<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12305
------------------------
FIRSTFED AMERICA BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3331237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 679-8181
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of June 30, 1998, there were 8,271,794 shares of the Registrant's Common
Stock outstanding.
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FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and March 31, 1998.......................................... 2
Consolidated Statements of Operations for the three months
ended June 30, 1998 (unaudited) and 1997 (unaudited)........ 3
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended June 30, 1998 (unaudited)........ 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 1998 (unaudited) and 1997 (unaudited)........ 5
Notes to Unaudited Consolidated Financial Statements........ 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................... 7
Quantitative and Qualitative Disclosures about Market
Item 3. Risk........................................................ 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 15
Item 2. Changes in Securities....................................... 15
Item 3. Default Upon Senior Securities.............................. 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES........................................................... 16
</TABLE>
1
<PAGE> 3
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
----------- ---------
(UNAUDITED)
<S> <C> <C>
Cash on hand and due from banks............................. $ 25,642 $ 32,021
Short-term investments...................................... 3,080 --
Mortgage loans held for sale................................ 63,571 84,867
Investment in trading securities (amortized cost of $100)... 100 --
Investment securities available for sale (amortized cost of
$8,067 and $5,816)........................................ 9,692 7,712
Mortgage-backed securities available for sale (amortized
cost of $265,174 and $214,225)............................ 266,511 215,143
Investment securities held to maturity (fair value of
$41,534 and $22,585)...................................... 41,460 22,491
Mortgage-backed securities held to maturity (fair value of
$11,074 and $12,688)...................................... 10,788 12,495
Stock in Federal Home Loan Bank of Boston, at cost.......... 22,214 17,945
Loans receivable, net of allowance for loan losses of
$11,164 and $10,937....................................... 828,970 848,552
Accrued interest receivable................................. 6,345 5,992
Mortgage servicing rights................................... 4,434 3,230
Office properties and equipment, net........................ 25,303 24,877
Real estate owned, net...................................... 443 595
Deferred income tax asset, net.............................. 3,254 3,278
Income tax receivable....................................... -- --
Prepaid expenses and other assets........................... 3,936 2,634
---------- ---------
Total assets...................................... $1,315,743 1,281,832
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $ 694,675 $ 708,488
FHLB advances and other borrowings........................ 474,121 403,865
Advance payments by borrowers for taxes and insurance..... 5,831 6,224
Accrued interest payable.................................. 3,158 2,613
Accrued income taxes...................................... 78 929
Other liabilities......................................... 21,277 32,727
---------- ---------
Total liabilities................................. 1,199,140 1,154,846
---------- ---------
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued................................ -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized; 8,707,152 shares issued and outstanding.... 87 87
Additional paid-in capital................................ 85,244 85,016
Retained earnings......................................... 51,703 50,422
Accumulated other comprehensive income.................... 1,739 1,616
Unearned 1997 stock-based incentive plan.................. (7,236) (4,734)
Unallocated ESOP shares................................... (5,421) (5,421)
Treasury stock............................................ (9,513) --
---------- ---------
Total stockholders' equity........................ 116,603 126,986
---------- ---------
Total liabilities and stockholders' equity........ $1,315,743 1,281,832
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
---------------------
1998 1997
-------- -------
(UNAUDITED)
<S> <C> <C>
Interest and dividend income:
Loans..................................................... $17,078 16,319
Investment securities..................................... 555 529
Mortgage-backed securities................................ 3,290 1,001
Federal Home Loan Bank stock.............................. 299 154
------- ------
Total interest and dividend income................ 21,222 18,003
------- ------
Interest expense:
Deposits.................................................. 7,480 8,575
Borrowed funds............................................ 5,930 2,026
------- ------
Total interest expense............................ 13,410 10,601
------- ------
Net interest income before provision for loan
losses........................................... 7,812 7,402
Provision for loan losses................................... 300 1,000
------- ------
Net interest income after provision for loan
losses........................................... 7,512 6,402
------- ------
Non-interest income:
Loan servicing income..................................... 521 651
Gain (loss) on sale of mortgage loans, net................ 453 113
Gain on sale of investments securities available for
sale................................................... 256 207
Other income.............................................. 510 331
------- ------
Total non-interest income......................... 1,740 1,302
------- ------
Non-interest expense:
Compensation and employee benefits........................ 3,903 2,679
Office occupancy and equipment............................ 1,017 603
Advertising and business promotion........................ 299 284
Federal deposit insurance premiums........................ 164 112
Data processing........................................... 193 177
Other..................................................... 962 894
------- ------
Total non-interest expenses....................... 6,538 4,749
------- ------
Income before income tax expense.................. 2,714 2,955
Income tax expense.......................................... 1,020 1,308
------- ------
Net income........................................ $ 1,694 1,647
======= ======
Basic earnings per share.................................... $ 0.22 0.20
======= ======
Diluted earnings per share.................................. $ 0.22 0.20
======= ======
Weighted average shares outstanding -- basic................ 7,643 8,110
======= ======
Weighted average shares outstanding -- diluted.............. 7,710 8,110
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
UNALLOCATED
1997
STOCK-
ACCUMULATED BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME SHARES SHARES STOCK EQUITY
------ ---------- -------- ------------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1998.................... $87 85,016 50,422 1,616 (5,421) (4,734) -- 126,986
Net income.............. -- -- 1,694 -- -- -- -- 1,694
Change in net unrealized
gain on investments
available for sale,
net................... -- -- -- 123 -- -- -- 123
Total
comprehensive
income......... -- -- -- -- -- -- -- 1,817
Cash dividends declared
($0.05/shr)........... -- -- (413) -- -- -- -- (413)
Common stock acquired
for SIP............... -- -- -- -- -- (2,502) -- (2,502)
Earned ESOP shares
charged to expense.... -- 228 -- -- -- -- -- 228
Common stock acquired
under repurchase
program -- (435,358
shares/$21.05 average
price)................ -- -- -- -- -- -- (9,164) (9,164)
Common stock acquired
for SERP -- (17,748
shares/$19.71 average
price)................ -- -- -- -- -- -- (349) (349)
--- ------ ------ ----- ------ ------ ------ -------
Balance at June 30,
1998.................... $87 85,244 51,703 1,739 (5,421) (7,236) (9,513) 116,603
=== ====== ====== ===== ====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
----------------------
1998 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,694 1,647
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization (accretion) of:
Premium (discount) on investment and mortgage-backed
securities held to maturity.......................... 2 (3)
Premium (discount) on investment and mortgage-backed
securities available for sale........................ 123 7
Deferred loan origination fees........................ (16) 108
Mortgage servicing rights............................. 312 102
Provisions for:
Loan losses........................................... 300 1,000
Deferred income taxes................................. -- 21
(Gains) losses on sales of:
Real estate owned..................................... (107) (23)
Mortgage loans........................................ (453) (113)
Net proceeds from sales of mortgage loans............. 177,218 46,903
Origination of mortgage loans held for sale........... (156,985) (38,706)
Purchase of trading securities........................ 100 --
Real estate owned valuation write-downs............... -- 70
Depreciation of office properties and equipment....... 525 325
Appreciation in fair value of ESOP shares............. 228 144
Increase or decrease in:
Accrued interest receivable........................... (353) (510)
Income tax receivable................................. -- 249
Prepaid expenses and other assets..................... (1,302) (1)
Accrued interest payable.............................. 545 70
Accrued income taxes and other liabilities............ (12,301) (3,511)
--------- -------
Net cash (used in) provided by operating
activities.................................... 9,530 7,779
--------- -------
Cash flows from investing activities:
Purchase of investment securities available for sale...... $ (2,252) (643)
Purchase of mortgage-backed securities
available-for-sale...................................... (69,806) (15,190)
Payments received on mortgage-backed securities available
for sale................................................ 18,734 669
Purchases of investment securities held to maturity....... (24,968) (5,993)
Maturities of investment securities held to maturity...... 6,000 3,000
Payments received on mortgage-backed securities held to
maturity................................................ 1,704 511
Purchase of Federal Home Loan Bank stock.................. (4,269) --
Net (increase) decrease in loans.......................... 19,217 (66,200)
Proceeds from sales of real estate owned.................. 340 362
Purchases of office properties and equipment.............. (951) (3,495)
--------- -------
Net cash used in investing activities.......... (56,451) (86,979)
--------- -------
Cash flows from financing activities:
Net increase (decrease) in deposits....................... $ (13,813) 2,221
Proceeds from FHLB advances and other borrowings.......... 224,528 117,516
Repayments on FHLB advances and other borrowings.......... (154,272) (77,344)
Net change in advance payments by borrowers for taxes and
insurance............................................... (393) 166
Cash dividend, paid....................................... (413) --
Payments to acquire stock-based incentive plan shares..... (2,502) --
Payments to acquire common stock for treasury stock....... (9,513) --
--------- -------
Net cash provided by financing activities...... 43,622 42,559
--------- -------
Net (decrease) in cash and cash equivalents................. (3,299) (36,641)
Cash and cash equivalents at beginning of year.............. 32,021 53,540
--------- -------
Cash and cash equivalents at end of year.................... $ 28,722 16,899
========= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................... $ 12,865 10,531
========= =======
Income taxes....................................... $ 1,872 --
========= =======
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans.................. $ 81 320
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of FIRSTFED AMERICA BANCORP, INC. (the "Company"), and its wholly-owned
subsidiaries, First Federal Savings Bank of America (the "Bank") and FAB FUNDING
CORPORATION ("FAB FUNDING"). First Federal Savings Bank of America includes its
wholly-owned subsidiaries, FIRSTFED MORTGAGE CORPORATION, FIRSTFED INVESTMENT
CORPORATION, PREMIO INVESTMENT CORPORATION, and CELMAC INVESTMENT CORPORATION.
The interim consolidated financial statements reflect all normal and
recurring adjustments which are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. The results of operations for the three
months ended June 30, 1998 are not necessarily indicative of the results of
operations that may be expected for all of fiscal year 1999.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report to Stockholders on Form 10-K for the
fiscal year ended March 31, 1998.
NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the aggregate as
other comprehensive income. The Company adopted SFAS 130 as of June 30, 1998,
under the equity statement method.
The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in June, 1997, which established standards
for reporting information about operating segments. An operating segment is
defined as a component of a business for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and evaluate performance. This statement
requires a company to disclose certain income statement and balance sheet
information by operating segment, as well as provide a reconciliation of
operating segment information to the company's consolidated balances. This
statement is effective for 1999 annual financial statements.
The FASB also issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in June, 1998, which provides for matching the timing of
gain or loss recognition on the hedging instrument with the recognition of: a)
the changes in fair value of the hedged asset or liability that are attributable
to the hedged risk; or b) the earnings effect of the hedged forecasted
transaction. The statement is effective after June 15, 1999.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND MARCH 31, 1998
GENERAL
Total assets at June 30, 1998 were $1.316 billion, an increase of $33.9
million, or 2.7%, compared to $1.282 billion at March 31, 1998. Asset growth was
primarily attributable to growth in mortgage-backed securities available for
sale which increased from $215.1 million to $266.5 million, an increase of $51.4
million or 23.9%, as well as growth in investment securities held to maturity,
which increased from $22.5 million to $41.5 million, an increase of $19.0
million, or 84.3%. Partially offsetting this growth was a $40.9 million decline
in loans receivable, net and mortgage loans held for sale which decreased to
$892.5 million at June 30, 1998 from $933.4 million at March 31, 1998. Balance
sheet growth was primarily funded by Federal Home Loan Bank advances and other
borrowings, which increased $70.3 million, or 17.4%, from $403.9 million at
March 31, 1998 to $474.1 million at June 30, 1998.
Total deposits at June 30, 1998 were $694.7 million, a decrease of $13.8
million, or 2.0%, compared to $708.5 million at March 31, 1998. Stockholders'
equity at June 30, 1998 was $116.6 million compared to $127.0 million at March
31, 1998. This $10.4 million decrease was primarily the result of the Company's
$9.5 million stock repurchase program completed in the first quarter and the
completion of the purchase of the 1997 Stock-based Incentive Plan shares. The
repurchase program, coupled with balance sheet growth, caused a 1.05% decline in
the stockholders' equity to total assets ratio, from 9.91% at March 31, 1998 to
8.86% at June 30, 1998.
LIQUIDITY AND CAPITAL
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB advances, investment
maturities, and proceeds from the sale of loans. While scheduled amortization of
loans and investment maturities are predictable sources of funds, deposit flows,
mortgage prepayments, and interest rate payments on adjustable-rate mortgage
loans and securities are influenced by general interest rates, economic
conditions and competition. The Company has other sources of liquidity if a need
for additional funds arises, including an overnight FHLB line of credit and
approximately $214 million of additional borrowing capacity at the Federal Home
Loan Bank and at securities dealers through repurchase agreements. The Bank has
maintained liquid assets in excess of the required minimum levels as defined by
the Office of Thrift Supervision (OTS) regulations. This requirement, which may
be varied at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of the Bank's deposits and short-term
borrowings. The Bank's required liquidity ratio is currently 4%. The Bank's
actual liquidity ratio was 11.36% and 11.70% at June 30, 1998 and March 30,
1997, respectively.
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investment in trading securities, investments available for
sale, and mortgage-backed securities available for sale. These asset levels are
dependent on the Company's operating, financing, lending, and investing
activities during any given period. At June 30, 1998, the Company's cash,
short-term investments, mortgage loans held for sale, investment in trading
securities, investments available for sale, and mortgage-backed securities
available for sale totaled $368.6 million or 28.0% of the Company's total
assets. Additional investments were available which qualified for the Bank's
regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances and dealer repurchase agreements. At June 30,
1998, the Bank had $474.1 million in advances and other borrowings outstanding
from the FHLB and securities dealers. The Company generally maintains a
competitive deposit rate strategy in its market and sources of funds such as
FHLB advances and repurchase agreements may be used for wholesale growth as well
as to supplement cash flow needs.
At June 30, 1998, the Company had commitments to originate portfolio loans
and unused outstanding lines of credit totaling $121.3 million. The Company
anticipates that it will have sufficient funds available to
7
<PAGE> 9
meet its current loan origination commitments. Certificate accounts which are
scheduled to mature in less than one year from June 30, 1998, totaled $364.3
million.
At June 30, 1998, the consolidated stockholders' equity to total assets
ratio was 8.86%. At June 30, 1998, the Bank exceeded all of its regulatory
capital requirements. The Bank's tangible capital of $97.0 million, or 7.47%, of
total adjusted assets, was above the required level of $26.0 million or 2.0%;
core capital of $97.0 million, or 7.47% of total adjusted assets, was above the
required level of $51.9 million, or 4.0%; risk-based capital of $105.0 million,
or 16.22% of risk-weighted assets, was above the required level of $51.8 million
or 8.0%, and Tier 1 risk-based capital of $97.0 million, or 14.98% of
risk-weighted assets, was above the required level of $25.9 million or 4.0%. The
Bank is considered a "well capitalized" institution under the OTS prompt
corrective action regulations.
YEAR 2000 COMPLIANCE
Included in other non-interest expenses are charges incurred in connection
with the modification or replacement of software or hardware in order for the
Company's computer and related systems to properly recognize dates beyond
December 31, 1999. The Company has completed its assessment of Year 2000 issues,
developed a plan, and arranged for the required resources to complete the
necessary remediation and testing efforts. In addition to these efforts, the
Company underwent a February, 1998 conversion to a new processing system for all
loan and deposit applications at a cost of approximately $700,000.
The Company will utilize both internal and external resources to reprogram,
or replace and test hardware and software for Year 2000 modifications. The
Company plans to complete changes and testing for mission critical systems by
March 31, 1999; a date prior to any impact on its operating systems. Testing of
non-critical applications will continue throughout 1999 and will be completed
prior to any impact on operating systems. The total cost of the Year 2000
project is estimated at $300,000 to $500,000. A significant portion of the costs
associated with the Year 2000 project are not expected to be incremental to the
Company, but rather represent a reprioritization of existing internal systems
technology resources.
The Company has initiated formal communications with all of its mission
critical vendors and service providers to determine the extent to which the
Company is vulnerable to any failure of those third parties to remedy their own
Year 2000 issues. The Company's total Year 2000 project costs and estimates to
complete the project include the estimated costs and time associated with the
impact of third party Year 2000 issues, based on information currently
available. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be remedied in a timely
manner or that there will be no adverse effect on the Company's systems.
Therefore, to the extent that other entities not affiliated with the Company are
unsuccessful in properly addressing this issue, the Company could possibly be
negatively impacted.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based upon management's best estimates,
which are derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
8
<PAGE> 10
ASSET QUALITY
At June 30, 1998, non-accrual loans totaled $3.4 million and REO totaled
$443,000. The Company ceases to accrue interest on loans 90 days or more past
due and charges off all accrued interest. Foregone interest on non-accrual loans
for the three months ended June 30, 1998 was $38,000. The following table sets
forth information regarding non-accrual loans and real estate owned ("REO").
<TABLE>
<CAPTION>
AT JUNE 30, AT MARCH 31,
1998 1998
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NON-ACCRUAL LOANS:
Mortgage loans:
One- to four-family.................................. $1,363 $1,073
Multi-family......................................... 101 101
Commercial real estate............................... 1,339 1,199
Construction and land................................ 117 169
------ ------
Total mortgage loans.............................. 2,920 2,542
------ ------
Commercial loans....................................... -- 74
------ ------
Consumer loans:
Home equity lines.................................... 432 425
Second mortgages..................................... 6 --
Other consumer loans................................. 6 7
------ ------
Total consumer loans.............................. 444 432
------ ------
Total nonaccrual loans............................ 3,364 3,048
Real estate owned, net(1)................................. 443 595
------ ------
Total non-performing assets....................... $3,807 $3,643
====== ======
Allowance for loan losses as a percent percent of
loans(2).................................................. 1.33% 1.27%
Allowance for loan losses as percent of non-performing
loans(3).................................................. 331.87% 358.83%
Non-performing loans as a percent of loans(2)(3)............ 0.40% 0.35%
Non-performing assets as a percent of total assets(4)....... 0.29% 0.28%
</TABLE>
- ---------------
(1) REO balances are shown net of related valuation allowances.
(2) Loans includes loans receivable, net, excluding allowance for loan losses.
(3) Non-performing loans consist of all loans 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectability of interest or principal.
(4) Non-performing assets consist of non-performing loans and REO.
CAUTIONARY STATEMENT
The preceding and following discussion in this Quarterly Report on Form
10-Q may contain certain forward-looking statements which are based on
management's current expectations regarding economic, legislative, and
regulatory issues that may impact the Company's earnings in future periods.
Factors that could cause future results to vary materially from current
management expectations include, but are not limited to: general economic
conditions, changes in interest rates, deposit flows, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory and technological factors affecting the Company's operations,
pricing, products and services. In particular, these issues may impact
management's estimates used in evaluating market risk and interest rate risk in
its GAP and NPV tables, loan loss provisions, classification of assets, Year
2000 issues, accounting estimates and other estimates used throughout this
discussion. Further description of the risks and uncertainties to the business
are included in detail in the "Business of the Company" section of the Company's
10-K.
9
<PAGE> 11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
THE THREE MONTHS ENDED JUNE 30, 1997
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 income is a function of both the relative amounts of interest earning
assets and interest-bearing liabilities, and the interest rates earned or paid
on them.
The following table sets forth certain information relating to the Company
for the three months ended June 30, 1998 and 1997. The average yields and costs
are derived by dividing income or expense by the average balance of interest
earning assets or interest bearing liabilities, respectively, for the periods
shown. Average balances are derived from average month-end balances. Management
does not believe that the use of average monthly balances instead of average
daily balances causes any material differences in the information presented. The
yields and the costs include fees, premiums and discounts which are considered
adjustments to yields.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
(1) Loans receivable, net and mortgage
loans held for sale................. $ 908,593 17,078 7.54% $ 853,268 16,319 7.67%
(2) Investment securities............... 60,690 854 5.64% 45,457 683 6.03%
(3) Mortgage-backed securities.......... 228,423 3,290 5.78% 58,073 1,001 6.91%
---------- ------ ------ ----
Total interest-earning
assets...................... 1,197,706 21,222 7.11% 956,798 18,003 7.55%
------ ---- ------ ----
Noninterest-earning assets......... 68,018 44,367
---------- ----------
Total assets.................. 1,265,724 1,001,165
========== ==========
Liabilities and Retained Earnings:
Interest-bearing liabilities:
(4) Deposits............................ 641,600 7,480 4.68% 684,632 8,575 5.02%
(5) FHLB advances and other borrow...... 408,156 5,930 5.83% 130,383 2,026 6.23%
---------- ------ ---- ---------- ------ ----
Total interest-bearing
liabilities................. 1,049,756 13,410 5.12% 815,015 10,601 5.22%
------ ---- ------ ----
Noninterest-bearing liabilities.... 94,487 62,967
---------- ----------
Total liabilities............. 1,144,243 877,982
---------- ----------
Retained earnings.................. 121,481 123,183
---------- ----------
Total liabilities and retained
earnings.................... $1,265,724 $1,001,165
========== ==========
Net interest rate spread................ 7,812 1.99% 7,402 2.33%
====== ==== ====== ====
Net interest margin..................... 2.62% 3.10%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities.......... 114.09% 117.40%
========== ==========
</TABLE>
10
<PAGE> 12
GENERAL
Net income increased to $1.7 million for the three months ended June 30,
1998, compared to $1.6 million for the three months ended June 30, 1997. The
$47,000 increase in net income for the three months ended June 30, 1998 was the
result of $1.1 million and $438,000 increases in net interest income after
provision for loan losses and non-interest income, respectively. These increases
were offset by a $1.8 million increase in non-interest expense, but a $288,000
decrease in income tax expense contributed to the net income increase. The
Company also declared its first dividend of $0.05 a share on June 18, 1998.
INTEREST INCOME
Interest and dividend income for the three months ended June 30, 1998 was
$21.2 million, compared to $18.0 million for the three months ended June 30,
1997, an increase of $3.2 million, or 17.9%. The increase in interest and
dividend income is primarily attributable to a $240.9 million increase in
average interest-earning assets which increased to $1.198 billion for the three
months ended June 30, 1998 from $956.8 million for the three months ended June
30, 1997. The increase in average interest-earning assets was mainly due to an
increase in mortgage-backed securities available for sale which were primarily
funded by FHLB advances. The increase in average interest-earning balances was
accompanied by a 44 basis point decrease in the average yield from 7.55% for the
three months ended June 30, 1997 to 7.11% for the three months ended June 30,
1998. This decline was primarily the result of the addition of low initial
coupon adjustable-rate mortgage-backed securities and to lower yields on the
Company's loan portfolio due to lower market rates.
Interest income on loans receivable, net and mortgage loans held for sale
for the three months ended June 30, 1998 increased by $759,000, or 4.7%, to
$17.1 million compared to $16.3 million for the same three months in 1997. This
increase was attributable to an increase of $55.3 million in the average loan
balance partially offset by a 13 basis point decrease in yield on loans
receivable and mortgage loans held for sale.
Interest and dividend income from investment securities was $854,000 for
the three months ended June 30, 1998, compared to $683,000 for the comparable
three months in 1997. The average yield on investment securities decreased by 39
basis points during the three months ended June 30, 1998 versus the three months
ended June 30, 1997, primarily due to increased equity investments at the
holding company and short-term investments in commercial paper. Investment
securities increased by $15.2 million to an average of $60.7 million during the
three months ending June 30, 1998 from $45.5 million during the three months
ended June 30, 1997.
Interest on mortgage-backed securities for the three months ended June 30,
1998 increased by $2.3 million to $3.3 million, compared to $1.0 million for the
same three months in 1997. This increase in income is attributable to a $170.4
million increase in the average mortgage-backed securities balance, partially
offset by a 113 basis point decrease in the average yield, from 6.91% to 5.78%,
during the three months ended June 30, 1998 versus the three months ended June
30, 1997. This reduction in yield was the result of the addition of low initial
coupon adjustable rate mortgage-backed securities, and to lower market rates of
return for all mortgage-backed securities.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 1998 was $13.4
million, compared to $10.6 million for the three months ended June 30, 1997, an
increase of $2.8 million, or 26.5%. The increase in interest expense during this
time period was the net effect of an increase in average interest-bearing
liabilities and a decrease in their associated cost. Average interest-bearing
liabilities increased $234.7 million, or 28.8%, to $1.050 billion for the three
months ended June 30, 1998, from $815.0 million for the three months ended June
30, 1997. Of this amount, average deposit declined $43.0 million, or 6.3%, from
$684.6 during the three months ended June 30, 1997 to $641.6 million during the
three months ended June 30, 1998. During this time period the cost of deposits
fell 34 basis points due to a decline in the general level of interest rates and
to the Company's less aggressive deposit pricing strategy.
Average Federal Home Loan Bank advances and other borrowings grew 213% to
$408.2 million during the three months ended June 30, 1998 versus $130.4 million
during the same period in 1997. Because of a
11
<PAGE> 13
decline in market interest rates, the cost of Federal Home Loan Bank advances
and other borrowings fell 40 basis points during this time period, from 6.23% to
5.83%, even though the Company actively extended liability maturities to reduce
overall interest-rate risk through longer-term advances.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $410,000, or
5.5%, to $7.8 million for the three months ended June 30, 1998 from $7.4 million
for the three months ended June 30, 1997. Net interest income improved during
this time period primarily because of the Company's wholesale growth strategy.
The Company's net interest margin decreased to 2.62% for the three months ended
June 30, 1998 from 3.10% for the three months ended June 30, 1997.
PROVISION FOR LOAN LOSSES
For the three months ended June 30, 1998, the Company's provision for loan
losses was $300,000 compared to $1.0 million for the same prior year period. The
quarterly provision was reduced based on management's current assessment of the
Bank's loan portfolio, trends in the credit quality of the loan portfolio, and
market conditions. The allowance for loan losses as a percentage of loans at
June 30, 1998 was 1.33% as compared to 1.27% at March 31, 1998.
NON-INTEREST INCOME
Non-interest income increased to $1.7 million for the three months ended
June 30, 1998 compared to $1.3 million for the three months ended June 30, 1997,
an increase of $438,000, or 33.6%. During this time period, net loan servicing
income decreased to $521,000 compared to $651,000 and gain/(loss) on sale of
mortgage loans increased to a $453,000 gain from a $113,000 gain. These
differences were primarily due to increased volume on loans sold and to the
effect of SFAS No. 122, "Accounting for Mortgage Servicing Rights", (ASFAS No.
122"), which recognizes the present value of mortgage servicing rights on loans
originated and sold during the period as a component of the gain/(loss) on sale
of mortgage loans. The amortization of mortgage servicing rights are then
expensed against loan servicing income over the estimated life of the loans
being serviced.
NON-INTEREST EXPENSE
Total non-interest expense was $6.5 million for the three months ended June
30, 1998 compared to $4.7 million for the comparable three months in 1997.
Compensation and benefits increased by $1.2 million to $3.9 million for the
three months ended June 30, 1998 from $2.7 million for the three months ended
June 30, 1997. The increase in compensation is primarily due to increased
staffing at the Bank to support balance sheet growth, increased ESOP expenses
due to higher share prices, and expenses related to the 1997 Stock-based
Incentive Plan, which was approved by stockholders in August of 1997. Office
occupancy and equipment expense was up $414,000 from $603,000 during the three
months ended June 30, 1997 to $1.0 million during the three months ended June
30, 1998 due to expenses related to the Company's new administrative and
operations facility in Swansea, Massachusetts and the renovation of the Downtown
Fall River main banking office and other banking offices.
INCOME TAXES
Income tax expense was $1.0 million for the three months ended June 30,
1998 compared to $1.3 million for the three months ended June 30, 1997, a
decrease of $288,000. This decrease was the result of the Company's recently
enacted tax management strategies. The effective income tax rates for the three
months ended June 30, 1998 and June 30, 1997 were 37.6% and 44.3%, respectively.
12
<PAGE> 14
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk affecting the Company is interest-rate risk. The
principal objective of the Company's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a monthly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.
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 longer-term, fixed-rate mortgage loans originated while generally
retaining the servicing rights on such loans; (3) investing primarily in
adjustable rate mortgage-backed securities; and (4) reducing the overall
interest rate sensitivity of liabilities by emphasizing longer-term deposits and
longer-term FHLB advances to replace rate sensitive deposits and to fund asset
growth.
In addition, the Company has engaged in two interest rate swap agreements
to synthetically lengthen its liability maturities. At June 30, 1998, the
Company maintained two off-balance sheet interest rate swap positions ("swaps")
with notional principal balances totaling $50 million. These positions require
the Company to pay a long term fixed rate that was set at the time the position
was established, and requires the swap's counter party to pay the Company a
short-term rate that resets semi-annually based on the 6 month London Inter Bank
Offer Rate (LIBOR). This position is a hedge to the Company's natural source of
short-term funds, short-term deposits, and reduces the Company's "liability
sensitive" interest rate risk profile. The net differential to be paid or
received is treated as an adjustment to deposit interest expense. The remaining
terms of these swaps were approximately 3.25 and 4.25 years at June 30, 1998.
The Company continues to follow its practice of selling certain fixed-rate
and adjustable-rate mortgage loans while generally retaining the servicing
rights. In conjunction with this mortgage banking activity, the Company uses
forward contracts in order to reduce exposure to interest-rate risk. The amount
of forward coverage of the "pipeline" of mortgages is managed on a day-to-day
basis by an operating officer, within Board approved policy guidelines, based on
the Company's assessment of the general direction of interest rates and levels
of mortgage origination activity.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period.
At June 30, 1998, the Company's cumulative interest rate gap (which is the
difference between the amount of interest-earning assets maturing or repricing
within one year) as a percentage of total assets, was a negative 3.55% versus a
negative 3.19% at March 31, 1998. Accordingly, during a period of rising
interest rates, the Company's interest-bearing liabilities would tend to reprice
upward at a faster rate than its interest-earning assets, which, consequently,
could negatively affect the Company's net interest income. During a period of
falling interest rates, the Company's interest-bearing liabilities would reprice
downward at a faster rate than its interest-earning assets which, consequently,
could positively affect the Company's net interest income.
13
<PAGE> 15
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service 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 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 estimated market value of assets in the
same scenario. The OTS produces a similar analysis using its own model, based
upon data submitted on the Bank's quarterly Thrift Financial Report, the results
of which may vary from the Company's internal model primarily due to differences
in assumptions utilized between the Company's internal model and the OTS model,
including estimated loan prepayment rates, reinvestment rates and deposit
renewal rates. The Company monitors the change in estimated NPV versus limits
imposed by the Company's Board of Directors, and as of June 30, 1998, was in
full compliance with those limits. See the Company's Form 10-K for the year
ended March 31, 1998 for detailed gap and NPV tables.
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 certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV model presented incorporates an assumption that
the composition of the Company's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured, and that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Company's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income and will differ from actual
results.
14
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings of a material nature at
the present time. From time to time, the Company is a party to routine legal
proceedings within the normal course of business. Such routine legal proceedings
in the aggregate are believed by management to be immaterial to the Company's
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held July 22, 1998. The following
proposals were voted on by the stockholders:
<TABLE>
<CAPTION>
WITHHELD/ BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
-------- --- ------- --------- ---------
<C> <S> <C> <C> <C> <C>
(1) Election of Directors:
Robert F. Stoico......................... 7,859,877 -- 50,455 --
John S. Holden, Jr....................... 7,849,497 -- 60,835 --
(2) Approval of the Amendment of the
FIRSTFED AMERICA BANCORP, INC. 1997
Stock-based Incentive Plan................. 7,225,122 640,146 45,063 --
(3) Approval of the FIRSTFED AMERICA BANCORP,
INC. 1998 Stock Option Plan................ 7,197,490 669,939 42,902 --
(4) Ratification of KPMG Peat Marwick LLP as
independent auditors of the Company for the
fiscal year ending March 31, 1999.......... 7,818,809 64,839 26,684 --
</TABLE>
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<S> <C>
3.1 Certificates of Incorporation of FIRSTFED AMERICA BANCORP,
INC.(1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.(1)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC.(1)
10.1 Amendment to the FIRSTFED AMERICA, INC. 1997 Stock-based
Incentive Plan(2)
10.2 Amendment to the FIRSTFED AMERICA, INC. 1998 Stock Option
Plan(2)
27 Financial Data Schedule (filed herewith)
</TABLE>
(b) Reports on Form 8-K
None
- ---------------
(1) Incorporated into this document by reference from the Exhibits to Form
S-1, Registration Statement, filed on September 27, 1996, as amended,
Registration No. 333-12855.
(2) Incorporated into this document by reference from Appendices A and B,
respectively, of the proxy statement dated June 15, 1998 and filed with
the SEC on June 15, 1998 (SEC No. 1-12305).
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
Registrant
Date: August 13, 1998
/s/ ROBERT F. STOICO
------------------------------------
President and Chief Executive
Officer and
Chairman of the Board
(Principal Executive Officer)
Date: August 13, 1998
/s/ EDWARD A. HJERPE III
------------------------------------
Executive Vice President and
Chief Operating Officer and
Chief Financial Officer
(Principal Accounting and Financial
Officer)
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<S> <C>
3.1 Certificates of Incorporation of FIRSTFED AMERICA BANCORP,
INC.(1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.(1)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC.(1)
10.1 Amendment to the FIRSTFED AMERICA, INC. 1997 Stock-based
Incentive Plan(2)
10.2 Amendment to the FIRSTFED AMERICA, INC. 1998 Stock Option
Plan(2)
27 Financial Data Schedule (filed herewith)
</TABLE>
- ---------------
(1) Incorporated into this document by reference from the Exhibits to Form S-1,
Registration Statement, filed on September 27, 1996, as amended,
Registration No. 333-12855.
(2) Incorporated into this document by reference from Appendices A and B,
respectively, of the proxy statement dated June 15, 1998 and filed with the
SEC on June 15, 1998 (SEC No. 1-12305).
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 25,642
<INT-BEARING-DEPOSITS> 3,080
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 100
<INVESTMENTS-HELD-FOR-SALE> 276,203
<INVESTMENTS-CARRYING> 52,248
<INVESTMENTS-MARKET> 52,608
<LOANS> 828,970<F1>
<ALLOWANCE> 11,164
<TOTAL-ASSETS> 1,315,743
<DEPOSITS> 694,675
<SHORT-TERM> 252,742
<LIABILITIES-OTHER> 30,344
<LONG-TERM> 221,379
0
0
<COMMON> 87
<OTHER-SE> 116,516
<TOTAL-LIABILITIES-AND-EQUITY> 1,315,743
<INTEREST-LOAN> 17,078
<INTEREST-INVEST> 3,845
<INTEREST-OTHER> 299
<INTEREST-TOTAL> 21,222
<INTEREST-DEPOSIT> 7,480
<INTEREST-EXPENSE> 13,410
<INTEREST-INCOME-NET> 7,812
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 256
<EXPENSE-OTHER> 6,538
<INCOME-PRETAX> 2,714
<INCOME-PRE-EXTRAORDINARY> 2,714
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,694
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<YIELD-ACTUAL> 2.62
<LOANS-NON> 3,364
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,340
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,937
<CHARGE-OFFS> 79
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 11,164
<ALLOWANCE-DOMESTIC> 11,164
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,288
<FN>
<F1>LOANS HELD TO MATURITY
</FN>
</TABLE>
