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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 2000
Commission File No.: 1-12305
----------------
FIRSTFED AMERICA BANCORP, INC.
(exact name of registrant as specified in its charter)
Delaware 04-3331237
(State or other jurisdiction (IRS Employer Identification)
of incorporation or organization)
----------------
ONE FIRSTFED PARK, Swansea, Massachusetts 02777
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 679-8181
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
The American Stock Exchange
(Name of exchange on which registered)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, i.e., persons other than directors and executive officers of the
registrant was $66.4 million and is based upon the last sales price as listed
on The American Stock Exchange for June 14, 2000.
The number of shares of Common Stock outstanding as of June 14, 2000 is
6,588,328.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the fiscal year ended
March 31, 2000 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I.................................................................... 3
Item 1.Business......................................................... 3
Additional Item. Executive Officers of the Registrant................... 36
Item 2.Properties....................................................... 37
Item 3.Legal Proceedings................................................ 38
Item 4.Submission of Matters to a Vote of Security Holders.............. 38
PART II................................................................... 39
Item 5.Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ 39
Item 6.Selected Financial Data.......................................... 39
Item 7.Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 39
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 39
Item 8.Financial Statements and Supplementary Data...................... 39
Item 9.Change In and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 39
PART III.................................................................. 40
Item 10. Directors and Executive Officers of the Registrant............. 40
Item 11.Executive Compensation.......................................... 40
Item 12.Security Ownership of Certain Beneficial Owners and Management.. 40
Item 13.Certain Relationships and Related Transactions.................. 40
PART IV................................................................... 40
Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-
K...................................................................... 40
SIGNATURES................................................................ 42
</TABLE>
2
<PAGE>
PART I
Item 1. Business.
General
FIRSTFED AMERICA BANCORP, INC. (also referred to as the "Company" or
"Registrant") was organized by the Board of Directors of First Federal Savings
Bank of America (the "Bank") for the purpose of acquiring all of the capital
stock of the Bank issued in connection with the Bank's conversion from mutual
to stock form. The conversion was completed on January 15, 1997. At March 31,
2000, the Company had consolidated total assets of $1.580 billion and total
stockholders' equity of $101.7 million. The Company was incorporated under
Delaware law and is a savings and loan holding company subject to regulation
by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission ("SEC").
The Bank was originally organized in 1946 and operated as First Federal
Savings and Loan Association of Fall River. In 1982, the Bank merged with
First Federal Savings and Loan Association of Attleboro, which was originally
organized in 1854 and became a federally-chartered savings and loan
association in 1959. In 1983, the Bank became a federally-chartered savings
bank, changing its name to First Federal Savings Bank of America. In 1984, the
Bank added mortgage banking activities to its operations. The Company conducts
business from its administrative, operations, and banking offices located in
Swansea, Massachusetts and its 14 other banking offices located in the
municipalities of Fall River, Attleboro, New Bedford, Seekonk, Somerset, and
Taunton, Massachusetts and Pawtucket, Providence, East Providence, Warwick,
and Cranston, Rhode Island, and its six loan origination centers located in
Yarmouth, Auburn, Agawam and Burlington, Massachusetts, East Greenwich, Rhode
Island, and Woodbury, Connecticut. The Company is opening a fifteenth banking
office in Providence, Rhode Island at the end of June 2000.
The Company's principal business has been and continues to be attracting
retail and business deposits in the areas surrounding its banking offices and
investing those deposits, together with funds generated from operations and
borrowings, primarily in residential, commercial, and consumer loans and
mortgage-backed securities ("MBS"). Through its 15 banking offices and six
loan origination centers, the Company originates loans for investment and
loans for sale in the secondary market, generally retaining the servicing
rights to loans sold. Loan sales are made from loans designated as being held
for sale or originated for sale during the period. The Company's revenues are
derived principally from interest on its loan portfolios, and interest and
dividends on its investment and mortgage-backed securities and loan servicing
income. The Company's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, proceeds from the
sale of loans, Federal Home Loan Bank ("FHLB") advances and other borrowings.
In February 2000, the Company formed the FIRSTFED TRUST COMPANY, NA ("Trust
Company") to provide investment and fiduciary services in the Rhode Island and
southeastern Massachusetts marketplace. The Trust Company is a joint venture
with certain members of the Metcalf and Danforth families of Rhode Island. In
addition to their 35% ownership interest, the families are also significant
clients of the Trust Company. In January 1999, the Company formed the FIRSTFED
INSURANCE AGENCY, LLC ("Agency"). In March 2000, the Agency purchased two
local independent agencies, Smith-Cochrane Insurance Agency, Inc. and All Risk
Insurance Agency of Swansea, bringing the total number of customers of the
Agency to over 3,000. The Agency offers a comprehensive insurance product line
including auto, home, life, accident and health insurance to consumers and
businesses.
The Company's executive offices are located at ONE FIRSTFED PARK, Swansea
Mall Drive, Swansea, Massachusetts 02777. The telephone number is (508) 679-
8181.
Information required by Guide 3 to be contained in the description of
business which is not contained in Item 1 is incorporated by referenced from
Item 7 herein.
3
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Market Area and Competition
The Company is a community-oriented financial institution offering a variety
of financial products and services to meet the needs of the communities it
serves. The Company's deposit gathering is concentrated in the communities
surrounding its 15 full service banking offices located in the Southeastern
Massachusetts municipalities of Fall River, Attleboro, New Bedford, Seekonk,
Somerset, Swansea and Taunton, and the Rhode Island municipalities of
Pawtucket, Providence, East Providence, Warwick, and Cranston. The Company
also maintains six loan origination centers in the municipalities of Yarmouth,
Auburn, Agawam and Burlington, Massachusetts, East Greenwich, Rhode Island,
and Woodbury, Connecticut. The Company primarily invests in loans secured by
first or second mortgages on properties located in Southern New England and in
AAA-rated mortgage-backed securities.
The Company's main banking office is located in Fall River, Massachusetts.
Fall River is located in the Southeastern region of Massachusetts and is
adjacent to Rhode Island. All of the Company's 15 banking offices are located
within 30 miles of Fall River. The Southeastern Massachusetts and Rhode Island
suburbs are generally low to middle income residential communities with
individuals employed primarily in Fall River and New Bedford, Massachusetts,
Providence, Rhode Island and areas along Interstates 195, 95 and 495 and Route
24.
While the economy in Southeastern New England has generally been positive in
recent years, the area still lags behind the rest of New England and the rest
of the nation. Unemployment rates in the Providence-Fall River area and in New
Bedford are currently higher than the national and state averages but have
improved from the mid-1990s. Small businesses, service firms and tourism form
the backbone of the region's economy. Cuts to the defense industry and
uncertainty in the technology industry have resulted in decreased employment
opportunities in the region. However, many significant employers, such as The
Acushnet Company, Fidelity Investments, Textron, American Power Conversion,
Globe Manufacturing, ON Semiconductor and Hasbro are located in the region.
The Company faces significant competition in generating loans and in
attracting deposits, as well as in the Insurance Agency and Trust businesses.
The Company's primary market area is highly competitive and the Company faces
direct competition from a significant number of financial institutions, many
with a state-wide or regional presence and, in some cases, a national
presence. Some of these financial institutions are significantly larger and
have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit
unions, mortgage brokers, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from local
savings, cooperative and commercial banks and credit unions. In addition, the
Company faces increasing competition for deposits from non-bank institutions
such as brokerage firms and insurance companies in such instruments as short-
term money market funds, corporate and government securities funds, mutual
funds and annuities. Competition may also increase as a result of the lifting
of restrictions on the interstate operations of financial institutions. In the
areas of Fall River and Rhode Island, the Company has experienced significant
competition from credit unions which have a competitive advantage because they
do not pay state or federal income taxes. Such competitive advantage has
placed increased pressure on the Bank with respect to its loan and deposit
pricing.
From the mid-1980s through the early 1990s, the Bank's operating strategy
was to control growth while building its loan servicing portfolio and the
resultant fee income. As part of this strategy, the Bank increased market
share through its mortgage banking activities. Interest-rate risk was managed
by generally retaining all adjustable rate one- to four-family loans and
selling all longer term fixed-rate one- to four-family loans in the secondary
market on a servicing retained basis. Beginning in 1993, the Bank began to
focus more heavily on building its loan and deposit franchise and increasing
its level of interest-earning assets and retail deposits. At that time, the
Bank began to expand its franchise in its existing market area and other areas
in Southeastern Massachusetts and Rhode Island through the establishment of de
novo banking offices and new loan origination facilities. Since 1994, the Bank
has opened eight new banking offices in Seekonk, Swansea and New Bedford,
4
<PAGE>
Massachusetts and Providence, East Providence, Pawtucket, Warwick and
Cranston, Rhode Island and two new loan origination offices in Burlington,
Massachusetts and Woodbury, Connecticut. In addition, the Company opened a new
centralized administrative and operations center in October, 1997 in Swansea,
Massachusetts. Pursuant to this expansion strategy, the Company seeks new
banking and loan production offices within its primary market area.
Lending Activities
Loan Portfolio Composition. The Company's loan portfolio consists primarily
of first mortgage loans secured by one- to four-family residences. At March
31, 2000, total loans receivable was $912.6 million, of which $671.6 million
were one- to four-family residential mortgage loans, or 73.6% of the Company's
total loans receivable. At such date, the remainder of the loan portfolio
consisted of: $2.6 million of multi-family residential loans, or .3% of total
loans receivable; $37.3 million of commercial real estate loans, or 4.1% of
total loans receivable; $39.2 million of construction and land loans, or 4.3%
of total loans receivable; $70.5 million of commercial loans, or 7.7% of total
loans receivable; and $91.5 million of consumer loans, or 10.0% of total loans
receivable, consisting of $31.4 million of home equity lines of credit, $51.5
million of second mortgages and $8.6 million of other consumer loans. After
including allowance for loan losses, undisbursed proceeds of construction
mortgages in process, and deferred loan origination fees, loans receivable,
net was $888.8 million at March 31, 2000. At that same date, 58.5% of the
Company's residential mortgage loans and construction and land loans,
excluding mortgage loans held for sale, had adjustable interest rates, most of
which are indexed to the one-year Constant Maturity Treasury ("CMT") Index.
The Company had $3.4 million of mortgage loans held for sale at March 31,
2000, consisting of one- to four-family fixed-rate mortgage loans.
The types of loans that the Company may originate are subject to federal and
state laws and regulations. Interest rates charged by the Company on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies
of the federal government, including the Federal Reserve Board, and
legislative tax policies.
5
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family.... $671,586 73.59% $583,692 74.13% $691,675 79.68% $666,942 82.08% $531,849 81.63%
Multi-family........... 2,568 .28 3,082 .39 3,899 .45 4,416 .54 4,703 .72
Commercial real
estate................ 37,274 4.09 38,760 4.92 45,723 5.27 33,057 4.07 23,368 3.59
Construction and land.. 39,205 4.30 31,671 4.02 27,145 3.13 23,919 2.95 25,297 3.88
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans.. 750,633 82.26 657,205 83.46 768,442 88.53 728,334 89.64 585,217 89.82
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial.............. 70,484 7.72 56,196 7.14 26,689 3.07 20,062 2.47 14,473 2.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer Loans:
Home equity lines...... 31,351 3.44 25,482 3.24 26,252 3.02 25,021 3.08 27,995 4.30
Second mortgages....... 51,488 5.64 40,630 5.16 38,862 4.48 32,122 3.95 18,064 2.77
Other consumer loans... 8,616 .94 7,872 1.00 7,828 .90 6,985 .86 5,813 .89
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans.. 91,455 10.02 73,984 9.40 72,942 8.40 64,128 7.89 51,872 7.96
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable............ 912,572 100.00% 787,385 100.00% 868,073 100.00% 812,524 100.00% 651,562 100.00%
====== ====== ====== ====== ======
Less:
Allowance for loan
losses................ (12,275) (12,016) (10,937) (8,788) (5,607)
Undisbursed proceeds of
construction mortgages
in process............ (11,983) (7,903) (7,164) (5,274) (6,568)
Deferred loan
origination
costs (fees), net..... 446 (779) (1,420) (2,107) (1,795)
-------- -------- -------- -------- --------
Loans receivable, net.. 888,760 766,687 848,552 796,355 637,592
Mortgage loans held for
sale.................. 3,417 52,334 84,867 23,331 17,747
-------- -------- -------- -------- --------
Loans receivable, net
and mortgage loans
held for sale......... $892,177 $819,021 $933,419 $819,686 $655,339
======== ======== ======== ======== ========
</TABLE>
Loan Maturity. The following table shows the remaining contractual maturity
of the Company's loans at March 31, 2000. The table does not include the
effect of future principal prepayments.
<TABLE>
<CAPTION>
At March 31, 2000
--------------------------------------------------------------------
One- to Commercial
Four- Multi- Real Construction Total
Family Family Estate and Land Commercial Consumer Loans
-------- ------ ---------- ------------ ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less....... $ 236 $ 4 $ 4,627 $27,291 $25,331 $32,054 $ 89,543
-------- ------ ------- ------- ------- ------- --------
After one year:
More than one year to
three years........... 4,408 19 8,624 178 15,342 5,263 33,834
More than three years
to five years......... 10,542 48 14,858 90 20,472 11,324 57,334
More than five years
to 10 years........... 97,087 620 6,615 683 8,457 18,054 131,516
More than 10 years to
20 years.............. 170,914 1,311 2,239 8,681 882 21,613 205,640
More than 20 years..... 388,399 566 311 2,282 -- 3,147 394,705
-------- ------ ------- ------- ------- ------- --------
Total due after one
year.................. 671,350 2,564 32,647 11,914 45,153 59,401 823,029
-------- ------ ------- ------- ------- ------- --------
Total amount due....... $671,586 $2,568 $37,274 $39,205 $70,484 $91,455 912,572
======== ====== ======= ======= ======= =======
Less:
Allowance for loan
losses.............. (12,275)
Undisbursed proceeds
of construction
mortgages in
process............. (11,983)
Deferred loan
origination fees,
net................. 446
--------
Loans receivable,
net................... $888,760
========
</TABLE>
6
<PAGE>
The following table sets forth, at March 31, 2000, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March
31, 2001, and whether such loans have fixed interest rates or adjustable
interest rates.
<TABLE>
<CAPTION>
Due After March 31, 2001
----------------------------
Fixed Adjustable Total
-------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family.............................. $287,366 $383,984 $671,350
Multi-family..................................... 278 2,286 2,564
Commercial real estate........................... 30,078 2,569 32,647
Construction and land............................ 1,617 10,297 11,914
-------- -------- --------
Total mortgage loans........................... 319,339 399,136 718,475
Commercial loans................................... 42,667 2,486 45,153
Consumer loans..................................... 59,401 -- 59,401
-------- -------- --------
Total loans.................................... $421,407 $401,622 $823,029
======== ======== ========
</TABLE>
Origination, Sale and Servicing of Loans. The Company's mortgage lending
activities are conducted primarily by its loan personnel operating at its 15
banking offices and six loan origination centers and through a network of
approximately 222 approved loan correspondents, wholesale loan brokers and
other financial institutions approved by the Company. All loans originated by
the Company, either through internal sources or through loan correspondents
are underwritten by the Company pursuant to the Company's policies and
procedures. For the fiscal year ended March 31, 2000, the Company's loan
correspondents originated $268.7 million in loans. The Company originates both
adjustable-rate and fixed-rate loans. The Company's ability to originate
fixed- or adjustable-rate loans is dependent upon the relative customer demand
for such loans, which is affected by the current and expected future level of
interest rates.
Generally, adjustable-rate residential mortgage loans are originated by the
Company for investment while longer-term fixed-rate residential mortgage loans
are originated for sale. While the Company has in the past, from time to time,
retained fixed-rate one- to four-family loans and sold adjustable-rate one-to
four-family loans, it is the general policy of the Company to sell
substantially all of the one- to four-family fixed-rate mortgage loans with
maturities over 10 years that it originates and to retain substantially all
fixed-rate loans with maturities of up to and including 10 years and all
adjustable-rate one- to four-family mortgage loans which it originates. The
one- to four-family loan products currently originated for sale by the Company
include a variety of mortgage loans which conform to the underwriting
standards specified by the Federal National Mortgage Association ("Fannie
Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac") ("conforming
loans") and, to a lesser extent, loans which do not conform to Fannie Mae or
Freddie Mac standards due to loan amounts ("jumbo loans"), or which otherwise
vary from agency underwriting standards. The Company also sells all mortgage
loans insured by the Federal Housing Administration ("FHA") and the Veterans'
Administration ("VA"). All one- to four-family loans sold by the Company are
sold pursuant to master commitments negotiated with Fannie Mae, Freddie Mac,
FHLB and other investors to purchase loans meeting such investors' defined
criteria. Although the Company has entered into master commitment contracts,
such contracts generally do not require the purchasers to buy or the Company
to deliver a specific amount of mortgage loans.
The Company currently sells substantially all longer-term fixed-rate
conforming mortgage loans it originates to Fannie Mae and Freddie Mac. Sales
of loans are made without recourse to the Company in the event of default by
the borrower, except, in the case of VA loans, which are subject to
limitations on the VA's loan guarantees. The Company generally retains the
servicing rights on the mortgage loans sold to Fannie Mae, Freddie Mac and
FHLB but generally sells all VA, FHA, long-term jumbo loans and non-conforming
loans to institutional investors on a servicing released basis.
Between the time the Company issues loan commitments and the time such loans
or the securities into which they are converted are sold, the Company is
exposed to movements in the market price due to changes in
7
<PAGE>
market interest rates. The Company manages this risk by utilizing forward cash
sales of loans or mortgage-backed securities primarily to Fannie Mae and
Freddie Mac (such forward sales of loans or mortgage-backed securities are
collectively referred to as "forward sale commitments"). Generally, the
Company attempts to cover between 60% and 70% of the principal amount of the
loans that it has committed to fund at specified interest rates with forward
sale commitments. However, the type, amount and delivery date of forward sale
commitments the Company will enter into is based upon anticipated movements in
market interest rates, bond market conditions and management's estimates of
closing volumes and the length of the origination or purchase commitments.
Differences between the volume and timing of actual loan origination and
purchases and management's estimates can expose the Company to losses. If the
Company is not able to deliver the mortgage loans or mortgage-backed
securities during the appropriate delivery period called for by the forward
sale commitment, the Company may be required to pay a non-delivery fee,
repurchase the delivery commitments at current market prices or purchase whole
loans at a premium for delivery. The above activity is managed continually;
however, there can be no assurances that the Company will be successful in its
effort to minimize interest-rate risk between the time origination or purchase
commitments are issued and the ultimate sale of the loan. At March 31, 2000,
the Company had $7.3 million of forward sales commitments.
At March 31, 2000, the Company was servicing its portfolio of $892.2 million
of loans receivable, net and mortgage loans held for sale and $1.595 billion
of loans for others, primarily consisting of conforming fixed-rate loans sold
by the Company. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of
the borrowers and generally administering the loans. All of the loans
currently being serviced for others are loans which have been sold by the
Company. The gross servicing fee income from loans originated and purchased is
generally .25 to .38% of the total balance of the loan serviced.
During the fiscal years ended March 31, 2000 and March 31, 1999, the Company
originated $408.4 million and $701.0 million of fixed-rate and adjustable-rate
residential mortgage loans, respectively, of which $243.2 million and $89.3
million, respectively, were retained by the Company. The fixed-rate loans
retained by the Company consisted primarily of loans with terms of 12 years or
less. The Company recognizes, at the time of sale, the cash gain or loss on
the sale of the loans based on the difference between the net cash proceeds
received and the carrying value of the loans sold. On April 1, 1996, the
Company implemented Statement of Financial Accounting Standards ("SFAS") No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122") as amended by
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", pursuant to which the value of servicing
rights are recognized as an asset of the Company. The book value of this asset
at March 31, 2000, net of amortization, was $6.3 million.
The Company has, in the past, from time to time, purchased loans or
participations in loans, primarily one- to four-family mortgage loans, and had
$3.5 million of purchased loans at March 31, 2000. Purchases of loans from
correspondent financial institutions are underwritten pursuant to the
Company's policies and are closed in the name of the correspondent financial
institution but immediately purchased by the Company for its mortgage banking
activities. At March 31, 2000, the Company had $3.4 million in mortgage loans
held for sale consisting of fixed-rate one- to four-family loans.
8
<PAGE>
The following table sets forth the Company's loan originations,
participations, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended March 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance(1)...................... $ 819,021 $ 933,419 $ 819,686
Loans originated:
Mortgage loans:
One- to four-family................. 366,511 663,999 463,765
Multi-family........................ 190 -- 220
Commercial real estate.............. 6,524 31,601 25,599
Construction and land............... 41,683 36,985 32,677
---------- ---------- ----------
Total mortgage loans.............. 414,908 732,585 522,261
---------- ---------- ----------
Commercial............................ 47,560 19,851 11,539
---------- ---------- ----------
Consumer loans:
Home equity lines................... 26,853 17,185 13,537
Second mortgages.................... 29,773 20,869 19,224
Other consumer loans................ 7,081 6,028 3,794
---------- ---------- ----------
Total consumer loans.............. 63,707 44,082 36,555
---------- ---------- ----------
Total loans originated................ 526,175 796,518 570,355
---------- ---------- ----------
Total............................. 1,345,196 1,729,937 1,390,041
Less:
Principal repayments and other, net..... (198,748) (277,623) (188,899)
Loan charge-offs, net................... (941) (121) (201)
Proceeds from sale of mortgage loans.... (253,099) (632,737) (266,109)
Transfer of mortgage loans to REO....... (231) (435) (1,413)
---------- ---------- ----------
Loans receivable, net and mortgage loans
held for sale............................ 892,177 819,021 933,419
Mortgage loans held for sale............ (3,417) (52,334) (84,867)
---------- ---------- ----------
Ending balance, loans receivable, net..... $ 888,760 $ 766,687 $ 848,552
========== ========== ==========
</TABLE>
--------
(1) Includes mortgage loans held for sale.
One-to-Four Family Mortgage Lending. The Company offers both fixed-rate and
adjustable-rate mortgage ("ARM") loans secured by one-to-four family
residences with maturities of up to 30 years. Substantially, all of such loans
are secured by properties located in Southern New England. Loan originations
are generally obtained from the Company's commissioned loan representatives,
correspondent banking relationships and wholesale brokers and their contacts
with the local real estate industry, existing or past customers, and members
of the local communities. At March 31, 2000, residential one-to-four family
mortgage loans totaled $671.6 million, or 73.6% of the Company's total loans
receivable. Of the Company's one-to-four family residential mortgage loans,
$287.9 million, or 42.9%, were fixed-rate loans and $383.7 million, or 57.1%,
were adjustable-rate loans.
The Company currently offers a number of ARM loan programs with interest
rates which are fixed for a period of one, three, four, five, seven or ten
years and adjust annually thereafter. The Company's ARM loans generally
provide for periodic (not more than 2%) and overall (not more than 6%) caps on
the increase or decrease in the interest rate at any adjustment date and over
the life of the loan, respectively. The interest rate adjustment on these
loans is generally indexed to the one-year U.S. Treasury CMT Index.
The Company's policy is to originate one-to-four family residential first-
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan and up to 100% of
9
<PAGE>
the appraised value or selling price if private mortgage insurance is obtained
with the exception of FHA and VA loans. Mortgage loans originated by the
Company include due-on-sale clauses which provide the Company with the
contractual right to deem the loan immediately due and payable in the event
the borrower transfers ownership of the property without the Company's
consent. Due-on-sale clauses are an important means of adjusting the rates on
the Company's fixed-rate mortgage loan portfolio and the Company has generally
exercised its rights under these clauses.
The origination of adjustable-rate residential mortgage loans, as opposed to
fixed-rate residential mortgage loans, helps reduce the Company's exposure to
increases in interest rates. However, adjustable-rate loans may pose credit
risks not inherent in fixed-rate loans, primarily because as interest rates
rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
reduce the credit risk associated with its adjustable-rate loans but also
limit the interest rate sensitivity of its adjustable-rate mortgage loans.
In an effort to provide financing for first-time and moderate income home
buyers, the Company offers FHA and VA loans and also has its own first-time
home buyer program. These programs offer single-family residential mortgage
loans to qualified individuals. These loans are offered with terms of up to 30
years. Such loans must be secured by a one-to-four family owner-occupied unit.
These loans are originated using modified underwriting guidelines with reduced
down payments and loan fees. Such loans are originated in amounts up to 100%
of the lower of the property's appraised value or the sales price. Private
mortgage insurance is normally required. The Company expects to achieve a
lower rate of return on loans originated under the first-time home buyer
program when compared to other residential mortgage loans because the Company
typically charges: a lower rate of interest; a lower mortgage origination fee;
or lower closing costs on such loan programs.
Commercial Real Estate Lending. The Company originates commercial real
estate loans that are generally secured by properties used for business
purposes such as manufacturing, office buildings, retail facilities,
recreation facilities, or apartment buildings located in the Company's primary
market area. To a lesser extent, the Company originates construction,
acquisition and development loans to experienced developers known to the
Company for the construction of residential or commercial developments. The
Company's commercial real estate underwriting policy provides that commercial
real estate loans may generally be made in amounts up to 80% of the appraised
value of the property. Commercial real estate lending is limited by the Bank's
regulatory loans-to-one borrower limit which at March 31, 2000 was $14.5
million. The Company currently originates commercial real estate loans,
generally with terms of up to 10 years and amortizations of up to 20 years
with the outstanding balance due and payable at the end of the loan term. The
Company's adjustable-rate loans generally have interest rates that adjust
daily and are indexed to the prime rate of interest. In reaching its decision
on whether to make a commercial real estate loan, the Company considers the
net operating income of the property, the borrower's expertise, credit
history, and profitability and the value of the underlying property. The
Company has generally required that the properties securing commercial real
estate loans have debt service coverage ratios (the ratio of earnings before
debt service to debt service) of at least 1.20x. In addition, environmental
assessments are generally required for all commercial real estate loans in
excess of $500,000. Generally, all commercial real estate loans made to
corporations, partnerships and other business entities require personal
guarantees by the principals. The Company's commercial real estate loan
portfolio at March 31, 2000 was $37.3 million, or 4.1% of total loans
receivable. At March 31, 2000, the largest commercial real estate loan in the
Company's portfolio had an outstanding principal balance of $2.0 million.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than one- to four-family residential mortgage
loans. Because payments on loans secured by commercial real estate properties
are often dependent on successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to prevailing
conditions in the real estate market or the economy. The Company seeks to
minimize these risks through its underwriting standards.
Commercial Lending. The Company also originates commercial loans to
businesses generally operating in the Company's primary market area. Such
loans are generally secured by equipment, inventory, accounts
10
<PAGE>
receivable, and real estate, in the case of owner-occupied commercial property
where repayment is significantly dependent on the underlying business. The
Company offers commercial loans in the form of term loans and lines of credit.
Term loans are generally offered with either fixed or adjustable rates of
interest and terms of up to ten years. Most term loans fully amortize during
the term of such loan. Business lines of credit generally have terms of one-
year and are indexed to the Company's prime rate of interest or the prime rate
as published in The Wall Street Journal. These lines of credit are renewable
annually.
In making commercial loans, the Company considers primarily the financial
resources of the borrower, the borrower's ability to repay the loan out of
cash flow, the Company's lending history with the borrower and the value of
the collateral. Generally, if the borrower is a corporation, partnership or
other business entity, personal guarantees by the principals are required. The
Company's largest commercial loan at March 31, 2000 was a $5.0 million line of
credit of which $5.0 million was advanced at March 31, 2000. At such date, the
Company had $19.6 million of unadvanced commercial lines of credit. At March
31, 2000, the Company had $70.5 million of commercial loans which amounted to
7.7% of the Company's total loans receivable.
Unlike mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are
made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for
the repayment of commercial loans may be substantially dependent on the
success of the business itself. Further, any collateral securing such loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
Multi-Family Lending. The Company originates adjustable-rate multi-family
mortgage loans generally secured by five to 12 unit residential apartment
buildings located in the Company's primary market area. Such loans adjust
annually, have a 25 year term and are indexed to the one year FHLB advance
rate. As a result of uncertain market conditions in its primary market area,
the Company currently originates multi-family loans on a limited and highly
selective basis. In reaching its decision on whether to make a multi-family
loan, the Company considers the value of the underlying property as well as
the qualifications of the borrower. Other factors relating to the property to
be considered are: the net operating income of the mortgaged premises before
debt service and depreciation; the debt service ratio; and the ratio of the
loan amount to appraised value. Pursuant to the Company's current underwriting
policies, a multi-family mortgage loan may only be made in an amount up to 60%
of the appraised value of the underlying property. The maximum amount of a
multi-family loan is limited by the Company's loans-to-one borrower limit
which, at March 31, 2000, was $14.5 million.
When evaluating the qualifications of the borrower for a multi-family loan,
the Company considers the financial resources and income level of the
borrower, the borrower's experience in owning or managing similar property,
and the Company's lending experience with the borrower. The Company's
underwriting guidelines require that the borrower be able to demonstrate
strong management skills and the ability to maintain the property from current
rental income. The borrower is required to present evidence of the ability to
repay the mortgage and a history of making mortgage payments on a timely
basis. In making its assessment of the creditworthiness of the borrower, the
Company generally reviews the financial statements, employment and credit
history of the borrower, as well as other related documentation. All multi-
family loans made to corporations, partnerships and other business entities
require personal guarantees by the principal borrowers. The Company's multi-
family loan portfolio at March 31, 2000, totaled $2.6 million, or .3% of total
loans receivable. At March 31, 2000, the Company's largest multi-family loan
had an outstanding carrying balance of $188,000.
Loans secured by apartment buildings and other multi-family residential
properties generally involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
prevailing conditions in the real estate market or the economy. The Company
seeks to minimize these risks through its underwriting policies.
11
<PAGE>
Construction and Land Lending. The Company originates construction and land
loans primarily for the development of single-family residences. Such loans
are made principally to individuals building their primary residence and, to a
lesser extent, to licensed and experienced developers known to the Company in
its primary market area for the construction of single-family developments.
The Company generally does not originate loans secured by raw land. In the
case of construction and land mortgage loans to individuals building their
primary residence, such loans are originated in amounts up to 90% of the
appraised value of the property, as improved. Construction and land loans to
commercial developers are originated in amounts up to 70% of the lesser of the
appraised value of the property, as improved, or the sales price. Proceeds of
construction and land loans are disbursed as phases of the construction are
completed. Generally, if the borrower is a corporation, partnership or other
business entity, personal guarantees by the principals are required. The
Company's largest construction and land loan at March 31, 2000 was a
performing loan with a $700,000 carrying balance secured by a single-family
home located in Topsfield, Massachusetts. At March 31, 2000, the Company had
$39.2 million of construction and land loans which amounted to 4.3% of the
Company's total loans receivable.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied
real estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including
interest) of construction. If the estimate of value proves to be inaccurate,
the Company may be confronted with a project, when completed, having a value
which is insufficient to assure full repayment.
Consumer Lending. Consumer loans at March 31, 2000 amounted to $91.5
million, or 10.0% of the Company's total loans receivable, and consisted
primarily of home equity lines of credit and second mortgage loans, and, to a
significantly lesser extent, secured and unsecured personal loans and new and
used automobile loans. Such loans are generally originated in the Company's
primary market area and generally are secured by real estate, deposit
accounts, personal property and automobiles. These loans are typically shorter
term and generally have higher interest rates than one-to-four family mortgage
loans.
The Company offers two types of home equity loans: a variable-rate "open-end
line of credit" and a fixed-rate "second mortgage". Substantially all of the
Company's home equity loans are secured by second liens on one-to-four family
residences located in the Company's primary market area. At March 31, 2000,
home equity loans totaled $82.8 million, or 9.1% of the Company's total loans
and 90.6% of total consumer loans. Home equity lines of credit have variable
rates of interest which can generally adjust on a monthly basis. The interest
rate on such loans is indexed to the prime rate as reported in The Wall Street
Journal and generally have an 18% lifetime limit on interest rates. Generally,
the maximum combined loans-to-value ratio ("LTV") on home equity loans is 80%;
however, fixed-rate second mortgage loans up to $50,000 and lines of credit up
to $25,000 can have an LTV of up to 100% on the property as long as other
underwriting criteria are satisfied. At March 31, 2000, the Company had $72.1
million of variable-rate home equity lines of credit with an outstanding
balance of $31.4 million, which was 3.4% of total loans receivable and 34.3%
of total consumer loans. Second mortgage loans are generally offered with
terms of up to 15 years and only with fixed-rates of interest which vary
depending on the amortization period chosen by the borrower. At March 31,
2000, fixed-rate second mortgage loans totaled $51.5 million, or 5.6% of the
Company's total loans receivable and 56.3% of total consumer loans. The
underwriting standards employed by the Company for home equity lines of credit
and second mortgage loans include a determination of the applicant's credit
history and an assessment of the applicant's ability to meet existing
obligations and payments on the proposed loan and the value of the collateral
securing the loan. The stability of the applicant's monthly income may be
determined by verification of gross monthly income from primary employment
and, additionally, from any verifiable secondary income. Creditworthiness of
the applicant is of primary consideration.
The Company also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans.
Secured personal loans are generally secured by deposit accounts, stocks or
bonds. Unsecured personal loans generally have a maximum borrowing limitation
of $10,000 and generally allow a maximum debt ratio (the ratio of debt service
to net earnings) of 40%. Automobile loans have
12
<PAGE>
a maximum borrowing limitation of 95% of the sale price of a new automobile
and 80% of the lesser of the purchase price or fair market value of a used
automobile. At March 31, 2000, personal loans totaled $5.1 million, or 0.6% of
the Company's total loans receivable and 5.6% of consumer loans; and
automobile loans totaled $3.5 million, or 0.4% of total loans receivable and
3.9% of consumer loans.
Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one-to-four family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the
underlying collateral. Further, consumer loan collections on these loans are
dependent on the borrower's continuing financial stability and, therefore, are
more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Finally, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans in the event of a default. At
March 31, 2000, consumer loans 90 days or more delinquent totaled $24,000.
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Company. In connection
with one- to four-family mortgage loans, the Board of Directors has authorized
the following persons and committees to approve loans up to the amounts
indicated: owner-occupied mortgages that meet the general underwriting
standards of Fannie Mae and Freddie Mac, with an 90% or lower LTV ratio and
which do not exceed Fannie Mae and Freddie Mac maximum limits, may be approved
by the Company's underwriters; all other mortgage loans in amounts up to
$300,000 must be approved by the Company's Director of Residential Loan
Production. The Senior Vice President of the Mortgage Banking Group or Senior
Vice President of Banking Group must approve mortgage loans in excess of
$300,000 and up to $500,000. The Company's Retail Loan Committee must approve
loans in excess of $500,000 and up to $750,000. Approval of the Board of
Directors' Executive Committee is required for any loan in excess of $750,000.
With respect to multi-family and construction and land loans, the Board of
Directors has authorized the following persons and committees to approve loans
up to the amounts indicated: mortgage loans in amounts up to $250,000 must be
approved by the Company's Director of Residential Loan Production; mortgage
loans in excess of $250,000 and up to $400,000 require the approval of either
the Company's Senior Vice President of Mortgage Banking Group or Senior Vice
President of Banking Group; mortgage loans in excess of $400,000 and up to
$500,000 require the approval of the Company's Retail Loan Committee; loans in
excess of $500,000 require the approval of the Board of Directors' Executive
Committee.
In connection with consumer loans, the Board of Directors has authorized the
following persons and committees to approve loans up to the amounts indicated:
consumer loans up to $100,000 and which meet certain lending criteria may be
approved by the Company's Consumer Loan Manager, Senior Underwriter, or
Underwriter; any consumer loan up to $250,000 may be approved by either the
Company's Senior Vice President of Mortgage Banking Group, Senior Vice
President of Banking Group, Director of Residential Loan Production or
Director of Commercial Services; loans in excess of $250,000 and up to
$400,000 must be approved by the Company's Retail Loan Committee; and loans in
excess of $400,000 must be approved by the Board of Directors' Executive
Committee.
With respect to commercial and commercial real estate loans to borrowers
with total credit exposure of up to $600,000, the Board of Directors has
authorized the approval of these loans by commercial lending officers of the
Company with progressively higher levels of responsibility as the amount of
aggregate credit exposure increases. Loans to borrowers with total credit
exposure in excess of $600,000 and up to $3 million require the approval of
the Commercial Loan Committee and loans to borrowers with total credit
exposure in excess of $3 million require the approval of the Board of
Directors' Executive Committee. Additionally, the President and CEO has
lending authority up to $4 million.
Pursuant to OTS regulations, loans to one borrower cannot, subject to
certain exceptions, exceed 15% of the Bank's unimpaired capital and surplus.
At March 31, 2000, the loans to one borrower limit was $14.5 million.
13
<PAGE>
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent accounts
are generated and reviewed by management on a monthly basis and the Board of
Directors performs a monthly review of all loans or lending relationships
delinquent 90 days or more and all real estate owned ("REO"). The procedures
taken by the Company with respect to delinquencies vary depending on the
nature of the loan, period and cause of delinquency and whether the borrower
is habitually delinquent. When a borrower fails to make a required payment on
a loan, the Company takes a number of steps to have the borrower cure the
delinquency and restore the loan to current status. The Company generally
sends the borrower a written notice of non-payment after the loan is first
past due. The Company's guidelines provide that telephone, written
correspondence and/or face-to-face contact will be attempted to ascertain the
reasons for delinquency and the prospects of repayment. When contact is made
with the borrower at any time prior to foreclosure, the Company will attempt
to obtain full payment, offer to provide budget and finance counseling
services, work out a repayment schedule with the borrower to avoid foreclosure
or, in some instances, accept a deed in lieu of foreclosure. In the event
payment is not then received or the loan not otherwise satisfied, additional
letters and telephone calls generally are made. If the loan is still not
brought current or satisfied and it becomes necessary for the Company to take
legal action, which typically occurs after a loan is 90 days or more
delinquent, the Company will commence foreclosure proceedings against any real
property that secures the loan. If a foreclosure action is instituted and the
loan is not brought current, paid in full, or refinanced before the
foreclosure sale, the property securing the loan generally is sold at
foreclosure and, if purchased by the Company, becomes REO.
Federal regulations and the Company's Credit Risk Review Policy require that
the Company utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Company has incorporated
the OTS internal asset classifications as a part of its credit monitoring
system. The Company currently classifies problem and potential problem assets
as "Substandard," "Doubtful" or "Loss" assets. An asset is considered
"Substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "Doubtful" have all of the weaknesses
inherent in those classified "Substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "Loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss", it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the OTS
which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and
lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that institutions have effective systems and
controls to identify, monitor and address asset quality problems; that
management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and that management has established
acceptable
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<PAGE>
allowance evaluation processes that meet the objectives set forth in the
policy statement. Although management believes that, based on information
currently available to it at this time, its allowance for loan losses is
adequate, actual losses are dependent upon future events and, as such, further
additions to the level of allowances for loan losses may become necessary.
The Company's Credit Risk Review Committee reviews and classifies the
Company's assets on a quarterly basis and the Board of Directors reviews the
results of the reports on a quarterly basis. The Company classifies assets in
accordance with the management guidelines described above. At March 31, 2000,
the Company had $6.1 million of loans designated as Substandard. As of March
31, 2000, the Company had loans totaling $8.3 million designated as Special
Mention. These loans are designated as Special Mention because of inherent
weaknesses that currently exist but might be correctable in a twelve month
cycle. Accordingly, they require additional monitoring.
15
<PAGE>
The following table sets forth delinquencies in the Company's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
At March 31, 2000 At March 31, 1999
------------------------------------- -------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------ ------------------ ------------------ ------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
One- to four-
family........... 2 $ 110 12 $ 941 6 $ 283 16 $ 971
Multi-family..... -- -- -- -- -- -- -- --
Commercial real
estate........... 2 46 -- -- -- -- 3 1,142
Construction and
land............. -- -- -- -- -- -- 1 117
---- ----- ---- ------ ---- ----- ---- ------
Total mortgage
loans........... 4 156 12 941 6 283 20 2,230
---- ----- ---- ------ ---- ----- ---- ------
Commercial Loans.. 2 93 4 345 1 9 3 280
---- ----- ---- ------ ---- ----- ---- ------
Consumer Loans:
Home equity
lines............ -- -- -- -- 1 162 2 36
Second
mortgages........ -- -- 2 12 -- -- -- --
Other consumer
loans............ 1 6 7 12 1 1 3 4
---- ----- ---- ------ ---- ----- ---- ------
Total consumer
loans........... 1 6 9 24 2 163 5 40
---- ----- ---- ------ ---- ----- ---- ------
Total loans(1).... 7 $ 255 25 $1,310 9 $ 455 28 $2,550
==== ===== ==== ====== ==== ===== ==== ======
Delinquent loans
to loans
receivable, net... 0.03% 0.15% 0.06% 0.33%
<CAPTION>
At March 31, 1998
-------------------------------------
60-89 Days 90 Days or More
------------------ ------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Mortgage Loans:
One- to four-
family........... 11 $ 683 17 $1,073
Multi-family..... -- -- 1 101
Commercial real
estate........... 2 176 3 1,199
Construction and
land............. -- -- 2 169
-------- --------- -------- ---------
Total mortgage
loans........... 13 859 23 2,542
-------- --------- -------- ---------
Commercial Loans.. 1 16 4 74
-------- --------- -------- ---------
Consumer Loans:
Home equity
lines............ 1 15 5 425
Second
mortgages........ 5 59 -- --
Other consumer
loans............ 4 6 6 7
-------- --------- -------- ---------
Total consumer
loans........... 10 80 11 432
-------- --------- -------- ---------
Total loans(1).... 24 $ 955 38 $3,048
======== ========= ======== =========
Delinquent loans
to loans
receivable, net... 0.11% 0.36%
</TABLE>
----
(1) Loans in the 90 days or more column consist of those loans 90 days or
more past due and other loans which have been identified by the Company
as presenting uncertainty with respect to the collectability of interest
or principal.
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<PAGE>
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans and REO. At March 31, 2000, there was no REO. It is the
policy of the Company to cease accruing interest on loans 90 days or more past
due and to reverse all accrued interest.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family.................. $ 941 $ 971 $ 1,073 $ 1,908 $ 2,469
Multi-family......................... -- -- 101 268 334
Commercial real estate............... -- 1,142 1,199 976 --
Construction and land................ -- 117 169 232 --
------- ------- ------- ------- -------
Total mortgage loans................ 941 2,230 2,542 3,384 2,803
------- ------- ------- ------- -------
Commercial loans...................... 345 280 74 -- 87
------- ------- ------- ------- -------
Consumer loans:
Home equity lines.................... -- 36 425 114 956
Second mortgages..................... 12 -- -- 95 196
Other consumer loans................. 12 4 7 69 3
------- ------- ------- ------- -------
Total consumer loans................ 24 40 432 278 1,155
------- ------- ------- ------- -------
Total nonaccrual loans.............. 1,310 2,550 3,048 3,662 4,045
Real estate owned, net(1).............. -- 344 595 665 643
------- ------- ------- ------- -------
Total non-performing assets.......... $ 1,310 $ 2,894 $ 3,643 $ 4,327 $ 4,688
======= ======= ======= ======= =======
Allowance for loan losses as a percent
of loans(2)........................... 1.36% 1.54% 1.27% 1.09% 0.87%
Allowance for loan losses as a percent
of non-performing loans(3)............ 937.02% 471.22% 358.83% 239.98% 138.62%
Non-performing loans as a percent of
loans(2)(3)........................... 0.15% 0.33% 0.35% 0.45% 0.63%
Non-performing assets as a percent of
total assets(4)....................... 0.08% 0.21% 0.28% 0.44% 0.65%
</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 collectibility of interest or principal.
(4) Non-performing assets consist of non-performing loans and REO.
Impaired Loans. The Company adopted a new accounting method for measuring
loan impairment on April 1, 1995. Adoption of this accounting standard did not
have a material effect on the comparability of the above tables. Impaired
loans are commercial and commercial real estate loans for which it is probable
that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. The definition of "impaired loans" is
not the same definition of "non-accrual loans," although the two categories
overlap. Non-accrual loans include impaired loans and are those on which the
accrual of interest is discontinued when collectibility of principal or
interest is uncertain or payments of principal or interest have been
contractually past due 90 days. The Company may choose to place a loan on non-
accrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if (i) it is not probable that the
Company will collect all amounts due in accordance with the contractual terms
of the loan or (ii) the loan is not a commercial or a commercial real estate
loan. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types
of impaired loans is
17
<PAGE>
determined by the difference between the present value of the expected cash
flows related to the loan, using the original contractual interest rate, and
its recorded value, or, in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the loan.
When foreclosure is probable, impairment is measured based on the fair value
of the collateral. Residential mortgage and consumer loans are measured for
impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower=s prior payment record
and the amount of the shortfall in relation to the principal and interest
owed.
At March 31, 2000 and March 31, 1999, total impaired loans were $556,000 and
$1.6 million, respectively. At March 31, 2000, impaired loans of $556,000
required an impairment allowance of $228,000. All impaired loans have been
measured using the fair value of the collateral method. During the fiscal year
ended March 31, 2000, the average recorded value of impaired loans was
$771,000. For these loans, $75,000 of interest income was recognized while
$114,000 of interest income would have been recognized under the original
terms.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance
for loan losses is maintained at an amount management considers adequate to
cover estimated losses in loans receivable which are deemed probable and
estimable based on information currently known to management. The allowance is
based upon a number of factors, including current economic conditions, actual
loss experience and industry trends. In addition, the OTS and FDIC, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. The OTS and FDIC may require the Company to make
additional provisions for estimated loan losses based upon judgments different
from those of management. As of March 31, 2000, the Company's allowance for
loan losses was 1.36% of total loans receivable as compared to 1.54% as of
March 31, 1999. The increase in allowance for loan losses of $259,000 reflects
management's assessment of the loan portfolio and was based upon the growth of
"higher" credit risk components of the portfolio. The Company had non-accrual
loans of $1.3 million and $2.6 million at March 31, 2000 and March 31, 1999,
respectively. The Company will continue to monitor and modify its allowances
for loan losses as conditions dictate. While management believes the Company's
allowance for loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Company's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Company or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from those assumed by management to determine the current level
of the allowance for loan losses.
18
<PAGE>
The following table sets forth activity in the Company's allowance for loan
losses for the years set forth in the following table.
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
-------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........... $12,016 $10,937 $ 8,788 $5,607 $4,239
Provision for loan losses................ 1,200 1,200 2,350 3,750 2,626
Charge-offs:
Mortgage loans:
One-to-four family................... 41 12 188 331 218
Multi-family......................... -- -- -- 82 --
Commercial real estate............... 759 -- -- -- 967
Construction and land................ -- -- -- -- --
Commercial loans....................... 140 74 -- 87 --
Consumer Loans:
Home equity lines.................... -- 30 -- 116 68
Second mortgages..................... -- 9 15 10 --
Other consumer....................... 18 13 9 11 35
------- ------- ------- ------ ------
Total.............................. 958 138 212 637 1,288
Recoveries............................... 17 17 11 68 30
------- ------- ------- ------ ------
Balance at end of period................. $12,275 $12,016 $10,937 $8,788 $5,607
======= ======= ======= ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period....................... 0.12% 0.01% 0.02% 0.07% 0.23%
======= ======= ======= ====== ======
</TABLE>
19
<PAGE>
The following tables set forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997
-------------------------- -------------------------- -------------------------- -------------------------
Percent Percent Percent Percent
Percent of Loans Percent of Loans Percent of Loans Percent of Loans
of in Each of in Each of in Each of in Each
Allowance Category Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------- --------- -------- ------- --------- -------- ------- --------- -------- ------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential..... $ 2,529 20.60% 78.17% $ 2,517 20.95% 78.54% $ 2,959 27.05% 83.26% $2,769 31.51% 85.57%
Commercial...... 1,749 14.25 4.09 2,725 22.68 4.92 3,023 27.64 5.27 2,239 25.48 4.07
------- ------ ------ ------- ------ ------ ------- ------ ------ ------ ------ ------
Total........... 4,278 34.85 82.26 5,242 43.63 83.46 5,982 54.69 88.53 5,008 56.99 89.64
Commercial....... 4,523 36.85 7.72 3,111 25.89 7.14 1,309 11.97 3.07 932 10.60 2.47
Consumer......... 1,647 13.42 10.02 1,320 10.99 9.40 1,358 12.42 8.40 1,151 13.10 7.89
Unallocated...... 1,827 14.88 -- 2,343 19.49 -- 2,288 20.92 -- 1,697 19.31 --
------- ------ ------ ------- ------ ------ ------- ------ ------ ------ ------ ------
Total allowance
for loan
losses.......... $12,275 100.00% 100.00% $12,016 100.00% 100.00% $10,937 100.00% 100.00% $8,788 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ====== ====== ====== ======
<CAPTION>
1996
-------------------------
Percent
Percent of Loans
of in Each
Allowance Category
to Total to Total
Amount Allowance Loans
------ --------- --------
<S> <C> <C> <C>
Mortgages:
Residential..... $2,175 38.79% 86.23%
Commercial...... 1,195 21.31 3.59
------ --------- --------
Total........... 3,370 60.10 89.82
Commercial....... 621 11.08 2.22
Consumer......... 829 14.79 7.96
Unallocated...... 787 14.03 --
------ --------- --------
Total allowance
for loan
losses.......... $5,607 100.00% 100.00%
====== ========= ========
</TABLE>
20
<PAGE>
Investment Activities
Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured
banks and savings institutions, bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally-chartered
savings institutions may also invest their assets in commercial paper,
investment-grade corporate debt securities and mutual funds whose assets
conform to the investments that a federally-chartered savings institution is
otherwise authorized to make directly. Additionally, the Company must maintain
minimum levels of investments that qualify as liquid assets under OTS
regulations. Historically, the Company has maintained liquid assets above the
minimum OTS requirements and at a level considered to be adequate to meet its
normal daily activities.
The investment policy of the Company, as approved by the Board of Directors,
requires management to maintain adequate liquidity, generate a favorable
return on investments without incurring undue interest rate and credit risk
and to complement the Company's lending activities. Generally, the Company's
investment policy is more restrictive than the OTS regulations allow and,
accordingly, the Company has invested primarily in AAA-rated mortgage-related
securities (consisting of mortgage-backed pass-through securities and
collateralized mortgage obligations) and U.S. government and federal agency
securities, all of which qualify as liquid assets under the OTS liquidity
regulations. As required by SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities ("SFAS No. 115"), the Company designates
investment securities as held to maturity, available for sale, or held for
trading. The Company generally invests in securities as part of a wholesale
leverage strategy as well as to manage interest-rate risk and to maintain
liquidity levels deemed appropriate by management. At March 31, 2000, the
Company had short-term investments of $250,000 consisting of overnight
deposits. As of the same date, the Company also maintained investments in
trading securities of $587,000. At March 31, 2000, the Company's investment
securities available for sale portfolio had a fair value of $5.6 million, or
0.4% of assets, consisting of marketable equity securities with an amortized
cost of $6.3 million. At March 31, 2000, the Company's had no investment
securities held to maturity.
At March 31, 2000, the Company had invested $546.4 million, or 34.6% of
assets, in mortgage-backed securities issued by either by the Government
National Mortgage Association ("Ginnie Mae"), FNMA, FHLMC or by private
mortgage security issuers. The portfolio consisted of $543.6 million of
mortgage-backed securities classified as available for sale, or 99.5% of total
mortgage-backed securities, and $2.8 million of mortgage-backed securities
classified as held to maturity, or .5% of total mortgage-backed securities. Of
the $546.4 million in mortgage-backed securities, $476.7 million were
adjustable-rate securities and $69.7 million were fixed-rate securities.
Of the $476.7 million of adjustable-rate securities, $259.8 million were
GNMA one year CMT indexed ARMs with 1% maximum annual rate adjustments and 5%
maximum lifetime rate adjustments, $23.5 million were FNMA and FHLMC one year
CMT indexed ARMs with initial fixed-rate periods of one to five years, and 2%
maximum annual rate adjustments and 6% maximum lifetime rate adjustments,
$63.3 million were FNMA and FHLMC Eleventh District Cost of Funds ("COFI")
indexed monthly resetting ARMs with no annual rate caps, but with lifetime
caps of 9.28% to 13.07%, $84.7 were FNMA and privately issued COFI indexed
collateralized mortgage obligation ("CMO") bonds, $38.7 million were Ginnie
Mae and privately issued LIBOR indexed CMO bonds, and $6.7 million were
privately issued CMO bonds with a 5 year initial fixed-rate period that will
then be indexed to monthly floating LIBOR.
Of the $69.7 million of fixed-rate securities, $54.1 million were AAA-rated
privately issued CMO bonds with average lives of approximately 5 years or
less, $14.9 million were FNMA and FHLMC 7 year securities with approximately 5
years until required repayment, and $700,000 were Ginnie Mae and FHLMC pass-
through securities with an average remaining term of 87 months.
Investments in mortgage-backed securities involve a risk that actual
prepayments will differ from estimated prepayments over the life of the
security. Mortgage-backed securities may require adjustments to the
21
<PAGE>
amortization of any premium or accretion of any discount relating to such
instruments thereby changing the net yield on such securities. There is also
reinvestment risk associated with the cash flows from such securities or in
the event such securities are redeemed by the issuer. In addition, the market
value and/or interest rates of such securities may be adversely affected by
changes in interest rates.
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's short-term investments and investment
securities at the dates indicated:
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------
2000 1999 1998
---------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------ --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Short-term investments.... $ 250 $ 250 $14,422 $14,422 $ -- $ --
====== ====== ======= ======= ======= =======
Investment securities:
Trading:
Limited Partnership..... $ 587 $ 587 $ 94 $ 94 $ -- $ --
Available for sale:
Marketable equity
securities............. 5,660 5,043 5,660 5,575 1,815 3,701
U.S. Government and
agency obligations..... 600 600 -- -- 4,001 4,011
------ ------ ------- ------- ------- -------
Total available for
sale.................. 6,260 5,643 5,660 5,575 5,816 7,712
------ ------ ------- ------- ------- -------
Held to maturity:
U.S. Government and
agency obligations..... -- -- 9,998 10,030 20,490 20,584
Federal Home Loan Bank
note................... -- -- -- -- 2,001 2,001
------ ------ ------- ------- ------- -------
Total held to
maturity.............. -- -- 9,998 10,030 22,491 22,585
------ ------ ------- ------- ------- -------
Total investment
securities.............. $6,847 $6,230 $15,752 $15,699 $28,307 $30,297
====== ====== ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ---------------------------
Amortized Percent Fair Amortized Percent Fair Amortized Percent Fair
Cost of Total Value Cost of Total Value Cost of Total Value
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities and
collateralized mortgage
obligations:
Available for sale:
Fixed-rate............. $ 70,842 12.8% $ 69,000 $ 78,661 19.0% $ 78,071 $ 39,922 17.6% $ 40,411
Adjustable-rate........ 479,267 86.7 474,627 329,822 79.6 330,380 174,283 76.9 174,732
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total available for
sale.................. 550,109 99.5 543,627 408,485 98.6 408,485 214,205 94.5 215,143
-------- ----- -------- -------- ----- -------- -------- ----- --------
Held to maturity:
Fixed-rate............. 732 0.1 732 1,055 0.3 1,127 1,502 .7 1,594
Adjustable-rate........ 2,087 0.4 2,121 4,553 1.1 4,606 10,993 4.8 11,094
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total held to
maturity.............. 2,819 0.5 2,853 5,608 1.4 5,733 12,495 5.5 12,688
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total mortgage-backed
securities and
collateralized
mortgage obligations.. $552,928 100.0% $546,480 $414,093 100.0% $414,184 $226,700 100.0% $227,831
======== ===== ======== ======== ===== ======== ======== ===== ========
</TABLE>
22
<PAGE>
The following table sets forth the Company's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended March 31,
------------------------------
2000 1999 1998
--------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance.............................. $ 414,093 $ 226,700 $ 47,494
Mortgage-backed securities and
collateralized-mortgage obligations
purchased available for sale................ 249,028 346,219 201,533
Collateralized-mortgage obligations sold..... -- (3,883) --
Collateralized-mortgage obligation
maturities.................................. -- (19,473) --
Principal repayments of securities........... (109,918) (134,316) (22,366)
Net accretion (amortization) of discount
(premium)................................... (275) (1,154) 39
--------- --------- --------
Ending balance................................. $ 552,928 $ 414,093 $226,700
========= ========= ========
</TABLE>
23
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's investment
securities and mortgage-backed securities as of March 31, 2000.
<TABLE>
<CAPTION>
At March 31, 2000
-----------------------------------------------------------------------------------------
More than One More than Five
Year to Five Years to Ten More than Ten
One Year or Less Years Years Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment
securities(1):
Available for sale:
U.S. Government and
agency obligations.... $600 6.27% $ -- -- % $ -- -- % $ -- -- % $ 600 6.27%
---- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total investment
securities.............. $600 6.27% $ -- -- % $ -- -- % $ -- -- % $ 600 6.27%
==== ==== ======= ==== ======= ==== ======== ==== ======== ====
Mortgage-backed
securities and
collateralized-mortgage
obligations:
Held to maturity:
Fixed rate............ $-- -- % $ 40 8.66% $ 692 8.83% $ -- -- % $ 732 8.82%
Adjustable rate....... -- -- -- -- -- -- 2,087 7.25 2,087 7.25
---- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total mortgage-backed
securities held
to maturity............ -- -- 40 8.66 692 8.83 2,087 7.25 2,819 7.66
---- ---- ------- ---- ------- ---- -------- ---- -------- ----
Available for sale:
Fixed-rate............ -- -- 14,948 7.00 -- -- 54,052 6.40 69,000 6.53
Adjustable-rate....... -- -- 10,050 7.18 34,636 6.02 429,941 6.04 474,627 6.06
---- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total mortgage-backed
securities available
for sale............... -- -- 24,998 7.07 34,636 6.02 483,993 6.08 543,627 6.12
---- ---- ------- ---- ------- ---- -------- ---- -------- ----
Total mortgage-backed
securities and
collateralized-mortgage
obligations............. $-- -- % $25,038 7.07% $35,328 6.07% $486,080 6.09% $546,446 6.13%
==== ==== ======= ==== ======= ==== ======== ==== ======== ====
</TABLE>
----
(1) Does not include $5,043 of marketable equity securities available for
sale at fair value at March 31, 2000.
24
<PAGE>
Sources of Funds
General. Deposits, loan and mortgage-backed security repayments and
prepayments, proceeds from sales of loans, cash flows generated from
operations and FHLB advances and other borrowings are the primary sources of
the Company's funds for use in lending, investing and for other general
purposes.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the fiscal year ended
March 31, 2000, core deposits (defined as total deposits less certificate
accounts) represented 36.6% of total average deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Company's
deposits are obtained predominantly from the areas in which its banking
offices are located. The Company has historically relied primarily on customer
service and long-standing relationships with customers to attract and retain
these deposits; however, market interest rates and rates offered by competing
financial institutions significantly affect the Company's ability to attract
and retain deposits. The Company uses traditional means of advertising its
deposit products, including radio and print media and generally does not
solicit deposits from outside its market area. While the Company does not
actively solicit certificate accounts in excess of $100,000 or use brokers to
obtain deposits, the Company may, from time to time, solicit such deposits or
utilize brokered deposits depending upon market conditions. The Company's
average certificate balances decreased from $441.6 million, or 65.4% of total
average deposits, during the year ended March 31, 1999 to $418.8 million, or
63.4% of total average deposits, during the year ended March 31, 2000. The
Company's cost of average interest-bearing deposits decreased from 4.47% for
the year ended March 31, 1999 to 4.08% for the year ended March 31, 2000. At
March 31, 2000, the weighted average remaining maturity of the Company's
certificate accounts was 8.5 months.
The following table presents the deposit activity of the Company for the
periods indicated:
<TABLE>
<CAPTION>
For the Year Ended March
31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Net deposits..................................... $(35,008) $(61,201) $(48,513)
Interest credited on deposit accounts............ 24,820 27,583 33,025
-------- -------- --------
Total decrease in deposit accounts............... $(10,188) $(33,618) $(15,488)
======== ======== ========
</TABLE>
At March 31, 2000, the Company had $59.0 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
--------------- ------- --------
(Dollars in
thousands)
<S> <C> <C>
Three months or less........................................... $17,461 5.21%
Over 3 through 6 months........................................ 16,333 5.38
Over 6 through 12 months....................................... 11,673 5.35
Over 12 months................................................. 13,525 5.77
-------
Total.......................................................... $58,992 5.41%
=======
</TABLE>
25
<PAGE>
The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods
presented utilize average month-end balances.
<TABLE>
<CAPTION>
For the Year Ended March 31,
-----------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -------------------------
Percent Percent Percent
of Total of Total of Total
Average Average Average Average Average Average Average Average Average
Balance Deposits Cost Balance Deposits Cost Balance Deposits Cost
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Business checking
accounts............... $ 51,997 7.9% -- % $ 58,408 8.6% -- % $ 44,064 6.2% -- %
Money market accounts... 33,377 5.1 2.34 31,871 4.7 2.66 30,788 4.3 2.87
Savings accounts........ 99,014 15.0 1.76 93,118 13.8 2.01 86,915 12.2 2.41
NOW accounts............ 56,973 8.6 0.98 50,760 7.5 0.98 45,619 6.4 1.76
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total.................. 241,361 36.6 1.28 234,157 34.6 1.37 207,386 29.1 1.82
-------- ----- ---- -------- ----- ---- -------- ----- ----
Certificate accounts(1):
Less than six
months(2)............. 196,759 29.8 5.08 214,975 31.8 5.38 228,480 32.0 5.59
Over six through 12
months(2)............. 84,618 12.8 5.16 85,409 12.7 5.48 105,989 14.8 5.82
Over 12 through 36
months................ 49,069 7.4 5.35 50,758 7.5 5.84 79,289 11.1 6.14
Over 36 months......... 4,615 0.7 5.81 5,625 0.8 6.12 6,771 1.0 6.20
IRA and KEOGH.......... 83,754 12.7 5.34 84,789 12.6 5.63 85,911 12.0 5.89
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total certificate
accounts.............. 418,815 63.4 5.19 441,556 65.4 5.51 506,440 70.9 5.78
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total average
deposits.............. $660,176 100.0% 3.76% $675,713 100.0% 4.08% $713,826 100.0% 4.63%
======== ===== ==== ======== ===== ==== ======== ===== ====
</TABLE>
--------
(1) Based on remaining contractual maturity of certificates.
(2) Includes the net effect of interest rate swaps.
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 2000.
<TABLE>
<CAPTION>
Period to Maturity from March 31, 2000 At March 31,
---------------------------------------------------- --------------------------
Less
than One to Two to Three to Four to
One Year Two years Three years Four years Five years 2000 1999 1998
-------- --------- ----------- ---------- ---------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
0 to 4.00%............. $ 1,339 $ -- $ -- $ -- $ -- $ 1,339 $ 4,185 $ --
4.01 to 5.00%.......... 133,549 4,089 162 76 -- 137,876 226,612 8,783
5.01 to 6.00%.......... 162,679 44,668 6,675 2,020 2,788 218,830 157,068 370,626
6.01 to 7.00%.......... 8,566 29,038 6,670 4 -- 44,278 27,977 76,392
7.01 to 8.00%.......... 4,569 -- -- -- -- 4,569 12,143 18,732
Over 8.01%............. -- -- -- -- -- -- 4 4
-------- ------- ------- ------ ------ -------- -------- --------
Total................. $310,702 $77,795 $13,507 $2,100 $2,788 $406,892 $427,989 $474,537
======== ======= ======= ====== ====== ======== ======== ========
</TABLE>
Borrowings. The Company utilizes advances from the FHLB and reverse
repurchase agreements with securities dealers as alternatives to retail
deposits to fund its operations as part of its operating strategy. During the
year ended March 31, 2000, the Company used FHLB borrowings to a greater
extent to fund its purchase of mortgage-backed securities. FHLB advances are
collateralized primarily by certain of the Company's mortgage loans and
mortgage-backed securities. FHLB advances are made pursuant to several
different credit programs, each of which has its own interest rate and range
of maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the Federal Housing Finance Board ("FHFB") and the FHLB.
At March 31, 2000, the Company had $608.0 million in outstanding advances from
the FHLB as compared to $530.7 million at March 31, 1999.
26
<PAGE>
The following table sets forth certain information regarding the Company's
FHLB Advances at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Year
Ended March 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding.................... $561,578 $464,404 $214,278
======== ======== ========
Maximum amount outstanding at any month-end
during the period............................. $607,980 $558,286 $356,615
======== ======== ========
Balance outstanding at end of period........... $607,980 $530,655 $356,615
======== ======== ========
Weighted average interest rate during the
period........................................ 5.54% 5.64% 6.05%
======== ======== ========
Weighted average interest rate at end of
period........................................ 5.97% 5.30% 5.87%
======== ======== ========
</TABLE>
The following table sets forth certain information regarding the Company's
reverse repurchase agreements and other borrowings at or for the periods ended
on the dates indicated:
<TABLE>
<CAPTION>
At or For the Year
Ended March 31,
--------------------------
2000 1999 1998
-------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Reverse repurchase agreements and other borrowings:
Average balance outstanding...................... $105,774 $50,103 $10,173
======== ======= =======
Maximum amount outstanding at any month-end
during the period............................... $191,753 $73,299 $47,250
======== ======= =======
Balance outstanding at end of period............. $171,682 $55,326 $47,250
======== ======= =======
Weighted average interest rate during the
period.......................................... 5.52% 5.30% 5.63%
======== ======= =======
Weighted average interest rate at end of period.. 5.91% 4.83% 5.58%
======== ======= =======
</TABLE>
Subsidiary Activities
First Federal Savings Bank of America includes its wholly-owned
subsidiaries: FIRSTFED MORTGAGE CORPORATION, a Massachusetts corporation which
is currently inactive; FIRSTFED INVESTMENT CORPORATION, a Massachusetts
security corporation; and CELMAC INVESTMENT CORPORATION, also a Massachusetts
security corporation.
FAB FUNDING CORPORATION ("FAB FUNDING"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Company formed primarily to finance stock
purchases by the Company's Employee Stock Ownership Plan and related trust
("ESOP"). The financing from FAB FUNDING is collateralized by the shares of
stock of the Company purchased by the ESOP, which are released for
distribution to eligible employees of the Company as payments are made on the
loan. Except for the loan to the ESOP, FAB FUNDING has no significant
operations.
FIRSTFED INSURANCE AGENCY, LLC, a Massachusetts limited liability
corporation, was formed in January 1999 and is jointly owned by the Company
and FAB FUNDING. The Agency offers a comprehensive insurance product line
including auto, home, life, accident and health insurance to consumers and
businesses. The Agency is licensed to sell insurance in both Massachusetts and
Rhode Island and is subject to regulations of, and periodic examinations by,
both of these states.
FIRSTFED TRUST COMPANY, NA, a nationally chartered organization
headquartered in Massachusetts, was formed in February 2000. The Trust Company
provides investment and fiduciary services in the Rhode Island and
southeastern Massachusetts marketplace and is 65% owned by the Company.
27
<PAGE>
Personnel
As of March 31, 2000, the Company had 301 authorized full-time employee
positions and 44 authorized part-time employee positions, for a total of
approximately 323 full-time equivalents. The employees are not represented by
a collective bargaining unit and the Company considers its relationship with
its employees to be good.
28
<PAGE>
REGULATION AND SUPERVISION
General
As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the Office of Thrift Supervision ("OTS"). The Bank, as a federally
chartered savings association, is subject to extensive regulation, examination
and supervision by the OTS, as its primary federal regulator, and the FDIC, as
the deposit insurer. The Bank is a member of the Federal Home Loan Bank System
and, with respect to deposit insurance, of the Savings Association Insurance
Fund ("SAIF") managed by the FDIC. The Trust Company, a nationally chartered
trust company, is subject to extensive regulation, examination and supervision
by its federal regulator, the Office of the Comptroller of the Currency
("OCC"), the agency that charters national banks. The Trust Company does not
accept deposits and is not insured by the FDIC.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's safety and soundness and compliance with
various regulatory requirements. Similarly, the Trust Company reports to, and
is subject to examination and supervision by, the OCC. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily to facilitate the
institution's safety and soundness. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including,
with respect to the Bank, policies regarding the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in the applicable regulatory requirements and policies, whether by the
OTS, the FDIC, the OCC or the Congress, could have a material adverse impact
on the Company, the Bank, the Trust Company and their operations. Certain of
the regulatory requirements applicable to the Bank, Trust Company and to the
Company are referred to below or elsewhere herein. The description of
statutory provisions and regulations set forth in this Form 10-K does not
purport to be a complete description of such statutes and regulations and
their effects on the Bank, the Trust Company and the Company.
Holding Company Regulation
The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Federal Savings Institution
Regulation--QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless
it engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the Company, so long as the Bank continues to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company
of another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited
to activities permissible for bank holding companies under Section 4(c)(8) of
the Bank Holding Company Act, subject to the prior approval of the OTS, and
certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written
approval of the OTS and from acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS considers the
financial and managerial resources and future prospects of the company and
institution involved, the effect of
29
<PAGE>
the acquisition on the risk to the deposit insurance funds, the convenience
and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the OTS 30 days before declaring any dividend to the Company. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries
deemed to pose a threat to the safety and soundness of the institution.
Regulation of the Bank and Trust Company
Business Activities. The activities of federal savings institutions, such as
the Bank, are governed by federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal associations, e.g., commercial, non-residential real property loans
and consumer loans, are limited to a specified percentage of the institution's
capital or assets.
The activities of the Trust Company are limited to providing fiduciary and
related services and are also subject to federal law and regulation.
Generally, the Trust Company is subject to all of the laws and regulations
applicable to national banks except where clearly inapplicable due to the
Trust Company's limited activities.
Capital Requirements. OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS rating system), and, together with
the risk-based capital standard itself, a 4% Tier 1 risk-based capital
standard. The OTS regulations also require that, in meeting the tangible,
leverage and risk-based capital standards, institutions must generally deduct
investments in and loans to subsidiaries engaged in activities as principal
that are not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core
capital and supplementary capital) to risk-weighted assets of at least 4% and
8%, respectively. In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, are multiplied by a risk-
weight factor of 0% to 100%, assigned by the OTS capital regulation based on
the risks believed inherent in the type of asset. Core (Tier 1) capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus, and minority
interests in equity accounts of consolidated subsidiaries less intangibles
other than certain mortgage servicing rights and credit card relationships.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are
subject to a deduction from total capital for purposes of calculating their
30
<PAGE>
risk-based capital requirements. For the present time, the OTS has deferred
implementation of the interest rate risk capital charge. At March 31, 2000,
the Bank met each of its capital requirements.
The following table presents the Bank's capital position at March 31, 2000.
<TABLE>
<CAPTION>
Capital
----------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
-------- -------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............................. $100,267 $31,590 $68,677 6.35% 2.00%
Core (Leverage)...................... 100,267 63,179 37,088 6.35 4.00
Risk-based........................... 109,319 58,052 51,267 15.06 8.00
</TABLE>
The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. The following table
presents the Trust Company's capital position at March 31, 2000.
<TABLE>
<CAPTION>
Capital
-----------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
------- -------- ------ ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............................... $2,809 $ 56 $2,753 100.43% 2.00%
Core (Leverage)........................ 2,809 112 2,697 100.43 4.00
Risk-based............................. 2,809 224 2,585 486.83 8.00
</TABLE>
Both the OTS and OCC have the discretion to establish higher capital
requirements in individual cases where deemed justified by the institution's
condition or risk profile.
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of
which depends upon the institution's degree of undercapitalization. Generally,
a savings institution that has a ratio of total capital to risk weighted
assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted
assets of less than 4% or a ratio of core capital to total assets of less than
4% (3% or less for institutions with the highest examination rating) is
considered to be "undercapitalized." A savings institution that has a total
risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3%
or a leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to
appoint a receiver or conservator for an institution that is "critically
undercapitalized." The regulation also provides that a capital restoration
plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information.
An institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.
In addition to the assessment for deposit insurance, FDIC-insured
institutions are required to make payments on bonds issued in the late 1980s
by the Financing Corporation ("FICO") to recapitalize the predecessor to the
SAIF. During 1999, FICO payments for SAIF members approximated 6.1 basis
points, while Bank Insurance
31
<PAGE>
Fund ("BIF") members paid 1.2 basis points. By law, there is equal sharing of
FICO payments between SAIF and BIF members which began on January 1, 2000.
The Bank's assessment rate for fiscal 2000 ranged from 2.12 to 5.92 basis
points and the premium paid for this period was $334,000. Payments toward the
FICO bonds amounted to $334,000. The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of
the Bank. Management cannot predict what insurance assessment rates will be in
the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
The Trust Company does not accept deposits and is not insured by the FDIC.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to
national banks. A savings institution may not make a loan or extend credit to
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if secured by specified readily-marketable
collateral. At March 31, 2000, the Bank's limit on loans to one borrower was
$14.5 million, and the Bank's largest aggregate outstanding balance of loans
to one borrower was $5.0 million.
QTL Test. The HOLA requires savings institutions such as the Bank to meet a
qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets;
(ii) intangibles, including goodwill; and (iii) the value of property used to
conduct business) in certain "qualified thrift investments" (primarily
residential mortgages and related investments, including certain mortgage-
backed securities) in at least 9 months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is subject
to certain operating restrictions and may be required to convert to a
commercial bank charter. As of March 31, 2000, the Bank maintained 88.4% of
its portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon
all capital distributions by a savings institution, including cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. Under the new OTS regulation effective on
April 1, 1999, an application to and the prior approval of the OTS is required
prior to any capital distribution if the institution does not meet the
criteria for "expedited treatment" of applications under OTS regulations
(i.e., generally, examination ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year
plus the amount of retained net income for the preceding two years, the
institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement
with OTS. If an application is not required, the institution must still
provide prior notice to OTS of the capital distribution if, like the Bank, it
is a subsidiary of a holding company. In the event the Bank's capital fell
below its regulatory requirements or the OTS notified it that it was in need
of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution
would constitute an unsafe or unsound practice.
Under OCC regulations, a national trust company may not, without OCC
approval, pay dividends in excess of the total of the Bank's retained net
income for the year combined with retained net income for the prior two years.
32
<PAGE>
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement is currently 4%, but may be changed
from time to time by the OTS to any amount within the range of 4% to 10%.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity ratio for March 31, 2000 was 28.4%, which
exceeded the applicable requirements. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Assessments. Savings institutions are required to pay assessments to the OTS
to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest
quarterly thrift financial report. The assessments paid by the Bank for the
fiscal year ended March 31, 2000 totaled $244,000.
The Trust Company must pay semi-annual assessments to the OCC to fund its
operations. The OCC has recently proposed to change the manner in which
national trust companies with less than $1 billion in managed assets, such as
the Trust Company, would be assessed. The proposal would implement both a
component based on the amount of balance sheet assets and a flat fee.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. Transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. The Trust Company is subject to similar restrictions. In addition,
savings institutions are prohibited from lending to any affiliate that is
engaged in activities that are not permissible for bank holding companies and
no savings institution may purchase the securities of any affiliate other than
a subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the
individual and aggregate amount of loans the Bank may make to insiders based,
in part, on the Bank's capital position and requires certain board approval
procedures to be followed.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines,
the OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution
and all institution-affiliated parties, including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate
in wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can
33
<PAGE>
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. The FDIC has the authority to recommend to the Director of the OTS that
enforcement action to be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
The OCC has similar enforcement authority with respect to the Trust Company.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists of
12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a
member of the Federal Home Loan Bank, is required to acquire and hold shares
of capital stock in that Federal Home Loan Bank in an amount at least equal to
1.0% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the Federal Home Loan Bank, whichever is greater.
The Bank was in compliance with this requirement with an investment in Federal
Home Loan Bank stock at March 31, 2000 of $30.9 million.
The Federal Home Loan Banks are required to provide funds for the resolution
of insolvent FSLIC-insured thrifts in the late 1980s and to contribute funds
for affordable housing programs. These requirements could reduce the amount of
dividends that the Federal Home Loan Banks pay to their members and could also
result in the Federal Home Loan Banks imposing a higher rate of interest on
advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, the Bank's net interest income
would likely also be reduced. Recent legislation has changed the structure of
the Federal Home Loan Banks funding obligations for insolvent thrifts, revised
the capital structure of the Federal Home Loan Banks and implemented entirely
voluntary membership for Federal Home Loan Banks. Management cannot predict
the effect that these changes may have with respect to its Federal Home Loan
Bank membership.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $44.3 million or less (subject to adjustment
by the Federal Reserve Board), the reserve requirement is 3%; and for accounts
aggregating greater than $44.3 million, the reserve requirement is $1.329
million plus 10% (subject to adjustment by the Federal Reserve Board between
8% and 14%) against that portion of total transaction accounts in excess of
$44.3 million. The first $5.0 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve Board) are exempted from the
reserve requirements. The Bank complies with the foregoing requirements.
Federal Securities Laws
The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject
to the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.
Shares of the common stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an
affiliate of the Company will be subject to the resale restrictions of Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"). If
the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's
sale to be aggregated with those of certain other persons) would be able to
sell in the public market, without registration, a number of shares not to
exceed in any three-month period the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provisions may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
34
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank report their income on a fiscal year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company. The Bank was last audited by the IRS
since 1983, which covered the tax years 1980 to 1981. For its 1999 taxable
year, the Bank is subject to a maximum federal income tax rate of 34%.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and
then from the Bank's supplemental reserve for losses on loans, to the extent
thereof, and an amount based on the amount distributed (but not in excess of
the amount of such reserves) will be included in the Bank's income. Non-
dividend distributions include distributions in excess of the Bank's current
and accumulated earnings and profits, as calculated for federal income tax
purposes, distributions in redemption of stock, and distributions in partial
or complete liquidation. Dividends paid out of the Bank's current or
accumulated earnings and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount
of such distribution (but not in excess of the amount of such reserves) would
be includable in income for federal income tax purposes, assuming a 35%
federal corporate income tax rate. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its bad debt reserves.
SAIF Recapitalization Assessment. The Funds Act levied a 65.7-cent fee on
every $100 of thrift deposits held on March 31, 1995. For financial statement
purposes, this assessment was reported as an expense for the quarter ended
September 30, 1996. The Funds Act includes a provision which states that the
amount of any special assessment paid to capitalize SAIF under this
legislation was deductible under Section 162 of the Code in the year of
payment.
State and Local Taxation
Commonwealth of Massachusetts Taxation For fiscal year 2000 the tax rate
applicable for financial institutions was 10.5%. Net income for years
beginning before January 1, 1999 includes gross income as defined under the
provisions of the Code, plus interest from bonds, notes and evidences of
indebtedness of any state, including Massachusetts, less the deductions,
excluding the deductions for dividends received, state taxes, and net
operating losses, as defined under the provisions of the Code. For taxable
years beginning on or after January 1, 1999, the definition of state taxable
income is modified to allow a deduction for 95% of dividends received from
stock where the Company owns 15% or more of the voting stock of the
institution paying the dividend and to allow deductions from certain expenses
allocated to federally tax exempt obligations. Subsidiary corporations of the
Company conducting business in Massachusetts must file separate Massachusetts
state tax returns and are taxed as financial institutions, with certain
modifications and grandfathering for taxable years before 1996.
Corporations which qualify as "securities corporations," as defined by the
Massachusetts tax code, are taxed at a special rate of 0.33% of their gross
income if they qualify as a "bank-holding company" under the Massachusetts tax
code. FIRSTFED INVESTMENT CORPORATION and CELMAC INVESTMENT CORPORATION
qualified for this reduced tax rate.
Rhode Island Taxation. Subsidiary corporations of the Company conducting
business in Rhode Island are subject to a Rhode Island excise tax and must
file separate Rhode Island state tax returns. The tax is based upon
35
<PAGE>
an apportioned percentage of net income related to activities conducted within
the State. The apportionment percentage is determined by adding the taxpayer's
receipts factor, property factor, and payroll factor and dividing the sum by
three. For fiscal year 2000, the tax rate was 9%.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
Additional Item. Executive Officers of the Registrant
The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.
<TABLE>
<CAPTION>
Age at
Name March 31, 2000 Position
---- -------------- --------
<S> <C> <C>
Edward A. Hjerpe, III... 41 Executive Vice President, Treasurer, Chief
Operating Officer, and Chief Financial
Officer of the Company and the Bank
Kevin J. McGillicuddy... 60 Senior Vice President of the Company and the
Bank
Frederick R. Sullivan... 58 Senior Vice President of the Company and the
Bank
Terrence M. Tyrrell..... 50 Senior Vice President of the Company and the
Bank
</TABLE>
36
<PAGE>
Item 2. Properties.
The Company currently conducts its business through a centralized
administrative, operations, and banking offices located in Swansea and 14
other full service banking offices and six loan origination centers, most of
which are located in Southeastern Massachusetts and Rhode Island.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Leasehold
Leased Year Leased Date of Improvements at
Location or Owned or Acquired Lease Expiration March 31, 2000
-------- -------- ----------- ---------------- ---------------
(In thousands)
<S> <C> <C> <C> <C>
Administrative/Operations/Banking
Office:
ONE FIRSTFED PARK
Swansea, MA 02777............... Owned 1994 -- $7,938
Banking Offices:
27 Park Street
Attleboro, MA 02703............. Owned 1990 -- 1,606
33 Sullivan Drive
Fall River, MA 02721............ Owned 1979 -- 1,380
1450 Plymouth Avenue
Fall River, MA 02721............ Owned 1972 -- 304
278 Union Street
New Bedford, MA 02740........... Owned 1972 -- 318
254 Rockdale Avenue
New Bedford, MA 02740........... Owned 1983 -- 677
265 Newport Avenue
Pawtucket, RI 02860............. Owned 1996 -- 685
40 Westminster Street
Providence, RI 02903............ Leased 2000 May 2010 710
741 Willett Avenue
East Providence, RI 02915....... Owned 1995 -- 653
1519 Newman Avenue
Seekonk, MA 02771............... Owned 1994 -- 604
149 Grand Army Highway
Somerset, MA 02725.............. Owned 1963 -- 398
2 Washington Street
Taunton, MA 02780............... Owned 1976 -- 644
2100 Warwick Avenue
Warwick, RI 02889............... Owned 1996 -- 615
975 Ashley Boulevard
New Bedford, MA 02745........... Leased 1996 --(1) 652
1215 Park Avenue
Cranston, RI 02910.............. Owned 1998 -- 1,453
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Leasehold
Leased Year Leased Date of Improvements at
Location or Owned or Acquired Lease Expiration March 31, 2000
-------- -------- ----------- ------------------ ---------------
(In thousands)
<S> <C> <C> <C> <C>
Loan Origination
Centers:
12 White's Path, Unit 7
Yarmouth, MA 02664..... Leased 1992 October 2000 (2) --
62 Auburn Street
Auburn, MA 01501 ...... Leased 1990 June 2000 (2) --
1325 Springfield Street
Agawam, MA 01089....... Leased 1992 June 2000 (2) --
10 Wall Street
Burlington, MA 01803... Leased 1994 January 2003 --
333 Main Street
East Greenwich,
RI 02818............... Leased 1990 September 2000 (2) --
142 Middle Road
Turnpike
Woodbury, CT 06798..... Leased 1999 --(3) --
Other Facilities:
1 North Main Street
Fall River, MA 02720... Owned 1956 -- 602
-------
Total................. $19,239
=======
</TABLE>
--------
(1) In 1996, the Company entered into a lease agreement for the land. The
lease has a commencement date of November 1, 1996 and a term of 20 years
with four five-year renewal options. Subsequent to entering into the
lease agreement, the Company constructed a banking office location which
structure the Company owns.
(2) The Company has options to renew these leases from 1 to 3 years.
(3) The Company leases this facility on a month-to-month basis.
Item 3. Legal Proceedings.
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
38
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" opposite
the inside back cover in the Registrant's 2000 Annual Report to Stockholders
is incorporated herein by reference.
Item 6. Selected Financial Data.
The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 2000 Annual
Report to Stockholders on pages 11 and 12 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
2000 Annual Report to Stockholders on pages 14 through 31 and is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
This information contained in the Section captioned, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Market Risk and Management of Interest-Rate Risk" on pages 17 through 21 of
the 2000 Annual Report to Stockholders is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of FIRSTFED AMERICA BANCORP, INC. and
its subsidiaries, together with the report thereon by KPMG LLP appears in the
Registrant's 2000 Annual Report to Stockholders on pages F-1 through F-36 and
are incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
39
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to "Additional Item--Executive
Officers of the Registrant" contained herein and the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 27, 2000,
at pages 5 through 8.
Item 11. Executive Compensation.
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 27, 2000, at pages 10 through 18 (excluding
the Compensation Committee Report on Executive Compensation and Stock
Performance Graph).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 27, 2000,
at pages 3 and 4.
Item 13. Certain Relationships and Related Transactions.
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held on July 27, 2000, at page 18.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 2000 Annual Report to
Stockholders:
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
Independent Auditors' Report.................................... F-1
Consolidated Balance Sheets as of March 31, 2000 and 1999....... F-2
Consolidated Statements of Operations for the Fiscal Years Ended
March 31, 2000, 1999 and 1998.................................. F-3
Consolidated Statements of Changes in Stockholders' Equity for
the Fiscal Years Ended March 31, 2000, 1999, and 1998.......... F-4 to F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
March 31, 2000, 1999 and 1998.................................. F-6 to F-7
Notes to Consolidated Financial Statements...................... F-8 to F-36
</TABLE>
The remaining information appearing in the 2000 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.
40
<PAGE>
(3) Exhibits
(a) The following exhibits are filed as part of this report.
<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)
10.1 Form of Employment Agreement between the Bank and Robert F.
Stoico(1)
10.2 Forms of Employment Agreement between Company and Kevin J.
McGillicuddy and Employment Agreement between the Bank and Kevin
J. McGillicuddy(1)
10.3 Forms of Employment Agreement between Company and Frederick R.
Sullivan and Employment Agreement between the Bank and Frederick
R. Sullivan(1)
10.4 Forms of Employment Agreement between Company and Terrence M.
Tyrrell and Employment Agreement between the Bank and Terrence M.
Tyrrell(1)
10.5 Form of Employment Agreement between the Bank and Edward A.
Hjerpe, III(3)
10.6 Employment Agreement between Company and Robert F. Stoico(5)
10.7 Employment Agreement between Company and Edward A. Hjerpe, III(5)
10.8 First Federal Savings Bank of America Employee Stock Ownership
Plan and Trust(1)
10.9 FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based Incentive Plan, as
amended and restated(2)
10.10 First Federal Savings Bank of America 1997 Supplemental Executive
Retirement Plan(1)
10.11 FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option Plan(4)
11.0 Computation of earnings per share is incorporated by reference to
the Consolidated Statements of Operations on page F-3 of the 2000
Annual Report to Stockholders.
13.0 Portions of the 2000 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference to
"Part I--Subsidiary Activities" and "Item 1. Business--General"
23.1 Consent of Independent Auditor (filed herewith)
27.0 Financial Data Schedule (filed herewith)
</TABLE>
--------
(1) Incorporated by reference into this document from the Exhibits
to Form S-1, Registration Statement, and any amendments
thereto, filed on September 27, 1996, Registration No. 333-
12855
(2) Incorporated by reference into this document from the Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
(3) Incorporated by reference into the Annual Report on Form 10-K
for the fiscal year ended March 31, 1998.
(4) Incorporated by reference into this document from the Proxy
Statement for the 1998 Annual Meeting of Stockholders dated
June 15, 1998.
(5) Incorporated by reference into the Annual Report on Form 10-K
for the fiscal year ended March 31, 1999.
(b) Reports on Form 8-K.
A current report on Form 8-K was filed on February 8, 2000,
attaching the press release issued on February 3, 2000, announcing
that the Annual Meeting of Shareholders was to held on July 27,
2000.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Robert F. Stoico
By: _________________________________
Robert F. Stoico
President and Chief Executive
Officer
DATED: June 29, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert F. Stoico President and Chief June 29, 2000
______________________________________ Executive Officer and
Robert F. Stoico Chairman of the Board
(Principal Executive
Officer)
/s/ Edward A. Hjerpe, III Executive Vice President, June 29, 2000
______________________________________ Treasurer, Chief
Edward A. Hjerpe, III Operating Officer, and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
/s/ Gilbert C. Oliveira Director June 29, 2000
______________________________________
Gilbert C. Oliveira
/s/ Thomas A. Rodgers, Jr. Director June 29, 2000
______________________________________
Thomas A. Rodgers, Jr.
/s/ Richard W. Cederberg Director June 29, 2000
______________________________________
Richard W. Cederberg
/s/ John S. Holden, Jr. Director June 29, 2000
______________________________________
John S. Holden, Jr.
/s/ Dr. Paul A. Raymond Director June 29, 2000
______________________________________
Dr. Paul A. Raymond
/s/ Anthony L. Sylvia Director June 29, 2000
______________________________________
Anthony L. Sylvia
</TABLE>
42
