UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO
COMMISSION FILE NUMBER 1-12305
FIRSTFED AMERICA BANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-3331237
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
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(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 679-8181
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of February 1, 2002, there were 6,220,249 shares of the Registrant's
Common Stock outstanding.
FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2001 (unaudited) and March 31, 2001 2
Consolidated Statements of Operations for the three months and nine months ended
December 31, 2001 (unaudited) and 2000 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the nine months ended
December 31, 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended December 31, 2001
(unaudited) and 2000 (unaudited) 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Default Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
1
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
ASSETS 2001 2001
---- ----
(UNAUDITED)
Cash on hand and due from banks $ 26,607 $ 23,013
Short-term investments 36,780 200
------------ ------------
Total cash and cash equivalents 63,387 23,213
Mortgage loans held for sale 67,280 39,103
Investment in trading securities, at fair value 528 815
Investment securities available for sale, at fair value
(amortized cost of $21,330 and $6,405) 23,939 7,837
Mortgage-backed securities available for sale, at fair value
(amortized cost of $527,463 and $498,344) 530,080 501,230
Mortgage-backed securities held to maturity
(fair value of $1,254 and $2,154) 1,236 2,138
Stock in Federal Home Loan Bank of Boston, at cost 40,369 40,369
Loans receivable, net
(net of allowance for loan losses of $14,049 and $13,233) 889,604 977,174
Accrued interest receivable 7,128 7,928
Mortgage servicing rights 5,982 4,881
Office properties and equipment, net 22,746 24,038
Real estate owned -- 175
Bank-Owned Life Insurance 35,181 33,764
Goodwill 1,087 1,145
Prepaid expenses and other assets 10,210 7,255
------------ ------------
Total assets $ 1,698,757 $ 1,671,065
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 765,287 $ 707,416
FHLB advances and other borrowings 766,139 814,764
Advance payments by borrowers for taxes and insurance 3,571 5,868
Accrued interest payable 3,563 5,997
Other liabilities 38,898 25,462
------------ ------------
Total liabilities 1,577,458 1,559,507
------------ ------------
Stockholders' equity:
Common stock 87 87
Additional paid-in capital 85,859 85,585
Retained earnings 77,549 70,048
Accumulated other comprehensive income 3,133 2,551
Unallocated ESOP shares (3,098) (3,098)
Unearned stock incentive plan (1,559) (2,998)
Treasury stock (40,672) (40,617)
------------ ------------
Total stockholders' equity 121,299 111,558
------------ ------------
Total liabilities and stockholders' equity $ 1,698,757 $ 1,671,065
============ ============
See accompanying notes to consolidated financial statements.
2
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(UNAUDITED)
Interest and dividend income:
Loans $ 16,996 $ 19,857 $ 53,924 $ 57,416
Investment securities 305 120 993 351
Mortgage-backed securities 7,659 8,347 24,371 25,435
Federal Home Loan Bank stock 458 720 1,657 2,018
----------- ----------- ----------- -----------
Total interest and dividend income 25,418 29,044 80,945 85,220
----------- ----------- ----------- -----------
Interest expense:
Deposits 5,935 6,755 19,280 19,460
Borrowed funds 9,959 13,915 33,790 39,869
----------- ----------- ----------- -----------
Total interest expense 15,894 20,670 53,070 59,329
----------- ----------- ----------- -----------
Net interest income before loan loss provision 9,524 8,374 27,875 25,891
Provision for loan losses 300 300 900 900
----------- ----------- ----------- -----------
Net interest income after loan loss provision 9,224 8,074 26,975 24,991
Non-interest income:
Service charges on deposit accounts 588 465 1,521 1,207
Loan servicing income 348 341 746 1,093
Insurance commission income 229 205 742 734
Trust fee income 354 303 1,044 701
Earnings on Bank-Owned Life Insurance 513 414 1,418 1,224
Gain on sale of mortgage loans, net 1,888 195 3,349 348
Gain on sale of securities available for sale -- -- 1,003 --
Other income 714 241 1,237 1,235
----------- ----------- ----------- -----------
Total non-interest income 4,634 2,164 11,060 6,542
----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 4,441 4,352 13,566 13,296
Office occupancy and equipment 1,101 1,103 3,264 3,266
Data processing 475 436 1,474 1,267
Advertising and business promotion 196 280 650 885
Federal deposit insurance premiums 33 35 100 104
Other expense 1,212 936 3,039 2,969
----------- ----------- ----------- -----------
Total non-interest expense 7,458 7,142 22,093 21,787
----------- ----------- ----------- -----------
Income before income tax expense 6,400 3,096 15,942 9,746
Income tax expense 2,402 966 5,615 3,047
----------- ----------- ----------- -----------
Net income before cumulative effect of accounting change 3,998 2,130 10,327 6,699
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of $237 tax benefit -- -- (461) --
----------- ----------- ----------- -----------
Net income $ 3,998 $ 2,130 $ 9,866 $ 6,699
=========== =========== =========== ===========
Basic earnings per share before cumulative effect of accounting change $ 0.69 $ 0.37 $ 1.79 $ 1.14
Cumulative effect of accounting change -- -- (0.08) --
----------- ----------- ----------- -----------
Basic earnings per share $ 0.69 $ 0.37 $ 1.71 $ 1.14
=========== =========== =========== ===========
Diluted earnings per share before cumulative effect of accounting change $ 0.68 $ 0.37 $ 1.77 $ 1.14
Cumulative effect of accounting change -- -- (0.08) --
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.68 $ 0.37 $ 1.69 $ 1.14
=========== =========== =========== ===========
Weighted average shares outstanding - basic 5,815,449 5,795,219 5,765,199 5,892,685
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 5,868,411 5,814,741 5,825,134 5,893,750
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
UNEARNED
ACCUMULATED 1997
OTHER STOCK-BASED
ADDITIONAL COMPREHENSIVE UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED INCOME ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS (LOSS) SHARES SHARES STOCK EQUITY
------------------------------------------------------------------------------------------------
Balance at March 31, 2001 $87 $85,585 $70,048 $2,551 $(3,098) $(2,998) $(40,617) $111,558
Earned SIP stock awards -- (155) -- -- -- 1,439 -- 1,284
Earned ESOP shares charged to
expense -- 430 -- -- -- -- -- 430
Stock options exercised -- (1) -- -- -- -- -- (1)
Cash dividends declared and paid
(1st quarter at $0.10 per share;
2nd and 3rd quarters at $0.14
per share) -- -- (2,365) -- -- -- -- (2,365)
Common stock acquired for certain
employee benefit plans
(3,331 shares at an average
price of $16.34 per share) -- -- -- -- -- -- (55) (55)
Comprehensive income:
Net income -- -- 9,866 -- -- -- -- 9,866
Other comprehensive income,
net of tax
Unrealized holding gains
on available for sale
securities -- -- -- 1,911 -- -- -- --
Reclassification adjustment
for losses (gains)
included in net income -- -- -- (1,003) -- -- -- --
-------------
Net unrealized gains -- -- -- 908 -- -- -- --
Tax effect -- -- -- (326) -- -- -- --
-------------
Net-of-tax effect -- -- -- 582 -- -- -- 582
-------------
Total comprehensive income -- -- -- -- -- -- -- 10,448
------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $87 $85,859 $77,549 $3,133 $(3,098) $(1,559) $(40,672) $121,299
================================================================================================
See accompanying notes to consolidated financial statements.
4
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED DECEMBER 31,
---------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $ 9,866 $ 6,699
Adjustments to reconcile net income to net cash used in operating activities:
Amortization (accretion) of:
Premium (discount) on investment and mortgage-backed securities 256 (385)
Deferred loan origination costs (1,052) (138)
Mortgage servicing rights 2,314 1,837
Goodwill 69 63
Provision for loan losses 900 900
Gains on sales of:
Mortgage loans (3,349) (348)
Investment securities available for sale (750) --
Mortgage-backed securities available for sale (253) --
Office properties and equipment (105) (2)
Real estate owned (27) (8)
Net proceeds from sales of mortgage loans 389,083 59,211
Origination of mortgage loans held for sale (418,209) (67,143)
Earnings on Bank-Owned Life Insurance (1,418) (1,224)
Unrealized (gain) loss on trading securities 460 (128)
Depreciation of office properties and equipment 1,201 2,038
Appreciation in fair value of ESOP shares 430 176
Earned SIP shares 1,284 1,280
Increase or decrease in:
Accrued interest receivable 800 (1,279)
Other assets (2,388) (661)
Accrued interest payable (2,434) 707
Other liabilities 13,436 (1,653)
----------- -----------
Net cash used in operating activities (9,886) (58)
----------- -----------
Cash flows from investing activities:
Purchase of investment securities available for sale (14,921) (142)
Purchase of trading securities (173) (100)
Purchase of mortgage-backed securities available for sale (224,094) --
Payments received on mortgage-backed securities available for sale 175,147 68,110
Proceeds from sale of investment securities available for sale 753 --
Proceeds from sale of mortgage-backed securities available for sale 19,820 --
Payments received on mortgage-backed securities held to maturity 900 196
Purchase of Federal Home Loan Bank stock -- (6,031)
Net decrease (increase) in loans 87,695 (114,829)
Purchase of office properties and equipment (903) (1,323)
Proceeds from sales of office properties and equipment 1,099 2
Proceeds from sales of real estate owned 209 121
----------- -----------
Net cash provided by (used in) investing activities 45,532 (53,996)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 57,871 4,241
Proceeds from FHLB advances and other borrowings 1,187,690 3,456,227
Repayments on FHLB advances and other borrowings (1,236,315) (3,391,996)
Net change in advance payments by borrowers for taxes and insurance (2,297) (1,725)
Cash dividends paid (2,365) (1,760)
Payments to acquire common stock for treasury stock and stock options exercised (56) (5,560)
----------- -----------
Net cash provided by financing activities 4,528 59,427
----------- -----------
Net increase in cash and cash equivalents 40,174 5,373
Cash and cash equivalents at beginning of period 23,213 20,970
----------- -----------
Cash and cash equivalents at end of period $ 63,387 $ 26,343
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 55,504 $ 58,622
=========== ===========
Income taxes $ 6,031 $ 4,175
=========== ===========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans $ 27 $ 304
=========== ===========
See accompanying notes to consolidated financial statements.
5
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of FIRSTFED AMERICA BANCORP, INC. (the "Company"), its wholly-owned
subsidiaries, First Federal Savings Bank of America (the "Bank"), FAB FUNDING
CORPORATION ("FAB FUNDING") and FIRSTFED INSURANCE AGENCY, LLC (the "Agency"),
and its 65% interest in FIRSTFED TRUST COMPANY, N.A. (the "Trust Company"). The
remaining 35% interest of the Trust Company is held by M/D Trust, LLC, a
minority owner. The Bank includes its wholly-owned subsidiaries, FIRSTFED
MORTGAGE CORPORATION, FIRSTFED INVESTMENT CORPORATION, and CELMAC INVESTMENT
CORPORATION.
The interim consolidated financial statements reflect all normal and
recurring adjustments which are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. The results of operations for the three
months and nine months ended December 31, 2001 are not necessarily indicative of
the results of operations that may be expected for all of fiscal year 2002.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report to Stockholders on Form 10-K for the
fiscal year ended March 31, 2001.
(2) IMPACT OF RECENT ACCOUNTING STANDARDS
On April 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and recognized an after-tax loss from the cumulative effect of
adoption of $461,000, or $0.08 per share, representing the initial adjustment to
fair value of certain derivative instruments, including a pre-tax adjustment of
$743,000 related to interest rate swaps designed to reduce its exposure to
interest rate changes, partially offset by a pre-tax adjustment of $45,000
related to commitments to originate and sell mortgage loans for sale that hedge
its secondary market activities. Changes to the fair value of derivative
instruments are recognized in non-interest income each quarter, and additions to
pre-tax income of $958,000, or approximately $0.10 per share, and $891,000, or
approximately $0.10 per share, were recognized for the third quarter and first
nine months, respectively, of fiscal year 2002.
In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities - a Replacement of FASB Statement No. 125."
Certain disclosure provisions required by SFAS No. 140 were effective
immediately, with additional requirements related to SFAS No. 140 effective
beginning March 31, 2001. The adoption of SFAS No. 140 had no effect on the
Company's consolidated financial position or results of operations.
6
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets." SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142 goodwill will no longer be
amortized, and will instead be subject to assessment for impairment, and
intangible assets with finite useful lives will continue to be amortized over
their useful lives. The Company will adopt SFAS No. 142 on April 1, 2002. At
December 31, 2001, the Company had $1.1 million of goodwill on its balance sheet
with an annual amortization rate of approximately $92,000.
(3) PENDING ACQUISITION
On October 1, 2001, the Company and People's Bancshares, Inc.
("People's"), New Bedford, Massachusetts, jointly announced that they had signed
a definitive agreement pursuant to which the Company will acquire People's for
approximately $72 million in cash and stock. People's reported total assets of
$915.8 million, total deposits of $561.1 million and total stockholders' equity
of $39.1 million at December 31, 2001. On February 4, 2002, stockholders of both
companies voted to approve the merger agreement. Under the terms of the merger
agreement, People's stockholders could elect to receive either 1.2644 shares of
the Company's common stock (and cash in lieu of any fractional share) or $22.00
in cash for each share of People's common stock they own. The value of the
FIRSTFED common stock will be evaluated during a 20-day measurement period
shortly before the closing of the merger. If during this period the average
closing price of the FIRSTFED stock declines below $13.92 (causing the value of
1.2644 shares of FIRSTFED stock to be less than $17.60), and the market value of
FIRSTFED common stock underperforms the "SNL New England Thrift Index" by more
than 15%, People's has the right to terminate the merger. FIRSTFED would have
the right to cancel the termination by increasing the number of shares of
FIRSTFED stock it is to exchange to a specified level. If the average closing
price of FIRSTFED common stock during the measurement period increases to $20.88
or more, the value of the shares of FIRSTFED common stock to be exchanged for
each share of People's common stock will be limited to $26.40. The elections of
People's shareholders will be subject to the requirement that 55% of People's
shares be exchanged for cash and 45% be exchanged for the Company's common
stock. Upon consummation of the merger, former shareholders of People's will own
approximately 23% of the Company's outstanding shares. The transaction, which
would increase the Company's assets from $1.7 billion as of December 31, 2001 to
approximately $2.6 billion, is expected to be completed prior to March 31, 2002,
subject to certain conditions including approval of the regulators of both
companies. In accordance with SFAS No. 141 and SFAS No. 142, the Company will
use the purchase method of accounting for the merger, as well as the new
accounting standards for goodwill and other intangible assets.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
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. 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 and securities, 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,
investment and mortgage-backed securities 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 service charges on deposit accounts, loan
servicing income, revenue from the Trust Company and Agency operations, earnings
on Bank-Owned Life Insurance ("BOLI"), gains on sale of loans and investment
securities, and other income. The Company's non-interest expense consists of
compensation and employee benefits, office occupancy and equipment expense, data
processing expense, advertising and business promotion, federal deposit
insurance premiums, 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.
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information 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.
Subject to applicable laws and regulations, the Company does not undertake
- and specifically disclaims any obligation - to publicly release the result of
any revisions which may be made to any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
8
RESULTS OF OPERATIONS
OVERVIEW
Net income increased $1.9 million, or 87.7%, to $4.0 million for the third
quarter of fiscal year 2002 from $2.1 million for the third quarter of fiscal
year 2001. Diluted earnings per share ("EPS") increased 83.8% to $0.68 for the
third quarter of fiscal year 2002 from $0.37 per share for the third quarter of
fiscal year 2001. Income before income tax expense increased $3.3 million, or
106.7%, to $6.4 million, as a result of increases in net interest income of $1.1
million and non-interest income of $2.5 million, partially offset by an increase
in non-interest expense of $316,000.
Year to date net income before the cumulative effect of adoption of SFAS
No. 133 was $10.3 million for the first nine months of fiscal year 2002, an
increase of $3.6 million, or 54.2%, from net income of $6.7 million for the
first nine months of fiscal year 2001. After the cumulative effect of adoption
of SFAS No. 133, net income was $9.9 million for the first nine months of fiscal
year 2002, an increase of $3.2 million, or 47.3%, as compared to the first nine
months of fiscal year 2001. Diluted EPS before the cumulative effect of adoption
of SFAS No. 133 increased 55.3% to $1.77 for the first nine months of fiscal
year 2002 from $1.14 for the first nine months of fiscal year 2001. After the
cumulative effect of adoption of SFAS No. 133, diluted EPS was $1.69 for the
first nine months of fiscal year 2002, an increase of 48.2% as compared to the
first nine months of fiscal year 2001. Income before income tax expense
increased $6.2 million, or 63.6%, to $15.9 million, as a result of increases in
net interest income of $2.0 million and non-interest income of $4.5 million,
partially offset by an increase in non-interest expense of $306,000.
The growth in EPS for the third quarter and year to date periods of fiscal
year 2002, compared to the same periods of fiscal year 2001, was caused
primarily by the growth in net income. Gain on sale of mortgage loans
contributed $0.20 per share and $0.37 per share to EPS for the third quarter of
fiscal year 2002 and the first nine months of fiscal year 2002, respectively, as
compared to $0.02 per share and $0.04 per share for the third quarter of fiscal
year 2001 and the first nine months of fiscal year 2001, respectively.
Return on average stockholders' equity increased to 12.99% for the third
quarter of fiscal year 2002 and 10.95% for the first nine months of fiscal year
2002, compared to 8.04% and 8.56% for the respective periods of fiscal year
2001. Return on average assets increased to 0.93% for the third quarter of
fiscal year 2002 and 0.77% for the first nine months of fiscal year 2002,
compared to 0.51% and 0.54% for the respective periods of fiscal year 2001.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $1.1
million, or 13.7%, to $9.5 million for the third quarter of fiscal year 2002
from $8.4 million for the third quarter of fiscal year 2001. The net interest
rate spread and net interest margin were 2.03% and 2.36% for the third quarter
of fiscal year 2002, compared to 1.88% and 2.15%, respectively, for the third
quarter of fiscal year 2001.
Year to date net interest income before provision for loan losses
increased $2.0 million, or 7.7%, to $27.9 million for the first nine months of
fiscal year 2002 from $25.9 million for the first nine months of fiscal year
2001. The net interest rate spread and net interest margin were 1.96% and 2.30%
for the first nine months of fiscal year 2002, compared to 1.96% and 2.24%,
respectively, for the first nine months of fiscal year 2001.
The increases in net interest income and the average balances of
interest-earning assets and interest-bearing liabilities during the third
quarter and year to date periods of fiscal year 2002, compared to the same
periods of fiscal year 2001, were due to several key factors. Declining market
interest rates and related consumer preferences resulted in the Company's shift
to origination of fixed-rate mortgages that are generally sold in the secondary
9
market, from origination of adjustable-rate mortgages that are generally
retained for portfolio. In addition, prepayment speeds on mortgage loans
increased due primarily to refinancing activity. This economic environment,
combined with the Company's business development and cross-selling efforts,
contributed to growth in commercial and consumer loans and deposits. The decline
in FHLB advances and other borrowings reflected a greater reliance on deposits
for funding balance sheet growth, while borrowing costs also declined. Lastly,
the growth in investment and mortgage-backed securities resulted from
management's strategy to maintain the Company's leverage in fiscal year 2002.
The following tables set forth certain information relating to the Company
for the periods indicated. Net interest income is a function of both the
relative amounts of interest-earning assets and interest-bearing liabilities,
and the interest rates earned or paid on them. Income from BOLI is excluded from
interest income, and the BOLI cash value balances are excluded from
interest-earning assets. The average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods shown. Average
balances are derived from the best available daily or monthly data, which
management believes approximates the average balances computed on a daily basis.
The yields and the costs include fees, premiums and discounts which are
considered adjustments to yields.
FOR THE THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2001 2000
-------------------------------------- --------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for sale (1) $ 956,329 $ 16,996 7.11% $1,006,240 $ 19,857 7.89%
Investment securities (2) 70,564 763 4.29 46,747 840 7.13
Mortgage-backed securities (3) 577,329 7,659 5.31 492,806 8,347 6.78
-------------------------------------- --------------------------------------
Total interest-earning assets 1,604,222 25,418 6.34 1,545,793 29,044 7.52
------------------------ ------------------------
Noninterest-earning assets 100,441 99,146
---------- ----------
Total assets $1,704,663 $1,644,939
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $ 669,463 5,935 3.52 $ 609,129 6,755 4.40
FHLB advances and other borrowings 794,168 9,959 4.98 845,875 13,915 6.53
-------------------------------------- --------------------------------------
Total interest-bearing liabilities 1,463,631 15,894 4.31 1,455,004 20,670 5.64
------------------------ ------------------------
Noninterest-bearing liabilities (5) 118,954 84,846
---------- ----------
Total liabilities 1,582,585 1,539,850
Stockholders' equity 122,078 105,089
---------- ----------
Total liabilities and stockholders'
equity $1,704,663 $1,644,939
========== ==========
Net interest rate spread (6) $ 9,524 2.03% $ 8,374 1.88%
======================== ========================
Net interest margin (7) 2.36% 2.15%
========== ==========
Ratio of interest-earning assets to interest-
bearing liabilities 109.61% 106.24%
========== ==========
10
FOR THE NINE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2001 2000
-------------------------------------- --------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------------------- --------------------------------------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for sale (1) $ 973,917 $ 53,924 7.38% $ 976,591 $ 57,416 7.84%
Investment securities (2) 72,085 2,650 4.88 44,570 2,369 7.05
Mortgage-backed securities (3) 562,763 24,371 5.77 514,733 25,435 6.59
-------------------------------------- --------------------------------------
Total interest-earning assets 1,608,765 80,945 6.70 1,535,894 85,220 7.40
------------------------ ------------------------
Noninterest-earning assets 102,525 99,903
---------- ----------
Total assets $1,711,290 $1,635,797
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $ 654,301 19,280 3.91 $ 608,449 19,460 4.25
FHLB advances and other borrowings 830,424 33,790 5.40 839,102 39,869 6.31
-------------------------------------- --------------------------------------
Total interest-bearing liabilities 1,484,725 53,070 4.74 1,447,551 59,329 5.44
------------------------ ------------------------
Noninterest-bearing liabilities (5) 107,006 84,380
---------- ----------
Total liabilities 1,591,731 1,531,931
Stockholders' equity 119,559 103,866
---------- ----------
Total liabilities and stockholders'
equity $1,711,290 $1,635,797
========== ==========
Net interest rate spread (6) $ 27,875 1.96% $ 25,891 1.96%
======================== ========================
Net interest margin (7) 2.30% 2.24%
========== ==========
Ratio of interest-earning assets to interest-
bearing liabilities 108.35% 106.10%
========== ==========
-----------
(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 payments related to 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.
11
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses remained unchanged at $300,000 for
the third quarters of fiscal years 2002 and 2001, and $900,000 for the first
nine months of fiscal years 2002 and 2001. The allowance for loan losses was
$14.0 million, or 1.55% of loans receivable, at December 31, 2001, compared to
$13.2 million, or 1.34% of loans receivable at March 31, 2001.
The provision for loan losses is based on 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 increases in the overall balance of its loan portfolio or further
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. For
additional information on the amount of the allowance and the process for
evaluating its adequacy, see "Financial Condition - Asset Quality."
NON-INTEREST INCOME
Non-interest income increased $2.5 million, or 114.1%, to $4.6 million for
the third quarter of fiscal year 2002 from $2.1 million for the third quarter of
fiscal year 2001. This increase was primarily attributable to increases of $1.7
million in gain on sale of mortgage loans, net, $123,000 in service charges on
deposit accounts and $473,000 in other non-interest income.
Year to date non-interest income increased $4.5 million, or 69.1%, to
$11.0 million for the first nine months of fiscal year 2002 from $6.5 million
for the first nine months of fiscal year 2001. This increase was primarily
attributable to increases of $3.0 million in gain on sale of mortgage loans,
net, $1.0 million in gain on sale of securities available for sale, $343,000 in
trust fee income, and $314,000 in service charges on deposit accounts, partially
offset by a decrease of $347,000 in loan servicing income.
The quarterly and year-to-date increases in gain on sale of mortgage
loans, net, were due primarily to a higher volume of fixed rate loans originated
for sale and more favorable loan pricing during fiscal year 2002. Mortgage
servicing rights were capitalized totaling $1.2 million and $218,000 for the
third quarters of fiscal year 2002 and 2001, respectively, and $3.4 million and
$504,000 for the first nine months of fiscal year 2002 and 2001, respectively.
In addition, increases in gain on sale of mortgage loans, net, of $858,000 for
the third quarter of fiscal year 2002 and $882,000 for the first nine months of
fiscal year 2002 were recognized as a result of changes in fair value of
derivative instruments utilized in secondary market hedging activities following
the adoption of SFAS No. 133 on April 1, 2001. Management of the Company
believes that the adoption of SFAS No. 133 has introduced the potential for
greater volatility to quarterly earnings due to valuation changes and
accelerated recognition of gains or losses in the Company's mortgage banking
activities. However, such effects are expected to offset over time as market
conditions change.
The year-to-date decrease in loan servicing income was due primarily to a
$240,000 addition to the valuation allowance for mortgage servicing rights
during the second quarter of fiscal year 2002, based on estimated impairment due
to a combination of faster than previously expected actual payoff experience and
faster prepayment forecasts in September 2001 versus June 2001. The balance of
the valuation allowance amounted to $490,000 at December 31, 2001 and $250,000
at March 31, 2001. Amortization of mortgage servicing rights, including the
addition to the valuation allowance, totaled $2.3 million and $1.8 million for
the first nine months of fiscal year 2002 and 2001, respectively.
12
The quarterly and year-to-date increases in service charges on deposit
accounts were due primarily to a higher fee rate structure. The year-to-date
increase in trust fee income was due to continued growth at the Trust Company,
which opened in February 2000. The quarterly increase in other non-interest
income was due primarily to an increase in the fair value of investments in
certain employee benefit plans, which is offset by a corresponding increase in
other non-interest expense.
NON-INTEREST EXPENSE
Non-interest expense increased $316,000, or 4.4%, to $7.4 million for the
third quarter of fiscal year 2002 from $7.1 million for the third quarter of
fiscal year 2001, due primarily to an increase of $276,000 in other non-interest
expense. The increase in other non-interest expense was due primarily to an
increase in the fair value of investments in certain employee benefit plans.
Year to date non-interest expense increased $306,000, or 1.4%, to $22.1
million for the first nine months of fiscal year 2002 from $21.8 million for the
first nine months of fiscal year 2001, due primarily to increases of $270,000 in
compensation and benefits and $207,000 in data processing expense, partially
offset by a decrease of $235,000 in advertising and business promotion expense.
INCOME TAXES
Income tax expense increased $1.4 million, or 148.6%, to $2.4 million for
the third quarter of fiscal year 2002 from $966,000 for the third quarter of
fiscal year 2001. Year to date income tax expense increased $2.6 million, or
84.3%, to $5.6 million for the first nine months of fiscal year 2002 from $3.0
million for the first nine months of fiscal year 2001. These increases were due
primarily to increased income before income tax expense. The Company's effective
tax rate increased to 35.2% during the first nine months of fiscal year 2002
from 31.3% for the first nine months of fiscal year 2001, due primarily to the
effects of an increase in the statutory federal income tax rate based on a
higher taxable earnings threshold, increased state taxes and appreciation of
FIRSTFED stock contributed to the Company's Employee Stock Ownership Plan.
13
FINANCIAL CONDITION
OVERVIEW
Total assets increased $27.7 million, or 1.7%, to $1.699 billion at
December 31, 2001 from $1.671 billion at March 31, 2001. This growth was
primarily attributable to increases of $36.6 million in short-term investments,
$28.9 million in mortgage-backed securities available for sale, $28.2 million in
mortgage loans held for sale, and $16.1 million in investment securities
available for sale, partially offset by a decrease of $87.6 million in loans
receivable, net.
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated:
DECEMBER 31, 2001 MARCH 31, 2001
--------------------- ---------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential $ 527,001 57.26% $ 680,527 67.49%
Commercial real estate 64,192 6.97 44,375 4.40
Construction and land 68,455 7.44 72,225 7.16
---------- -------- ---------- --------
Total mortgage loans 659,648 71.67 797,127 79.05
---------- -------- ---------- --------
Commercial Loans 136,141 14.79 94,681 9.39
---------- -------- ---------- --------
Consumer Loans:
Home equity lines 64,770 7.04 45,191 4.48
Second mortgages 50,227 5.45 61,759 6.12
Other consumer loans 9,643 1.05 9,665 .96
---------- -------- ---------- --------
Total consumer loans 124,640 13.54 116,615 11.56
---------- -------- ---------- --------
Total loans receivable 920,429 100.00% 1,008,423 100.00%
======== ========
Less:
Allowance for loan losses (14,049) (13,233)
Undisbursed proceeds of
Construction mortgages
in process (18,038) (19,445)
Deferred loan origination
costs, net 1,262 1,429
---------- ----------
Loans receivable, net $ 889,604 $ 977,174
========== ==========
Balance sheet growth was primarily funded by an increase of $57.9 million,
or 8.2%, in deposit balances, partially offset by a decrease of $48.6 million,
or 6.0%, in FHLB advances and other borrowings during the first nine months of
fiscal year 2002. The increase in deposits included increases of $49.9 million
in demand and savings accounts and $8.0 million in certificate accounts.
Total stockholders' equity increased $9.7 million, or 8.7%, to $121.3
million at December 31, 2001, from $111.6 million at March 31, 2001. The
increase is due primarily to $9.9 million in net income, $1.3 million in earned
Stock-based Incentive Plan awards, and a $582,000 increase in the fair market
value of securities available for sale, net of tax, partially offset by $2.4
million in dividends paid to stockholders. Stockholders' equity to assets was
7.14% at December 31, 2001, compared to 6.68% at March 31, 2001. Book value per
share increased 6.4% to $20.82 at December 31, 2001 from $19.57 at March 31,
2001.
14
At December 31, 2001 and March 31, 2001, mortgage loans sold to others and
serviced by the Bank on a fee basis under various agreements amounted to $1.563
billion and $1,531 billion, respectively. Loans serviced for others are not
included in the Consolidated Balance Sheets.
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 and securities, 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 Company's most liquid assets are cash, short-term investments,
mortgage loans held for sale, investments in trading securities, investment
securities available for sale, and mortgage-backed securities available for
sale. The levels of these assets are dependent on the Company's operating,
financing, lending and investing activities during any given period. At December
31, 2001, 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 $685.2 million, or 40.3%
of total assets.
The Company has other sources of liquidity if a need for additional funds
arises, including a $25.0 million FHLB secured line of credit, FHLB advances,
and other borrowings. At December 31, 2001, the Company had $766.1 million in
advances outstanding from the FHLB and other borrowings, and an additional
borrowing capacity from the FHLB of $134.9 million. The Company uses FHLB
advances and other borrowings to fund asset growth and other cash flow needs,
and may continue to do so in the future, depending on market conditions, the
pricing of deposit products, and the pricing of FHLB advances and other
borrowings. At December 31, 2001, the putable advances portfolio totaled $159.0
million, consisting of eight advances with an average rate of 5.34%, an average
life to maturity of 7.2 years and an expected average life of 2.4 years. The
expected average life calculated by the Bank may or may not mirror the FHLB's
actual decision to exercise its option to terminate the advances.
At December 31, 2001, the Company had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $188.5 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
December 31, 2001 totaled $288.4 million. Based upon historical experience with
deposit retention, the Company expects that it will retain a majority of
maturing certificate accounts.
At December 31, 2001, the Bank exceeded all of its regulatory capital
requirements. The Bank's tangible capital of $111.8 million, or 6.63% of total
adjusted assets, was above the required level of $33.7 million or 2.0%; Tier 1
core capital of $111.8 million, or 6.63% of total adjusted assets, was above the
required level of $67.4 million, or 4.0%; risk-based capital of $119.2 million,
or 13.30% of risk-weighted assets, was above the required level of $71.7 million
or 8.0%, and Tier 1 risk-based capital of $111.8 million, or 12.05% of
risk-weighted assets, was above the required level of $35.9 million or 4.0%. The
Bank is considered a "well capitalized" institution under the OTS prompt
corrective action regulations. The Trust Company is subject to similar
regulatory capital requirements, and exceeded all of its capital requirements at
December 31, 2001.
The Company expects the Bank's Tier 1 core capital ratio to be
approximately 5.0% upon consummation of the merger with People's. If the Bank
does not maintain a Tier 1 core capital ratio of 5.0%, its regulatory
classification would change from "well capitalized" to "adequately capitalized."
Although an "adequately capitalized" classification means that First Federal
complies with all applicable minimum regulatory capital requirements,
reclassification as "adequately capitalized" would have certain adverse
consequences such as increased FDIC insurance premiums and a prohibition on
accepting brokered deposits without prior FDIC approval. Under the current FDIC
regulations, institutions which qualify as well capitalized are assessed 0.17
basis points per
15
$100 of deposits, depending on the risk of the institution as compared to 3 to
24 basis points for "adequately capitalized" institutions. The Company expects
to fund the cash payment to People's stockholders from its cash and cash
equivalents. The Company has obtained a commitment from a third party for an
unsecured loan of approximately $10 million. The loan is expected to close prior
to the consummation of the merger. Proceeds from this loan may be used for
general corporate purposes including the payment of such funds to the Bank as a
capital contribution, thereby raising the Bank's level of Tier 1 capital. The
funding of the loan or any other form of capital raising is not a condition to
the consummation of the merger under the terms of the merger agreement.
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 has primarily utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of
adjustable-rate and shorter-term (generally ten years or less) fixed-rate,
one-to-four family mortgage loans; (2) selling in the secondary market
longer-term, fixed-rate mortgage loans originated while generally retaining the
servicing rights on such loans; and (3) investing primarily in adjustable-rate
mortgage-backed securities and short-term fixed-rate collateralized mortgage
obligations ("CMOs"). In conjunction with its 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. In addition, the
Company has engaged in interest rate swap agreements to synthetically lengthen
its liability maturities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period. At December 31,
2001, the Company's cumulative one-year interest rate gap (which is the
difference between the amount of interest-earning assets and the amount of
interest-bearing liabilities maturing or repricing within one year) as a
percentage of total assets was a positive 9.12%. Accordingly, during a period of
falling interest rates, the Company's interest-earning assets would be expected
to reprice downward at a faster rate than its interest-bearing liabilities,
which, consequently, may negatively affect the Company's net interest income.
During a period of rising interest rates, the Company's interest-earning assets
would be expected to reprice upward at a faster rate than its interest-bearing
liabilities, which, consequently, may positively affect the Company's net
interest income.
Certain shortcomings are inherent in gap analysis. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
16
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in
calculating the cumulative one year interest rate gap. Finally, the ability of
some borrowers to service their adjustable-rate loans may decrease in the event
of an interest rate increase.
The Company's interest rate sensitivity is also monitored by management
through the use of a model which generates estimates of the change in the
Company's net interest income ("NII") and net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario divided
by the estimated market value of assets in the same scenario. The OTS produces a
similar analysis for the Bank using its own model, based upon data submitted on
the Bank's quarterly Thrift Financial Report, the results of which may vary from
the Company's internal model primarily due to differences in assumptions
utilized between the Company's internal model and the OTS model, including
estimated loan prepayment rates, reinvestment rates and deposit renewal rates.
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 Company's
NPV model incorporates an assumption that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured, and that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities.
Accordingly, although the NPV measurements and net interest income models
provide an indication of the Company's interest rate risk exposure at a
particular point in time, such measurements are not intended to, and do not,
provide a precise forecast of the effect of changes in market interest rates on
the Company's net interest income and may differ from actual results.
17
ASSET QUALITY
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned ("REO") and other repossessed
assets. The Company ceases to accrue interest on loans 90 days or more past due
and charges off all accrued interest. Foregone interest on non-accrual loans was
$58,000 for the three months ended December 31, 2001 and $108,000 for the nine
months ended December 31, 2001.
AT DECEMBER 31, AT MARCH 31,
2001 2001
--------------- ---------------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family .................................... $ 729 $ 431
Construction and land ................................. 1,382 --
--------------- ---------------
Total mortgage loans ................................ 2,111 431
--------------- ---------------
Commercial loans ....................................... 628 821
--------------- ---------------
Consumer loans:
Second mortgages ...................................... 56 56
Other consumer loans .................................. 32 24
--------------- ---------------
Total consumer loans ................................ 88 80
--------------- ---------------
Total non-accrual loans ............................. 2,827 1,332
Real estate owned, net (1) .............................. -- 175
Other repossessed assets, net ........................... 20 --
--------------- ---------------
Total non-performing assets ........................... $ 2,847 $ 1,507
=============== ===============
Allowance for loan losses as a percent of loans (2) ..... 1.55% 1.34%
Allowance for loan losses as a percent
of non-accrual loans (3) .............................. 497% 993%
Non- accrual loans as a percent of loans (2)(3) ......... 0.31% 0.13%
Non-performing assets as a percent of total assets (4) .. 0.17% 0.09%
(1) REO balances are shown net of related valuation allowances.
(2) Loans includes loans receivable, net, excluding allowance for loan losses.
(3) Non-performing loans consist of all loans 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectability of interest or principal.
(4) Non-performing assets consist of non-performing loans, REO and other
repossessed assets.
The increase in non-performing assets during the first nine months of
fiscal year 2002 is primarily due to an increase of $1.7 million in non-accrual
one-to-four family mortgage loans, including $1.4 million in the construction
and land category.
Allowance for Loan Losses. The allowance for loan losses is based on
management's ongoing review and estimate of the credit losses inherent in the
loan portfolio. Management's methodology to estimate loss exposure inherent in
the portfolio includes analysis of individual loans deemed to be impaired,
performance of individual loans in relation to contract terms, and allowance
allocations for various loan types based on payment status or loss experience.
An unallocated allowance is also maintained within an established range based on
management's assessment of many factors including current market conditions,
trends in loan delinquencies and charge-offs, the volume and mix of new
originations, and the current type, mix, changing risk profiles and balance of
the portfolio. In addition, the OTS and the FDIC, as an integral part of their
examination process, periodically review the
18
Company's 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.
The allowance for loan losses totaled $14.0 million at December 31, 2001,
an increase of $816,000, or 6.2%, as compared to $13.2 million at March 31,
2001. The following table sets forth activity in the Company's allowance for
loan losses for the periods indicated:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ...... $ 13,725 $ 12,783 $ 13,233 $ 12,275
Provision for loan losses ........... 300 300 900 900
-------- -------- -------- --------
Charge-offs:
One-to-four family mortgage loans . -- (27) -- (42)
Commercial loans .................. -- -- (68) (58)
Consumer Loans:
Home equity lines ............... (4) (2) (7) (4)
Second mortgages ................ -- (5) -- (14)
Other consumer .................. (63) (16) (102) (27)
-------- -------- -------- --------
Total ...................... (67) (50) (177) (145)
Recoveries .......................... 91 33 93 36
-------- -------- -------- --------
Balance at end of period ............ $ 14,049 $ 13,066 $ 14,049 $ 13,066
======== ======== ======== ========
Ratio of net recoveries (charge-offs)
during the period to average loans
outstanding during the period ..... 0.01% (0.01%) (0.01%) (0.01%)
Management was influenced by several key factors as a basis for
maintaining the level of the Company's provisions for loan losses, which
resulted in increases in the balance of the allowance for loan losses and as a
percent of the total loan portfolio during fiscal year 2002. Although the
Company's non-performing loans and charge-offs have remained low, there has been
a significant shift in the composition of the loan portfolio during the
reporting periods of fiscal year 2002 as compared to fiscal year 2001. The
residential mortgage portfolio has decreased due primarily to a low fixed rate
environment, which resulted in high refinancing activity, while the commercial
and consumer loan portfolios have shown significant growth. Commercial and
consumer loans bear a higher degree of risk than the one-to-four family mortgage
loans that make up substantially all of the Company's residential portfolio. In
addition, management believes that current economic conditions, including rising
unemployment rates in its key market area of southeastern New England, could
have an adverse affect on asset quality and result in higher non-performing
loans and charge-offs.
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 was sufficient to absorb losses inherent in its loan portfolio
at December 31, 2001, 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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the Section of Item 2 captioned, "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financial Condition - Market
Risk and Management of Interest-Rate Risk" for quantitative and qualitative
information about market risk and its potential effect on the Company.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not engaged in any legal proceedings of a material nature
at the present time. From time to time, the Company is a party to routine legal
proceedings within the normal course of business. Such routine legal proceedings
in the aggregate are believed by management to be immaterial to the Company's
financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP, INC.
(1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC. (1)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC. (1)
b) Reports on Form 8-K
A current report of Form 8-K was filed on October 2, 2001, attaching
the press release issued on October 1, 2001 announcing the signing of a
definitive agreement to acquire People's Bancshares, Inc.
(1) Incorporated by reference into this document from the Exhibits
to Form S-1, Registration Statement, and any amendments thereto,
filed on September 27, 1996, Registration No. 333-12855.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
Registrant
Date: February 13, 2002 /s/ Robert F. Stoico
--------------------
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2002 /s/ Edward A. Hjerpe III
------------------------
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
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