UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12305
FIRSTFED AMERICA BANCORP, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3331237
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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) (Zip Code)
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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
As of November 4, 2003, there were 18,296,298 shares of the Registrant's
Common Stock outstanding.
FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION........................................ 2
Item 1. Financial Statements......................................... 2
Consolidated Balance Sheets.................................. 2
Consolidated Statements of Income............................ 3
Consolidated Statements of Changes in Stockholders' Equity... 4
Consolidated Statements of Cash Flows........................ 5
Notes to Unaudited Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 17
Item 4. Controls and Procedures...................................... 17
PART II OTHER INFORMATION............................................ 17
Item 1. Legal Proceedings............................................ 17
Item 2. Changes in Securities and Use of Proceeds.................... 17
Item 3. Defaults Upon Senior Securities.............................. 18
Item 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 5. Other Information............................................ 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
SIGNATURES................................................... 19
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS SEPTEMBER 30, MARCH 31,
2003 2003
------------- -----------
Cash on hand and due from banks .......................................... $ 37,810 $ 53,529
Short-term investments ................................................... -- 2,000
----------- -----------
Total cash and cash equivalents ........................................ 37,810 55,529
Mortgage loans held for sale ............................................. 272,110 245,745
Investment securities available for sale, at fair value
(amortized cost of $8,633 and $16,659) .............................. 15,737 22,730
Mortgage-backed securities available for sale, at fair value
(amortized cost of $613,819 and $623,841) ........................... 612,021 634,965
Mortgage-backed securities held to maturity (fair value of $845 and $956) 823 934
Stock in Federal Home Loan Bank of Boston, at cost ....................... 58,433 58,433
Loans receivable
Residential mortgages .............................................. 666,812 605,507
Commercial real estate mortgages ................................... 173,631 142,974
Construction and land mortgages .................................... 43,816 43,946
Commercial ......................................................... 267,145 282,955
Consumer ........................................................... 217,273 185,284
Allowance for loan losses .......................................... (19,318) (19,335)
----------- -----------
Loans receivable, net ........................................... 1,349,359 1,241,331
Accrued interest receivable .............................................. 8,487 7,588
Mortgage servicing rights, net of valuation allowance of $2,074 and $3,095 7,679 5,971
Office properties and equipment, net ..................................... 37,255 38,298
Bank-owned life insurance ................................................ 38,383 37,513
Goodwill and other intangible assets ..................................... 52,553 53,659
Prepaid expenses and other assets ........................................ 21,646 11,782
----------- -----------
Total assets ................................................... $ 2,512,296 $ 2,414,478
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Demand ............................................................. $ 634,996 $ 573,344
Savings ............................................................ 313,807 286,719
Time ............................................................... 585,842 567,044
----------- -----------
Total deposits .................................................. 1,534,645 1,427,107
FHLB advances and other borrowings ..................................... 708,001 712,253
Company obligated, mandatorily redeemable securities ................... 11,232 11,324
Advance payments by borrowers for taxes and insurance .................. 6,667 5,974
Accrued interest payable ............................................... 3,495 3,607
Other liabilities ...................................................... 49,719 61,129
----------- -----------
Total liabilities .............................................. 2,313,759 2,221,394
----------- -----------
Stockholders' equity:
Common stock ........................................................... 220 216
Additional paid-in capital ............................................. 129,117 125,198
Retained earnings ...................................................... 105,294 97,100
Accumulated other comprehensive income ................................. 3,120 9,777
Unallocated ESOP shares ................................................ (1,549) (1,549)
Unearned 1997 stock-based incentive plan ............................... (39) (112)
Treasury stock ......................................................... (37,626) (37,546)
----------- -----------
Total stockholders' equity ..................................... 198,537 193,084
----------- -----------
Total liabilities and stockholders' equity ..................... $ 2,512,296 $ 2,414,478
=========== ===========
See accompanying notes to consolidated financial statements.
2
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
------- -------- ------- --------
Interest and dividend income:
Loans .................................................. $24,315 $ 21,575 $46,395 $ 42,443
Mortgage-backed securities ............................. 6,135 10,011 12,452 18,940
Investment securities .................................. 265 824 573 2,169
Federal Home Loan Bank stock ........................... 449 553 908 1,099
------- -------- ------- --------
Total interest and dividend income ................. 31,164 32,963 60,328 64,651
------- -------- ------- --------
Interest expense:
Deposits ............................................... 5,596 7,289 11,434 14,856
Borrowed funds ......................................... 8,835 10,547 17,266 21,064
------- -------- ------- --------
Total interest expense ............................. 14,431 17,836 28,700 35,920
------- -------- ------- --------
Net interest income before provision for loan losses 16,733 15,127 31,628 28,731
Provision for loan losses ................................... 125 150 375 250
------- -------- ------- --------
Net interest income after provision for loan losses 16,608 14,977 31,253 28,481
------- -------- ------- --------
Non-interest income:
Service charges on deposit accounts .................... 875 621 1,733 1,294
Trust fee income ....................................... 406 352 777 713
Loan servicing income (expense) ........................ 1,251 (915) 146 (869)
Insurance commission income ............................ 367 230 667 439
Earnings on Bank-Owned Life Insurance .................. 426 480 870 963
Gain on sale of mortgage loans, net .................... 6,917 7,311 16,615 11,564
Gain on sale of investment securities available for sale 426 40 2,138 1,571
Other income ........................................... 886 705 1,965 1,342
------- -------- ------- --------
Total non-interest income .......................... 11,554 8,824 24,911 17,017
------- -------- ------- --------
Non-interest expense:
Compensation and employee benefits ..................... 11,664 8,648 22,398 17,057
Office occupancy and equipment ......................... 2,122 2,099 4,314 4,063
Data processing ........................................ 680 697 1,305 1,650
Advertising and business promotion ..................... 359 199 782 391
Amortization of intangible assets ...................... 553 607 1,106 1,214
Other expense .......................................... 2,725 2,323 5,769 4,694
------- -------- ------- --------
Total non-interest expense ......................... 18,103 14,573 35,674 29,069
------- -------- ------- --------
Income before income tax expense ................... 10,059 9,228 20,490 16,429
Income tax expense .......................................... 4,136 3,581 8,308 6,348
------- -------- ------- --------
Net income ......................................... $ 5,923 $ 5,647 $12,182 $ 10,081
======= ======== ======= ========
Basic earnings per share .................................... $ 0.35 $ 0.35 $ 0.72 $ 0.63
======= ======== ======= ========
Diluted earnings per share .................................. $ 0.34 $ 0.34 $ 0.70 $ 0.61
======= ======== ======= ========
Weighted average shares outstanding - basic ................. 16,972 16,031 16,884 15,893
======= ======== ======= ========
Weighted average shares outstanding - diluted ............... 17,611 16,542 17,460 16,424
======= ======== ======= ========
See accompanying notes to consolidated financial statements.
3
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
UNEARNED
1997
ACCUMULATED STOCK-BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) SHARES SHARES STOCK EQUITY
------ ---------- -------- ------------- ----------- ----------- -------- -------------
Balance at March 31, 2003....... $ 216 $125,198 $ 97,100 $9,777 $(1,549) $ (112) $(37,546) $ 193,084
Earned SIP stock awards....... -- (5) -- -- -- 73 -- 68
Earned ESOP shares
charged to expense.......... -- 970 -- -- -- -- -- 970
Stock options exercised....... 4 2,954 -- -- -- -- -- 2,958
Cash dividends declared
and paid (1st quarter at
$0.10 per share; 2nd
quarter at $0.13 per
share)...................... -- -- (3,988) -- -- -- -- (3,988)
Common stock acquired for
certain employee benefit
plans (5,396 shares at
an average price of
$14.85 per share)........... -- -- -- -- -- -- (80) (80)
Comprehensive income:
Net income.................. -- -- 12,182 -- -- -- -- 12,182
Other comprehensive
income (loss),
net of tax Unrealized
holding losses on
available for sale
securities, net of
taxes of ($4,290)......... -- -- -- (5,460) -- -- -- --
Reclassification adjustment
for gains included in net
income, net of taxes
of $941................... -- -- -- (1,197) -- -- -- --
------
Net unrealized losses....... -- -- -- (6,657) -- -- -- (6,657)
---------
Total comprehensive
income.................. -- -- -- -- -- -- -- 5,525
----- -------- -------- ------ ------- ------ -------- ---------
Balance at September 30, 2003... $ 220 $129,117 $105,294 $3,120 $(1,549) $ (39) $(37,626) $ 198,537
===== ======== ======== ====== ======= ======= ======== =========
See accompanying notes to consolidated financial statements.
4
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED SEPTEMBER 30,
------------------------------
2003 2002
------------ -----------
Cash flows from operating activities:
Net income ......................................................... $ 12,182 $ 10,081
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization (accretion) of:
Discounts, net .............................................. (1,322) (1,980)
Deferred loan origination costs ............................. 890 456
Mortgage servicing rights ................................... 1,564 1,444
Intangible assets ........................................... 1,106 1,214
Provision for loan losses ...................................... 375 250
Provision for estimated impairment on mortgage servicing rights 171 1,550
Gains on sales of:
Mortgage loans .............................................. (16,615) (11,564)
Investment and mortgage-backed securities available-for-sale (2,138) (1,571)
Office property and equipment ............................... (2) (13)
Net proceeds from sales of mortgage loans ...................... 1,993,526 990,138
Origination of mortgage loans held for sale .................... (2,008,293) (1,116,398)
Earnings on bank-owned life insurance .......................... (870) (963)
Depreciation of office properties and equipment ................ 2,165 2,122
Appreciation in fair value of ESOP shares ...................... 970 580
Earned SIP shares .............................................. 68 1,281
Increase or decrease in:
Accrued interest receivable ................................. (899) (489)
Other assets ................................................ (3,059) (1,188)
Accrued interest payable .................................... (112) (642)
Other liabilities ........................................... (11,410) 19,186
------------ -----------
Net cash used in operating activities ....................... (31,703) (106,506)
------------ -----------
Cash flows from investing activities:
Purchase of investment securities available for sale ............... (2,678) (1,476)
Purchase of mortgage-backed securities available for sale .......... (284,086) (348,080)
Payments received on mortgage-backed securities .................... 207,632 128,643
Proceeds from sale of investments securities available for sale .... 8,219 42,093
Proceeds from sale of mortgage-backed securities available for sale 87,781 4,701
Maturities of investment securities available for sale ............. 2,909 1,527
Net increase in loans .............................................. (109,863) (13,947)
Proceeds from sale of office properties and equipment .............. 12 256
Purchases of office properties and equipment ....................... (1,132) (2,897)
------------ -----------
Net cash used in investing activities ....................... (91,206) (189,180)
------------ -----------
Cash flows from financing activities:
Net increase in deposits ........................................... 107,710 14,684
Proceeds from FHLB advances and other borrowings ................... 14,621,097 2,408,659
Repayments on FHLB advances and other borrowings ................... (14,623,200) (2,232,153)
Net change in advance payments by borrowers for taxes and insurance 693 (675)
Cash dividends paid ................................................ (3,988) (2,399)
Payments to acquire common stock and stock issuance costs .......... (80) (85)
Common stock issued in private placement ........................... -- 5,000
Stock options exercised ............................................ 2,958 1,143
------------ -----------
Net cash provided by financing activities ................... 105,190 194,174
------------ -----------
Net decrease in cash and cash equivalents ............................ (17,719) (101,512)
Cash and cash equivalents at beginning of period ..................... 55,529 145,049
------------ -----------
Cash and cash equivalents at end of period ........................... $ 37,810 $ 43,537
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ......................................................... $ 28,812 $ 36,562
============ ===========
Income taxes ..................................................... $ 7,042 $ 9,418
============ ===========
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"),
People's Bancshares Capital Trust II ("Capital Trust II"), and the Company's 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, People's Mortgage Corporation
("PMC"), 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. Certain amounts previously reported have
been reclassified to conform to the current year's presentation. The results of
operations for the six months ended September 30, 2003 are not necessarily
indicative of the results of operations that may be expected for all of fiscal
year 2004.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America 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 on Form 10-K for the fiscal year ended March 31, 2003.
(2) STOCK SPLIT
On June 26, 2003, the Company's Board of Directors declared a 2-for-1
common stock split that was distributed on July 17, 2003 to shareholders of
record as of July 7, 2003. In the accompanying unaudited consolidated financial
statements, Management's Discussion and Analysis of Financial Condition and
Results of Operation, and Other Information, the numbers of shares and per share
amounts of the Company's common stock have been retroactively restated to
reflect the increased number of common shares outstanding.
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill and other intangible assets
for the six months ended September 30, 2003 are as follows (in thousands):
CORE TOTAL
DEPOSIT NON-COMPETE IDENTIFIABLE
INTANGIBLE INTANGIBLE INTANGIBLE
GOODWILL ASSET ASSET ASSETS
-------- ---------- ----------- -----------
Balance at March 31, 2003 $43,825 $ 9,596 $ 238 $ 9,834
Recorded during the period -- -- -- --
Amortization expense -- (976) (130) (1,106)
Impairment recognized -- -- -- --
-------- -------- ------ --------
Balance at September 30, 2003 $43,825 $ 8,620 $ 108 $8,728
======== ======== ====== ========
Estimated amortization expense for fiscal
years ended March 31:
2004 $ 1,933 $ 238 $ 2,171
2005 1,717 -- 1,717
2006 1,500 -- 1,500
2007 1,283 -- 1,283
2008 1,066 -- 1,066
After 2008 2,097 -- 2,097
The components of identifiable intangible assets at September 30, 2003 are
as follows (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Core deposit intangible asset $11,926 $3,306 $8,620
Non-compete intangible asset 520 412 108
------- ------ ------
$12,446 $3,718 $8,728
======= ====== ======
6
(4) STOCK OPTION PLANS
The Company continues to follow the intrinsic value method for accounting
for its stock option plans. 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, the
Company's net income would have been reduced to the pro forma amounts indicated
below (dollars in thousands, except per share data):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------- -------
Net income as reported ............... $5,923 $5,647 $12,182 $10,081
Pro forma net income ................. 5,756 5,540 11,847 9,866
Basic earning per share as reported .. 0.35 0.35 0.72 0.63
Diluted earnings per share as reported 0.34 0.34 0.70 0.61
Pro forma basic earnings per share ... 0.34 0.35 0.70 0.62
Pro forma diluted earnings per share . 0.33 0.33 0.68 0.60
The fair value of stock options was determined by using the trinomial
option pricing model. No stock options have been granted since fiscal year 2001.
(5) RECENT DEVELOPMENTS
On October 7, 2003, the Company announced that it had reached a definitive
agreement to be acquired by Webster Financial Corporation ("Webster"),
headquartered in Waterbury, Connecticut. Webster is the holding company for
Webster Bank. Pursuant to the agreement, the Bank will be merged with and into
Webster Bank, and the Company's shareholders will be entitled to receive either
0.5954 shares of Webster common stock or $24.50 in cash for each share of the
Company's common stock, subject to proration. The transaction is valued at
approximately $465 million, payable 60% in Webster stock and 40% in cash.
Following consummation of the merger, the combined bank will rank as the 45th
largest in the United States, with $16 billion in assets, market capitalization
of $2.2 billion and a 141-branch retail footprint in Connecticut, Massachusetts
and Rhode Island. The transaction, which is subject to approval by regulatory
authorities and the Company's shareholders, is expected to close in the first
calendar quarter of 2004.
The proposed transaction will be submitted to the Company's shareholders
for their consideration. Webster and the Company will file with the SEC a
registration statement, a proxy statement/prospectus and other relevant
documents concerning the proposed transaction with the SEC. Shareholders of the
Company are urged to read the registration statement and the proxy
statement/prospectus when it becomes available and any other relevant documents
filed with the SEC, as well as any amendments or supplements to those documents,
because they will contain important information.
(6) IMPACT OF RECENT ACCOUNTING STANDARDS
In January 2003, the FASB issued Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51."
FIN No. 46 establishes accounting guidance for consolidation of variable
interest entities ("VIE") that function to support the activities of the primary
beneficiary. The primary beneficiary of a VIE entity is the entity that absorbs
a majority of the VIEs expected losses, receives a majority of the VIEs expected
residual returns, or both, as a result of ownership, controlling interest,
contractual relationship or other business relationship with a VIE. Prior to the
implementation of FIN No. 46, VIEs were generally consolidated by an enterprise
when the enterprise had a controlling financial interest through ownership of a
majority of voting interest in the entity. The Company adopted FIN No. 46 as of
February 1, 2003 for all arrangements entered into after January 31, 2003 and
will adopt as of December 31, 2003 for other arrangements entered into prior to
January 31, 2003 per FASB Staff Position No. FIN 46-6. The Company does not
believe the adoption of this interpretation will have a material impact on the
Company's Consolidated Financial Statements.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 requires derivatives contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149 (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative discussed in paragraph 6(b) of
Statement 133, (2) clarifies when a derivative contains a financing component,
and (3) amends the definition of an underlying event to conform it to language
used in FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain other existing pronouncements. This Statement is
effective for contracts entered into or modified after June 30, 2003. The
Company does not believe the adoption of SFAS No. 149 will have a material
impact on the Company's Consolidated Financial Statements.
7
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150, which was effective July 1, 2003, requires an issuer to classify a
financial instrument within the scope of the statement as a liability if the
financial instrument embodies an obligation of the issuer. The adoption of SFAS
No. 150 did not have a material impact on the Company's Consolidated Financial
Statements.
8
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 gains on sale of loans and investment securities,
service charges on deposit accounts, loan servicing income, revenue from the
Trust Company and Agency operations, earnings on bank-owned life insurance
("BOLI"), 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, amortization of
intangible assets, 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.
The following discussion should be read in conjunction with the financial
statements, notes, discussion and tables included in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 2003.
RESULTS OF OPERATIONS
OVERVIEW
Net income increased $276,000, or 5%, to $5.9 million for the second
quarter of fiscal year 2004 from $5.6 million for the second quarter of fiscal
year 2003. Diluted earnings per share ("EPS") was $0.34 for the second quarter
of fiscal year 2004, compared to the same amount for the second quarter of
fiscal year 2003. Income before income tax expense increased $831,000, or 9%, to
$10.1 million, the net result of increases in net interest income after
provision for loan losses of $1.6 million, non-interest income of $2.7 million,
and non-interest expense of $3.5 million.
For the first six months of fiscal year 2004, net income was $12.2 million,
an increase of $2.1 million, or 21%, from $10.1 million for the first six months
of fiscal year 2003. Diluted EPS increased 15% to $0.70 for the first six months
of fiscal year 2004 from $0.61 for the first six months of fiscal year 2003.
Income before income tax expense increased $4.1 million, or 25%, to $20.5
million, the net result of increases in net interest income after provision for
loan losses of $2.8 million, non-interest income of $7.9 million, and
non-interest expense of $6.6 million.
9
Return on average stockholders' equity was 11.52% for the second quarter of
fiscal year 2004 and 12.17% for the first six months of fiscal year 2004,
compared to 12.65% and 12.02% for the respective periods of fiscal year 2003.
Return on average assets was 0.85% for the second quarter of fiscal year 2004
and 0.92% for the first six months of fiscal year 2004, compared to 0.92% and
0.85% for the respective periods of fiscal year 2003.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $1.6
million, or 11%, to $16.7 million for the second quarter of fiscal year 2004
from $15.1 million for the second quarter of fiscal year 2003. The net interest
rate spread and net interest margin were 2.37% and 2.58%, respectively, for the
second quarter of fiscal year 2004, compared to 2.49% and 2.71%, respectively,
for the second quarter of fiscal year 2003. For the first six months of fiscal
year 2004, net interest income before provision for loan losses increased $2.9
million, or 10%, to $31.6 million for the first six months of fiscal year 2004
from $28.7 million for the first six months of fiscal year 2003. The net
interest rate spread and net interest margin were 2.34% and 2.59%, respectively,
for the first six months of fiscal year 2004, compared to 2.46% and 2.67%,
respectively, for the first six months of fiscal year 2003. The increases in net
interest income were due primarily to growth in loans receivable, net, and
mortgage loans held for sale, as funded principally by increases in deposits.
The decreases in the net interest rate spread and net interest margin reflected
declines in market interest rates, with reductions in the Company's interest
yields on interest-earning assets exceeding the reductions in its interest costs
on interest-bearing liabilities.
The following tables set forth certain information relating to the Company
for the periods indicated. 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 SEPTEMBER 30,
---------------------------------------------------------------
2003 2002
------------------------------- -----------------------------
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) $1,826,473 $24,315 5.33% $1,302,078 $21,575 6.63%
Investment securities (2) 80,963 714 3.50 106,180 1,377 5.15
Mortgage-backed securities (3) 665,434 6,135 3.69 807,172 10,011 5.96
------------------------------ -----------------------------
Total interest-earning assets 2,572,870 31,164 4.85 2,215,430 32,963 5.95
---------------- ----------------
Noninterest-earning assets 195,772 219,657
---------- ----------
Total assets $2,768,642 $2,435,087
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $1,365,637 5,596 1.63 $1,139,713 7,289 2.54
FHLB advances and other borrowings 947,314 8,835 3.70 904,050 10,547 4.63
------------------------------ -----------------------------
Total interest-bearing
liabilities 2,312,951 14,431 2.48 2,043,763 17,836 3.46
---------------- -----------------------------
Noninterest-bearing liabilities (5) 251,643 214,191
---------- ----------
Total liabilities 2,564,594 2,257,954
Stockholders' equity 204,048 177,133
---------- ----------
Total liabilities and
stockholders' equity $2,768,642 $2,435,087
========== ==========
Net interest rate spread (6) $16,733 2.37% $15,127 2.49%
================ ================
Net interest margin (7) 2.58% 2.71%
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities 111.24% 108.40%
========== ==========
10
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
2003 2002
------------------------------ -----------------------------
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) $1,703,218 $46,395 5.45% $1,258,202 $42,443 6.75%
Investment securities (2) 86,298 1,481 3.42 139,386 3,268 4.68
Mortgage-backed securities (3) 647,308 12,452 3.85 751,524 18,940 5.04
------------------------------ ----------------------------
Total interest-earning assets 2,436,824 60,328 4.95 2,149,112 64,651 6.02
---------------- ---------------
Noninterest-earning assets 193,167 223,342
---------- ----------
Total assets $2,629,991 $2,372,454
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $1,330,006 11,434 1.71 $1,159,150 14,856 2.56
FHLB advances and other borrowings 863,169 17,266 3.99 855,111 21,064 4.91
------------------------------ ----------------------------
Total interest-bearing
liabilities 2,193,175 28,700 2.61 2,014,261 35,920 3.56
---------------- ---------------
Noninterest-bearing liabilities (5) 237,183 190,918
---------- ----------
Total liabilities 2,430,358 2,205,179
Stockholders' equity 199,633 167,275
---------- ----------
Total liabilities and
stockholders' equity $2,629,991 $2,372,454
========== ==========
Net interest rate spread (6) $31,628 2.34% $28,731 2.46%
================ ===============
Net interest margin (7) 2.59% 2.67%
====== =====
Ratio of interest-earning assets to
interest-bearing liabilities 111.11% 106.69%
========== ==========
----------
(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, investment securities available for sale
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.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $125,000 for the second quarter
of fiscal year 2004, compared to $150,000 for the second quarter of fiscal year
2003. For the first six months of fiscal year 2004, the provision for loan
losses was $375,000, compared to $250,000 for the first six months of fiscal
year 2003. These provisions were based primarily on management's assessment of
several key factors, including portfolio growth and composition changes,
charge-offs, internal loan review classifications, and current economic
conditions. For additional information on the amount of the allowance and the
process for evaluating its adequacy, see "Financial Condition -- Asset Quality
-- Allowance for Loan Losses."
NON-INTEREST INCOME
Non-interest income increased $2.7 million, or 31%, to $11.6 million for
the second quarter of fiscal year 2004 from $8.8 million for the second quarter
of fiscal year 2003, due primarily to increases of $2.2 million in loan
servicing income, and $386,000 in gain on sale of investment securities
available for sale, partially offset by a decrease of $394,000 in gain on sale
of mortgage loans. For the first six months of fiscal year 2004, non-interest
income increased $7.9 million, or 46%, to $24.9 million from $17.0 million for
the first six months of fiscal year 2003, due primarily to increases of $1.0
million in loan servicing income, $5.1 million in gain on sale of mortgage
loans, and $567,000 in gain on sale of investment securities available for sale.
The decrease in gain on sale of mortgage loans for the second quarter was
due primarily to changes in fair value of derivative instruments utilized in
secondary market hedging activities, as required by SFAS No. 133, that resulted
in a reduction to the gain of $1.8 million for the second quarter of fiscal year
2004, compared to an addition of $269,000 for the second quarter of fiscal year
2003. This $1.8 million reduction to the gain in the second quarter of fiscal
year 2004 reflected fluctuations in market interest rates for mortgage loans and
a decline in commitments to originate mortgage loans for sale that exceeds the
decline in commitments to sell mortgage loans. The increase in gain on sale of
mortgage loans for the first six months was due primarily to a higher volume of
loans originated for sale, partially offset
11
by changes in fair value of derivative instruments utilized in secondary market
hedging activities that resulted in a reduction to the gain of $924,000 for
first six months of fiscal year 2004, compared to an addition of $162,000 for
the first six months of fiscal year 2003. In accordance with generally accepted
accounting principles, the Company did not recognize $1.6 million of unrealized
gains as of September 30, 2003 on mortgage loans held for sale that are carried
at the lower of cost or market value.
The increase in loan servicing income for the second quarter was due
primarily to a $1.2 million recovery of valuation allowance for mortgage
servicing rights for the second quarter of fiscal year 2004, compared to a $1.2
million addition to the valuation allowance for the second quarter of fiscal
year 2003. The increase in loan servicing income for the first six months was
due primarily to a $1.4 million addition to the valuation allowance for the
first quarter of fiscal year 2004 offset by the $1.2 million recovery for the
second quarter of fiscal year 2004, compared to a $1.4 million addition to the
valuation allowance for the first six months of fiscal year 2003. The valuation
allowance adjustments were based on estimated impairment due to a combination of
actual payoff experience and prepayment forecasts for the applicable periods.
The recovery in the second quarter of fiscal year 2004 resulted from an increase
in the present value of the Company's mortgage servicing rights. Amortization of
mortgage servicing rights totaled $836,000 for the second quarter of fiscal year
2004 and $1.6 million for the first six months of fiscal year 2004, compared to
$763,000 and $1.5 million for the respective periods of fiscal year 2003.
NON-INTEREST EXPENSE
Non-interest expense increased $3.5 million, or 24%, to $18.1 million for
the second quarter of fiscal year 2004 from $14.6 million for the second quarter
of fiscal year 2003, due primarily to an increase of $3.0 million in
compensation and benefits. For the first six months of fiscal year 2004,
non-interest expense increased $6.6 million, or 23%, to $35.7 million from $29.1
million for the first six months of fiscal year 2003, due primarily to an
increase of $5.3 million in compensation and benefits. The increases in
compensation and benefits were due primarily to higher costs related to growth
in mortgage originations, the net accounting impact of market price increases of
FAB stock held by certain employee benefit plans, and higher employee health
plan costs.
INCOME TAXES
Income tax expense increased $555,000, or 15%, to $4.1 million for the
second quarter of fiscal year 2004 from $3.6 million for the second quarter of
fiscal year 2003. For the first six months of fiscal year 2004, income tax
expense increased $2.0 million, or 31%, to $8.3 million from $6.3 million for
the first six months of fiscal year 2003. The Company's effective tax rate
increased to 40.5% for the first six months of fiscal year 2004 from 38.6% for
the first six months of fiscal year 2003, due primarily to the effects of
increased state taxes and a lower earnings rate from BOLI relative to the
increase in pre-tax income.
12
FINANCIAL CONDITION
OVERVIEW
Total assets increased $97.8 million, or 4%, to $2.512 billion at September
30, 2003 from $2.414 billion at March 31, 2003, due primarily to an increase of
$108.0 million, or 9%, 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:
SEPTEMBER 30, 2003 MARCH 31, 2003
----------------------- ----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential $ 661,296 47.89% $601,063 47.21%
Commercial real estate 173,631 12.57 142,974 11.23
Construction and land 62,702 4.54 61,698 4.85
---------- ------ ---------- ------
Total mortgage loans 897,629 65.00 805,735 63.29
---------- ------ ---------- ------
Commercial Loans 267,237 19.35 283,137 22.24
---------- ------ ---------- ------
Consumer Loans:
Home equity lines 175,975 12.74 140,189 11.01
Second mortgages 30,778 2.23 32,914 2.58
Other consumer loans 9,273 0.68 11,158 0.88
---------- ------ ---------- ------
Total consumer loans 216,026 15.65 184,261 14.47
---------- ------ ---------- ------
Total loans receivable 1,380,892 100.00% 1,273,133 100.00%
====== ======
Less:
Allowance for loan losses (19,318) (19,335)
Undisbursed proceeds of
construction mortgages
in process (18,886) (17,752)
Purchase premium on
loans, net 2,807 3,377
Deferred loan origination
costs, net 3,864 1,908
---------- ----------
Loans receivable, net $1,349,359 $1,241,331
========== ==========
Mortgage loan originations totaled $2.301 billion for the first six months
of fiscal year 2004, including $2.008 billion originated for sale of which
$1.591 billion were originated by PMC. During this time, $1.969 billion of
mortgage loans were sold in the secondary market, including $1.530 billion sold
servicing released by PMC.
Mortgage loans sold to others and serviced by the Bank on a fee basis under
various agreements decreased $149.4 million, or 11%, to $1.263 billion at
September 30, 2003 from $1.412 billion at March 31, 2003, due primarily to
refinancing activity. Loans serviced for others are not included in the
Consolidated Balance Sheets. Mortgage servicing rights, net of the valuation
allowance, increased $1.7 million, or 29%, to $7.7 million at September 30,
2003, from $6.0 million at March 31, 2003. The valuation allowance related to
the impairment of mortgage servicing rights decreased $1.0 million to $2.1
million at September 30, 2003, from $3.1 million at March 31, 2003, due to a
valuation recovery of $1.2 million during the second quarter of fiscal year 2004
and a write-down of $1.2 million for permanent impairment during the first
quarter of fiscal year 2004, less an addition for estimated impairment of $1.4
million during the first quarter of fiscal year 2004. Mortgage servicing rights
were 0.61% of loans serviced for others at September 30, 2003, compared to 0.42%
at March 31, 2003.
Balance sheet growth during the first six months of fiscal year 2004 was
primarily funded by an increase of $107.5 million in deposit balances. The 8%
increase in deposits, to $1.535 billion at September 30, 2003, included
increases in demand deposits of $61.7 million, or 11%, savings deposits of $27.1
million, or 9%, and time deposits of $18.8 million, or 3%. The Company's demand
and savings accounts, or core deposits, were 61.8% of total deposits at
September 30, 2003, compared to 60.3% at March 31, 2003.
13
Total stockholders' equity increased $5.5 million, or 3%, to $198.5 million
at September 30, 2003, from $193.1 million at March 31, 2003. The increase was
due primarily to $12.2 million in net income and a $3.0 million increase from
common shares issued for stock options exercised, partially offset by $4.0
million in dividends paid to stockholders and a $6.7 million decrease in the
fair market value of available for sale securities, net of tax. Stockholders'
equity to assets was 7.90% at September 30, 2003, compared to 8.00% at March 31,
2003. Book value per share increased to $11.66 at September 30, 2003 from $11.63
at March 31, 2003. Tangible book value per share increased to $8.57 at September
30, 2003 from $8.40 at March 31, 2003.
ASSET QUALITY
Non-Performing Assets. The following table sets forth information regarding
non-accrual loans and real estate owned ("REO"). The Company ceases to accrue
interest on loans 90 days or more past due and charges off all accrued interest.
Foregone interest on non-accrual loans was $23,000 for the three months ended
September 30, 2003 and $50,000 for the six months ended September 30, 2003.
SEPTEMBER 30, MARCH 31,
2003 2003
------------- ---------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family ........................................... $ 452 $1,699
Commercial real estate ....................................... 438 96
------ ------
Total mortgage loans ....................................... 890 1,795
------ ------
Commercial loans ............................................... 432 1,388
------ ------
Consumer loans:
Home equity lines ............................................ -- --
Second mortgages ............................................. 104 107
Other consumer loans ......................................... 37 15
------ ------
Total consumer loans ....................................... 141 122
------ ------
Total non-accrual loans .................................... 1,463 3,305
REO, net (1) ..................................................... 194 194
------ ------
Total non-performing assets ................................ $1,657 $3,499
====== ======
Allowance for loan losses as a percent of loans (2) .............. 1.41% 1.53%
Allowance for loan losses as a percent of non-performing loans (3) 1,320% 585%
Non-accrual loans as a percent of loans (2)(3) ................... 0.11% 0.26%
Non-performing assets as a percent of total assets ............... 0.07% 0.14%
-------------
(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.
The decrease of $1.8 million in non-performing assets during the first six
months of fiscal year 2004 was due primarily to declines of $905,000 in
non-accrual mortgage loans and $956,000 in non-accrual commercial loans.
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, as an integral part of their examination
process, periodically reviews the Company's allowance for loan losses. The OTS
and the FDIC may require the Company to adjust the allowance for loan losses
based upon judgments different from those of management.
14
The allowance for loan losses totaled $19.3 million at September 30, 2003,
compared to $19.3 million at March 31, 2003. The following table sets forth
activity in the Company's allowance for loan losses for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period ........... $ 19,521 $ 19,215 $ 19,335 $ 19,237
Provision for loan losses ................ 125 150 375 250
-------- -------- -------- --------
Charge-offs:
One-to-four family mortgage loans ..... -- -- (63) (10)
Commercial loans ...................... (298) -- (298) (86)
Consumer Loans:
Home equity lines .................. -- (14) (11) (23)
Second mortgages ................... -- -- -- --
Other consumer ..................... (35) (32) (49) (51)
-------- -------- -------- --------
Total ....................... (333) (46) (421) (170)
Recoveries ............................... 5 2 29 4
-------- -------- -------- --------
Balance at end of period ................. $ 19,318 $ 19,321 $ 19,318 $ 19,321
======== ======== ======== ========
Ratio of net charge-offs during the period
to average loans outstanding during the
period ................................... 0.10% 0.02% 0.06% 0.03%
Management was influenced by several key factors as a basis for the level
of the Company's provisions for loan losses, which resulted in the changes to
the provision of loan losses and the allowance for loan losses during the past
year. Although the Company's non-performing loans and charge-offs have remained
low, there has been a shift in the composition of the loan portfolio at
September 30, 2003 as compared to September 30, 2002. The residential mortgage
portfolio has increased due primarily to the origination and retention of
certain adjustable-rate and fixed-rate mortgage loans with terms of 15 years or
less, and high refinancing activity reflecting the low fixed rate environment.
The commercial and consumer loan portfolios have also continued to show
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. Management also considered internal loan review
classifications and current economic conditions, including unemployment rates in
the Company's key market area of southeastern New England, which 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 September 30, 2003, 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.
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) the origination and retention of certain adjustable-rate
and shorter-term (generally 15 years or less) fixed-rate, one-to-four family
mortgage loans; (2) selling mortgage loans originated for sale in the secondary
market with either servicing rights retained or servicing rights released; and
(3) investing primarily in adjustable-rate mortgage-backed securities and
short-term fixed-rate CMOs. In conjunction with its mortgage banking activities,
the Company uses forward contracts in order to reduce exposure to interest-rate
risk. The Company obtains commitments from investors on a loan-by-loan basis for
mortgage loans sold with servicing rights released. The amount of forward
coverage of the "pipeline" of mortgages is managed on a day-to-day basis, 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, from time
to time, to synthetically lengthen its liability maturities.
15
The Company's interest rate risk is monitored by management through the use
of a model that generates estimates of the change in the Company's net interest
income 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 in 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 September 30, 2003 and March 31, 2003, as calculated by the Company.
SEPTEMBER 30, 2003 MARCH 31, 2003
----------------------------- ------------------------------
CHANGE IN ESTIMATED NPV ESTIMATED NPV
INTEREST RATES NET SENSITIVITY NET SENSITIVITY
IN BASIS PORTFOLIO NPV IN BASIS PORTFOLIO NPV IN BASIS
POINTS VALUE RATIO POINTS VALUE RATIO POINTS
-------------- --------- ----- ----------- --------- ----- ------------
(DOLLARS IN THOUSANDS)
300 $128,783 5.37% (114) $179,199 7.57% 123
200 143,798 5.88 (63) 181,195 7.54 120
100 155,181 6.23 (29) 172,562 7.09 75
Unchanged 165,267 6.52 -- 155,172 6.34 --
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require certain
assumptions that 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.
LIQUIDITY AND CAPITAL RESOURCES
The Bank'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 expects to use deposits, FHLB advances and
other borrowings, and retained earnings to fund asset growth in the future,
depending on market conditions, the pricing of deposit products, and the pricing
of FHLB advances and other borrowings.
The Bank's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale. The levels of these assets are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. At September 30, 2003, cash, short-term investments,
mortgage loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale totaled $937.7 million, or 37.3%
of total assets.
The Bank 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 September 30, 2003, the Bank had $698.0 million in
advances outstanding from the FHLB and other borrowings, and an additional
borrowing capacity from the FHLB of $128.7 million including the $25.0 million
line of credit. At September 30, 2003, the portfolio of putable FHLB advances
and putable reverse repurchase agreements totaled $432.5 million, with an
average effective interest rate of 4.30%, and an average life to maturity and
estimated average life of 5.9 years. The estimated average life calculated by
the Bank may or may not mirror the counter-party's actual decision to exercise
its option to terminate the advances. The FHLB is required by regulation to
offer replacement funding to the Bank if the FHLB terminates a putable advance
prior to the maturity date of the advance, provided that the Bank is able to
satisfy the FHLB's normal credit and collateral requirements. Such replacement
funding would be for the remaining maturity of the putable advance, and at a
market interest rate or a predetermined interest rate agreed upon between the
Bank and the FHLB.
At September 30, 2003, Capital Trust II had $10.0 million of 11.695% trust
preferred securities outstanding, with an average interest cost of 10.29%, that
mature in July 2030 unless the Company elects and obtains regulatory approval to
accelerate the maturity date to as early as July 2010.
16
At September 30, 2003, the Bank had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $547.8 million. The Bank anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificate of
deposit accounts scheduled to mature in less than one year from September 30,
2003 totaled $430.7 million. Based on its prior experience and other factors,
the Bank currently expects that it will retain a majority of maturing
certificate accounts.
At September 30, 2003, the consolidated capital to total assets ratio of
the Company was 7.90%. The Company paid a cash dividend of $0.10 per share and
$0.13 per share to stockholders during the first and second quarters,
respectively, of fiscal year 2004, and announced the declaration of a quarterly
cash dividend of $0.13 per share to stockholders for payment during the third
quarter of fiscal year 2004. The Company's primary source of funding for
dividends, and payments for periodic stock repurchases, has been dividends from
the Bank and proceeds from exercises of employee stock options. The Bank's
ability to pay dividends and other capital distributions to the Company is
generally limited by OTS regulations.
As of September 30, 2003, the Company had repurchased 360,616 shares of
Company stock at an average price of $7.09 per share, or 56% of the 640,056
shares authorized for repurchase under the Company's seventh stock repurchase
program announced on September 29, 2000. There was no stock repurchase activity
during the first six months of fiscal year 2004. The Company has repurchased
4,973,806 shares since May 15, 1998.
At September 30, 2003, the Bank exceeded all of its regulatory capital
requirements. The Bank's Tier 1 core capital of $155.1 million, or 6.33% of
total adjusted assets, was above the required level of $98.1 million, or 4.0%;
risk-based capital of $167.5 million, or 11.35% of risk-weighted assets, was
above the required level of $118.1 million or 8.0%, and Tier 1 risk-based
capital of $155.1 million, or 10.18% of risk-weighted assets, was above the
required level of $59.0 million or 4.0%. The Bank also continued to exceed the
regulatory capital requirements for designation as a "well capitalized"
institution under the OTS prompt corrective action regulations of 5.0% for Tier
1 core capital, 10.0% for risk-based capital and 6% for Tier 1 risk-based
capital. The Trust Company is subject to similar regulatory capital
requirements, and exceeded all of its capital requirements at September 30,
2003.
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.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended September 30, 2003
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the normal course of the Company's business, there are various
outstanding legal proceedings. In the opinion of management, based on
consultation with legal counsel, the financial position of the Company will not
be affected materially as a result of the outcome of such legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders was held July 31, 2003. The following
proposals were voted on by the stockholders:
WITHHELD/ BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
-------- ---------- ------- --------- ---------
1) Election of Directors:
Richard W. Cederberg 14,472,574 -- 112,534 --
Thomas A. Rodgers, Jr. 14,336,612 -- 248,496 --
Anthony L. Sylvia 14,471,484 -- 113,624 --
2) Ratification of KPMG LLP as
independent auditors of the
Company for the fiscal year
ending March 31, 2004 14,482,350 91,032 11,726 --
The Directors whose terms continued and the years their terms expire are as
follows: Robert F. Stoico (2004), B. Benjamin Cavallo (2005), John S. Holden,
Jr. (2005), Gilbert C. Oliveira (2005) and Paul A. Raymond, DDS (2005).
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
2.1 Agreement and Plan of Merger by and among Webster Financial
Corporation and FIRSTFED AMERICA BANCORP, INC. (1)
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP, INC.
(2)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC. (3)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC. (2)
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith)
------------
(1) Incorporated by reference into this document from the Exhibit to the
Form 8-K filed by Webster Financial Corporation (Commission File
Number 001-31486) on November 4, 2003.
(2) 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.
(3) Incorporated by reference into this document from the Exhibits to the
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
b) Reports on Form 8-K
A current report on Form 8-K was filed on July 23, 2003, attaching a press
release announcing the Company's financial results for the quarter ended
June 30, 2003.
A current report on Form 8-K was filed on July 31, 2003, attaching a press
release announcing the results of the Company's July 31, 2003 annual
meeting of shareholders and the availability of an investor presentation on
the Company's website.
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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, thereunto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
--------------------------------------------
Registrant
Date: November 12, 2003 /s/ Robert F. Stoico
--------------------------------------------
Robert F. Stoico
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 2003 /s/ Edward A. Hjerpe, III
--------------------------------------------
Edward A. Hjerpe, III
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
19