<PAGE>
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 September 30, 1999
[ ] 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)
DELAWARE 04-3331237
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 September 30, 1999, there were 7,077,129 shares of the Registrant's Common
Stock outstanding.
<PAGE>
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 September 30, 1999 (unaudited) and March 31, 1999 2
Consolidated Statements of Operations for the three months and six months ended September 30, 1999
(unaudited) and 1998 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the six months ended September 30, 1999
(unaudited) 4
Consolidated Statements of Cash Flows for the six months ended September 30, 1999 (unaudited) and 1998
(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 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Default Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
1
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
Assets 1999 1999
------------ ----------
(unaudited)
<S> <C> <C>
Cash on hand and due from banks $ 18,510 24,598
Short-term investments 3,845 14,422
----------- ---------
Total cash and cash equivalents 22,355 39,020
Mortgage loans held for sale 10,002 52,334
Investment in trading securities 274 94
Investment securities available for sale
(amortized cost of $5,660 and $5,660) 5,419 5,575
Mortgage-backed securities available for sale
(amortized cost of $519,518 and $408,485) 515,868 408,451
Investment securities held to maturity
(fair value of $- and $10,030) -- 9,998
Mortgage-backed securities held to maturity
(fair value of $3,499 and $5,733) 3,420 5,608
Stock in Federal Home Loan Bank of Boston, at cost 29,800 28,682
Loans receivable, net
(net of allowance for loan losses of $11,950 and $12,016) 788,698 766,687
Accrued interest receivable 6,587 6,369
Office properties and equipment, net 24,660 25,255
Mortgage servicing rights 7,222 6,537
Real estate owned, net -- 344
Bank-Owned Life Insurance 31,351 30,575
Prepaid expenses and other assets 9,627 7,708
----------- ---------
Total assets $ 1,455,283 1,393,237
=========== =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 668,330 674,870
FHLB advances and other borrowings 652,536 585,981
Advance payments by borrowers for taxes and insurance 4,823 5,660
Accrued interest payable 3,707 3,058
Other liabilities 21,400 20,707
----------- ---------
Total liabilities 1,350,796 1,290,276
----------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value; 25,000,000 shares authorized;
8,707,152 shares issued 87 87
Additional paid-in capital 85,381 85,407
Retained earnings 59,666 56,892
Accumulated other comprehensive loss (2,483) (150)
Unallocated ESOP shares (4,647) (4,647)
Unearned 1997 stock-based incentive plan (4,438) (5,869)
Treasury stock (29,079) (28,759)
----------- ---------
Total stockholders' equity 104,487 102,961
----------- ---------
Total liabilities and stockholders' equity $ 1,455,283 1,393,237
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended September 30, Ended September 30,
----------------------------- ------------------------------
1999 1998 1999 1998
-------------- -------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $14,805 $16,522 $29,589 $33,600
Investment securities 127 534 424 1,089
Mortgage-backed securities 7,276 4,245 13,302 7,535
Federal Home Loan Bank stock 482 370 951 669
-------------- -------------- --------------- --------------
Total Interest and dividend income: 22,690 21,671 44,266 42,893
-------------- -------------- --------------- --------------
Interest expense:
Deposit accounts 6,265 7,248 12,574 14,728
Borrowed funds 8,472 7,155 16,191 13,085
-------------- -------------- --------------- --------------
Total interest expense 14,737 14,403 28,765 27,813
-------------- -------------- --------------- --------------
Net interest income before loan loss provision 7,953 7,268 15,501 15,080
Provision for loan losses 300 300 600 600
-------------- -------------- --------------- --------------
Net interest income after loan loss provision 7,653 6,968 14,901 14,480
Non-interest income:
Loan servicing income 694 344 1,165 865
Gain (loss) on sale of mortgage loans, net (457) 569 (931) 1,022
Gain on sale of investments, net 0 8 0 8
Service charges on deposit accounts 349 230 644 486
Other income 909 166 2,043 676
-------------- -------------- --------------- --------------
Total non-interest income 1,495 1,317 2,921 3,057
-------------- -------------- --------------- --------------
Non-interest expense:
Compensation and benefits 3,747 3,440 7,282 7,343
Office occupancy and equipment 1,007 986 2,057 2,003
Advertising and business promotion 310 162 561 461
Data processing 307 229 672 422
Deposit insurance premiums 99 166 198 330
Other expense 833 866 1,783 1,828
-------------- -------------- --------------- --------------
Total non-interest expense 6,303 5,849 12,553 12,387
-------------- -------------- --------------- --------------
Income before income tax expense 2,845 2,436 5,269 5,150
Income tax expense 922 773 1,644 1,793
-------------- -------------- --------------- --------------
Net income 1,923 1,663 3,625 3,357
============== ============== =============== ==============
Basic earnings per share $0.30 $0.23 $0.57 $0.45
============== ============== =============== ==============
Diluted earnings per share $0.30 $0.23 $0.57 $0.45
============== ============== =============== ==============
Weighted average shares outstanding -- basic 6,392,510 7,166,794 6,363,972 7,403,204
============== ============== =============== ==============
Weighted average shares outstanding -- diluted 6,392,510 7,166,794 6,363,972 7,421,726
============== ============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended September 30, 1999
(Dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Shares Accumulated
of Additional other Unallocated
Preferred common Common paid-in Retained comprehensive ESOP
stock stock stock capital earnings (loss) shares
--------- -------- --------- ---------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1999 - 8,707 $ 87 $ 85,407 $ 56,892 $ (150) $ (4,647)
Earned SIP stock awards - - - (154) - - -
Earned ESOP shares charged to expense - - - 128 - - -
Cash dividends declared and paid
(1st quarter at $0.05 per share;
2nd quarter at $0.07 per share) - - - - (851) - -
Common stock acquired under
repurchase program
(14,900 shares at a price
of $12.63 per share) - - - - - - -
Common stock acquired for certain
employee benefit plans
(11,403 shares at an average price
of $14.05 per share) - - - - - - -
Common stock sold from certain
employee benefit plans
(1,708 shares at an average price
of $16.57 per share) - - - - - - -
Comprehensive income:
Net income - - - - 3,625 - -
Other comprehensive income, net of tax
Unrealized holding losses on
available for sale securities - - - - - (3,774) -
Reclassification adjustment for
losses
(gains) included in net income - - - - - - -
--------------
Net unrealized losses - - - - - (3,774) -
Tax effect - - - - - 1,441 -
--------------
Net-of-tax effect - - - - - (2,333) -
Total comprehensive income - - - - - - -
--------- -------- --------- ---------- ---------- -------------- -----------
Balance at September 30, 1999 - 8,707 $ 87 $ 85,381 $ 59,666 $ (2,483) $ (4,647)
========= ======== ========= ========== ========== ============== ===========
</TABLE>
<TABLE>
<CAPTION>
Unallocated
1997
stock-based
incentive Total
plan (SIP) Treasury stockholders'
shares stock equity
------------ ----------- -------------
<S> <C> <C> <C>
Balance at March 31, 1999 $ (5,869) $ (28,759) $ 102,961
Earned SIP stock awards 1,431 - 1,277
Earned ESOP shares charged to expense - - 128
Cash dividends declared and paid
(1st quarter at $0.05 per share;
2nd quarter at $0.07 per share) - - (851)
Common stock acquired under
repurchase program
(14,900 shares at a price
of $12.63 per share) - (189) (189)
Common stock acquired for certain
employee benefit plans
(11,403 shares at an average price
of $14.05 per share) - (160) (160)
Common stock sold from certain
employee benefit plans
(1,708 shares at an average price
of $16.57 per share) - 29 29
Comprehensive income:
Net income - - 3,625
Other comprehensive income, net of tax
Unrealized holding losses on
available for sale securities - - -
Reclassification adjustment for
losses
(gains) included in net income - - -
Net unrealized losses - - -
Tax effect - - -
Net-of-tax effect - - (2,333)
-------------
Total comprehensive income - - 1,292
------------ ----------- -------------
Balance at September 30, 1999 $ (4,438) $ (29,079) $ 104,487
============ =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended September 30,
-----------------------------
1999 1998
--------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,625 $ 3,357
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization (accretion) of:
Premium on investment and mortgage-backed securities held to maturity 1 1
Premium on investment and mortgage-backed securities available for sale 530 309
Deferred loan origination (costs) fees 92 (50)
Mortgage servicing rights 864 769
Provisions for:
Loan losses 600 600
Deferred income taxes - 10
(Gains) losses on sales of:
Investment securities available for sale - (8)
Real estate owned (60) (52)
Land, building and equipment (30) -
Mortgage loans 931 (1,022)
Net proceeds from sales of mortgage loans 188,193 317,684
Origination of mortgage loans held for sale (148,341) (272,756)
Unrealized gain on trading securities (80) -
Provision for real estate owned (43) -
Depreciation of office properties and equipment 1,265 1,077
Appreciation in fair value of ESOP shares 128 375
Earned SIP shares 1,277 1,217
Increase or decrease in:
Accrued interest receivable (218) (314)
Prepaid expenses and other assets (1,255) (189)
Accrued interest payable 649 172
Accrued income taxes and other liabilities 693 (15,977)
--------------- -------------
Net cash provided by operating activities 48,821 35,203
--------------- -------------
Cash flows from investing activities:
Purchase of trading securities $ (100) $ (100)
Purchase of investment securities available for sale - (3,845)
Purchase of mortgage-backed securities available-for-sale (178,847) (146,142)
Sale of mortgage-backed securities available-for-sale - 3,897
Payments received on mortgage-backed securities available for sale 67,283 45,524
Purchases of investment securities held to maturity - (120,788)
Maturities of investment securities held to maturity 10,000 130,288
Payments received on mortgage-backed securities held to maturity 2,185 3,154
Purchase of Federal Home Loan Bank stock (1,118) (6,912)
Net decrease (increase) in loans (22,873) 40,472
Proceeds from sales of real estate owned 617 325
Purchases of office properties and equipment (743) (1,365)
Sale of office properties and equipment 103 -
--------------- -------------
Net cash used in investing activities (123,493) (55,492)
--------------- -------------
Cash flows from financing activities:
Net decrease in deposits $ (6,540) $ (41,806)
Proceeds from FHLB advances and other borrowings 736,152 685,094
Repayments on FHLB advances and other borrowings (669,597) (599,586)
Net change in advance payments by borrowers for taxes and insurance (837) (1,207)
Cash dividends paid (851) (413)
Payments to acquire stock-based incentive plan shares - (2,502)
Payments to acquire common stock for treasury stock (320) (17,314)
--------------- -------------
Net cash provided by financing activities 58,007 22,266
--------------- -------------
Net increase (decrease) in cash and cash equivalents (16,665) 1,977
Cash and cash equivalents at beginning of period 39,020 32,021
--------------- -------------
Cash and cash equivalents at end of period $ 22,355 $ 33,998
=============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 28,116 $ 27,641
=============== =============
Income taxes $ 1,350 $ 3,028
=============== =============
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans $ 170 $ 61
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
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"), FAB FUNDING
CORPORATION ("FAB FUNDING") and FIRSTFED INSURANCE AGENCY, LLC (the "Agency").
First Federal Savings Bank of America includes its wholly-owned subsidiaries,
FIRSTFED MORTGAGE CORPORATION, FIRSTFED 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 six months ended September 30, 1999 are not necessarily indicative of
the results of operations that may be expected for all of fiscal year 2000.
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, 1999.
Note 2. Impact of Recent Accounting Pronouncements
- ---------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137 which
defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND MARCH 31, 1999
General
Total assets at September 30, 1999 were $1.455 billion, an increase of
$62.0 million, or 4.5%, compared to $1.393 billion at March 31, 1999. Asset
growth was primarily attributable to growth in mortgage-backed securities
available for sale which increased $107.4 million, or 26.3%, to $515.9 million
at September 30, 1999 from $408.5 million at March 31, 1999 and an increase in
loans receivable, net, which increased $22.0 million, or 2.9%, to $788.7 million
at September 30, 1999 from $766.7 million at March 31, 1999. Partially
offsetting this growth was a $42.3 million decrease in mortgage loans held for
sale, a $16.7 million decrease in cash and cash equivalents, and a $10.0 million
decrease in investment securities held to maturity. Deposit balances declined by
$6.5 million, to $668.3 million at September 30, 1999 from $674.9 million at
March 31, 1999. Balance sheet growth was primarily funded by a $66.6 million
increase in Federal Home Loan Bank of Boston advances and other borrowings
during the six months ended September 30, 1999.
Total stockholders' equity increased $1.5 million to $104.5 million at
September 30, 1999, from $103.0 million at March 31, 1999, primarily due to net
income for the six months ended September 30, 1999 of $3.6 million.
Stockholders' equity to assets was 7.18% at September 30, 1999, down from 7.39%
at March 31, 1999, the result of a 4.5% increase in assets versus a 1.5%
increase in stockholder's equity.
Liquidity and Capital
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 September 30, 1999
and March 31, 1999, the Bank's liquidity ratio was 39.1% and 30.4%,
respectively. The OTS required liquidity ratio is 4.0%.
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investments in trading securities, 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 September 30, 1999,
cash and cash equivalents, mortgage loans held for sale, investments in trading
securities, investment securities available for sale, and mortgage-backed
securities available for sale totaled $553.9 million, or 38.1% of total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including a $25 million FHLB secured line of credit, FHLB advances, and
other borrowings from securities dealers. At September 30, 1999, the Company had
$652.5 million in advances outstanding from the FHLB and other borrowings, and
an additional borrowing capacity from the FHLB of $219.2 million. The Company
uses FHLB advances and other borrowings to fund asset growth and other cash flow
needs, 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.
7
<PAGE>
At September 30, 1999, the Company had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $103.4 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate of deposit accounts scheduled to mature in less than one year from
September 30, 1999 totaled $338.2 million. The Company expects that it will
retain a majority of maturing certificate accounts.
At September 30, 1999, the consolidated stockholders' equity to total
assets ratio was 7.18%. At September 30, 1999, the Bank exceeded all of its
regulatory capital requirements. The Bank's tangible capital of $100.2 million,
or 6.90%, of total adjusted assets, was above the required level of $29.1
million or 2.0%; core capital of $100.2 million, or 6.90% of total adjusted
assets, was above the required level of $58.1 million, or 4.0%; risk-based
capital of $108.5 million, or 16.3% of risk-weighted assets, was above the
required level of $53.1 million or 8.0%, and Tier 1 risk-based capital of $100.2
million, or 15.1% of risk-weighted assets, was above the required level of $26.7
million or 4.0%. The Bank is considered a Awell capitalized@ institution under
the OTS prompt corrective action regulations.
Year 2000 Project
Included in other non-interest expenses are charges incurred in connection
with the modification or replacement of software and hardware to address the
"Year 2000 issue," which will allow for the Company's computer, communications,
and other related non-technology systems to properly recognize dates beyond
December 31, 1999. The Company has developed a plan that is based upon the
Federal Financial Institutions Examination Council ("FFIEC") recommended phases
and time frames for insuring Year 2000 readiness. These phases include
awareness, assessment, renovation, validation and implementation.
The Company has utilized both internal and external resources to test and
reprogram or replace software and hardware (including non-technology systems)
for Year 2000 modifications. The Company has completed renovation and testing of
all mission critical processing systems. Testing and remediation of non-critical
applications was completed by September 30, 1999.
The Company has worked 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 from all such parties. 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 be negatively impacted. The Company's total Year
2000 project costs, as discussed below, include the estimated costs and time
associated with the impact of third party Year 2000 issues.
In the unlikely event the Company experiences problems due to either
internal and/or external systemic failure, a contingency plan has been developed
outlining alternative methods of processing until the affected systems have been
corrected or replaced. The worst case scenario considered by the Bank involves a
general failure of multiple processing systems supporting mission-critical loan
and deposit platforms. Accordingly, the Bank has developed a contingency plan
outlining alternate processing routines to protect the integrity of deposit and
loan data while maintaining an acceptable level of customer service should such
an outage occur. Testing of the viability of alternative processing methods will
continue throughout the remainder of 1999. 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 entering into a significant relationship with the
Company.
8
<PAGE>
The total cost of the Year 2000 project is estimated at $200,000 to
$300,000. This estimate has been revised based on favorable results of
mission-critical system testing and lower than projected expenditures for
software and hardware upgrades. A significant portion of the costs are not
incremental to the Company, but rather represent a reprioritization of existing
internal systems technology resources. The Company does not explicitly track
internal costs associated with the Year 2000 project. For the three months ended
September 30, 1999 and for the entire project through September 30, 1999, the
Company has expensed approximately $4,000 and $154,000, respectively, toward
Year 2000 remediation efforts. In addition, in preparation for the Year 2000
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 Year 2000 related modifications were based on management's
best estimates, which were 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 code, and
similar uncertainties.
Pending Legislation
Legislation recently enacted by Congress eliminates many Federal and State
law barriers to affiliations among banks and other financial service providers.
The legislation, which takes effect 120 days after the date of enactment,
establishes a statutory framework pursuant to which full affiliations can occur
between banks and securities firms, insurance companies, and other financial
companies. The legislation provides some degree of flexibility in structuring
these new affiliations, although certain activities may only be conducted
through a holding company structure. The legislation preserves the role of the
Board of Governors of the Federal Reserve System as the umbrella supervisor for
holding companies, but incorporates a system of functional regulation pursuant
to which the various Federal and state financial supervisors will continue to
regulate the activities traditionally within their jurisdictions. The
legislation specifies that banks may not participate in the new affiliations
unless the banks are well-capitalized and well-managed or if any bank affiliate
had received a less than "satisfactory" Community Reinvestment Act of 1977
rating as of its most recent examination.
The President is expected to sign the legislation into law in the very near
future.
9
<PAGE>
Asset Quality
At September 30, 1999, non-accrual loans totaled $1.1 million and there was
no real estate owned ("REO"). The Company ceases to accrue interest on loans 90
days or more past due and charges off all accrued interest. Foregone interest on
non-accrual loans for the three months ended September 30, 1999 was $14,000 and
was $29,000 for the six months ended September 30, 1999. The following table
sets forth information regarding non-accrual loans and REO.
<TABLE>
<CAPTION>
At September 30, At March 31,
1999 1999
---------------- ------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family.................................... $ 510 $ 971
Multi-family........................................... - -
Commercial real estate 247 1,142
Construction and land.................................. 117 117
------ ------
Total mortgage loans............................... 874 2,230
------ ------
Commercial loans......................................... 252 280
------ ------
Consumer loans:
Home equity lines - 36
Second mortgages....................................... - -
Other consumer loans................................... 6 4
------ ------
Total consumer loans............................... 6 40
------ ------
Total nonaccrual loans............................. 1,132 2,550
Real estate owned, net(1).................................. - 344
------ ------
Total non-performing assets ........................... $1,132 $2,894
====== ======
Allowance for loan losses as a percent
percent of loans(2) 1.49% 1.54%
Allowance for loan losses as percent
of non-performing loans(3) 1,055.65% 471.22%
Non-performing loans as a percent
of loans(2)(3) 0.14% 0.33%
Non-performing assets as a percent
of total assets(4) 0.08% 0.21%
</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.
10
<PAGE>
Cautionary Statement
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information about the Company and it's
business, including additional factors that could materially affect the
Company's financial results, is included in the Company's other filings with the
Securities and Exchange Commission.
The Company does not undertake - and specifically disclaims any obligation
- - to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
11
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998
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 September 30, 1999 and 1998. 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 September 30,
------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ---------------------------------------
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 $ 785,559 $14,805 7.54% $ 871,522 $16,522 7.58%
Investment securities 41,739 609 5.80 58,767 904 6.10
Mortgage-backed securities 498,440 7,276 5.84 305,205 4,245 5.56
---------------- -------------------------- ----------------- ----------------------
Total interest-earning assets 1,325,738 22,690 6.84 1,235,494 21,671 7.02
-------------------------- ----------------------
Noninterest-earning assets 97,478 66,555
---------------- -----------------
Total assets $ 1,423,216 $ 1,302,049
================ =================
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits $ 612,009 6,265 4.07 $ 625,267 7,248 4.60
FHLB advances and other borrowings 628,896 8,472 5.36 482,246 7,155 5.89
---------------- -------------------------- -----------------------------------------
Total interest-bearing liabilities 1,240,905 14,737 4.72 1,107,513 14,403 5.16
-------------------------- ------------------------
Noninterest-bearing liabilities 77,391 82,870
----------------
Total liabilities 1,318,296 1,190,383
---------------- -----------------
Retained earnings 104,920 111,666
----------------
Total liabilities and retained earnings $ 1,423,216 $ 1,302,049
================ =================
Net interest rate spread $ 7,953 2.12% $ 7,268 1.86%
========================== =======================
Net interest margin 2.39% 2.33%
============= ==========
Ratio of interest-earning assets to
interest-bearing liabilities 106.84% 111.56%
================ =================
</TABLE>
12
<PAGE>
General
Net income increased $260,000, or 15.6%, to $1.9 million for the three
months ended September 30, 1999 from $1.7 million for the three months ended
September 30, 1998. Net interest income before loan loss provision increased
$685,000, or 9.4%, to $8.0 million for the three months ended September 30,
1999. Non-interest income increased $178,000, non-interest expense increased
$454,000, and income tax expense increased $149,000 for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998.
Interest Income
Interest and dividend income for the three months ended September 30, 1999
was $22.7 million, compared to $21.7 million for the three months ended
September 30, 1998, an increase of $1.0 million, or 4.7%. The increase in
interest and dividend income is primarily attributable to a $90.2 million
increase in average interest-earning assets which increased to $1.326 billion
for the three months ended September 30, 1999 from $1.235 billion for the three
months ended September 30, 1998. The increase in average interest-earning assets
was mainly due to a $193.2 million increase in mortgage-backed securities
available for sale, partially offset by a $86.0 million decrease in loans
receivable, net. The increase in average interest-earning balances was
accompanied by a 18 basis point decrease in average yield on interest-earning
assets from 7.02% for the three months ended September 30, 1998 to 6.84% for the
three months ended September 30, 1999. This decline was primarily the result of
the addition of adjustable-rate and shorter-term fixed-rate mortgage-backed
securities.
Interest income on loans receivable, net and mortgage loans held for sale
for the three months ended September 30, 1999 decreased by $1.7 million, or
10.4%, to $14.8 million compared to $16.5 million for the three months ended
September 30, 1998. This decrease was attributable to a decrease of $86.0
million in average loan balance and a 4 basis point decrease in yield on loans
receivable and mortgage loans held for sale. About $28.8 million of the $86.0
million decline in average loan balance was in mortgage loans held for sale.
Interest and dividend income from investment securities and FHLB of Boston
stock was $609,000 for the three months ended September 30, 1999, compared to
$904,000 for the three months ended September 30, 1998. Investment securities
average balances decreased by $17.0 million to an average of $41.7 million
during the three months ending September 30, 1999 from $58.8 million during the
three months ended September 30, 1998.
Interest on mortgage-backed securities for the three months ended September
30, 1999 increased by $3.0 million to $7.3 million, compared to $4.2 million for
the three months ended September 30, 1998. This increase in income is
attributable to a $193.2 million increase in the average mortgage-backed
securities balance and a 28 basis point increase in the average yield, from
5.56% to 5.84%, for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. This increase in yield was the result of
rising market interest rates which led to: a) higher rate resets on existing
adjustable-rate mortgage-backed securities; b) slower mortgage prepayment rates
and, therefore, slower amortization of purchase premiums; and, c) generally
higher yields on new mortgage-backed securities purchased during the period.
Interest Expense
Interest expense for the three months ended September 30, 1999 was $14.7
million, compared to $14.4 million for the three months ended September 30,
1998, an increase of $334,000, or 2.3%. The increase in interest expense during
this time period was the net effect of an increase in average interest-bearing
liabilities of $133.4 million and a decrease in their associated cost of 44
basis points.
13
<PAGE>
Average interest-bearing liabilities increased $133.4 million, or 12.0%, to
$1.241 billion for the three months ended September 30, 1999, from $1.108
billion for the three months ended September 30, 1998. Of this amount, average
deposits declined $13.3 million, or 2.1%, from $625.3 million during the three
months ended September 30, 1998 to $612.0 million during the three months ended
September 30, 1999. The average cost of deposits for the three months ended
September 30, 1999 fell 53 basis points compared to the three months ended
September 30, 1998 due to a decline in the general level of local deposit rates
and to the Company's less aggressive deposit pricing strategy.
Average Federal Home Loan Bank advances and other borrowings grew $146.7
million, or 30.4%, to $628.9 million during the three months ended September 30,
1999 versus $482.2 million during the comparable period in 1998. Because of a
sharp decline in market interest rates late in 1998, new borrowings were added
and maturing "high" rate borrowings were replaced at rates significantly lower
than the average cost of total borrowings. The cost of Federal Home Loan Bank
advances and other borrowings fell 53 basis points, from 5.89% for the three
months ended September 30, 1998 to 5.36% for the three months ended September
30, 1999.
Net Interest Income
Net interest income before loan loss provision increased $685,000, or 9.4%,
to $8.0 million from $7.3 million, for the three months ended September 30, 1999
and 1998, respectively. This increase was the net effect of a $90.2 million
increase in interest earning assets and a 26 basis point increase in interest
rate spread partially offset by a re-deployment of funds out of interest-earning
assets and into $30.0 million of Bank-Owned Life Insurance ("BOLI") and a $6.7
million decrease in average stockholders' equity primarily due to the Company's
capital stock repurchase program. Earnings from BOLI are reported as
non-interest income. The Company's interest rate spread increased to 2.12% for
the three months ended September 30, 1999, compared to 1.86% for the three
months ended September 30, 1998.
Provision for Loan Losses
The Company's provision for loan losses remained at $300,000 for the three
months ended September 30, 1999 and 1998. The Company's allowance for loan
losses was $12.0 million, or 1.49% of loans receivable, net, at September 30,
1999, unchanged from $12.0 million, or 1.54% of loans receivable at March 31,
1999. Allowance for loan losses was 1,056% and 471% of non-performing loans at
September 30, 1999 and March 31, 1999, respectively. The increase in this ratio
was primarily the result of a decrease in non-performing loans. To the extent
the Company experiences increases in the balance of its loan portfolio or
increases its concentration 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.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon management's assessment of the risk
inherent in its loan portfolio in light of current economic conditions, actual
loss experience, industry trends and other factors which may affect real estate
and business values in the Company's market area. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to provide additions to the allowance based upon judgements
which differ from those of management. While management of the Company believes
that the allowance for loan losses is sufficient based on information currently
available to it, 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.
14
<PAGE>
Non-performing loans at September 30, 1999 decreased $1.4 million to $1.1
million, or 0.14% of loans receivable, net, from $2.6 million, or 0.33% of loans
receivable, net, at March 31, 1999. At September 30, 1999, the Company's
non-performing assets, which include non-performing loans and REO, decreased
$1.8 million to $1.1 million compared to $2.9 million at March 31, 1999.
Decreases in non-performing loans and assets are primarily a result of continued
strengthening in the local economy and conservative loan underwriting.
Non-interest Income
Non-interest income increased $178,000, or 13.5%, to $1.5 million for the
three months ended September 30, 1999 from $1.3 million for the three months
ended September 30, 1998. The increase is primarily attributable to a $350,000
increase in loan servicing income, a $743,000 increase in other non-interest
income, and a $119,000 increase in service charges, partially offset by a $1.0
million decrease in gain (loss) on sale of mortgage loans. The increase in loan
servicing income is primarily attributable to higher income from an increase in
the servicing portfolio and a $237,000 reduction in the valuation reserve for
mortgage servicing rights ("MSR") due to an increase in the market valuation of
MSR. The increase in other non-interest income is primarily a result of $395,000
earnings from BOLI and a $248,000 increase in the fair value of investments held
by certain employee benefit plans. The increase in service charges is the result
of an increase in fee-based checking accounts. The decrease in gain (loss) on
sale of mortgage loans was due to a rise in mortgage rates throughout 1999.
Non-interest Expense
Non-interest expense increased $454,000, or 7.8%, to $6.3 million for the
three months ended September 30, 1999 from $5.8 million for the three months
ended September 30, 1998. The increase is primarily attributable to a $307,000
increase in compensation and benefits and a $148,000 increase in advertising and
promotion. The increase in compensation and benefits was due to increased
staffing related to the opening of the Cranston banking office and the FIRSTFED
INSURANCE AGENCY, LLC, and an increase in the fair value of investments held by
certain employee benefit plans (offset by a comparable increase in non-interest
income noted above), partially offset by a decrease in expense for stock-based
benefit plans including the Employee Stock Ownership Plan ("ESOP") and the
amended 1997 Stock-based Incentive Plan ("SIP").
Income Taxes
Income tax expense increased $149,000, or 19.3%, to $922,000 for the three
months ended September 30, 1999 from $773,000 for the three months ended
September 30, 1998. The Company's effective tax rate increased to 32.4% for the
three months ended September 30, 1999 from 31.7% for the three months ended
September 30, 1998. The low effective tax rate was the result of the Company's
investment in BOLI and other tax mitigation strategies.
15
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1999 AND THE SIX MONTHS ENDED SEPTEMBER 30, 1998
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 six months ended September 30, 1999 and 1998. 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 Six Months Ended September 30,
------------------------------------------------------------------------------------
1999 1998
------------------------------------------- ---------------------------------------
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 $ 792,941 $29,589 7.46% $ 890,057 $33,600 7.55%
Investment securities 48,212 1,375 5.70 59,728 1,758 5.87
Mortgage-backed securities 464,934 13,302 5.72 266,814 7,535 5.65
------------------------------------------- ----------------------------------------
Total interest-earning assets 1,306,087 44,266 6.78 1,216,599 42,893 7.05
--------------------------- -----------------------
Noninterest-earning assets 98,291 67,287
---------------- -----------------
Total assets $ 1,404,378 $ 1,283,886
================ =================
Liabilities and Retained Earnings:
Interest-bearing liabilities:
Deposits $ 612,939 12,574 4.10 $ 633,433 14,728 4.64
FHLB advances and other borrow. 605,595 16,191 5.35 447,201 13,085 5.84
------------------------------------------- ----------------------------------------
Total interest-bearing liabilities 1,218,534 28,765 4.72 1,080,634 27,813 5.13
--------------------------- -----------------------
Noninterest-bearing liabilities 79,235 86,679
---------------- -----------------
Total liabilities 1,297,769 1,167,313
---------------- -----------------
Retained earnings 106,609 116,573
----------------
Total liabilities and retained earnings $ 1,404,378 $ 1,283,886
================ =================
Net interest rate spread $ 15,501 2.06% $ 15,080 1.92%
=========================== =======================
Net interest margin 2.37% 2.47%
============= ==========
Ratio of interest-earning assets to
interest-bearing liabilities 107.19% 112.58%
================ =================
</TABLE>
16
<PAGE>
General
Net income increased $268,000, or 8.0%, to $3.6 million for the six months
ended September 30, 1999 from $3.4 million for the six months ended September
30, 1998. Net interest income before loan loss provision increased $421,000, or
2.8%, to $15.5 million for the six months ended September 30, 1999. Non-interest
income decreased $136,000, non-interest expense increased $166,000, and income
tax expense decreased $149,000 for the six months ended September 30, 1999
compared to the six months ended September 30, 1998.
Interest Income
Interest and dividend income for the six months ended September 30, 1999
was $44.3 million, compared to $42.9 million for the six months ended September
30, 1998, an increase of $1.4 million, or 3.2%. The increase in interest and
dividend income is primarily attributable to a $89.5 million increase in average
interest-earning assets which increased to $1.306 billion for the six months
ended September 30, 1999 from $1.217 billion for the six months ended September
30, 1998. The increase in average interest-earning assets was mainly due to a
$198.1 million increase in mortgage-backed securities available for sale,
partially offset by a $97.1 million decrease in loans receivable, net. The
increase in average interest-earning balances was accompanied by a 27 basis
point decrease in average yield on interest-earning assets from 7.05% for the
six months ended September 30, 1998 to 6.78% for the six months ended September
30, 1999. This decline was primarily the result of the addition of
adjustable-rate and shorter-term fixed-rate mortgage-backed securities.
Interest income on loans receivable, net and mortgage loans held for sale
for the six months ended September 30, 1999 decreased by $4.0 million, or 11.9%,
to $29.6 million from $33.6 million for the six months ended September 30, 1998.
This decrease was attributable to a $97.1 million decrease in average loan
balance and a 9 basis point decrease in yield on loans receivable and mortgage
loans held for sale. About $29.3 million of the $97.1 million decline in average
loan balance was in mortgage loans held for sale.
Interest and dividend income from investment securities and FHLB of Boston
stock was $1.4 million for the six months ended September 30, 1999, compared to
$1.8 million for the six months ended September 30, 1998. Investment securities
average balances decreased by $11.5 million to an average of $48.2 million
during the six months ending September 30, 1999 from $59.7 million during the
six months ended September 30, 1998.
Interest on mortgage-backed securities for the six months ended September
30, 1999 increased by $5.8 million to $13.3 million, compared to $7.5 million
for the six months ended September 30, 1998. This increase in income is
attributable to a $198.1 million increase in the average mortgage-backed
securities balance and a 7 basis point increase in the average yield, from 5.65%
to 5.72%, for the six months ended September 30, 1999 compared to the six months
ended September 30, 1998. This increase in yield was the result of rising market
interest rates which led to: a) higher rate resets on existing adjustable-rate
mortgage-backed securities; b) slower mortgage prepayment rates and, therefore,
slower amortization of purchase premiums; and, c) generally higher yields on new
mortgage-backed securities purchased during the period.
Interest Expense
Interest expense for the six months ended September 30, 1999 was $28.8
million, compared to $27.8 million for the six months ended September 30, 1998,
an increase of $952,000, or 3.4%. The increase in interest expense during this
time period was the net effect of an increase in average interest-bearing
liabilities of $137.9 million and a decrease in their associated cost of 41
basis points.
17
<PAGE>
Average interest-bearing liabilities increased $137.9 million, or 12.8%, to
$1.218 billion for the six months ended September 30, 1999, from $1.081 billion
for the six months ended September 30, 1998. Of this amount, average deposits
declined $20.5 million, or 3.2%, from $633.4 million during the six months ended
September 30, 1998 to $612.9 million during the six months ended September 30,
1999. The average cost of deposits for the six months ended September 30, 1999
fell 54 basis points compared to the six months ended September 30, 1998 due to
a decline in the general level of local deposit rates and to the Company's less
aggressive deposit pricing strategy.
Average Federal Home Loan Bank advances and other borrowings grew $158.4
million, or 35.4%, to $605.6 million during the six months ended September 30,
1999 versus $447.2 million during the comparable period in 1998. Because of a
sharp decline in market interest rates late in 1998, new borrowings were added
and maturing "high" rate borrowings were replaced at rates significantly lower
than the average cost of total borrowings. The cost of Federal Home Loan Bank
advances and other borrowings fell 49 basis points, from 5.84% for the six
months ended September 30, 1998 to 5.35% for the six months ended September 30,
1999.
Net Interest Income
Net interest income before loan loss provision increased $421,000, or 2.8%,
to $15.5 million from $15.1 million, for the six months ended September 30, 1999
and 1998, respectively. This increase was the net effect of a $89.5 million
increase in interest earning assets and a 14 basis point increase in interest
rate spread partially offset by a re-deployment of funds out of interest-earning
assets and into $30.0 million of Bank-Owned Life Insurance ("BOLI") and a $10.0
million decrease in average stockholders' equity primarily due to the Company's
capital stock repurchase program. Earnings from BOLI are reported as
non-interest income. The Company's interest rate spread increased to 2.06% for
the six months ended September 30, 1999, compared to 1.92% for the six months
ended September 30, 1998.
Provision for Loan Losses
The Company's provision for loan losses remained at $600,000 for the six
months ended September 30, 1999 and 1998. The Company's allowance for loan
losses was $12.0 million, or 1.49% of loans receivable, net, at September 30,
1999, unchanged from $12.0 million, or 1.54% of loans receivable at March 31,
1999. Allowance for loan losses was 1,056% and 471% of non-performing loans at
September 30, 1999 and March 31, 1999, respectively. The increase in this ratio
was primarily the result of a decrease in non-performing loans. To the extent
the Company experiences increases in the balance of its loan portfolio or
increases its concentration 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.
The Company establishes provisions for loan losses, which are charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon management's assessment of the risk
inherent in its loan portfolio in light of current economic conditions, actual
loss experience, industry trends and other factors which may affect real estate
and business values in the Company's market area. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to provide additions to the allowance based upon
18
<PAGE>
judgements which differ from those of management. While management of the
Company believes that the allowance for loan losses is sufficient based on
information currently available to it, 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-performing loans at September 30, 1999 decreased $1.4 million to $1.1
million, or 0.14% of loans receivable, net, from $2.6 million, or 0.33% of loans
receivable, net, at March 31, 1999. At September 30, 1999, the Company's
non-performing assets, which include non-performing loans and REO, decreased
$1.8 million to $1.1 million compared to $2.9 million at March 31, 1999.
Decreases in non-performing loans and assets are primarily a result of continued
strengthening in the local economy and conservative loan underwriting.
Non-interest Income
Non-interest income decreased $136,000, or 4.5%, to $2.9 million for the
six months ended September 30, 1999 from $3.1 million for the six months ended
September 30, 1998. The decrease is primarily attributable to a $2.0 million
loss on mortgage sales, partially offset by $775,000 in earnings from BOLI, a
$217,000 increase in the fair value of investments held by certain employee
benefit plans, a $237,000 reduction in the valuation reserve for MSR, and a
$158,000 increase in service charges.
Non-interest Expense
Non-interest expense increased $166,000, or 1.3%, to $12.6 million from
$12.4 million, in the six months ended September 30, 1999 and 1998. The increase
is primarily attributable to a $250,000 increase in data processing expense and
a $100,000 increase in advertising and business promotion, partially offset by a
$132,000 decrease in deposit insurance premiums and $61,000 decrease in
compensation and benefits.
Income Taxes
Income tax expense decreased $149,000, or 8.3%, to $1.6 million for the six
months ended September 30, 1999 from $1.8 million for the six months ended
September 30, 1998. The Company's effective tax rate decreased to 31.2% for the
six months ended September 30, 1999 from 34.8% for the six months ended
September 30, 1998. The low effective tax rate was the result of the Company's
investment in BOLI and other tax mitigation strategies.
19
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk affecting the Company is interest-rate risk. The
principal objective of the Company's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a monthly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.
In recent years, the Company has primarily utilized the following
strategies to manage interest rate risk: (1) emphasizing the origination and
retention of adjustable-rate and shorter-term (generally twelve years or less)
fixed-rate, one- to four-family mortgage loans; (2) selling in the secondary
market longer-term, fixed-rate mortgage loans originated while generally
retaining the servicing rights on such loans; (3) investing primarily in
adjustable rate mortgage-backed securities and short-term fixed-rate
collateralized mortgage obligations ("CMOs"); 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 September 30, 1999, the Company's cumulative one year interest rate gap
(which is the difference between the amount of interest-earning assets and the
amount of interest-bearing liabilities maturing or repricing within one year) as
a percentage of total assets was a negative 1.20%. Accordingly, 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, may negatively affect the Company's net interest income. During a
period of rising interest rates, the Company's interest-earning assets would
reprice upward at a faster rate than its interest-bearing liabilities which,
consequently, may positively affect the Company's net interest income.
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
20
<PAGE>
levels would likely deviate significantly from those assumed in calculating the
table. Finally, the ability of some 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 interest income ("NII") and net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario divided
by the estimated market value of assets in the same scenario. The OTS produces a
similar analysis for the Bank using its own model, based upon data submitted 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 September 30, 1999, was in full
compliance with those limits. As of September 30, 1999 there was no material
difference between current and March 31, 1999 gap and NPV measures. See the
Company's Annual Report on Form 10-K for the year ended March 31, 1999 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.
During fiscal year-end 2000, the Company continues to follow its practice
of selling certain fixed-rate and adjustable-rate mortgage loans while generally
retaining the servicing rights. In conjunction with this mortgage banking
activity, the Company uses forward contracts in order to reduce exposure to
interest-rate risk. The amount of forward coverage of the "pipeline" of
mortgages is managed on a day-to-day basis by an operating officer, within Board
approved policy guidelines, based on the Company's assessment of the general
direction of interest rates and levels of mortgage origination activity.
21
<PAGE>
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 Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
22
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
3.1 Certificate 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 FIRSTFED AMERICA, INC. 1997 Stock-based Incentive Plan,
as amended (2)(3)
10.2 FIRSTFED AMERICA, INC. 1998 Stock Option Plan (3)
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 the proxy
statement dated June 20, 1997 and filed with the SEC on June
20, 1997 (SEC No. 1-12305).
(3) Incorporated into this document by reference from Appendices
A (Amendments to the FIRSTFED AMERICA BANCORP, INC. 1997
Stock-Based Incentive Plan) and B (FIRSTFED AMERICA, INC.
1998 Stock Option Plan), respectively, of the proxy
statement dated June 15, 1998 and filed with the SEC on June
15, 1998 (SEC No. 1-12305).
23
<PAGE>
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, thereunto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
--------------------------------------------
Registrant
Date: November 15, 1999 /s/ Robert F. Stoico
--------------------------------------------
President and Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: November 15, 1999 /s/ Edward A. Hjerpe III
--------------------------------------------
Executive Vice President and
Chief Operating Officer and
Chief Financial Officer
(Principal Accounting and Financial Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,355
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 274
<INVESTMENTS-HELD-FOR-SALE> 521,287
<INVESTMENTS-CARRYING> 3,420
<INVESTMENTS-MARKET> 3,499
<LOANS> 788,698<F1>
<ALLOWANCE> 11,950
<TOTAL-ASSETS> 1,455,283
<DEPOSITS> 668,330
<SHORT-TERM> 360,496
<LIABILITIES-OTHER> 29,930
<LONG-TERM> 292,040
0
0
<COMMON> 87
<OTHER-SE> 104,400
<TOTAL-LIABILITIES-AND-EQUITY> 1,455,283
<INTEREST-LOAN> 29,589
<INTEREST-INVEST> 13,726
<INTEREST-OTHER> 951
<INTEREST-TOTAL> 44,266
<INTEREST-DEPOSIT> 12,574
<INTEREST-EXPENSE> 28,765
<INTEREST-INCOME-NET> 15,501
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,553
<INCOME-PRETAX> 5,269
<INCOME-PRE-EXTRAORDINARY> 5,269
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,625
<EPS-BASIC> .57
<EPS-DILUTED> .57
<YIELD-ACTUAL> 2.37
<LOANS-NON> 1,132
<LOANS-PAST> 0
<LOANS-TROUBLED> 618
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,016
<CHARGE-OFFS> 675
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<ALLOWANCE-CLOSE> 11,950
<ALLOWANCE-DOMESTIC> 11,950
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,680
<FN>
<F1>LOANS HELD TO MATURITY
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</TABLE>
