<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12305
------------------------
FIRSTFED AMERICA BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-3331237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 679-8181
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of December 31, 1998, there were 7,465,294 shares of the Registrant's
Common Stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998
(unaudited) and March 31, 1998.............................. 2
Consolidated Statements of Operations for the three months
and nine months ended December 31, 1998 (unaudited) and 1997
(unaudited)................................................. 3
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended December 31, 1998 (unaudited)..... 4
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1998 (unaudited) and 1997 (unaudited).... 5
Notes to Unaudited Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 18
Item 2. Changes in Securities and Use of Proceeds................... 18
Item 3. Default Upon Senior Securities.............................. 18
Item 4. Submission of Matters to a Vote of Security Holders......... 18
Item 5. Other Information........................................... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
SIGNATURES........................................................... 19
</TABLE>
1
<PAGE> 3
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash on hand and due from banks............................. $ 23,917 $ 32,021
Short-term investments...................................... 29,143 --
Mortgage loans held for sale................................ 102,528 84,867
Investment in trading securities (amortized cost of $100)... 100 --
Investment securities available for sale (amortized cost of
$5,660 and $5,816)........................................ 6,171 7,712
Mortgage-backed securities available for sale (amortized
cost of $368,743 and $214,225)............................ 367,720 215,143
Investment securities held to maturity (fair value of
$13,078 and $22,585)...................................... 12,996 22,491
Mortgage-backed securities held to maturity (fair value of
$7,257 and $12,688)....................................... 7,159 12,495
Stock in Federal Home Loan Bank of Boston, at cost.......... 27,917 17,945
Loans receivable, net of allowance for loan losses of
$11,737 and $10,937....................................... 786,514 848,552
Accrued interest receivable................................. 6,139 5,992
Mortgage servicing rights................................... 5,411 3,230
Office properties and equipment, net........................ 25,233 24,877
Real estate owned, net...................................... 314 595
Deferred income tax asset, net.............................. 4,495 3,278
Prepaid expenses and other assets........................... 32,395 2,634
---------- ----------
Total assets...................................... $1,438,152 $1,281,832
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $ 664,437 $ 708,488
FHLB advances and other borrowings........................ 631,523 403,865
Advance payments by borrowers for taxes and insurance..... 4,384 6,224
Accrued interest payable.................................. 4,134 2,613
Accrued income taxes...................................... 419 929
Other liabilities......................................... 27,602 32,727
---------- ----------
Total liabilities................................. 1,332,499 1,154,846
---------- ----------
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $0.01 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................................ 85,317 85,016
Retained earnings......................................... 55,171 50,422
Accumulated other comprehensive (loss) income............. (493) 1,616
Unearned 1997 stock-based incentive plan.................. (5,869) (4,734)
Unallocated ESOP shares................................... (5,421) (5,421)
Treasury stock (1,241,858 shares acquired under repurchase
program and 25,968 shares acquired for SERP)........... (23,139) --
---------- ----------
Total stockholders' equity........................ 105,653 126,986
---------- ----------
Total liabilities and stockholders' equity........ $1,438,152 $1,281,832
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans..................................... $ 15,986 $ 17,100 $ 49,586 $ 50,422
Investment securities..................... 550 519 1,639 1,524
Mortgage-backed securities................ 4,816 1,603 12,351 3,632
Federal Home Loan Bank stock.............. 413 189 1,082 500
---------- ---------- ---------- ----------
Total Interest and dividend
income:......................... 21,765 19,411 64,658 56,078
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts.......................... 6,554 8,273 21,282 25,283
Borrowed funds............................ 7,681 3,553 20,766 8,299
---------- ---------- ---------- ----------
Total interest expense............ 14,235 11,826 42,048 33,582
---------- ---------- ---------- ----------
Net interest income before loan
loss provision.................. 7,530 7,585 22,610 22,496
Provision for loan losses................... 300 300 900 2,050
---------- ---------- ---------- ----------
Net interest income after loan
loss provision.................. 7,230 7,285 21,710 20,446
Non-interest income:
Loan servicing income..................... 560 672 1,425 1,969
Gain on sale of mortgage loans, net....... 371 537 1,393 1,011
Gain on sale of investments, net.......... -- 134 8 164
Service charges on deposit accounts....... 313 265 799 655
Other income.............................. 918 320 1,594 1,009
---------- ---------- ---------- ----------
Total non-interest income......... 2,162 1,928 5,219 4,808
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits................. 3,498 3,518 10,841 9,514
Office occupancy and equipment............ 858 848 2,861 2,035
Advertising and business promotion........ 151 387 612 848
Data processing........................... 296 180 718 537
Deposit insurance premiums................ 156 117 486 348
Other expense............................. 1,221 809 3,049 2,505
---------- ---------- ---------- ----------
Total non-interest expense........ 6,180 5,859 18,567 15,787
---------- ---------- ---------- ----------
Income before income tax
expense......................... 3,212 3,354 8,362 9,467
Income tax expense.......................... 1,024 1,421 2,817 4,106
---------- ---------- ---------- ----------
Net income............................. $ 2,188 $ 1,933 $ 5,545 $ 5,361
========== ========== ========== ==========
Basic earnings per share.................... $ 0.32 $ 0.24 $ 0.77 $ 0.66
========== ========== ========== ==========
Diluted earnings per share.................. $ 0.32 $ 0.24 $ 0.77 $ 0.66
========== ========== ========== ==========
Weighted average shares outstanding --
basic..................................... 6,832,515 8,148,802 7,212,138 8,129,388
========== ========== ========== ==========
Weighted average shares outstanding --
diluted................................... 6,832,515 8,207,645 7,212,138 8,129,388
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 5
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
UNALLOCATED
1997
STOCK-
ACCUMULATED BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME SHARES SHARES STOCK EQUITY
------ ---------- -------- ------------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1998.................... $87 85,016 50,422 1,616 (5,421) (4,734) -- $126,986
Net Income................ -- -- 5,545 -- -- -- -- 5,545
Change in net unrealized
gain on investments
available for sale
(AFS), net:
Unrealized holding
(losses) on AFS
securities............ -- -- -- (3,318) -- -- -- (3,318)
Reclassification
adjustment for (gains)
realized income....... -- -- -- (8) -- -- -- (8)
------ --------
Net unrealized
(losses).............. -- -- -- (3,326) -- -- -- (3,326)
Tax effect.............. -- -- -- 1,217 -- -- -- 1,217
------ --------
Net-of-tax amount....... -- -- -- (2,109) -- -- -- (2,109)
------ --------
Total
comprehensive
income.......... -- -- -- -- -- -- -- 3,436
Cash dividends declared... -- -- (796) -- -- -- -- (796)
($0.05/shr. -- May 1998
$0.05/shr. -- October
1998)
Common stock acquired for
SIP..................... -- -- -- -- -- (2,502) -- (2,502)
Payment-SIP stock
awards.................. -- (150) -- -- -- 1,367 -- 1,217
Earned ESOP shares charged
to expense.............. -- 451 -- -- -- -- -- 451
Common stock acquired
under repurchase program
(1,241,858 shares/$18.24
average price).......... -- -- -- -- -- -- (22,651) (22,651)
Common stock acquired for
SERP -- (25,968
shares/$18.79 average
price).................. -- -- -- -- -- -- (488) (488)
--- ------ ------ ------ ------ ------ ------- --------
Balance at December 31,
1998.................... $87 85,317 55,171 (493) (5,421) (5,869) (23,139) $105,653
=== ====== ====== ====== ====== ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,545 $ 5,361
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization (accretion) of:
Premium (discount) on investment and mortgage-backed
securities held to maturity.......................... 4 (4)
Premium (discount) on investment and mortgage-backed
securities available for sale........................ 734 (20)
Deferred loan origination (costs) fees................ (111) 314
Mortgage servicing rights............................. 1,254 388
Provisions for:
Loan losses........................................... 900 2,050
(Gains) on sales of:
Investment securities available for sale.............. (8) (164)
Real estate owned..................................... (89) (37)
Land, building and equipment.......................... -- (18)
Mortgage loans........................................ (1,393) (1,011)
Net proceeds from sales of mortgage loans............... 417,602 174,115
Origination of mortgage loans held for sale............. (437,305) (173,822)
Real estate owned valuation write-downs................. 8 143
Depreciation of office properties and equipment......... 1,637 1,170
Appreciation in fair value of ESOP shares............... 451 482
Earned SIP shares....................................... -- 1,162
Increase or decrease in:
Accrued interest receivable........................... (147) (481)
Income tax receivable................................. -- 263
Prepaid expenses and other assets..................... (29,761) (605)
Stock subscription proceeds........................... -- (55)
Accrued interest payable.............................. 1,521 621
Accrued income taxes and other liabilities............ (5,635) 2,707
---------- ---------
Net cash (used) provided by operating activities.... (44,793) 12,559
---------- ---------
Cash flows from investing activities:
Purchase of trading securities............................ $ (100) $ --
Purchase of investment securities available for sale...... (3,845) (5,474)
Sale of investment securities available for sale.......... -- 511
Maturities of investment securities available for sale.... 4,000 --
Purchase of mortgage-backed securities
available-for-sale...................................... (248,600) (124,160)
Sale of mortgage-backed securities available-for-sale..... 3,906 --
Payments received on mortgage-backed securities available
for sale................................................ 89,450 4,752
Purchases of investment securities held to maturity....... -- (11,990)
Maturities of investment securities held to maturity...... 9,500 8,000
Payments received on mortgage-backed securities held to
maturity................................................ 5,327 2,013
Purchase of Federal Home Loan Bank stock.................. (9,972) (4,606)
Net decrease (increase) in loans.......................... 61,005 (71,101)
Proceeds from sales of real estate owned.................. 607 900
Purchases of office properties and equipment.............. (1,993) (10,777)
Sale of office properties and equipment................... -- 19
---------- ---------
Net cash used in investing activities............... (90,715) (211,913)
---------- ---------
Cash flows from financing activities:
Net decrease in deposits.................................. $ (44,051) $ (18,387)
Proceeds from FHLB advances and other borrowings.......... 1,097,066 492,873
Repayments on FHLB advances and other borrowings.......... (869,408) (305,402)
Net change in advance payments by borrowers for taxes and
insurance............................................... (1,840) (1,055)
Cash dividends paid....................................... (796) --
Payments to acquire stock-based incentive plan shares..... (2,502) --
Earned SIP shares......................................... 1,217 --
Payments to acquire common stock for treasury stock....... (23,139) --
---------- ---------
Net cash provided by financing activities........... 156,547 168,029
---------- ---------
Net increase (decrease) in cash and cash equivalents........ 21,039 (31,325)
Cash and cash equivalents at beginning of period............ 32,021 53,540
---------- ---------
Cash on hand and due from banks and short-term investments
at end of period.......................................... $ 53,060 $ 22,215
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 40,527 $ 32,961
========== =========
Income taxes............................................ $ 3,328 $ 2,823
========== =========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans.................. $ 245 $ 1,102
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of FIRSTFED AMERICA BANCORP, INC. (the "Company"), and its wholly-owned
subsidiaries, First Federal Savings Bank of America (the "Bank") and FAB FUNDING
CORPORATION ("FAB FUNDING"). First Federal Savings Bank of America includes its
wholly-owned subsidiaries, FIRSTFED MORTGAGE CORPORATION, FIRSTFED INVESTMENT
CORPORATION, PREMIO INVESTMENT CORPORATION, and CELMAC INVESTMENT CORPORATION.
The interim consolidated financial statements reflect all normal and
recurring adjustments which are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. The results of operations for the three
months and nine months ended December 31, 1998 are not necessarily indicative of
the results of operations that may be expected for all of fiscal year 1999.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report to Stockholders on Form 10-K for the
fiscal year ended March 31, 1998.
NOTE 2. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the aggregate as
other comprehensive income. The Company adopted SFAS 130 as of June 30, 1998,
under the equity statement method.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in June, 1997, which established standards for
reporting information about operating segments. An operating segment is defined
as a component of a business for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and evaluate performance. This statement
requires a company to disclose certain income statement and balance sheet
information by operating segment, as well as provide a reconciliation of
operating segment information to the company's consolidated balances. This
statement is effective for 1999 annual financial statements. The adoption of
SFAS No. 131 is not expected to have a material impact on the consolidated
financial statements.
The FASB also issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" in June, 1998, which provides for matching the timing of
gain or loss recognition on the hedging instrument with the recognition of: a)
the changes in fair value of the hedged asset or liability that are attributable
to the hedged risk; or b) the earnings effect of the hedged forecasted
transaction. The statement is effective for fiscal years beginning after June
15, 1999.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND MARCH 31, 1998
GENERAL
Total assets at December 31, 1998 were $1.438 billion, an increase of
$156.3 million, or 12.2%, compared to $1.282 billion at March 31, 1998. Asset
growth was primarily attributable to growth in mortgage-backed securities
available for sale, which increased from $215.1 million at March 31, 1998 to
$367.7 million at December 31, 1998, an increase of $152.6 million or 70.9%.
Short-term investments and prepaid expenses and other assets also increased
$29.1 million and $29.8 million, respectively, the result of year-end commercial
paper purchases and the purchase of Bank-owned Life Insurance (BOLI). Partially
offsetting this growth was a $62.0 million, or 7.3%, decline in loans
receivable, net which decreased to $786.5 million at December 31, 1998 from
$848.6 million at March 31, 1998.
Total liabilities increased $177.7 million, or 15.4%, to $1.332 billion at
December 31, 1998 as compared to $1.155 billion at March 31, 1998. Of this
increase, Federal Home Loan Bank advances and other borrowings increased $227.7
million, or 56.4%, to $631.5 million at December 31, 1998 from $403.9 million at
March 31, 1998, while total deposits at December 31, 1998 decreased $44.1
million to $664.4 million, or 6.2%, from $708.5 million at March 31, 1998. Other
liabilities decreased $5.1 million to $27.6 million on December 31, 1998 from
$32.7 million on March 31, 1998.
Stockholders' equity at December 31, 1998 decreased $21.3 million, or
16.8%, to $105.7 million from $127.0 million at March 31, 1998. This $21.3
million change was primarily the net effect of a $23.1 million reduction in
equity due to the repurchase of Company stock, the purchase of 111,200 shares
for the 1997 Stock-based Incentive Plan, and a $4.7 million increase in retained
earnings from year-to-date net income less dividends. The reduction in equity,
coupled with balance sheet growth, caused a 2.56% decline in the stockholders'
equity to total assets ratio, from 9.91% at March 31, 1998 to 7.35% at December
31, 1998.
LIQUIDITY AND CAPITAL
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, FHLB advances, investment
maturities, and proceeds from the sale of loans. While scheduled amortization of
loans and investment maturities are predictable sources of funds, deposit flows,
mortgage prepayments, and interest rate payments on adjustable-rate mortgage
loans and securities are influenced by general interest rates, economic
conditions and competition. The Company has other sources of liquidity if a need
for additional funds arises, including a $25 million overnight FHLB line of
credit, approximately $106 million of additional borrowing capacity at the
Federal Home Loan Bank. The Bank has maintained liquid assets in excess of the
required minimum levels as defined by the Office of Thrift Supervision (OTS)
regulations. This requirement, which may be varied at the direction of the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of the Bank's deposits and short-term borrowings. The Bank's required liquidity
ratio is currently 4%. The Bank's actual liquidity ratio was 30.3% and 11.70% at
December 31, 1998 and March 31, 1998, respectively.
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investment in trading securities, investments available for
sale, and mortgage-backed securities available for sale. These asset levels are
dependent on the Company's operating, financing, lending, and investing
activities during any given period. At December 31, 1998, the Company's cash,
short-term investments, mortgage loans held for sale, investment in trading
securities, investment securities available for sale, and mortgage-backed
securities available for sale totaled $529.6 million or 36.8% of the Company's
total assets. Additional investments were available which qualified for the
Bank's regulatory liquidity requirements.
The Company has other sources of liquidity if a need for additional funds
arises, including FHLB advances and dealer repurchase agreements. At December
31, 1998, the Bank had $631.5 million in advances and other borrowings
outstanding from the FHLB and securities dealers. The Company generally
maintains a competitive deposit rate strategy in its market and sources of funds
such as FHLB advances and repurchase agreements may be used for wholesale growth
as well as to supplement cash flow needs.
7
<PAGE> 9
At December 31, 1998, the Company had commitments to originate portfolio
loans and unused outstanding lines of credit totaling $142.5 million. The
Company anticipates that it will have sufficient funds available to meet its
current loan origination commitments. Certificate accounts that are scheduled to
mature in less than one year from December 31, 1998, totaled $333.5 million.
At December 31, 1998, the consolidated stockholders' equity to total assets
ratio was 7.35%. At December 31, 1998, the Bank exceeded all of its regulatory
capital requirements. The Bank's tangible capital of $98.4 million, or 6.86%, of
total adjusted assets, was above the required level of $28.7 million, or 2.0% of
total adjusted assets; core capital of $98.4 million, or 6.86% of total adjusted
assets, was above the required level of $57.4 million, or 4.0% of total adjusted
assets; risk-based capital of $107.7 million, or 15.5% of risk-weighted assets,
was above the required level of $55.6 million or 8.0% of risk-weighted assets,
and Tier 1 risk-based capital of $98.4 million, or 14.2% of risk-weighted
assets, was above the required level of $27.8 million, or 4.0% of risk-weighted
assets. The Bank is considered a "well capitalized" institution under the OTS
prompt corrective action regulations.
YEAR 2000 COMPLIANCE
Included in other non-interest expenses are charges incurred in connection
with the modification or replacement of software or hardware in order for the
Company's computer, communications, and other related non-technology 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.
The Company will utilize both internal and external resources to reprogram
or replace and test software and hardware (including non-technology systems) for
Year 2000 modifications. The Company is on schedule 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 Company has had 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 and has received written assurances of readiness. The Company's total
Year 2000 project costs and estimates to complete the project include the
estimated costs and time associated with the impact of third party Year 2000
issues, based on information currently available. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be remedied in a timely manner or that there will be no adverse effect
on the Company's systems. Therefore, to the extent that other entities not
affiliated with the Company are unsuccessful in properly addressing this issue,
the Company could possibly be negatively impacted. The Company is finalizing its
contingency plan to deal with unforeseen systemic failure beyond the Company's
control and/or a failure in the aforementioned remediation efforts. In addition,
the Company has performed a risk assessment of significant existing customers to
determine their exposure to Year 2000 related issues and on the customer's
ability to perform in accordance with contractual agreements. Management has
determined the Company's exposure to this risk is low. Furthermore, a Year 2000
risk assessment is performed on all new customers.
The total cost of the Year 2000 project is estimated at $300,000 to
$500,000. A significant portion of the costs associated with the Year 2000
project are not expected to be incremental to the Company, but rather represent
a reprioritization of existing internal systems technology resources. During the
three months and nine months ended December 31, 1998, the Company incurred
$17,000 and $32,000, respectively, of expenses directly related to Year 2000.
Since the Year 2000 Compliance project's inception, the Company has incurred
total costs of $82,000. In addition, in preparation for the Year 2000 Compliance
project, 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 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
8
<PAGE> 10
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.
ASSET QUALITY
At December 31, 1998, non-accrual loans totaled $2.8 million and real
estate owned ("REO") totaled $314,000. The Company ceases to accrue interest on
loans 90 days or more past due and charges off all accrued interest. Foregone
interest on non-accrual loans for the nine months ended December 31, 1998 was
$32,000. The following table sets forth information regarding non-accrual loans
and REO.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
1998 1998
--------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family.................................. $1,122 $1,073
Multi-family......................................... 193 101
Commercial real estate............................... 1,306 1,199
Construction and land................................ 117 169
------ ------
Total mortgage loans.............................. 2,738 2,542
------ ------
Commercial loans....................................... 45 74
------ ------
Consumer loans:
Home equity lines.................................... 36 425
Second mortgages..................................... 7 --
Other consumer loans................................. 4 7
------ ------
Total consumer loans.............................. 47 432
------ ------
Total nonaccrual loans............................ 2,830 3,048
Real estate owned, net(1).............................. 314 595
------ ------
Total non-performing assets....................... $3,144 $3,643
====== ======
Allowance for loan losses as a percent of loans(2).......... 1.47% 1.27%
Allowance for loan losses as a percent of non-performing
loans(3).................................................. 414.7% 358.8%
Non-performing loans as a percent of loans(2)(3)............ 0.35% 0.35%
Non-performing assets as a percent of total assets(4)....... 0.22% 0.28%
</TABLE>
- ---------------
(1) REO balances are shown net of related valuation allowances.
(2) Loans includes loans receivable, net, excluding allowance for loan losses.
(3) Non-performing loans consist of all loans 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectability of interest or principal.
(4) Non-performing assets consist of non-performing loans and REO.
CAUTIONARY STATEMENT
The preceding and following discussion in this Quarterly Report on Form
10-Q may contain certain forward-looking statements which are based on
management's current expectations regarding economic, legislative, and
regulatory issues that may impact the Company's earnings in future periods.
Factors that could cause future results to vary materially from current
management expectations include, but are not limited to: general economic
conditions, changes in interest rates, deposit flows, real estate values, and
competition; changes in accounting principles, policies, or guidelines; changes
in legislation or regulation; and other economic, competitive, governmental,
regulatory and technological factors affecting the Company's operations,
pricing, products and services. In particular, these issues may impact
management's estimates used in evaluating market risk and interest rate risk in
its GAP and NPV tables, loan loss provisions, classification of assets, Year
2000 issues, accounting estimates and other estimates used throughout this
discussion. Further description of the risks and uncertainties to the business
are included in detail in the "Business of the Company" section of the Company's
10-K.
9
<PAGE> 11
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
AND THE THREE MONTHS ENDED DECEMBER 31, 1997
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income is a function of both the relative amounts of interest earning
assets and interest-bearing liabilities, and the interest rates earned or paid
on them.
The following table sets forth certain information relating to the Company
for the three months ended December 31, 1998 and 1997. The average yields and
costs are derived by dividing income or expense by the average balance of
interest earning assets or interest bearing liabilities, respectively, for the
periods shown. Average balances are derived from average month-end balances.
Management does not believe that the use of average monthly balances instead of
average daily balances causes any material differences in the information
presented. The yields and the costs include fees, premiums and discounts which
are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for
sale.......................... $ 855,694 $15,986 7.41% $ 887,311 $17,100 7.65%
Investment securities........... 70,270 963 5.44% 42,852 708 6.55%
Mortgage-backed securities...... 352,245 4,816 5.42% 107,829 1,603 5.90%
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets................... 1,278,209 21,765 6.76% 1,037,992 19,411 7.42%
------- ---- ------- ----
Non-interest earning assets........ 71,886 54,048
---------- ----------
Total assets............... 1,350,095 1,092,040
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Deposits........................ 597,111 6,554 4.35% 666,337 8,273 4.93%
FHLB advances and other
borrow........................ 553,752 7,681 5.50% 233,675 3,553 6.03%
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities.............. 1,150,863 14,235 4.91% 900,012 11,826 5.21%
------- ---- ------- ----
Non-interest bearing liabilities... 89,897 64,237
---------- ----------
Total liabilities.......... 1,240,760 964,249
---------- ----------
Stockholders' equity............... 109,335 127,791
---------- ----------
Total liabilities and
stockholders' equity..... $1,350,095 $1,092,040
========== ==========
Net interest rate spread............. $ 7,530 1.85% $ 7,585 2.21%
======= ==== ======= ====
Net interest margin.................. 2.34% 2.90%
==== ====
Ratio of interest-earning assets to
interest-bearing liabilities....... 111.07% 115.33%
========== ==========
</TABLE>
10
<PAGE> 12
GENERAL
Net income was $2.2 million for the three months ended December 31, 1998,
compared to $1.9 million for the three months ended December 31, 1997. The
$255,000, or 13.2%, increase in net income for the three months ended December
31, 1998, was the result of a $142,000 decrease in income before income tax
expense being offset by a $397,000 decrease in income tax expense.
INTEREST INCOME
Interest and dividend income for the three months ended December 31, 1998
was $21.8 million, compared to $19.4 million for the three months ended December
31, 1997, an increase of $2.4 million, or 12.1%. The increase in interest and
dividend income is primarily attributable to a $240.2 million increase in
average interest-earning assets which increased to $1.278 billion for the three
months ended December 31, 1998 from $1.038 billion for the three months ended
December 31, 1997. The increase in average interest-earning assets was mainly
due to an increase in mortgage-backed securities available for sale which were
primarily funded by FHLB advances and other borrowings. The increase in average
interest-earning assets was accompanied by a 66 basis point decrease in the
average yield from 7.42% for the three months ended December 31, 1997 to 6.76%
for the three months ended December 31, 1998. This decline was primarily the
result of the Company's continuing wholesale growth strategy. This strategy
involves the purchase of mortgage-backed securities funded on a matched basis by
wholesale liabilities with a marginal spread below that of the Company's core
retail business. Income generated from this strategy had a positive impact on
the Company's return on equity and earnings per share.
Interest income on loans receivable, net and mortgage loans held for sale
for the three months ended December 31, 1998 decreased by $1.1 million, or 6.5%,
to $16.0 million from $17.1 million for the three months ended December 31,
1997. This decrease in income was attributable to a decrease of $31.6 million in
the average loan balance and a 24 basis point decrease in the yield on loans
receivable and mortgage loans held for sale. The decrease in yield was
attributable to prepayments of fixed-rate portfolio mortgages, recent drops in
the Prime rate, and lower interest rates on loans originated for portfolio.
Interest and dividend income from investment securities and Federal Home
Loan Bank stock was $963,000 for the three months ended December 31, 1998,
compared to $708,000 for the comparable three months in 1997. The average yield
on investment securities decreased by 111 basis points during the three months
ended December 31, 1998 versus the three months ended December 31, 1997,
primarily due to increased equity investments at the holding company, short-term
investments in commercial paper, and lower market interest rates. Investment
securities increased by $27.4 million to an average of $70.3 million during the
three months ending December 31, 1998 from $42.9 million during the three months
ended December 31, 1997.
Interest on mortgage-backed securities (MBS) for the three months ended
December 31, 1998 increased by $3.2 million to $4.8 million, compared to $1.6
million for the same three months in 1997. This increase in income is
attributable to a $244.4 million increase in the average MBS balance, partially
offset by a 48 basis point decrease in the average yield, from 5.90% to 5.42%,
for the three months ended December 31, 1998 versus the three months ended
December 31, 1997, respectively. This reduction in yield was primarily the
result of lower rate resets on adjustable-rate MBS, and faster,
refinance-related prepayments on higher coupon, premium MBS.
INTEREST EXPENSE
Interest expense for the three months ended December 31, 1998 was $14.2
million, compared to $11.8 million for the three months ended December 31, 1997,
an increase of $2.4 million, or 20.4%. The increase in interest expense during
this time period was the net effect of an increase in average interest-bearing
liabilities and a decrease in their associated cost. Average interest-bearing
liabilities increased $250.9 million, or 27.9%, to $1.151 billion for the three
months ended December 31, 1998, from $900.0 million for the three months ended
December 31, 1997. The average cost of funds fell 30 basis points to 4.91% from
5.21% during this period. Average deposits declined $69.2 million, or 10.4%,
from $666.3 million during the three months ended December 31, 1997 to $597.1
million during the three months ended December 31, 1998. During this
11
<PAGE> 13
time period, the cost of deposits fell 58 basis points due to a decline in the
general level of interest rates and to the Company's less aggressive deposit
pricing strategy.
Average Federal Home Loan Bank advances and other borrowings grew 137% to
$553.8 million during the three months ended December 31, 1998 versus $233.7
million during the same period in 1997. The cost of Federal Home Loan Bank
advances and other borrowings fell 53 basis points during this time period from
6.03% to 5.50%, also because of the decline in the level of market interest
rates.
NET INTEREST INCOME
Net interest income before provision for loan losses decreased $55,000, or
0.7%, to $7.5 million for the three months ended December 31, 1998 from $7.6
million for the three months ended December 31, 1997. Net interest income
decreased during this time period primarily because of the Company's stock
repurchase activity, which removed $18.5 million of average stockholder's equity
and reduced the ratio of interest-earning assets to interest-bearing
liabilities. The Company's net interest margin decreased to 2.34% for the three
months ended December 31, 1998 from 2.90% for the three months ended December
31, 1997.
PROVISION FOR LOAN LOSSES
For the three months ended December 31, 1998, the Company's provision for
loan losses remained at $300,000. The quarterly provision is based on
management's current assessment of the loan loss reserve level, the existing
loan portfolio, current market conditions, and the volume and mix of new
originations. The current quarterly provision is being allocated to the
Commercial loan reserve due to growth of the Commercial loan portfolio. The
provision for loan losses and the allowance for loan losses are periodically
reviewed by the OTS and FDIC as an integral part of their examination process.
The allowance for loan losses as a percentage of loans at December 31, 1998
was 1.47% as compared to 1.27% at March 31, 1998, and was 414.7% and 358.8% of
non-performing loans at the same time periods, respectively.
NON-INTEREST INCOME
Non-interest income increased to $2.2 million for the three months ended
December 31, 1998 compared to $1.9 million for the three months ended December
31, 1997, an increase of $234,000, or 12.1%. The increase is primarily
attributable to $199,000 earnings on the Bank-owned Life Insurance purchased
during the quarter, a $308,000 increase in the fair value of investments held by
certain employee benefit plans, partially offset by a $134,000 decrease in gains
on sale of investments, and $166,000 decrease in the gain on sale of mortgage
loans due to generally falling and more volatile market prices throughout the
quarter.
NON-INTEREST EXPENSE
Total non-interest expense increased $321,000, or 5.5%, to $6.2 million for
the three months ended December 31, 1998 compared to $5.9 million for the
comparable three months in 1997. This increase was primarily caused by a
$116,000 increase in expenses related to the Company's conversion and upgrade to
a new data processor in fiscal year 1998, a $308,000 increase in the fair value
of investments held by certain employee benefit plans, partially offset by a
$236,000 decrease in advertising and business promotion resulting from fiscal
year 1998's opening of the Company's new banking office, administrative and
operations facility in Swansea, Massachusetts and the re-opening of the
renovated Downtown Fall River, Massachusetts banking office.
INCOME TAXES
Income tax expense was $1.0 million for the three months ended December 31,
1998 compared to $1.4 million for the three months ended December 31, 1997, a
decrease of $397,000. This decrease was the result of a reduction in pre-tax
income, the Company's implementation of tax strategies during the fiscal year,
and the purchase of Bank-owned Life Insurance during the three months ended
December 31, 1998. The Company's effective tax rate was reduced to 31.9% during
the three months ended December 31, 1998 from 42.4% during the three months
ended December 31, 1997.
12
<PAGE> 14
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
AND THE NINE MONTHS ENDED DECEMBER 31, 1997
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income is a function of both the relative amounts of interest earning
assets and interest-bearing liabilities, and the interest rates earned or paid
on them.
The following table sets forth certain information relating to the Company
for the nine months ended December 31, 1998 and 1997. The average yields and
costs are derived by dividing income or expense by the average balance of
interest earning assets or interest bearing liabilities, respectively, for the
periods shown. Average balances are derived from average month-end balances.
Management does not believe that the use of average monthly balances instead of
average daily balances causes any material differences in the information
presented. The yields and the costs include fees, premiums and discounts which
are considered adjustments to yields.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997
------------------------------- ---------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- ---------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net and
Mortgage loans held for
sale..................... $ 878,603 $49,586 7.49% $ 872,843 $50,422 7.67%
Investment securities...... 63,243 2,721 5.71% 43,405 2,024 6.19%
Mortgage-backed
securities............... 295,291 12,351 5.55% 78,510 3,632 6.14%
---------- ------- ---- ---------- ------- ----
Total interest-earning
assets.............. 1,237,137 64,658 6.94% 994,758 56,078 7.48%
------- ---- ------- ----
Non-interest earning assets... 68,819 49,022
---------- ----------
Total assets.......... 1,305,956 1,043,780
========== ==========
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Deposits................... 621,298 21,282 4.55% 675,269 25,283 4.97%
FHLB advances and other
borrow................... 481,385 20,766 5.73% 180,353 8,299 6.11%
---------- ------- ---- ---------- ------- ----
Total interest-bearing
liabilities......... 1,102,683 42,048 5.06% 855,622 33,582 5.21%
------- ---- ------- ----
Non-interest bearing
liabilities................ 89,113 62,683
---------- ----------
Total liabilities..... 1,191,796 918,305
---------- ----------
Stockholders' equity.......... 114,160 125,475
---------- ----------
Total liabilities and
stockholders'
equity.............. $1,305,956 $1,043,780
========== ==========
Net interest rate spread........ $22,610 1.88% $22,496 2.27%
======= ==== ======= ====
Net interest margin............. 2.43% 3.00%
==== ====
Ratio of interest-earning assets
to interest-bearing
liabilities................... 112.19% 116.26%
========== ==========
</TABLE>
13
<PAGE> 15
GENERAL
Net income increased $184,000, or 3.4%, to $5.5 million for the nine months
ended December 31, 1998 compared to $5.4 million for the nine months ended
December 31, 1997. The increase in net income for the nine months ended December
31, 1998, was the result of a $1.1 million decrease in income before income tax
expense being offset by a $1.3 million decrease in income tax expense.
INTEREST INCOME
Interest and dividend income for the nine months ended December 31, 1998
was $64.7 million, compared to $56.1 million for the nine months ended December
31, 1997, an increase of $8.6 million, or 15.3%. The increase in interest and
dividend income is primarily attributable to a $242.4 million increase in
average interest-earning assets which increased to $1.237 billion for the nine
months ended December 31, 1998 from $994.8 million for the nine months ended
December 31, 1997. The increase in average interest-earning assets was mainly
due to an increase in mortgage-backed securities available for sale which were
primarily funded by FHLB advances and other borrowings. The increase in average
interest-earning assets was accompanied by a 54 basis point decrease in the
average yield from 7.48% for the nine months ended December 31, 1997 to 6.94%
for the nine months ended December 31, 1998. This decline was primarily the
result of the Company's continuing wholesale growth strategy.
Interest income on loans receivable, net and mortgage loans held for sale
for the nine months ended December 31, 1998 decreased by $836,000, or 1.7%, to
$49.6 million from $50.4 million for the same nine months in 1997. Although
average loan balances increased by $5.8 million to $878.6 million for the nine
months ended December 31, 1998, an 18 basis point decrease in the yield caused
the decline in interest income on loans receivable, net and mortgage loans held
for sale. The decrease in yield was attributable to prepayments of fixed-rate
portfolio mortgages, recent drops in the Prime rate, and lower interest rates on
loans originated for portfolio.
Interest and dividend income from investment securities and Federal Home
Loan Bank stock was $2.7 million for the nine months ended December 31, 1998,
compared to $2.0 million for the comparable nine months in 1997. The average
yield on investment securities decreased by 48 basis points during the nine
months ended December 31, 1998 versus the nine months ended December 31, 1997,
primarily due to increased equity investments at the holding company, short-term
investments in commercial paper, and lower market interest rates. Investment
securities increased by $19.8 million to an average of $63.2 million during the
nine months ending December 31, 1998 from $43.4 million during the nine months
ended December 31, 1997.
Interest on mortgage-backed securities for the nine months ended December
31, 1998 increased by $8.7 million to $12.4 million, compared to $3.6 million
for the same nine months in 1997. This increase in income is attributable to a
$216.8 million increase in the average mortgage-backed securities balance,
partially offset by a 59 basis point decrease in the average yield, from 6.14%
to 5.55%, for the nine months ended December 31, 1998 versus the nine months
ended December 31, 1997, respectively. This reduction in yield was primarily the
result of lower rate resets on adjustable-rate MBS, and faster,
refinance-related prepayments on higher coupon, premium MBS.
INTEREST EXPENSE
Interest expense for the nine months ended December 31, 1998 was $42.0
million, compared to $33.6 million for the nine months ended December 31, 1997,
an increase of $8.5 million, or 25.2%. The increase in interest expense during
this time period was the net effect of an increase in average interest-bearing
liabilities and a decrease in their associated cost. Average interest-bearing
liabilities increased $247.1 million, or 28.9%, to $1.103 billion for the nine
months ended December 31, 1998, from $855.6 million for the nine months ended
December 31, 1997. The average cost of funds fell 15 basis points to 5.06% from
5.21% during this period. Average deposits declined $54.0 million, or 8.0%, from
$675.3 during the nine months ended December 31, 1997 to $621.3 million during
the nine months ended December 31, 1998. During this time
14
<PAGE> 16
period the cost of deposits fell 42 basis points due to a decline in the general
level of interest rates and to the Company's less aggressive deposit pricing
strategy.
Average Federal Home Loan Bank advances and other borrowings grew 167% to
$481.4 million during the nine months ended December 31, 1998 versus $180.4
million during the same period in 1997. Due to the decline in market interest
rates, the cost of Federal Home Loan Bank advances and other borrowings fell 38
basis points during this time period, from 6.11% to 5.73%.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $114,000, or
0.5%, to $22.6 million for the nine months ended December 31, 1998 from $22.5
million for the nine months ended December 31, 1997. Net interest income
increased during this time period due to a $242.4 million increase in interest
earning assets which was partially offset by the effect of the Company's two
stock repurchase programs which removed $11.3 million of average stockholder's
equity and reduced the ratio of interest-earning assets to interest-bearing
liabilities. The Company's net interest margin decreased to 2.43% for the nine
months ended December 31, 1998 from 3.00% for the nine months ended December 31,
1997.
PROVISION FOR LOAN LOSSES
For the nine months ended December 31, 1998, the Company's provision for
loan losses was $900,000 compared to $2.1 million for the same prior year
period. The quarterly provision is based on management's current assessment of
the loan loss reserve level, the existing loan portfolio, current market
conditions, and the volume and mix of new originations. The current quarterly
provision is being allocated to the Commercial loan reserve due to growth of the
Commercial loan portfolio. The provision for loan losses and the allowance for
loan losses are periodically reviewed by the OTS and FDIC as an integral part of
their examination process.
The allowance for loan losses as a percentage of loans at December 31, 1998
was 1.47% as compared to 1.27% at March 31, 1998, and was 414.7% and 358.8% of
non-performing loans at the same time periods, respectively.
NON-INTEREST INCOME
Non-interest income increased to $5.2 million for the nine months ended
December 31, 1998 compared to $4.8 million for the nine months ended December
31, 1997, an increase of $411,000, or 8.6%. The increase is primarily
attributable to a $382,000 increase in gain on sale of mortgage loans due to
increased volume and more favorable secondary market conditions during the first
half of fiscal year 1999, a $144,000 increase in service charges, $199,000
earnings on Bank-owned Life Insurance, and a $153,000 increase in the fair value
of investments held by certain employee benefit plans. Partially offsetting
these increases are a $544,000 decrease in loan servicing income due to an
increase in the valuation allowance for mortgage servicing rights during the
first half of fiscal year 1999, and a $156,000 decrease in gain on sale of
investments.
NON-INTEREST EXPENSE
Total non-interest expense increased $2.8 million, or 17.6%, to $18.6
million for the nine months ended December 31, 1998 compared to $15.8 million
for the comparable nine months in 1997. This increase was primarily caused by a
$1.3 million increase in compensation and benefits related to increased staffing
for new banking offices and an increase in loan origination volume, an $826,000
increase in office occupancy and equipment related to increased depreciation on
building and equipment for new and recently renovated banking offices and the
new administrative and operations facility, and a $544,000 increase in other
operating expenses. The increase in other operating expenses was the result of
an increase in the fair value of investments held by certain employee benefit
plans, additional consulting fees, as well as additional costs for telephone,
postage, and supplies as a result of increased loan origination activity.
15
<PAGE> 17
INCOME TAXES
Income tax expense was $2.8 million for the nine months ended December 31,
1998 compared to $4.1 million for the nine months ended December 31, 1997, a
decrease of $1.3 million. This decrease was the result of a reduction in pre-tax
income, the Company's implementation of tax strategies during the fiscal year,
and the purchase of Bank-owned Life Insurance during the nine months ended
December 31, 1998. The Company's effective tax rate was reduced to 33.7% during
the nine months ended December 31, 1998 from 43.4% during the nine months ended
December 31, 1997.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk affecting the Company is interest-rate risk. The
principal objective of the Company's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. The Company seeks to manage the volatility of earnings and net
portfolio value in response 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 and short duration fixed-rate mortgage securities; and (4)
reducing the overall interest rate sensitivity of liabilities by emphasizing
longer-term deposits and longer-term FHLB advances to replace rate sensitive
deposits and to fund asset growth.
In addition, the Company has engaged in two interest rate swap agreements
to synthetically lengthen its liability maturities. At December 31, 1998, the
Company maintained two off-balance sheet interest rate swap positions ("swaps")
with notional principal balances totaling $50 million. These positions require
the Company to pay a long term fixed rate that was set at the time the position
was established, and requires the swap's counter party to pay the Company a
short-term rate that resets semi-annually based on the 6 month London Interbank
Offer Rate (LIBOR). This position is a hedge to the Company's natural source of
short-term funds. The net differential to be paid or received is treated as an
adjustment to deposit interest expense. The remaining terms of these swaps were
approximately 3 and 4 years at December 31, 1998.
The Company continues to follow its practice of selling the majority of
fixed-rate mortgage loans while generally retaining the servicing rights. In
conjunction with this mortgage banking activity, the Company uses forward
contracts to reduce exposure to interest-rate risk. The amount of forward
coverage of the "pipeline" of mortgages is managed on a day-to-day basis by an
operating officer, within Board approved policy guidelines, based on the
Company's assessment of the general direction of interest rates and levels of
mortgage origination activity.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period.
At December 31, 1998, the Company's cumulative one year 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
16
<PAGE> 18
assets, was a positive 7.06% versus a negative 3.19% at March 31, 1998.
Accordingly, during a period of rising interest rates, the Company's
interest-earning assets would tend to reprice upward at a faster rate than its
interest-bearing liabilities, which, consequently, could positively affect the
Company's net interest income. During a period of falling interest rates, the
Company's interest-earning assets would reprice downward at a faster rate than
its interest-bearing liabilities which, consequently, could negatively affect
the Company's net interest income.
This shift from modest short-term (one year) liability-sensitivity to
modest asset-sensitivity is the consequence of several factors, including: the
Company's increased investment in adjustable rate mortgage-backed securities; an
increase in Prime rate loans; a redistribution of maturing FHLB advances into
longer term maturities during a recent heavy repricing period; and an increase
in projected mortgage prepayment rates which accelerates mortgage maturities in
the Company's gap model. As is discussed in the following section, if rates were
to rise, prepayment rates would likely slow, causing an extension of mortgage
maturities that could shift the gap profile back negative. The Company's
longer-term exposure to interest-rate risk, as measured by the three year
cumulative interest rate gap, remained relatively stable and closely balanced at
a positive 1.03% on December 31, 1998 versus a negative 1.60% at March 31, 1998.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of change in interest rates, prepayment and early
withdrawal levels would likely deviate 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 also 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 December 31, 1998, was in full compliance with those limits. See the
Company's Form 10-K for the year ended March 31, 1998 for detailed gap and NPV
tables.
As in the case with the Gap Table, certain short-comings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in NPV require certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV model presented incorporates an assumption that
the composition of the Company=s interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured, and that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV measurements and
net interest income models provide an indication of the Company's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Company's net interest income and will differ from actual
results.
17
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings of a material nature at
the present time. From time to time, the Company is a party to routine legal
proceedings within the normal course of business. Such routine legal proceedings
in the aggregate are believed by management to be immaterial to the Company's
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificates of Incorporation of FIRSTFED AMERICA BANCORP, INC.(1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.(1)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC.(1)
10.1 Amended and restated FIRSTFED AMERICA, INC. 1997 Stock-based Incentive
Plan
10.2 FIRSTFED AMERICA, INC. 1998 Stock Option Plan(2)
27 Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
None
- ---------------
(1) Incorporated into this document by reference from the Exhibits to Form S-1,
Registration Statement, filed on September 27, 1996, as amended,
Registration No. 333-12855.
(2) Incorporated into this document by reference from Appendices A and B,
respectively, of the proxy statement dated June 15, 1998 and filed with the
SEC on June 15, 1998 (SEC No. 1-12305).
18
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
Registrant
Date: February 12, 1999
/s/ ROBERT F. STOICO
--------------------------------------
President and Chief Executive Officer
and
Chairman of the Board
(Principal Executive Officer)
Date: February 12, 1999
/s/ EDWARD A. HJERPE III
--------------------------------------
Executive Vice President and
Chief Operating Officer and
Chief Financial Officer
(Principal Accounting and Financial
Officer)
19
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 23,917
<INT-BEARING-DEPOSITS> 29,143
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 100
<INVESTMENTS-HELD-FOR-SALE> 373,891
<INVESTMENTS-CARRYING> 20,155
<INVESTMENTS-MARKET> 20,355
<LOANS> 786,514<F1>
<ALLOWANCE> 11,737
<TOTAL-ASSETS> 1,438,152
<DEPOSITS> 664,437
<SHORT-TERM> 366,269
<LIABILITIES-OTHER> 25,481
<LONG-TERM> 265,254
0
0
<COMMON> 87
<OTHER-SE> 105,566
<TOTAL-LIABILITIES-AND-EQUITY> 1,438,152
<INTEREST-LOAN> 49,586
<INTEREST-INVEST> 13,990
<INTEREST-OTHER> 1,082
<INTEREST-TOTAL> 64,658
<INTEREST-DEPOSIT> 21,282
<INTEREST-EXPENSE> 42,048
<INTEREST-INCOME-NET> 22,610
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 18,567
<INCOME-PRETAX> 8,362
<INCOME-PRE-EXTRAORDINARY> 8,362
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,817
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
<YIELD-ACTUAL> 2.43
<LOANS-NON> 2,830
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,306
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,937
<CHARGE-OFFS> 116
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 11,737
<ALLOWANCE-DOMESTIC> 11,737
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,298
<FN>
<F1>LOANS HELD TO MATURITY
</FN>
</TABLE>
