<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 December 31, 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.
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(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
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(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 679-8181
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(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, 1999, there were 6,743,029 shares of the Registrant's
Common Stock outstanding.
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<PAGE>
FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 (unaudited)
and March 31, 1999............................................ 2
Consolidated Statements of Operations for the three months and
nine months ended December 31, 1999 (unaudited) and 1998
(unaudited)................................................... 3
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended December 31, 1999 (unaudited)........... 4
Consolidated Statements of Cash Flows for the nine months ended
December 31, 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..... 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 21
Item 2. Changes in Securities and Use of Proceeds...................... 21
Item 3. Defaults Upon Senior Securities................................ 21
Item 4. Submission of Matters to a Vote of Security Holders............ 21
Item 5. Other Information.............................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
SIGNATURES............................................................... 22
</TABLE>
1
<PAGE>
FIRSTFED AMERICA BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ----------
(unaudited)
<S> <C> <C>
Assets
Cash on hand and due from banks....................... $ 21,036 $ 24,598
Short-term investments................................ 18,750 14,422
---------- ----------
Total cash and cash equivalents..................... 39,786 39,020
Mortgage loans held for sale.......................... 3,876 52,334
Investment in trading securities...................... 330 94
Investment securities available for sale (amortized
cost of $5,660 and $5,660)........................... 5,323 5,575
Mortgage-backed securities available for sale
(amortized cost of $537,323 and $408,485)............ 532,177 408,451
Investment securities held to maturity (fair value of
$- and $10,030)...................................... -- 9,998
Mortgage-backed securities held to maturity (fair
value of $3,276 and $5,733).......................... 3,235 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 $12,111 and $12,016)....................... 814,295 766,687
Accrued interest receivable........................... 6,537 6,369
Office properties and equipment, net.................. 25,135 25,255
Mortgage servicing rights............................. 6,822 6,537
Real estate owned, net................................ 61 344
Bank-Owned Life Insurance............................. 31,733 30,575
Prepaid expenses and other assets..................... 10,612 7,708
---------- ----------
Total assets...................................... $1,509,722 $1,393,237
========== ==========
Liabilities and Stockholders' Equity
Liabilities:
Deposits............................................ $ 650,090 $ 674,870
FHLB advances and other borrowings.................. 730,769 585,981
Advance payments by borrowers for taxes and
insurance.......................................... 4,316 5,660
Accrued interest payable............................ 4,637 3,058
Other liabilities................................... 18,957 20,707
---------- ----------
Total liabilities..................................... 1,408,769 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.......................... 85,431 85,407
Retained earnings................................... 61,381 56,892
Accumulated other comprehensive loss................ (3,471) (150)
Unallocated ESOP shares............................. (4,647) (4,647)
Unearned 1997 stock-based incentive plan............ (4,438) (5,869)
Treasury stock...................................... (33,390) (28,759)
---------- ----------
Total stockholders' equity........................ 100,953 102,961
---------- ----------
Total liabilities and stockholders' equity........ $1,509,722 $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 Nine Months
Ended December 31, Ended December 31,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans.......................... $ 15,326 $ 15,986 $ 44,915 $ 49,586
Investment securities.......... 199 550 623 1,639
Mortgage-backed securities..... 8,091 4,816 21,393 12,351
Federal Home Loan Bank stock... 500 413 1,451 1,082
---------- ---------- ---------- ----------
Total Interest and dividend
income: 24,116 21,765 68,382 64,658
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts............... 6,187 6,554 18,761 21,282
Borrowed funds................. 9,796 7,681 25,987 20,766
---------- ---------- ---------- ----------
Total interest expense....... 15,983 14,235 44,748 42,048
---------- ---------- ---------- ----------
Net interest income before
loan loss provision......... 8,133 7,530 23,634 22,610
Provision for loan losses........ 300 300 900 900
---------- ---------- ---------- ----------
Net interest income after
loan loss provision......... 7,833 7,230 22,734 21,710
---------- ---------- ---------- ----------
Non-interest income:
Loan servicing income.......... 457 560 1,622 1,425
Gain (loss) on sale of mortgage
loans, net.................... (80) 371 (1,011) 1,393
Gain on sale of investments,
net........................... -- -- -- 8
Service charges on deposit
accounts...................... 395 313 1,039 799
Other income................... 855 918 2,898 1,594
---------- ---------- ---------- ----------
Total non-interest income.... 1,627 2,162 4,548 5,219
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and benefits...... 3,710 3,498 10,992 10,841
Office occupancy and
equipment..................... 961 858 3,018 2,861
Advertising and business
promotion..................... 202 151 763 612
Data processing................ 327 296 999 718
Deposit insurance premiums..... 99 156 297 486
Other expense.................. 981 1,221 2,765 3,049
---------- ---------- ---------- ----------
Total non-interest expense... 6,280 6,180 18,834 18,567
---------- ---------- ---------- ----------
Income before income tax
expense..................... 3,180 3,212 8,448 8,362
Income tax expense............... 979 1,024 2,623 2,817
---------- ---------- ---------- ----------
Net income................... $ 2,201 $ 2,188 $ 5,825 $ 5,545
========== ========== ========== ==========
Basic earnings per share......... $ 0.35 $ 0.32 $ 0.92 $ 0.77
========== ========== ========== ==========
Diluted earnings per share....... $ 0.35 $ 0.32 $ 0.92 $ 0.77
========== ========== ========== ==========
Weighted average shares
outstanding--basic.............. 6,228,906 6,832,515 6,318,657 7,212,138
========== ========== ========== ==========
Weighted average shares
outstanding--diluted............ 6,228,906 6,832,515 6,318,657 7,212,138
========== ========== ========== ==========
</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 Nine Months Ended December 31, 1999
(Dollars and shares in thousands)
(unaudited)
<TABLE>
<CAPTION>
Unallocated
1997
Accumulated stock-based
Shares of Additional other Unallocated incentive Total
Preferred common Common paid-in Retained comprehensive ESOP plan (SIP) Treasury stockholders'
stock stock stock capital earnings (loss) shares shares stock equity
--------- --------- ------ ---------- -------- ------------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1999........... -- 8,707 $ 87 $85,407 $56,892 $ (150) $(4,647) $(5,869) $(28,759) $102,961
Earned SIP stock
awards............ -- -- -- (154) -- -- -- 1,431 -- 1,277
Earned ESOP shares
charged to
expense........... -- -- -- 178 -- -- -- -- -- 178
Cash dividends
declared and paid
(1st quarter at
$0.05 per share;
2nd and 3rd
quarters at $0.07
per share)........ -- -- -- -- (1,336) -- -- -- -- (1,336)
Common stock
acquired under
repurchase program
(349,000 shares at
a price of $12.62
per share)........ -- -- -- -- -- -- -- -- (4,405) (4,405)
Common stock
acquired for
certain Employee
benefit plans
(18,600 shares at
an average price
of $13.71 per
share)............ -- -- -- -- -- -- -- -- (255) (255)
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........ -- -- -- -- 5,825 -- -- -- -- 5,825
Other
comprehensive
income, net of
tax Unrealized
holding losses on
Available for
sale securities... -- -- -- -- -- (5,365) -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- -- -- -- -- -- -- --
-------
Net unrealized
losses............ -- -- -- -- -- (5,365) -- -- -- --
Tax effect........ -- -- -- -- -- 2,044 -- -- -- --
-------
Net-of-tax
effect............ -- -- -- -- -- (3,321) -- -- -- (3,321)
--------
Total
comprehensive
income.......... -- -- -- -- -- -- -- -- -- 2,504
--- ----- ---- ------- ------- ------- ------- ------- -------- --------
Balance at December
31, 1999........... -- 8,707 $ 87 $85,431 $61,381 $(3,471) $(4,647) $(4,438) $(33,390) $100,953
=== ===== ==== ======= ======= ======= ======= ======= ======== ========
</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 Nine Months
Ended December 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 5,825 $ 5,545
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........................ 2 4
Premium on investment and mortgage-backed
securities available for sale...................... 459 734
Deferred loan origination costs..................... (132) (111)
Mortgage servicing rights........................... 1,462 1,254
Provisions for loan losses........................... 900 900
(Gains) losses on sales of:
Investment securities available for sale............ -- (8)
Real estate owned................................... (52) (81)
Land, building and equipment........................ (30) --
Mortgage loans...................................... 1,011 (1,393)
Net proceeds from sales of mortgage loans............ 210,739 417,602
Origination of mortgage loans held for sale.......... (165,039) (437,305)
Unrealized gain on trading securities................ (136) --
Provision for real estate owned...................... (43) --
Depreciation of office properties and equipment...... 1,890 1,637
Appreciation in fair value of ESOP shares............ 178 451
Earned SIP shares.................................... 1,277 1,217
Increase or decrease in:
Accrued interest receivable......................... (168) (147)
Prepaid expenses and other assets................... (2,017) (29,761)
Accrued interest payable............................ 1,579 1,521
Accrued income taxes and other liabilities.......... (1,750) (5,635)
----------- ----------
Net cash provided (used) by operating activities... 55,955 (43,576)
----------- ----------
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................................................ (218,473) (248,600)
Sale of mortgage-backed securities available-for-
sale................................................ -- 3,906
Payments received on mortgage-backed securities
available for sale.................................. 89,174 89,450
Maturities of investment securities available for
sale................................................ -- 4,000
Maturities of investment securities held to
maturity............................................ 10,000 9,500
Payments received on mortgage-backed securities held
to maturity......................................... 2,369 5,327
Purchase of Federal Home Loan Bank stock............. (1,118) (9,972)
Net decrease (increase) in loans..................... (48,607) 61,005
Proceeds from sales of real estate owned............. 609 607
Purchases of office properties and equipment......... (1,843) (1,993)
Sale of office properties and equipment.............. 103 --
----------- ----------
Net cash used in investing activities.............. (167,886) (90,715)
----------- ----------
Cash flows from financing activities:
Net decrease in deposits............................. $ (24,780) $ (44,051)
Proceeds from FHLB advances and other borrowings..... 1,981,836 1,097,066
Repayments on FHLB advances and other borrowings..... (1,837,048) (869,408)
Net change in advance payments by borrowers for taxes
and insurance....................................... (1,344) (1,840)
Cash dividends paid.................................. (1,336) (796)
Payments to acquire stock-based incentive plan
shares.............................................. -- (2,502)
Payments to acquire common stock for treasury stock.. (4,631) (23,139)
----------- ----------
Net cash provided by financing activities.......... 112,697 155,330
----------- ----------
Net increase (decrease) in cash and cash equivalents.. 766 21,039
Cash and cash equivalents at beginning of period...... 39,020 32,021
----------- ----------
Cash and cash equivalents at end of period............ $ 39,786 $ 53,060
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................. $ 43,169 $ 40,527
=========== ==========
Income taxes......................................... $ 1,835 $ 3,328
=========== ==========
Supplemental disclosures of noncash investing
activities:
Property acquired in settlement of loans............. $ 231 $ 245
=========== ==========
</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 nine months ended December 31, 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 December 31, 1999 and March 31, 1999
General
Total assets at December 31, 1999 were $1.510 billion, an increase of $116.5
million, or 8.4%, compared to $1.393 billion at March 31, 1999. Asset growth
was primarily attributable to growth in mortgage-backed securities ("MBS")
available for sale which increased $123.7 million, or 30.3%, to $532.2 million
at December 31, 1999 from $408.5 million at March 31, 1999 and an increase in
loans receivable, net, which increased $47.6 million, or 6.2%, to $814.3
million at December 31, 1999 from $766.7 million at March 31, 1999. Partially
offsetting this growth was a $48.5 million decrease in mortgage loans held for
sale and a $10.0 million decrease in investment securities held to maturity.
Deposit balances declined by $24.8 million, to $650.1 million at December 31,
1999 from $674.9 million at March 31, 1999. Balance sheet growth was primarily
funded by a $144.8 million increase in Federal Home Loan Bank of Boston
("FHLB") advances and other borrowings during the nine months ended December
31, 1999.
Total stockholders' equity decreased $2.0 million to $101.0 million at
December 31, 1999, from $103.0 million at March 31, 1999, due to a $4.6
million stock repurchase plan related increase in Treasury stock and a $3.3
million decrease in accumulated other comprehensive income, partially offset
by a $5.9 million increase in retained earnings and unearned Stock Incentive
Plan shares. Stockholders' equity to assets was 6.69% at December 31, 1999,
down from 7.39% at March 31, 1999, the result of a 8.4% increase in assets and
a 2.0% decrease 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 December 31,
1999 and March 31, 1999, the Bank's liquidity ratios were 34.0% 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 December 31,
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 $581.5 million, or 38.5% 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 December 31, 1999, the
Company had $730.8 million in FHLB of Boston advances and other borrowings,
and an additional borrowing capacity from the FHLB of $166.6 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.
At December 31, 1999, the Company had commitments to originate loans and
unused outstanding lines of credit and undisbursed balances of construction
loans totaling $90.4 million. The Company anticipates that it
7
<PAGE>
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 December 31, 1999 totaled $332.8 million. The Company expects
that it will retain a majority of maturing certificate accounts.
At December 31, 1999, the consolidated stockholders' equity to total assets
ratio was 6.69%. At December 31, 1999, the Bank exceeded all of its regulatory
capital requirements. The Bank's tangible capital of $97.9 million, or 6.49%,
of total adjusted assets, was above the required level of $30.2 million or
2.0%; core capital of $97.9 million, or 6.49% of total adjusted assets, was
above the required level of $60.4 million, or 4.0%; risk-based capital of
$106.5 million, or 15.5% of risk-weighted assets, was above the required level
of $55.0 million or 8.0% of risk-weighted assets, and Tier 1 risk-based
capital of $97.9 million, or 14.3% of risk-weighted assets, was above the
required level of $27.5 million or 4.0%. The Bank is considered a "well
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 allowed for the Company's computer, communications,
and other related non-technology systems to properly recognize dates beyond
December 31, 1999. The Company developed a plan that was based upon the
Federal Financial Institutions Examination Council ("FFIEC") recommended
phases and time frames for insuring Year 2000 readiness. These phases included
awareness, assessment, renovation, validation, and implementation.
The Company utilized both internal and external resources to test and
reprogram or replace software and hardware (including non-technology systems),
and worked with all of its mission critical vendors and service providers to
determine the extent to which the Company was vulnerable to any failure of
those third parties to remedy their own Year 2000 issues and received written
assurances of readiness from all such parties. 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.
Throughout the Year 2000 date rollover, the Company did not experience any
significant disruptions in it's data processing and computer systems
(including non-technology systems) or with the systems of it's mission
critical vendors, service providers, or significant borrowers. While systems
functioned normally before, during, and immediately following the actual date
rollover, there can be no guarantee that there will be no residual adverse
effects on the Company's systems on other key dates in the foreseeable future.
The final cost of the Year 2000 project is estimated at $175,000 to
$225,000. This estimate has been revised based on the favorable results of the
century date rollover and lower than projected expenditures for software and
hardware upgrades. A significant portion of the costs were not incremental to
the Company, but rather represented a reprioritization of existing internal
systems technology resources. The Company did not explicitly track internal
costs associated with the Year 2000 project. For the three months ended
December 31, 1999 and for the entire project through December 31, 1999, the
Company has expensed approximately $27,000 and $181,000, 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 numerous
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.
8
<PAGE>
Legislation
Legislation recently enacted by Congress and signed into law by the
President 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.
Asset Quality
At December 31, 1999, non-accrual loans totaled $2.1 million and real estate
owned ("REO") totaled $61,000. The Company ceases to accrue interest on loans
90 days or more past due and charges off all accrued interest. Foregone
interest on non-accrual loans for the three months ended December 31, 1999 was
$15,000 and was $26,000 for the nine months ended December 31, 1999. The
following table sets forth information regarding non-accrual loans and REO.
<TABLE>
<CAPTION>
At December 31, At March 31,
1999 1999
--------------- ------------
(Dollars in thousands)
<S> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family....................... $ 754 $ 971
Multi-family.............................. -- --
Commercial real estate.................... 160 1,142
Construction and land..................... -- 117
------ ------
Total mortgage loans.................... 914 2,230
------ ------
Commercial loans............................ 1,131 280
------ ------
Consumer loans:
Home equity lines......................... -- 36
Second mortgages.......................... 13 --
Other consumer loans...................... 5 4
------ ------
Total consumer loans.................... 18 40
------ ------
Total nonaccrual loans.................. 2,063 2,550
Real estate owned, net(1)..................... 61 344
------ ------
Total non-performing assets................... $2,124 $2,894
====== ======
Allowance for loan losses as a percent percent
of loans(2).................................. 1.47% 1.54%
Allowance for loan losses as percent of non-
performing loans(3).......................... 587.06% 471.22%
Non-performing loans as a percent of
loans(2)(3).................................. 0.25% 0.33%
Non-performing assets as a percent of total
assets(4).................................... 0.14% 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.
9
<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.
10
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1999 AND THE THREE MONTHS ENDED DECEMBER 31, 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 December 31, 1999 and 1998. The average yields and
costs are derived by dividing income or expense by the daily average balance
of interest-earning assets or interest-bearing liabilities, respectively, for
the periods shown. 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,
---------------------------------------------------------
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............... $ 811,354 $15,326 7.56% $ 855,694 $15,986 7.47%
Investment
securities......... 46,865 699 5.93 70,270 963 5.44
Mortgage-backed
securities......... 532,156 8,091 6.08 352,245 4,816 5.47
---------- ------- ---- ---------- ------- ----
Total interest-
earning assets... 1,390,375 24,116 6.94 1,278,209 21,765 6.81
------- ---- ------- ----
Noninterest-earning
assets............... 98,608 71,886
---------- ----------
Total assets...... $1,488,983 $1,350,095
========== ==========
Liabilities and
shareholders' equity:
Interest-bearing
liabilities:
Deposits............ $ 608,884 6,187 4.04 $ 597,111 6,554 4.35
FHLB advances and
other borrowings... 699,625 9,796 5.57 553,752 7,681 5.50
---------- ------- ---- ---------- ------- ----
Total interest-
bearing
liabilities...... 1,308,509 15,983 4.86 1,150,863 14,235 4.91
------- ---- ------- ----
Noninterest-bearing
liabilities.......... 76,708 89,897
---------- ----------
Total
liabilities...... 1,385,217 1,240,760
---------- ----------
Shareholders' equity.. 103,766 109,335
---------- ----------
Total liabilities
and shareholders'
equity............. $1,488,983 $1,350,095
========== ==========
Net interest rate
spread................. $ 8,133 2.08% $ 7,530 1.90%
======= ==== ======= ====
Net interest margin..... 2.33% 2.34%
==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 106.26% 111.07%
========== ==========
</TABLE>
11
<PAGE>
General
Net income increased $13,000, or 0.6%, to $2.2 million for the three months
ended December 31, 1999 and for the three months ended December 31, 1998. Net
interest income before loan loss provision increased $603,000, or 8.0%, to
$8.1 million for the three months ended December 31, 1999 from $7.5 million
for the three months ended December 31, 1998. Non-interest income decreased
$535,000, non-interest expense increased $100,000, and income tax expense
decreased $45,000 for the three months ended December 31, 1999 compared to the
three months ended December 31, 1998.
Interest Income
Interest and dividend income for the three months ended December 31, 1999
was $24.1 million, compared to $21.8 million for the three months ended
December 31, 1998, an increase of $2.4 million, or 10.8%. The increase in
interest and dividend income is primarily attributable to a $112.2 million
increase in average interest-earning assets which increased to $1.390 billion
for the three months ended December 31, 1999 from $1.278 billion for the three
months ended December 31, 1998. The increase in average interest-earning
assets was mainly due to a $179.9 million increase in mortgage-backed
securities, partially offset by a $44.3 million decrease in loans receivable,
net, and a $23.4 million decrease in investment securities. The increase in
average interest-earning balances was accompanied by a 13 basis point increase
in average yield on interest-earning assets from 6.81% for the three months
ended December 31, 1998 to 6.94% for the three months ended December 31, 1999.
This yield increase was primarily the result of rising interest rates which
led to upward resets on the Company's adjustable rate loans and mortgage-
backed securities, as well as the addition of adjustable-rate loans and
mortgage-backed securities at higher market yields relative to the existing
loan and MBS portfolio.
Interest income on loans receivable, net and mortgage loans held for sale
for the three months ended December 31, 1999 decreased by $660,000, or 4.1%,
to $15.3 million compared to $16.0 million for the three months ended December
31, 1998. This decrease was attributable to a decrease of $44.3 million in
average loan balance partially offset by a 9 basis point increase in yield on
loans receivable and mortgage loans held for sale. About $38.7 million of the
$44.3 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 $699,000 for the three months ended December 31, 1999, compared to
$963,000 for the three months ended December 31, 1998. Investment securities
average balances decreased by $23.4 million to an average of $46.9 million
during the three months ending December 31, 1999 from $70.3 million during the
three months ended December 31, 1998.
Interest on mortgage-backed securities for the three months ended December
31, 1999 increased by $3.3 million to $8.1 million, compared to $4.8 million
for the three months ended December 31, 1998. This increase in income is
attributable to a $179.9 million increase in the average mortgage-backed
securities balance and a 61 basis point increase in the average yield, from
5.47% to 6.08%, for the three months ended December 31, 1999 compared to the
three months ended December 31, 1998. This increase in yield was the result of
rising market interest rates which led to: a) upward 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 December 31, 1999 was $16.0
million, compared to $14.2 million for the three months ended December 31,
1998, an increase of $1.7 million, or 12.3%. The increase in interest expense
during this time period was the net effect of an increase in average interest-
bearing liabilities of $157.6 million and a decrease in their associated cost
of 5 basis points.
Average deposit balances increased $11.8 million, or 2.0%, from $597.1
million during the three months ended December 31, 1998 to $608.9 million
during the three months ended December 31, 1999. The average
12
<PAGE>
cost of deposits for the three months ended December 31, 1999 fell 31 basis
points compared to the three months ended December 31, 1998. This decline was
due to generally lower rates on deposits and to a shift in the deposit mix
towards demand deposits and passbook accounts.
Average FHLB advances and other borrowings grew $145.9 million, or 26.3%, to
$699.6 million during the three months ended December 31, 1999 versus $553.8
million during the three months ended December 31, 1998. The cost of FHLB
advances and other borrowings increased 7 basis points, from 5.50% for the
three months ended December 31, 1998 to 5.57% for the three months ended
December 31, 1999.
Net Interest Income
Net interest income before loan loss provision increased $603,000, or 8.0%,
to $8.1 million from $7.5 million, for the three months ended December 31,
1999 and 1998, respectively. This increase was the net effect of a $112.2
million increase in average interest-earning assets and an 18 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 $5.6 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 2.08% for the three months ended December 31, 1999, compared to
1.90% for the three months ended December 31, 1998.
Provision for Loan Losses
The Company's provision for loan losses remained at $300,000 for the three
months ended December 31, 1999 and 1998. The Company's allowance for loan
losses was $12.1 million, or 1.47% of loans receivable, net, at December 31,
1999, a $100,000 increase as compared to the $12.0 million, or 1.54% of loans
receivable at March 31, 1999. Allowance for loan losses was 587% and 471% of
non-performing loans at December 31, 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.
Non-performing loans at December 31, 1999 decreased $487,000 to $2.1
million, or 0.25% of loans receivable, net, from $2.6 million, or 0.33% of
loans receivable, net, at March 31, 1999. At December 31, 1999, the Company's
non-performing assets, which include non-performing loans and REO, decreased
$770,000 to $2.1 million compared to $2.9 million at March 31, 1999.
Non-interest Income
Non-interest income decreased $535,000, or 24.8%, to $1.6 million for the
three months ended December 31, 1999 from $2.2 million for the three months
ended December 31, 1998. The decrease is primarily attributable
13
<PAGE>
to a $451,000 million decrease in gain (loss) on sale of mortgage loans. The
decrease in gain (loss) on sale of mortgage loans was due to a rise in
mortgage rates throughout 1999 which brought an end to the relatively high
refinance volume and caused market value losses on the unhedged portion of the
mortgage pipeline.
Non-interest Expense
Non-interest expense increased $100,000, or 1.6%, to $6.3 million for the
three months ended December 31, 1999 from $6.2 million for the three months
ended December 31, 1998. The increase is primarily attributable to a $212,000
increase in compensation and benefits and a $103,000 increase in office
occupancy and equipment, partially offset by a $240,000 decrease in other non-
interest expense. The increase in compensation and benefits is due to
increased staffing related to the opening of the Cranston banking office, the
FIRSTFED INSURANCE AGENCY, LLC, and the FIRSTFED TRUST COMPANY, N.A. (in
formation), partially offset by a decrease in expense for stock-based benefit
plans including the Employee Stock Ownership Plan ("ESOP") and the 1997 Stock-
based Incentive Plan ("SIP"). The increase in office occupancy and equipment
is due to increases in depreciation expense related to the opening of the
Cranston banking office and new equipment purchases. The decrease in other
non-interest expense is primarily attributable to a reduction in loan
origination expenses from a decline in origination volume related to a higher
interest rate environment.
Income Taxes
Income tax expense decreased $45,000, or 4.4%, to $979,000 for the three
months ended December 31, 1999 from $1.0 million for the three months ended
December 31, 1998. The Company's effective tax rate decreased to 30.8% for the
three months ended December 31, 1999 from 31.9% for the three months ended
December 31, 1998. The lower effective tax rate was primarily the result of
the Company's investment in BOLI.
14
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
DECEMBER 31, 1999 AND THE NINE MONTHS ENDED DECEMBER 31, 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 nine months ended December 31, 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 Nine Months Ended December 31,
---------------------------------------------------------
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............... $ 799,079 $44,915 7.49% $ 878,603 $49,586 7.52%
Investment
securities......... 47,763 2,074 5.78 63,243 2,721 5.71
Mortgage-backed
securities......... 487,341 21,393 5.85 295,291 12,351 5.58
---------- ------- ---- ---------- ------- ----
Total interest-
earning assets... 1,334,183 68,382 6.83 1,237,137 64,658 6.97
------- ---- ------- ----
Noninterest-earning
assets............... 98,397 68,819
---------- ----------
Total assets...... $1,432,580 $1,305,956
========== ==========
Liabilities and
shareholders' equity:
Interest-bearing
liabilities:
Deposits............ $ 611,588 18,761 4.08 $ 621,298 21,282 4.55
FHLB advances and
other borrowings... 636,939 25,987 5.43 481,385 20,766 5.73
---------- ------- ---- ---------- ------- ----
Total interest-
bearing
liabilities...... 1,248,527 44,748 4.77 1,102,683 42,048 5.06
------- ---- ------- ----
Noninterest-bearing
liabilities.......... 78,391 89,113
---------- ----------
Total
liabilities...... 1,326,918 1,191,796
---------- ----------
Shareholders' equity.. 105,662 114,160
---------- ----------
Total liabilities
and shareholders'
equity............. $1,432,580 $1,305,956
========== ==========
Net interest rate
spread................. $23,634 2.06% $22,610 1.91%
======= ==== ======= ====
Net interest margin..... 2.36% 2.43%
==== ====
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 106.86% 112.19%
========== ==========
</TABLE>
15
<PAGE>
General
Net income increased $280,000, or 5.1%, to $5.8 million for the nine months
ended December 31, 1999 from $5.5 million for the nine months ended December
31, 1998. Net interest income before loan loss provision increased $1.0
million, or 4.5%, to $23.6 million for the nine months ended December 31, 1999
from $22.6 million for the nine months ended December 31, 1998. Non-interest
income decreased $671,000, non-interest expense increased $267,000, and income
tax expense decreased $194,000 for the nine months ended December 31, 1999
compared to the nine months ended December 31, 1998.
Interest Income
Interest and dividend income for the nine months ended December 31, 1999 was
$68.4 million, compared to $64.7 million for the nine months ended December
31, 1998, an increase of $3.7 million, or 5.8%. The increase in interest and
dividend income is primarily attributable to a $97.0 million increase in
average interest-earning assets which increased to $1.334 billion for the nine
months ended December 31, 1999 from $1.237 billion for the nine months ended
December 31, 1998. The increase in average interest-earning assets was mainly
due to a $192.1 million increase in mortgage-backed securities, partially
offset by a $79.5 million decrease in loans receivable, net. The increase in
average interest-earning balances was accompanied by a 14 basis point decrease
in average yield on interest-earning assets from 6.97% for the nine months
ended December 31, 1998 to 6.83% for the nine months ended December 31, 1999.
This decline in yield on average interest-earning assets was the result of
lower loan yields and purchases of adjustable-rate mortgage-backed securities.
Loan portfolio yields reached a low in February, 1999 after two years of
declining mortgage rates induced a large volume of higher loan re-financings.
However, this trend was reversed in mid 1999 as increasing interest rates not
only eliminated the refinance incentive, but also raised the yield on existing
adjustable-rate loans and new loan production. Also contributing to a lower
yield on average interest-earning assets was the addition of $192.1 million of
adjustable-rate mortgage-backed securities and collateralized mortgage
obligations during the nine months ended December 31, 1999. While these
securities generally had yields lower than the average yield on interest-
earning assets, they too have benefited from recent interest rate increases.
Interest income on loans receivable, net and mortgage loans held for sale
for the nine months ended December 31, 1999 decreased by $4.7 million, or
9.42%, to $44.9 million from $49.6 million for the nine months ended December
31, 1998. This decrease was attributable to a $79.5 million decrease in
average loan balance and a 3 basis point decrease in yield on loans receivable
and mortgage loans held for sale. About $32.5 million of the $79.5 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 $2.1 million for the nine months ended December 31, 1999, compared
to $2.7 million for the nine months ended December 31, 1998. Investment
securities and FHLB of Boston stock average balances decreased by $15.5
million to an average of $47.8 million during the nine months ending December
31, 1999 from $63.2 million during the nine months ended December 31, 1998.
Interest on mortgage-backed securities for the nine months ended December
31, 1999 increased by $9.0 million to $21.4 million, compared to $12.4 million
for the nine months ended December 31, 1998. This increase in income is
attributable to a $192.1 million increase in the average mortgage-backed
securities balance and a 27 basis point increase in the average yield, to
5.85% from 5.58%, for the nine months ended December 31, 1999 compared to the
nine months ended December 31, 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 nine months ended December 31, 1999 was $44.7
million, compared to $42.0 million for the nine months ended December 31,
1998, an increase of $2.7 million, or 6.4%. The increase in
16
<PAGE>
interest expense during this time period was the net effect of an increase in
average interest-bearing liabilities of $145.8 million and a decrease in their
associated cost of 29 basis points.
Average deposit balances decreased $9.7 million, or 1.6%, from $621.3
million during the nine months ended December 31, 1998 to $611.6 million
during the nine months ended December 31, 1999. The average cost of deposits
for the nine months ended December 31, 1999 fell 47 basis points compared to
the nine months ended December 31, 1998. This decline was due to generally
lower rates on deposits and to a shift in the deposit mix towards demand
deposits and passbook accounts.
Average FHLBank advances and other borrowings grew $155.6 million, or 32.3%,
to $636.9 million during the nine months ended December 31, 1999 versus $481.4
million during the comparable period in 1998. The cost of FHLB advances and
other borrowings fell 30 basis points, from 5.73% for the nine months ended
December 31, 1998 to 5.43% for the nine months ended December 31, 1999.
Because of a decline in interest rates late in 1998, new borrowings were added
and maturing higher rate borrowings were replaced at rates significantly lower
than the average cost of total borrowings.
Net Interest Income
Net interest income before loan loss provision increased $1.0 million, or
4.5%, to $23.6 million from $22.6 million, for the nine months ended December
31, 1999 and 1998, respectively. This increase was the net effect of a $97.0
million increase in average interest-earning assets and a 15 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 BOLI and a $8.5
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 nine months ended December 31, 1999, compared to 1.91% for the nine months
ended December 31, 1998.
Provision for Loan Losses
The Company's provision for loan losses remained at $900,000 for the nine
months ended December 31, 1999 and 1998. The Company's allowance for loan
losses was $12.1 million, or 1.47% of loans receivable, net, at December 31,
1999, a $100,000 increase as compared to the $12.0 million, or 1.54% of loans
receivable at March 31, 1999. Allowance for loan losses was 587% and 471% of
non-performing loans at December 31, 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.
Non-performing loans at December 31, 1999 decreased $487,000 to $2.1
million, or 0.25% of loans receivable, net, from $2.6 million, or 0.33% of
loans receivable, net, at March 31, 1999. At December 31, 1999,
17
<PAGE>
the Company's non-performing assets, which include non-performing loans and
REO, decreased $770,000 to $2.1 million compared to $2.9 million at March 31,
1999.
Non-interest Income
Non-interest income decreased $671,000, or 12.9%, to $4.5 million for the
nine months ended December 31, 1999 from $5.2 million for the nine months
ended December 31, 1998. The decrease is primarily attributable to a $2.4
million decrease in gain (loss) on mortgage sales partially offset by $960,000
in earnings from BOLI, a $135,000 unrealized gain in trading securities, a
$237,000 reduction in the valuation reserve for mortgage servicing rights, and
a $240,000 increase in service charges.
Non-interest Expense
Non-interest expense increased $267,000, or 1.4%, to $18.8 million from
$18.6 million, in the nine months ended December 31, 1999 and 1998. The
increase is primarily attributable to a $308,000 increase in compensation and
benefits and office occupancy and equipment expenses, as well as a $281,000
increase in data processing expense, partially offset by a $473,000 decrease
in deposit insurance premiums and other expenses related to lower loan
origination volume. The increase in compensation and benefits is due to
increased staffing related to the opening of the Cranston banking office, the
FIRSTFED INSURANCE AGENCY, LLC, and the FIRSTFED TRUST COMPANY, N.A. (in
formation), partially offset by a decrease in expense for stock-based benefit
plans including the ESOP and the SIP. The increase in office occupancy and
equipment is due to increases in depreciation expense related to the opening
of the Cranston banking office and new equipment purchases, while the increase
in data processing expense was related to increased online processing costs,
partially related to year 2000 project testing.
Income Taxes
Income tax expense decreased $194,000, or 6.9%, to $2.6 million for the nine
months ended December 31, 1999 from $2.8 million for the nine months ended
December 31, 1998. The Company's effective tax rate decreased to 31.0% for the
nine months ended December 31, 1999 from 33.7% for the nine months ended
December 31, 1998. The lower effective tax rate was the result of the
Company's investment in BOLI and other tax mitigation strategies.
18
<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 new longer-term, fixed-rate
mortgage loans 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 in September, 1997 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 December 31, 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 8.66%. Accordingly, during a
period of falling interest rates, the Company's interest-earning assets would
reprice downward at a slower rate than its interest-bearing liabilities,
which, consequently, may positively 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 slower rate than its interest-bearing
liabilities which, consequently, may negatively 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 levels would likely deviate significantly from those assumed in
calculating the interest-rate gap 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
19
<PAGE>
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 December
31, 1999, was in full compliance with those limits. As of December 31, 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.
Certain short-comings are inherent in the methodology used in the NPV
analysis. 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.
20
<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
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
<TABLE>
<C> <S>
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)
FIRSTFED AMERICA, INC. 1997 Stock-based Incentive Plan, as
10.1 amended (2)(3)
10.2 FIRSTFED AMERICA, INC. 1998 Stock Option Plan (3)
27 Financial Data Schedule ( filed herewith )
</TABLE>
b) Reports on Form 8-K
None
- --------
(1) Incorporated into this document by reference from the Exhibits to Form S-
1, Registration Statement, filed on September 27, 1996, as amended,
Registration No. 333-12855.
(2) Incorporated into this document by reference from 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).
21
<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, there unto duly authorized.
Firstfed America Bancorp, Inc.
Registrant
Date: February 14, 2000
/s/ Robert F. Stoico
_____________________________________
President and Chief Executive
Officer andChairman of the
Board(Principal Executive Officer)
Date: February 14, 2000
/s/ Edward A. Hjerpe III
_____________________________________
Executive Vice President andChief
Operating Officer andChief Financial
Officer(Principal Accounting and
Financial Officer)
22
<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> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 39,786
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 330
<INVESTMENTS-HELD-FOR-SALE> 537,500
<INVESTMENTS-CARRYING> 3,235
<INVESTMENTS-MARKET> 3,276
<LOANS> 814,295<F1>
<ALLOWANCE> 12,111
<TOTAL-ASSETS> 1,509,722
<DEPOSITS> 650,090
<SHORT-TERM> 518,803
<LIABILITIES-OTHER> 27,910
<LONG-TERM> 211,966
0
0
<COMMON> 87
<OTHER-SE> 100,866
<TOTAL-LIABILITIES-AND-EQUITY> 1,509,722
<INTEREST-LOAN> 44,915
<INTEREST-INVEST> 22,016
<INTEREST-OTHER> 1,451
<INTEREST-TOTAL> 68,382
<INTEREST-DEPOSIT> 18,761
<INTEREST-EXPENSE> 44,748
<INTEREST-INCOME-NET> 23,634
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 18,834
<INCOME-PRETAX> 8,448
<INCOME-PRE-EXTRAORDINARY> 8,448
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,825
<EPS-BASIC> .92
<EPS-DILUTED> .92
<YIELD-ACTUAL> 2.36
<LOANS-NON> 2,063
<LOANS-PAST> 0
<LOANS-TROUBLED> 312
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,016
<CHARGE-OFFS> 822
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 12,111
<ALLOWANCE-DOMESTIC> 12,111
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,535
<FN>
<F1>LOANS HELD TO MATURITY
</FN>
</TABLE>
