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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, 1998
COMMISSION FILE NO.: 1-12305
FIRSTFED AMERICA BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 04-3331237
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION)
OF INCORPORATION OR ORGANIZATION)
</TABLE>
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
(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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [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 was $147.5 million and is based upon the last sales price as listed
on The American Stock Exchange for June 15, 1998.
The number of shares of Common Stock outstanding as of June 15, 1998 is
8,271,794.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR ENDED
MARCH 31, 1998 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF SHAREHOLDERS
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
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INDEX
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PAGE
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PART I...................................................... 2
Item 1. Business........................................ 2
Additional Item. Executive Officers of the Registrant.... 35
Item 2. Properties...................................... 35
Item 3. Legal Proceedings............................... 36
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 36
PART II..................................................... 37
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters..................... 37
Item 6. Selected Financial Data......................... 37
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 37
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk..................................... 37
Item 8. Financial Statements and Supplementary Data..... 37
Item 9. Change In and Disagreements with Accountants on
Accounting and Financial Disclosure............. 37
PART III.................................................... 37
Item 10. Directors and Executive Officers of the
Registrant...................................... 37
Item 11. Executive Compensation.......................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................. 37
Item 13. Certain Relationships and Related
Transactions.................................... 38
PART IV..................................................... 38
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................. 38
SIGNATURES.................................................. 40
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1
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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. The conversion was completed on January 15, 1997. At March 31, 1998,
the Company had consolidated total assets of $1.282 billion and total
stockholders' equity of $127.0 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 Company conducts business
from its administrative and operations offices located in Swansea, Massachusetts
and its 13 other banking offices located in the municipalities of Fall River,
Attleboro, New Bedford, Seekonk, Somerset, Swansea and Taunton, Massachusetts
and Pawtucket, East Providence and Warwick, Rhode Island, and its five loan
origination centers located in Yarmouth, Auburn, Agawam and Burlington,
Massachusetts and East Greenwich, Rhode Island.
The Company's principal business has been and continues to be attracting
retail deposits from the general public in the areas surrounding its banking
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
banking offices and five loan origination offices, the Company 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 Company 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 Company's revenues are derived
principally from interest on its loan portfolios, and to a lesser extent,
interest and dividends on its investment and mortgage-backed securities and loan
servicing income. The Company's primary sources of funds are deposits, principal
and interest payments on loans and mortgage-backed securities, proceeds from the
sale of loans, Federal Home Loan Bank ("FHLB") advances and other borrowings. At
the time of conversion, the Company's Board of Directors authorized management
to establish a trust services department to provide future trust services to
customers. To date, the trust services department has not been established. The
establishment of additional banking offices and trust services by the Company
would result in additional capital expenditures and other costs associated with
the establishment of such banking offices and services which the Company has not
yet currently estimated.
The Company's and Bank's executive offices are located at ONE FIRSTFED
PARK, Swansea Mall Drive, Swansea, Massachusetts 02777. 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.
MARKET AREA AND COMPETITION
The Company is a community-oriented savings institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Company's deposit gathering is concentrated in the communities
surrounding its 13 full service banking offices located in the Southeastern
Massachusetts municipalities of Fall River, Attleboro, New Bedford, Seekonk,
Somerset, Swansea and Taunton, and the
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Rhode Island municipalities of Pawtucket, East Providence and Warwick. The
Company also maintains loan origination centers in the municipalities of
Yarmouth, Auburn, Agawam and Burlington, Massachusetts and East Greenwich, Rhode
Island. The Company primarily invests in loans secured by first or second
mortgages on properties located in Massachusetts and Rhode Island and, to a
lesser extent, other areas of New England.
The Company's main banking office is located in Fall River, Massachusetts.
Fall River is located in the Southeastern region of Massachusetts and is
adjacent to Rhode Island. All of the Company's 13 banking 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.
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.
While the economy in Southeastern New England has generally been positive
in recent years, the area still lags behind the rest of New England and the rest
of the nation. Unemployment rates in Providence, Fall River and New Bedford are
currently higher than the national and state averages but have improved from the
mid-1990s. Small businesses, service firms and tourism form the backbone of the
region's economy. 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 significant employers,
such as The Acushnet Company, Fidelity Investments, Textron, American Power
Conversion, Globe Manufacturing, Electric Boat and Hasbro are still located in
the region.
The Company faces significant competition both in generating loans and in
attracting deposits. The Company's primary market area is highly competitive and
the Company faces direct competition from a significant number of financial
institutions, many with a 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 Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from local savings,
cooperative and commercial banks and credit unions. In addition, the Company
faces increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such instruments as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. In the
areas of Fall River and Rhode Island, the Company has experienced significant
competition from credit unions which have a competitive advantage as they do not
pay state or federal income taxes. Such competitive advantage has placed
increased pressure on the Bank with respect to its loan and deposit pricing.
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 banking
offices and new loan origination facilities. Since 1994, the Bank has opened six
new banking offices in Seekonk, Swansea, and New Bedford, Massachusetts and East
Providence, Pawtucket and Warwick, Rhode Island and one new loan origination
office in Burlington, Massachusetts. In addition, the Company opened a new
centralized administrative and operations center in October, 1997 in Swansea,
Massachusetts, and is currently constructing a banking office in Cranston, Rhode
Island. Pursuant to this expansion strategy, the Company is currently
3
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seeking new banking offices 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 Company's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residences. At
March 31, 1998, total loans receivable was $868.1 million, of which $691.7
million were one- to four-family residential mortgage loans, or 79.7% of the
Company's total loans receivable. At such date, the remainder of the loan
portfolio consisted of: $3.9 million of multi-family residential loans, or .4%
of total loans receivable; $45.7 million of commercial real estate loans, or
5.3% of total loans receivable; $27.1 million of construction and land loans, or
3.1% of total loans receivable; $26.7 million of commercial loans, or 3.1% of
total loans receivable; and $72.9 million of consumer loans, or 8.4% of total
loans receivable, consisting of $26.3 million of home equity lines of credit,
$38.9 million of second mortgages and $7.8 million of other consumer loans.
After including allowance for loan losses, undisbursed proceeds of construction
mortgages in process, and deferred loan origination fees, loans receivable, net
was $848.6 million at March 31, 1998. At that same date, 51.4% of the Company's
residential mortgage loans and construction and land loans, excluding mortgage
loans held for sale, had adjustable interest rates, most of which are indexed to
the one-year Constant Maturity Treasury ("CMT") Index. The Company had $84.9
million of mortgage loans held for sale at March 31, 1998, consisting of one- to
four-family fixed-rate mortgage loans.
The types of loans that the Company may originate are subject to federal
and state laws and regulations. Interest rates charged by the Company on loans
are affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board, and legislative tax
policies.
4
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The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
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AT MARCH 31,
--------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- ------------------- --------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Residential:
One- to four-family... $691,675 79.68% $666,942 82.08% $531,849 81.63% $405,747
Multi-family.......... 3,899 .45 4,416 .54 4,703 .72 5,157
Commercial real
estate................ 45,723 5.27 33,057 4.07 23,368 3.59 19,968
Construction and land... 27,145 3.13 23,919 2.95 25,297 3.88 26,337
-------- ------- -------- ------- -------- ------- --------
Total mortgage
loans............... 768,442 88.53 728,334 89.64 585,217 89.82 457,209
-------- ------- -------- ------- -------- ------- --------
COMMERCIAL................ 26,689 3.07 20,062 2.47 14,473 2.22 12,756
-------- ------- -------- ------- -------- ------- --------
CONSUMER LOANS:
Home equity lines....... 26,252 3.02 25,021 3.08 27,995 4.30 29,373
Second mortgages........ 38,862 4.48 32,122 3.95 18,064 2.77 9,111
Other consumer loans.... 7,828 .90 6,985 .86 5,813 .89 3,874
-------- ------- -------- ------- -------- ------- --------
Total consumer
loans............... 72,942 8.40 64,128 7.89 51,872 7.96 42,358
-------- ------- -------- ------- -------- ------- --------
Total loans
receivable.......... 868,073 100.00% 812,524 100.00% 651,562 100.00% 512,323
======= ======= =======
Less:
Allowance for loan
losses................ (10,937) (8,788) (5,607) (4,239)
Undisbursed proceeds of
construction mortgages
in process............ (7,164) (5,274) (6,568) (5,511)
Deferred loan
origination Fees,
net................... (1,420) (2,107) (1,795) (2,596)
-------- -------- -------- --------
Loans receivable, net... 848,552 796,355 637,592 499,977
Mortgage loans held for
sale.................. 84,867 23,331 17,747 6,816
-------- -------- -------- --------
Loans receivable, net
and mortgage loans
held for sale....... $933,419 $819,686 $655,339 $506,793
======== ======== ======== ========
<CAPTION>
AT MARCH 31,
------------------------------
1995 1994
-------- -------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS:
Residential:
One- to four-family... 79.20% $335,374 78.84%
Multi-family.......... 1.00 5,257 1.24
Commercial real
estate................ 3.90 14,849 3.49
Construction and land... 5.14 20,142 4.73
------- -------- -------
Total mortgage
loans............... 89.24 375,622 88.30
------- -------- -------
COMMERCIAL................ 2.49 10,269 2.41
------- -------- -------
CONSUMER LOANS:
Home equity lines....... 5.73 30,409 7.15
Second mortgages........ 1.78 5,438 1.28
Other consumer loans.... .76 3,672 .86
------- -------- -------
Total consumer
loans............... 8.27 39,519 9.29
------- -------- -------
Total loans
receivable.......... 100.00% 425,410 100.00%
======= =======
Less:
Allowance for loan
losses................ (3,964)
Undisbursed proceeds of
construction mortgages
in process............ (6,758)
Deferred loan
origination Fees,
net................... (2,915)
--------
Loans receivable, net... 411,773
Mortgage loans held for
sale.................. 15,779
--------
Loans receivable, net
and mortgage loans
held for sale....... $427,552
========
</TABLE>
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Loan Maturity. The following table shows the remaining contractual
maturity of the Company's loans at March 31, 1998. The table does not include
the effect of future principal prepayments.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION TOTAL
FAMILY FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER LOANS
-------- ------ ----------- ------------ ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less.................. $ 516 $ 10 $ 5,231 $11,506 $13,027 $28,497 $ 58,787
-------- ------ ------- ------- ------- ------- --------
After one year:
More than one year to three
years......................... 3,053 38 7,058 78 2,392 4,812 17,431
More than three years to five
years......................... 12,173 98 25,368 23 7,886 8,990 54,538
More than five years to 10
years......................... 98,344 644 5,278 418 2,545 17,402 124,631
More than 10 years to 20
years......................... 220,484 1,786 2,211 8,196 839 12,027 245,543
More than 20 years.............. 357,105 1,323 577 6,924 -- 1,214 367,143
-------- ------ ------- ------- ------- ------- --------
Total due after one year........ 691,159 3,889 40,492 15,639 13,662 44,445 809,286
-------- ------ ------- ------- ------- ------- --------
Total amount due........... $691,675 $3,899 $45,723 $27,145 $26,689 $72,942 868,073
======== ====== ======= ======= ======= =======
Less:
Allowance for loan losses....... (10,937)
Undisbursed proceeds of
construction mortgages in
process....................... (7,164)
Deferred loan origination fees,
net........................... (1,420)
--------
Loans receivable, net........... $848,552
========
</TABLE>
The following table sets forth, at March 31, 1998, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
1999, and whether such loans have fixed interest rates or adjustable interest
rates.
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1999
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family...................................... $340,830 $350,329 $691,159
Multi-family............................................. 248 3,641 3,889
Commercial real estate................................... 34,865 5,627 40,492
Construction and land.................................... 3,899 11,740 15,639
-------- -------- --------
Total mortgage loans............................. 379,842 371,337 751,179
Commercial loans........................................... 9,645 4,017 13,662
Consumer loans............................................. 44,445 -- 44,445
-------- -------- --------
Total loans...................................... $433,932 $375,354 $809,286
======== ======== ========
</TABLE>
Origination, Sale and Servicing of Loans. The Company's mortgage lending
activities are conducted primarily by its loan personnel operating at its 13
banking 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 Company. All loans originated by the
Company, either through internal sources or through loan correspondents are
underwritten by the Company pursuant to the Company's policies and procedures.
For the fiscal year ended March 31, 1998, the Company's loan correspondents
originated $260.5 million in loans. The Company originates both adjustable-rate
and fixed-rate loans. The Company's ability to originate fixed- or
adjustable-rate loans is dependent upon the relative customer demand for such
loans, which is affected by the current and expected future level of interest
rates.
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Generally, all loans originated by the Company are originated for
investment with the exception of longer-term fixed-rate one- to four-family
mortgage loans. While the Company has in the past, from time to time, retained
fixed-rate one- to four-family loans and sold adjustable-rate one-to four-family
loans, it is the general policy of the Company to sell substantially all of the
one- to four-family fixed-rate 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 Company 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 which otherwise vary from
agency underwriting standards. The Company also sells all mortgage loans insured
by FHA and VA. All one- to four-family loans sold by the Company are sold
pursuant to master commitments negotiated with FNMA, FHLMC and other investors
to purchase loans meeting such investors' defined criteria. Although the Company
has entered into master commitment contracts, such contracts generally do not
require the purchasers to buy or the Company to deliver a specific amount of
mortgage loans.
The Company currently sells substantially all longer-term fixed-rate
conforming mortgage loans it originates to FNMA and FHLMC. Sales of loans are
made without recourse to the Company 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 Company generally retains the servicing rights on the
mortgage loans sold to FNMA and FHLMC but generally sells all VA, FHA, jumbo
loans and non-conforming loans to institutional investors on a servicing
released basis.
Between the time the Company issues loan commitments and the time such
loans or the securities into which they are converted are sold, the Company is
exposed to movements in the market price due to changes in market interest
rates. The Company manages 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 Company attempts to cover between 60% and 80%
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 Company will enter into is based
upon anticipated movements in market interest rates, bond market conditions and
management's estimates of closing volumes and the length of the origination or
purchase commitments. Differences between the volume and timing of actual loan
origination and purchases and management's estimates can expose the Company to
losses. If the Company is not able to deliver the mortgage loans or
mortgage-backed securities during the appropriate delivery period called for by
the forward sale commitment, the Company may be required to pay a non-delivery
fee, repurchase the delivery commitments at current market prices or purchase
whole loans at a premium for delivery. The above activity is managed
continually; however, there can be no assurances that the Company will be
successful in its effort to minimize interest-rate risk between the time
origination or purchase commitments are issued and the ultimate sale of the
loan. At March 31, 1998, the Company had $119.5 million of forward sale
commitments.
At March 31, 1998, the Company was servicing its portfolio of $933.4
million of loans receivable, net and mortgage loans held for sale and $1.280
billion of loans for others, primarily consisting of conforming fixed-rate loans
sold by the Company. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of the
borrowers and generally administering the loans. All of the loans currently
being serviced for others are loans which have been sold by the Company. The
gross servicing fee income from loans originated and purchased is generally .25
to .38% of the total balance of the loan serviced.
During the fiscal years ended March 31, 1998 and March 31, 1997, the
Company originated $463.8 million and $421.1 million of fixed-rate and
adjustable-rate one- to four-family loans, respectively, of which $136.2 million
and $203.5 million, respectively, were retained by the Company. The fixed-rate
loans retained by the Company consisted primarily of loans with terms of 12
years or less. The Company recognizes, at the time of sale, the cash gain or
loss on the sale of the loans based on the difference between the net cash
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proceeds received and the carrying value of the loans sold. On April 1, 1996,
the Company implemented Statement of Financial Accounting Standards ("SFAS") No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122") as amended by
SFAS No. 125, pursuant to which the value of servicing rights are recognized as
an asset of the Company. The book value of this asset at March 31, 1998, net of
amortization, was $3.2 million.
The Company has, in the past, from time to time, purchased loans or
participations in loans, primarily one- to four-family mortgage loans, and had
$6.1 million of purchased loans at March 31, 1998. Purchases of loans from
correspondent financial institutions are underwritten pursuant to the Company's
policies and are closed in the name of the correspondent financial institution
but immediately purchased by the Company for its mortgage banking activities. At
March 31, 1998, the Company had $84.9 million in mortgage loans held for sale
consisting of fixed-rate one- to four-family loans.
The following table sets forth the Company's loan originations,
participations, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-------------------------------------
1998 1997 1996
---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance(1)................................... $ 819,686 $ 655,339 $ 506,793
Loans originated:
Mortgage loans:
One- to four-family............................. 463,765 421,088 375,063
Multi-family.................................... 220 189 40
Commercial real estate.......................... 25,599 17,809 6,839
Construction and land........................... 32,677 27,316 29,519
---------- ---------- ---------
Total mortgage loans......................... 522,261 466,402 411,461
---------- ---------- ---------
Commercial............................................. 11,539 11,316 8,660
---------- ---------- ---------
Consumer loans:
Home equity lines............................... 13,537 5,516 10,695
Second mortgages................................ 19,224 21,636 13,868
Other consumer loans............................ 3,794 2,956 2,688
---------- ---------- ---------
Total consumer loans......................... 36,555 30,108 27,251
---------- ---------- ---------
Total loans originated....................... 570,355 507,826 447,372
---------- ---------- ---------
Total........................................ 1,390,041 1,163,165 954,165
Less:
Principal repayments and other, net.................. (188,899) (124,482) (112,546)
Loan charge-offs, net................................ (201) (569) (1,258)
Proceeds from sale of mortgage loans................. (266,109) (217,591) (184,207)
Transfer of mortgage loans to REO.................... (1,413) (837) (815)
---------- ---------- ---------
Loans receivable, net and mortgage loans held for
sale................................................. 933,419 819,686 655,339
Mortgage loans held for sale......................... (84,867) (23,331) (17,747)
---------- ---------- ---------
Ending balance, loans receivable, net.................. $ 848,552 $ 796,355 $ 637,592
========== ========== =========
</TABLE>
- ---------------
(1) Includes mortgage loans held for sale.
One- to Four-Family Mortgage Lending. The Company offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans secured by one- to four-family
residences with maturities of up to 30 years. Substantially all of such loans
are secured by property located in the Company's primary market area. Loan
originations are generally obtained from the Company's commissioned loan
representatives, correspondent
8
<PAGE> 10
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, 1998, residential one- to four-family mortgage loans
totaled $691.7 million, or 79.7% of the Company's total loans receivable. Of the
Company's one- to four-family residential mortgage loans, $341.4 million, or
49.4%, were fixed-rate loans and $350.3 million, or 50.6%, were adjustable-rate
loans.
The Company's fixed-rate mortgage loans currently are made for terms from
seven to 30 years. The Company sells substantially all fixed-rate residential
mortgage loans that it originates with a maturity greater than 12 years and
retains the servicing on all loans sold to FNMA and FHLMC. The Company generally
retains for its portfolio shorter-term, fixed-rate loans with a maturity of 12
years or less and all adjustable-rate one- to four-family loans.
The Company 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 Company's ARM loans generally provide for
periodic (not more than 2%) and overall (not more than 6%) caps on the increase
or decrease in the interest rate at any adjustment date and over the life of the
loan, respectively. The interest rate adjustment on these loans is generally
indexed to the one-year U.S. Treasury CMT Index.
The Company's policy is to originate one- to four-family residential
first-mortgage loans in amounts up to 80% of the lower of the appraised value or
the selling price of the property securing the loan and up to 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 Company
include due-on-sale clauses which provide the Company with the contractual right
to deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Company's consent. Due-on-sale clauses are
an important means of adjusting the rates on the Company's fixed-rate mortgage
loan portfolio and the Company has generally exercised its rights under these
clauses.
The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Company's exposure to
increases in interest rates. However, adjustable-rate loans may pose credit
risks not inherent in fixed-rate loans, primarily because as interest rates
rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
reduce the credit risk associated with its adjustable-rate loans but also limit
the interest rate sensitivity of its adjustable-rate mortgage loans.
In an effort to provide financing for first-time and moderate income home
buyers, the Company offers FHA and VA loans and also has its own first-time home
buyer program. These programs offer single-family residential mortgage loans to
qualified individuals. These loans are offered with terms of up to 30 years.
Such loans must be secured by a one- to four-family owner-occupied unit. These
loans are originated using modified underwriting guidelines with reduced down
payments and loan fees. Such loans are originated in amounts up to 97% of the
lower of the property's appraised value or the sale price. Private mortgage
insurance is normally required. The Company expects to achieve a lower rate of
return on loans originated under the first time home buyer program when compared
to other residential mortgage loans because the Company typically charges: a
lower rate of interest; a lower mortgage origination fee or; lower closing costs
on such loan programs.
Commercial Real Estate Lending. The Company 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 Company's primary market area. To a lesser extent, the
Company originates construction, acquisition and development loans to
experienced developers known to the Company for the construction of residential
developments. The Company's commercial real estate underwriting policy provides
that commercial real estate loans may generally be made in amounts up to 80% of
the appraised value of the property. Commercial real estate lending is limited
by the Bank's regulatory loans-to-one borrower limit which at March 31, 1998 was
$16.9 million. The Company currently originates commercial real estate loans,
generally with terms of up to 10 years and amortizations of up to 20 years with
the outstanding balance due and payable at the end of the loan term. The
Company's adjustable-rate loans generally have interest rates that adjust daily
and are indexed to the prime rate of interest. In reaching its decision on
whether to make a commercial real estate loan, the Company considers the net
operating income
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<PAGE> 11
of the property, the borrower's expertise, credit history and profitability and
the value of the underlying property. The Company 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
1.20x. 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
Company may waive a personal guarantee on such loans depending on the
creditworthiness of the borrower, the amount of the down payment, and other
mitigating circumstances. The Company's commercial real estate loan portfolio at
March 31, 1998 was $45.7 million, or 5.3% of total loans receivable. At March
31, 1998, the largest commercial real estate loan in the Company'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 prevailing
conditions in the real estate market or the economy. The Company seeks to
minimize these risks through its underwriting standards.
Commercial Lending. The Company also originates commercial loans to
businesses generally operating in the Company's primary market area. Such loans
are generally secured by equipment, inventory and accounts receivable. The
Company 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. Most 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 Company'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 Company considers primarily the financial
resources of the borrower, the borrower's ability to repay the loan out of net
operating income, the Company'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, on an exception basis, personal guarantees may be waived on such loans
depending on the creditworthiness of the borrower and other mitigating
circumstances. The Company's largest commercial loan at March 31, 1998 was a
$2.0 million line of credit of which no funds were advanced at March 31, 1998.
At such date, the Company had $9.8 million of unadvanced commercial lines of
credit. At March 31, 1998, the Company had $26.7 million of commercial loans
which amounted to 3.1% of the Company'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 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 Company originates adjustable-rate multi-family
mortgage loans generally secured by five to 12 unit residential apartment
buildings located in the Company'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
Company 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 Company 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 Company'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 Company's loans-to-one borrower limit which,
at March 31, 1998, was $16.9 million.
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<PAGE> 12
When evaluating the qualifications of the borrower for a multi-family loan,
the Company considers the financial resources and income level of the borrower,
the borrower's experience in owning or managing similar property, and the
Company's lending experience with the borrower. The Company'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 Company 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 Company's multi-family loan portfolio
at March 31, 1998, totaled $3.9 million, or .4% of total loans receivable. At
March 31, 1998, the Company had no multi-family loans with an outstanding
carrying balance in excess of $200,000.
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
prevailing conditions in the real estate market or the economy. The Company
seeks to minimize these risks through its underwriting policies.
Construction and Land Lending. The Company originates construction and
land loans primarily for the development of single-family residences. Such loans
are made principally to individuals building their primary residence and, to a
lesser extent, to licensed and experienced developers known to the Company in
its primary market area for the construction of single-family developments. The
Company 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 Company's
largest construction and land loan at March 31, 1998 was a performing loan with
a $600,000 carrying balance secured by a single-family home located in
Shrewsbury, Massachusetts. At March 31, 1998, the Company had $27.1 million of
construction and land loans which amounted to 3.1% of the Company'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 Company
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, 1998 amounted to $72.9
million, or 8.4% of the Company'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 Company's
primary market area and generally are secured by real estate, deposit accounts,
personal property and automobiles. These loans are typically shorter term and
generally have higher interest rates than one- to four-family mortgage loans.
The Company offers two types of home equity loans: a variable-rate
"open-end line of credit" and a fixed-rate "second mortgage". Substantially all
of the Company's home equity loans are secured by second liens on one- to
four-family residences located in the Company's primary market area. At March
31, 1998, home equity loans totaled $65.1 million, or 7.5% of the Company's
total loans and 89.3% of total consumer loans. Home equity lines of credit have
variable rates of interest which can generally adjust on a monthly basis. The
interest rate on such loans is indexed to the prime rate as reported in The Wall
Street Journal and generally have an 18% lifetime limit on interest rates.
Generally, the maximum combined loans-to-value ratio ("LTV") on home equity
loans is 80%; however, fixed-rate second mortgage loans up to $50,000 can have
an
11
<PAGE> 13
LTV of up to 100% on the property as long as other underwriting criteria are
satisfied. At March 31, 1998, the Company had $57.0 million of variable-rate
home equity lines of credit with an outstanding balance of $26.3 million, which
was 3.0% of total loans receivable and 36.0% of total consumer loans. Second
mortgage loans are generally offered with terms of up to 15 years and only with
fixed-rates of interest which vary depending on the amortization period chosen
by the borrower. At March 31, 1998, fixed-rate second mortgage loans totaled
$38.9 million, or 4.5% of the Company's total loans receivable and 53.3% of
total consumer loans. The underwriting standards employed by the Company for
home equity lines of credit and second mortgage loans include a determination of
the applicant's credit history and an assessment of the applicant's ability to
meet existing obligations and payments on the proposed loan and the value of the
collateral securing the loan. The stability of the applicant's monthly income
may be determined by verification of gross monthly income from primary
employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration.
The Company also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans are generally secured by deposit accounts, stocks or bonds.
Unsecured personal loans generally have a maximum borrowing limitation of
$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, 1998, personal
loans totaled $4.4 million, or .5% of the Company's total loans receivable and
6.0% of consumer loans; and automobile loans totaled $3.4 million, or .4% of
total loans receivable and 4.7% of consumer loans.
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, 1998, consumer
loans 90 days or more delinquent totaled $432,000.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Company. 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 Company's underwriters; all other
mortgage loans in amounts up to $300,000 must be approved by the Company'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 Company'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 Company's Director of Residential Loan Production; mortgage
loans in excess of $250,000 and up to $400,000 require the approval of either
the Company'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 Company'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 has 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 Company's Consumer Loan Manager; any consumer loan up
12
<PAGE> 14
to $250,000 may be approved by either the Company'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 Company'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 $600,000, the Board of Directors has
authorized the approval of these loans by commercial lending officers of the
Company with progressively higher levels of responsibility as the amount of
aggregate credit exposure increases. Loans to borrowers with total credit
exposure in excess of $600,000 and up to $2 million require the approval of the
Commercial Loan Committee and loans to borrowers with total credit exposure in
excess of $2 million require the approval of the Board of Directors' Executive
Committee. Additionally, the President and CEO has lending authority up to $3
million.
Pursuant to OTS regulations, loans to one borrower cannot, subject to
certain exceptions, exceed 15% of the Company's unimpaired capital and surplus.
At March 31, 1998, the loans to one borrower limit was $16.9 million.
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 Company 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 Company takes a number of steps to have the borrower cure the
delinquency and restore the loan to current status. The Company generally sends
the borrower a written notice of non-payment after the loan is first past due.
The Company's guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment. When contact is made with the borrower at any
time prior to foreclosure, the Company will attempt to obtain full payment,
offer to provide budget and finance counseling services, work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan 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 Company to take legal action, which typically occurs after a
loan is 90 days or more delinquent, the Company will commence foreclosure
proceedings against any real property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the property securing the loan generally
is sold at foreclosure and, if purchased by the Company, becomes REO.
Federal regulations and the Company's Credit Risk Review Policy require
that the Company utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Company has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Company currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the 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 designated "Special
Mention."
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<PAGE> 15
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 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 Company's Credit Risk Review Committee reviews and classifies the
Company's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Company classifies assets in
accordance with the management guidelines described above. At March 31, 1998,
the Company had $4.1 million of loans designated as Substandard. As of March 31,
1998, the Company had 18 loans totaling $3.0 million designated as Special
Mention. These loans are designated as Special Mention because of inherent
weaknesses that currently exist but might be correctable in a twelve month
cycle. Accordingly, they require additional monitoring. At March 31, 1998, the
largest loan designated as Special Mention was a commercial real estate loan
with a carrying balance of $399,000, and was secured by a first mortgage lien.
In addition, at March 31, 1998, the Company had $2.7 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.
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<PAGE> 16
The following table sets forth delinquencies in the Company's loan
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31, 1998 AT MARCH 31, 1997
------------------------------------------- -------------------------------------------
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............... 11 $683 17 $1,073 12 $ 525 33 $1,908
Multi-family...................... -- -- 1 101 1 202 2 268
Commercial real estate............ 2 176 3 1,199 -- -- 1 976
Construction and land............. -- -- 2 169 -- -- 2 232
---- ---- ---- ------ ---- ------ ---- ------
Total mortgage loans....... 13 859 23 2,542 13 727 38 3,384
-- ---- ---- ------ ---- ------ ---- ------
COMMERCIAL LOANS.................... 1 16 4 74 1 23 -- --
---- ---- ---- ------ ---- ------ ---- ------
CONSUMER LOANS:
Home equity lines................. 1 15 5 425 6 180 4 114
Second mortgages.................. 5 59 -- -- 3 34 3 95
Other consumer loans.............. 4 6 6 7 10 57 9 69
---- ---- ---- ------ ---- ------ ---- ------
Total consumer loans....... 10 80 11 432 19 271 16 278
---- ---- ---- ------ ---- ------ ---- ------
Total loans......................... 24 $955 38 $3,048 33 $1,021 54 $3,662
==== ==== ==== ====== ==== ====== ==== ======
Delinquent loans to loans
receivable, net................... 0.11% 0.36% 0.13% 0.46%
<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
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
One- to four-family............... 24 $1,589 31 $2,469
Multi-family...................... -- -- 3 334
Commercial real estate............ 1 231 -- --
Construction and land............. 1 37 -- --
---- ------ ---- ------
Total mortgage loans....... 26 1,857 34 2,803
---- ------ ---- ------
COMMERCIAL LOANS.................... -- -- 1 87
---- ------ ---- ------
CONSUMER LOANS:
Home equity lines................. 16 231 12 956
Second mortgages.................. -- -- 12 196
Other consumer loans.............. 4 12 4 3
---- ------ ---- ------
Total consumer loans....... 20 243 28 1,155
---- ------ ---- ------
Total loans......................... 46 $2,100 63 $4,045
==== ====== ==== ======
Delinquent loans to loans
receivable, net................... 0.33% 0.63%
</TABLE>
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<PAGE> 17
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and REO. At March 31, 1998, REO totaled $595,000
consisting of 10 properties, 2 of which were secured by land and 8 of which were
secured by one- to four-family homes. It is the policy of the Company to cease
accruing interest on loans 90 days or more past due and to reverse all accrued
interest.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family...................... $1,073 $1,908 $2,469 $2,501 $3,649
Multi-family............................. 101 268 334 51 --
Commercial real estate................... 1,199 976 -- 85 --
Construction and land.................... 169 232 -- -- 26
------ ------ ------ ------ ------
Total mortgage loans................ 2,542 3,384 2,803 2,637 3,675
------ ------ ------ ------ ------
Commercial loans............................ 74 -- 87 -- 15
------ ------ ------ ------ ------
Consumer loans:
Home equity lines........................ 425 114 956 386 483
Second mortgages......................... -- 95 196 -- 34
Other consumer loans..................... 7 69 3 10 14
------ ------ ------ ------ ------
Total consumer loans................ 432 278 1,155 396 531
------ ------ ------ ------ ------
Total nonaccrual loans.............. 3,048 3,662 4,045 3,033 4,221
Real estate owned, net(1)..................... 595 665 643 296 939
------ ------ ------ ------ ------
Total non-performing assets......... $3,643 $4,327 $4,688 $3,329 $5,160
====== ====== ====== ====== ======
Allowance for loan losses as a percent of
Loans(2).................................... 1.27% 1.09% 0.87% 0.84% 0.95%
Allowance for loan losses as a percent of non-
performing loans(3)......................... 358.83% 239.98% 138.62% 139.76% 93.91%
Non-performing loans as a percent of
Loans(2)(3)................................. 0.35% 0.45% 0.63% 0.60% 1.02%
Non-performing assets as a percent of total
assets(4)................................... 0.28% 0.44% 0.65% 0.59% 1.10%
</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 those 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.
Impaired Loans. The Company 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 Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The definition of "impaired loans" is
not the same definition of "non-accrual loans," although the two categories
overlap. Non-accrual loans include impaired loans and are those on which the
accrual of interest is discontinued when collectibility of principal or interest
is uncertain or payments of principal or interest have been contractually past
due 90 days. The Company may choose to place a loan on non-accrual status due to
payment delinquency or uncertain collectibility, while not classifying the loan
as impaired, if (i) it is not probable that the Company 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
16
<PAGE> 18
related to the loan, using the original contractual interest rate, and its
recorded value, or, 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, 1998 and March 31, 1997, total impaired loans were $1.5
million and $1.5, respectively. At March 31, 1998, impaired loans of $1.5
million required an impairment allowance of $812,000. All impaired loans have
been measured using the fair value of the collateral method. During the fiscal
year ended March 31, 1998, the average recorded value of impaired loans was $1.5
million. For these loans, $120,000 of interest income was recognized while
$228,000 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, the OTS and FDIC, as an integral
part of their examination process, periodically review the Company's allowance
for loan losses. The OTS and FDIC may require the Company to make additional
provisions for estimated loan losses based upon judgments different from those
of management. As of March 31, 1998, the Company's allowance for loan losses was
1.27% of total loans receivable as compared to 1.09% as of March 31, 1997. The
increase in allowance for loan losses reflects management's assessment of the
loan portfolio and was based upon growth in the loan balances and the
composition of the portfolio. The Company had non-accrual loans of $3.0 million
and $3.7 million at March 31, 1998 and March 31, 1997, respectively. The Company
will continue to monitor and modify its allowances for loan losses as conditions
dictate. While management believes the Company's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Company's level of allowance for loan losses
will be sufficient to cover future loan losses incurred by the Company or that
future adjustments to the allowance for loan losses will not be necessary if
economic and other conditions differ substantially from those assumed management
to determine the current level of the allowance for loan losses.
17
<PAGE> 19
The following table sets forth activity in the Company's allowance for loan
losses for the years set forth in the following table.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year................. $ 8,788 $5,607 $4,239 $3,964 $3,524
Provision for loan losses.................... 2,350 3,750 2,626 653 1,035
Charge-offs:
Mortgage loans:
One- to four-family..................... 188 331 218 168 324
Multi-family............................ -- 82 -- -- 55
Commercial real estate.................. -- -- 967 25 121
Construction and land................... -- -- -- -- 25
Commercial loans........................ -- 87 -- 15 38
Consumer loans:
Home equity lines....................... -- 116 68 113 20
Second mortgages........................ 15 10 -- -- --
Other consumer loans.................... 9 11 35 79 45
------- ------ ------ ------ ------
Total.............................. 212 637 1,288 400 628
Recoveries................................... 11 68 30 22 33
------- ------ ------ ------ ------
Balance at end of year....................... $10,937 $8,788 $5,607 $4,239 $3,964
======= ====== ====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the
year....................................... 0.02% 0.07% 0.23% 0.08% 0.14%
======= ====== ====== ====== ======
</TABLE>
18
<PAGE> 20
The following tables set forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------ ------------------------------
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.............. $ 2,959 27.05% 83.26% $2,769 31.51% 85.57% $2,175 38.79% 86.23%
Commercial............... 3,023 27.64 5.27 2,239 25.48 4.07 1,195 21.31 3.59
------- ------ ------ ------ ------ ------ ------ ------ ------
Total.............. 5,982 54.69 88.53 5,008 56.99 89.64 3,370 60.10 89.82
Commercial................. 1,309 11.97 3.07 932 10.60 2.47 621 11.08 2.22
Consumer................... 1,358 12.42 8.40 1,151 13.10 7.89 829 14.79 7.96
Unallocated................ 2,288 20.92 -- 1,697 19.31 -- 787 14.03 --
------- ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses...... $10,937 100.00% 100.00% $8,788 100.00% 100.00% $5,607 100.00% 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
AT MARCH 31,
---------------------------------------------------------------
1995 1994
------------------------------ ------------------------------
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.............. $1,223 28.85% 85.34% $1,144 28.86% 84.81%
Commercial............... 1,265 29.84 3.90 1,063 26.82 3.49
------ ------ ------ ------ ------ ------
Total.............. 2,488 58.69 89.24 2,207 55.68 88.30
Commercial................. 600 14.16 2.49 426 10.75 2.41
Consumer................... 473 11.16 8.27 454 11.45 9.29
Unallocated................ 678 15.99 -- 877 22.12 --
------ ------ ------ ------ ------ ------
Total allowance for
loan losses...... $4,239 100.00% 100.00% $3,964 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE> 21
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 Company must maintain minimum
levels of investments that qualify as liquid assets under OTS regulations.
Historically, the Company 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 Company, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Company's lending activities. Generally, the
Company's investment policy is more restrictive than the OTS regulations allow
and, accordingly, the Company has invested primarily in U.S.
government-sponsored agency mortgage-related securities (consisting of
mortgage-backed pass-through securities and collateralized mortgage obligations)
and U.S. government and federal agency securities, all of which qualify as
liquid assets under the OTS liquidity regulations. As required by SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS No.
115"), the Company designates investment securities as held to maturity,
available for sale, or held for trading. The Company generally invests in
securities as part of a wholesale leverage strategy as well as to manage
interest-rate risk and to maintain liquidity levels deemed appropriate by
management. The Company does not currently maintain a portfolio of securities
categorized as held for trading. At March 31, 1998 the Company had no short-term
or overnight investments. As of the same date, the Company's investment
securities available for sale portfolio totaled $7.7 million, or .6% of assets,
consisting of marketable equity securities with a fair value of $3.7 million and
federal agency floating-rate securities with a fair value of $4.0 million and a
weighted average remaining maturity of 7.9 months. At March 31, 1998, the
Company's investment securities held to maturity portfolio totaled $22.5
million, or 1.8% of assets, consisting of U.S. government and federal agency
securities with a weighted average remaining maturity of 9.5 months.
At March 31, 1998, the Company had invested $227.6 million, or 17.8% of
assets, in mortgage-backed securities insured by either the Government National
Mortgage Association ("GNMA"), FNMA or FHLMC. The portfolio consisted of $215.1
million of mortgage-backed securities classified as available for sale, or 94.5%
of total mortgage-backed securities, and $12.5 million of mortgage-backed
securities classified as held to maturity, or 5.5% of total mortgage-backed
securities. Of the $227.6 million, $185.7 million were adjustable-rate
securities with maximum interest rate adjustments of up to 2% annually or up to
6% over the life of the security. Fixed-rate mortgage-backed securities
available for sale with a fair value of $40.4 million have balloon payments
seven years after their original issue date. Investments in mortgage-backed
securities involve a risk that actual prepayments will differ from estimated
prepayments over the life of the security. Mortgage-backed securities may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value and/or interest rates of such securities may be
adversely affected by changes in interest rates.
20
<PAGE> 22
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's short-term investments and investment
securities at the dates indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
--------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
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:
Marketable equity
securities............ $ 1,815 $ 3,701 $ 5 $ 888 $ 55 $ 725
U.S. Government and
agency obligations.... 4,001 4,011 -- -- -- --
------- ------- ------- ------- ------- -------
Total available for
sale............. $ 5,816 $ 7,712 $ 5 $ 888 $ 55 $ 725
------- ------- ------- ------- ------- -------
Held to maturity:
U.S. Government and agency
obligations............. 20,490 20,584 20,991 20,958 22,986 23,061
Federal Home Loan Bank
note.................... 2,001 2,001 -- -- 1,000 999
Other investment
securities.............. -- -- -- -- 1 1
------- ------- ------- ------- ------- -------
Total held to
maturity......... $22,491 $22,585 $20,991 $20,958 $23,987 $24,061
------- ------- ------- ------- ------- -------
Total investment
securities................. $28,307 $30,297 $20,996 $21,846 $24,042 $24,786
======= ======= ======= ======= ======= =======
</TABLE>
21
<PAGE> 23
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
AT MARCH 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -----------------------------
AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR
COST OF TOTAL VALUE COST OF TOTAL VALUE COST OF TOTAL VALUE
--------- -------- -------- --------- --------- ------- --------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
Available for sale:
Fixed-rate:
FNMA.................... $ 30,531 13.5% $ 30,940 $20,200 42.5% $19,980 $ -- --% $ --
FHLMC................... 9,391 4.1 9,471 11,859 25.0 11,752 -- -- --
-------- ----- -------- ------- ----- ------- ------ ----- ------
Total fixed-rate...... 39,922 17.6 40,411 32,059 67.5 31,732 -- -- --
-------- ----- -------- ------- ----- ------- ------ ----- ------
Adjustable-rate:
GNMA.................... 85,869 37.9 86,510 -- -- -- -- -- $ --
FNMA.................... 88,414 39.0 88,222 -- -- -- -- -- --
-------- ----- -------- ------- ----- ------- ------ ----- ------
Total
adjustable-rate..... 174,283 76.9 174,732 -- -- -- -- -- --
-------- ----- -------- ------- ----- ------- ------ ----- ------
Total mortgage-backed
securities available
for sale............ 214,205 94.5 215,143 32,059 67.5 31,732 -- -- --
-------- ----- -------- ------- ----- ------- ------ ----- ------
Held to maturity:
Fixed-rate:
GNMA...................... 1,271 0.6 1,347 1,644 3.5 1,719 1,901 26.2 1,998
FHLMC..................... 231 0.1 247 309 0.6 324 401 5.6 423
-------- ----- -------- ------- ----- ------- ------ ----- ------
Total fixed-rate...... 1,502 0.7 1,594 1,953 4.1 2,043 2,302 31.8 2,421
-------- ----- -------- ------- ----- ------- ------ ----- ------
Adjustable-rate:
FHLMC..................... 10,993 4.8 11,094 13,482 28.4 13,535 4,946 68.2 4,965
-------- ----- -------- ------- ----- ------- ------ ----- ------
Total mortgage-backed
securities held to
maturity............ 12,495 5.5 12,688 15,435 32.5 15,578 7,248 100.0 7,386
-------- ----- -------- ------- ----- ------- ------ ----- ------
Total mortgage-backed
securities.......... $226,700 100.0% $227,831 $47,494 100.0% $47,310 $7,248 100.0% $7,386
======== ===== ======== ======= ===== ======= ====== ===== ======
</TABLE>
The following table sets forth the Company's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------
1998 1997 1996
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................................... $ 47,494 $ 7,248 $2,721
Mortgage-backed securities purchased:
Held to maturity....................................... -- 9,996 4,960
Available for sale..................................... 201,533 32,061 --
Principal repayments of securities........................ (22,346) (1,805) (433)
Net accretion (amortization) of discount (premium)........ 39 (6) --
-------- ------- ------
Ending balance.............................................. $226,720 $47,494 $7,248
======== ======= ======
</TABLE>
22
<PAGE> 24
The table below sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Company's
investment securities and mortgage-backed securities as of March 31, 1998.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES:
Available for sale(1):
U.S. Government and agency
obligations.................... $ 4,011 5.67% $ -- --% $ -- --%
Held to maturity:
U.S. Government and agency
obligations.................... 12,500 6.10 9,991 6.08 -- --
------- ---- ------ ---- ------- ----
Total investment
securities................. $16,511 6.00% $9,991 6.08% $ -- --%
======= ==== ====== ==== ======= ====
MORTGAGE-BACKED SECURITIES:
Available for sale:
Fixed rate:
FNMA........................... $ -- --% $ -- --% $30,940 6.98%
FHLMC.......................... -- -- 9,471 6.95 -- --
Adjustable rate:
GNMA........................... -- -- -- -- -- --
FNMA........................... -- -- -- -- -- --
------- ---- ------ ---- ------- ----
Total mortgage-backed
securities available for
sale....................... -- -- 9,471 6.95 30,940 6.98
------- ---- ------ ---- ------- ----
Held to maturity:
Fixed-rate:
GNMA........................... -- -- 21 8.00 497 8.11
FHLMC.......................... -- -- -- -- 149 8.29
Adjustable-rate:
FHLMC.......................... -- -- -- -- -- --
------- ---- ------ ---- ------- ----
Total mortgage-backed
securities held to
maturity................... -- -- 21 8.00 646 8.15
------- ---- ------ ---- ------- ----
Total mortgage-backed
securities................. $ -- --% $9,492 6.95% $31,586 7.00%
======= ==== ====== ==== ======= ====
<CAPTION>
AT MARCH 31, 1998
-----------------------------------------
MORE THAN TEN YEARS TOTAL
------------------- -------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES:
Available for sale(1):
U.S. Government and agency
obligations.................... $ -- --% $ 4,011 5.67%
Held to maturity:
U.S. Government and agency
obligations.................... -- -- 22,491 6.09
-------- ----- -------- ----
Total investment
securities................. $ -- --% $ 26,502 6.03
======== ===== ======== ====
MORTGAGE-BACKED SECURITIES:
Available for sale:
Fixed rate:
FNMA........................... $ -- --% $ 30,940 6.98%
FHLMC.......................... -- -- 9,471 6.95
Adjustable rate:
GNMA........................... 86,510 5.52 86,510 5.52
FNMA........................... 88,222 5.98 88,222 5.98
-------- ----- -------- ----
Total mortgage-backed
securities available for
sale....................... 174,732 5.75 215,143 5.98
-------- ----- -------- ----
Held to maturity:
Fixed-rate:
GNMA........................... 753 9.08 1,271 8.68
FHLMC.......................... 82 11.41 231 9.40
Adjustable-rate:
FHLMC.......................... 10,993 6.58 10,993 6.58
-------- ----- -------- ----
Total mortgage-backed
securities held to
maturity................... 11,828 6.77 12,495 6.85
-------- ----- -------- ----
Total mortgage-backed
securities................. $186,560 5.81% $227,638 6.03%
======== ===== ======== ====
</TABLE>
- ---------------
(1) Does not include $3,701 of marketable equity securities available for sale
at fair value at March 31, 1998.
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 and other borrowings are the primary sources of the Company's
funds for use in lending, investing and for other general purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the fiscal year ended
March 31, 1998, core deposits (defined as total deposits less certificate
accounts) represented 29.1% of total average deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Company's deposits are
obtained predominantly from the areas in which its banking offices are located.
The Company 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
23
<PAGE> 25
institutions significantly affect the Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including radio and print media and generally does not solicit
deposits from outside its market area. While the Company does not actively
solicit certificate accounts in excess of $100,000 or use brokers to obtain
deposits, the Company may, from time to time, solicit such deposits or utilize
brokered deposits depending upon market conditions. In recent years, the
Company, in connection with its growth strategy, has significantly increased its
deposit base by establishing new banking 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 Company's core deposits. As a result, the Company's average
certificate accounts increased from $453.5 million, or 70.6% of total average
deposits, during the year ended March 31, 1997 to $506.4 million, or 71.0% of
total average deposits, during the year ended March 31, 1998. However, a less
aggressive deposit pricing strategy during the second half of year end 1998
resulted in a decline in certificate accounts from $524.8 million at March 31,
1997, to $474.5 million at March 31, 1998. The decline in certificate balances
was partially offset by an increase in checking and savings accounts from $199.2
million at March 31, 1997 to $234.0 million at March 31, 1998. The Company's
cost of average interest-bearing deposits decreased from 5.01% for the year
ended March 31, 1997 to 4.93% for the year ended March 31, 1998. At March 31,
1998, the weighted average remaining maturity of the Company's certificate
accounts was 8.7 months.
The following table presents the deposit activity of the Company for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net deposits....................................... $(48,513) $109,952 $120,527
Interest credited on deposit accounts.............. 33,025 30,274 23,116
-------- -------- --------
Total increase (decrease) in deposit accounts...... $(15,488) $140,226 $143,643
======== ======== ========
</TABLE>
At March 31, 1998, the Company had $57.1 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........................................ $16,606 5.62%
Over 3 through 6 months..................................... 15,435 5.58
Over 6 through 12 months.................................... 12,950 5.78
Over 12 months.............................................. 12,146 6.21
------- ----
Total....................................................... $57,137 5.77%
======= ====
</TABLE>
24
<PAGE> 26
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize average month-end balances.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
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... $ 44,064 6.17% --% $ 38,428 5.99% --% $ 35,587 7.08% --%
Money market accounts........ 30,788 4.31 2.72 28,967 4.51 2.83 27,194 5.41 2.83
Savings accounts............. 86,915 12.18 2.25 82,536 12.85 2.50 76,511 15.23 2.50
NOW accounts................. 45,619 6.39 1.26 38,801 6.04 1.98 30,088 5.99 1.98
-------- ------ -------- ------ -------- ------
Total................ 207,386 29.05 1.51 188,732 29.39 1.92 169,380 33.71 1.82
-------- ------ -------- ------ -------- ------
Certificate accounts(1):
Less than six months....... 228,480 32.01 5.54 184,111 28.67 5.62 125,491 24.98 5.66
Over six through 12
months................... 105,989 14.85 5.72 94,439 14.71 5.85 64,743 12.89 5.91
Over 12 through 36
months................... 79,289 11.11 6.07 84,341 13.13 6.18 61,698 12.28 6.37
Over 36 months............. 6,771 0.95 6.15 12,479 1.94 6.45 14,558 2.90 6.74
IRA and KEOGH.............. 85,911 12.03 5.83 78,084 12.16 5.91 66,487 13.24 6.17
-------- ------ -------- ------ -------- ------
Total certificate
accounts........... 506,440 70.95 5.71 453,454 70.61 5.83 332,977 66.29 5.95
-------- ------ -------- ------ -------- ------
Total average
deposits........... $713,826 100.00% 4.32% $642,186 100.00% 4.76% $502,357 100.00% 4.59%
======== ====== ======== ====== ======== ======
</TABLE>
- ---------------
(1) Based on remaining contractual maturity of certificates.
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, 1998.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MARCH 31, 1998
------------------------------------------------------------- AT MARCH 31,
LESS THAN ONE TO TWO TO THREE TO FOUR TO ------------------------------
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 1998 1997 1996
--------- --------- ----------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%......... $ -- $ -- $ -- $ -- $ -- $ -- $ 260 $ 253
4.01 to 5.00%...... 8,783 -- -- -- -- 8,783 18,741 31,913
5.01 to 6.00%...... 310,718 48,406 7,869 2,512 1,121 370,626 396,283 178,891
6.01 to 7.00%...... 48,999 12,429 5,777 2,827 6,360 76,392 82,551 140,863
7.01 to 8.00%...... 6,893 7,535 4,304 -- -- 18,732 26,975 40,027
Over 8.01.......... -- 4 -- -- -- 4 4 4
-------- ------- ------- ------ ------ -------- -------- --------
Total...... $375,393 $68,374 $17,950 $5,339 $7,481 $474,537 $524,814 $391,951
======== ======= ======= ====== ====== ======== ======== ========
</TABLE>
Borrowings. The Company utilizes advances from the FHLB as an alternative
to retail deposits to fund its operations as part of its operating strategy.
During the year ended March 31, 1998, the Company used FHLB borrowings to a
greater extent to fund its purchase of adjustable-rate mortgage-backed
securities. FHLB advances are collateralized primarily by certain of the
Company's mortgage loans and mortgage-backed securities. FHLB advances are made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions, including the Company, fluctuates from time to
time in accordance with the policies of the Federal Housing Finance Board
("FHFB") and the FHLB. At March 31, 1998, the Company had $356.6 million in
outstanding advances from the FHLB as compared to $111.1 million at March 31,
1997.
25
<PAGE> 27
The following table sets forth certain information regarding the Company's
FHLB Advances at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED MARCH 31,
-------------------------------
1998 1997 1996
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding....................... $214,278 $131,523 $50,321
======== ======== =======
Maximum amount outstanding at any month-end
During the period.............................. $356,615 $177,580 $75,141
======== ======== =======
Balance outstanding at end of period.............. $356,615 $111,062 $75,141
======== ======== =======
Weighted average interest rate during the
period......................................... 6.05% 6.25% 6.46%
======== ======== =======
Weighted average interest rate at end of period... 5.87% 6.13% 5.94%
======== ======== =======
</TABLE>
The Company also utilizes other borrowings as another alternative to retail
deposits. These borrowings generally consist of reverse repurchase agreement
with securities dealers and are collateralized by mortgage-backed securities.
The following table sets forth certain information regarding the Company's
reverse repurchase agreements and other borrowings at or for the periods ended
on the dates indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED MARCH 31,
-----------------------
1998 1997 1996
------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Reverse repurchase agreements and other borrowings:
Average balance outstanding............................... $10,173 $-- $--
======= === ===
Maximum amount outstanding at any month-end During the
period................................................. $47,250 $-- $--
======= === ===
Balance outstanding at end of period...................... $47,250 $-- $--
======= === ===
Weighted average interest rate during the period.......... 5.63% --% --%
======= === ===
Weighted average interest rate at end of period........... 5.58% --% --%
======= === ===
</TABLE>
SUBSIDIARY ACTIVITIES
FIRSTFED MORTGAGE CORPORATION ("FMC"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Bank. FMC is currently inactive.
FAB FUNDING CORPORATION ("FAB FUNDING"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Company formed primarily to finance stock
purchases by the Company's Employee Stock Ownership Plan and related trust
("ESOP"). The financing from FAB FUNDING is collateralized by the shares of
stock of the Company purchased by the ESOP, which are released for distribution
to eligible employees of the Company as payments are made on the loan. Except
for the loan to the ESOP, FAB FUNDING has no significant operations.
PERSONNEL
As of March 31, 1998, the Company had 264 authorized full-time employee
positions and 47 authorized part-time employee positions, for a total of
approximately 297.5 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.
26
<PAGE> 28
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"). See "Federal Savings Institution
Regulation -- QTL Test." 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 holding company may acquire
more than 5% 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
27
<PAGE> 29
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 four minimum capital standards: a 2% tangible capital
ratio, a 4% leverage (core) capital ratio, a 8% risk-based capital ratio, and a
4% Tier 1 risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage (core) capital ratio (3% for institutions
receiving the highest rating on the CAMEL 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 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, 1998, the Bank
met each of its capital requirements.
28
<PAGE> 30
The following table presents the Bank's capital position at March 31, 1998.
<TABLE>
<CAPTION>
CAPITAL
EXCESS -------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------- -------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Risk-based...................... $115,998 $50,581 $65,417 18.35% 8.00%
Core............................ 108,124 50,659 57,465 8.54 4.00
Tangible........................ 108,124 25,330 82,794 8.54 2.00
Tier 1 risk-based............... 108,124 25,290 82,834 17.10 4.00
</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 CAMEL 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 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be "significantly undercapitalized" and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
"critically undercapitalized." Subject to a narrow exception, the 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. On September 30, 1996, the President 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. The SAIF was undercapitalized due primarily to a
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. 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 was 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 Bank Insurance Fund ("BIF") members. The BIF is the fund
which primarily insures commercial bank deposits. Beginning on January 1, 1997,
BIF deposits were assessed for a FICO payment of approximately 1.3 basis points,
while SAIF deposits pay approximately 6.4 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.
29
<PAGE> 31
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. The FDIC reviews the assessment rate semiannually and,
currently, has instituted the 0 to 27 basis point range. SAIF members will also
continue to make the FICO payments described above. 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 year-end 1998 ranged from 6.30 to 9.28 basis
points and the premium paid for this period was $514,000. 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. Various proposals to eliminate the federal thrift charter, create
a uniform financial institutions charter and abolish the OTS have been
introduced in Congress. Some 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. Under some
proposals, 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 regulation as applies to state commercial banks. A more recent
bill passed by the House Banking Committee would allow savings institutions to
continue to exercise activities being conducted when they convert to a bank
regardless of whether a national bank could engage in the activity. Holding
companies for savings institutions would become subject to the same regulation
as holding companies that control commercial banks, with some limited
grandfathering, including savings and loan holding company activities.
The grandfathering would be lost under certain circumstances such as a
change in control of the company. The Bank is unable to predict whether such
legislation would be enacted or 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, 1998,
the Bank's limit on loans to one borrower was $16.9 million. At March 31, 1998,
the Bank's largest aggregate outstanding balance of loans to one borrower was
$1.9 million.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings and loan association is either must qualify as a
"domestic building and loan association" as defined in the Internal Revenue Code
or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of
March 31, 1998, the Bank maintained 87.47% of its portfolio assets in qualified
thrift investments and, therefore, met the QTL test. Recent legislation has
expanded the extent to which education loans, credit card loans and small
business loans may be considered "qualified thrift investments."
30
<PAGE> 32
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 1 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 January 1998, 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 December 31, 1997, the Bank was a Tier
1 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 was 5% for fiscal 1997, but is subject to change 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. In 1997,
OTS regulations also required each savings institution to maintain an average
daily balance of short-term liquid assets of at least 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. On November 24, 1997, the OTS lowered the liquidity requirement
from 5% to 4% and eliminated the 1% short term liquid asset requirement. The
Bank's liquidity ratio for March 31, 1998 was 11.70%, 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, 1998 totaled $198,000.
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 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
31
<PAGE> 33
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 that enforcement action to be taken with respect to a
particular savings institution. If action is not taken by the Director, the FDIC
has authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
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 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). The Federal Reserve Board
regulations generally required for most of 1997 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 was 3%; and for accounts aggregating greater than $49.3
million, the reserve requirement was $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) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements. For 1998, the Federal Reserve Board
has decreased from $49.3 to $47.8 million the amount of transaction accounts
subject to the 3% reserve requirement and to increase the amount of exempt
reservable balances from $4.4 million to $4.7 million. 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.
32
<PAGE> 34
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank report their income on a consolidated
basis and the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. 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 has not been audited by the IRS since 1983, which
covered the tax years 1980 and 1981. For its 1998 taxable year, the Bank is
subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. 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.
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 (i.e., take into income) over a six year period
the excess of the balance of its tax bad debt reserves as of December 31, 1995
other than its supplemental reserve for losses on loans, if any, over the
balance of such reserves as of December 31, 1987. As a result of such recapture,
the Bank will incur an additional tax liability of approximately $750,000 which
is generally expected to be taken into income beginning in 1996 over a six year
period.
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.
33
<PAGE> 35
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 35% federal
corporate income tax rate. The Banks 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 levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was 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.
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 12.15% for 1995,
11.71% for 1996 and 11.32% for 1997, and will be 10.91% for 1998, and 10.50% for
1999 and thereafter. 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 qualifies for this reduced tax rate.
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.
34
<PAGE> 36
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, 1998 POSITION
- ---- -------------- --------
<S> <C> <C>
Edward A. Hjerpe, III.............................. 39 Senior Vice President, Treasurer
and Chief Financial Officer
Kevin J. McGillicuddy.............................. 58 Senior Vice President of the
Company and the Bank
Frederick R. Sullivan.............................. 56 Senior Vice President of the
Company and the Bank
Terrence M. Tyrrell................................ 48 Senior Vice President of the
Company and the Bank
Nelson J. Braga.................................... 39 Vice President of the Bank
Joseph J. Bustin................................... 57 Vice President of the Bank
Philip G. Campbell................................. 49 Vice President of the Bank
Christine F. Chicca................................ 51 Vice President of the Bank
Sheila M. Rioux.................................... 57 Vice President of the Bank
Robert A. Skurka................................... 46 Vice President of the Bank
Gary J. Vierra..................................... 37 Vice President of the Bank
Anthony L. Weatherford............................. 47 Vice President of the Bank
Cecilia R. Viveiros................................ 35 Corporate Secretary of the Company
and the Bank
</TABLE>
ITEM 2. PROPERTIES.
The Company currently conducts its business through a centralized
administrative and operations center located in Swansea and 13 full service
banking offices and five loan origination centers, most of which are located in
Southeastern Massachusetts and Rhode Island.
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 1998
-------- ------ -------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/OPERATIONS/
BANKING OFFICE:
ONE FIRSTFED PARK
Swansea, MA 02777................... Owned 1994 -- $ 7,848
BANKING OFFICES:
27 Park Street
Attleboro, MA 02703.............. Owned 1990 -- 1,714
33 Sullivan Drive
Fall River, MA 02721............. Owned 1979 -- 2,008
1450 Plymouth Avenue
Fall River, MA 02721............. Owned 1972 -- 344
278 Union Street
New Bedford, MA 02740............ Owned 1972 -- 437
254 Rockdale Avenue
New Bedford, MA 02740............ Owned 1983 -- 746
265 Newport Avenue
Pawtucket, RI 02860.............. Owned 1996 -- 704
741 Willett Avenue
East Providence, RI 02915........ Owned 1995 -- 689
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 1998
-------- ------ -------- ---------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1519 Newman Avenue
Seekonk, MA 02771................ Owned 1994 -- 523
149 Grand Army Highway
Somerset, MA 02725............... Owned 1963 -- 424
2 Washington Street
Taunton, MA 02780................ Owned 1976 -- 685
2100 Warwick Avenue
Warwick, RI 02889................ Owned 1996 -- 645
975 Ashley Boulevard(1)
New Bedford, MA 02745............ Leased 1996 -- 687
1215 Park Avenue(3)
Cranston, RI 02910............... Owned 1998 -- 412
LOAN ORIGINATION CENTERS:
12 White's Path, Unit 7
Yarmouth, MA 02664............... Leased 1992 October 1998 --
62 Auburn Street
Auburn, MA 01501................. Leased 1990 June 1998(2) --
1325 Springfield Street
Agawam, MA 01089................. Leased 1992 June 1998(2) --
10 Wall Street
Burlington, MA 01803............. Leased 1994 December 1998(2) --
333 Main Street
East Greenwich, RI 02818......... Leased 1990 September 1998(2) --
--
-------
OTHER FACILITIES:
1 North Main Street(4)
Fall River, MA 02720............. Owned 1956 -- 512
Total....................... $18,378
=======
</TABLE>
- ---------------
(1) 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 banking office location which structure the
Company owns.
(2) The Company has options to renew this lease which range from 1 to 3 years.
(3) The Company purchased the property in March, 1998, and is in the process of
constructing a banking office.
(4) The Company has leased this property to a third party under a 2 year lease
agreement with three 2 year renewal options. The lease began in April, 1998.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
36
<PAGE> 38
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 1998 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 1998 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1998 Annual Report to Stockholders on pages 13 through 30 and is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This information contained in the Section captioned, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Market Risk and Management of Interest Rate Risk" on pages 16
through 19 of the 1998 Annual Report to Stockholders 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 1998 Annual Report to Stockholders on pages F-1
through F-33 and are incorporated herein by reference.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to "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 July 21, 1998, at
pages 5 through 7.
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 July 21, 1998, at pages 9 through 19 (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 July 21, 1998, at
pages 3 through 4.
37
<PAGE> 39
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 July 21, 1998, at page 19.
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 1998 Annual Report to
Stockholders:
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of March 31, 1998 and 1997... F-2
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 1998, 1997 and 1996....................... F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal
Years Ended March 31, 1998, 1997 and 1996................. F-4
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 1998, 1997 and 1996....................... F-5 to F-6
Notes to Consolidated Financial Statements.................. F-7 to F-33
</TABLE>
The remaining information appearing in the 1998 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.
<TABLE>
<S> <C>
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 1997 Supplemental
Executive Retirement Plan*
</TABLE>
38
<PAGE> 40
<TABLE>
<S> <C>
10.10 Forms of Employment Agreement between Company and Edward A.
Hjerpe, III and Employment Agreement between the Bank and
Edward A. Hjerpe, III (filed herewith)
10.11 FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option Plan ***
11.0 Computation of earnings per share is incorporated by
reference to the Consolidated Statements of Operations on
page F-3 of the 1998 Annual Report to Stockholders
13.0 Portions of the 1998 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"
23.1 Consent of Independent Accountant (filed herewith)
27.0 Financial Data Schedule (filed herewith)
99.0 Proxy Statement for 1998 Annual Meeting (filed herewith)
</TABLE>
- ---------------
* Incorporated by reference into this document from the Exhibits to Form S-1,
Registration Statement, and any amendments thereto, filed on September 27,
1996, Registration No. 333-12855
** Incorporated by reference into this document from the Proxy Statement for
the 1997 Annual Meeting of Stockholders dated June 20, 1997.
*** Incorporated by reference into this document from the Proxy Statement for
the 1998 Annual Meeting of Stockholders dated June 15, 1998.
(b) Reports on Form 8-K.
None.
39
<PAGE> 41
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 26, 1998
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
---- ----- ----
<C> <S> <C>
/s/ Robert F. Stoico President and Chief Executive June 26, 1998
- --------------------------------------------------- Officer and Chairman of the
Robert F. Stoico Board (Principal Executive
Officer)
/s/ Edward A. Hjerpe, III Senior Vice President, June 26, 1998
- --------------------------------------------------- Treasurer and Chief Financial
Edward A. Hjerpe, III Officer (Principal Accounting
and Financial Officer)
/s/ Gilbert C. Oliveira Director June 26, 1998
- ---------------------------------------------------
Gilbert C. Oliveira
/s/ Thomas A. Rodgers, Jr. Director June 26, 1998
- ---------------------------------------------------
Thomas A. Rodgers, Jr.
/s/ Richard W. Cederberg Director June 26, 1998
- ---------------------------------------------------
Richard W. Cederberg
/s/ John S. Holden, Jr. Director June 26, 1998
- ---------------------------------------------------
John S. Holden, Jr.
/s/ Dr. Paul A. Raymond Director June 26, 1998
- ---------------------------------------------------
Dr. Paul A. Raymond
/s/ Anthony L. Sylvia Director June 26, 1998
- ---------------------------------------------------
Anthony L. Sylvia
</TABLE>
40
<PAGE> 1
EXHIBIT 10.10
-------------
FIRSTFED AMERICA BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of July 31, 1997 by
and between FIRSTFED AMERICA BANCORP, INC. (the "Holding Company"), a
corporation organized under the laws of Delaware, with its principal offices at
One North Main Street, Fall River, Massachusetts, and Edward A. Hjerpe, III
("Executive"). Any reference to "Institution" herein shall mean First Federal
Savings Bank of America or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees
to serve as Senior Vice President, Chief Financial Officer and Treasurer of the
Holding Company. The Executive shall render administrative and management
services to the Holding Company such as are customarily performed by persons in
a similar executive capacity. During said period, Executive also agrees to
serve, if elected, as an officer or director of any subsidiary of the Holding
Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of twenty-four (24) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the second anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder, including activities and services related to the organization,
operation and management of the Holding Company and its direct or indirect
subsidiaries ("Subsidiaries") and participation in community, professional and
civic organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time
-1-
<PAGE> 2
to time, Executive may serve, or continue to serve, on the boards of directors
of, and hold any other offices or positions in, companies or organizations,
which, in such Board's judgment, will not present any conflict of interest with
the Holding Company or its Subsidiaries, or materially affect the performance of
Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary,
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement. However, Executive shall not perform, in any
respect, directly or indirectly, during the pendency of his temporary or
permanent suspension or termination from the Institution, duties and
responsibilities formerly performed at the Institution as part of his duties and
responsibilities as Senior Vice President, Chief Financial Officer and Treasurer
of the Holding Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Executive shall be entitled to a salary from the Holding Company
or its Subsidiaries of $192,500 per year ("Base Salary"). Base Salary shall
include any amounts of compensation deferred by Executive under any qualified or
unqualified plan maintained by the Holding Company and its Subsidiaries. Such
Base Salary shall be payable bi-weekly. During the period of this Agreement,
Executive's Base Salary shall be reviewed at least annually; the first such
review will be made no later than one year from the date of this Agreement. Such
review shall be conducted by the Board or by a Committee of the Board delegated
such responsibility by the Board. The Committee or the Board may increase
Executive's Base Salary. Any increase in Base Salary shall become the "Base
Salary" for purposes of this Agreement. In addition to the Base Salary provided
in this Section 3(a), the Holding Company shall also provide Executive, with all
such other benefits, arrangements and perquisites as described in Exhibit A and
as provided uniformly to permanent full-time employees of the Holding Company
and its Subsidiaries.
(b) The Holding Company and its Subsidiaries will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would materially adversely affect Executive's rights or
benefits thereunder, except to the extent that such changes are made applicable
to all Holding Company and Institution employees eligible to participate in such
plans, arrangements and perquisites on a non-discriminatory basis. Without
limiting the generality of the foregoing provisions of this Subsection (b),
Executive shall be entitled to participate in or receive benefits under any
employee benefit plans including, but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plans, medical coverage and any other employee benefit plan
or arrangement made available by the Holding Company and its Subsidiaries in the
future to its senior executives and key management employees, subject to and on
a basis consistent with the terms, conditions and overall administration of such
plans and arrangements. Nothing paid to the Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which the
Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Holding Company shall pay or reimburse Executive for all reasonable
travel and other reasonable expenses incurred in the
-2-
<PAGE> 3
performance of Executive's obligations under this Agreement and may provide such
additional compensation in such form and such amounts as the Board may from time
to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Holding Company of Executive's full-time employment hereunder
for any reason other than termination governed by Section 5(a) hereof, or for
Cause, as defined in Section 7 hereof; (ii) Executive's resignation from the
Holding Company's employ, upon, any (A) failure to elect or reelect or to
appoint or reappoint Executive as Senior Vice President, Chief Financial Officer
and Treasurer, unless consented to by the Executive, (B) a material change in
Executive's function, duties, or responsibilities with the Holding Company or
its Subsidiaries, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by the Executive, (C)
a relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by the Executive, (D) a material reduction in the benefits, arrangements and
perquisites to the Executive as described in Exhibit A, unless consented to by
the Executive, (E) a liquidation or dissolution of the Holding Company or the
Institution, or (F) breach of this Agreement by the Holding Company. Upon the
occurrence of any event described in clauses (A), (B), (C), (D), (E) or (F),
above, Executive shall have the right to elect to terminate his employment under
this Agreement by resignation upon not less than sixty (60) days prior written
notice given within six full calendar months after the event giving rise to said
right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a sum equal to the sum of: (i)
the amount of the remaining payments that the Executive would have earned if he
had continued his employment with the Holding Company during the remaining term
of this Agreement at the Executive's Base Salary at the Date of Termination; and
(ii) the amount equal to the annual contributions that would have been made on
Executive's behalf to any employee benefit plans of the Institution or the
Holding Company during the remaining term of this Agreement based on
contributions made (on an annualized basis) at the Date of Termination. At the
election of the Executive, which election is to be made prior to an Event of
Termination, such payments shall be made in a lump sum. In the event that no
election is made, payment to the Executive will be made on a monthly basis in
approximately equal installments during the remaining term of the Agreement.
Such payments shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
the Executive. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
-3-
<PAGE> 4
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Holding
Company or the Institution shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control or "Acquisition of Control" of the Institution or the Holding
Company within the meaning of the Home Owners' Loan Act of 1933, as amended, the
Federal Deposit Insurance Act, and the Rules and Regulations promulgated by the
Office of Thrift Supervision (or its predecessor agency), as in effect on the
date hereof (provided, that in applying the definition of change in control as
set forth under the rules and regulations of the OTS, the Board shall substitute
its judgment for that of the OTS); or (iii) without limitation such a 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 voting securities of the Institution or the Holding
Company representing 20% or more of the Institution's or the Holding Company's
outstanding voting securities or right to acquire such securities except for any
voting securities of the Institution purchased by the Holding Company and any
voting securities purchased by any employee benefit plan of the Holding Company
or its Subsidiaries, or (B) individuals who constitute the Board 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 Company's stockholders was approved by a Nominating Committee solely
composed of members which are Incumbent Board members, 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 Institution or the Holding Company or
similar transaction occurs or is effectuated in which the Institution or Holding
Company is not the resulting entity; provided, however, that such an event
listed above will be deemed to have occurred or to have been effectuated upon
the receipt of all required federal regulatory approvals not including the lapse
of any statutory waiting periods, or (D) a proxy statement has been distributed
soliciting proxies from stockholders 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
Institution with one or more corporations as a result of which the outstanding
shares of the class of securities then subject to such plan or transaction are
exchanged for or converted into cash or property or securities not issued by the
Institution or the Holding Company shall be distributed, or (E) a tender offer
is made for 20% or more of the voting securities of the Institution or Holding
Company then outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or reduction
in benefits or relocation of his
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principal place of employment by more than 25 miles from its location
immediately prior to the change in control, unless such termination is because
of his death or termination for Cause.
(c) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of: (i)
the payments due for the remaining term of the Agreement; or (ii) three (3)
times Executive's average annual compensation for the five (5) preceding taxable
years or, if the Executive has been employed by the Holding Company or any
subsidiary for less than five years, the annual average compensation of the
Executive for such lesser time period. Such annual compensation shall include
Base Salary, commissions, bonuses, contributions on behalf of Executive to any
pension and profit sharing plan, severance payments, directors or committee fees
and fringe benefits paid or to be paid to the Executive during such years. At
the election of the Executive, which election is to be made prior to a Change in
Control, such payment shall be made in a lump sum. In the event that no election
is made, payment to the Executive will be made on a monthly basis in
approximately equal installments during the remaining term of the Agreement.
Such payments shall not be reduced in the event Executive obtains other
employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Holding Company will cause to be continued life, medical, dental and
disability coverage substantially equivalent to the coverage maintained by the
Holding Company or the Institution for Executive at no premium cost to Executive
prior to his severance. Such coverage and payments shall cease upon the
expiration of twenty-four (24) months following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
(a) Notwithstanding the provisions of Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded
to Executive, which are deemed to be parachute payments
as defined in Section 280G of the Internal Revenue Code
of 1986, as amended (the "Code") or any successor
thereof, (the "Termination Benefits") would be deemed to
include an "excess parachute payment" under Section 280G
of the Code; and
(ii) if such Termination Benefits were reduced to an amount
(the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3)
times Executive's "base amount," as determined in
accordance with said Section 280G and the Non-Triggering
Amount less the product of the marginal rate of any
applicable state and federal income tax and the
Non-Triggering Amount would be greater than the aggregate
value of the Termination Benefits (without such
reduction) minus (i) the amount of tax required to be
paid by the Executive thereon by Section 4999 of the Code
and further minus (ii) the product of the Termination
Benefits and the marginal rate of any applicable state
and federal income tax, then the Termination Benefits
shall be reduced to the Non-Triggering Amount. The
allocation of
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the reduction required hereby among the Termination
Benefits shall be determined by the Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the
Institution, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination, such stock options and related limited rights and
any such unvested awards shall become null and void and shall not be exercisable
by or delivered to Executive at any time subsequent to such Termination for
Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of
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<PAGE> 7
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Holding Company. Executive shall, upon
reasonable notice, furnish such information and assistance to the Holding
Company as may reasonably be required by the Holding Company in connection with
any litigation in which it or any of its subsidiaries or affiliates is, or may
become, a party.
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<PAGE> 8
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which the Executive's normal business office is located
and the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by the Executive of the provisions of this Section,
the Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Holding
Company from pursuing any other remedies available to the Holding Company for
such breach or threatened breach, including the recovery of damages from
Executive.
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<PAGE> 9
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Holding Company subject to Section 11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated July 31, 1997,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by the Executive as
determined by the Holding Company and the Institution on a quarterly basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to the Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Holding Company and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
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<PAGE> 10
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware,
unless otherwise specified herein.
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of the Institution, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of the Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him
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<PAGE> 11
in connection with or arising out of any action, suit or proceeding in which he
may be involved by reason of his having been a director or officer of the
Holding Company (whether or not he continues to be a director or officer at the
time of incurring such expenses or liabilities), such expenses and liabilities
to include, but not be limited to, judgments, court costs and attorneys' fees
and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject
to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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<PAGE> 12
SIGNATURES
IN WITNESS WHEREOF, FIRSTFED AMERICA BANCORP, INC. has caused this
Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer and its directors, and Executive has signed this Agreement,
on the 31st day of July, 1997.
ATTEST: FIRSTFED AMERICA BANCORP, INC.
/s/ Cecilia R. Viveiros By: /s/ Robert F. Stoico
- ------------------------------- ----------------------------------
Cecilia R. Viveiros Robert F. Stoico
Secretary Director, President and Chief
Executive Officer
For the Entire Board of Directors
[SEAL]
WITNESS:
/s/ Cecilia R. Viveiros By: /s/ Edward A. Hjerpe, III
- ------------------------------- ----------------------------------
Cecilia R. Viveiros Edward A. Hjerpe, III
Secretary Executive
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<PAGE> 13
FIRST FEDERAL SAVINGS BANK OF AMERICA
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of July 31, 1997 by
and among First Federal Savings Bank of America (the "Bank"), a federally
chartered savings bank, with its principal administrative office at One North
Main Street, Fall River, Massachusetts, 02720, FIRSTFED AMERICA BANCORP, INC., a
corporation organized under the laws of the State of Delaware, the holding
company for the Bank (the "Holding Company"), and Edward A. Hjerpe, III
("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve
as Senior Vice President, Chief Financial Officer and Treasurer of the Bank.
Executive shall render administrative and management services to the Bank such
as are customarily performed by persons situated in a similar executive
capacity. During said period, Executive also agrees to serve, if elected, as an
officer and director of the Holding Company or any subsidiary of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of twenty-four (24) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be twenty-four (24) months unless the Executive
elects not to extend the term of this Agreement by giving written notice in
accordance with Section 8 of this Agreement. The Board will review the Agreement
and Executive's performance annually for purposes of determining whether to
extend the Agreement and the rationale and results thereof shall be included in
the minutes of the Board's meeting. The Board shall give notice to the Executive
as soon as possible after such review as to whether the Agreement is to be
extended.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Bank and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board,
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<PAGE> 14
from time to time, Executive may serve, or continue to serve, on the boards of
directors of, and hold any other offices or positions in, companies or
organizations, which, in such Board's judgment, will not present any conflict of
interest with the Bank, or materially affect the performance of Executive's
duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Bank may be terminated by the Bank or the Executive during
the term of this Agreement, subject to the terms and conditions of this
Agreement.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of $192,500
per year ("Base Salary"). Base Salary shall include any amounts of compensation
deferred by Executive under any qualified or unqualified plan maintained by the
Bank. Such Base Salary shall be payable bi-weekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by the Board or by a Committee of the
Board, delegated such responsibility by the Board. The Committee or the Board
may increase Executive's Base Salary. Any increase in Base Salary shall become
the "Base Salary" for purposes of this Agreement. In addition to the Base Salary
provided in this Section 3(a), the Bank shall also provide Executive, with all
such other benefits, arrangements and perquisites as described in Exhibit A and
as are provided uniformly to permanent full-time employees of the Bank.
(b) The Bank will not, without Executive's prior written consent, make
any changes in such plans, arrangements or perquisites which would materially
adversely affect Executive's rights or benefits thereunder; except to the extent
such changes are made applicable to all Bank employees on a non-discriminatory
basis. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive shall be entitled to participate in or receive
benefits under any employee benefit plans including but not limited to,
retirement plans, supplemental retirement plans, pension plans, profit-sharing
plans, health-and-accident plans, medical coverage or any other employee benefit
plan or arrangement made available by the Bank in the future to its senior
executives and key management employees, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements. Nothing paid to the Executive under any such plan or arrangement
will be deemed to be in lieu of other compensation to which the Executive is
entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3 and other compensation provided for by paragraph (b) of this Section
3, the Bank shall pay or reimburse Executive for all reasonable travel and other
reasonable expenses incurred by Executive performing his obligations under this
Agreement and may provide such additional compensation in such form and such
amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply.
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As used in this Agreement, an "Event of Termination" shall mean and include any
one or more of the following: (i) the termination by the Bank or the Holding
Company of Executive's full-time employment hereunder for any reason other than
a termination governed by Section 5(a) hereof, or Termination for Cause, as
defined in Section 7 hereof; (ii) Executive's resignation from the Bank's employ
upon any (A) failure to elect or reelect or to appoint or reappoint Executive as
Senior Vice President, Chief Financial Officer and Treasurer unless consented to
by the Executive, (B) a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (C) a
relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by the Executive, (D) a material reduction in the benefits, arrangements and
perquisites to the Executive, as described in Exhibit A, unless consented to by
the Executive, (E) a liquidation or dissolution of the Bank or Holding Company,
or (F) breach of this Agreement by the Bank. Upon the occurrence of any event
described in clauses (A), (B), (C), (D), (E) or (F), above, Executive shall have
the right to elect to terminate his employment under this Agreement by
resignation upon not less than sixty (60) days prior written notice given within
six full months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be a sum equal to the sum of: (i)
the amount of the remaining payments that the Executive would have earned if he
had continued his employment with the Bank during the remaining term of this
Agreement at the Executive's Base Salary at the Date of Termination; and (ii)
the amount equal to the annual contributions that would have been made on
Executive's behalf to any employee benefit plans of the Bank or the Holding
Company during the remaining term of this Agreement based on contributions made
(on an annualized basis) at the Date of Termination; PROVIDED, HOWEVER, that any
payments pursuant to this subsection and subsection 4(c) below shall not, in the
aggregate, exceed three times Executive's average annual compensation for the
five most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five years. In the event the Bank is not in compliance
with its minimum capital requirements or if such payments pursuant to this
subsection (b) would cause the Bank's capital to be reduced below its minimum
regulatory capital requirements, such payments shall be deferred until such time
as the Bank or successor thereto is in capital compliance. At the election of
the Executive, which election is to be made prior to an Event of Termination,
such payments shall be made in a lump sum as of the Executive's Date of
Termination. In the event that no election is made, payment to Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event the
Executive obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to his termination at no premium cost to the Executive, except
to the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
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<PAGE> 16
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" of the Bank or
Holding Company shall mean an event 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 Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) results in a
Change in Control or "Acquisition of Control" of the Bank or the Holding Company
within the meaning of the Home Owners' Loan Act of 1933, as amended, the Federal
Deposit Insurance Act and the Rules and Regulations promulgated by the Office of
Thrift Supervision ("OTS") (or its predecessor agency), as in effect on the date
hereof (provided, that in applying the definition of change in control as set
forth under the rules and regulations of the OTS, the Board shall substitute its
judgment for that of the OTS); or (iii) without limitation such a 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 voting securities of the Bank or the Holding Company
representing 25% or more of the Bank's or the Holding Company's outstanding
voting securities or right to acquire such securities except for any voting
securities of the Bank purchased by the Holding Company and any voting
securities purchased by any employee benefit plan of the Bank or the Holding
Company, or (B) individuals who constitute the Board 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 the same Nominating Committee
serving under an 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; provided, however, that
such an event listed above will be deemed to have occurred or to have been
effectuated upon the receipt of all required regulatory approvals not including
the lapse of any statutory waiting periods.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death, disability, retirement or termination for
Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, a sum equal to
the greater of: (1) the payments due for the remaining term of the Agreement; or
2) three (3) times Executive's average annual compensation for the five (5) most
recent taxable years that Executive has been employed by the Bank or such lesser
number of years
-16-
<PAGE> 17
in the event that Executive shall have been employed by the Bank for less than
five (5) years. Such average annual compensation shall include Base Salary,
commissions, bonuses, contributions on Executive's behalf to any pension and/or
profit sharing plan, severance payments, retirement payments, directors or
committee fees and fringe benefits paid or to be paid to the Executive in any
such year and payment of any expense items without accountability or business
purpose or that do not meet the Internal Revenue Service requirements for
deductibility by the Bank; PROVIDED, HOWEVER, that any payment under this
provision and subsection 5(d) below shall not exceed three (3) times the
Executive's average annual compensation. In the event the Bank is not in
compliance with its minimum capital requirements or if such payments would cause
the Bank's capital to be reduced below its minimum regulatory capital
requirements, such payments shall be deferred until such time as the Bank or
successor thereto is in capital compliance. At the election of the Executive,
which election is to be made prior to a Change in Control, such payment shall be
made in a lump sum as of the Executive's Date of Termination. In the event that
no election is made, payment to the Executive will be made in approximately
equal installments on a monthly basis over a period of twenty-four (24) months
following the Executive's termination. Such payments shall not be reduced in the
event Executive obtains other employment following termination of employment.
(d) Upon the Executive's entitlement to benefits pursuant to Section
5(b), the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Holding
Company or the Bank for Executive prior to his severance at no premium cost to
the Executive, except to the extent that such coverage may be changed in its
application for all Bank employees on a non-discriminatory basis. Such coverage
and payments shall cease upon the expiration of twenty-four (24) months
following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended, or any
successor thereto, and in order to avoid such a result, Termination Benefits
will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the
value of which is one dollar ($1.00) less than an amount equal to three (3)
times Executive's "base amount", as determined in accordance with said Section
280G. The allocation of the reduction required hereby among the Termination
Benefits provided by Section 5 shall be determined by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel,
-17-
<PAGE> 18
to be heard before the Board), finding that in the good faith opinion of the
Board, Executive was guilty of conduct justifying Termination for Cause and
specifying the particulars thereof in detail. Executive shall not have the right
to receive compensation or other benefits for any period after the Date of
Termination for Cause. During the period beginning on the date of the Notice of
Termination for Cause pursuant to Section 8 hereof through the Date of
Termination for Cause, stock options and related limited rights granted to
Executive under any stock option plan shall not be exercisable nor shall any
unvested awards granted to Executive under any stock benefit plan of the Bank,
the Holding Company or any subsidiary or affiliate thereof, vest. At the Date of
Termination for Cause, such stock options and related limited rights and any
unvested awards shall become null and void and shall not be exercisable by or
delivered to Executive at any time subsequent to such Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and,
provided further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event the Executive is
terminated for reasons other than Termination for Cause, the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon
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<PAGE> 19
reasonable notice, furnish such information and assistance to the Bank as may
reasonably be required by the Bank in connection with any litigation in which it
or any of its subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE OF BANK BUSINESS.
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4 hereof, Executive agrees not to compete with the Bank for a period of
one (1) year following such termination in any city, town or county in which the
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Subsection 10(a) agree that in the event of
any such breach by Executive, the Bank, will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employees and all
persons acting for or under the direction of Executive. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank
to the OTS and the Federal Deposit Insurance Corporation ("FDIC") pursuant to a
formal regulatory request. In the event of a breach or threatened breach by
Executive of the provisions of this Section, the Bank will be entitled to an
injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in cash
or check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts
-19-
<PAGE> 20
and benefits due from the Bank are not timely paid or provided by the Bank, such
amounts and benefits shall be paid or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated July 31, 1997,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Holding Company Agreement shall be allocated
in proportion to the services rendered and time expended on such activities by
Executive as determined by the Holding Company and the Bank on a quarterly
basis.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this Agreement shall be interpreted
to mean that Executive is subject to receiving fewer benefits than those
available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. REQUIRED PROVISIONS.
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<PAGE> 21
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
sec.1818(e)(3) or (g)(1); the Bank 's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i)
pay Executive all or part of the compensation withheld while their contract
obligations were suspended; and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
sec.1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act, 12 U.S.C. sec.1813(x)(1) all obligations of the
Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution: (i) by the Director of the OTS
(or his designee), the FDIC or the Resolution Trust Corporation, at the time the
FDIC enters into an agreement to provide assistance to or on behalf of the Bank
under the authority contained in Section 13(c) of the Federal Deposit Insurance
Act, 12 U.S.C. sec.1823(c); or (ii) by the Director of the OTS (or his designee)
at the time the Director (or his designee) approves a supervisory merger to
resolve problems related to the operations of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section
1828(k), 12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and
regulations promulgated thereunder.
16. REINSTATEMENT OF BENEFITS UNDER SECTION 15(b).
In the event Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice described in
Section 15(b) hereof (the "Notice") during the term of this Agreement and a
Change in Control, as defined herein, occurs, the Bank will assume its
obligation to pay and Executive will be entitled to receive all of the
termination benefits provided for under Section 5 of this Agreement upon the
Bank's receipt of a dismissal of charges in the Notice.
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<PAGE> 22
17. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
18. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the State of Delaware, but only to
the extent not superseded by federal law.
20. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
21. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
22. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal
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<PAGE> 23
law against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject
to and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R.
Part 359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.
23. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Holding Company,
expressly and unconditionally to assume and agree to perform the Bank's
obligations under this Agreement, in the same manner and to the same extent that
the Bank would be required to perform if no such succession or assignment had
taken place.
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<PAGE> 24
SIGNATURES
IN WITNESS WHEREOF, First Federal Savings Bank of America and FIRSTFED
AMERICA BANCORP, INC. have caused this Agreement to be executed and their seals
to be affixed hereunto by their duly authorized officers and directors, and
Executive has signed this Agreement, on the 31st day of July, 1997.
ATTEST: FIRST FEDERAL SAVINGS BANK OF AMERICA
/s/ Cecilia R. Viveiros By: /s/ Robert F. Stoico
- ------------------------------- -------------------------------------
Cecilia R. Viveiros Robert F. Stoico
Secretary President and Chief Executive Officer
[SEAL]
ATTEST: FIRSTFED AMERICA BANCORP, INC.
(Guarantor)
/s/ Cecilia R. Viveiros By: /s/ Robert F. Stoico
- ------------------------------- -------------------------------------
Cecilia R. Viveiros Robert F. Stoico
Secretary President and Chief Executive Officer
[SEAL]
WITNESS:
/s/ Cecilia R. Viveiros /s/ Edward A. Hjerpe, III
- ------------------------------- -------------------------------------
Cecilia R. Viveiros Edward A. Hjerpe, III
Executive
-24-
<PAGE> 1
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,
------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $1,281,832 $ 979,736 $723,572 $560,038 $469,433
Short-term investments -- 39,410 -- -- --
Investment securities available for sale(1) 7,712 888 725 518 --
Mortgage-backed securities available for sale(1) 215,143 31,732 -- -- --
Investment securities held to maturity(1) 22,491 20,991 23,987 20,988 10,049
Mortgage-backed securities held to maturity(1) 12,495 15,435 7,248 2,721 3,437
Mortgage loans held for sale 84,867 23,331 17,747 6,816 15,779
Loans receivable, net(2) 848,552 796,355 637,592 499,977 411,773
Deposits 708,488 723,976 583,750 440,107 360,093
FHLB advances and other borrowings 403,865 111,062 75,141 66,592 59,542
Stockholders' equity 126,986 122,154 46,418 41,697 36,469
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest and dividend income $ 76,890 $ 62,259 $ 46,044 $ 37,487 $ 33,206
Interest expense 46,529 38,497 26,382 18,337 14,196
---------- --------- -------- -------- --------
Net interest income before provision
for loan losses 30,361 23,762 19,662 19,150 19,010
Provision for loan losses 2,350 3,750 2,626 653 1,035
---------- --------- -------- -------- --------
Net interest income after provision
for loan losses 28,011 20,012 17,036 18,497 17,975
Total non-interest income 6,353 4,414 4,592 2,509 4,470
Total non-interest expense(3) 22,259 27,305 13,672 12,193 12,790
---------- --------- -------- -------- --------
Income (loss) before income tax expense
and cumulative effect of
change in accounting for income taxes 12,105 (2,879) 7,956 8,813 9,655
Income tax expense (credit) 5,286 (449) 3,353 3,852 4,235
---------- --------- -------- -------- --------
Net income before cumulative effect of
change in accounting for income taxes 6,819 (2,430) 4,603 4,961 5,420
Cumulative effect of change in accounting
for income taxes -- -- -- -- 1,495
---------- --------- -------- -------- --------
Net income (loss) $ 6,819 ($ 2,430) $ 4,603 $ 4,961 $ 6,915
========== ========= ======== ======== ========
</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, 1998 do not
include $17.9 million of FHLB-Boston stock.
(2) The allowance for loan losses at March 31, 1998, 1997, 1996, 1995 and 1994
was $10.9 million, $8.8 million, $5.6 million, $4.2 million and $4.0
million, respectively.
(3) For the year ended March 31, 1997, non-interest expense includes $6.5
million for the establishment of The Foundation, $1.3 million increased
compensation expense from the ESOP and a $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.
<PAGE> 2
Selected Financial Ratios and Other Data (4):
<TABLE>
<CAPTION>
At or For the Year Ended
March 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return (loss) on average assets 0.63% (0.28)% 0.76% 0.96% 1.51%
Return (loss) on average stockholders' equity 5.40 (3.71) 10.40 12.83 20.51
Average stockholders' equity to average assets 11.60 7.58 7.26 7.45 7.35
Stockholders' equity to total assets
at end of period 9.91 12.47 6.41 7.45 7.77
Average interest rate spread(5) 2.22 2.27 2.79 3.39 3.85
Net interest margin(6) 2.93 2.87 3.37 3.86 4.37
Average interest-earning assets
to average interest-bearing liabilities 115.87 112.67 112.90 112.71 115.88
Total non-interest expense to average assets 2.04 3.16 2.24 2.35 2.79
Efficiency ratio(3)(7) 60.63 96.91 56.37 56.30 54.47
REGULATORY CAPITAL RATIOS (BANK ONLY):
Tangible capital 8.54 10.34 6.36 7.40 7.77
Core capital 8.54 10.34 6.36 7.40 7.77
Risk-based capital 18.35 20.24 12.48 14.13 14.56
ASSET QUALITY RATIOS:
Non-performing loans as a percent of loans(8)(9) 0.35 0.45 0.63 0.60 1.02
Non-performing assets
as a percent of total assets(9) 0.28 0.44 0.65 0.59 1.10
Allowance for loan losses
as a percent of loans(2)(8) 1.27 1.09 0.87 0.84 0.95
Allowance for loan losses as a percent of
non-performing loans(2)(9) 358.83 239.98 138.62 139.76 93.91
PER SHARE DATA:
Basic earnings per common share $ 0.84 N/M -- -- --
Diluted earnings per common share $ 0.84 N/M -- -- --
Year-end book value per common share $ 15.99 15.08 -- -- --
Year-end market value per common share $ 21.13 13.63 -- -- --
Number of shares outstanding at end of period 8,470,066 8,707,152 -- -- --
Number of full-service customer facilities 13 13 10 9 8
Number of loan origination centers 5 5 5 5 5
</TABLE>
(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 non-interest expenses divided
by the sum of net interest income and non-interest 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> 3
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, and
the Company concurrently issued 8,707,152 shares of common stock, raising $77.6
million of net proceeds. The Company utilized $43.4 million of such net proceeds
to acquire all of the outstanding stock of the Bank.
The Company's current business operations primarily consist of investment
activities and holding the stock of the Bank. Accordingly, the Company's
business operations are primarily 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
administrative office and operations center in Swansea, Massachusetts. Its main
banking office is located in Fall River, Massachusetts and its twelve other
banking offices are located in the municipalities of Fall River, Attleboro,
Taunton, New Bedford, Somerset, Seekonk, and Swansea, 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,
mortgage-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,
dividends 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,
proceeds from the sale of loans, Federal Home Loan Bank of Boston ("FHLB")
advances, and other borrowings.
The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses, investment and loan sale activities and
loan servicing income. The Company's noninterest expense consists of
compensation and employee benefits, office occupancy and equipment expense,
federal deposit insurance premiums, advertising and business promotion, data
processing expense, and other expenses. Results of operations of the Company are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and the actions of
regulatory authorities. The Company had no material assets, liabilities or
operations 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.
The preceding and following discussion 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.
13
<PAGE> 4
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, FHLB advances, and other borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are influenced by general interest rates, economic
conditions and competition. The Bank is required to maintain minimum levels of
liquid assets as defined by 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 ("liquidity ratio"). At March 31, 1998 and
1997, the Bank's liquidity ratio was 11.70% and 13.40% respectively. The
regulatory required liquidity ratio was 5.0% at March 31, 1997. Effective
November 24, 1997, the OTS changed the required liquidity ratio to 4.0%.
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale. The levels of these assets are
dependent on the Company's operating, financing, lending and investing
activities during any given period. At March 31, 1998, cash, short-term
investments, mortgage loans held for sale, investment securities available for
sale, and mortgage-backed securities available for sale totaled $339.7 million,
or 26.50% of total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances and other borrowings. At March 31, 1998, the
Company had $356.6 million in advances outstanding from the FHLB, and an
additional borrowing capacity from the FHLB of $283.7 million. During fiscal
year 1998, the Company used FHLB advances and other borrowings to fund asset
growth and a decline in deposits, and may continue to do so in the future,
depending on market conditions, the pricing of deposit products, and the pricing
of FHLB advances and other borrowings.
At March 31, 1998, the Company had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $129.9 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, 1998, totaled $375.4 million. The Company expects that the majority of
the maturing certificate accounts will be retained by the Company at maturity.
In connection with the Company's strategy to expand its operations and
facilities, the Company opened its new administrative and operations center and
a new banking office in Swansea, Massachusetts in November, 1997. The Company
also renovated and enlarged its Downtown Fall River main banking office in late
1997 and plans to open another banking office in Cranston, Rhode Island in late
1998. The Company continues to seek sites for new banking offices and loan
origination centers in or adjacent to its market area. In addition, the Company
may, from time to time, consider expanding its market share and/or market area
through the acquisition of other banking institutions and may consider
acquisitions of other types of financial services companies.
While no formal plan is currently in place, the Company's Board of
Directors has authorized management to establish a trust services function to
provide future trust services to its customers. In addition, the Company
completed a 5.0% stock buyback program on May 19, 1998. The establishment of
additional banking offices, loan origination centers, trust service operations,
mergers and acquisitions, and additional capital management strategies by the
Company would result in additional capital expenditures and other associated
costs which the Company has not yet estimated.
At March 31, 1998, the consolidated capital to total assets ratio of the
Company and Bank was 9.91%. As of March 31, 1998, the Bank exceeded all of its
regulatory capital requirements with tangible, core, Tier 1 risk-based, and
risk-based capital ratios of 8.54%, 8.54%, 17.10%, and 18.35%, respectively, as
compared to the minimum regulatory requirements of 2.0%, 4.0%, 4.0%, and 8.0%,
respectively.
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
14
<PAGE> 5
holders of the Bank prior to conversion based on such account holder's
qualifying deposits. The liquidation account will be reduced to the extent that
such account holders reduce their qualifying deposits. In the unlikely event of
a complete liquidation of the Bank, each such account holder will be entitled to
receive a distribution from the liquidation account. The Bank is not permitted
to declare or pay dividends on its capital stock, or repurchase any of its
outstanding stock, if the effect thereof would cause its stockholders' equity to
be reduced below the amount required for the liquidation account or applicable
regulatory capital requirements. The balance of the liquidation account at March
31, 1998 was approximately $25.2 million.
YEAR 2000 COMPLIANCE
Included in other non-interest expenses in fiscal year 1998 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. Through March 31, 1998, the
Company expensed approximately $50,000 toward the initial assessment of the Year
2000 project. The Company will incur remediation and testing costs through the
Year 2000, but does not anticipate that material incremental costs will be
incurred in any single period.
A significant portion of the costs associated with the Year 2000 project
are not expected to be incremental to the Company, but rather represents 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 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, the Company could
possibly be negatively impacted to the extent that other entities not affiliated
with the Company are unsuccessful in properly addressing this issue.
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.
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 impact of
inflation is reflected in the increased cost of the Company's operations. 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
15
<PAGE> 6
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
MARKET RISK AND MANAGEMENT OF INTEREST RATE RISK
The principal market risk affecting the Company is interest-rate risk. The
principal objective of the Company's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a monthly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.
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 fund asset
growth. In addition, the Company engaged in two interest rate swap agreements
with a total notional principal amount of $50 million to synthetically lengthen
its liability maturities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period. At March 31,
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 3.19%. 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, may tend to negatively affect the Company's net interest
income. During a period of falling interest rates, the Company's
interest-bearing liabilities would tend to reprice downward at a faster rate
than its interest-earning assets which, consequently, may tend to positively
affect 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, 1998, which are
anticipated 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
below, 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 liabilities at
March 31, 1998, 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 adjustable-rate loans.
Annual market prepayment rates for one-to four-family and multi-family mortgage
loans, and mortgage-backed securities are assumed to range from 20.5% to 36.3%
for adjustable-rates and 9.6% to 32.4% for fixed-rates, respectively. Money
market deposit accounts and negotiable order of withdrawal ("NOW") accounts are
assumed to reprice evenly over a three year period, while regular savings
accounts are viewed as composed of two equally weighted components -- a
longer-term "core" deposit that reprices evenly over a
16
<PAGE> 7
thirty year term, and a more active secondary tier that reprices evenly over
three years. These assumptions may or may not be indicative of actual prepayment
and withdrawals experienced by the Company. The table does not necessarily
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
pressures and, therefore, actual experience may vary from that indicated.
The following table shows the gap position of the Company at March 31,
1998:
<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:
Investment securities......... $ 6,001 $ 3,499 $ 7,011 $ 9,991 $ -- $ 3,701 $ 30,203
Loans receivable(1)........... 204,737 66,777 115,840 249,049 164,182 142,143 942,728
Mortgage-backed securities.... 53,062 53,774 37,801 43,615 25,495 13,891 227,638
Stock in FHLB-Boston.......... 17,945 -- -- -- -- -- 17,945
-------- -------- -------- -------- -------- -------- ----------
Total interest-earning
assets............... 281,745 124,050 160,652 302,655 189,677 159,735 1,218,514
-------- -------- -------- -------- -------- -------- ----------
INTEREST-BEARING LIABILITIES:
Money market accounts......... 2,728 2,728 5,456 21,826 -- -- 32,738
Savings accounts.............. 4,063 4,063 9,303 32,501 2,955 36,933 89,818
NOW accounts.................. 4,077 4,077 8,154 32,617 -- -- 48,925
Certificate accounts.......... 118,774 98,511 106,127 57,923 6,699 -- 388,034
IRA and KEOGH accounts........ 16,067 16,752 19,162 28,401 6,121 -- 86,503
FHLB advances and other
borrowings.................. 61,828 115,655 59,800 109,082 56,704 796 403,865
-------- -------- -------- -------- -------- -------- ----------
Total interest-bearing
liabilities.......... 207,537 241,786 208,002 282,350 72,479 37,729 1,049,883
-------- -------- -------- -------- -------- -------- ----------
INTEREST-RATE SWAPS:
Pay fixed..................... -- -- -- -- (50,000) -- (50,000)
Receive floating.............. 25,000 25,000 -- -- -- -- 50,000
-------- -------- -------- -------- -------- -------- ----------
Interest-rate gap after swaps... $ 99,208 $(92,736) $(47,350) $ 20,305 $ 67,198 $122,006 $ 168,631
======== ======== ======== ======== ======== ======== ==========
Cumulative interest-rate gap.... $ 99,208 $ 6,472 $(40,878) $(20,573) $ 46,625 $168,631
======== ======== ======== ======== ======== ========
Cumulative interest-rate gap as
a percentage of total assets
at March 31, 1998............. 7.74% 0.50% (3.19)% (1.60)% 3.64% 13.16%
Cumulative interest-rate gap as
a percentage of total
interest-earning assets at
March 31, 1998................ 8.14% 0.53% (3.35)% (1.69)% 3.83% 13.84%
Cumulative interest-earning
assets as a percentage of
interest-bearing liabilities
at March 31, 1998............. 135.76% 90.31% 86.17% 92.49% 104.61% 116.06%
________________________________
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
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.
17
<PAGE> 8
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
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 March 31, 1998, was in
full compliance with those limits. The following table sets forth the Company's
estimated NPV as of March 31, 1998, as calculated by the Company.
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES ESTIMATED NET PORTFOLIO VALUE VALUE OF ASSETS
IN BASIS POINTS -------------------------------- ----------------------
(RATE SHOCK) $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE(1)
- --------------- -------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400........................... 137,637 (30,642) (18) 11.05% (163)
300........................... 143,388 (24,621) (15) 11.37 (131)
200........................... 152,660 (15,349) (9) 11.90 (78)
100........................... 161,529 (6,481) (4) 12.38 (30)
Static........................ 168,009 -- -- 12.68 --
(100)......................... 165,405 (2,605) (2) 12.38 (30)
(200)......................... 154,172 (13,838) (8) 11.52 (116)
(300)......................... 144,607 (23,402) (14) 10.79 (189)
(400)......................... 137,850 (30,160) (18) 10.24 (244)
</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 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.
During fiscal year 1998, the Company continued 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
18
<PAGE> 9
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.
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 also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
each.
The following table sets forth certain information relating to the Company
at fiscal year end 1998 and for fiscal years 1998, 1997, and 1996. 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 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.
19
<PAGE> 10
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------
AT 1998 1997
MARCH 31, 1998 ------------------------------- -------------------
------------------- AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST
---------- ------ ---------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for
sale(1)...................... $ 933,419 7.63% $ 881,226 $67,493 7.66% $759,185 $57,941
Investment securities(2)....... 48,147 5.83 44,409 2,789 6.28 53,199 3,360
Mortgage-backed
securities(3)................ 227,638 6.02 110,484 6,608 5.98 16,085 958
---------- ---- ---------- ------- ---- -------- -------
Total interest-earning
assets................... 1,209,204 7.26 1,036,119 76,890 7.42 828,469 62,259
---- ------- ---- -------
Noninterest-earning assets....... 72,628 52,964 35,895
---------- ---------- --------
Total assets............... $1,281,832 $1,089,083 $864,364
========== ========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Money market accounts.......... 32,738 2.71 $ 30,788 883 2.87 $ 28,967 828
Savings accounts............... 89,818 2.25 86,915 2,093 2.41 82,536 2,061
NOW accounts................... 48,925 1.26 45,619 801 1.76 38,801 763
Certificate accounts........... 474,537 5.71 506,440 29,257 5.78 453,454 26,625
---------- ---- ---------- ------- ---- -------- -------
Total...................... 646,016 4.74 669,762 33,034 4.93 603,758 30,277
FHLB advances and other
borrowings................... 403,865 5.84 224,451 13,495 6.01 131,523 8,220
---------- ---- ---------- ------- ---- -------- -------
Total interest-bearing
liabilities.............. 1,049,883 5.16 894,213 46,529 5.20 735,281 38,497
---- ------- ---- -------
Non-interest-bearing
liabilities(4)................. 104,963 68,508 63,516
---------- ---------- --------
Total liabilities.......... 1,154,846 962,721 798,797
---------- ---------- --------
Stockholders' equity............. 126,986 126,362 65,567
---------- ---------- --------
Total liabilities and
stockholders' equity..... $1,281,832 $1,089,083 $864,364
========== ========== ========
Net interest rate spread(5)........ 2.10% $30,361 2.22% $23,762
======= ==== =======
Net interest margin(6)............. 2.93%
====
Ratio of interest-earning assets to
interest-bearing liabilities..... 115.18% 115.87% 112.67%
========== ========== ========
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
---------------------------------------
1997 1996
------- -----------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for
sale(1)...................... 7.63% $548,558 $43,757 7.98%
Investment securities(2)....... 6.32 30,808 1,966 6.38
Mortgage-backed
securities(3)................ 5.96 4,411 321 7.28
---- -------- ------- ----
Total interest-earning
assets................... 7.51 583,777 46,044 7.89
---- ------- ----
Noninterest-earning assets....... 25,570
--------
Total assets............... $609,347
========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Money market accounts.......... 2.86 $ 27,194 783 2.88
Savings accounts............... 2.50 76,511 1,915 2.50
NOW accounts................... 1.97 30,088 599 1.99
Certificate accounts........... 5.87 332,977 19,834 5.96
---- -------- ------- ----
Total...................... 5.01 466,770 23,131 4.96
FHLB advances and other
borrowings................... 6.25 50,321 3,251 6.46
---- -------- ------- ----
Total interest-bearing
liabilities.............. 5.24 517,091 26,382 5.10
---- ------- ----
Non-interest-bearing
liabilities(4)................. 48,015
--------
Total liabilities.......... 565,106
--------
Stockholders' equity............. 44,241
--------
Total liabilities and
stockholders' equity..... $609,347
========
Net interest rate spread(5)........ 2.27% $19,662 2.79%
==== ======= ====
Net interest margin(6)............. 2.87% 3.37%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities..... 112.90%
========
</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
maturity.
(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
average interest-earning assets.
20
<PAGE> 11
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
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to:
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated on a proportional
basis between changes in rate and volume.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1998 MARCH 31, 1997
COMPARED TO COMPARED TO
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------------------ -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
-------------------- -------------------
VOLUME RATE NET VOLUME RATE NET
--------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Investment securities................... $ (552) $ (19) $ (571) $ 1,414 $ (20) $ 1,394
Loans receivable, net and mortgage loans
held for sale........................ 9,346 206 9,552 16,148 (1,964) 14,184
Mortgage-backed securities.............. 5,646 4 5,650 705 (68) 637
------- ------ ------- ------- ------- -------
Total interest-earning assets...... 14,440 191 14,631 18,267 (2,052) 16,215
------- ------ ------- ------- ------- -------
INTEREST-BEARING LIABILITIES:
Money market accounts................... 52 3 55 51 (6) 45
Savings accounts........................ 107 (75) 32 146 -- 146
NOW accounts............................ 125 (87) 38 171 (7) 164
Certificate accounts.................... 3,067 (435) 2,632 7,078 (287) 6,791
------- ------ ------- ------- ------- -------
Total deposits..................... 3,351 (594) 2,757 7,446 (300) 7,146
FHLB advances and other borrowings...... 5,598 (323) 5,275 5,078 (109) 4,969
------- ------ ------- ------- ------- -------
Total interest-bearing
liabilities..................... 8,949 (917) 8,032 12,524 (409) 12,115
------- ------ ------- ------- ------- -------
Net change in net interest income......... $ 5,491 $1,108 $ 6,599 $ 5,743 $(1,643) $ 4,100
======= ====== ======= ======= ======= =======
</TABLE>
ASSET QUALITY
The following table sets forth information regarding non-accrual loans and
real estate owned "REO"). At March 31, 1998, REO totaled $595,000. 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 1998 and 1997
the amount of additional interest income that would have been recognized on
non-accrual loans if such loans were
21
<PAGE> 12
performing in accordance with their regular terms and amounts recognized was
$63,000 and $130,000, respectively.
<TABLE>
<CAPTION>
AT MARCH 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One-to four-family..................... $1,073 $1,908 $2,469 $2,501 $3,649
Multi-family........................... 101 268 334 51 --
Commercial real estate................. 1,199 976 -- 85 --
Construction and land.................. 169 232 -- -- 26
------ ------ ------ ------ ------
Total mortgage loans................ 2,542 3,384 2,803 2,637 3,675
------ ------ ------ ------ ------
Commercial loans......................... 74 -- 87 -- 15
------ ------ ------ ------ ------
Consumer loans:
Home equity lines...................... 425 114 956 386 483
Second mortgages....................... -- 95 196 -- 34
Other consumer loans................... 7 69 3 10 14
------ ------ ------ ------ ------
Total consumer loans................ 432 278 1,155 396 531
------ ------ ------ ------ ------
Total nonaccrual loans.............. 3,048 3,662 4,045 3,033 4,221
Real estate owned, net(1)..................... 595 665 643 296 939
------ ------ ------ ------ ------
Total non-performing assets......... $3,643 $4,327 $4,688 $3,329 $5,160
====== ====== ====== ====== ======
Allowance for loan losses as a percent of
loans(2).................................... 1.27% 1.09% 0.87% 0.84% 0.95%
Allowance for loan losses as a percent of non-
performing loans(3)......................... 358.83% 239.98% 138.62% 139.76% 93.91%
Non-performing loans as a percent of
loans(2)(3)................................. 0.35% 0.45% 0.63% 0.60% 1.02%
Non-performing assets as a percent of total
assets(4)................................... 0.28% 0.44% 0.65% 0.59% 1.10%
</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.
At March 31, 1998 and 1997, total impaired loans were $1.5 million and $1.5
million, respectively. At March 31, 1998 and 1997, impaired loans of $1.5
million and $1.3 million required impairment allowances of $812,000 and
$762,000, respectively. For a description of which loans qualify as impaired
loans under SFAS No. 114, see Note 1 to Consolidated Financial Statements
included elsewhere herein. All impaired loan have been measured using the fair
value of the collateral method. During fiscal year 1998, the average recorded
value of impaired loans was $1.5 million. For these loans, $120,000 of interest
income was recognized while $228,000 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
currently known to management. The allowance is based upon a number of factors,
including current economic conditions, actual loss experience and industry
22
<PAGE> 13
trends. In addition, the OTS and FDIC, as an integral part of their examination
process, periodically review the Company's allowance for loan losses. Such
agencies may require the Company to make additional provisions for estimated
loan losses based upon judgments different from those of management. As of March
31, 1998, the Company's allowance for loan losses was 1.27% of total loans
receivable and 324.35% of total non-performing loans as compared to 1.09% and
239.98%, respectively, as of March 31, 1997. The Company had non-accrual loans
of $3.0 million and $3.7 million at March 31, 1998 and March 31, 1997,
respectively. The allowance for loan losses totaled $10.9 million at March 31,
1998 as compared to $8.8 million at March 31, 1997. The increase in the
allowance of $2.1 million reflects management's assessment of the loan portfolio
and was based upon growth in the balance and composition of such portfolio. The
Company will continue to monitor and modify its allowances for loan losses as
conditions dictate. While management believes the Company's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that the Company's level of allowance for loan
losses will be sufficient to cover future loan losses incurred by the Company or
that future adjustments to the allowance for loan losses will not be necessary
if economic and other conditions differ substantially from the economic and
other conditions used by management to determine the current level of the
allowance for loan losses.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $ 8,788 $5,607 $4,239 $3,964 $3,524
Provision for loan losses.................... 2,350 3,750 2,626 653 1,035
Charge-offs:
Mortgage loans:
One to four family...................... 188 331 218 168 324
Multi-family............................ -- 82 -- -- 55
Commercial real estate.................. -- -- 967 25 121
Construction and land................... -- -- -- -- 25
Commercial loans:....................... -- 87 -- 15 38
Consumer Loans:
Home equity lines....................... -- 116 68 113 20
Second mortgages........................ 15 10 -- -- --
Other consumer.......................... 9 11 35 79 45
------- ------ ------ ------ ------
Total.............................. 212 637 1,288 400 628
Recoveries................................... 11 68 30 22 33
------- ------ ------ ------ ------
Balance at end of period..................... $10,937 $8,788 $5,607 $4,239 $3,964
======= ====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the
period..................................... 0.02% 0.07% 0.23% 0.08% 0.14%
======= ====== ====== ====== ======
</TABLE>
The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. At March 31, 1998,
1997, and 1996, the Company classified (excluding REO) $3.0 million, $3.7
million, and $4.9 million of substandard loans, respectively. In the opinion of
management, the performing substandard loans evidence one or more weaknesses or
potential weaknesses, and depending on the regional economy and other factors,
may become non-performing assets in future periods.
23
<PAGE> 14
COMPARISON OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED
MARCH 31, 1998 AND MARCH 31, 1997
FINANCIAL CONDITION
Assets at March 31, 1998 totaled $1.282 billion, an increase of $302.1
million or 30.8%, compared to $979.7 million at March 31, 1997. Most of the
growth in assets was in loans receivable and mortgage loans held for sale, which
increased $113.7 million from $819.7 million to $933.4 million, or 13.9%, and
mortgage-backed securities available for sale, which increased $183.4 million
from $31.7 million to $215.1 million, or 578%. The increase in loans receivable
was attributable to strong growth in consumer and commercial loans and the
increase in mortgage loans held for sale was caused by heavy mortgage refinance
activity brought about by lower market rates during early 1998. Growth in the
mortgage-backed securities available for sale portfolio was part of a management
strategy to increase the Company's leverage. Cash on hand and due from banks
increased from $14.1 million at March 31, 1997 to $32.0 million at March 31,
1998. Office properties and equipment, net increased by $10.7 million from $14.2
million at March 31, 1997 to $24.9 million at March 31, 1998. The increase in
office properties and equipment, net, took place over the entire fiscal year
ending March 31, 1997 as a result of the Company's capital outlays for its new
administrative offices and operations center, as well as to remodel existing,
older banking offices and to buy, build, and equip the Company's new additional
banking office locations.
Deposit accounts decreased from $724.0 million at March 31, 1997 to $708.5
million at March 31, 1998, a decrease of 2.1%. The loss of deposits was
primarily attributable to a $50.3 million or 9.6% decrease in certificate
accounts, which declined from $524.8 million to $474.5 million. This decline,
however, was partially offset by a 17.5% increase in other deposits of $34.8
million from $199.2 million at March 31, 1997 to $234.0 million at March 31,
1998. The decrease in certificate accounts was due primarily to the Company's
less aggressive deposit pricing strategy. FHLB advances and other borrowings
increased from $111.1 million at March 31, 1997 to $403.9 million at March 31,
1998, an increase of $292.8 million, or 264%. The increase in FHLB advances
partially offset the decline in deposits but was primarily used to fund
mortgage-backed security growth as part of a wholesale leverage strategy.
Total stockholders' equity at March 31, 1998 was $127.0 million or 9.91% of
assets compared to $122.2 million or 12.47% of assets at March 31, 1997. The
increase in stockholders' equity was a due to a combination of retained net
income, an increase in the unrealized gain on securities available for sale, a
decrease in unallocated Employee Stock Ownership Plan (the "ESOP") shares, and
the purchase of Company stock to fund the Company's stock-based incentive plan.
The decline in the stockholders' equity to assets ratio is a function of the
increased leverage strategy.
Non-performing assets decreased to $3.6 million or .28% of total assets at
March 31, 1998, compared to $4.3 million or .44% of total assets at March 31,
1997. The allowance for loan losses was increased from $8.8 million at March 31,
1997 to $10.9 million at March 31, 1998 due to loan portfolio growth. The
allowances for loan losses amounted to 1.27% of loans at March 31, 1998,
compared to 1.09% of loans at March 31, 1997. See "Asset Quality" included
elsewhere herein.
RESULTS OF OPERATIONS
GENERAL
Net income for the year ended March 31, 1998 was $6.8 million, or $0.84
basic earnings per share and $0.84 diluted earnings per share. For the year
ended March 31, 1997, the Company experienced a $2.4 million net loss which was
primarily due to nonrecurring pre-tax charges of $6.5 million to fund the
formation of The FIRSTFED Charitable Foundation and a $2.9 million assessment to
recapitalize the Savings Association Insurance Fund of the FDIC ( the "SAIF").
After excluding these items, net income for year-end 1998 was up $3.1 million,
or 82.2%, over pro forma year-end 1997 net income of $3.7 million. The $3.1
million increase in net income was primarily due to balance sheet growth
generated by the proceeds of the Company's initial public offering on January
15, 1997. Net interest income before provision for loan losses for the years
ended 1998 and 1997 amounted to $30.4 million and $23.8 million, respectively,
an increase of $6.6 million, or 27.8%.
24
<PAGE> 15
INTEREST INCOME
Total interest income for year-end 1998 was $76.9 million. This is an
increase of $14.6 million or 23.5% from the $62.3 million total interest income
for year-end 1997. Most of the increase in total interest income was due to
higher average balances of interest-earning assets, which averaged $1.036
billion for year-end 1998, compared to the average balance of $828.5 million
during year-end 1997. Interest income from loans receivable, increased $9.6
million or 16.5% to $67.5 million for year-end 1998. This increase resulted from
the net effect of a $122.0 million increase in the average balance of loans
receivable, coupled with a 3 basis point increase in yield. Additionally, the
average balance of mortgage-backed securities increased from $16.1 million for
year-end 1997 to an average balance of $110.5 million year-end 1998. These
increases in interest-earning assets were primarily funded by FHLB advances and
other borrowings during year-end 1998. The yield on interest-earning assets
decreased by 9 basis points to 7.42% in year-end 1998 from 7.51% in year-end
1997 as the relative percentage of lower yielding, adjustable rate
mortgage-backed securities increased. The lower yield on the adjustable rate
mortgage-backed securities is due to a low initial coupon.
INTEREST EXPENSE
Interest expense for year-end 1998 amounted to $46.5 million, an increase
of $8.0 million, from the year-end 1997 total of $38.5 million, an increase of
20.9%. The primary reason for this increase was due to significantly higher
average balances for interest-bearing liabilities totaling $894.2 million during
year-end 1998, compared to average balances for interest-bearing liabilities of
$735.3 million during year-end 1997, an increase of $158.9 million. The increase
in interest-bearing liabilities was the net effect of a $92.9 million increase
in average FHLB advances and other borrowings and a $66.0 million increase in
total deposits. The average cost of interest-bearing deposits decreased for
year-end 1998 to 4.93% from to 5.01% for year-end 1997 as marginal deposit costs
were less than the average cost of existing deposits. A less aggressive deposit
pricing strategy, a relative percentage shift towards lower-cost transaction and
savings accounts, and generally lower market rates contributed to the decline in
average deposit rates. The average cost of FHLB advances and other borrowings
decreased for year-end 1998 to 6.01% as compared to 6.25% for year-end 1997,
also as a result of lower market rates.
NET INTEREST INCOME
Net interest income before the provision for loan losses increased by $6.6
million, or 27.8%, from $23.8 million to $30.4 million for the years ended March
31, 1997 and 1998, respectively. A full year's use of proceeds from the initial
public offering helped to offset a decrease in the net interest rate spread from
2.27% for year-end 1997 to 2.22% for year-end 1997. The decrease in the net
interest rate spread was due to a drop in earning asset yield brought about by
the addition of lower yielding adjustable rate mortgage-backed securities, as
previously discussed. The Company's net interest margin increased from 2.87% for
year-end 1997 to 2.93% for year-end 1998.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses amounted to $2.4 million for
year-end 1998, as compared to a provision of $3.8 million for year-end 1997. The
decrease in the provision for loan losses resulted from management's review and
evaluation of the adequacy of the Company's loan loss reserve relative to the
overall credit quality of its loan portfolio. 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 further increases in its
allowance for loan losses 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 assurances 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.
25
<PAGE> 16
NON-INTEREST INCOME
Non-interest income increased $2.0 million, or 43.9% from $4.4 million for
year-end 1997 to $6.4 million for year-end 1998. Non-interest income consists of
loan servicing income, gains and losses on the sale of mortgages, and other
non-interest income. A $2.0 million increase in the gain on sale of mortgage
loans was the primary driver of the increase in non-interest income. This
increase was primarily the result of more favorable secondary mortgage market
conditions and an increase in the volume of loans originated and sold. A
$374,000 increase in gain on sale of investments and other income was offset by
a $406,000 decline in loan servicing income, primarily the result of accelerated
amortization of mortgage servicing rights during the fourth quarter due to
faster prepayment rate forecasts and faster than expected actual prepayments.
NON-INTEREST EXPENSE
Total non-interest expense decreased to $22.3 million for year-end 1998
compared to $27.3 million for year-end 1997. Year-end non-interest expense for
1997 included pre-tax, nonrecurring charges of $2.9 million for the SAIF special
assessment and $6.5 million for funding the Foundation. The absence of these
items in year-end 1998 figures partially offset a $3.4 million increase in
compensation and benefits related to increased staffing and the recognition of
the Company's Stock-based Incentive Plan, and a $922,000 increase in office
occupancy and equipment expense related to the Company's new administrative
offices and operations center and the renovation of the Company's Downtown Fall
River main banking office. After excluding the SAIF assessment, the Company's
deposit insurance declined to $514,000, while data processing expense was
virtually unchanged at $717,000. The Company's advertising and promotion expense
declined $57,000 to $1.0 million for year-end 1998, while other expenses
increased $568,000. The largest sources of this increase were: a $205,000
increase in accounting, legal, and consulting fees; a $162,000 increase in loan
expense for appraisals and other loan origination related expenses that were
increased during the early 1998 refinance surge; a $121,000 increase in
stockholder and corporate communication expenses arising from the Company's
first full year as a public company; and a partial offset of $214,000 caused by
a decrease in REO and foreclosure expense.
INCOME TAXES
Income tax expense was $5.3 million for year-end 1998 (resulting in an
effective tax rate of 43.7%), compared to an income tax benefit of $449,000 for
year-end 1997 (resulting in an effective tax benefit of 15.6%). The increase in
income tax expense was primarily due to increased pre-tax income.
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
million or 35.4%, compared to $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 million, mortgaged-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 attributable to strong growth in mortgages, consumer loans, and
commercial loans. 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 properties 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 additional banking
office 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 million
from the stock conversion.
26
<PAGE> 17
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
resulted primarily from the inflow of deposits from the opening of three branch
offices, the Company's competitive deposit pricing strategy and increased
marketing 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
million 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 accounts
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 6.42% of assets at March 31, 1996. The
increase is due to the addition of conversion proceeds of $77.6 million, offset
by a net loss of $2.4 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.
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,
compared to .87% of loans at March 31, 1996. See "Asset Quality" included
elsewhere herein.
RESULTS OF OPERATIONS
GENERAL
For fiscal year 1997, the Company experienced a $2.4 million net loss,
compared to net income of $4.6 million for the year ended March 31, 1996. The
decrease in net income was primarily attributable to pre-tax charges totaling
$10.7 million. Included in the $10.7 million pre-tax charges was the impact of
the establishment of The FIRSTFED Charitable Foundation (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 Foundation 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.
INTEREST INCOME
Total interest income for fiscal year 1997 was $62.3 million. This is an
increase of $16.3 million or 35.4% 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
million for fiscal year 1997, compared to the average balance of $583.8 million
during fiscal year 1996. Interest income from loans receivable, increased $14.2
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 balance of loans
receivable, offset by a 35 basis point decrease in yield. Additionally, 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 conversion. The
increase in total interest income was offset partially by a decrease 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.
27
<PAGE> 18
INTEREST EXPENSE
Interest expense for fiscal year 1997 amounted to $38.5 million, an
increase of $12.2 million, from fiscal year 1996 total of $26.3 million, an
increase of 46.4%. 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 investments, and mortgage-backed securities. The average cost of
interest-bearing 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 at the banking offices. 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
interest 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 review 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 necessary 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 assurances 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.
NON-INTEREST INCOME
Non-interest income decreased $178,000, or 3.9% from $4.6 million for
fiscal year 1996 to $4.4 million for fiscal year 1997. Non-interest income
consists of loan servicing income, gains and losses on the sale of mortgages,
and other non-interest income. Other non-interest income for fiscal year 1997
decreased to $2.1 million from $2.8 million for fiscal year 1996. This decline
in other non-interest income primarily reflects the reversal of a reserve during
fiscal year 1996 which increased non-interest 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 non-interest 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,
28
<PAGE> 19
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.
NON-INTEREST EXPENSE
Total non-interest expense increased to $27.3 million for fiscal year 1997
compared to $13.7 million for fiscal year 1996. The increase in non-interest
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
impact 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,
compensation and employee benefits expense increased $1.3 million due to the
implementation of 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
employee benefits expense increased to $8.6 million for fiscal year 1997
compared to $7.4 million for fiscal year 1996, an increase of $1.2 million, or
16.2%. 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
occupancy 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 subsequent 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 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 assessment risk
classification for its particular portion of the financial 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 increases. 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 accounting, 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, expects in the future to establish a
trust department, and is presently in the process of evaluating its present data
processing provider. These activities will result in further increases in the
Company's non-interest expense in the future and on an ongoing basis.
INCOME TAXES
Income tax benefit was $449,000 for fiscal year 1997 (resulting in an
effective tax benefit 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 contribution of $6.5 million.
For state income tax purposes, the Company did not receive 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 ESOP shares allocated.
IMPACT OF NEW ACCOUNTING STANDARDS
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 stockholders. Net income is a component of comprehensive
29
<PAGE> 20
income, with all other components referred to in the aggregate as other
comprehensive income. This statement is effective for 1998 financial statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes 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 the 1998 annual financial statements.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (an amendment of SFAS No. 87,
88 and 106). The statement standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable. This statement is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 is not expected to have a material impact on the consolidated
financial statements.
30
<PAGE> 21
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, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the
results of their operations and cash flows for each of the years in the
three-year period ended March 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
--------------------------
Boston, Massachusetts
April 30, 1998
F-1
<PAGE> 22
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- -------
<S> <C> <C>
ASSETS
Cash on hand and due from banks............................. $ 32,021 14,130
Short-term investments...................................... -- 39,410
Mortgage loans held for sale................................ 84,867 23,331
Investment securities available for sale (amortized cost of
$5,816 and $5) (note 4)................................... 7,712 888
Mortgage-backed securities available for sale (amortized
cost of $214,225 and $32,059) (note 4 and 10)............. 215,143 31,732
Investment securities held to maturity (fair value of
$22,585 and $20,958) (note 5)............................. 22,491 20,991
Mortgage-backed securities held to maturity (fair value of
$12,688 and $15,578) (note 5)............................. 12,495 15,435
Stock in Federal Home Loan Bank of Boston, at cost (notes 5
and 10)................................................... 17,945 9,531
Loans receivable, net of allowance for loan losses of
$10,937 and $8,788 (notes 6 and 10)....................... 848,552 796,355
Accrued interest receivable................................. 5,992 4,722
Mortgage servicing rights (note 7).......................... 3,230 1,630
Office properties and equipment, net (note 8)............... 24,877 14,215
Real estate owned, net...................................... 595 665
Deferred income tax asset, net (note 13).................... 3,278 4,511
Income tax receivable (note 13)............................. -- 263
Prepaid expenses and other assets........................... 2,634 1,927
---------- -------
Total assets...................................... $1,281,832 979,736
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9)......................................... $ 708,488 723,976
FHLB advances and other borrowings (note 10).............. 403,865 111,062
Advance payments by borrowers for taxes and insurance..... 6,224 5,580
Accrued interest payable.................................. 2,613 717
Accrued income taxes (note 13)............................ 929 --
Other liabilities......................................... 32,727 16,247
---------- -------
Total liabilities................................. 1,154,846 857,582
---------- -------
Commitments and contingencies (notes 3, 6, 8, 10, 11, 13 and
15)
Stockholders' equity (notes 2 and 3):
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................................ 85,016 84,334
Retained earnings (notes 2 and 3)......................... 50,422 43,603
Unrealized gain on investments available for sale, net of
tax (note 4)........................................... 1,616 326
Unearned 1997 stock-based incentive plan (note 14)........ (4,734) --
Unallocated ESOP shares (note 14)......................... (5,421) (6,196)
---------- -------
Total stockholders' equity........................ 126,986 122,154
---------- -------
Total liabilities and stockholders' equity........ $1,281,832 979,736
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 23
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Interest and dividend income:
Loans..................................................... $67,493 57,941 43,757
Investment securities..................................... 2,033 2,805 1,519
Mortgage-backed securities................................ 6,608 958 321
Federal Home Loan Bank stock.............................. 756 555 447
------- ------ ------
Total interest and dividend income................ 76,890 62,259 46,044
------- ------ ------
Interest expense:
Deposits (note 9)......................................... 33,034 30,277 23,131
Borrowed funds............................................ 13,495 8,220 3,251
------- ------ ------
Total interest expense............................ 46,529 38,497 26,382
------- ------ ------
Net interest income before provision for loan
losses.......................................... 30,361 23,762 19,662
Provision for loan losses (note 6).......................... 2,350 3,750 2,626
------- ------ ------
Net interest income after provision for loan
losses.......................................... 28,011 20,012 17,036
------- ------ ------
Non-interest income:
Loan servicing income..................................... 2,354 2,760 2,628
Gain (loss) on sale of mortgage loans, net (note 7)....... 1,493 (478) (841)
Gain on sale of investments securities available for
sale................................................... 163 51 --
Other income.............................................. 2,343 2,081 2,805
------- ------ ------
Total non-interest income......................... 6,353 4,414 4,592
------- ------ ------
Non-interest expense:
Compensation and employee benefits (note 14).............. 13,290 9,933 7,366
Office occupancy and equipment............................ 2,927 2,005 1,504
Advertising and business promotion........................ 1,023 1,080 916
Federal deposit insurance premiums........................ 514 1,014 1,044
SAIF special assessment (note 3).......................... -- 2,880 --
Contribution to The FIRSTFED Charitable Foundation (note
2)..................................................... -- 6,454 --
Data processing........................................... 717 719 570
Other..................................................... 3,788 3,220 2,272
------- ------ ------
Total non-interest expenses....................... 22,259 27,305 13,672
------- ------ ------
Income (loss) before income tax expense........... 12,105 (2,879) 7,956
Income tax expense (benefit) (note 13)...................... 5,286 (449) 3,353
------- ------ ------
Net income (loss)................................. $ 6,819 (2,430) 4,603
======= ====== ======
Basic earnings per share.................................... $ 0.84 NM NM
======= ====== ======
Diluted earnings per share.................................. $ 0.84 NM NM
======= ====== ======
Weighted average shares outstanding -- basic................ 8,131 NM NM
======= ====== ======
Weighted average shares outstanding -- diluted.............. 8,138 NM NM
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 24
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
SHARES OF ADDITIONAL INVESTMENTS UNALLOCATED
PREFERRED COMMON COMMON PAID-IN RETAINED AVAILABLE ESOP
STOCK STOCK STOCK CAPITAL EARNINGS FOR SALE, NET SHARES
--------- --------- ------ ---------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995............. -- -- $-- -- 41,430 267 --
Net income.......................... -- -- -- -- 4,603 -- --
Change in net unrealized gain on
investments available for sale,
net of taxes...................... -- -- -- -- -- 118 --
-------- ----- --- ------ ------ ----- ------
Balance at March 31, 1996............. -- -- -- -- 46,033 385 --
Stock issued pursuant to initial
common stock offering............. -- 8,062 81 77,510 -- -- --
Issuance of 645,380 shares of common
stock to the FIRSTFED Charitable
Foundation charged to expense..... -- 645 6 6,448 -- -- --
Common stock acquired by ESOP....... -- -- -- -- -- -- (6,970)
Earned ESOP shares charged to
expense........................... -- -- -- 376 -- -- 774
Change in net unrealized gain on
investments available for sale,
net............................... -- -- -- -- -- (59) --
Net loss............................ -- -- -- -- (2,430) -- --
-------- ----- --- ------ ------ ----- ------
Balance at March 31, 1997............. -- 8,707 87 84,334 43,603 326 (6,196)
Common stock acquired for SIP....... -- -- -- -- -- -- --
Earned ESOP shares charged to
expense........................... -- -- -- 682 -- -- 775
Change in net unrealized gain on
investments available for sale,
net............................... -- -- -- -- -- 1,290 --
Net income.......................... -- -- -- -- 6,819 -- --
-------- ----- --- ------ ------ ----- ------
Balance at March 31, 1998............. -- 8,707 $87 85,016 50,422 1,616 (5,421)
======== ===== === ====== ====== ===== ======
<CAPTION>
UNALLOCATED
1997
STOCK-
BASED
INCENTIVE TOTAL
PLAN (SIP) STOCKHOLDERS'
SHARES EQUITY
----------- -------------
<S> <C> <C>
Balance at March 31, 1995............. -- 41,697
Net income.......................... -- 4,603
Change in net unrealized gain on
investments available for sale,
net of taxes...................... -- 118
------ -------
Balance at March 31, 1996............. -- 46,418
Stock issued pursuant to initial
common stock offering............. -- 77,591
Issuance of 645,380 shares of common
stock to the FIRSTFED Charitable
Foundation charged to expense..... -- 6,454
Common stock acquired by ESOP....... -- (6,970)
Earned ESOP shares charged to
expense........................... -- 1,150
Change in net unrealized gain on
investments available for sale,
net............................... -- (59)
Net loss............................ -- (2,430)
------ -------
Balance at March 31, 1997............. -- 122,154
Common stock acquired for SIP....... (4,734) (4,734)
Earned ESOP shares charged to
expense........................... -- 1,457
Change in net unrealized gain on
investments available for sale,
net............................... -- 1,290
Net income.......................... -- 6,819
------ -------
Balance at March 31, 1998............. (4,734) 126,986
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 25
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 6,819 (2,430) 4,603
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 (discount) on investment and mortgage-backed
securities held to maturity........................ (4) (9) 2
Premium (discount) on investment and mortgage-backed
securities available for sale...................... 43 2 --
Deferred loan origination fees........................ 322 175 (626)
Mortgage servicing rights............................. 782 150 --
Provisions for:
Loan losses........................................... 2,350 3,750 2,626
Deferred income taxes................................. 264 (2,496) (710)
(Gains) losses on sales of:
Office property and equipment......................... (18) -- --
Real estate owned..................................... (93) (59) (1)
Mortgage loans........................................ (1,493) 478 841
Investment securities available-for-sale.............. (163) (51) --
Net proceeds from sales of mortgage loans............... 265,221 215,333 183,366
Origination of mortgage loans held for sale............. (327,642) (223,175) (195,138)
Real estate owned valuation write-downs................. 240 186 65
Depreciation of office properties and equipment......... 1,692 967 671
Appreciation in fair value of ESOP shares............... 682 376 --
Increase or decrease in:
Accrued interest receivable........................... (1,270) (1,011) (847)
Income tax receivable................................. 263 (263) (145)
Prepaid expenses and other assets..................... (707) (204) (226)
Accrued interest payable.............................. 1,896 413 (97)
Accrued income taxes and other liabilities............ 17,409 2,455 6,172
--------- --------- ---------
Net cash (used in) provided by operating
activities....................................... (33,407) 1,041 556
--------- --------- ---------
Cash flows from investing activities:
Purchase of investment securities available for sale...... $ (6,159) -- --
Purchase of mortgage-backed securities
available-for-sale...................................... (201,533) (32,061) --
Payments received on mortgage-backed securities available
for sale................................................ 19,322 -- --
Proceeds from sale of investment securities available for
sale.................................................... 511 101 --
Purchases of investment securities held to maturity....... (11,990) (10,991) (10,001)
Payments received on mortgage-backed securities held to
maturity................................................ 2,934 1,805 433
Purchases of mortgage-backed securities held to
maturity................................................ -- (9,996) (4,960)
Purchase of the Federal Home Loan Bank Stock.............. (8,414) (2,901) --
Maturities of investment securities held to maturity...... 10,500 14,000 7,000
Net increase in loans..................................... (56,282) (163,525) (140,430)
Proceeds from sale of office equipment.................... 30 -- --
Proceeds from sales of real estate owned.................. 1,336 688 404
Purchases of office properties and equipment.............. (12,367) (6,853) (2,560)
--------- --------- ---------
Net cash used in investing activities.............. (262,112) (209,733) (150,114)
--------- --------- ---------
</TABLE>
F-5
<PAGE> 26
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits....................... $ (15,488) 140,226 143,643
Proceeds FHLB advances and other borrowings............... 763,127 543,817 297,905
Repayments on FHLB advances and other borrowings.......... (470,324) (507,896) (289,356)
Net change in advance payments by borrowers for taxes and
insurance............................................... 644 1,413 752
Net proceeds from common stock issued pursuant to initial
public offering......................................... -- 77,591 --
Payments to acquire stock-based incentive plan shares..... (4,734) -- --
Payments to acquire common stock for ESOP................. -- (6,970) --
Reduction in unearned ESOP shares......................... 775 774 --
--------- --------- ---------
Net cash provided by financing activities.......... 274,000 248,955 152,944
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (21,519) 40,263 3,386
Cash and cash equivalents at beginning of year.............. 53,540 13,277 9,891
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 32,021 53,540 13,277
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 44,633 38,084 26,505
========= ========= =========
Income taxes............................................ $ 3,830 3,227 4,325
========= ========= =========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans.................. $ 1,413 837 815
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 27
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997 AND 1996
(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 Bank and the Company are subject to regulations
of, and periodic examinations by, the Office of Thrift Supervision ("OTS") and
the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") of the FDIC up to
$100. 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 Company
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 Corp., an inactive company.
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 $6,962 at March 31, 1998.
F-7
<PAGE> 28
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 being resold in the near term are classified as trading and reported
at fair value, with unrealized 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 (loss) on
sale of investment securities. Gains and losses on the sale of investment and
mortgage-backed securities are recognized at the time of sale on a specific
identification basis.
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, unamortized loan origination fees and costs, and mortgage servicing
rights. Generally, all longer term (typically mortgage loans with terms of at
least fifteen years) fixed-rate residential single-family mortgage loans are
originated for sale and shorter term fixed rate and adjustable-rate loans are
originated for portfolio.
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 probable that the Bank will
not 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.
F-8
<PAGE> 29
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 expedient 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, the OTS and FDIC
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 mortgage servicing fees and considering estimated
loan prepayments; and (3) any origination fees, net of applicable origination
costs, retained by the Bank.
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.
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 reduced 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-9
<PAGE> 30
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 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 continues to follow APB Opinion No. 25,
Accounting for Stock Issued to Employees. However, the Company provides expanded
disclosures of pro-forma net income and earnings per share and other disclosure
information in Note 14 to the consolidated financial statements as if the fair
value method had been applied.
Earnings Per Share
The Company adopted SFAS No. 128, Earnings per Share, during fiscal 1998.
This Statement specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS"). SFAS No. 128 simplifies the
standards for computing EPS previously found in APB Opinion No. 15 and makes
them
F-10
<PAGE> 31
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comparable to international EPS standards. The Statement replaces the
presentation of primary EPS with basic EPS, requires dual presentation of basic
and diluted EPS on the face of the statement of operations, and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
The adoption of this pronouncement also requires restatement of all prior
year EPS data presented. 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 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.
Basic EPS is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year adjusted for the weighted
average number of unallocated shares held by the Employee Stock Ownership Plan
("ESOP") and the unearned shares relating to the 1997 Stock-Based Incentive Plan
("SIP"). Diluted EPS reflects the effect to weighted average shares outstanding
of the number of additional shares outstanding if dilutive stock options and
dilutive SIP shares were converted into common stock using the treasury stock
method.
A reconciliation of the weighted average shares outstanding for the year
ended March 31, 1998 follows (in thousands):
<TABLE>
<CAPTION>
1998
-----
<S> <C>
Basic shares................................................ 8,131
Dilutive impact of stock options............................ 6
Dilutive impact of SIP shares............................... 1
-----
Diluted shares.............................................. 8,138
=====
</TABLE>
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. Statement
FAS 125 did not have a material impact on the consolidated financial statements.
The adoption of SFAS No. 127 is not expected to have a material impact on the
consolidated financial statements.
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 stockholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. This statement is effective for 1999 financial statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes 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
F-11
<PAGE> 32
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 the 1999 annual financial
statements.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (an amendment of SFAS No. 87,
88 and 106). The statement standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable. This statement is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 is not expected to have a material impact on the consolidated
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 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 $25.2 million (unaudited) at March 31,
1998.
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, 1998, there
were no shares of preferred stock issued.
F-12
<PAGE> 33
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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). As of March 31,
1998, the Bank meets all capital adequacy requirements to which it is subject.
As of August 21, 1997, the most recent notification from the OTS
categorized the Bank as "well capitalized" by regulatory definition. To be
categorized as "well capitalized" the Bank must maintain minimum total
risk-based, core, tangible, and Tier 1 risk-based capital ratios as set forth in
the table. As of March 31, 1998, the Bank is categorized as "well capitalized"
based on its ratios of risk-based, core, tangible, and Tier 1 risk-based
capital. There are no conditions or events since that notification that
management believes have changed the Bank's category.
The Bank's actual and required capital amounts and ratios are presented in
the 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, 1998:
Risk-based capital................. $115,998 18.35% $50,581 8.0% $63,226 10.0%
Core capital....................... 108,124 8.54 50,659 4.0 63,324 5.0
Tangible capital................... 108,124 8.54 25,330 2.0 63,324 5.0
Tier 1 risk-based.................. 108,124 17.10 25,290 4.0 37,935 6.0
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
</TABLE>
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the FDIC. On September 30, 1996, the President 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.
F-13
<PAGE> 34
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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, 1998
----------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Investment securities:
Marketable equity
securities.............. $ 1,815 1,888 (2) 3,701
Government obligations due
within one year......... 5.7% 4,001 10 -- 4,011
--- -------- ----- ---- -------
Total investment
securities available
for sale.............. $ 5,816 1,898 (2) 7,712
======== ===== ==== =======
Mortgage-backed securities
due:
FHLMC
Less than five years.... 7.0% $ 9,391 80 -- 9,471
--- -------- ----- ---- -------
FNMA
After five years but
within ten years...... 7.0 30,551 389 -- 30,940
After ten years......... 6.0 88,414 49 (241) 88,222
--- -------- ----- ---- -------
6.3 118,965 438 (241) 119,162
--- -------- ----- ---- -------
GNMA
Less than five years.... 6.0 14,694 155 -- 14,849
After ten years......... 5.4 71,175 487 (1) 71,661
--- -------- ----- ---- -------
5.5 85,869 642 (1) 86,510
--- -------- ----- ---- -------
Total mortgage-backed
securities available
for sale.............. 6.0% $214,225 1,160 (242) 215,143
=== ======== ===== ==== =======
</TABLE>
<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
securities.............. $ 5 883 -- 888
======== ===== ==== =======
Mortgage-backed securities
due:
FHLMC
After five years but
within ten years...... 7.0% 11,859 -- (107) 11,752
--- -------- ----- ---- -------
FNMA
After five years but
within ten years...... 7.0% 20,200 -- (220) 19,980
--- -------- ----- ---- -------
Total mortgage-backed
securities available
for sale.............. 7.0% $ 32,059 -- (327) 31,732
=== ======== ===== ==== =======
</TABLE>
F-14
<PAGE> 35
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the years ended March 31, 1998 and 1997, realized gains on
investment securities available for sale were $163 and $51, respectively.
Proceeds from the sale of investment securities available for sale during 1998
and 1997 amounted to $511 and $101, respectively. There were no sales of
investment securities available for sale for the year ended March 31, 1996.
Adjustable-rate mortgage-backed securities available for sale had total
amortized costs and fair values of $183,674 and $184,203, respectively, at March
31, 1998 and $11,860 and $11,752, respectively, at March 31, 1997.
Included in mortgage-backed securities available for sale are two
collateralized mortgage obligations with a total amortized cost and a fair value
of $29,369 and $29,276, respectively, at March 31, 1998.
(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, 1998
---------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
United States Government and
related obligations due:
Within one year............. 6.1% $12,500 29 -- 12,529
After one year but within
five years............... 6.1 9,991 65 -- 10,056
--- ------- -- --- ------
Total investment
securities held to
maturity............... 6.1% $22,491 94 -- 22,585
=== ======= == === ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE 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
securities held to
maturity............... 5.9% $20,991 8 (41) 20,958
=== ======= == === ======
</TABLE>
F-15
<PAGE> 36
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, 1998
--------------------------------------------------------
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% $ 149 7 -- 156
After ten years.......................... 6.6 11,075 110 -- 11,185
--- ------- --- -- -------
6.6 11,224 117 -- 11,341
--- ------- --- -- -------
GNMA due:
Less than five years..................... 8.0 21 -- (1) 20
After five years but within ten years.... 8.1 497 21 (1) 517
After ten years.......................... 9.1 753 57 -- 810
--- ------- --- -- -------
8.7 1,271 78 (2) 1,347
--- ------- --- -- -------
Total mortgage-backed securities held
to maturity......................... 6.8% $12,495 195 (2) 12,688
=== ======= === == =======
</TABLE>
<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
=== ======= === == =======
</TABLE>
Adjustable-rate mortgage-backed securities held to maturity had total
amortized costs and fair values of $10,993 and $11,094, respectively, at March
31, 1998 and $13,482 and $13,536, respectively, at March 31, 1997.
Maturities of mortgage-backed securities are based on contractual
maturities with scheduled amortization. Actual maturities will differ from
contractual maturities due to prepayments.
GNMA mortgage-backed securities with a book value of approximately $1,119
and $1,416 were pledged as collateral for certain deposits in the "Deposit
Collateralization Bailee Program" at the Federal Home Loan Bank of Boston at
March 31, 1998 and 1997, respectively.
As a member of the Federal Home Loan Bank ("FHLB") system, the Company is
required to maintain a minimum investment in FHLB stock. The current investment
exceeds the required level at March 31, 1998.
F-16
<PAGE> 37
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Any excess may be redeemed by the Company or called by the FHLB at par. At its
discretion, the FHLB may declare dividends on this stock.
(6) LOANS RECEIVABLE (DOLLARS IN THOUSANDS)
The Company's lending activities are conducted principally in
Massachusetts, Rhode Island, and to a lesser degree in Connecticut. The Company
grants single and multifamily residential loans, commercial real estate loans,
commercial loans and a variety of consumer loans. In addition, the Company
grants loans for the construction of residential homes, multifamily properties
and 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>
1998 1997
-------- -------
<S> <C> <C>
Mortgage loans:
Residential 1-4 family.................................... $691,675 666,942
Multi-family.............................................. 3,899 4,416
Commercial real estate.................................... 45,723 33,057
Construction and land..................................... 27,145 23,919
-------- -------
Total mortgage loans................................... 768,442 728,334
-------- -------
Commercial loans............................................ 26,689 20,062
-------- -------
Consumer loans and other loans:
Home equity lines......................................... 26,252 25,021
Second mortgages.......................................... 38,862 32,122
Other consumer loans...................................... 7,828 6,985
-------- -------
Total consumer loans................................... 72,942 64,128
-------- -------
Total loans receivable................................. 868,073 812,524
-------- -------
Less:
Allowance for loan losses................................. (10,937) (8,788)
Undisbursed proceeds of construction mortgages in
process................................................ (7,164) (5,274)
Deferred loan origination fees, net....................... (1,420) (2,107)
-------- -------
(19,521) (16,169)
-------- -------
Loans receivable, net.................................. $848,552 796,355
======== =======
</TABLE>
Included in residential mortgage loans and construction and land loans at
March 31, 1998 and 1997, respectively were $371,123 and $351,771 of loans at
variable interest rates.
The weighted average interest rate on the mortgage loan portfolio was
approximately 7.44% at March 31, 1998 compared with 7.45% at March 31, 1997.
Loans serviced for others approximated $1,280,000, $1,192,000 and
$1,086,000 at March 31, 1998, 1997 and 1996, respectively.
F-17
<PAGE> 38
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loans placed on nonaccrual status totaled approximately $3,048 and $3,662
at March 31, 1998 and 1997, respectively.
The following table summarizes information regarding the reduction of
interest income on nonaccrual loans for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income in accordance with original items.................... $261 337 358
Income recognized........................................... 198 207 234
---- --- ---
Foregone interest income during year........................ $ 63 130 124
==== === ===
</TABLE>
At March 31, 1998, there were no commitments to lend additional funds to
those borrowers whose loans were classified as impaired or nonaccrual.
At March 31, 1998 and 1997, total impaired loans were $1,469 and $1,464,
respectively. At March 31, 1998 and 1997, impaired loans of $1,469 and $1,300
required impairment allowances of $812 and $762, respectively. At March 31,
1997, impaired loans of $164 did not require an impairment allowance. All
impaired loans have been measured using the fair value of the collateral method.
The average recorded value of impaired loans was $1,462 during 1998 and $1,021
in 1997. The Company follows the same policy for recognition of income on
impaired loans as it does for all other loans. Impaired loans of $986 and $976
were on nonaccrual at March 31, 1998 and 1997, respectively.
The following table summarizes information regarding the reduction of
interest income on impaired loans for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original terms.................... $228 232 195
Income recognized........................................... 120 112 128
---- --- ---
Foregone interest income during the year.................... $108 120 67
==== === ===
</TABLE>
An analysis of the allowance for loan losses for the years ended March 31
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ----- ------
<S> <C> <C> <C>
Balance at beginning of year............................. $ 8,788 5,607 4,239
Provision for loan losses.............................. 2,350 3,750 2,626
Charge-offs............................................ (212) (637) (1,288)
Recoveries............................................. 11 68 30
------- ----- ------
Balance at end of year................................... $10,937 8,788 5,607
======= ===== ======
</TABLE>
In the ordinary course of business, the Company makes loans to its
directors, executive officers, and their related interests, at the same
prevailing terms as those of other borrowers. The following is a summary of
related party loan activity for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 749 778 796
Originations.............................................. 271 169 182
Payments.................................................. (192) (198) (200)
----- ---- ----
Balance, end of year........................................ $ 828 749 778
===== ==== ====
</TABLE>
F-18
<PAGE> 39
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 $178 and $189 at March 31, 1998 and 1997,
respectively.
Loans with a book value of $6,589 were pledged as collateral for the
"Deposit Collateralization Bailee Program" with the Federal Home Loan Bank of
Boston at March 31, 1998.
(7) SALE OF MORTGAGE LOANS (DOLLARS IN THOUSANDS)
The following summarizes mortgage loan sales and the components of gain or
(loss) on sale of mortgage loans for the years ended March 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Gain (loss) on sale of mortgage loans:
Cash proceeds from sales of loans............... $ 265,297 215,479 183,323
Buy-up (buy-down) fees paid (received), net..... (76) (146) 43
--------- -------- --------
Net cash proceeds from sales of loans........ 265,221 215,333 183,366
Principal balance of loans sold................. (266,767) (217,689) (183,571)
Deferred origination (costs) fees recognized at
time of sale................................. 340 425 (422)
Change in unrealized loss on mortgage loans held
for sale..................................... 318 (327) (214)
Capitalized mortgage servicing rights........... 2,381 1,780 --
--------- -------- --------
Gain (loss) on sale of mortgage loans, net... $ 1,493 (478) (841)
========= ======== ========
</TABLE>
A summary of the activity of the mortgage servicing rights for the years
ended March 31:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Beginning balance........................................... $1,630 --
Capitalized mortgage servicing rights....................... 2,381 1,780
Amortization................................................ (781) (150)
------ -----
Balance at March 31......................................... $3,230 1,630
====== =====
</TABLE>
The Company has determined that the fair value of mortgage servicing rights
at March 31, 1998 is less than their carrying amount. Therefore, a valuation
allowance of $203 for the mortgage servicing rights was established at March 31,
1998.
(8) OFFICE PROPERTIES AND EQUIPMENT (DOLLARS IN THOUSANDS)
Office properties and equipment consist of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Land........................................................ $ 1,389 1,384
Office building and improvements............................ 16,078 7,371
Furniture, fixtures and equipment........................... 9,630 6,174
Construction in progress.................................... 3,233 4,803
------- ------
30,330 19,732
Less accumulated depreciation............................... (5,453) (5,517)
------- ------
$24,877 14,215
======= ======
</TABLE>
F-19
<PAGE> 40
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Construction in progress at March 31, 1998 represents costs incurred for
the construction of new banking offices in Cranston, RI, New Bedford, MA,
renovation of the Company's main banking office in Fall River, MA, and
expenditures for computer equipment related to a data processing conversion.
The Company leases certain office space under various non-cancelable
operating leases. A summary of future minimum rental payments under such leases
at March 31, 1998 follows:
<TABLE>
<CAPTION>
YEAR ENDING MINIMUM RENTAL
MARCH 31, EXPENSE
- ----------- --------------
<S> <C>
1999............................................ $110
2000............................................ 87
2001............................................ 32
2002............................................ 28
2003............................................ 28
After 2003...................................... 380
</TABLE>
Rent expense was $189, $197 and $182 for the years ended March 31, 1998,
1997 and 1996, respectively.
(9) DEPOSITS (DOLLARS IN THOUSANDS)
Deposits at March 31 are as follows:
<TABLE>
<CAPTION>
WEIGHTED 1998 1997
AVERAGE ----------------- -----------------
RATES AMOUNT % AMOUNT %
---------- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Money market.......................... (2.71;2.83) $ 32,738 4.6% $ 29,411 4.0%
Business checking..................... ( -- ; --) 62,470 8.8 41,276 5.7
Savings............................... (2.25;2.50) 89,818 12.7 86,594 12.0
NOW................................... (1.26;1.98) 48,925 6.9 41,881 5.8
-------- ----- -------- -----
233,951 33.0 199,162 27.5
-------- ----- -------- -----
Certificates:
Six months to one year.............. (5.43;5.68) 203,202 28.7 249,461 34.5
Over one year....................... (6.07;6.15) 161,379 22.8 167,326 23.1
Jumbo............................... (5.54;5.51) 9,045 1.3 9,043 1.2
IRA & Keogh......................... (5.83;5.91) 86,503 12.2 83,872 11.6
Business statement.................. (4.80;5.01) 618 0.1 1,329 0.2
7-91 day............................ (4.91;4.86) 13,790 1.9 13,783 1.9
-------- ----- -------- -----
Total certificate accounts........ 474,537 67.0 524,814 72.5
-------- ----- -------- -----
$708,488 100.0% $723,976 100.0%
======== ===== ======== =====
Weighted average stated interest rate
of deposits......................... (4.32;4.76)
</TABLE>
The remaining contractual maturities of certificate accounts at March 31
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
AMOUNT % AMOUNT %
-------- ----- ------- -----
<S> <C> <C> <C> <C>
Within twelve months................................ $375,393 79.1% 370,634 70.6%
Thirteen months to thirty-six months................ 86,324 18.2 138,070 26.3
Beyond thirty-six months............................ 12,820 2.7 16,110 3.1
-------- ----- ------- -----
$474,537 100.0% 524,814 100.0%
======== ===== ======= =====
</TABLE>
Certificates of deposit in denominations of $100 or more totaled
approximately $57,137 and $57,306 at March 31, 1998 and 1997, respectively.
F-20
<PAGE> 41
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, the Company accepts deposits from
brokerage companies on behalf of their clients. These monies are invested in
certificates of deposit. Brokered deposits amounted to $1,285 and $1,966 at
March 31, 1998 and 1997, respectively.
Interest expense on deposits consisted of the following for the years ended
March 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Money market.............................................. $ 883 828 783
Regular and club.......................................... 2,094 2,061 1,915
NOW....................................................... 801 763 599
Certificates.............................................. 29,256 26,625 19,834
------- ------ ------
$33,034 30,277 23,131
======= ====== ======
</TABLE>
(10) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (DOLLARS IN
THOUSANDS)
At March 31, 1998 and 1997, advances from the Federal Home Loan Bank of
Boston ("FHLB") with a weighted average interest rate of 5.87% and 6.13%,
respectively, mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31, 1998 1997
- ----------- -------- -------
<S> <C> <C>
1998...................................................... $ -- 46,000
1999...................................................... 181,483 32,700
2000...................................................... 43,314 31,314
2001...................................................... 35,768 1,000
2002...................................................... 19,909 --
After 2002................................................ 76,141 48
-------- -------
$356,615 111,062
======== =======
</TABLE>
Of the $181,483 maturing before March 31, 1999, $10,000 has an adjustable
rate that reprices monthly based on the one month London Inter-Bank Offer Rate
("LIBOR").
Of the $76,141 maturing after March 31, 2002, $30,000 has a one time put
option exercisable by the FHLB on November 8, 1999, and $8,800 has a put option
exercisable by the FHLB on January 9, 1999, and every three months thereafter.
In accordance with the Federal Home Loan Bank of Boston's collateral
requirements, a portion of first mortgage loans on residential property and all
otherwise unencumbered deposits and securities issued, insured or guaranteed by
the United States government or an agency thereof, are pledged as collateral to
secure such advances.
The Company has a $25 million secured line of credit available and
additional borrowing capacity of $283.7 million with the FHLB at March 31, 1998.
The Company also had $47.3 million of other borrowings primarily consisting
of reverse repurchase agreements with securities dealers that were
collateralized by mortgage-backed securities. The following table shows
information pertaining to these agreements for the years ended March 31:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Reverse repurchase agreements............................... $47,000
Book value of MBS collateral................................ 47,263
Fair value of MBS collateral................................ 47,647
Maximum amount outstanding at any month end................. 47,000
Average amount outstanding during the year.................. 10,154
</TABLE>
F-21
<PAGE> 42
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average rate of the agreements at March 31, 1998 was 5.57% and
the average cost for fiscal year 1998 was 5.63%. Of the $47,000 remaining at
March 31, 1998, $19,000 is scheduled to mature in June, 1998 and $28,000 is
scheduled to mature in February of 1999. The collateral for the agreements
consists of mortgage-backed securities that are under the control of the
Company.
(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 Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage interest-rate risk exposure. These financial instruments primarily
include commitments to originate and sell loans, unadvanced lines of credit, and
interest rate swap agreements. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheet. The contract amounts of those instruments
reflect the extent of the Company's involvement in these particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and unadvanced
lines of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Financial instruments whose contract amount represents
credit risk:
Commitments to originate loans to be sold................. $60,941 18,079
Commitments to originate loans to be held in portfolio.... 19,527 35,430
Unadvanced home equity lines of credit.................... 32,480 24,958
Unadvanced commercial lines of credit..................... 9,815 9,416
Unadvanced residential construction loans................. 7,164 5,274
Financial instruments whose contractual amount exceeds the
amount of credit risk:
Commitments to sell residential mortgage loans............ 119,454 17,158
Financial instruments whose notional amount exceeds the
amount of credit risk:
Interest rate swap agreements............................. 50,000 --
</TABLE>
At March 31, 1998 and 1997, commitments to originate loans to be sold with
maturities ranging from 15 years to 30 years had interest rates ranging from
5.99% to 8.25% and 6.25% to 8.75%, 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
F-22
<PAGE> 43
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the borrower.
The Company also enters into contracts to sell mortgage loans in the
secondary market. Risks arise from the possible inability of the Company to
originate loans to fulfill these contracts, in which case the Company would
normally purchase loans or securities in the open market to deliver against
these contracts. All loans are sold without recourse.
In addition, the Company uses interest rate swap agreements as part of its
interest-rate risk management strategy. Swaps are agreements in which the
Company agrees with another party to exchange interest payments (e.g. fixed-rate
for floating-rate payments) computed on a notional amount. The credit risk
associated with swap agreements is the risk of default by the counterparty. To
minimize this risk, the Company enters into swap agreements only with highly
rated counterparties that management believes to be creditworthy. The notional
amounts of these agreements do not represent amounts exchanged by the parties
and, thus, are not a measure of the Company's potential loss exposure.
(13) INCOME TAXES (DOLLARS IN THOUSANDS)
Income tax expense for the years ended March 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Current income tax expense:
Federal income tax...................................... $3,359 1,414 2,861
State income tax........................................ 1,663 633 1,202
------ ------ -----
5,022 2,047 4,063
------ ------ -----
Deferred income tax (benefit) expense:
Federal income tax...................................... 317 (2,407) (586)
State income tax........................................ (53) (89) (124)
------ ------ -----
264 (2,496) (710)
------ ------ -----
Income tax expense (benefit).............................. $5,286 (449) 3,353
====== ====== =====
</TABLE>
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>
1998 1997 1996
---- ----- ----
<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......................... 8.8 (12.4) 8.9
Appreciation of stock contributed to ESOP................. 1.9 (4.4) --
Other, net................................................ (1.0) (1.6) (.8)
---- ----- ----
Effective income tax rate................................... 43.7% 15.6% 42.1%
==== ===== ====
</TABLE>
F-23
<PAGE> 44
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis of income taxes receivable (payable) at March
31:
<TABLE>
<CAPTION>
1998 1997
------- ----
<S> <C> <C>
Federal income taxes receivable (payable)................... $(1,227) (95)
State income taxes receivable (payable)..................... 298 358
------- ---
Total current receivable (payable), net................ $ (929) 263
======= ===
</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>
1998 1997
------ -----
<S> <C> <C>
Deferred tax assets:
Accrued interest income................................... $ 50 96
Write-down of equity investments.......................... -- 63
Deferred loan fees, net................................... 171 382
Accrued stock awards...................................... 764 --
Allowance for loan losses................................. 3,695 3,422
Contribution to the Foundation carryforward............... 1,701 2,145
Other..................................................... 12 --
------ -----
Gross deferred tax asset............................... 6,393 6,108
------ -----
Deferred tax liabilities:
Depreciation.............................................. 563 636
Mortgage servicing rights................................. 1,328 670
Other..................................................... 25 61
Unrealized gain on investments available for sale......... 1,199 230
------ -----
Gross deferred tax liability........................... 3,115 1,597
------ -----
Deferred income tax assets, net........................ $3,278 4,511
====== =====
</TABLE>
The net deferred federal income tax asset of $2,877 at March 31, 1998 is
supported by the potential recovery of taxes previously paid by the Company in
the carryback period. Since there is no carryback provision for state purposes,
management believes the existing net deductible temporary differences which give
rise to the net deferred state income tax asset of $401 will reverse during
periods in which the Company generates net taxable income.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the base year
reserve of approximately $7,398 remains subject to recapture in the event that
the Company pays dividends in excess of its earnings and profits or redeems its
stock.
(14) PENSION PLAN AND OTHER BENEFITS (DOLLARS IN THOUSANDS, EXCEPT PER 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 Company. 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.
F-24
<PAGE> 45
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company makes to the ESOP. The Company recorded a
charge to compensation and employee benefits expense of $1.3 million 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 Company'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, 1998, shares held in suspense to be released annually as the
loan is paid down amounted to 542,118. The fair value of unallocated ESOP shares
was $11,452 at March 31, 1998. Dividends on allocated ESOP shares are charged to
retained earnings, dividends on unallocated ESOP shares are charged to
compensation and employee benefits expense and ESOP shares committed-to-be
released are considered outstanding in determining earnings per share.
1997 Stock-Based Incentive Plan
On August 5, 1997, the Company's stockholders approved the 1997 Stock-Based
Incentive Plan ("SIP"). The objective of the SIP is to enable the Company to
provide officers, key employees and directors with a proprietary interest in the
Company as an incentive to encourage such persons to remain with the Company.
The SIP acquired 237,086 shares in the open market at an average price of $19.97
per share. This acquisition was recorded as unallocated SIP shares in
stockholders' equity.
Awards are granted in the form of common stock held by the SIP. During
fiscal year 1998, 330,007 shares were awarded on August 5, 1997. Awards
outstanding vest in five annual installments commencing one year from the date
of the award. As of March 31, 1998, 18,282 shares remain unallocated under the
SIP. A recipient will be entitled to all voting and other stockholder rights.
Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service period for the
portion of each award that vests equally over a five-year period. The company
recognized $1,859 in compensation expense during fiscal year 1998 for these
awards.
The SIP also authorizes the granting of options to purchase up to 870,715
shares of the common stock of the Company to officers, key employees and
directors. All options have been issued at not less than fair market value at
the date of the grant and expire in 10 years from the date of the grant. All
stock options vest and become fully exercisable after 5 years from the date of
grant.
During fiscal year 1998, the Company granted employees and directors
options to purchase 783,654 shares of common stock at $18.50 per share.
F-25
<PAGE> 46
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of option activity follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF REMAINING AVERAGE
SHARES CONTRACTUAL LIFE EXERCISE PRICE
--------- ---------------- --------------
<S> <C> <C> <C>
Balance at March 31, 1997.................... -- -- $ --
Granted...................................... 783,654 9.4 years 18.50
------- --------- ------
Balance at March 31, 1998.................... 783,654 9.4 years $18.50
======= ========= ======
Options exercisable.......................... -- -- $ --
======= ========= ======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS No. 123, the Company's
net income would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998
------
<S> <C>
Net income as reported...................................... $6,819
Pro forma net income........................................ 5,982
Basic earning per share as reported......................... 0.84
Diluted earnings per share as reported...................... 0.84
Pro forma basic earnings per share.......................... 0.74
Pro forma diluted earnings per share........................ 0.74
</TABLE>
The per share weighted average fair value of stock options granted during
1997 was $8.09, which was determined using the Black-Scholes option pricing
model, adjusted for the non-exercisable vesting window. The following
assumptions were inputs to the model:
<TABLE>
<S> <C>
Expected dividend yield..................................... 0.00%
Risk-free interest rate..................................... 5.64%
Expected volatility......................................... 20.56%
Expected life in years...................................... 7.4
</TABLE>
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 $79, $154 and $360 for
the years ended March 31, 1998, 1997 and 1996.
F-26
<PAGE> 47
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $76 over the average life
expectancy of the participants, which is 12 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
$212, $144 and $130 for the years ended March 31, 1998, 1997, and 1996,
respectively. At March 31, 1998, the Company holds restricted assets in a
irrevocable grantor's trust with a cost basis of $1,084 and a market value of
$1,395, which are included in other assets and offset by an accrued liability of
$1,084.
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, 1998, 1997 and 1996 were $157,
$110 and $104, respectively.
Executive Officer Employment Agreements
The Bank and the Company have entered into Employment Agreements with its
President and Chief Executive Officer and its four Senior Vice Presidents. The
agreements generally provide for the continued payment of specified compensation
and benefits for three years for the President and Chief Executive and for two
years for the Senior Vice Presidents and provide payments for the remaining term
of the agreement after the officers are terminated, unless the termination is
for "cause" as defined in the Employment Agreement. 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
executive upon the executives termination after a change in control, as defined
in their change in control agreements.
Employee Severance Compensation Plan
The Bank established the First Federal Savings Bank of America Employee
Severance Compensation Plan. The Plan provides eligible employees with severance
pay benefits in the event of a change in control of the Bank or Company.
Generally, employees are eligible to participate in the Plan if they have
completed at least one year of service with the Bank and are not eligible to
receive benefits under the executive officer employment agreements. The Plan
provides for the payment, under certain circumstances, of lump-sum amounts upon
termination following a change in control, as defined in the Plan.
F-27
<PAGE> 48
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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.
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.
F-28
<PAGE> 49
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Other Borrowings
Other borrowings consist primarily of reverse repurchase agreements with
securities dealers. The fair value of other borrowings are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on reverse repurchase agreements to a schedule of aggregated expected
monthly maturities on other borrowings.
Accrued Interest Payable
The fair value of accrued interest payable approximates its carrying amount
as reported in the balance sheet because of the short-term nature of these
financial instruments.
Interest Rate Swap Agreements
The fair value of the off-balance sheet interest rate swap agreements is
the net of the present values of the pay fixed/receive floating payments,
discounted at current swap rates for the appropriate remaining term of the
existing swaps.
Other Off-balance Sheet Instruments
Fair values for the Company's off-balance-sheet instruments are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the 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
F-29
<PAGE> 50
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The carrying amounts and fair values of the Company's financial instruments
at March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash on hand and due from banks............ $ 32,021 32,021 $ 14,130 14,130
Short-term investments..................... -- -- 39,410 39,410
Mortgage loans held for sale............... 84,867 84,867 23,331 23,331
Investment securities available for sale... 7,712 7,712 888 888
Mortgage-backed securities available for
sale.................................... 215,143 215,143 31,732 31,732
Investment securities held to maturity..... 22,491 22,585 20,991 20,958
Mortgage-backed securities held to
maturity................................ 12,495 12,688 15,435 15,578
Stock in FHLB of Boston.................... 17,945 17,945 9,531 9,531
Loans receivable, net...................... 848,552 850,214 796,355 789,824
Accrued interest receivable................ 5,992 5,992 4,722 4,722
Financial liabilities:
Deposits................................... $708,488 709,874 $723,976 725,139
FHLB advances and other borrowings......... 403,865 403,904 111,062 110,686
Advance payments by borrowers for taxes and
insurance............................... 6,224 6,224 5,580 5,580
Accrued interest payable................... 2,613 2,613 717 717
Off-balance sheet:
Interest rate swap agreements.............. -- (577) -- --
</TABLE>
F-30
<PAGE> 51
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and interest bearing deposit in subsidiary bank........ $ 7,754 17,467
-------- --------
Total cash and cash equivalents........................ 7,754 17,467
-------- --------
Investment securities available for sale (amortized cost of
$5,811)................................................... 6,390 --
Mortgage-backed securities available for sale (amortized
cost of $4,481)........................................... 4,480 --
Investment in subsidiaries, at equity....................... 112,657 102,880
Accrued interest receivable................................. 107 82
Deferred income tax asset................................... 1,616 2,145
-------- --------
Total assets........................................... $133,004 122,574
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued income taxes........................................ $ 1,026 18
Accrued expenses and other liabilities...................... 4,992 402
Total liabilities...................................... 6,018 420
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 issued and outstanding.......................... 87 87
Additional paid-in capital.................................. 85,016 84,334
Retained earnings........................................... 50,422 43,603
Unrealized gain on investments available for sale, net of
tax....................................................... 1,616 326
Unearned 1997 stock-based incentive plan.................... (4,734) --
Unallocated ESOP shares..................................... (5,421) (6,196)
-------- --------
Total stockholders' equity............................. 126,986 122,154
-------- --------
Total liabilities and stockholders' equity............. $133,004 122,574
======== ========
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<S> <C> <C>
Interest income............................................. $ 1,073 233
-------- --------
Total interest income.................................. 1,073 233
Gain on sale of securities.................................. 163 --
-------- --------
Total non-interest income.............................. 163 --
Contribution to The FIRSTFED Charitable Foundation.......... -- 6,454
Other non-interest expense.................................. 584 70
-------- --------
Total non-interest expense............................. 584 6,524
-------- --------
Income (loss) before income taxes...................... 652 (6,291)
Income tax expense (benefit)................................ 351 (2,125)
-------- --------
Income (loss) before equity in net income of
subsidiaries......................................... 301 (4,166)
Equity in net income of subsidiaries........................ 6,518 1,736
-------- --------
Net income (loss)........................................... $ 6,819 (2,430)
======== ========
</TABLE>
F-31
<PAGE> 52
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Net cash flows from operating activities:
Net income (loss)......................................... $ 6,819 (2,430)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Amortization of premiums on investments and
mortgage-backed securities available for sale..... 3 --
(Gain) on sales of investment securities available
for sale.......................................... (163) --
Contribution of shares to the Foundation............. -- 6,454
Equity in undistributed earnings of subsidiaries..... (6,518) (1,736)
Appreciation in fair value of ESOP shares............ 682 376
(Increase) in accrued interest receivable............ (25) (82)
(Increase) decrease in deferred federal taxes........ 265 (2,145)
Increase in accrued income taxes..................... 1,008 18
Increase in accrued expenses and other liabilities... 4,590 402
-------- -------
Net cash provided by operating activities......... 6,661 857
-------- -------
Cash flow from investing activities:
Purchase of investment securities available for sale...... (6,161) --
Purchase of mortgage-backed securities available for
sale................................................... (5,013) --
Principal paydowns on mortgage-backed securities available
for sale............................................... 530 --
Proceeds from sales of investment securities available for
sale................................................... 511 --
Change in investment in subsidiaries...................... (2,282) (54,785)
-------- -------
Net cash used in investing activities............. (12,415) (54,785)
-------- -------
Cash flow from financing activities:
Net proceeds from common stock issued pursuant to initial
public offering........................................ -- 77,591
Payments to acquire stock-based incentive plan shares..... (4,734) --
Payments to acquire common stock for ESOP................. -- (6,970)
Reduction in allocated ESOP shares........................ 775 774
-------- -------
Net cash provided (used) by financing
activities...................................... (3,959) 71,395
-------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (9,713) 17,467
Cash and cash equivalents at beginning of year.............. 17,467 --
-------- -------
Cash and cash equivalents at end of year.................... $ 7,754 17,467
-------- -------
Supplemental cash flow information:
Cash paid during the year for:
Income taxes........................................... $ 187 1
======== =======
</TABLE>
F-32
<PAGE> 53
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summaries of consolidated operating results on a quarterly basis for the
year ended December 31 follows:
<TABLE>
<CAPTION>
1998 QUARTERS 1997 QUARTERS
---------------------------------- ---------------------------------
(DOLLARS IN THOUSANDS, EXCEPT (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) PER SHARE AMOUNTS)
---------------------------------- ---------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income............. $20,812 19,411 18,663 18,004 16,894 16,058 15,422 13,885
Interest expense......................... 12,948 11,826 11,154 10,601 10,084 10,247 9,750 8,416
------- ------ ------ ------ ------ ------ ------ ------
Net interest income...................... 7,864 7,585 7,509 7,403 6,810 5,811 5,672 5,469
Provision for loan losses................ 300 300 750 1,000 750 1,000 1,000 1,000
Non-interest income...................... 1,546 1,928 1,578 1,301 655 1,263 1,268 1,230
SAIF special assessment.................. -- -- -- -- -- -- 2,880 --
Contribution to The FIRSTFED Charitable
Foundation............................. -- -- -- -- 6,454 -- -- --
Non-interest expense..................... 6,472 5,859 5,178 4,750 5,446 4,569 4,111 3,847
------- ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes........ 2,638 3,354 3,159 2,954 (5,185) 1,505 (1,051) 1,852
Income tax expense (benefit)............. 1,180 1,421 1,377 1,308 (1,541) 755 (444) 781
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss)........................ $ 1,458 1,933 1,782 1,646 (3,644) 750 (607) 1,071
======= ====== ====== ====== ====== ====== ====== ======
Basic earnings per share................. $ 0.18 0.24 0.22 0.20 N/A N/A N/A N/A
======= ====== ====== ====== ====== ====== ====== ======
Diluted earnings per share............... $ 0.18 0.24 N/A N/A N/A N/A N/A N/A
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
Prior to consummation of the Conversion, the Company had no significant
assets, liabilities, or operations. Accordingly, the results of operations and
other Financial data presented herein relating to periods prior to January 15,
1997 represent the consolidated data of the Bank and its subsidiary.
F-33
<PAGE> 54
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of stockholders will be held on Tuesday, July 21, 1998
at 2:00 p.m. Eastern Time. 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
As of March 31, 1998, the Company had 8,470,066 shares outstanding and
approximately 1,500 stockholders of record, not including persons or entities
holding stock in nominee or street name through brokers or banks.
STOCK PRICE
<TABLE>
<CAPTION>
FY '98
----------------------------------------
1 2 3 4
BY QUARTER ------- ------- ------- -------
<S> <C> <C> <C> <C>
High........................................ $18.250 $22.125 $21.938 $21.750
Low......................................... $13.625 $17.625 $19.500 $19.375
</TABLE>
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 FIRSTFED PARK, Swansea,
MA 02777.
<TABLE>
<S> <C>
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 Marketing,
Washington, D.C. 20016 Corporate Planning and Investor Relations
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
Swansea, MA 02777
Tel: 508-679-8181
</TABLE>
<PAGE> 1
EXHIBIT 23.1
------------
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
FIRSTFED AMERICA BANCORP, INC.
We consent to incorporation by reference in the registration statement on
Form S-8 of FIRSTFED AMERICA BANCORP, INC. relating to First Federal Savings
Bank of America Employees Savings and Profit Sharing Plan and Trust of our
report dated April 30, 1998, relating to the consolidated balance sheets of
FIRSTFED AMERICA BANCORP, INC. and subsidiaries as of March 31, 1998 and 1997,
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, 1998, which report is included in the March 31, 1998 annual report on Form
10-K of FIRSTFED AMERICA BANCORP, INC.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF FIRSTFED AMERICA BANCORP, INC. AT AND FOR THE FISCAL YEAR ENDED
MARCH 31, 1998 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-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 32,021
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 222,855
<INVESTMENTS-CARRYING> 34,986
<INVESTMENTS-MARKET> 35,723
<LOANS> 848,552 <F1>
<ALLOWANCE> 10,937
<TOTAL-ASSETS> 1,281,832
<DEPOSITS> 708,488
<SHORT-TERM> 228,733
<LIABILITIES-OTHER> 42,493
<LONG-TERM> 175,132
0
0
<COMMON> 87
<OTHER-SE> 126,899
<TOTAL-LIABILITIES-AND-EQUITY> 1,281,832
<INTEREST-LOAN> 67,493
<INTEREST-INVEST> 8,641
<INTEREST-OTHER> 756
<INTEREST-TOTAL> 76,890
<INTEREST-DEPOSIT> 33,034
<INTEREST-EXPENSE> 46,529
<INTEREST-INCOME-NET> 30,361
<LOAN-LOSSES> 2,350
<SECURITIES-GAINS> 163
<EXPENSE-OTHER> 22,259
<INCOME-PRETAX> 12,105
<INCOME-PRE-EXTRAORDINARY> 12,105
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,819
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<YIELD-ACTUAL> 2.93
<LOANS-NON> 3,048
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,469
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,788
<CHARGE-OFFS> 212
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 10,937
<ALLOWANCE-DOMESTIC> 10,937
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,288
<FN>
<F1>
LOANS HELD TO MATURITY
</FN>
</TABLE>
<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
FIRSTFED AMERICA BANCORP, INC
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
SWANSEA, MASSACHUSETTS 02777
(508) 679-8181
June 15, 1998
Fellow Shareholders:
You are cordially invited to attend the 1998 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"), Swansea,
Massachusetts, which will be held on July 21, 1998 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" PROPOSALS 2, 3
AND 4.
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> 3
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
SWANSEA, MASSACHUSETTS 02777
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 21, 1998
------------------------
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 July 21,
1998 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 ratification of certain amendments to the FIRSTFED AMERICA
BANCORP, INC. 1997 Stock-Based Incentive Plan.
3. The ratification of the FIRSTFED AMERICA BANCORP, INC. 1998 Stock
Option Plan.
4. The ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending March 31,
1999; and
5. 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 5, 1998, 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 FIRSTFED PARK, Swansea, Massachusetts 02777,
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
Swansea, Massachusetts
June 15, 1998
<PAGE> 4
FIRSTFED AMERICA BANCORP, INC.
------------------------
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
JULY 21, 1998
------------------------
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 July 21,
1998, 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 1998 Annual
Report to Stockholders, including the consolidated financial statements of the
Company for the fiscal year ended March 31, 1998, accompanies this Proxy
Statement which is first being mailed to record holders on or about June 15,
1998.
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 RATIFICATION OF CERTAIN AMENDMENTS TO THE
FIRSTFED AMERICA BANCORP, INC. 1997 STOCK-BASED INCENTIVE PLAN, "FOR" THE
RATIFICATION OF THE FIRSTFED AMERICA BANCORP, INC. 1998 STOCK OPTION PLAN AND
"FOR" THE RATIFICATION OF KPMG PEAT MARWICK LLP AS INDEPENDENT AUDITORS OF THE
COMPANY FOR THE FISCAL YEAR ENDING MARCH 31, 1999.
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 $3,000, 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, 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.
<PAGE> 5
The close of business on June 5, 1998, 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 8,271,794 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 ratification of certain amendments to the FIRSTFED AMERICA
BANCORP, INC. 1997 Stock-Based Incentive Plan (Proposal 2), by checking the
appropriate box, you may: (i) vote "FOR" the item; (ii) vote "AGAINST" the item;
or (iii) "ABSTAIN" with respect to the item.
As to the ratification of the FIRSTFED AMERICA BANCORP, INC. 1998 Stock
Option Plan (the "Stock Option Plan") (Proposal 3), by checking the appropriate
box, you may: (i) vote "FOR" the item; (ii) vote "AGAINST" the item; or (iii)
"ABSTAIN" with respect to the item.
As to the ratification of KPMG Peat Marwick LLP as independent auditors of
the Company (Proposal 4) 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.
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 Proposals 2, 3
and 4 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.
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
2
<PAGE> 6
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.
<TABLE>
<CAPTION>
AMOUNT
AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
-------------- ------------------- ---------- --------
<S> <C> <C> <C>
Common Stock......................... Wellington Management Company, LLP 1,189,800(1) 14.38%
75 State Street
Boston, Massachusetts 02109
Common Stock......................... First Federal Savings Bank of America 696,083(2) 8.42%
Employee Stock
Ownership Plan ("ESOP")
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
Common Stock......................... The FIRSTFED Charitable Foundation 645,380(3) 7.80%
ONE FIRSTFED PARK
Swansea, Massachusetts 02777
Common Stock......................... Brandes Investment Partners, LP 561,540(4) 6.79%
12750 High Bluff Drive
San Diego, California 92130
</TABLE>
- ---------------
(1) Based on information in an amended Schedule 13G filed on February 10, 1998,
Wellington Management Company, LLP, in its capacity as an investment
advisor, may be deemed the beneficial owner of 1,189,800 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 5, 1998, 154,892 shares had been
allocated under the ESOP and 542,118 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.
(4) Based on information in a Schedule 13G filed on February 12, 1998, Brandes
Investment Partners, LP may be deemed the beneficial owner of 561,540
shares.
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Certain officers, employees and non-employee directors of the Company and
Bank have been granted awards under the FIRSTFED AMERICA BANCORP, INC. 1997
Stock-Based Incentive Plan being presented for approval of amendments in
Proposal 2.
3
<PAGE> 7
Upon obtaining shareholder approval, the Company and the Bank intend to
grant to certain officers, employees and non-employee directors stock options
under the FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option Plan being presented
for adoption in Proposal 3.
PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING
PROPOSAL 1. ELECTION OF DIRECTORS
The Board of Directors of the Company 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 Robert F.
Stoico and John S. Holden, Jr. 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 PRESENT DIRECTOR OF TERM AS BENEFICIAL AS A PERCENT
AND FOR PAST FIVE YEARS AGE SINCE(1) DIRECTOR OWNERSHIP(2) OF CLASS
---------------------------------------- --- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NOMINEES
Robert F. Stoico............................. 57 1980 2001 185,136(4)(6) 2.24%
Chairman of the Board of the Company and
President and Chief Executive Officer of
the Company and the Bank
John S. Holden, Jr. ......................... 68 1982 2001 20,873(3)(5) *
President and Treasurer of Automatic
Machine Products Co.
CONTINUING DIRECTORS
Thomas A. Rodgers, Jr. ...................... 84 1963 2000 37,173(3)(5) *
Chairman and Chief Executive Officer of
Globe Manufacturing Co., Inc.
</TABLE>
4
<PAGE> 8
<TABLE>
<CAPTION>
AMOUNT AND
EXPIRATION NATURE OF OWNERSHIP
NAME AND PRINCIPAL OCCUPATION AT PRESENT DIRECTOR OF TERM AS BENEFICIAL AS A PERCENT
AND FOR PAST FIVE YEARS AGE SINCE(1) DIRECTOR OWNERSHIP(2) OF CLASS
---------------------------------------- --- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Anthony L. Sylvia............................ 66 1984 2000 24,673(3)(5) *
President and Treasurer of The Baker
Manufacturing Co., Inc.
Gilbert C. Oliveira.......................... 73 1960 1999 43,673(3)(5) *
Chairman of the Board of the Bank and
President and Treasurer of Gilbert C.
Oliveira Insurance Agency, Inc.
Richard W. Cederberg......................... 69 1982 1999 23,673(3)(5) *
Retired, former Chairman of Larson Tool and
Stamping Company
Paul A. Raymond, DDS......................... 54 1981 1999 21,043(3)(5) *
Dentist in town of Swansea, Massachusetts
NAMED EXECUTIVE OFFICERS (WHO ARE NOT ALSO
DIRECTORS)
Edward A. Hjerpe, III........................ 39 -- -- 28,709(4)(6) *
Senior Vice President, Treasurer and Chief
Financial Officer of the Company and the
Bank
Kevin J. McGillicuddy........................ 58 -- -- 34,711(4)(6) *
Senior Vice President of the Company and
the Bank
Frederick R. Sullivan........................ 56 -- -- 37,677(4)(6) *
Senior Vice President of the Company and
the Bank
Terrence M. Tyrrell.......................... 48 -- -- 42,187(4)(6) *
Senior Vice President of the Company and
the Bank
All directors and executive officers as a
group (19 persons)......................... -- -- -- 609,811(7) 7.37%
</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) Includes 10,449 shares awarded to each outside director under the FIRSTFED
AMERICA BANCORP, INC. 1997 Stock-Based Incentive Plan (the "Incentive
Plan"). Such awards commence vesting at a rate of 20% per year beginning
August 5, 1998 but will vest immediately upon death, disability, retirement
or a change in control.
(4) Includes 87,072, 17,414, 17,414, 17,414, and 17,414 shares awarded to
Messrs. Stoico, Hjerpe, McGillicuddy, Sullivan and Tyrrell, respectively,
under the Incentive Plan. Such awards commence vesting at a rate of 20% per
year beginning August 5, 1998 but will vest immediately upon death,
disability, retirement or a change in control. Each participant presently
has voting power as to the shares awarded.
(5) Includes 5,224 options granted to each outside director under the Incentive
Plan which are currently exercisable or will become exercisable within 60
days and excludes 20,898 shares subject to unexercisable options granted to
each outside director under the Incentive Plan. Shares subject to options
granted under
5
<PAGE> 9
the Incentive Plan vest at a rate of 20% per year commencing on August 5,
1998 but will vest immediately upon death, disability, retirement or a
change in control.
(6) Includes 43,536, 8,707, 8,707, 8,707 and 8,707 options granted to Messrs.
Stoico, Hjerpe, McGillicuddy, Sullivan and Tyrrell, respectively, under the
Incentive Plan which are currently exercisable or will become exercisable
within 60 days and excludes 174,144 shares for Mr. Stoico and 34,829 shares
for Messrs. Hjerpe, McGillicuddy, Sullivan and Tyrrell subject to
unexercisable options granted to each of these named executive officers
under the Incentive Plan. Shares subject to options granted under the
Incentive Plan vest at a rate of 20% per year commencing on August 5, 1998
but will vest immediately upon death, disability, retirement or a change in
control.
(7) Includes a total of 348,289 shares awarded under the Incentive Plan as to
which voting may be directed. Excludes a total of 870,723 shares subject to
options granted under the Incentive Plan.
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 generally
meets quarterly while the Bank's Board of Directors generally meet on a monthly
basis and both may have additional meetings as needed. During the fiscal year
ended March 31, 1998, the Board of Directors of the Company held 14 meetings,
including eight telephonic meetings. The Board of Directors of the Bank held 14
meetings during fiscal 1998, including one telephonic meeting. 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, 1998. 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, Raymond and Sylvia, who are outside Directors. The
Audit and Compliance Committee of the Bank consists of Messrs. Holden, Raymond,
Sylvia and Gerhard S. Lowenstein, who are outside Directors. 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. 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 5
times in fiscal 1998.
NOMINATING COMMITTEE. The Company's Nominating Committee for the 1998
Annual Meeting consists of Messrs. Stoico, Rodgers and Sylvia. 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 on April 30, 1998.
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 jointly 2
times in fiscal 1998.
6
<PAGE> 10
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 $650 for each regular and special board meeting which they
attend. Directors of the Company and the Bank are not compensated for telephonic
meetings. In addition, members of the Board's Executive Committee receive an
annual retainer of $5,000 and a fee of $450 for each Executive Committee meeting
which they attend.
INCENTIVE PLAN. Under the Incentive Plan maintained by the Company, each
member of the Board of Directors of the Company who is not an officer or
employee of the Company or the Bank received non-statutory stock options to
purchase 26,122 shares of Common Stock at an exercise price of $18.50, the fair
market value of the Common Stock on August 5, 1997, the date the option was
granted (as discussed below), and stock awards for 10,449 shares of common Stock
(collectively "Directors' Awards"). The Directors' Awards initially granted
under the Incentive Plan will vest over a five-year period, at a rate of 20%
each year commencing on August 5, 1998, the first anniversary of the date of the
grant.
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, 1998. The following discussion
addresses compensation information relating to the Chief Executive Officer and
the executive officers of the Bank for fiscal 1998 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 engaged the services of a
nationally known executive compensation consultant to design the Executive
Compensation Program 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.
This new Executive Compensation Program incorporates the consolidated financial
results of the Company as well as other factors related to the performance of
the Company's stock. For fiscal 1998, the Executive Compensation Program was
implemented and 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 1998 involved review of an extensive
analysis by the compensation consultant including compensation surveys and peer
group analysis. It was the goal of the Compensation Committee to utilize
industry specific and objective data upon which to base their recommendations to
the full Board.
7
<PAGE> 11
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 within the
parameters of compensation policy as defined within the Executive Compensation
Program. The Chief Executive Officer, a member of the Board of Directors,
abstains from voting on matters related to his compensation.
The Company has in the past used a number of salary surveys and on occasion
an outside consultant. The Board this year decided to use the same practice as
last year, which included using an outside consultant, but felt that it would be
helpful to use a different outside consultant in order to receive another point
of view. Accordingly, Watson Wyatt & Company was engaged to assist the
Compensation Committee and the Board in its executive compensation deliberations
for fiscal 1998.
Watson Wyatt'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 Watson Wyatt. 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 presented in the
report were recommended by the Compensation Committee and approved by the Board
of Directors.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The Chief Executive Officer
was evaluated on his performance in managing the Company during fiscal 1998,
including the effort related to operating the Company in its first year as a
public company, fiscal performance, and stock appreciation. Certain quantitative
and qualitative factors were reviewed to determine the Chief Executive Officer's
compensation. Following a review of the Chief Executive's performance, it was
determined that the total cash compensation for the Chief Executive Officer
would be established according to the compensation philosophy as recommended by
the executive compensation consultant. In reaching its determination regarding
the Chief Executive Officer's base salary, the Compensation Committee utilized
the report of Watson Wyatt and recommended to the Board of Directors a base
salary substantially equivalent to the amount recommended by Watson Wyatt. Such
report analyzed the Chief Executive Officer's base salary 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. The
Committee's determination of the Chief Executive Officer's bonus for fiscal 1998
also was determined by the Committee following a review of the Chief Executive
Officer's performance. In reaching its determination regarding the recommended
level of the Chief Executive Officer's cash bonus for fiscal 1998, the Committee
considered Watson Wyatt's report and recommended to the Board an amount of bonus
substantially equivalent to the amount recommended by Watson Wyatt in its
report.
8
<PAGE> 12
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
9
<PAGE> 13
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
March 31, 1998. 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 were supplied by Media General Financial Services.
FIRSTFED AMERICA BANCORP, INC.,
THE AMERICAN STOCK EXCHANGE AND THE MG INDEX FOR SAVINGS AND LOANS
<TABLE>
<CAPTION>
FIRSTFED
AMERICA MG INDEX AMERICAN
MEASUREMENT PERIOD BANCORP, FOR SAVINGS STOCK
(FISCAL YEAR COVERED) INC. AND LOANS EXCHANGE
<S> <C> <C> <C>
1/15/97 100.00 100.00 100.00
3/31/97 136.30 101.75 97.14
6/30/97 177.50 121.07 106.69
9/30/97 218.80 142.87 120.23
12/31/97 218.80 160.84 118.15
3/31/98 211.30 172.30 127.44
</TABLE>
Notes:
A. The lines represent quarterly 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 quarterly 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 at 100.00 on 1/15/97.
10
<PAGE> 14
SUMMARY COMPENSATION TABLE. The following table shows, for the years ended
March 31, 1998, 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 $100,000 in
fiscal year 1998 ("Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION(1) ----------------------- -------
-------------------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
FISCAL COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
- ---------------------------- ------ --------- -------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert F. Stoico........... 1998 $354,579 $171,300 -- $1,610,832 217,680 -- $292,281
President and Chief 1997 328,941 100,000 -- -- -- -- 239,216
Executive Officer 1996 282,045 75,000 -- -- -- -- 149,364
Edward A. Hjerpe, III...... 1998 126,035 $ 50,000 -- 322,159 43,536 -- 25,012
Senior Vice President,
Treasurer and Chief
Financial Officer(7)
Kevin J. McGillicuddy...... 1998 117,314 20,000 -- 322,159 43,536 -- 56,216
Senior Vice President 1997 105,677 15,000 -- -- -- -- 44,310
1996 96,846 8,000 -- -- -- -- 771
Frederick R. Sullivan...... 1998 117,316 25,000 -- 322,159 43,536 -- 58,229
Senior Vice President 1997 105,677 15,000 -- -- -- -- 43,518
1996 99,923 8,000 -- -- -- -- 16,167
Terrence M. Tyrrell........ 1998 101,201 20,000 -- 322,159 43,536 -- 47,006
Senior Vice President 1997 98,446 15,000 -- -- -- -- 37,555
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 year 1998, 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) Includes stock awards of 87,072, 17,414, 17,414, 17,414 and 17,414 shares
granted to Messrs. Stoico, Hjerpe, McGillicuddy, Sullivan and Tyrrell under
the Incentive Plan. The awards will vest in five equal annual installments
commencing on August 5, 1998, the first anniversary of the effective date of
the award. When shares become vested and are distributed, the recipients
will also receive an amount equal to accumulated cash and stock dividends
(if any) with respect thereto plus earnings thereon. All awards vest
immediately upon termination of employment due to death, disability,
retirement or following change in control. As of March 31, 1998, the market
value of the shares held by Messrs. Stoico, Hjerpe, McGillicuddy, Sullivan
and Tyrrell was $1,839,396, $367,871, $367,871, $367,871 and $367,871,
respectively. The dollar amounts set forth in the table represent the market
value of the shares awarded on the date of grant.
(4) Includes stock options granted to Messrs. Stoico, Hjerpe, McGillicuddy,
Sullivan and Tyrrell, respectively, pursuant to the Incentive Plan during
fiscal year 1998. See "Option Grants in Last Fiscal Year" table for
discussion of options granted under the Incentive Plan.
(5) For fiscal years 1998, 1997 and 1996, there were no payouts or awards under
any long-term incentive plan.
(6) Includes employer contributions of $9,645, $3,812, $3,450, $3,450 and $2,979
and $20,400, $7,200, $15,300, $16,800 and $11,100 to the Bank's Thrift and
Retirement Plans for Messrs. Stoico, Hjerpe, McGillicuddy, Sullivan and
Tyrrell, respectively, for fiscal year 1998. Also includes $94,945, $0,
$36,005, $36,154 and $31,334 representing the value of shares allocated
under the ESOP for the benefit of
11
<PAGE> 15
Messrs. Stoico, Hjerpe, McGillicuddy, Sullivan and Tyrrell, respectively, as
of March 31, 1998. Also includes employer contributions of $162,081
contributed to Mr. Stoico pursuant to the Bank's Supplemental Retirement
Plan for fiscal year 1998. Edward A. Hjerpe, III received $14,000 in
relocation assistance. Also includes payments of $5,210, $0, $1,461, $1,895,
$1,593 related to thrift and ESOP plans for Messrs. Stoico, Hjerpe,
McGillicuddy, Sullivan and Tyrrell, respectively.
(7) Mr. Hjerpe began employment with the Company on July 31, 1997 with an
initial annualized base salary of $192,500.
COMPENSATION ARRANGEMENTS
EMPLOYMENT AGREEMENTS. The Bank and the Company have entered into
employment agreements (collectively, the "Employment Agreement(s)" or
"Agreement(s)") with Messrs. Stoico, Hjerpe, 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,
Hjerpe, McGillicuddy, Sullivan and Tyrrell.
The Employment Agreements provide for a three-year term for Mr. Stoico and
a two-year term for Messrs. Hjerpe, 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. Hjerpe,
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. Hjerpe, 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 1998 as reported in the Summary Compensation Table, Messrs. Stoico, Hjerpe,
McGillicuddy, Sullivan and Tyrrell would receive approximately $1.6 million,
$528,000, $412,000, $427,000 and $364,000, respectively, in severance payments,
in addition to other cash and noncash benefits.
12
<PAGE> 16
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
1998 base salary and incentive bonus and pursuant to the CIC Agreements, the
Executives would receive, in the aggregate, $1.3 million, in addition to other
cash and noncash benefits.
INCENTIVE PLAN. The Company maintains the Incentive Plan, which provides
discretionary awards of options to purchase Common Stock, option-related awards
and awards of Common Stock (collectively, "Awards") to officers, directors and
key employees as determined by a committee of the Board of Directors. Awards of
Common Stock to officers, directors and key employees is provided under
"Restricted Stock Awards" in the "Summary Compensation Table." The following
table lists all grants of options under the Incentive Plan to the Named
Executive Officers for fiscal 1998 and contains certain information about
potential value of those options based upon certain assumptions as to the
appreciation of the Company's stock over the life of the option.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/SARS APPRECIATION FOR
OPTIONS/ GRANTED TO EXERCISE OR OPTIONS(1)
SARS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME (#)(2)(3)(4)(5) FISCAL YEAR(6) PER SHARE DATE(7) 5% 10%
---- --------------- -------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Stoico........ 217,680 27.85% $18.50 8/05/07 $2,532,609 $6,423,436
Edward A. Hjerpe, III... 43,536 5.57 18.50 8/05/07 506,541 1,283,615
Kevin J. McGillicuddy... 43,536 5.57 18.50 8/05/07 506,541 1,283,615
Frederick R. Sullivan... 43,536 5.57 18.50 8/05/07 506,541 1,283,615
Terrence M. Tyrrell..... 43,536 5.57 18.50 8/05/07 506,541 1,283,615
</TABLE>
- ---------------
(1) The amounts represent certain assumed rates of appreciation. Actual gains,
if any, on stock option exercises and Common Stock holdings are dependent on
the future performance of the Common Stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this
table will be realized.
(2) Options granted pursuant to the Incentive Plan are exercisable in five equal
annual installments commencing on August 5, 1998, provided, however, options
will be immediately exercisable in the event the optionee terminates
employment due to death or disability.
(3) The purchase price may be made in whole or in part in cash or Common Stock.
13
<PAGE> 17
(4) Options include limited rights (SARs) pursuant to which the options may be
exercised in the event of a change in control of the Company. Upon the
exercise of a limited right, the optionee would receive a cash payment equal
to the difference between the exercise price of the related option on the
date of grant and the fair market value of the underlying shares of Common
Stock on the date the limited right is exercised.
(5) All options are intended to be Incentive Stock Options to the extent
permissible under Section 422 of the Code.
(6) Includes options granted to officers, directors and employees.
(7) The option term is ten years.
The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding options held by the Named
Executive Officers as of March 31, 1998. Also reported are the values for
"in-the-money" options which represent the positive spread between the exercise
price of any such existing stock options and the year end price of the Common
Stock.
FISCAL YEAR-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
FISCAL YEAR-END(#)(1) AT FISCAL YEAR END($)(2)(3)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert F. Stoico................... 0 217,680 0 571,410
Edward A. Hjerpe, III.............. 0 43,536 0 114,282
Kevin J. McGillicuddy.............. 0 43,536 0 114,282
Frederick R. Sullivan.............. 0 43,536 0 114,282
Terrence M. Tyrrell................ 0 43,536 0 114,282
</TABLE>
- ---------------
(1) The options in this table have an exercise price of $18.50.
(2) The price of the Common Stock on March 31, 1998 was $21.125.
(3) Based on the market value of the underlying Common Stock at fiscal year end,
minus the exercise price.
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 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, 1998, Messrs.
Stoico, Hjerpe, McGillicuddy, Sullivan and Tyrrell had credited years of service
of 24 years 4 months, 10 years 6 months, 1 year 11 months, 8 years 9 months, and
16 years 7 months, respectively. The Retirement Plan provides the participant
portability with another participating member. Mr. Hjerpe's credited years of
service include credited years of service with his former employer, a
participant in the same multiple employer retirement plan.
14
<PAGE> 18
<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, 1998.
The following table sets forth the years of credited service (i.e., benefit
service) as of December 31, 1997 for each Named Executive Officer.
<TABLE>
<CAPTION>
CREDITED SERVICE (1)
---------------------
YEARS MONTHS
------- --------
<S> <C> <C>
Robert F. Stoico.......................................... 24 4
Edward A. Hjerpe, III..................................... 10 6
Kevin J. McGillicuddy..................................... 1 11
Frederick R. Sullivan..................................... 8 9
Terrence M. Tyrrell....................................... 16 7
</TABLE>
- ---------------
(1) The Retirement Plan provides the participant portability with another
participating member. Mr. Hjerpe's credited years of service include
credited years of service with his former employer, a participant in the
same multiple employer retirement plan.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Bank currently maintains a
Supplemental Executive 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. The
Bank intends the benefits provided under the Supplemental Executive Retirement
Plan to make participants whole for reductions in benefits payable under the
terms of the Thrift, ESOP and Retirement Plan maintained by the Bank, as a
result of limitations imposed by the Code, and provide additional retirement
benefits for participants.
Participants generally vest in the amounts credited to the Supplemental
Executive 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 Executive 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 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 Executive 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 Executive Retirement Plan. As of March 31, 1998, only Mr.
Stoico participated in the Supplemental Executive Retirement Plan.
15
<PAGE> 19
INCENTIVE AWARD AND SALARY DEFERRAL PLAN. Effective January 1, 1998 the
Bank established a compensation plan whereby eligible executives may defer a
percentage of their annual salary into a non-qualified plan. Executives receive
a 50% matching contribution on the first six percent of salary deferral which is
consistent with the Bank's 401(k) Plan. Investment options provided through the
Plan Trustee include Company stock and allow the executive to elect various
investment funds under the plan.
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.
PROPOSAL 2. APPROVAL OF THE AMENDMENT OF THE FIRSTFED AMERICA
BANCORP, INC. 1997 STOCK-BASED INCENTIVE PLAN
The Board of Directors of the Company is presenting for shareholder
ratification an amendment of the FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based
Incentive Plan, which was originally approved by shareholders on August 5, 1997.
The proposed amendment to the Incentive Plan is attached hereto as Appendix A.
The Board of Directors has determined that it is in the best interest of the
Company and the Bank to amend the Incentive Plan to generally provide for the
acceleration of the vesting of restricted stock awards, stock options and
related rights ("Awards") following retirement or upon an individual's
termination of employment or service in connection with a change in control of
the Company or Bank.
At March 31, 1998, options covering 781,720 of the Company's Common Stock
had been granted and 89,003 shares (other than shares that might in the future
be returned to the Incentive Plan as a result of cancellation or expiration of
options) remained available to satisfy options granted in the future under the
Incentive Plan. At March 31, 1998, Stock Awards of 329,041 shares of the
Company's Common Stock had been granted and 19,249 shares remained available for
future grants under the Incentive Plan.
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 shareholders' concerns and reward employees for outstanding
performance. The Incentive Plan authorizes the granting of options to purchase
Common Stock of the Company, option-related awards and stock awards
(collectively, "Awards"). 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 is administered by a
committee ("Committee") consisting of three members of the Board of Directors
who are not employees of the Company or its affiliates.
AMENDMENTS
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 exercisable in
installments at a rate of no less than 20% per year, except in the case of death
or disability. The one year prohibition on accelerated vesting as applied to the
Bank and the Company has expired, and the Company's Board of Directors has
determined to amend the Incentive Plan to generally provide accelerated vesting
of Awards upon an individual's retirement or in connection with a "change in
control" of the Company or the Bank (as defined in the Incentive Plan).
Specifically, the amendments provide that unless the Committee otherwise
determines, Awards which have not vested as of an individual's retirement shall
immediately become fully
16
<PAGE> 20
vested as of such time and, in the case of the stock options, shall remain
exercisable for three (3) years. In addition, in the event of an individual's
termination of employment or service, within twenty-four months of a change in
control of the Company or the Bank, all unvested Awards held by such individual
will immediately vest and, in the case of stock options, shall remain
exercisable for three (3) years.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENT OF THE
FIRSTFED AMERICA BANCORP, INC. 1997 STOCK-BASED INCENTIVE PLAN.
PROPOSAL 3. APPROVAL OF THE FIRSTFED AMERICA BANCORP, INC. 1998
STOCK OPTION PLAN
The Board of Directors of the Company is presenting for shareholder
ratification the FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option Plan (the
"Stock Option Plan"), in the form attached hereto as Appendix B. The purpose of
the Stock Option Plan is to advance the interests of the Company and its
shareholders by providing those key employees and non-employee directors of the
Company and its affiliates, including the Bank, upon whose judgment, initiative
and efforts the successful conduct of the business of the Company and its
affiliates largely depends, with additional incentive in the form of a
proprietary interest in the Company to perform in a superior manner. A further
purpose of the Stock Option Plan is to attract and retain people of experience
and ability to the service of the Company and its affiliates.
The following is a summary of the material terms of the Stock Option Plan
which is qualified in its entirety by the complete provisions of the Stock
Option Plan document attached as Appendix B.
GENERAL
The Stock Option Plan reserves 413,590 shares of Common Stock for purchase
pursuant to the exercise of stock options and stock option-related awards. All
officers and other employees of the Company and its affiliates, and directors
who are not also serving as employees of the Company or any of its affiliates
("Outside Directors"), are eligible to receive awards under the Stock Option
Plan. The Stock Option Plan will be administered by a committee of non-employee
directors (the "Committee"). Authorized but unissued shares or authorized shares
previously issued and reacquired by the Company may be used to satisfy an
exercise of an option under the Stock Option Plan. If authorized but unissued
shares are used to satisfy option exercises, the number of shares outstanding
would increase which would have a dilutive effect on the holdings of existing
shareholders.
AWARDS TO EMPLOYEES
Types of Awards. The Stock Option Plan authorizes the grant to employees
of (i) options to purchase the Company's Common Stock 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), which
generally 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 the same income tax benefits to recipients as Incentive Stock
Options), but which may provide tax deductions to the Company, referred to as
"Non-Statutory Stock Options"; and (iii) Limited Rights (discussed below) which
are exercisable only upon a "change in control" (as defined in the Stock Option
Plan) of the Company or Bank.
As of the date of this proxy statement, the Board of Directors, has not yet
granted any stock options under the Stock Option Plan and has made no
determination as to any future grants. Pursuant to the Stock Option Plan, the
Committee has the authority to grant options and option-related awards as
determined under its sole discretion. Unless other determined by the Committee,
all stock options shall become fully vested and exercisable upon death,
disability, retirement or termination of employment or service within
twenty-four (24) months of a change of control and remain exercisable for three
(3) years from such time. Unless otherwise determined by the Committee, upon the
termination of an employee's service for any reason, other than death,
disability, retirement, termination for cause or change in control, the
employee's options will be exercisable only as to those shares that were
immediately exercisable by the employee at the date of
17
<PAGE> 21
termination and only for a period of three months. In the event of an employee's
termination for cause, all related rights to the individual's stock options
become null and void upon such termination. The exercise price of stock options
granted must be equal to at least 100% of the fair market value of the
underlying Common Stock at the time of grant, except as provided below. The
exercise price may be paid in cash, borrowed funds or in Common Stock. Options
granted under the Stock Option Plan to employees may be exercised at such times
as the Committee determines, but in no event shall an option be exercisable more
than 10 years from the date of grant.
Incentive Stock Options may only be granted to employees. In order to
qualify as Incentive Stock Options under Section 422 of the Code, in addition to
certain other restrictions, the exercise price must not be less than 100% of the
fair market value on the date of grant. 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.
Limited Rights. Upon exercise of Limited Rights in the event of a change
in control of the Company, the optionee will be entitled to receive a lump sum
cash payment equal to the difference between the exercise price of the related
option and the fair market value of the shares of Common Stock subject to the
option on the date of exercise of the Limited Right in lieu of purchasing the
stock underlying the option. Upon the exercise of a Limited Right the underlying
option is terminated.
Change in Control. In the event of a change in control, all options then
available for grant under the Stock Option Plan will automatically be granted,
on a pro rata basis, among current employees and Outside Directors who have
previously been granted options by the Company, whether exercisable or
unexercisable, as of the date of the change in control. All such options that
are automatically granted upon a change in control will be 100% vested and
exercisable upon the termination of the recipient's employment or service within
twenty-four (24) months of the change in control. Such options granted
subsequent to a change in control will have an exercise price equal to the
weighted-average exercise price of all previously granted options granted to
each respective individual, and will remain exercisable for 10 years following
the change in control.
AMENDMENT
The Board of Directors generally may, at any time, amend the Stock Option
Plan, subject to certain prohibitions established by law or by the terms of the
plan itself.
NON-TRANSFERABILITY
An award of options under the Stock Option Plan shall not be transferable
by the optionee other than by will or the laws of intestate succession or
pursuant to a domestic relations order. With consent of the Committee, an
optionee may permit transferability or assignment of a Non-Statutory Stock
Option for valid estate planning purposes as permitted under the Code or Rule
16b-3 under the Exchange Act and an optionee may designate a person or his or
her estate, beneficiary of any stock option and Limited Right to which the
optionee would then be entitled, in the event of the death of the employee.
TAX TREATMENT
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 the 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. 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 stock option in an amount equal to the aggregate amount by which
the per share exercise price exceeds the fair market value of the
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<PAGE> 22
Common Stock. In the event that a Non-statutory Stock Option is exercised during
a period that would subject the optionee to liability under Section 16(b) of the
Exchange Act (i.e., within six months of the date of grant), the optionee will
not be deemed to have recognized income until such period of liability has
expired, unless the optionee makes an election under Section 83(b) of the Code.
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") or more than 3 months of terminating employment (12
months in the cases of death and disability), the exercise of the option will
generally 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 tax purposes. In the case of Limited Rights, upon exercise, the
option holder would have to include the amount paid to him upon exercise 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. The employee will recognize taxable income for the
amount of cash received under the Dividend Equivalent Rights for the year such
amounts are paid. The employee will recognize taxable income for the amount of
cash received under the Dividend Equivalent Rights for the year such amounts are
paid. The Company may take an off-setting deduction for such amount.
AWARDS
No awards of options under the Stock Option Plan have been made to date.
Options for 413,590 shares of Common Stock are reserved under the Stock Option
Plan for future grants to employees and Outside Directors of the Company and its
affiliates, including the Bank.
STOCKHOLDER RATIFICATION AND EFFECTIVE DATE OF THE PLAN
The Board of Directors adopted the Stock Option Plan in June, 1998, and
determined to submit the Stock Option Plan for ratification by shareholders. The
Stock Option Plan shall become effective upon its ratification or approval by
shareholders. Implementation of the Stock Option Plan in the absence of
shareholder ratification or approval may result in the inability of the Company
to grant Incentive Stock Options but will not impair its ability to grant
Non-Statutory Stock Options. In the event the Stock Option Plan is not ratified
or approved by shareholders, the Plan provides that the Board of Directors may
terminate the Plan and any awards made pursuant to the Plan.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE RATIFICATION OF
THE FIRSTFED AMERICA BANCORP, INC. 1998 STOCK OPTION PLAN.
PROPOSAL 4. RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Company's independent auditors for the fiscal year ended March 31,
1998, 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, 1999, 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.
19
<PAGE> 23
ADDITIONAL INFORMATION
SHAREHOLDER PROPOSALS
To be considered for inclusion in the Company's proxy statement and form of
proxy relating to the 1999 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 February
16, 1999. Any such proposal will be subject to 17 C.F.R. sec. 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. 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, 1998, 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 FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777.
By Order of the Board of Directors
/s/ Cecilia R. Viveiros
Cecilia R. Viveiros
Corporate Secretary
Swansea , Massachusetts
June 15, 1998
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.
20
<PAGE> 24
APPENDIX A
AMENDMENTS TO STOCK-BASED INCENTIVE PLAN
THE FIRSTFED AMERICA BANCORP, INC. 1997
SECTION 6(D) OF THE PLAN SHALL BE DELETED IN ITS ENTIRETY AND REPLACED WITH
THE FOLLOWING PARAGRAPH:
(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, Change in Control, 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. Unless otherwise determined by the Committee, in the
event of a Participant's termination of 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 Retirement, all Non-statutory Stock Options held by such
Participant shall immediately become exercisable and remain exercisable for a
period of three (3) years. In the event of a Participant's termination of
employment or service within twenty-four (24) months of a Change in Control, all
Non-statutory Stock Options held by such Participant shall immediately become
exercisable as of the date of such termination 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.
SECTION 7(E) OF THE PLAN SHALL BE DELETED IN ITS ENTIRETY AND REPLACED WITH
THE FOLLOWING PARAGRAPH:
(e) TERMINATION OF EMPLOYMENT. Unless otherwise determined by the
Committee, upon the termination of an Employee's employment for any reason other
than Disability, death, Retirement, Change in Control, 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. Unless otherwise determined by the Committee, in the event of the
termination of an Employee's service due to Disability or death, all unvested
Incentive Stock Options held by such Employee shall immediately become
exercisable and shall remain exercisable for three (3) years. Unless otherwise
determined by the Committee, in the event of an Employee's Retirement, all
Incentive Stock Options held by such Employee shall immediately become
exercisable and shall remain exercisable for three (3) years. In the event of a
Participant's termination of employment or service within twenty-four (24)
months of a Change in Control, all Incentive Stock Options held by such
Participant shall immediately become exercisable as of the date of such
termination and remain exercisable for a period of three (3) years. 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
originally designated as an Incentive Stock Option shall be treated as a
Non-Statutory Stock Options to the extent the Participant exercises such Option
more than one (1) year following termination of employment as a result of death
or Disability or more than three (3) months following the Participant's
termination of employment for any other reason. Any Option which otherwise, by
operation of this provision, does not meet the requirements of Section 422 of
the Code, shall be considered a Non-statutory Stock Option.
SECTION 9(C) OF THE PLAN SHALL BE DELETED IN ITS ENTIRETY AND REPLACED WITH
THE FOLLOWING PARAGRAPH:
(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, Change in Control, 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. Unless otherwise determined by
the Committee, in the event of a termination of the Participant's service due to
Disability or death, all unvested Stock Awards held by such Participant shall
immediately vest. Unless otherwise determined by the Committee, in the event of
a Participant's Retirement,
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<PAGE> 25
all unvested Stock Awards held by such Participant at Retirement shall
immediately vest. In the event of a Participant's termination from employment or
service within twenty-four (24) months of a Change in Control, all unvested
Stock Awards held by such Participant shall immediately vest as of the date of
such termination. Unless otherwise determined by the Committee, 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.
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<PAGE> 26
APPENDIX B
FIRSTFED AMERICA BANCORP, INC.
1998 STOCK OPTION 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, and Limited Rights.
(c) "Award Agreement" means an agreement evidencing and setting forth the
terms of an Award.
(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 Holding Company or
the Bank 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 Association or the Holding Company representing 20% or more of
the Association's or the Holding Company's outstanding securities except for any
securities of the Association purchased by the Holding Company and any
securities purchased by any tax-qualified employee benefit plan of the
Association; 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 Association or the Holding Company or similar transaction
occurs in which the Association or Holding Company is not the resulting entity;
or (D) a solicitation of 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
Association 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 Association or the Holding Company; or (E) a tender offer is made for 20% or
more of the voting securities of the Association 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,
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
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<PAGE> 27
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 adopted by the Board of
Directors or ratified by shareholders, as provided for in Section 19 of the
Plan.
(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 Participant may purchase a
share of Common Stock pursuant to an Option.
(p) "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. The
Committee's determination of Fair Market Value shall be conclusive and binding
on all persons.
(q) "Holding Company" means FIRSTFED AMERICA BANCORP, INC.
(r) "Incentive Stock Option" means a stock 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.
(s) "Limited Right" means an Award granted to a Participant pursuant to
Section 8 of the Plan.
(t) "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.
(u) "Option" means an Incentive Stock Option or Non-Statutory Stock Option.
(v) "Outside Director" means a member of the Boards of Directors of the
Holding Company or an Affiliate who is not also an Employee of the Holding
Company or an Affiliate.
(w) "Participant" means any person who holds an outstanding Award.
(x) "Performance Award" means an Award granted to a Participant pursuant to
Section 9 of the Plan.
(y) "Plan" means this FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option
Plan.
(z) "Retirement" means retirement from employment with the Holding Company
or an Affiliate in accordance with the retirement policies of the Holding
Company or Affiliate, as applicable, then in effect. "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.
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<PAGE> 28
(aa) "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,
unless defined differently under any employment agreement with the Holding
Company or an Affiliate, termination of employment, because of a material loss
to the Holding Company or an Affiliate, as determined by and in the sole
discretion of the Board of Directors or its designee(s).
2. ADMINISTRATION.
--------------
(a) The Committee shall administer the Plan. 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 or for whom Awards are not intended to satisfy the provisions of Section
162(m) of the Code.
(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 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 and at a minimum, the Committee shall
set forth in each Award Agreement (i) the type of Award granted (ii) the
Exercise Price of any Option, (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 is 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 satisfaction of any conditions of a Performance Award.
However, only the Committee or a portion of the Committee may certify the
attainment of any conditions of a Performance Award intended to satisfy the
requirements of Section 162(m) of the Code.
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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.
4. STOCK SUBJECT TO THE PLAN.
-------------------------
Subject to adjustment as provided in Section 14 of the Plan, the maximum
number of shares reserved hereby for purchase pursuant to the exercise of
Options and Option-related Awards granted under the Plan is 413,590, which
number shall not exceed five percent (5%) 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
issued and acquired or reacquired by the Trust or the Bank, respectively. To the
extent that Options are granted under the Plan, the shares underlying such
Options will be unavailable for any other use including future grants under the
Plan except that, to the extent that such Options terminate, expire, or are
forfeited 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 not previously awarded under
the Plan, grant Non-Statutory Stock Options to eligible individuals upon such
terms and conditions as it may determine to the extent such terms and conditions
are consistent with the following provisions:
(a) EXERCISE PRICE. The Committee shall determine the Exercise Price of
each Non-Statutory Stock Option. However, the Exercise Price shall not be less
than 100% of the Fair Market Value of the Common Stock on the Date of Grant.
(b) TERMS OF NON-STATUTORY STOCK OPTIONS. The Committee shall determine
the term during which a Participant may exercise a Non-Statutory Stock Option,
but in no event may a Participant exercise a Non-Statutory Stock Option, in
whole or in part, more than ten (10) years from the Date of Grant. The Committee
shall also determine the date on which each Non-Statutory Stock Option, or any
part thereof, first becomes exercisable and any terms or conditions a
Participant must satisfy in order to exercise each Non-Statutory Stock Option.
The shares of Common Stock underlying each Non-Statutory Stock Option may be
purchased in whole or in part by the Participant at any time during the term of
such Non-Statutory Stock Option, or any portion thereof, becomes exercisable.
(c) NON-TRANSFERABILITY. Unless otherwise determined by the Committee in
accordance with this Section 6(c), a Participant may not transfer, assign,
hypothecate, or dispose of in any manner, other than by will or the laws of
intestate succession, a Non-Statutory Stock Option. 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
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
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<PAGE> 30
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, grandparents, spouse, children, grandchildren, siblings
(including half bothers and sisters), and individuals who are family members by
adoption. 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 other conditions proscribed by the Committee with
respect to such Non-Statutory Stock Option.
(d) TERMINATION OF EMPLOYMENT OR SERVICE (GENERAL). Unless otherwise
determined by the Committee, upon the termination of a Participant's employment
or other service for any reason other than Retirement, Disability or death, a
Change in Control, or Termination for Cause, the Participant may exercise only
those Non-Statutory Stock Options that were immediately exercisable by the
Participant at the date of such termination and only for a period of three (3)
months following the date of such termination.
(e) TERMINATION OF EMPLOYMENT OR SERVICE (RETIREMENT). Unless otherwise
determined by the Committee, in the event of a Participant's Retirement, the
Participant's may exercise only those Non-Statutory Stock Options that were
immediately exercisable by the Participant at the date of Retirement and only
for a period of three (3) years following the date of Retirement.
(f) TERMINATION OF EMPLOYMENT OR SERVICE (DISABILITY OR DEATH). Unless
otherwise determined by the Committee, in the event of the termination of a
Participant's employment or other 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 three (3) years following the
date of such termination.
(g) TERMINATION OF EMPLOYMENT OR SERVICE (CHANGE IN CONTROL). Unless
otherwise determined by the Committee, in the event of the termination of a
Participant's employment or service within twenty-four (24) months of a Change
in Control, all Non-Statutory Stock Options held by such Participant shall
immediately become exercisable and remain exercisable for a period of three (3)
years following the date of such termination.
(h) TERMINATION OF EMPLOYMENT OR SERVICE (TERMINATION FOR CAUSE). Unless
otherwise determined by the Committee, in the event of a Participant's
Termination for Cause, all rights with respect to the Participant's
Non-Statutory Stock Options shall expire immediately upon the effective date of
such Termination for Cause.
(i) PAYMENT. Payment due to a Participant upon the exercise of a
Non-Statutory Stock Option shall be made in the form of shares of Common Stock.
(j) 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 12-month period.
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 upon such terms and conditions as
it may determine to the extent such terms and conditions are consistent with the
following provisions:
(a) EXERCISE PRICE. The Committee shall determine the Exercise Price of
each Incentive Stock Option. However, the Exercise Price shall not be less than
100% of the Fair Market Value of the Common Stock on the Date of Grant;
provided, however, that if at the time an Incentive Stock Option is granted, the
Employee
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<PAGE> 31
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.
(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 Committee shall determine the
term during which a Participant may exercise an Incentive Stock Option, but in
no event may a Participant exercise an Incentive Stock Option, in whole or in
part, more than ten (10)years from the Date of Grant; provided, however, that 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. The
Committee shall also determine the date on which each Incentive Stock Option, or
any part thereof, first becomes exercisable and any terms or conditions a
Participant must satisfy in order to exercise each Incentive Stock Option. The
shares of Common Stock underlying each Incentive Stock Option may be purchased
in whole or in part at any time during the term of such Incentive Stock Option
after such Option becomes exercisable.
(d) NON-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 the Committee grants the
Incentive Stock Option. The designation of a beneficiary does not constitute a
transfer of an Incentive Stock Option.
(e) TERMINATION OF EMPLOYMENT (GENERAL). Unless otherwise determined by
the Committee, upon the termination of a Participant's employment or other
service for any reason other than Retirement, Disability or death, a Change in
Control, or Termination for Cause, the Participant may exercise only those
Incentive Stock Options that were immediately exercisable by the Participant at
the date of such termination and only for a period of three (3) months following
the date of such termination.
(f) TERMINATION OF EMPLOYMENT (RETIREMENT). Unless otherwise determined by
the Committee, in the event of a Participant's Retirement, the Participant may
exercise only those Incentive Stock Options that were immediately exercisable by
the Participant at the date of Retirement and only for a period of three (3)
years following the date of Retirement. Any Option originally designated as an
Incentive Stock Option shall be treated as a Non-Statutory Stock Options to the
extent the Participant exercises such Option more than three (3) months
following the Date of the Participant's Retirement.
(g) TERMINATION OF EMPLOYMENT (DISABILITY OR DEATH). Unless otherwise
determined by the Committee, in the event of the termination of a Participant's
employment or other service due to Disability or death, all Incentive Stock
Options held by such Participant shall immediately become exercisable and remain
exercisable for a period Three (3) years following the date of such termination.
Any Option originally designated as an Incentive Stock Option shall be treated
as a Non-Statutory Stock Options to the extent the Participant exercises such
Option more than one (1) year following the Date of the Participant's
Retirement.
(h) TERMINATION OF EMPLOYMENT (CHANGE IN CONTROL). Unless otherwise
determined by the Committee, in the event of the termination of a Participant's
employment or service within twenty-four (24) months of a Change in Control, all
Incentive Stock Options held by such Participant shall become immediately
exercisable and remain exercisable for a period of three (3) years following the
date of such termination. Any Option originally designated as an Incentive Stock
Option shall be treated as a Non-Statutory Stock Options to the extent the
Participant exercises such Option more than one (1) year following the Date of
the Participant's Retirement.
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<PAGE> 32
(i) TERMINATION OF EMPLOYMENT (TERMINATION FOR CAUSE). 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.
(j) PAYMENT. Payment due to a Participant upon the exercise of an
Incentive Stock Option shall be made in the form of shares of Common Stock.
(k) 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 12-month period.
(l) DISQUALIFYING DISPOSITIONS. Each Award Agreement with respect to an
Incentive Stock Option shall require the Participant to notify the Committee of
any disposition of shares of Common Stock issued pursuant to the exercise of
such Option under the circumstances described in Section 421(b) of the Code
(relating to certain disqualifying dispositions), within 10 days of such
disposition.
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, 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 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. PERFORMANCE AWARDS.
------------------
(a) The Committee may determine to make any Award under the Plan contingent
upon the satisfaction of any conditions related to the performance of the
Holding Company, an Affiliate of the Participant. Each Performance Award shall
be evidenced in the Award Agreement, which shall set forth the applicable
conditions, the maximum amounts payable and such other terms and conditions as
are applicable to the Performance Award. Unless otherwise determined by the
Committee, each Performance Award shall be granted and administered to comply
with the requirements of Section 162(m) of the Code and subject to the following
provisions:
(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 applicable conditions 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 satisfaction of the conditions 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.
B-7
<PAGE> 33
(d) No Award or portion thereof that is subject to the satisfaction of any
condition shall be considered to be earned or vested until the Committee
certifies in writing that the conditions to which the distribution, earning or
vesting of such Award is subject have been achieved.
10. GRANTS IN THE EVENT OF A CHANGE IN CONTROL.
------------------------------------------
(a) In the event of a Change in Control, Options then available for grant
under this Plan pursuant to Section 4 shall be automatically granted among those
current Employees and current Outside Directors who have previously been granted
Options under this Plan or the FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based
Incentive Plan (the "1997 Plan"), as of the date of the Change in Control. The
number of shares subject to Options to be granted to each such individual
pursuant to this Section 10 shall be determined by multiplying the number of
Options to purchase shares of Common Stock then available for grant to Employees
and Outside Directors, respectively, pursuant to Section 4 by a fraction, the
numerator of which is the number of Options to purchase shares of Common Stock
previously granted to that individual under this Plan and the 1997 Plan (whether
or not yet exercised), and the denominator of which is the total number of
Options to purchase shares of Common Stock previously granted to all Employees
(whether or not yet exercised), in the case of an Employee, and all current
Outside Directors, in the case of an Outside Director, under this Plan and the
1997 Plan.
(b) The Exercise Price for any Option granted pursuant to this Section 10
shall be the weighted average Exercise Price of all Options, as adjusted
pursuant to Section 15, granted under this Plan or the 1997 Plan, whether such
previously granted Option has been exercised or is exercisable or unexercisable,
to the respective Employee or Outside Director prior to the Change in Control.
(c) All Options granted pursuant to this Section 10 shall be 100% vested
and exercisable upon the Participant's termination of employment or service
following within twenty-four (24) months of a Change in Control and shall remain
exercisable for a period of ten (10) years from the date of grant.
11. DEFERRED PAYMENTS.
-----------------
The Committee, in its discretion, may permit a Participant to elect to
defer receipt of all or any part of any cash or stock payment under the Plan, or
the Committee may determine to defer receipt by some or all Participants, of all
or part of any such payment. The Committee shall determine the terms and
conditions of any such deferral, including the period of deferral, the manner of
deferral, and the method for measuring appreciation on deferred amounts until
their payout.
12. METHOD OF EXERCISE OF OPTIONS.
-----------------------------
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 or a constructive stock swap, as the Committee may specify in the
applicable Award Agreement.
13. 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.
B-8
<PAGE> 34
14. 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.
15. 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 is made, 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 15 shall be subject to required
approval by the Office of Thrift Supervision.
16. TAX WITHHOLDING.
---------------
(a) Whenever under this Plan, cash or shares of Common Stock are to be
delivered upon exercise of an Award or any other event with respect to rights
and benefits hereunder, the Committee shall be entitled to require as a
condition of delivery (i) that the Participant remit an amount sufficient to
satisfy all federal, state, and local withholding tax requirements related
thereto, (ii) that the withholding of such sums come from compensation otherwise
due to the Participant or from any shares of Common Stock due to the Participant
under this Plan or (iii) any combination of the foregoing provided, however,
that no amount shall be withheld from any cash payment or shares of Common Stock
relating to an Award which was transferred by the Participant in accordance with
this Plan.
(b) If any disqualifying disposition described in Section 7(k) is made with
respect to shares of Common Stock acquired under an Incentive Stock Option
granted pursuant to this Plan, or any transfer described in Section 6(c) is
made, or any election described in Section 16 is made, then the person making
such disqualifying disposition, transfer, or election shall remit to the Holding
Company or its Affiliates an amount sufficient to satisfy all federal, state,
and local withholding taxes thereby incurred; provided that, in lieu of or in
addition to the foregoing, the Holding Company or its Affiliates shall have the
right to withhold such sums from compensation otherwise due to the Participant,
or, except in the case of any transfer pursuant to Section 6(c), from any shares
of Common Stock due to the Participant under this Plan.
17. NOTIFICATION UNDER SECTION 83(B).
--------------------------------
The Committee may, on the Date of Grant or any later date, prohibit a
Participant from making the election described below. If the Committee has not
prohibited such Participant from making such election, and the Participant
shall, in connection with the exercise of any Option, or the grant of any Stock
Award, make the election permitted under Section 83(b) of the Code (i.e., an
election to include in such Participant's gross income in the year of transfer
the amounts specified in Section 83(b) of the Code), such Participant
B-9
<PAGE> 35
shall notify the Committee of such election within 10 days of filing notice of
the election with the Internal Revenue Service, in addition to any filing and
notification required pursuant to regulations issued under the authority of
Section 83(b) of the Code.
18. AMENDMENT OF THE PLAN AND AWARDS.
--------------------------------
(a) Except as provided in paragraph (c) of this Section 18, 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 shall be submitted for shareholder
approval to the extent required by such law or regulation. 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) Except as provided in paragraph (c) of this Section 18, 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.
(c) In no event shall the Board of Directors amend the Plan or shall the
Committee amend an Award Agreement in any manner that has the effect of:
(i) Allowing any Option to be granted with an exercise below the Fair
Market Value of the Common Stock on the Date of Grant.
(ii) Allowing the exercise price of any Option previously granted
under the Plan to be reduced subsequent to the Date of Award.
(d) Notwithstanding anything in this Plan or any Award Agreement to the
contrary, if any Award or right under this Plan would cause a transaction to be
ineligible for pooling of interest accounting that would, but for such Award or
right, be eligible for such accounting treatment, the Committee may modify or
adjust the Award or right so that pooling of interest accounting is available.
19. EFFECTIVE DATE OF PLAN.
----------------------
The Plan shall become effective upon ratification by the Holding Company's
shareholders or, if not so ratified, as of the date adopted by the Board of
Directors. The failure to obtain shareholder ratification 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 ratified by stockholders in
accordance with IRS regulations, the Plan shall remain in full force and effect,
unless terminated by the Board of Directors, 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.
20. 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.
21. APPLICABLE LAW.
--------------
The Plan will be administered in accordance with the laws of the state of
Delaware and applicable federal law.
B-10
<PAGE> 36
REVOCABLE PROXY
FIRSTFED AMERICA BANCORP, INC.
ANNUAL MEETING OF SHAREHOLDERS
JULY 21, 1998
2:00 P.M. EASTERN TIME
-------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert F. Stoico, Thomas A. Rodgers, Jr.
and Anthony L. Sylvia 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 July 21, 1998, 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:
1. The election as directors of all nominees listed (except as marked to
the contrary below).
Robert F. Stoico
John S. Holden, Jr.
FOR ALL
FOR VOTE WITHHELD EXCEPT
--- ------------- -------
/ / / / / /
INSTRUCTION: To withhold your vote for any individual nominee, mark "FOR
ALL EXCEPT" and write that nominee's name on the line provided below.
- --------------------------------------------------------------------------------
2. The approval of the amendment of the FIRSTFED AMERICA BANCORP, INC.
1997 Stock-Based Incentive Plan.
FOR AGAINST ABSTAIN
--- ------- -------
/ / / / / /
3. The approval of the FIRSTFED AMERICA BANCORP, INC. 1998 Stock-Option
Plan.
FOR AGAINST ABSTAIN
--- ------- -------
/ / / / / /
4. 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, 1999.
FOR AGAINST ABSTAIN
--- ------- -------
/ / / / / /
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
<PAGE> 37
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.
Dated:
------------------------
-------------------------------
SIGNATURE OF SHAREHOLDER
-------------------------------
SIGNATURE OF CO-HOLDER (IF ANY)
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 15, 1998 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.
