<PAGE>
Exhibit 13.0
Portions of the
2000 Annual Report to Stockholders
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto presented
elsewhere in this Annual Report. Prior to January 15, 1997, the Company had no
significant assets, liabilities or operations, and accordingly, the data prior
to such time represents the financial condition and results of operations of
the Bank.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial
Condition Data:
Total assets............... $1,579,995 $1,393,237 $1,281,832 $979,736 $723,572
Short-term investments..... 250 14,422 -- 39,410 --
Investment in trading
securities................ 587 94 -- -- --
Investment securities
available for sale(1)..... 5,643 5,575 7,712 888 725
Mortgage-backed securities
available for sale........ 543,627 408,451 215,143 31,732 --
Investment securities held
to maturity(1)............ -- 9,998 22,491 20,991 23,987
Mortgage-backed securities
held to maturity.......... 2,819 5,608 12,495 15,435 7,248
Mortgage loans held for
sale...................... 3,417 52,334 84,867 23,331 17,747
Loans receivable, net(2)... 888,760 766,687 848,552 796,355 637,592
Deposits................... 664,682 674,870 708,488 723,976 583,750
FHLB advances and other
borrowings................ 779,662 585,981 403,865 111,062 75,141
Stockholders' equity....... 101,705 102,961 126,986 122,154 46,418
<CAPTION>
For the Year Ended March 31,
---------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest and dividend
income.................... $ 93,821 $ 86,777 $ 76,890 $ 62,259 $ 46,044
Interest expense........... 61,771 56,443 46,529 38,497 26,382
---------- ---------- ---------- -------- --------
Net interest income before
provision for loan
losses................... 32,050 30,334 30,361 23,762 19,662
Provision for loan losses.. 1,200 1,200 2,350 3,750 2,626
---------- ---------- ---------- -------- --------
Net interest income after
provision for loan
losses................... 30,850 29,134 28,011 20,012 17,036
Total non-interest income.. 6,534 7,638 6,353 4,414 4,592
Total non-interest
expense(3)................ 25,509 25,333 22,259 27,305 13,672
---------- ---------- ---------- -------- --------
Income (loss) before income
tax expense............... 11,875 11,439 12,105 (2,879) 7,956
Income tax expense
(credit).................. 3,689 3,818 5,286 (449) 3,353
---------- ---------- ---------- -------- --------
Net income (loss)......... $ 8,186 $ 7,621 $ 6,819 $ (2,430) $ 4,603
========== ========== ========== ======== ========
</TABLE>
--------
(1) Investment securities at March 31, 2000, 1999, 1998, 1997, and 1996 do not
include $30.9 million, $28.7 million, $17.9 million, $9.5 million, and
$6.6 million of Federal Home Loan Bank of Boston stock.
(2) The allowance for loan losses at March 31, 2000, 1999, 1998, 1997 and 1996
was $12.3 million, $12.0 million, $10.9 million, $8.8 million, and $5.6
million, respectively.
(3) For the year ended March 31, 1997, non-interest expense includes $6.5
million for the establishment of The Foundation, and a $2.9 million
assessment to recapitalize the Savings Association Insurance Fund of the
FDIC.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(5) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
12
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA(4)
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
---------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return (loss) on average
assets.................. 0.56% 0.57% 0.63% (0.28)% 0.76%
Return (loss) on average
stockholders' equity.... 7.79% 6.82% 5.40% (3.71)% 10.40%
Average stockholders'
equity to average
assets.................. 7.20% 8.39% 11.60% 7.58 % 7.26%
Stockholders' equity to
total assets at end of
period.................. 6.44% 7.39% 9.91% 12.47 % 6.41%
Average interest rate
spread(5)............... 2.06% 1.29% 2.22% 2.27 % 2.79%
Net interest margin(6)... 2.36% 2.41% 2.93% 2.87 % 3.37%
Average interest-earning
assets to average
interest-bearing
liabilities............. 106.63% 111.04% 115.87% 112.67 % 112.90%
Total non-interest
expense to average
assets.................. 1.75% 1.90% 2.04% 3.16 % 2.24%
Efficiency ratio(3)(7)... 66.11% 66.71% 60.63% 96.91 % 56.37%
Regulatory Capital Ratios
(Bank Only):
Triangle capital......... 6.35% 7.03% 8.54% 10.34 % 6.36%
Core capital............. 6.35% 7.03% 8.54% 10.34 % 6.36%
Risk-based capital....... 15.06% 16.18% 18.35% 20.24 % 12.48%
Asset Quality Ratios:
Non-performing loans as a
percent of loans(8)(9).. 0.15% 0.33% 0.35% 0.45 % 0.63%
Non-performing assets as
a percent of total
assets(9)............... 0.08% 0.21% 0.28% 0.44 % 0.65%
Allowance for loan losses
as a percent of
loans(2)(8) ............ 1.36% 1.54% 1.27% 1.09 % 0.87%
Allowance for loan losses
as a percent of non-
performing loans(2)(9).. 937.02% 471.22% 358.83% 239.98 % 138.62%
Per Share Data:
Basic earnings per common
share................... $ 1.31 $ 1.09 $ 0.84 N/M --
Diluted earnings per
common share............ $ 1.31 $ 1.09 $ 0.84 N/M --
Book value per a common
share................... $16.88 $16.27 $15.99 $15.08 --
Market value per a common
share................... $10.75 $12.00 $21.13 $13.63 --
Number of shares
outstanding at end of
period(10).............. 6,024,278 6,329,430 7,941,628 8,100,107 --
Number of full-service
customer facilities..... 14 14 13 13 10
Number of loan
origination centers..... 6 5 5 5 5
</TABLE>
--------
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of non-interest expenses
divided by the sum of net interest income and non-interest income.
(8) Loans include loans receivable, net excluding the allowance for loan
losses.
(9) Non-performing assets consists of non-performing loans and real estate
owned ("REO"). Non-performing loans consists of all loans 90 days or more
past due and other loans which have been identified by the Company as
presenting uncertainty with respect to the collectability of interest or
principal. It is the Company's policy to cease accruing interest on all
such loans.
(10) Based upon total shares issued at IPO less unreleased ESOP shares,
unreleased 1997 Stock-based Incentive Plan shares repurchased, and shares
held in other employee benefit plans.
13
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
FIRSTFED AMERICA BANCORP, INC. (the "Company") was incorporated on September
6, 1996 and is the holding company for First Federal Savings Bank of America
(the "Bank"). On January 15, 1997, the Bank completed its conversion (the
"conversion") from a mutual savings bank to a stock form of ownership, and the
Company concurrently issued 8,707,152 shares of common stock, raising $77.6
million of net proceeds. The Company utilized $43.4 million of such net
proceeds to acquire all of the outstanding stock of the Bank.
The Company's current business operations consist of holding 100% of the
stock of the Bank, holding 65% of the stock of FIRSTFED TRUST COMPANY, NA (the
"Trust Company"), holding 99% of the stock of FIRSTFED INSURANCE AGENCY, LLC
(the "Agency"), and other investment activities. The majority of the Company's
business operations are conducted through the Bank. As a result, references to
the Company in the following discussion generally refer to the consolidated
operations of the Company, the Bank, the Agency, and the Trust Company. The
Company operates its administrative office and operations center in Swansea,
Massachusetts. Its main banking office is located in Fall River, Massachusetts
and its thirteen other banking offices are located in the municipalities of
Fall River, Attleboro, Taunton, New Bedford, Somerset, Seekonk, and Swansea,
Massachusetts as well as East Providence, Pawtucket, Warwick, and Cranston,
Rhode Island. The Company plans to open a fifteenth banking office in
Providence, Rhode Island at the end of June, 2000. The Company also maintains
a Trust and Business Banking office at the Providence, Rhode Island location
and operates six loan origination centers, four in Massachusetts, one in Rhode
Island, and one in Connecticut. The Company's primary business is attracting
retail deposits from the general public and investing those deposits and other
borrowed funds in loans, mortgage-backed securities, U.S. Government
securities and other securities. The Company originates commercial, consumer,
and mortgage loans for investment, and mortgage loans for sale in the
secondary market. Mortgage loan sales are made from mortgage loans held in the
Company's portfolio designated as being held for sale or originated for sale
during the period. The Company's revenues are derived principally from
interest on its loans, and to a lesser extent, dividends and interest on its
investments and mortgage-backed securities, fees and loan servicing income.
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, proceeds from the sale of
loans, Federal Home Loan Bank of Boston ("FHLB") advances, and other
borrowings.
The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid
on deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses and non-interest income including loan
sale activities, loan servicing income, and revenue from the Trust Company and
Agency operations. The Company's non-interest expense consists of compensation
and employee benefits, office occupancy and equipment expense, federal deposit
insurance premiums, advertising and business promotion, data processing
expense, and other expenses. Results of operations of the Company are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and the actions of
regulatory authorities. The Company had no material assets, liabilities or
operations prior to January 15, 1997, and accordingly, the results of
operations and other data discussed below occurring prior to that date reflect
only those of the Bank and its subsidiary.
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995, and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identified by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain.
14
<PAGE>
Factors which could have a material adverse effect on the operations of the
Company and the subsidiaries include, but are not limited to, changes in:
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information on the Company and its
business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, proceeds from the sale of
loans, FHLB advances, and other borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are influenced by general interest rates, economic
conditions and competition. The Bank is required to maintain minimum levels of
liquid assets as defined by Office of Thrift Supervision ("OTS") regulations.
This requirement, which may be varied at the direction of the OTS depending
upon economic conditions and deposit flows, is based upon a percentage of the
Bank's deposits and short-term borrowings ("liquidity ratio"). At March 31,
2000 and 1999, the Bank's liquidity ratio was 28.35% and 30.38%, respectively.
The OTS required liquidity ratio is 4.0%.
The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investments in trading securities, investment securities
available for sale, and mortgage-backed securities available for sale. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At March 31, 2000,
cash, short-term investments, mortgage loans held for sale, investments in
trading securities, investment securities available for sale, and mortgage-
backed securities available for sale totaled $574.2 million, or 36.3% of total
assets.
The Company has other sources of liquidity if a need for additional funds
arises, including a $25 million FHLB secured line of credit, FHLB advances,
and other borrowings. At March 31, 2000, the Company had $608.0 million in
advances outstanding from the FHLB, and an additional borrowing capacity from
the FHLB of $161.3 million. During year-end 2000, the Company used FHLB
advances and other borrowings to fund asset growth and a small decline in
deposits, and may continue to do so in the future, depending on market
conditions, the pricing of deposit products, and the pricing of FHLB advances
and other borrowings.
At March 31, 2000, the Company had commitments to originate loans and unused
outstanding lines of credit and undistributed balances of construction loans
totaling $130.7 million. The Company anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificate
of deposit accounts scheduled to mature in less than one year from March 31,
2000 totaled $311.5 million. The Company expects that it will retain a
majority of maturing certificate accounts.
The Company plans to open a new banking office in Providence, Rhode Island
in June 2000, bringing total banking offices to fifteen. The Company continues
to consider sites for new banking offices and loan origination centers in or
adjacent to its market area. In addition, the Company may, from time to time,
consider expanding its market share and/or market area through the acquisition
of assets or other banking institutions and may consider acquisitions of other
types of financial services companies.
In February 2000, the Company formed the 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 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.
15
<PAGE>
The Company completed one 5.0% stock repurchase program and initiated an
additional 5% stock repurchase program in fiscal year 2000 which reduced
outstanding shares in the Company to 6,663,228 from the 8,707,152 shares
originally issued. The Company also paid one $0.05 dividend and three $0.07
dividends to stockholders during the fiscal year 2000. The establishment of
additional banking offices, loan origination centers, trust service
operations, mergers and acquisitions, and additional capital management
strategies by the Company would result in additional capital expenditures and
other associated costs which the Company has not yet estimated.
At March 31, 2000, the consolidated capital to total assets ratio of the
Company was 6.44%. As of March 31, 2000, the Bank exceeded all of its
regulatory capital requirements with tangible, core, Tier 1 risk-based, and
risk-based capital ratios of 6.35%, 6.35%, 13.82%, and 15.06%, respectively,
as compared to the minimum regulatory requirements of 2.0%, 4.0%, 4.0%, and
8.0%, respectively.
At the time of conversion, the Bank was required to establish a liquidation
account in an amount equal to its retained earnings as of September 30, 1996,
which provides a liquidation preference to eligible account holders of the
Bank prior to conversion based on such account holder's qualifying deposits.
The liquidation account will be reduced to the extent that such account
holders reduce their qualifying deposits. In the unlikely event of a complete
liquidation of the Bank, each such account holder will be entitled to receive
a distribution from the liquidation account. The Bank is not permitted to
declare or pay dividends on its capital stock, or repurchase any of its
outstanding stock, if the effect thereof would cause its stockholders' equity
to be reduced below the amount required for the liquidation account or
applicable regulatory capital requirements. The balance of the liquidation
account at March 31, 2000 was approximately $17.9 million.
Year 2000 Project
Year 2000 computer software compliance issues affected the Company and many
other financial institutions and companies throughout the world. The primary
concern was that computer programs would not recognize the proper date which
could then generate erroneous data or cause systems to fail, thereby creating
an adverse impact on the Company's business and possibly its operating
results.
The Company developed a plan that was based upon the Federal Financial
Institutions Examination Council ("FFIEC") recommended phases and time frames
for ensuring Year 2000 readiness. Software systems and hardware components
were tested and contingency plans were developed. Human and financial
resources were made available to complete the remediation efforts.
Due to this extensive planning and testing the Company was able to begin the
Year 2000 without any interruption in its operations. In addition, the
Company's critical vendors and suppliers have informed the Company that they
have also made the transition successfully. Furthermore, the Company has not
been notified by any of its significant borrowers of any material Year 2000
related problems that would adversely affect the borrower's abilities to
satisfy their current obligations to the Company.
Included in other non-interest expenses during fiscal year-end 2000 were
charges incurred in connection with the modification or replacement of
software and hardware in order for the Company's computer systems to properly
recognize the Year 2000. The expenses incurred totaled approximately $41,000
for the year ended March 31, 2000 and $181,000 over the course of the project.
In addition, in preparation for the Year 2000 project, the Company underwent a
February, 1998 conversion to a new processing system for all loan and deposit
applications at a cost of approximately $700,000.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting Principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollar amounts without considering the changes
in
16
<PAGE>
the relative purchasing power of money over time due to inflation. The impact
of inflation is reflected in the cost of the Company's operations,
particularly in compensation and benefits and occupation expenses. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on
the Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Market Risk and Management of Interest-Rate Risk
The principal market risk affecting the Company is interest-rate risk. The
principal objective of the Company's interest rate risk management function is
to evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an
Asset/Liability Committee, responsible for reviewing its asset/liability
policies and interest rate risk position, which meets on a monthly basis and
reports trends and interest rate risk position to the Board of Directors on a
quarterly basis. The extent of the movement of interest rates is an
uncertainty that could have a negative impact on the earnings of the Company.
The Company primarily utilizes the following strategies to manage interest
rate risk: (1) emphasizing the origination and retention of adjustable-rate
and shorter-term (generally twelve years or less) fixed-rate, one- to four-
family mortgage loans; (2) selling primary market originated longer-term,
fixed-rate mortgage loans in the secondary market while generally retaining
the servicing rights on such loans; (3) investing primarily in adjustable rate
mortgage-backed securities and fixed-rate collateralized mortgage obligations
("CMOs"); and (4) managing the overall interest rate sensitivity of
liabilities by using longer-term deposits and longer-term FHLB advances to
fund asset growth.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring a bank's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap
is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time
period. At March 31, 2000, the Company's cumulative 1 year interest rate gap
(which is the difference between the amount of interest-earning assets and the
amount of interest-bearing liabilities maturing or repricing within one year)
as a percentage of total assets was a negative 7.30%. Accordingly, during a
period of falling interest rates, the Company's interest-earning assets would
tend to reprice downward at a slower rate than its interest-bearing
liabilities, which, consequently, may tend to positively affect the Company's
net interest income. During a period of rising interest rates, the Company's
interest-earning assets would tend to reprice upward at a slower rate than its
interest-bearing liabilities which, consequently, may tend to negatively
affect the Company's net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2000 which, based upon
certain assumptions, are anticipated by the Company to reprice or mature in
each of the future time periods shown (the "GAP table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at March 31, 2000, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three month
period and subsequent selected time intervals.
The loan amounts in the table reflect principal balances expected to be
redeployed and/or repriced as a result of maturities, contractual
amortization, and anticipated prepayments of adjustable-rate loans and fixed-
rate loans,
17
<PAGE>
and as a result of contractual rate adjustments on adjustable-rate loans.
Annual market prepayment rates for one- to four-family and multi-family
mortgage loans, and mortgage-backed securities are assumed to range from 9.7%
to 47.3% for adjustable-rates and 5.8% to 67.0% for fixed-rates, respectively.
Eleventh District Cost of Funds indexed ("COFI") floating-rate CMOs and
adjustable-rate MBS are assumed to fully reprice over a two year period based
on projected index changes and principal repayments under a constant interest
rate scenario.
Money market deposit accounts and negotiable order of withdrawal ("NOW")
accounts are assumed to reprice evenly over a three year period, while regular
savings accounts are viewed as composed of two equally weighted components--a
longer-term "core" deposit that reprices evenly over a thirty year term, and a
more active secondary tier that reprices evenly over three years. In-the-money
putable FHLB advances (where the Company is short the put option) were
repriced at their put dates while out-of-the-money putable FHLB advances were
repriced at their contractual maturities.
These assumptions may or may not be indicative of actual prepayment and
withdrawals experienced by the Company. The table does not necessarily
indicate the impact of general interest rate movements on the Company's net
interest income because the actual repricing dates of various assets and
liabilities are subject to customer discretion and competitive and other
pressures and, therefore, actual experience may vary from that indicated.
18
<PAGE>
The following table shows the estimated gap position of the Company at March
31, 2000:
<TABLE>
<CAPTION>
More than More than More than More than More
3 Months 3 Months to 6 Months to 1 Year to 3 Years to Than Total
Or Less 6 Months 1 Year 3 Years 5 Years 5 Years Amount
-------- ----------- ----------- --------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term
investments.......... $ 250 $ -- $ -- $ -- $ -- $ -- $ 250
Investment
securities........... 587 -- 198 121 282 5,042 6,230
Loans receivable (1).. 141,873 74,282 122,561 254,946 155,886 142,629 892,177
Mortgage-backed
securities........... 151,224 129,088 158,097 94,743 11,032 2,262 546,446
Stock in FHLB-Boston.. 30,928 -- -- -- -- -- 30,928
-------- --------- --------- --------- -------- -------- ----------
Total interest-
earning assets..... 324,862 203,370 280,856 349,810 167,200 149,933 1,476,031
-------- --------- --------- --------- -------- -------- ----------
Interest-bearing
liabilities:
Money market
accounts............. 3,008 3,008 6,016 24,062 -- -- 36,094
Savings accounts...... 4,622 4,622 10,563 36,978 3,362 42,020 102,167
NOW accounts.......... 5,150 5,150 10,300 41,200 -- -- 61,800
Certificate accounts.. 92,611 94,981 77,097 57,087 2,871 -- 324,647
IRA and KEOGH
accounts............. 13,509 11,684 21,579 33,456 2,017 -- 82,245
FHLB advances and
other borrowings..... 305,973 171,794 132,768 168,369 -- 758 779,662
-------- --------- --------- --------- -------- -------- ----------
Total interest-
bearing
liabilities........ 424,873 291,239 258,323 361,152 8,250 42,778 1,386,615
-------- --------- --------- --------- -------- -------- ----------
Interest-rate swaps:
Pay fixed............. -- -- -- (50,000) -- -- (50,000)
Receive floating...... 25,000 25,000 -- -- -- -- 50,000
-------- --------- --------- --------- -------- -------- ----------
Interest-rate gap after
swaps.................. $(75,011) $ (62,869) $ 22,533 $ (61,342) $158,950 $107,155 $ 89,416
======== ========= ========= ========= ======== ======== ==========
Cumulative interest-rate
gap.................... $(75,011) $(137,880) $(115,347) $(176,689) $(17,739) $ 89,416
======== ========= ========= ========= ======== ========
Cumulative interest-rate
gap as a percentage of
total assets at March
31, 2000............... (4.75)% (8.73)% (7.30)% (11.18)% (1.12)% 5.66%
Cumulative interest-rate
gap as a percentage of
total interest-earning
assets at March 31,
2000................... (5.08)% (9.34)% (7.81)% (11.97)% (1.20)% 6.06%
Cumulative interest-
earning assets as a
percentage of interest-
bearing liabilities at
March 31, 2000......... 76.46% 73.76% 83.03% 86.77% 98.68% 106.45%
-------------------------------------------------------------------------------------------------------
Cumulative interest-rate
gap as a percentage of
total assets at March
31, 1999............... 11.20% 9.24% 5.77% (0.66)% 1.15% 6.69%
Cumulative interest-rate
gap as a percentage of
total interest-earning
assets at March 31,
1999................... 12.08% 9.97% 6.23% (0.71)% 1.24% 7.22%
Cumulative interest-
earning assets as a
percentage of interest-
bearing liabilities at
March 31, 1999......... 170.82% 119.04% 104.55% 96.79% 101.38% 107.78%
</TABLE>
-------
(1) Includes total loans receivable and mortgage loans held for sale (including
non-performing loans), net of deferred loan origination costs, undisbursed
proceeds of construction mortgages in process, and allowance for loan
losses.
19
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a short-
term basis and over the life of the asset. Further, in the event of a change
in interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of borrowers to service their adjustable-rate loans may decrease in
the event of an interest rate increase.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which generates estimates of the change in the
Company's net interest income ("NII") and net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The NPV
ratio, under any interest rate scenario, is defined as the NPV in that
scenario divided by the estimated market value of assets in the same scenario.
The OTS produces a similar analysis for the Bank using its own model, based
upon data submitted on the Bank's quarterly Thrift Financial Report, the
results of which may vary from the Company's internal model primarily due to
differences in assumptions utilized between the Company's internal model and
the OTS model, including estimated loan prepayment rates, reinvestment rates
and deposit renewal rates. The following table sets forth the Company's
estimated NPV and NPV ratios as of March 31, 2000 and 1999, as calculated by
the Company.
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
----------------------------------- ----------------------------
Change in Estimated NPV Estimated NPV
Interest Rates Net Sensitivity Net Sensitivity
in Basis Portfolio NPV Board in Basis Portfolio NPV in Basis
Points Value Ratio Limits Points Value Ratio Points
-------------- --------- ----- ------ ----------- --------- ----- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
+300 $ 73,976 4.85% 4.00% (377) $111,090 8.16% (131)
+200 100,026 6.42 4.25 (220) 122,397 8.84 (63)
+100 121,970 7.69 5.00 (93) 130,686 9.30 (17)
Unchanged 138,896 8.62 6.00 -- 134,662 9.47 --
-100 148,019 9.09 5.00 47 127,627 8.93 (54)
-200 147,723 9.02 4.25 40 115,072 8.05 (142)
-300 141,974 8.63 4.00 1 103,470 7.21 (226)
</TABLE>
As in the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling
changes in NPV require certain assumptions which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the NPV model presented incorporates an assumption that
the composition of the Company's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured, and that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the term to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements and net interest income models provide an indication of the
Company's interest rate risk exposure at a particular point in time, such
measurements are not intended to, and do not, provide a precise forecast of
the effect of changes in market interest rates on the Company's net interest
income.
The results in the NPV ratio table for March 31, 2000 show a shift towards
liability sensitivity versus the results shown for March 31, 1999. This shift
is the result of rising interest rates, slower "base case" mortgage prepayment
rate forecasts, and "flatter" prepayment rate curves under different rate
shock scenarios. Currently projected base case average lives of mortgage loans
and mortgage-backed securities are longer than those projected for comparable
assets at March 31, 1999. While net portfolio value has remained relatively
unchanged, the market value of assets have increased 13.3%, primarily the
result of asset growth and increased leverage.
During fiscal year-end 2000, the Company continued to follow its practice of
selling certain fixed-rate and adjustable-rate mortgage loans while generally
retaining the servicing rights of such loans. In conjunction with
20
<PAGE>
this mortgage banking activity, the Company uses forward contracts in order to
reduce exposure to interest-rate risk. The amount of forward coverage of the
"pipeline" of mortgages is managed on a day-to-day basis by an operating
officer, within Board approved policy guidelines, based on the Company's
assessment of the general direction of interest rates and levels of mortgage
origination activity.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-
earning assets and expense on interest- bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest- bearing liabilities and the interest rate earned or paid on each.
The following table sets forth certain information relating to the Company
at fiscal year end 2000 and for fiscal years 2000, 1999, and 1998. The average
yields and costs are derived by dividing income or expense by the average
balance of interest earning assets or interest bearing liabilities,
respectively, for the periods shown. Fiscal year 2000 average balances are
calculated from daily balances while prior year average balances are derived
from month-end balances. Management does not believe that the use of average
monthly balances instead of average daily balances has caused any material
differences in the information presented. The yields and the costs include
fees, premiums, and discounts which are considered adjustments to yields.
21
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended March 31,
At --------------------------------------------------------------------------------------
March 31, 2000 2000 1999 1998
------------------ ---------------------------- ---------------------------- ----------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- ------ ---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning
assets:
Loans receivable,
net and mortgage
loans held for
sale(1).......... $ 892,177 7.73% $ 809,945 $61,005 7.53% $ 873,335 $65,352 7.48% $ 881,226 $67,493 7.66%
Investment
securities(2).... 37,408 7.33 47,061 2,775 5.90 64,356 3,634 5.65 44,409 2,789 6.28
Mortgage-backed
securities(3).... 546,446 6.34 503,062 30,041 5.97 319,068 17,791 5.58 110,484 6,608 5.98
---------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-
earning assets.. 1,476,031 7.20 1,360,068 93,821 6.90 1,256,759 86,777 6.90 1,036,119 76,890 7.42
---- ------- ---- ------- ---- ------- ----
Non-interest-
earning assets.... 103,964 98,808 75,582 52,964
---------- ---------- ---------- ----------
Total assets.... $1,579,995 $1,458,876 $1,332,341 $1,089,083
========== ========== ========== ==========
Liabilities and
Stockholders'
Equity:
Interest-bearing
liabilities:
Money market
accounts......... $ 36,094 2.64 $ 33,377 780 2.34 $ 31,871 849 2.66 $ 30,788 883 2.87
Savings
accounts......... 102,167 1.76 99,014 1,743 1.76 93,118 1,875 2.01 86,915 2,093 2.41
NOW accounts..... 61,800 0.98 56,973 558 0.98 50,760 498 0.98 45,619 801 1.76
Certificate
accounts(4)...... 406,892 5.24 418,815 21,731 5.19 441,556 24,350 5.51 506,440 29,257 5.78
---------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total........... 606,953 4.07 608,179 24,812 4.08 617,305 27,572 4.47 669,762 33,034 4.93
FHLB advances and
other
borrowings....... 779,662 5.96 667,352 36,959 5.54 514,507 28,871 5.61 224,451 13,495 6.01
---------- ---- ---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total interest-
bearing
liabilities..... 1,386,615 5.14 1,275,531 61,771 4.84 1,131,812 56,443 4.99 894,213 46,529 5.20
---- ------- ---- ------- ---- ------- ----
Non-interest-
bearing
liabilities(5).... 91,675 78,268 88,751 68,508
---------- ---------- ---------- ----------
Total
liabilities..... 1,478,290 1,353,799 1,220,563 962,721
---------- ---------- ---------- ----------
Stockholders'
Equity............ 101,705 105,077 111,778 126,362
---------- ---------- ---------- ----------
Total
liabilities and
stockholders'
equity.......... $1,579,995 $1,458,876 $1,332,341 $1,089,083
========== ========== ========== ==========
Net interest rate
spread(6)......... 2.06% $32,050 2.06% $30,334 1.91% $30,361 2.22%
==== ======= ==== ======= ==== ======= ====
Net interest
margin(7)......... 2.36% 2.41% 2.93%
==== ==== ====
Ratio of interest-
earning assets to
Interest-bearing
liabilities....... 106.45% 106.63% 111.04% 115.87%
========== ========== ========== ==========
</TABLE>
----
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction mortgages in process, allowance for loan losses and includes
non-performing loans.
(2) Includes short-term investments, investments in trading securities,
investment securities available for sale and held to maturity, and FHLB
stock.
(3) Consists of mortgage-backed securities available for sale and held to
maturity.
(4) Includes the net effect of interest rate swaps.
(5) Consists primarily of business checking accounts.
(6) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
22
<PAGE>
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in rate and volume.
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 2000 March 31, 1999
Compared to Compared to
Year Ended Year Ended
March 31, 1999 March 31, 1998
------------------------- -------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
---------------- ----------------
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net
and mortgage loans
held for sale......... $(4,772) $ 425 $(4,347) $ (600) $(1,541) $(2,141)
Investment securities.. (1,014) 155 (859) 1,149 (304) 845
Mortgage-backed
securities............ 10,907 1,343 12,250 11,659 (476) 11,183
------- ------- ------- ------- ------- -------
Total interest-
earning assets...... 5,121 1,923 7,044 12,208 (2,321) 9,887
------- ------- ------- ------- ------- -------
Interest-bearing liabili-
ties:
Money market accounts.. 39 (108) (69) 30 (64) (34)
Savings accounts....... 114 (246) (132) 142 (360) (218)
NOW accounts........... 61 (1) 60 82 (385) (303)
Certificate accounts... (1,220) (1,399) (2,619) (3,623) (1,284) (4,907)
------- ------- ------- ------- ------- -------
Total deposits....... (1,006) (1,754) (2,760) (3,369) (2,093) (5,462)
FHLB advances and other
borrowings............ 8,470 (382) 8,088 16,333 (957) 15,376
------- ------- ------- ------- ------- -------
Total interest-
bearing
liabilities......... 7,464 (2,136) 5,328 12,964 (3,050) 9,914
------- ------- ------- ------- ------- -------
Net change in net
interest income......... $(2,343) $ 4,059 $ 1,716 $ (756) $ 729 $ (27)
======= ======= ======= ======= ======= =======
</TABLE>
23
<PAGE>
Asset Quality
The following table sets forth information regarding non-accrual loans and
real estate owned ("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 charge off all accrued interest. For fiscal years ended 2000 and
1999 the amount of additional interest income that would have been recognized
on non-accrual loans if such loans were performing in accordance with their
regular terms and amounts recognized were $29,000 and $37,000, respectively.
<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
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.
At March 31, 2000 and 1999, total impaired loans were $556,000 and $1.6
million, respectively. At March 31, 2000 and 1999, impaired loans of $556,000
and $1.6 million required impairment allowances of $228,000 and $919,000,
respectively. During fiscal year-end 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.
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
24
<PAGE>
allowance for loan losses. Such agencies may require the Company to make
additional provisions for estimated loan losses based upon judgments different
from those of management. As of March 31, 2000, the Company's allowance for
loan losses was 1.36% of total loans receivable and 937.0% of total non-
performing loans as compared to 1.54% and 471.2%, respectively, as of March
31, 1999. The Company had non-accrual loans of $1.3 million and $2.6 million
at March 31, 2000 and March 31, 1999, respectively. The allowance for loan
losses totaled $12.3 million at March 31, 2000 as compared to $12.0 million at
March 31, 1999. The increase in the allowance 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 will continue to
monitor and modify its allowances for loan losses as conditions dictate. While
management believes the Company's allowance for loan losses is sufficient to
cover losses inherent in its loan portfolio at this time, no assurances can be
given that the Company's level of allowance for loan losses will be sufficient
to cover future loan losses incurred by the Company or that future adjustments
to the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses.
The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
-----------------------------------------
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>
The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. At March 31,
2000, 1999, and 1998, the Company classified (excluding REO) $7.0 million,
$3.9 million, and $3.0 million of substandard loans, respectively. In the
opinion of management, the performing substandard loans evidence one or more
weaknesses or potential weaknesses, and depending on the regional economy and
other factors, may become non-performing assets in future periods.
25
<PAGE>
Comparison of Financial Condition and Results of Operations for the years
ended March 31, 2000 and March 31, 1999
Financial Condition
Assets at March 31, 2000 totaled $1.580 billion, an increase of $186.8
million or 13.4%, compared to $1.393 billion at March 31, 1999. Most of the
growth in assets was from a $135.2 million increase in mortgage-backed
securities available for sale, which grew 33.1% to $543.6 million from $408.5
million and from a $122.1 million increase in loans receivable, net, which
grew 15.9% to $888.8 million at March 31, 2000 from $766.7 million at March
31, 1999. This growth was partially offset by a $48.9 million, or 93.5%,
decrease in mortgage loans held for sale, which decreased from $52.3 million
at March 31, 1999 to $3.4 million at March 31, 2000, and from a $14.2 million,
or 98.3%, decrease in short-term investments. The growth in mortgage-backed
securities was the result of the continuation of management's strategy to
increase the Company's capital leverage. The growth in loans receivable, net,
reflected borrower demand for adjustable-rate residential mortgages with low
initial rates for periods of from 1 to 10 years, which are currently held in
the Company's portfolio, as well as $14.3 million and $17.5 million increases
in commercial and consumer loan balances, respectively. The decline in loans
held for sale was also due to borrower demand for adjustable-rate residential
mortgages as opposed to fixed- rate residential mortgages which are originated
for sale.
Deposits decreased to $664.7 million at March 31, 2000 from $674.9 million
at March 31, 1999, a decrease of 1.5%. The decline in deposit balances was
primarily attributable to a $21.1 million or 4.9% decrease in certificate
accounts, which declined from $428.0 million to $406.9 million. This decline,
however, was partially offset by a 4.4% increase in demand and savings
deposits of $10.9 million from $246.9 million at March 31, 1999 to $257.8
million at March 31, 2000. Growth in low cost demand and savings deposits over
the last three fiscal years has improved the Company's deposit mix to 38.8%
demand and savings deposits at March 31, 2000 from 27.5% at March 31, 1997.
FHLB advances and other borrowings increased from $586.0 million at March 31,
1999 to $779.7 million at March 31, 2000, an increase of $193.7 million, or
33.1%. The increase in FHLB advances was primarily used to fund mortgage-
backed security growth as part of a wholesale leverage strategy and to offset
the decline in deposits.
Total stockholders' equity was $101.7 million at March 31, 2000, down $1.3
million, or 1.2%, from $103.0 million at March 31, 1999. This decline was
primarily due to two 5.0% stock repurchase programs, the payment of four
quarterly dividends to shareholders, and a decline in the fair value of
securities available for sale, net of tax. Stockholders' equity to assets was
6.44% at March 31, 2000 down from 7.39% at March 31, 1999, as a result of
balance sheet growth and the reduction in total stockholders' equity. This
leveraging of stockholders' equity has had a favorable impact on return on
average stockholders' equity ("ROE"). During the fiscal year ended 2000, ROE
increased to 7.79% as compared to 6.82% for the fiscal year end 1999.
Non-performing assets decreased to $1.3 million or 0.08% of total assets at
March 31, 2000, compared to $2.9 million or 0.21% of total assets at March 31,
1999. The allowance for loan losses was increased from $12.0 million at March
31, 1999 to $12.3 million at March 31, 2000 due to loan portfolio growth. The
allowances for loan losses amounted to 1.36% of loans at March 31, 2000,
compared to 1.54% of loans at March 31, 1999. See "Asset Quality" included
elsewhere herein.
Results of Operations
General
Net income for the year ended March 31, 2000 was $8.2 million, or $1.31
basic and diluted earnings per share ("EPS"), compared to $7.6 million, or
$1.09 basic and diluted EPS for the year ended March 31, 1999. Pre-tax income
increased $436,000, or 3.8%, to $11.9 million, the net result of a $1.7
million increase in net interest income, a $1.1 million decrease in non-
interest income, and a $176,000 increase in non-interest expense. Growth in
EPS was caused by the growth in net income and a reduction in outstanding
shares of the Company's stock of 451,179 shares primarily as a result of two
stock repurchase programs since March 31, 1999.
26
<PAGE>
Interest Income
Total interest income for year-end 2000 was $93.8 million, an increase of
$7.0 million or 8.1% from $86.8 million total interest income for year-end
1999. Most of the growth in total interest income was due to a $103.3 million
increase in the average balance of interest-earning assets, which averaged
$1.360 billion for year-end 2000, compared to an average balance of $1.257
billion during year-end 1999. Interest income from loans receivable, decreased
$4.3 million, or 6.7%, to $61.0 million for year-end 2000. This decrease was
the result of a $63.4 million decrease in the average balance of loans
receivable, net, partially offset by a 5 basis point increase in yield.
Additionally, the average balance of mortgage-backed securities increased from
$319.1 million for year-end 1999 to an average balance of $503.1 million for
year-end 2000. The increase in mortgage-backed securities was primarily funded
by FHLB advances and other borrowings during year-end 2000. The yield on
interest-earning assets was unchanged at 6.90% in year-end 2000.
Interest Expense
Interest expense for year-end 2000 amounted to $61.8 million, an increase of
$5.3 million, or 9.4%, from the year-end 1999 total of $56.4 million. The
primary reason for this increase was due to a $143.7 million increase in
average balances for interest-bearing liabilities partially offset by a 15
basis point decrease in the average cost of funds. Interest- bearing
liabilities averaged $1.276 billion during year-end 2000, compared to an
average balance of $1.132 billion during year-end 1999, an increase of 12.7%.
The increase in average interest-bearing liabilities was the net effect of a
$9.1 million decrease in average deposits and a $152.8 million increase in
average FHLB advances and other borrowings. The average cost of interest-
bearing deposits decreased 39 basis points to 4.08% for year-end 2000 from
4.47% for year-end 1999 as the cost of new deposits was less than the average
cost of existing deposits and as the deposit mix shifted toward lower cost
demand and savings accounts. The average cost of FHLB advances and other
borrowings decreased for year-end 2000 to 5.54% as compared to 5.61% for year-
end 1999.
Net Interest Income
Net interest income before provision for loan losses increased $1.7 million,
or 5.7%, to $32.1 million from $30.3 million for the years ended March 31,
2000 and 1999, respectively. Net interest rate spread increased 15 basis
points to 206 basis points for year-end 2000 compared to 191 basis points for
year-end 1999, while net interest margin decreased 5 basis points to 2.36%
from 2.41%.
Provision for Loan Losses
The Company's provision for loan losses amounted to $1.2 million for both
year-end 2000 and year-end 1999, due to management's assessment of the loan
loss reserve level, the existing loan portfolio, current market conditions,
and the volume and mix of new originations. To the extent the Company
experiences further increases in the overall balance of its loan portfolio or
increases its concentrations of loans which bear a higher degree of risk than
one- to four-family loans, the Company anticipates further increases in its
allowance for loan losses through continued provisions for loan losses. While
management of the Company believes that the current level of its allowance for
loan losses is sufficient based on information currently available at this
time, no assurances can be made that future events, conditions or regulatory
directives will not result in increased provisions for loan losses or
additions to the Company's allowance for loan losses which may adversely
affect net income.
Non-interest Income
Non-interest income decreased $1.1 million, or 14.5%, to $6.5 million for
year-end 2000 from $7.6 million for year-end 1999. Non-interest income
consists of loan servicing income, gains and losses on the sale of mortgages,
and other non-interest income including deposit fees, earnings on Bank-Owned
Life Insurance ("BOLI") and revenue from Trust Company and Agency operations.
The decrease is primarily attributable to a $3.0 million decrease in gain
(loss) on sale of mortgage loans, net, partially offset by a $977,000 increase
of
27
<PAGE>
earnings on BOLI, a $248,000 increase in service charges, a $299,000 increase
in the unrealized gain (loss) on trading securities, and a $368,000 increase
in insurance commissions. The decrease in gain (loss) on sale of mortgage
loans is due to lower volume of saleable mortgages and unfavorable secondary
market conditions during fiscal year 2000.
Non-interest Expense
Total non-interest expense increased to $25.5 million for year-end 2000
compared to $25.3 million for year-end 1999, an increase of $176,000, or 0.7%.
The increase is primarily attributable to a $117,000 increase in compensation
and benefits, a $124,000 increase in office occupancy and equipment, a
$363,000 increase in advertising and business promotion due to the
introduction of online banking, and a $277,000 increase in data processing due
to increased online processing charges. These increases were partially offset
by a $254,000 decrease in deposit insurance premiums and a $451,000 decrease
in other non-interest expense. The decrease in other non-interest expense was
primarily the result of lower costs for telephone, postage, and supplies due
to decreased loan origination activity.
Income Taxes
Income tax expense was $3.7 million for year-end 2000 compared to income tax
expense of $3.8 million for year-end 1999. This decrease in income tax expense
was the result of a full year's impact of the Company's implementation of
certain tax strategies. Overall, the Company's effective tax rate was 31.1%
during year-end 2000, compared to 33.4% for year-end 1999.
Comparison of Financial Condition and Results of Operations for the years
ended March 31, 1999 and March 31, 1998
Financial Condition
Assets at March 31, 1999 totaled $1.393 billion, an increase of $111.4
million or 8.7%, compared to $1.282 billion at March 31, 1998. Most of the
growth in assets was from a $193.3 million increase in mortgage-backed
securities available for sale, which grew 89.9% from $215.1 million to $408.4
million. Additional growth came from a $32.4 million increase in other assets,
primarily the result of the purchase of $30.0 million of BOLI, and an increase
of $14.4 million in short-term investments. This growth was partially offset
by an $81.9 million, or 9.6% decrease in loans receivable, net, from $848.6
million to $766.7 million, and a $32.5 million, or 38.3% decrease in mortgage
loans held for sale. The growth in mortgage-backed securities was the result
of the continuation of management's strategy to increase the Company's
leverage, while the decrease in loans receivable, net, reflected borrower
demand for long-term, fixed-rate mortgages which are not currently held in the
Company's portfolio. While adjustable-rate and short-term fixed-rate mortgage
production could not keep up with mortgage portfolio payoffs, the Company's
commercial loan portfolio experienced record growth of $22.5 million, or
31.1%, to $95.0 million.
Deposits decreased from $708.5 million at March 31, 1998 to $674.9 million
at March 31, 1999, a decrease of 4.7%. The decline in deposit balances was
primarily attributable to a $46.5 million or 9.8% decrease in certificate
accounts, which declined from $474.5 million to $428.0 million, the result of
a less aggressive deposit pricing strategy in effect during the first half of
the fiscal year. This decline, however, was partially offset by a 5.5%
increase in demand and savings deposits of $12.9 million from $234.0 million
at March 31, 1998 to $246.9 million at March 31, 1999. Growth in low cost
demand and savings deposits over the last two fiscal years has improved the
Company's deposit mix to 36.6% demand and savings deposits at March 31, 1999
from 27.5% at March 31, 1997. FHLB advances and other borrowings increased
from $403.9 million at March 31, 1998 to $586.0 million at March 31, 1999, an
increase of $182.1 million, or 45.1%. The increase in FHLB advances was
primarily used to fund mortgage-backed security growth as part of a wholesale
leverage strategy and to offset the decline in deposits.
28
<PAGE>
Total stockholders' equity was $103.0 million at March 31, 1999, down $24.0
million from $127.0 million at March 31, 1998. This decline was primarily due
to four 5.0% stock repurchase programs, the payment of four quarterly
dividends to shareholders, and a decline in the fair value of securities
available for sale, net of tax. Stockholders' equity to assets was 7.39% at
March 31, 1999 down from 9.91% at March 31, 1998, as a result of balance sheet
growth and the reduction in total stockholders' equity. This leveraging of
stockholders' equity has had a favorable impact on ROE. During the fiscal year
ended 1999, ROE increased to 6.82% as compared to 5.40% for the fiscal year
end 1998.
Non-performing assets decreased to $2.9 million or 0.21% of total assets at
March 31, 1999, compared to $3.6 million or 0.28% of total assets at March 31,
1998. The allowance for loan losses was increased from $10.9 million at March
31, 1998 to $12.0 million at March 31, 1999 due to loan portfolio growth. The
allowances for loan losses amounted to 1.54% of loans at March 31, 1999,
compared to 1.27% of loans at March 31, 1998. See "Asset Quality" included
elsewhere herein.
Results of Operations
General
Net income for the year ended March 31, 1999 was $7.6 million, or $1.09
basic and diluted EPS, compared to $6.8 million, or $0.84 basic and diluted
EPS for the year ended March 31, 1998. Pre-tax income declined $666,000, or
5.5%, to $11.4 million, the net result of a $27,000 decrease in net interest
income, a $1.2 million decrease in provision for loan loss, a $1.3 million
increase in non-interest income, and a $3.1 million increase in non-interest
expense. Growth in EPS was caused by the growth in net income and a 1,615,122
share reduction in outstanding shares of the Company's stock as a result of
four stock repurchases since March 31, 1998.
Interest Income
Total interest income for year-end 1999 was $86.8 million, an increase of
$9.9 million or 12.9% from the $76.9 million total interest income for year-
end 1998. Most of the growth in total interest income was due to a $220.6
million increase in the average balance of interest-earning assets, which
averaged $1.257 billion for year-end 1999, compared to an average balance of
$1.036 billion during year-end 1998. Interest income from loans receivable,
decreased $2.1 million or 3.2% to $65.4 million for year-end 1999. This
decrease was the result of a $7.9 million decrease in the average balance of
loans receivable, net, coupled with an 18 basis point decrease in yield.
Additionally, the average balance of mortgage-backed securities increased from
$110.5 million for year-end 1998 to an average balance of $319.1 million for
year-end 1999. The increase in mortgage-backed securities was primarily funded
by FHLB advances and other borrowings during year-end 1999. The yield on
interest-earning assets decreased by 52 basis points to 6.90% in year-end
1999, from 7.42% in year-end 1998, as the relative percentage of lower
yielding, adjustable rate mortgage-backed securities increased.
Interest Expense
Interest expense for year-end 1999 amounted to $56.4 million, an increase of
$9.9 million, or 21.3%, from the year-end 1998 total of $46.5 million. The
primary reason for this increase was due to higher average balances for
interest-bearing liabilities partially offset by a decrease in the average
cost of funds. Interest-bearing liabilities averaged $1.132 billion during
year-end 1999, compared to average balances of $894.2 million during year-end
1998, an increase of $237.6 million, or 26.6%. The increase in average
interest-bearing liabilities was the net effect of a $52.5 million decrease in
average deposits and a $290.1 million increase in average FHLB advances and
other borrowings. The average cost of interest-bearing deposits decreased 46
basis points to 4.47% for year-end 1999 from 4.93% for year-end 1998 as the
cost of new deposits was less than the average cost of existing deposits and
as the deposit mix shifted toward lower cost demand and savings accounts. The
average cost of FHLB advances and other borrowings decreased for year-end 1999
to 5.61% as compared to 6.01% for year-end 1998.
29
<PAGE>
Net Interest Income
Net interest income before provision for loan losses decreased $27,000, or
0.09%, from $30.4 million to $30.3 million for the years ended March 31, 1998
and 1999, respectively. Net interest rate spread decreased 30 basis points to
192 basis points for year-end 1999 compared to 222 basis points for year-end
1998. The drop in spread was offset by a $220.6 million increase in average
interest-earning assets funded by a $237.6 million increase in average
interest-bearing liabilities during the year ended March 31, 1999.
Provision for Loan Losses
The Company's provision for loan losses amounted to $1.2 million for year-
end 1999, as compared to a provision of $2.4 million for year-end 1998. This
decrease was due to management's assessment of the loan loss reserve level,
the existing loan portfolio, current market conditions, and the volume and mix
of new originations. To the extent the Company then experiences further
increases in the overall balance of its loan portfolio or increases its
concentrations of loans which bear a higher degree of risk than one- to four-
family loans, the Company anticipates further increases in its allowance for
loan losses through continued provisions for loan losses. While management of
the Company believes that the current level of its allowance for loan losses
is sufficient based on information currently available at this time, no
assurances can be made that future events, conditions or regulatory directives
will not result in increased provisions for loan losses or additions to the
Company's allowance for loan losses which may adversely affect net income.
Non-interest Income
Non-interest income increased $1.3 million, or 20.2%, from $6.4 million for
year-end 1998 to $7.6 million for year-end 1999. Non-interest income consists
of loan servicing income, gains and losses on the sale of mortgages, and other
non-interest income including deposit fees and earnings on BOLI. The increase
is primarily attributable to $575,000 of earnings on BOLI, a $553,000 increase
in gain on sale of mortgage loans, a $244,000 increase in service charges, a
$206,000 increase in the fair value of investments held in certain employee
benefit plans. The increase in gain on sale of mortgage loans is due to higher
volume and more favorable secondary market conditions during the first half of
fiscal year 1999. Partially offsetting these increases are a $445,000 decrease
in loan servicing income due to an increase in the valuation allowance for
mortgage servicing rights during the first half of the 1999 fiscal year, and a
$154,000 decrease in gain on sale of investments.
Non-interest Expense
Total non-interest expense increased to $25.3 million for year-end 1999
compared to $22.3 million for year-end 1998, an increase of $3.1 million, or
13.8%. The increase is primarily attributable to a $1.3 million increase in
compensation and benefits related to increased staffing for new banking
offices and a record increase in loan origination volume, an $854,000 increase
in office occupancy and equipment related to increased depreciation on
buildings and equipment for new and recently renovated banking offices and the
new administrative and operations facility, a $328,000 increase in data
processing charges due to the Bank's conversion and upgrade to a new data
processing system at the end of fiscal year 1998, and a $720,000 increase in
other operating expenses. The increase in other operating expenses was the
result of an increase in the fair value of investments held by certain
employee benefit plans (offset by a comparable increase in non-interest income
noted above), additional consulting fees, and additional costs for telephone,
postage, and supplies due to increased loan origination activity. Partially
offsetting these increases is a $227,000 decrease in advertising and business
promotion.
Income Taxes
Income tax expense was $3.8 million for year-end 1999 compared to income tax
expense of $5.3 million for year-end 1998. This decrease in income tax expense
was the result of the Company's implementation of certain tax strategies and
the purchase of Bank-Owned Life Insurance earlier in fiscal year-end 1999.
Overall, the Company's effective tax rate was 33.4% during year-end 1999,
compared to 43.7% for year-end 1998.
30
<PAGE>
Impact of New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Under this statement, an entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. In June 1999, the FASB issued SFAS No. 137
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, which defers the effective date of
SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FIRSTFED AMERICA BANCORP, INC.:
We have audited the accompanying consolidated balance sheets of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries, (the "Company") as of March 31, 2000
and 1999, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries at March 31, 2000 and 1999, and the
results of their operations and cash flows for each of the years in the three-
year period ended March 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.
[LOGO OF KPMG LLP]
Boston, Massachusetts
April 20, 2000
F-1
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---------- ---------
(Dollars in
Thousands)
<S> <C> <C>
Assets
Cash on hand and due from banks........................ $ 20,720 24,598
Short-term investments................................. 250 14,422
---------- ---------
Total cash and cash equivalents....................... 20,970 39,020
Mortgage loans held for sale........................... 3,417 52,334
Investment in trading securities (note 5).............. 587 94
Investment securities available for sale (amortized
cost of $6,260 and $5,660) (note 5)................... 5,643 5,575
Mortgage-backed securities available for sale
(amortized cost of $550,109 and $408,485) (note 5 and
10)................................................... 543,627 408,451
Investment securities held to maturity (fair value of
$-0- and $10,030) (note 5 and 10)..................... -- 9,998
Mortgage-backed securities held to maturity (fair value
of $2,853 and $5,733) (note 5)........................ 2,819 5,608
Stock in Federal Home Loan Bank of Boston, at cost
(notes 5 and 10)...................................... 30,928 28,682
Loans receivable, net of allowance for loan losses of
$12,275 and $12,016 (notes 6 and 10).................. 888,760 766,687
Accrued interest receivable............................ 7,018 6,369
Mortgage servicing rights (note 7)..................... 6,288 6,537
Office properties and equipment, net (note 8).......... 25,187 25,255
Real estate owned, net................................. -- 344
Bank-Owned Life Insurance.............................. 32,127 30,575
Prepaid expenses and other assets...................... 12,624 7,708
---------- ---------
Total assets....................................... $1,579,995 1,393,237
========== =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9)..................................... $ 664,682 674,870
FHLB advances and other borrowings (note 10).......... 779,662 585,981
Advance payments by borrowers for taxes and
insurance............................................ 5,984 5,660
Accrued interest payable.............................. 4,620 3,058
Other liabilities..................................... 23,342 20,707
---------- ---------
Total liabilities.................................. 1,478,290 1,290,276
========== =========
Commitments and contingencies (notes 4, 6, 8, 10, 11,
13 and 15)
Stockholders' equity (notes 3 and 4):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued.............................. -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 8,707,152 shares issued.................. 87 87
Additional paid-in capital............................ 85,449 85,407
Retained earnings (notes 2 and 3)..................... 63,270 56,892
Accumulated other comprehensive loss.................. (4,470) (150)
Unearned 1997 stock-based incentive plan (note 14).... (4,438) (5,869)
Unallocated ESOP shares (note 14)..................... (3,872) (4,647)
Treasury stock; at cost (2,100,847 and 1,649,668
shares at 2000 and 1999)............................. (34,321) (28,759)
---------- ---------
Total stockholders' equity......................... 101,705 102,961
---------- ---------
Total liabilities and stockholders' equity......... $1,579,995 1,393,237
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------- ------ ------
(In Thousands, Except
Per Share Data)
<S> <C> <C> <C>
Interest and dividend income:
Loans................................................. $61,005 65,352 67,493
Investment securities................................. 803 2,100 2,033
Mortgage-backed securities............................ 30,041 17,791 6,608
Federal Home Loan Bank stock.......................... 1,972 1,534 756
------- ------ ------
Total interest and dividend income.................. 93,821 86,777 76,890
------- ------ ------
Interest expense:
Deposits (note 9)..................................... 24,812 27,572 33,034
Borrowed funds........................................ 36,959 28,871 13,495
------- ------ ------
Total interest expense.............................. 61,771 56,443 46,529
------- ------ ------
Net interest income before provision for loan
losses............................................. 32,050 30,334 30,361
Provision for loan losses (note 6)...................... 1,200 1,200 2,350
------- ------ ------
Net interest income after provision for loan
losses............................................. 30,850 29,134 28,011
------- ------ ------
Non-interest income:
Loan servicing income................................. 2,003 1,909 2,354
Gain (loss) on sale of mortgage loans, net (note 7)... (952) 2,046 1,493
Gain on sale of investments securities available for
sale................................................. -- 9 163
Service charges on deposit accounts................... 1,344 1,096 852
Earnings on Bank-Owned Life Insurance................. 1,552 575 --
Other income.......................................... 2,587 2,003 1,491
------- ------ ------
Total non-interest income........................... 6,534 7,638 6,353
------- ------ ------
Non-interest expense:
Compensation and employee benefits (note 14).......... 14,732 14,615 13,290
Office occupancy and equipment........................ 3,905 3,781 2,927
Data processing....................................... 1,322 1,045 717
Advertising and business promotion.................... 1,159 796 1,023
Federal deposit insurance premiums.................... 334 588 514
Other................................................. 4,057 4,508 3,788
------- ------ ------
Total non-interest expense.......................... 25,509 25,333 22,259
------- ------ ------
Income before income tax expense.................... 11,875 11,439 12,105
Income tax expense (note 13)............................ 3,689 3,818 5,286
------- ------ ------
Net income.......................................... $ 8,186 7,621 6,819
======= ====== ======
Basic earnings per share................................ $ 1.31 1.09 0.84
======= ====== ======
Diluted earnings per share.............................. $ 1.31 1.09 0.84
======= ====== ======
Weighted average shares outstanding--basic.............. 6,256 6,980 8,131
======= ====== ======
Weighted average shares outstanding--diluted............ 6,256 6,980 8,138
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Unearned
1997
Accumulated Stock-based
Shares of Additional other incentive Total
Preferred common Common paid-in Retained comprehensive Unallocated plan (SIP) Treasury stockholders'
stock stock stock capital earnings income (loss) ESOP shares shares stock equity
--------- --------- ------ ---------- -------- ------------- ----------- ----------- -------- -------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1997.......... -- 8,707 $87 $84,334 $43,603 $ 326 $(6,196) $ -- $ -- $122,154
Common stock
acquired for
SIP.............. -- -- -- -- -- -- -- (4,734) -- (4,734)
Earned ESOP
shares charged to
expense.......... -- -- -- 682 -- -- 775 -- -- 1,457
Comprehensive
income (loss):
Net income....... -- -- -- -- 6,819 -- -- -- -- 6,819
Other
comprehensive
income:
Unrealized
holding gains
(losses) on
available for
sale
securities...... -- -- -- -- -- 2,422 -- -- -- --
Reclassification
adjustments for
losses (gains)
included in net
income.......... -- -- -- -- -- (163) -- -- -- --
-------
Unrealized
(losses) gains.. -- -- -- -- -- 2,259 -- -- -- --
Tax effect...... -- -- -- -- -- (969) -- -- -- --
-------
Net-of-tax
effect.......... -- -- -- -- -- 1,290 -- -- -- 1,290
--------
Total
comprehensive
income........... -- -- -- -- -- -- -- -- -- 8,109
---- ----- --- ------- ------- ------- ------- ------- -------- --------
Balance at March
31, 1998.......... -- 8,707 87 85,016 50,422 1,616 (5,421) (4,734) -- 126,986
Common stock
acquired for
SIP.............. -- -- -- -- -- -- -- (2,502) -- (2,502)
Earned SIP stock
awards........... -- -- -- (150) -- -- -- 1,367 -- 1,217
Earned ESOP
shares charged to
expense.......... -- -- -- 541 -- -- 774 -- -- 1,315
Cash dividends
declared and paid
($0.15 per
share)........... -- -- -- -- (1,151) -- -- -- -- (1,151)
Common stock
repurchased
(1,615,123 shares
at an average
price of $17.43
per share)....... -- -- -- -- -- -- -- -- (28,152) (28,152)
Common stock
acquired for
certain employee
benefit plans
(34,545 shares at
an average price
of $17.58 per
share)........... -- -- -- -- -- -- -- -- (607) (607)
Comprehensive
income (loss):
Net income....... -- -- -- -- 7,621 -- -- -- -- 7,621
Other
comprehensive
income, net of
tax:
Unrealized
holding gains
(losses) on
available for
sale
securities...... -- -- -- -- -- (2,924) -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income.......... -- -- -- -- -- (9) -- -- -- --
-------
Net unrealized
(losses) gains.. -- -- -- -- -- (2,933) -- -- -- --
Tax effect...... -- -- -- -- -- 1,167 -- -- -- --
-------
Net-of-tax
effect.......... -- -- -- -- -- (1,766) -- -- -- (1,766)
--------
Total
comprehensive
income........... -- -- -- -- -- -- -- -- -- 5,855
---- ----- --- ------- ------- ------- ------- ------- -------- --------
Balance at March
31, 1999.......... -- 8,707 $87 $85,407 $56,892 $ (150) $(4,647) $(5,869) $(28,759) $102,961
==== ===== === ======= ======= ======= ======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, Continued
Years ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Unearned
1997
Accumulated Stock-based
Shares of Additional other incentive Total
Preferred common Common paid-in Retained comprehensive Unallocated plan (SIP) Treasury stockholders'
stock stock stock capital earnings income (loss) ESOP shares shares stock equity
--------- --------- ------ ---------- -------- ------------- ----------- ----------- -------- -------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1999.......... -- 8,707 $87 $85,407 $56,892 $ (150) $(4,647) $(5,869) $(28,759) $102,961
Earned SIP stock
awards........... -- -- -- (154) -- -- -- 1,431 -- 1,277
Earned ESOP
shares charged to
expense.......... -- -- -- 196 -- -- 775 -- -- 971
Cash dividends
declared and paid
($0.26 per
share)........... -- -- -- -- (1,808) -- -- -- -- (1,808)
Common stock
repurchased
(428,801 shares
at an average
price of $12.24
per share)....... -- -- -- -- -- -- -- -- (5,271) (5,271)
Common stock
acquired for
certain employee
benefit plans
(24,086 shares at
an average price
of $13.32 per
share)........... -- -- -- -- -- -- -- -- (320) (320)
Common stock sold
for certain
employee benefit
plans (1,708
shares at an
average price of
$16.57 per
share)........... -- -- -- -- -- -- -- -- 29 29
Comprehensive
income (loss):
Net income....... -- -- -- -- 8,186 -- -- -- -- 8,186
Other
comprehensive
income, net of
tax:
Unrealized
holding gains
(losses) on
available for
sale
securities...... -- -- -- -- -- (6,981) -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income.......... -- -- -- -- -- -- -- -- -- --
-------
Net unrealized
(losses) gains.. -- -- -- -- -- (6,981) -- -- -- --
Tax effect...... -- -- -- -- -- 2,661 -- -- -- --
-------
Net-of-tax
effect.......... -- -- -- -- -- (4,320) -- -- -- (4,320)
--------
Total
comprehensive
income........... -- -- -- -- -- -- -- -- -- 3,866
---- ----- --- ------- ------- ------- ------- ------- -------- --------
Balance at March
31, 2000.......... -- 8,707 $87 $85,449 $63,270 $(4,470) $(3,872) $(4,438) $(34,321) $101,705
==== ===== === ======= ======= ======= ======= ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 8,186 7,621 6,819
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization (accretion) of:
Premium (discount) on investment and mortgage-
backed securities held to maturity........... 3 6 (4)
Premium on investment and mortgage-backed
securities available for sale................ 269 1,148 43
Deferred loan origination (costs) fees......... (155) (50) 322
Mortgage servicing rights...................... 2,070 1,704 782
Provisions for Loan losses..................... 1,200 1,200 2,350
(Gains) losses on sales of:
Office property and equipment................. (30) -- (18)
Real estate owned............................. (56) (104) (93)
Mortgage loans................................ 952 (2,046) (1,493)
Investment and mortgage-backed securities
available-for-sale........................... -- (9) (163)
Net proceeds from sales of mortgage loans...... 250,326 629,772 265,221
Origination of mortgage loans held for sale.... (204,182) (600,204) (327,642)
Income from bank-owned life insurance.......... (1,552) (575) --
Unrealized (gain) loss on trading securities... (293) 6 --
Real estate owned valuation adjustments........ (43) 38 240
Depreciation of office properties and
equipment..................................... 2,542 2,251 1,692
Appreciation in fair value of ESOP shares...... 195 541 682
Earned SIP shares.............................. 1,277 1,217 --
Increase or decrease in:
Accrued interest receivable................... (649) (377) (1,270)
Prepaid expenses and other assets............. (2,254) (629) 706
Accrued interest payable...................... 1,562 445 1,896
Other liabilities............................. 2,635 (12,949) 17,409
--------- -------- --------
Net cash provided by (used in) operating
activities.................................. 62,003 29,006 (33,407)
========= ======== ========
</TABLE>
F-6
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash flows from investing activities:
Purchase of investment securities available
for sale.................................. $ (600) (3,845) (6,159)
Purchase of trading securities............. (200) (100) --
Purchase of mortgage-backed securities
available for sale........................ (249,028) (346,219) (201,533)
Payments received on mortgage-backed
securities available for sale............. 107,134 127,442 19,322
Proceeds from sale of investment securities
available for sale........................ -- -- 511
Proceeds from sale of mortgage-backed
securities available for sale............. -- 3,906 --
Purchases of investment securities held to
maturity.................................. -- -- (11,990)
Payments received on mortgage-backed
securities held to maturity............... 2,784 6,874 2,934
Purchase of the Federal Home Loan Bank
Stock..................................... (2,246) (10,737) (8,414)
Maturities of investment securities held to
maturity.................................. 10,000 12,500 10,500
Maturities of investment securities
available for sale........................ -- 4,000 --
Maturities of mortgage-backed securities
available for sale........................ -- 19,473 --
Net (increase) decrease in loans........... (123,349) 80,280 (56,282)
Proceeds from sale of office equipment..... 104 -- 30
Proceeds from sales of real estate owned... 674 752 1,336
Purchase of bank-owned life insurance...... -- (30,000) --
Purchases of office properties and
equipment................................. (2,548) (2,629) (12,367)
----------- ---------- --------
Net cash used in investing activities... (257,275) (138,303) (262,112)
----------- ---------- --------
Cash flows from financing activities:
Net decrease in deposits................... $ (10,188) (33,618) (15,488)
Proceeds FHLB advances and other
borrowings................................ 2,867,106 1,584,786 763,127
Repayments on FHLB advances and other
borrowings................................ (2,673,425) (1,402,670) (470,324)
Net change in advance payments by borrowers
for taxes and insurance................... 324 (564) 644
Payments to acquire SIP shares............. -- (2,502) (4,734)
Cash dividends paid........................ (1,808) (1,151) --
Common stock repurchased, net.............. (5,562) (28,759) --
Reduction in unearned ESOP shares.......... 775 774 775
----------- ---------- --------
Net cash provided by financing
activities............................. 177,222 116,296 274,000
----------- ---------- --------
Net increase (decrease) in cash and cash
equivalents................................ (18,050) 6,999 (21,519)
Cash and cash equivalents at beginning of
year....................................... 39,020 32,021 53,540
----------- ---------- --------
Cash and cash equivalents at end of year.... $ 20,970 39,020 32,021
=========== ========== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................. $ 60,209 55,998 44,633
=========== ========== ========
Income taxes.............................. $ 1,951 3,933 3,830
=========== ========== ========
Supplemental disclosures of noncash
investing activities:
Property acquired in settlement of loans... $ 231 435 1,413
=========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000, 1999 and 1998
(1) Organization
FIRSTFED AMERICA BANCORP, INC. (the "Company") is a holding company for
First Federal Savings Bank of America (the "Bank"), FAB FUNDING CORPORATION
("FAB FUNDING"), FIRSTFED INSURANCE AGENCY, LLC, and the FIRSTFED TRUST
COMPANY, N.A. The Company owns all of the issued and outstanding shares of
common stock of the Bank and FAB FUNDING. The FIRSTFED INSURANCE AGENCY, LLC
(the "Agency") is owned jointly by the Company and FAB FUNDING, with the
Company's ownership share being a substantial majority. The Company owns a 65%
interest in FIRSTFED TRUST COMPANY, N.A. (the "Trust Company"), with the
remaining 35% interest being held by M/D Trust, LLC; a minority owner.
The Bank provides a full range of banking services to individual and
business customers in Massachusetts, Rhode Island and, to a lesser degree, in
Connecticut. The Bank is subject to competition from other financial
institutions, mortgage banking companies and other financial service providers
doing business in the area. The Bank and the Company are subject to
regulations of, and periodic examinations by, the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"). The Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF") of the
FDIC up to $100,000. To provide protection for customers' retirement account
balances in excess of FDIC coverage, the Bank participates in the "Deposit
Collateralization Bailee Program" with the Federal Home Loan Bank of Boston.
To participate, the Company must pledge investment securities and mortgage
loans as collateral with the Federal Home Loan Bank of Boston.
As more fully described in note 3, the Bank converted from a mutual savings
bank to a capital stock savings bank on January 15, 1997.
The Agency was formed on January 7, 1999. 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.
In March 2000, the Agency purchased two local independent agencies, Smith-
Cochrane Insurance Agency, Inc. and All Risk Insurance Agency of Swansea for
$1.1 million. Since these acquisitions were accounted for under the purchase
method of accounting, the results of the acquisitions are included for the
periods subsequent to the acquisition date. Goodwill of approximately $1.1
million was recorded and is being amortized on a straight-line basis between
five and fifteen years. Subject to levels of customer retention, the Agency
may be required to make additional payments up to $480,000 over 3 years, which
if paid, will be recorded as goodwill.
The Trust Company was formed on February 1, 2000 as a limited purpose
national bank, which provides comprehensive fiduciary products and services in
Massachusetts and Rhode Island. The Trust Company is subject to the
regulations of, and periodic examination by the Office of the Comptroller of
the Currency ("OCC"), as well as the states in which it operates.
FAB FUNDING is a business corporation formed at the direction of the Company
under the laws of the Commonwealth of Massachusetts on October 8, 1996. FAB
FUNDING was established to lend funds to a Company sponsored employee stock
ownership plan and related trust for the purchase of stock in the initial
public offering.
The Bank includes its wholly-owned subsidiaries: FIRSTFED Mortgage Corp. (an
inactive company), FIRSTFED INVESTMENT CORP. (a Massachusetts security
corporation), and CELMAC INVESTMENT CORP. (a Massachusetts security
corporation).
F-8
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(2) Summary of Significant Accounting Policies (Dollars in Thousands)
Principles of Consolidation
In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets, and income and expense for the periods. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the
allowance for loan losses.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Certain amounts previously reported have been reclassified
to conform to the current year's presentation.
Cash and Due From Banks
The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserve is calculated based upon deposit levels and
amounted to $7,139 at March 31, 2000.
Investments and Mortgage-Backed Securities
Debt securities that the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at amortized cost.
Debt and equity securities that are bought and held principally for the
purpose of being resold in the near term are classified as trading and
reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either held-to-maturity or
trading are classified as available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of related income taxes.
Investments and Mortgage-Backed Securities
Debt securities that the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at amortized cost.
Debt and equity securities that are bought and held principally for the
purpose of being resold in the near term are classified as trading and
reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either held-to-maturity or
trading are classified as available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of related income taxes.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income using a method that approximates the
interest method. If a decline in fair value below the amortized cost basis of
an investment or mortgage-backed security is judged to be other than
temporary, the cost basis of the investment is written down to fair value as a
new cost basis and the amount of the write-down is included as a charge
against gain (loss) on sale of investment securities. Gains and losses on the
sale of investment and mortgage-backed securities are recognized at the time
of sale on a specific identification basis.
Loans
Loans are reported at the principal amount outstanding, reduced by net
deferred loan origination fees or costs. Mortgage loans held for sale are
carried at the lower of aggregate cost or market. Considered in the
calculation of cost are unamortized deferred loan origination fees and costs
and mortgage servicing rights. Generally, all longer term (typically mortgage
loans with terms greater than fifteen years) fixed-rate residential single-
family mortgage loans are originated for sale and shorter term fixed-rate and
adjustable-rate loans are originated for portfolio.
F-9
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loan origination fees are offset with related direct incremental loan
origination costs and the resulting net amount is deferred and amortized over
the contractual life of the related loans using the interest method. When
loans are sold in the secondary market, the remaining balance of the amount
deferred is included in the determination of gain or loss on sale.
Accrual of interest on loans is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest have
become contractually past due 90 days or more. When a loan is placed on non-
accrual, all income that has been accrued but remains unpaid is reversed
against current period income and all amortization of deferred loan fees is
discontinued. Interest received on non-accrual loans is either recorded as
income or applied against the principal balance depending on management's
evaluation of the collectibility of principal. Loans are removed from non-
accrual status when they have been current as to principal and interest for a
period of time, the borrower has demonstrated an ability to comply with the
repayment terms, and when, in management's opinion, the loans are considered
fully collectible.
Impaired loans are commercial and commercial real estate loans for which it
is probable that the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. The definition of
"impaired loans" is not the same as the definition of "nonaccrual loans,"
although the two categories overlap. Nonaccrual loans include impaired loans
and are those on which the accrual of interest is discontinued when
collectibility of principal or interest is uncertain or payments of principal
or interest have been contractually past due 90 days. The Bank may choose to
place a loan on nonaccrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired, if (i) it is
probable that the Bank will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is not a commercial or a
commercial real estate loan. Factors considered by management in determining
impairment include payment status and collateral value.
The amount of impairment for these types of impaired loans is determined by
the difference between the present value of the expected cash flows related to
the loan, using the original contractual interest rate, and its recorded
value, or, as a practical expedient in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded amount of
the loan. When foreclosure is probable, impairment is measured based on the
fair value of the collateral. Residential mortgage and consumer loans are
measured for impairment collectively. Loans that experience insignificant
payment delays and insignificant shortfalls in payment amounts generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.
Allowance for Loan Losses
The allowance for loan losses is available for future credit losses inherent
in the portfolio. The level of the allowance is based on management's ongoing
review of the existing loan portfolio, current market conditions, as well as
the volume and mix of new originations. Loans (or portions thereof) deemed to
be uncollectible are charged against the allowance and recoveries of amounts
previously charged-off are added to the allowance. The provisions for loan
losses charged to earnings are added to the allowance to bring it to the
desired level.
While management believes that the allowance for loan losses is adequate to
absorb probable loan losses, future additions to the allowance may be
necessary based on changes in the above factors. In addition, the OTS and FDIC
periodically review the Bank's allowance for loan losses. Such agencies may
require the recognition of additions to the allowance based on their judgments
about information available to them at the time of their examination.
F-10
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Gain or Loss on Sale of Mortgage Loans
Gain or loss on sale of mortgage loans is recognized at the time of sale.
Such gain or loss results from the combination of (1) the difference between
the net cash paid by the investor for the loan and the loan's carrying value;
(2) the calculated present value of the difference between the interest rate
paid by the borrower on the loan sold and the interest rate guaranteed to the
investor, adjusted for mortgage servicing fees and considering estimated loan
prepayments; and (3) any origination fees, net of applicable origination
costs, retained by the Bank.
Capitalized mortgage servicing rights are recognized, based on the allocated
fair value of the rights to service mortgage loans for others. Mortgage
servicing rights are amortized to loan servicing fee income using a method
which approximates the level yield method in proportion to, and over the
period of, estimated net servicing income. Mortgage servicing rights are
assessed for impairment based on the fair value of those rights. Prepayment
experience on mortgage servicing rights is reviewed periodically and, when
actual repayments exceed estimated prepayments, the balance of the mortgage
servicing assets is reduced by a charge to earnings through a valuation
allowance. The risk characteristics of the underlying loans used to measure
impairment include loan type, interest rate, loan origination date, and term
to maturity.
Office Properties and Equipment
Land is carried at cost. Office properties and equipment are recorded at
cost less accumulated depreciation. Depreciation of office properties and
equipment is determined on the straight-line basis over the estimated useful
lives of the related assets (3 to 40 years). Expenditures for major additions
and improvements are capitalized while the costs of current maintenance and
repairs are charged to operating expenses.
Real Estate Owned
Real estate owned is acquired through foreclosure or by accepting a deed in
lieu of foreclosure. Real estate acquired in settlement of loans is recorded
at the lower of the carrying value of the loan or the fair value, less
disposal costs, of the property constructively or actually received, thereby
establishing a new cost basis. Subsequent write- downs are recorded if the
cost basis exceeds current net fair value. Related operating costs, net of
rental income, are reflected in operations when incurred. Realized gains and
losses upon disposition are recognized in income.
Management believes that the net carrying value of real estate acquired
through foreclosure reflects the lower of its cost basis or estimated net fair
value. Factors similar to those considered in the evaluation of the allowance
for loan losses, including regulatory requirements, are considered in the
evaluation of the net fair value of real estate acquired through foreclosure.
Bank Owned Life Insurance
Bank owned life insurance ("BOLI") represents life insurance on certain
employees. The Company is the beneficiary of the insurance policies. Increases
in the cash value of the policies, as well as insurance proceeds received, are
recorded in other income, and are not subject to income taxes. BOLI is
reported on the balance sheet at cash value.
Goodwill
Goodwill arises in a business combination accounted for under the purchase
method. It represents the difference between the cost of an acquired company
and the sum of the fair values of the intangible and identifiable intangible
assets acquired less the fair value of the tangible liabilities assumed.
Goodwill is amortized on a straight-line basis over a period not exceeding
fifteen years, and is reviewed for possible impairment when
F-11
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
it is determined that events or changed circumstances may affect the
underlying basis of the asset. Goodwill is reported on the balance as a
component of prepaid expenses and other assets.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Company's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Company's deferred tax asset is reviewed periodically
and adjustments to such asset are recognized as deferred income tax expense or
benefit based upon management's judgments relating to the realizability of
such asset.
Pension
The Company accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the
compensation cost of an employee's benefit over that employee's approximate
service period.
Employee Benefits
The Company continues to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees. However, the Company provides expanded disclosures of
pro-forma net income and earnings per share and other disclosure information
in Note 14 to the consolidated financial statements as if the fair value
method had been applied.
Interest Rate Risk Management Agreements
The Company uses off-balance sheet financial instruments from time to time
as part of its interest rate risk management strategy. Interest rate swap
agreements are entered into as hedges against future interest rate
fluctuations on specifically identified assets or liabilities. The Company
does not enter into agreements for trading or speculative purposes. Therefore,
these agreements are not marked to market.
The net amounts to be paid or received on outstanding interest rate risk
management agreements are recognized on the accrual basis as an adjustment to
the related interest income or expense over the life of the agreements.
Earnings Per Share
Basic EPS is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year adjusted for the
weighted average number of unallocated shares held by the Employee Stock
Ownership Plan ("ESOP") and the unearned shares relating to the 1997 Stock-
Based Incentive Plan ("SIP"). Diluted EPS reflects the effect to weighted
average shares outstanding of the number of additional shares outstanding if
dilutive stock options and dilutive SIP shares were converted into common
stock using the treasury stock method.
A reconciliation of the weighted average shares outstanding for the year
ended March 31, 2000 and 1999 follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Basic shares............................................. 6,256 6,980 8,131
Dilutive impact of stock options......................... -- -- 6
Dilutive impact of SIP shares............................ -- -- 1
----- ----- -----
Diluted shares........................................... 6,256 6,980 8,138
===== ===== =====
</TABLE>
F-12
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
Comprehensive income is defined as all changes to equity except investments
by and distribution to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the aggregate
as other comprehensive income.
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents consist of
cash on hand and due from banks and short-term investments. Short-term
investments have original maturities of 90 days or less.
Trust Assets
Securities and other property held in a fiduciary or agency capacity are not
included in the consolidated balance sheets because they are not assets of the
Company. Trust assets under administration at March 31, 2000 were $445,000.
Income from trust activities is reported on an accrual basis.
Recent Accounting Developments
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Under this statement, an entity that
elects to apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining the
ineffective aspect of the hedge. In June 1999, the FASB issued SFAS No. 137
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, which defers the effective date of
SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
(3) Conversion to Stock Form of Ownership
The Company is a business corporation formed at the direction of the Bank
under the laws of Delaware on September 6, 1996. On January 15, 1997, (i) the
Bank converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank, (ii) the Bank issued all of its outstanding
capital stock to the Company and (iii) the Company consummated its initial
public offering of common stock, par value $.01 per share (the "Common
Stock"), by selling at a price of $10.00 per share 7,364,762 shares of Common
Stock to certain of the Bank's eligible account holders who had subscribed for
such shares (collectively, the "Conversion"), by selling 697,010 shares to the
Bank's Employee Stock Ownership Plan and related trust ("ESOP") and by
contributing 645,380 shares of Common Stock to The FIRSTFED Charitable
Foundation (the "Foundation"). The Conversion resulted in net proceeds of
$77.6 million, after expenses of $3.0 million. Net proceeds of $43.4 million
were invested in the Bank to increase the Bank's tangible capital to 10% of
the Bank's total adjusted assets. The Company established the Foundation
dedicated to the communities served by the Bank. In connection with the
Conversion, the common stock contributed by the Company to the Foundation at a
value of $6.5 million was charged to expense.
Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, the Bank
established a liquidation account at the time of Conversion in an amount equal
to the retained earnings of the Bank as of the date of its latest balance
sheet date, September 30, 1996, contained in the final Prospectus used in
connection with the Conversion. In the unlikely event of a complete
liquidation of the Bank (and only in such an event), eligible depositors who
continue to maintain accounts at the Bank shall be
F-13
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
entitled to receive a distribution from the liquidation account. The total
amount at the liquidation account is decreased if the balances of eligible
depositors decrease at the annual determination dates. The liquidation account
approximated $17.9 million (unaudited) at March 31, 2000.
The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory requirements.
In addition to the 25,000,000 authorized shares of common stock, the Company
authorized 1,000,000 shares of preferred stock with a par value of $0.01 per
share (the "Preferred Stock"). The Board of Directors is authorized, subject
to any limitations by law, to provide for the issuance of the shares of
preferred stock in series, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restriction thereof. As of March 31, 2000,
there were no shares of preferred stock issued.
(4) Stockholders' Equity (Dollars in Thousands)
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of risk-based core and tangible capital (as defined). As of March
31, 2000, the Bank meets all capital adequacy requirements to which it is
subject.
As of September 27, 1999, the most recent notification from the OTS
categorized the Bank as "well capitalized" by regulatory definition. To be
categorized as "well capitalized" the Bank must maintain minimum total risk-
based, core, tangible, and Tier 1 risk-based capital ratios as set forth in
the table. As of March 31, 2000, the Bank is categorized as "well capitalized"
based on its ratios of risk-based, core, tangible, and Tier 1 risk-based
capital. There are no conditions or events since that notification that
management believes have changed the Bank's category.
F-14
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bank's actual and required capital amounts and ratios are presented in
the table. No deduction was taken from capital for interest-rate risk.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Risk-based capital............ $109,319 15.06% $58,052 8.0% $72,565 10.0%
Core capital.................. 100,267 6.35 63,179 4.0 78,974 5.0
Tangible capital.............. 100,267 6.35 31,590 2.0 78,974 5.0
Tier 1 risk-based............. 100,267 13.82 29,026 4.0 43,539 6.0
As of March 31, 1999:
Risk-based capital............ $105,684 16.18% $52,250 8.0% $65,312 10.0%
Core capital.................. 97,544 7.03 55,534 4.0 69,417 5.0
Tangible capital.............. 97,544 7.03 27,767 2.0 69,417 5.0
Tier 1 risk-based............. 97,544 14.93 26,125 4.0 39,187 6.0
</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
Excess ----------------
Actual Required (Deficiency) Actual Required
------ -------- ------------ ------ --------
<S> <C> <C> <C> <C> <C>
Tangible capital............... $2,809 $56 $2,753 100.43% 2.00%
Core capital................... 2,809 112 2,697 100.43 4.00
Risk-based capital............. 2,809 224 2,585 486.83 8.00
</TABLE>
(5) Investment and Mortgage-Backed Securities (Dollars in Thousands)
Available For Sale
A summary of investment securities available for sale follows:
<TABLE>
<CAPTION>
March 31, 2000
----------------------------------------------
Weighted
average Amortized Unrealized Unrealized Fair
rate cost gains losses value
-------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government Agency
obligations.............. 6.2% $ 600 -- -- 600
Marketable equity
securities............... 5,660 1,353 (1,970) 5,043
------ ----- ------ -----
Total investment
securities............. $6,260 1,353 (1,970) 5,643
====== ===== ====== =====
<CAPTION>
March 31, 1999
----------------------------------------------
Weighted
average Amortized Unrealized Unrealized Fair
rate cost gains losses value
-------- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
Investment securities:
Marketable equity
securities............... $5,660 1,429 (1,514) 5,575
------ ----- ------ -----
Total investment
securities............. $5,660 1,429 (1,514) 5,575
====== ===== ====== =====
</TABLE>
F-15
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of mortgage-backed and collateralized mortgage obligation
securities available for sale follows:
<TABLE>
<CAPTION>
March 31, 2000
------------------------------------------------
Weighted
average Amortized Unrealized Unrealized Fair
rate cost gains losses value
-------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities
due:
Less than five years........ 7.0% $ 15,254 -- (306) 14,948
Within five to ten years.... -- -- -- -- --
After ten years............. 6.0 348,559 132 (4,140) 344,551
--- -------- --- ------ -------
Total mortgage-backed
securities............... 6.0% $363,813 132 (4,446) 359,499
--- -------- --- ------ -------
Collateralized mortgage
obligations due:
Less than five years........ 7.2% $ 9,996 54 -- 10,050
Within five to ten years.... 6.0 35,168 -- (532) 34,636
After ten years............. 6.4 141,132 744 (2,434) 139,442
--- -------- --- ------ -------
Total collateralized
mortgage obligations..... 6.3% $186,296 798 (2,966) 184,128
--- -------- --- ------ -------
Total................... 6.1% $550,109 930 (7,412) 543,627
=== ======== === ====== =======
<CAPTION>
March 31, 1999
------------------------------------------------
Weighted
average Amortized Unrealized Unrealized Fair
rate cost gains losses value
-------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities
due:
Less than five years........ 7.0% $ 18,765 73 -- 18,838
Within five to ten years.... 7.0 2,557 13 -- 2,570
After ten years............. 6.1 243,526 671 (210) 243,987
--- -------- --- ------ -------
Total mortgage-backed
securities............... 6.2% $264,848 757 (210) 265,395
--- -------- --- ------ -------
Collateralized mortgage
obligations due:
Less than five years........ --% $ -- -- -- --
Within five to ten years.... 5.7 23,189 24 -- 23,213
After ten years............. 6.2 120,448 83 (688) 119,843
--- -------- --- ------ -------
Total collateralized
mortgage obligations..... 6.1% $143,637 107 (688) 143,056
--- -------- --- ------ -------
Total................... 6.2% $408,485 864 (898) 408,451
=== ======== === ====== =======
</TABLE>
During the years ended March 31, 2000, 1999 and 1998, realized gains on
investment securities available for sale were $-0-, $9 and $163, respectively.
Proceeds from the sale of investment and mortgage-backed securities available
for sale during fiscal years 2000, 1999 and 1998 amounted to $-0-, $3,906 and
$511, respectively.
Adjustable-rate mortgage-backed securities and collateralized mortgage
obligations available for sale had total amortized costs and fair values of
$479,266 and $474,627, respectively, at March 31, 2000 and $329,823 and
$330,381, respectively, at March 31,1999.
F-16
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Held To Maturity
A summary of investment securities held to maturity at March 31, 1999, is
shown below. There were no investment securities held to maturity at March 31,
2000.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------
Weighted
average Amortized Unrealized Unrealized Fair
rate cost gains losses value
-------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
United States Government and
related obligations due:
Within one year............... 6.1% $9,998 32 -- 10,030
--- ------ --- --- ------
Total investment securities
held to maturity........... 6.1% $9,998 32 -- 10,030
=== ====== === === ======
A summary of mortgage-backed securities held to maturity follows:
<CAPTION>
March 31, 2000
-----------------------------------------------
Weighted
average Amortized Unrealized Unrealized Fair
rate cost gains losses value
-------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities due:
Less than five years.......... 8.7% $ 40 -- -- 40
Within five to ten years...... 8.8 692 -- -- 692
After ten years............... 7.2 2,087 34 -- 2,121
--- ------ --- --- ------
Total mortgage-backed
securities held to
maturity................... 7.7% $2,819 34 -- 2,853
=== ====== === === ======
<CAPTION>
March 31, 1999
-----------------------------------------------
Weighted
average Amortized Unrealized Unrealized Fair
rate cost gains losses value
-------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Mortgage-backed securities due:
Less than five years.......... 7.7% $ 14 -- -- 14
Within five to ten years...... 8.5 815 53 -- 868
After ten years............... 6.7 4,779 72 -- 4,851
--- ------ --- --- ------
Total mortgage-backed
securities held to
maturity................... 7.0% $5,608 125 -- 5,733
=== ====== === === ======
</TABLE>
Adjustable-rate mortgage-backed securities held to maturity had total
amortized cost and fair value of $2,087 and $2,121, respectively, at March 31,
2000 and $4,553 and $4,605, respectively, at March 31, 1999.
Maturities of mortgage-backed securities are based on contractual maturities
with scheduled amortization. Actual maturities will differ from contractual
maturities due to prepayments.
Mortgage-backed securities with a book value of approximately $560 and $807
were pledged as collateral for certain deposits in the "Deposit
Collateralization Bailee Program" at the Federal Home Loan Bank of Boston at
March 31, 2000 and 1999, respectively.
As a member of the Federal Home Loan Bank ("FHLB") system, the Company is
required to maintain a minimum investment in FHLB stock. The current
investment exceeds the required level at March 31, 2000. Any excess may be
redeemed by the Company or called by the FHLB at par. At its discretion, the
FHLB may declare dividends on this stock.
F-17
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Trading Securities
The Company maintains an investment position in a venture-capital limited
partnership, which is classified as a trading security.
(6) Loans Receivable (Dollars in Thousands)
The Company's lending activities are conducted principally in Massachusetts,
Rhode Island and, to a lesser degree, in Connecticut. The Company grants one-
to four-family and multifamily residential loans, commercial real estate
loans, commercial loans and a variety of consumer loans. In addition, the
Company grants loans for the construction of residential homes, multifamily
properties and commercial real estate properties. The ability and willingness
of one-to four-family and multifamily residential and consumer borrowers to
honor their repayment commitments is generally dependent on real estate values
and the level of overall economic activity within the borrowers' geographic
areas. The ability and willingness of commercial, commercial real estate and
construction loan borrowers to honor their repayment commitments is generally
dependent on the health of the real estate economic sector in the borrowers'
geographic areas and the general economy.
The following is a comparative summary of loans receivable classified by
type at March 31:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Mortgage loans:
Residential 1-4 family................................ $671,586 583,692
Multi-family.......................................... 2,568 3,082
Commercial real estate................................ 37,274 38,760
Construction and land................................. 39,205 31,671
-------- -------
Total mortgage loans................................ 750,633 657,205
-------- -------
Commercial loans........................................ 70,484 56,196
-------- -------
Consumer loans and other loans:
Home equity lines..................................... 31,351 25,482
Second mortgages...................................... 51,488 40,630
Other consumer loans.................................. 8,616 7,872
-------- -------
Total consumer loans................................ 91,455 73,984
-------- -------
Total loans receivable.............................. 912,572 787,385
-------- -------
Less:
Allowance for loan losses............................. (12,275) (12,016)
Undisbursed proceeds of construction mortgages in
process.............................................. (11,983) (7,903)
Deferred loan origination costs (fees), net........... 446 (779)
-------- -------
(23,812) (20,698)
-------- -------
Loans receivable, net............................... $888,760 766,687
======== =======
</TABLE>
The weighted average interest rate on the residential mortgage, construction
and land loan portfolio was approximately 7.25% at March 31, 2000 compared
with 7.13% at March 31, 1999. Included in this portfolio are $417,107 and
$295,404 of loans at variable interest rates, at March 31, 2000 and 1999,
respectively.
At March 31, 2000 and 1999, mortgage loans sold to others and serviced by
the Bank on a fee basis under various agreements amounted to $1,595,000 and
$1,564,000, respectively. Loans serviced for others are not included in the
Consolidated Balance Sheets.
F-18
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans placed on nonaccrual status totaled approximately $1,310 and $2,550 at
March 31, 2000 and 1999, respectively.
The following table summarizes information regarding the reduction of
interest income on nonaccrual loans for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original items...................... $107 231 261
Income recognized............................................. 78 194 198
---- --- ---
Foregone interest income during year.......................... $ 29 37 63
==== === ===
</TABLE>
At March 31, 2000, there were no commitments to lend additional funds to
those borrowers whose loans were classified as impaired or nonaccrual.
At March 31, 2000 and 1999, total impaired loans were $556 and $1,565,
respectively. At March 31, 2000 and 1999, impaired loans of $556 and $1,565
required impairment allowances of $228 and $919, respectively. All impaired
loans have been measured using the fair value of the collateral method. The
average recorded value of impaired loans was $771 during 2000 and $1,498 in
1999. The Company follows the same policy for recognition of income on
impaired loans as it does for all other loans. Impaired loans of $244 and
$1,088 were on nonaccrual at March 31, 2000 and 1999, respectively.
The following table summarizes information regarding the reduction of
interest income on impaired loans for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original terms...................... $114 227 228
Income recognized............................................. 75 122 120
---- --- ---
Foregone interest income during the year...................... $ 39 105 108
==== === ===
</TABLE>
An analysis of the allowance for loan losses for the years ended March 31 is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Balance at beginning of year........................ $12,016 10,937 8,788
Provision for loan losses......................... 1,200 1,200 2,350
Charge-offs....................................... (958) (138) (212)
Recoveries........................................ 17 17 11
------- ------ ------
Balance at end of year.............................. $12,275 12,016 10,937
======= ====== ======
</TABLE>
In the ordinary course of business, the Company makes loans to its
directors, executive officers, and their related interests, at the same
prevailing terms as those of other borrowers. The following is a summary of
related party loan activity for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year................................. $685 828 749
Originations............................................. 297 56 271
Principal repayments..................................... (110) (199) (192)
---- ---- ----
Balance, end of year....................................... $872 685 828
==== ==== ====
</TABLE>
F-19
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Not included in the amounts stated above are unused portions of lines of
credit. These amounted to $228 and $188 at March 31, 2000 and 1999,
respectively.
Loans with a book value of $8,973 were pledged as collateral for the
"Deposit Collateralization Bailee Program" with the Federal Home Loan Bank of
Boston at March 31, 2000.
(7) Sale of Mortgage Loans (Dollars in Thousands)
The following summarizes mortgage loan sales and the components of gain or
(loss) on sale of mortgage loans for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Gain (loss) on sale of mortgage loans:
Cash proceeds from sales of loans......... $ 250,265 630,044 265,297
Buy-up (down) fees received, net.......... 61 (272) (76)
--------- -------- --------
Net cash proceeds from sales of loans... 250,326 629,772 265,221
Principal balance of loans sold........... (251,768) (631,107) (266,767)
Deferred origination (costs) fees
recognized at time of sale............... (1,331) (1,480) 340
Change in unrealized loss on mortgage
loans held for sale...................... -- (150) 318
Capitalized mortgage servicing rights..... 1,821 5,011 2,381
--------- -------- --------
Gain (loss) on sale of mortgage loans,
net.................................... $ (952) 2,046 1,493
========= ======== ========
</TABLE>
The following is a summary of capitalized mortgage servicing rights for the
years ended March 31:
<TABLE>
<CAPTION>
2000 1999
------- ------
<S> <C> <C> <C>
Beginning balance....................................... $ 6,537 3,230
Capitalized mortgage servicing rights................... 1,821 5,011
Amortization............................................ (2,070) (1,704)
------- ------ ---
Balance at March 31..................................... $ 6,288 6,537
======= ======
</TABLE>
Capitalized mortgage servicing rights are periodically evaluated for
impairment. As of March 31, 2000 and 1999, the balance of the valuation
allowance amounted to $250 and $487, respectively.
(8) Office Properties and Equipment (Dollars in Thousands)
Office properties and equipment consist of the following at March 31:
<TABLE>
<CAPTION>
2000 1999
-------- ------
<S> <C> <C>
Land....................................................... $ 1,882 1,939
Office building and improvements........................... 19,542 18,930
Furniture, fixtures and equipment.......................... 13,052 12,038
Construction in progress................................... 945 52
-------- ------
35,421 32,959
Less accumulated depreciation.............................. (10,234) (7,704)
-------- ------
$ 25,187 25,255
======== ======
</TABLE>
F-20
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company leases certain office space under various non-cancelable
operating leases. A summary of future minimum rental payments under such leases
at March 31, 2000 follows:
<TABLE>
<CAPTION>
Minimum Rental
Year ending March 31, Expense
--------------------- --------------
<S> <C>
2001.......................................................... $ 284
2002.......................................................... 301
2003.......................................................... 278
2004.......................................................... 226
2005.......................................................... 158
After 2005.................................................... 1,333
</TABLE>
Rent expense was $181, $127 and $189 for the years ended March 31, 2000, 1999
and 1998, respectively.
(9) Deposits (Dollars in Thousands)
Deposits at March 31 are as follows:
<TABLE>
<CAPTION>
Weighted 2000 1999
Average -------------- --------------
Rates Amount % Amount %
---------- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
Money market...................... (2.60;2.38) $ 36,094 5.4% $ 32,834 4.9%
Business checking................. ( -- ; -- ) 57,729 8.7 62,238 9.2
Savings........................... (1.75;1.75) 102,167 15.4 97,277 14.4
NOW............................... (0.98;0.98) 61,800 9.3 54,532 8.1
-------- ----- -------- -----
257,790 38.8 246,881 36.6
-------- ----- -------- -----
Certificates:
Six months to one year.......... (5.18;4.81) 186,937 28.1 204,075 30.2
Over one year................... (5.54;5.65) 112,881 17.0 113,389 16.8
Jumbo........................... (5.41;4.63) 7,532 1.1 8,434 1.2
IRA & Keogh..................... (5.35;5.40) 82,245 12.4 84,149 12.5
Business statement.............. (5.75;4.47) 3,436 0.5 500 0.1
7-91 day........................ (4.48;4.24) 13,861 2.1 17,442 2.6
-------- ----- -------- -----
Total certificate accounts.... 406,892 61.2 427,989 63.4
-------- ----- -------- -----
$664,682 100.0% $674,870 100.0%
======== ===== ======== =====
Weighted average stated interest
rate of deposits................. (3.74;3.70)
</TABLE>
The remaining contractual maturities of certificate accounts at March 31 are
summarized as follows:
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
Amount % Amount %
-------- ----- ------- -----
<S> <C> <C> <C> <C>
Within twelve months........................ $311,461 76.5% 339,640 79.4%
More than thirteen months to thirty-six
months..................................... 90,543 22.3 79,024 18.5
Beyond thirty-six months.................... 4,888 1.2 9,325 2.1
-------- ----- ------- -----
$406,892 100.0% 427,989 100.0%
======== ===== ======= =====
</TABLE>
Certificates of deposit in denominations of $100 or more totaled
approximately $58,992 and $55,580 at March 31, 2000 and 1999, respectively.
F-21
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the ordinary course of business, the Company accepts deposits from
brokerage companies on behalf of their clients. These monies are invested in
certificates of deposit. Brokered deposits amounted to $1,194 and $1,983 at
March 31, 2000 and 1999, respectively.
Interest expense on deposits consisted of the following for the years ended
March 31:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Money market........................................... $ 780 849 883
Regular and club....................................... 1,743 1,875 2,094
NOW.................................................... 558 498 801
Certificates........................................... 21,731 24,350 29,256
------- ------ ------
$24,812 27,572 33,034
======= ====== ======
</TABLE>
(10) Federal Home Loan Bank Advances and Other Borrowings (Dollars in
thousands)
At March 31, 2000 and 1999, advances from the Federal Home Loan Bank of
Boston ("FHLB") with a weighted average interest rate of 5.84% and 5.30%,
respectively, mature as follows:
<TABLE>
<CAPTION>
Year ending March 31, 2000 1999
--------------------- -------- -------
<S> <C> <C>
2000........................................................ $ -- 181,838
2001........................................................ 369,068 157,768
2002........................................................ 47,909 44,909
2003........................................................ 61,459 66,795
2004........................................................ 25,000 25,000
After 2004.................................................. 104,544 54,345
-------- -------
$607,980 530,655
======== =======
</TABLE>
At March 31, 2000, the preceding totals include the following putable
advances which are exercisable at the discretion of the FHLB:
<TABLE>
<CAPTION>
Contractual
Advance Maturity Put Exercise Interest
Date Date Date Type Balance Rate
------- ----------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
9/17/98 9/17/03 9/17/01 One Time $ 25,000 4.99%
1/19/99 1/20/09 1/21/03 One Time 15,000 4.98
10/8/99 10/8/09 10/9/01 One Time 24,000 5.58
11/8/99 11/8/04 11/8/00 One Time 45,000 5.58
2/16/00 2/16/10 2/19/02 One Time 10,000 6.47
2/16/00 2/16/10 2/18/03 One Time 10,000 6.69
-------- ----
$129,000 5.55
======== ====
</TABLE>
Of the $369,068 maturing between April 1, 2000 and March 31, 2001, $47,000
have an adjustable rate that reprice monthly based on the one month London
Inter-Bank Offer Rate ("LIBOR"). Of the $47,909 maturing between April 1, 2001
and March 31, 2002, $25,000 have an adjustable rate that reprice monthly based
on the one month LIBOR.
In accordance with the FHLB collateral requirements, a portion of the Bank's
first mortgage loans on residential property and all otherwise unencumbered
deposits and securities issued, insured or guaranteed by the United States
government or an agency thereof, are pledged as collateral to secure such
advances.
F-22
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Bank has a $25 million secured line of credit available and additional
borrowing capacity of $161.3 million with the FHLB at March 31, 2000.
The Bank also had $171.7 million of other borrowings primarily consisting of
reverse repurchase agreements with securities dealers that were collateralized
by mortgage-backed securities. The following table shows information
pertaining to these agreements for the years ended March 31:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Reverse repurchase agreements............................ $171,467 $55,092
Book value of pledged collateral......................... 186,802 59,074
Fair value of pledged collateral......................... 185,254 59,226
Maximum amount outstanding at any month end.............. 191,538 73,065
Average amount outstanding during the year............... 105,559 49,861
</TABLE>
The weighted average rate of the agreements at March 31, 2000 was 5.88% and
the average cost for fiscal year 2000 was 5.51%. Of the $171.5 million of
repurchase agreements, $25.0 million have an adjustable rate that reprice
monthly based on the one month LIBOR. The collateral for the agreements is
under the control of the Bank. The following table shows information
pertaining to the maturity of these agreements for the years ended March 31:
<TABLE>
<CAPTION>
Year ending March 31, 2000 1999
--------------------- -------- ------
<S> <C> <C>
2000....................................................... $ -- 38,092
2001....................................................... 171,467 17,000
-------- ------
$171,467 55,092
======== ======
</TABLE>
(11) Litigation
Various legal proceedings are pending against the Company which have arisen
out to the normal course of business. In the opinion of management, the
ultimate disposition of these matters is not expected to have a material
adverse effect on the consolidated financial position, the annual results of
operations, or liquidity of the Company.
F-23
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Financial Instruments with Off-balance Sheet Risk (in thousands)
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to manage interest-rate risk exposure. These financial instruments primarily
include commitments to originate and sell loans, unadvanced lines of credit,
and interest rate swap agreements. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheet. The contract amounts of those
instruments reflect the extent of the Company's involvement in these
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and unadvanced
lines of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
2000 1999
------- ------
<S> <C> <C>
Financial instruments whose contractual amount represents
credit risk:
Commitments to originate loans to be sold................. $ 5,462 39,260
Commitments to originate loans to be held in portfolio.... 52,805 10,132
Unadvanced home equity lines of credit.................... 40,794 36,460
Unadvanced commercial lines of credit..................... 19,635 16,082
Unadvanced residential construction loans................. 11,983 7,903
Financial instruments whose contractual amount exceeds the
amount of credit risk:
Commitments to sell residential mortgage loans............ 7,264 70,969
Financial instruments whose notional amount exceeds the
amount of credit risk:
Interest rate swap agreements............................. 50,000 50,000
</TABLE>
At March 31, 2000 and 1999, commitments to originate loans to be sold with
maturities ranging from 15 years to 30 years had interest rates ranging from
7.38% to 8.78% and 5.88% to 7.88%, respectively. Commitments to originate
loans, unadvanced commercial lines of credit, unadvanced home equity lines of
credit and unadvanced residential construction loans are agreements to lend to
a customer provided there is no violation of any condition established in the
contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the borrower.
The Company also enters into contracts to sell mortgage loans in the
secondary market. Risks arise from the possible inability of the Company to
originate loans to fulfill these contracts, in which case the Company would
normally purchase loans or securities in the open market to deliver against
these contracts. All loans are sold without recourse.
In addition, the Company uses interest rate swap agreements as part of its
interest-rate risk management strategy. Swaps are agreements in which the
Company agrees with another party to exchange interest payments (e.g. fixed-
rate for floating-rate payments) computed on a notional amount. The credit
risk associated with swap agreements is the risk of default by the
counterparty. To minimize this risk, the Company enters into swap agreements
only with highly rated counterparties that management believes to be
creditworthy. The notional amounts of these agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
potential loss exposure.
F-24
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Income Taxes (Dollars in thousands)
Income tax expense for the years ended March 31 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------ ----- -----
<S> <C> <C> <C>
Current income tax expense:
Federal income tax................................... $2,642 3,107 3,359
State income tax..................................... 178 96 1,663
------ ----- -----
2,820 3,203 5,022
------ ----- -----
Deferred income tax (benefit) expense:
Federal income tax................................... 841 531 317
State income tax..................................... 28 84 (53)
------ ----- -----
869 615 264
------ ----- -----
Income tax expense..................................... $3,689 3,818 5,286
====== ===== =====
</TABLE>
The reasons for the differences between the effective tax rates and the
statutory federal income tax rate for the years ended March 31 were as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate........................ 34.0% 34.0% 34.0%
Items affecting federal income tax rate:
State tax, net of federal benefit...................... 1.1 1.1 8.8
Appreciation of stock contributed to ESOP.............. 0.3 1.6 1.9
Earnings on Bank-Owned Life Insurance.................. (4.4) (1.7) --
Other, net............................................. 0.1 (1.6) (1.0)
---- ---- ----
Effective income tax rate............................ 31.1% 33.4% 43.7%
==== ==== ====
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31
are presented below:
<TABLE>
<CAPTION>
2000 1999
------ -----
<S> <C> <C>
Deferred tax assets:
Accrued interest income..................................... $ 40 44
Deferred loan fees, net..................................... 158 73
Accrued stock awards........................................ 1,080 1,107
Allowance for loan losses................................... 4,803 4,589
Contribution to the Foundation carryforward................. 377 1,335
Unrealized loss on investments available for sale........... 2,629 --
Other....................................................... 12 19
------ -----
Gross deferred tax asset.................................. 9,099 7,167
------ -----
Deferred tax liabilities:
Depreciation................................................ $ 594 578
Mortgage servicing rights................................... 2,676 2,676
Other....................................................... 207 51
Unrealized gain on investments available for sale........... -- 98
------ -----
Gross deferred tax liability.............................. 3,477 3,403
------ -----
Deferred income tax assets, net........................... $5,622 3,764
====== =====
</TABLE>
F-25
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The net deferred federal income tax asset of $4,709 at March 31, 2000 is
supported by the potential recovery of taxes previously paid by the Company in
the carryback period. Since there is no carryback provision for state
purposes, management believes the existing net deductible temporary
differences which give rise to the net deferred state income tax asset of $913
will reverse during periods in which the Company generates net taxable income.
As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the base
year reserve of approximately $7,398 remains subject to recapture in the event
that the Company pays dividends in excess of its earnings and profits or
redeems its stock.
(14) Pension Plan and Other Benefits (Dollars in Thousands, Except Per Share
Data)
Employee Stock Ownership Plan
Effective January 15, 1997 the Company adopted an Employee Stock Ownership
Plan ("ESOP"). The ESOP is designed to provide retirement benefits for
eligible employees of the Bank. Because the ESOP invests primarily in the
stock of the Company, it will also give eligible employees an opportunity to
acquire an ownership interest in the Company. Employees are eligible to
participate in the ESOP after reaching age twenty-one, completing one year of
service and working at least one thousand hours of consecutive service during
the previous year. Contributions are allocated to eligible participants on the
basis of compensation.
During January, 1997, the Company issued a total of 697,010 shares to the
ESOP at a total purchase price of $6,970. The purchase was made from the
proceeds of a $6,970 loan from FAB FUNDING CORPORATION, a wholly-owned
subsidiary of the Company, bearing interest at the prime rate. The loan will
be repaid over a period of approximately nine years, principally with funds
from the Company's future contributions to ESOP, subject to IRS limitations.
The Company recognized a charge to compensation and employee benefits expense
of $971,000, $1,315, and $1,457 during fiscal years 2000, 1999, and 1998,
respectively.
Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal and interest on the loan is
paid. Employees vest in their ESOP account at a rate of 20% annually
commencing after the completion of one year of credited service or immediately
if service was terminated due to death, retirement, disability, or change in
control. Dividends on both released and unreleased shares are credited to the
participants' ESOP accounts.
At March 31, 2000, shares held in suspense to be released annually as the
loan is paid down amounted to 387,229. The fair value of unallocated ESOP
shares was $4,163 at March 31, 2000. Dividends on allocated ESOP shares are
charged to retained earnings, dividends on unallocated ESOP shares are charged
to compensation and employee benefits expense and ESOP shares committed-to-be
released are considered outstanding in determining earnings per share.
1997 Stock-Based Incentive Plan
On August 5, 1997, the Company's stockholders approved the 1997 Stock-Based
Incentive Plan ("SIP"), which was subsequently amended and restated and re-
approved by the stockholders in 1998. The objective of the SIP is to enable
the Company to provide officers, key employees and directors with a
proprietary interest in the Company as an incentive to encourage such persons
to remain with the Company. The SIP acquired 348,286 shares in the open market
at an average price of $20.78 per share. This acquisition represents deferred
compensation which is initially recorded as a reduction in stockholders'
equity and charged to compensation expense over the vesting period of the
award.
F-26
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Awards are granted in the form of common stock held by the SIP and vest in
five annual installments commencing one year from the date of the award.
Recipients are entitled to all voting and other stockholder rights. As of
March 31, 2000, 1,346 shares remain unallocated under the SIP. A summary of
award activity follows:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Balance at March 31, 1997........................................ --
Granted.......................................................... 330,007
Forfeited........................................................ --
-------
Balance at March 31, 1998........................................ 330,007
Granted.......................................................... 15,190
Distributed...................................................... (65,808)
Forfeited........................................................ (966)
-------
Balance at March 31, 1999........................................ 278,423
Granted.......................................................... 3,000
Distributed...................................................... (68,846)
Forfeited........................................................ (291)
-------
Balance at March 31, 2000........................................ 212,286
=======
</TABLE>
Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service period for
the portion of each award that vests equally over a five-year period. The
Company recognized $1,253, $2,065, and $1,859 in compensation and benefits
expense for these awards during fiscal years 2000, 1999, and 1998,
respectively.
Stock Option Plans
The Company adopted a Stock Option Plan in 1997 as part of the SIP (the
"1997 Plan") for officers, key employees and directors. The 1997 Plan was
subsequently amended and restated in 1998. Pursuant to the terms of the 1997
Plan, the number of common shares reserved for issuance is 870,715, of which
none remain unawarded. All options have been issued at not less than fair
market value at the date of the grant and expire in 10 years from the date of
the grant. All stock options granted vest over a five year period from the
date of grant.
In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan").
Pursuant to the terms of the 1998 Plan, the number of common shares reserved
for issuance is 413,590, of which 407,922 remain unawarded. All options have
been issued at not less than fair market value at the date of the grant and
expire in 10 years from the date of the grant. All stock options granted vest
over a five year period from the date of grant.
F-27
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of option activity follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance at March 31, 1997....................... -- $ --
Granted......................................... 783,654 18.50
Forfeited....................................... -- --
------- ------
Balance at March 31, 1998....................... 783,654 $18.50
Granted......................................... 75,630 19.25
Forfeited....................................... (1,934) 18.50
------- ------
Balance at March 31, 1999....................... 857,350 $18.57
Granted......................................... 20,000 19.25
Expired......................................... (388) 18.50
Forfeited....................................... (579) 18.50
------- ------
Balance at March 31, 2000....................... 876,383 $18.58
======= ======
</TABLE>
A summary of options outstanding and exercisable by price range as of March
31 follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------
Outstanding Weighted Average Exercisable
As of Remaining Weighted Average As of Weighted Average
March 31, 2000 Contractual Life Exercise Price March 31, 2000 Exercise Price
-------------- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
780,753 7.3 years $18.50 309,787 $18.50
55,630 8.3 years 19.25 11,126 19.25
20,000 8.6 years 19.25 4,000 19.25
10,000 9.3 years 19.25 -- 19.25
10,000 9.9 years 19.25 -- --
------- --------- ------ ------- ------
876,771 7.5 years $18.58 324,913 $18.53
======= ========= ====== ======= ======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined compensation expense based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Net income as reported............................... $8,186 $7,621 $6,819
Pro forma net income................................. 8,046 7,375 5,982
Basic earning per share as reported.................. 1.31 1.09 0.84
Diluted earnings per share as reported............... 1.31 1.09 0.84
Pro forma basic earnings per share................... 1.29 1.06 0.74
Pro forma diluted earnings per share................. 1.29 1.06 0.74
</TABLE>
F-28
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The per share weighted average fair value of stock options granted during
fiscal years 2000, 1999, and 1998 was $1.55, $2.80, and $8.09, respectively.
This was determined by using the binomial option pricing model for fiscal
years 2000 and 1999, and the Black-Scholes model for fiscal year 1998. All
were adjusted for the non-exercisable vesting window. The following
assumptions were inputs to the model:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Expected dividend yield............................... 1.95% 1.25% 0.00%
Risk-free interest rate............................... 6.51% 5.46% 5.64%
Expected volatility................................... 23.95% 30.72% 20.56%
Expected life in years................................ 7.5 8.5 7.4
</TABLE>
Pension Plan
All eligible officers and employees of the Company, who have reached the age
of twenty-one and completed one year of service, are included in a
noncontributory, defined benefit pension plan (the "Pension Plan") provided by
the Company. The Pension Plan is administered by Pentegra (the "Fund"). The
Fund does not segregate the assets or liabilities of all participating
employers and, accordingly, disclosure of accumulated vested and nonvested
benefits is not possible. Contributions are based on each individual
employer's experience. According to the Fund's administrators, as of June 30,
1999, the date of the latest actuarial valuation, the market value of the
Fund's net assets exceeded the actuarial present value of vested and nonvested
benefits in the aggregate.
The Company's contribution to the pension plan was $104, $7 and $79 for the
years ended March 31, 2000, 1999 and 1998.
Postretirement Benefits
On April 1, 1995, the Company adopted SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other than Pensions. Under SFAS No. 106, the
Company changed its method of accounting for postretirement benefits other
than pensions from the pay-as-you-go method to the method of accruing these
costs over employees' service periods. The effect of adopting SFAS No. 106 can
be charged to expense immediately or spread over no more than the lesser of
twenty years or the average life expectancy of the participants. The Company
currently provides postretirement benefits for a limited number of retirees.
The Company is amortizing the cumulative effect of this change of $71 over the
average life expectancy of the participants, which is 10 years.
Supplemental Retirement Plan
In 1986, the Internal Revenue Service issued regulations that limit the
benefits of certain individuals under qualified retirement plans. During 1993,
the Company adopted a supplemental retirement plan which provides for certain
Company executives to receive benefits upon retirement subject to certain
limitations as set forth in the plan. The Company's expense under this Plan
was $216, $204 and $212 for the years ended March 31, 2000, 1999, and 1998,
respectively. At March 31, 2000, the Company holds restricted assets in an
irrevocable grantor's trust with a cost basis of $2,119 and a market value of
$2,575, of which $900 are common stock of the Company and are classified as
treasury stock, and the remaining $1,675 are included in other assets and
offset by an accrued liability of $2,295. These treasury shares are considered
retired in the computation of earnings per share.
Employee Tax Deferred Thrift Plan
The Company has an employee tax deferred thrift plan (the "401k Plan") under
which employee contributions to the 401k Plan are matched within certain
limitations by the Company. Full-time employees are
F-29
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
eligible to participate in the 401k Plan. The amounts matched by the Company
are included in compensation and benefits expense. The amounts matched for the
years ended March 31, 2000, 1999 and 1998 were $192, $126 and $157,
respectively.
Executive Officer Employment Agreements
The Bank and the Company have entered into Employment Agreements with its
President and Chief Executive Officer, Executive Vice President and its three
Senior Vice Presidents. The agreements generally provide for the continued
payment of specified compensation and benefits for five years for the
President and Chief Executive and Executive Vice President, and for two years
for the Senior Vice Presidents. They also provide payments for the remaining
term of the agreement after the officers are terminated, unless the
termination is for "cause" as defined in the Employment Agreement. In the
event of a change in control, as defined in the agreements, payments will also
be provided to the officer upon voluntary or involuntary termination. In
addition, the Bank entered into change in control agreements with certain
other executives which provide for the payment, under certain circumstances,
to the executive upon the executives termination after a change in control, as
defined in their change in control agreements.
Employee Severance Compensation Plan
The Bank established the First Federal Savings Bank of America Employee
Severance Compensation Plan (the "Plan") on January 15, 1997. The Plan
provides eligible employees with severance pay benefits in the event of a
change in control of the Bank or Company. Generally, employees are eligible to
participate in the Plan if they have completed at least one year of service
with the Bank and are not eligible to receive benefits under the executive
officer employment agreements. The Plan provides for the payment, under
certain circumstances, of lump-sum amounts upon termination following a change
in control, as defined in the Plan.
(15) Fair Values of Financial Instruments (Dollars in thousands)
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Other significant assets and liabilities
that are not considered financial assets or liabilities include real estate
acquired by foreclosure, the deferred income tax asset, office properties and
equipment, and core deposit and other intangibles. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no actual market exists for some of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, cash flows, current economic
conditions, risk characteristics and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions and changes in the loan, debt and interest rate markets could
significantly affect the estimates. Further, the income tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on the fair value estimates and have not been considered.
The following methods and assumptions were used by the Company in estimating
fair values of its financial instruments:
F-30
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash on Hand and Due from Banks
The fair values for cash on hand and due from banks approximate the carrying
amount as reported in the balance sheet.
Short-term Investments
The fair values for short-term investments approximate the carrying amount
as reported because of the short-term nature of these financial instruments.
Investment and Mortgage-backed Securities
Fair values for investment and mortgage-backed securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Mortgage Loans Held for Sale
Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to sell loans
have been considered in the value of mortgage loans held for sale.
Loans
The fair values of loans are estimated using discounted cash flow analyses
and interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.
Accrued Interest Receivable
The fair value of accrued interest receivable approximates its carrying
amount as reported in the balance sheet because of the short-term nature of
these financial instruments.
Stock in FHLB of Boston
The fair value for FHLB stock approximates the carrying amount as reported
in the balance sheet. If redeemed, the Company expects to receive an amount
equal to the par value of the stock.
Deposits and Advance Payments by Borrowers for Taxes and Insurance
The fair values of demand deposits (e.g., NOW, business checking, savings
accounts, certain types of money market accounts and advance payments by
borrowers for taxes and insurance) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow technique that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
FHLB Advances
The fair value of FHLB overnight advances approximates their carrying value
due to their short term nature. All other advances are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on advances to a schedule of aggregated expected monthly maturities on
FHLB advances.
F-31
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Borrowings
Other borrowings consist primarily of reverse repurchase agreements with
securities dealers. The fair value of other borrowings are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on reverse repurchase agreements to a schedule of aggregated expected
monthly maturities on other borrowings.
Accrued Interest Payable
The fair value of accrued interest payable approximates its carrying amount
as reported in the balance sheet because of the short-term nature of these
financial instruments.
Interest Rate Swap Agreements
The fair value of the off-balance sheet interest rate swap agreements is the
net of the present values of the pay fixed / receive floating payments,
discounted at current swap rates for the appropriate remaining term of the
existing swaps.
Other Off-balance Sheet Instruments
Fair values for the Company's off-balance-sheet instruments are based on
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit standing.
The difference between the fair value of commitments to originate loans and
their book value is considered to be immaterial based on a comparison to
current offering rates for similar loan products. The contractual value of
commitments to sell loans was considered in determining the fair value of
loans held for sale. The Company's commitments for unused lines and
outstanding standby letters of credit and unadvanced portions of loans are at
floating rates, and therefore, there is no fair value adjustment.
The carrying amounts and fair values of the Company's financial instruments
at March 31 are as follows:
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Financial assets:
Cash on hand and due from banks........... $ 20,720 20,720 $ 24,598 24,598
Short-term investments.................... 250 250 14,422 14,422
Mortgage loans held for sale.............. 3,417 3,417 52,334 52,334
Investment in trading securities.......... 587 587 94 94
Investment securities available for sale.. 5,643 5,643 5,575 5,575
Mortgage-backed securities available for
sale..................................... 543,627 543,627 408,451 408,451
Investment securities held to maturity.... -- -- 9,998 10,030
Mortgage-backed securities held to
maturity................................. 2,819 2,853 5,608 5,733
Stock in FHLB of Boston................... 30,928 30,928 28,682 28,682
Loans receivable, net..................... 888,760 870,084 766,687 770,281
Accrued interest receivable............... 7,018 7,018 6,369 6,369
Financial liabilities:
Deposits.................................. $664,682 664,240 $674,870 676,276
FHLB advances and other borrowings........ 779,662 773,869 585,981 584,544
Advance payments by borrowers for taxes
and insurance............................ 5,984 5,984 5,660 5,660
Accrued interest payable.................. 4,620 4,620 3,058 3,058
Off-balance sheet:
Interest rate swap agreements............. -- 340 -- (1,064)
</TABLE>
F-32
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(16) Parent Company Only Financial Statements (Dollars in Thousands)
The following are the condensed financial statements for FIRSTFED AMERICA
BANCORP, INC. (the "Parent Company") only at March 31:
Balance Sheet
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Assets
Cash and interest bearing deposit in subsidiary bank....... $ 1,146 1,771
-------- -------
Total cash and cash equivalents........................ 1,146 1,771
-------- -------
Investment in trading securities........................... 587 94
Investment securities available for sale (amortized cost of
$6,256 and $5,811)........................................ 3,908 4,405
Investment in subsidiaries, at equity...................... 103,655 105,167
Deferred tax asset......................................... 2,342 2,138
-------- -------
Total assets........................................... $111,638 113,575
======== =======
Liabilities and Stockholders' Equity
Accrued expenses and other liabilities..................... $ 9,933 10,614
-------- -------
Total liabilities...................................... 9,933 10,614
-------- -------
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued................................... -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized; 8,707,152 issued and outstanding.............. 87 87
Additional paid-in capital................................. 85,449 85,407
Retained earnings.......................................... 63,270 56,892
Accumulated other comprehensive (loss) income.............. (4,470) (150)
Unearned 1997 stock-based incentive plan................... (4,438) (5,869)
Unallocated ESOP shares.................................... (3,872) (4,647)
Treasury stock............................................. (34,321) (28,759)
-------- -------
Total stockholders' equity............................. 101,705 102,961
-------- -------
Total liabilities and stockholders' equity............. $111,638 113,575
======== =======
</TABLE>
F-33
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Operations
<TABLE>
<CAPTION>
2000 1999 1998
------ ------- -----
<S> <C> <C> <C> <C>
Dividends received from subsidiaries................ $5,550 21,000 --
Interest income..................................... 119 357 548
------ ------- ----- ---
Total dividend and interest income.............. 5,669 21,357 548
Gain on sale of securities.......................... -- 8 164
Other non-interest income (expense)................. 293 (5) --
------ ------- -----
Total non-interest income....................... 293 3 164
Non-interest expense................................ 355 510 578
------ ------- -----
Total non-interest expense...................... 355 510 578
------ ------- -----
Income before income taxes...................... 5,607 20,850 134
Income tax expense (benefit)........................ 30 (70) 139
------ ------- -----
Income (loss) before equity in net income of
subsidiaries................................... 5,577 20,920 (6)
Equity in undistributed net income (loss) of
subsidiaries....................................... 2,609 (13,299) 6,825
------ ------- -----
Net income.......................................... $8,186 7,621 6,819
====== ======= =====
</TABLE>
F-34
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Cash Flows
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income........................................ $ 8,186 7,621 6,819
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of premiums on investments and
mortgage-backed securities available for sale... -- 19 3
(Gain) on sales of investment securities
available for sale.............................. -- (9) (163)
Equity in undistributed earnings of
subsidiaries.................................... (2,609) 13,299 (6,825)
Appreciation in fair value of ESOP shares........ 196 541 682
Unrealized (gain) loss on trading securities..... (293) 5 --
Decrease (increase) in accrued interest
receivable...................................... -- 33 (33)
Decrease (increase) decrease in prepaid expenses
and other assets................................ -- 1,128 1,718
Increase (decrease) in accrued expenses and other
liabilities..................................... (681) (1,065) 5,421
------- ------- -------
Net cash provided (used) by operating
activities.................................... 4,799 21,572 7,622
------- ------- -------
Cash flow from investing activities:
Purchase of trading securities.................... $ (200) (100) --
Purchase of investment securities available for
sale............................................. -- (3,845) (6,161)
Purchase of mortgage backed securities available
for sale......................................... -- -- (5,013)
Principal paydowns on mortgage-backed securities
available for sale............................... -- 583 530
Maturities of investment securities available for
sale............................................. -- 4,000 --
Proceeds from sales of mortgage-backed securities
available for sale............................... -- 3,888 --
Proceeds from sales of investment securities
available for sale............................... -- -- 511
Change in investment in subsidiaries.............. (196) 199 (3,973)
------- ------- -------
Net cash provided (used) by investing
activities.................................... (396) 4,725 (14,106)
------- ------- -------
Cash flow from financing activities:
Cash dividends paid............................... $(1,808) (1,151) --
Payments to acquire treasury shares............... (5,271) (28,759) --
Payments to acquire stock-based incentive plan
shares........................................... -- (2,502) (4,734)
Reduction in unearned 1997 stock-based incentive
plan shares...................................... 1,277 1,217 --
Reduction in allocated ESOP shares................ 774 773 775
------- ------- -------
Net cash used by financing activities.......... (5,028) (30,422) (3,959)
------- ------- -------
Net decrease in cash and cash equivalents...... (625) (4,125) (10,443)
Cash and cash equivalents at beginning of year...... 1,771 5,896 16,339
------- ------- -------
Cash and cash equivalents at end of year............ $ 1,146 1,771 5,896
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Income taxes..................................... $ -- 187 1
======= ======= =======
</TABLE>
F-35
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(17) Quarterly Results of Operations (unaudited)
Summaries of consolidated operating results on a quarterly basis for the year
ended March 31 follows:
<TABLE>
<CAPTION>
2000 Quarters 1999 Quarters
---------------------------- ---------------------------
Fourth Third Second First Fourth Third Second First
------- ------ ------ ------ ------ ------ ------ ------
(Dollars In Thousands, (Dollars In Thousands,
Except Per Share Amounts) Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend
income................. $25,439 24,116 22,690 21,576 22,119 21,765 21,671 21,222
Interest expense........ 17,023 15,983 14,737 14,028 14,395 14,235 14,403 13,410
------- ------ ------ ------ ------ ------ ------ ------
Net interest income..... 8,416 8,133 7,953 7,548 7,724 7,530 7,268 7,812
Provision for loan
losses................. 300 300 300 300 300 300 300 300
Non-interest income..... 1,986 1,627 1,495 1,426 2,419 2,162 1,317 1,740
Non-interest expense.... 6,675 6,280 6,303 6,250 6,766 6,180 5,849 6,538
------- ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 3,427 3,180 2,845 2,424 3,077 3,212 2,436 2,714
Income tax expense...... 1,066 979 922 722 1,001 1,024 773 1,020
------- ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 2,361 2,201 1,923 1,702 2,076 2,188 1,663 1,694
======= ====== ====== ====== ====== ====== ====== ======
Basic earnings per
share.................. $ 0.39 0.35 0.30 0.27 0.32 0.32 0.23 0.22
======= ====== ====== ====== ====== ====== ====== ======
Diluted earnings per
share.................. $ 0.39 0.35 0.30 0.27 0.32 0.32 0.23 0.22
======= ====== ====== ====== ====== ====== ====== ======
</TABLE>
F-36
<PAGE>
[This page left blank intentionally.]
F-37
<PAGE>
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of stockholders will be held on Thursday, July 27, 2000
at 2:00 p.m. Eastern Time. The meeting will take place at The Westin Hotel,
One West Exchange Street, Providence, RI.
Stock Listing
FIRSTFED AMERICA BANCORP, INC. became a public company on January 15, 1997.
FIRSTFED AMERICA BANCORP, INC. Common Stock is traded on the American Stock
Exchange with the symbol "FAB".
Common Stock Information
As of March 31, 2000, the Company had 6,663,228 shares outstanding and
approximately 1,350 stockholders of record, not including persons or entities
holding stock in nominee or street name through brokers or banks.
Stock Price
<TABLE>
<CAPTION>
FY '00
-------------------------------
By Quarter 1 2 3 4
---------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
High.......................................... $14.125 $14.750 $13.500 $11.625
Low........................................... $12.000 $12.563 $11.625 $10.375
</TABLE>
10-K Report
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge upon written request to
FIRSTFED AMERICA BANCORP, INC., Investor Relations, ONE FIRSTFED PARK,
Swansea, MA 02777.
Transfer Agent Independent Auditor
Registrar and Transfer Company KPMG LLP
10 Commerce Drive 99 High Street
Cranford, NJ 07016 Boston, MA 02110
Stockholder Inquiries: 908-272-8511
Regulatory Counsel Investor Relations
Muldoon, Murphy & Faucette Philip G. Campbell
5101 Wisconsin Avenue N.W. Vice President, Director of
Washington, DC 20016 Marketing,
Corporate Planning and Investor
Relations
FIRSTFED AMERICA BANCORP, INC.
ONE FIRSTFED PARK
Swansea, MA 02777
Tel: 508-235-1361
F-38
