligation
arising under this Plan shall be valued at the Fair Market Value of the Common
Stock on the day preceding the date of the issuance of such stock to the
Participant.
14. METHOD OF EXERCISE
------------------
Subject to any applicable Award Agreement, any Option may be exercised by
the Participant in whole or in part at such time or times, and the Participant
may make payment of the Exercise Price in such form or forms, including, without
limitation, payment by delivery of cash, Common Stock or other consideration
(including, where permitted by law and the Committee, Awards) having a Fair
Market Value on the exercise date equal to the total Exercise Price, or by any
combination of cash, shares of Common Stock and other consideration, including
exercise by means of a cashless exercise arrangement with a qualifying broker-
dealer, as the Committee may specify in the applicable Award Agreement.
A-16
<PAGE>
15. RIGHTS OF PARTICIPANTS.
----------------------
No Participant shall have any rights as a shareholder with respect to any
shares of Common Stock covered by an Option until the date of issuance of a
stock certificate for such Common Stock. Nothing contained herein or in any
Award Agreement confers on any person any right to continue in the employ or
service of the Holding Company or an Affiliate or interferes in any way with the
right of the Holding Company or an Affiliate to terminate a Participant's
services.
16. DESIGNATION OF BENEFICIARY.
--------------------------
A Participant may, with the consent of the Committee, designate a person or
persons to receive, in the event of death, any Award to which the Participant
would then be entitled. Such designation will be made upon forms supplied by
and delivered to the Holding Company and may be revoked in writing. If a
Participant fails effectively to designate a beneficiary, then the Participant's
estate will be deemed to be the beneficiary.
17. DILUTION AND OTHER ADJUSTMENTS.
------------------------------
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, reorganization, combination or exchange of shares, or other similar
corporate change, or other increase or decrease in such shares without receipt
or payment of consideration by the Holding Company, or in the event an
extraordinary capital distribution (including an Extraordinary Dividend) is made
and any necessary OTS approval is obtained, the Committee may make such
adjustments to previously granted Awards, to prevent dilution, diminution, or
enlargement of the rights of the Participant, including any or all of the
following:
(a) adjustments in the aggregate number or kind of shares of Common Stock
or other securities that may underlie future Awards under the Plan;
(b) adjustments in the aggregate number or kind of shares of Common Stock
or other securities underlying Awards already made under the Plan;
(c) adjustments in the Exercise Price of outstanding Incentive and/or
Non-statutory Stock Options, or any Limited Rights attached to such
Options.
No such adjustments may, however, materially change the value of benefits
available to a Participant under a previously granted Award. All Awards under
this Plan shall be binding upon any successors or assigns of the Holding
Company.
Notwithstanding the above, in the event of an extraordinary capital
distribution, any adjustment under this Section 17 shall be subject to required
OTS approval.
A-17
<PAGE>
18. TAX WITHHOLDING.
---------------
Notwithstanding any other provision of the Plan, Awards under this Plan
shall be subject to tax withholding to the extent required by any governmental
authority. Any withholding shall comply with Rule 16b-3 or any amendment or
successive rule. Shares of Common Stock withheld to pay for tax withholding
amounts shall be valued at their Fair Market Value on the date the Award is
deemed taxable to the Participant. Participants granted Non-statutory Stock
Options shall be responsible for any required withholding applicable to any Non-
statutory Stock Option which has been transferred pursuant to Section 6(c)
hereof, unless otherwise inconsistent with current tax law.
19. AMENDMENT OF THE PLAN AND AWARDS.
--------------------------------
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, prospectively or retroactively; provided
however, that provisions governing grants of Incentive Stock Options, unless
permitted by the rules and regulations or staff pronouncements promulgated under
the Code shall be submitted for shareholder approval to the extent required by
such law, regulation or interpretation.
Failure to ratify or approve amendments or modifications by shareholders
shall be effective only as to the specific amendment or modification requiring
such ratification. Other provisions of this Plan will remain in full force and
effect.
No such termination, modification or amendment may adversely affect the
rights of a Participant under an outstanding Award without the written
permission of such Participant.
(b) The Committee may amend any Award Agreement, prospectively or
retroactively; provided, however, that no such amendment shall adversely affect
the rights of any Participant under an outstanding Award without the written
consent of such Participant.
20. EFFECTIVE DATE OF PLAN.
----------------------
The Plan shall become effective upon approval by the Holding Company's
shareholders in accordance with OTS and Internal Revenue Service ("IRS")
regulations or January 16, 1998, whichever is earlier. The failure to obtain
shareholder approval for such purposes will not effect the validity of the Plan
and any Awards made under the Plan; provided, however, that if the Plan is not
approved by stockholders in accordance with IRS regulations, the Plan shall
remain in full force and effect, and any Incentive Stock Options granted under
the Plan shall be deemed to be Non-statutory Stock Options and any Award
intended to comply with Section 162(m) of the Code shall not comply with Section
162(m) of the Code.
A-18
<PAGE>
21. TERMINATION OF THE PLAN.
-----------------------
The right to grant Awards under the Plan will terminate upon the earlier
of: (i) ten (10) years after the Effective Date; (ii) the issuance of a number
of shares of Common Stock pursuant to the exercise of Options or the
distribution of Stock Awards which together with the exercise of Limited Rights
is equivalent to the maximum number of shares reserved under the Plan as set
forth in Section 4 hereof. The Board of Directors has the right to suspend or
terminate the Plan at any time, provided that no such action will, without the
consent of a Participant, adversely affect a Participant's vested rights under a
previously granted Award.
22. APPLICABLE LAW.
--------------
The Plan will be administered in accordance with the laws of the state of
Delaware and applicable federal law.
23. COMPLIANCE WITH OTS CONVERSION REGULATIONS
------------------------------------------
Notwithstanding any other provision contained in this Plan:
(a) no Award under the Plan shall be made which would be prohibited by 12
CFR Section 563b.3(g)(4);
(b) unless the Plan is approved by a majority vote of the outstanding
shares of the total votes eligible to be cast at a duty called meeting
of stockholders to consider the Plan, as required by 12 CFR Section
563b.3(g)(4)(vii), the Plan shall not become effective or implemented
prior to one (1) year from the date of the Bank's mutual to stock
conversion;
(c) no Award granted prior to one (1) year from the date of the Bank's
mutual to stock conversion shall become vested or exercisable at a rate
in excess of 20% per year of the total number of Stock Awards or
Options (whichever may be the case) granted to such Participant,
provided, that Awards shall become fully vested or immediately
exercisable in the event of a Participant's termination of service due
to death or Disability;
(d) no Award granted to any individual Employee prior to one (1) year from
the date of the Bank's mutual to stock conversion may exceed 25% of the
total amount of Awards which may be granted under the Plan;
(e) no Award granted to any individual Outside Director prior to one (1)
year from the date of the Bank's mutual to stock conversion may exceed
5% of the total amount of Awards which may be granted under the Plan;
and
A-19
<PAGE>
(f) the aggregate amount of Awards granted to all Outside Directors prior
to one (1) year from the date of the Bank's mutual to stock conversion
may not exceed 30% of the total amount of Awards which may be granted
under the Plan.
24. DELEGATION OF AUTHORITY
-----------------------
The Committee may delegate all authority for: (i) the determination of
forms of payment to be made by or received by the Plan and (ii) the execution of
any Award Agreement. The Committee may rely on the descriptions,
representations, reports and estimates provided to it by the management of the
Holding Company or an Affiliate for determinations to be made pursuant to the
Plan, including the attainment of Performance Goals. However, only the
Committee or a portion of the Committee may certify the attainment of a
Performance Goal.
A-20
<PAGE>
PLEASE MARK VOTES REVOCABLE PROXY
[X] AS IN THIS EXAMPLE FIRSTFED AMERICA BANCORP, INC.
ANNUAL MEETING OF SHAREHOLDERS
August 5, 1997
2:00 p.m. Eastern Time
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert F. Stoco, Gilbert C. Oliveira and Paul
A. Raymond or any one or more of them acting in the absence of others each with
full power of substitution, to act as proxy for the undersigned, and to vote all
shares of Common Stock of FIRSTFED AMERICA BANCORP, INC. (the "Company") which
the undersigned is entitled to vote only at the Annual Meeting of Shareholders,
to be held on August 5, 1997, at 2:00 p.m. Eastern Time, at The Westin Hotel,
One West Exchange Street, Providence, Rhode Island 02903, and at any and all
adjournments thereof, with all of the powers the undersigned would possess if
personally present at such meeting as follows:
Please be sure to sign and date ----------------
this Proxy in the box below. Date
- --------------------------------------------------------------------------------
- --------Shareholder sign above----------Co-holder (if any) sign above-----------
Vote For
With- All
For held Except
1. The election as directors of all nominees listed
(except as marked to the contrary below). [_] [_] [_]
Thomas A. Rodgers Jr. Anthony L. Sylvia
INSTRUCTION: TO WITHHOLD YOUR VOTE FOR ANY INDIVIDUAL NOMINEE, MARK "FOR All
EXCEPT" AND WRITE THAT NOMINEE'S NAME ON THE LINE PROVIDED BELOW.
- --------------------------------------------------------------------------------
For Against Abstain
2. The approval of the FIRSTFED AMERICA BANCORP,
INC. 1997 Stock-Based Incentive Plan. [_] [_] [_]
3. The ratification of the appointment of KPMG
Peat Marwick LLP as independent auditors of
FIRSTFED AMERICA BANCORP, INC. for the fiscal [_] [_] [_]
year ending March 31, 1998.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
EACH OF THE LISTED PROPOSALS.
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS
ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS LISTED. IF
ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL MEETING, INCLUDING WHETHER OR NOT
TO ADJOURN THE MEETING, THIS PROXY WILL BE VOTED BY THE PROXIES IN THEIR BEST
JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER
BUSINESS TO BE PRESENTED AT THE ANNUAL MEETING.
- --------------------------------------------------------------------------------
DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED.
FIRSTFED AMERICA BANCORP, INC.
- --------------------------------------------------------------------------------
The above signed acknowledges receipt from the Company prior to the execution
of this proxy of a Notice of Annual Meeting of Shareholders and of a Proxy
Statement dated June 20, 1997 and of the Annual Report to Shareholders.
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder may sign but only one signature
is required.
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY
IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
- --------------------------------------------------------------------------------
