FIRSTFED AMERICA BANCORP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2001

COMMISSION FILE NO.: 1-12305

FIRSTFED AMERICA BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 04-3331237
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION)

ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 679-8181

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

COMMON STOCK, PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

THE AMERICAN STOCK EXCHANGE
(NAME OF EXCHANGE ON WHICH REGISTERED)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant was $102.0 million and is based upon the last sales price as listed
on The American Stock Exchange for June 4, 2001.

The number of shares of Common Stock outstanding as of June 4, 2001 is
6,220,249.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Stockholders for the fiscal year ended
March 31, 2001 are incorporated by reference into Part II of this Form 10-K.

Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders
are incorporated by reference into Part III of this Form 10-K.
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INDEX

PAGE
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PART I................................................................. 2
Item 1. Business.................................................... 2
Additional Item. Executive Officers of the Registrant................ 17
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II................................................................
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 42
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Change In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 42
PART III............................................................... 42
Item 10. Directors and Executive Officers of the Registrant.......... 42
Item 11. Executive Compensation...................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 42
Item 13. Certain Relationships and Related Transactions.............. 42
PART IV................................................................ 43
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 43
SIGNATURES............................................................. 44

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PART I

ITEM 1. BUSINESS

GENERAL

FIRSTFED AMERICA BANCORP, INC. (also referred to as the "Company" or
"Registrant") was organized by the Board of Directors of First Federal Savings
Bank of America (the "Bank") for the purpose of acquiring all of the capital
stock of the Bank issued in connection with the Bank's conversion (the
"conversion") from mutual to stock form of ownership. The Company was
incorporated on September 6, 1996 under Delaware law and is a savings and loan
holding company subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities
and Exchange Commission ("SEC"). On January 15, 1997, the Bank completed its
conversion, and the Company concurrently issued 8,707,152 shares of common
stock, raising $77.6 million of net proceeds. The Company utilized $43.4 million
of such net proceeds to acquire all of the outstanding stock of the Bank. At
March 31, 2001, the Company had consolidated total assets of $1.671 billion and
total stockholders' equity of $111.6 million.

The Bank was originally organized in 1946 and operated as First Federal
Savings and Loan Association of Fall River. In 1982, the Bank merged with First
Federal Savings and Loan Association of Attleboro, which was originally
organized in 1854 and became a federally chartered savings and loan association
in 1959. In 1983, the Bank became a federally chartered savings bank, changing
its name to First Federal Savings Bank of America. In 1984, the Bank added
mortgage-banking activities to its operations. The Company conducts business
from its administrative, operations, and banking offices located in Swansea,
Massachusetts and its 14 other banking offices located in the municipalities of
Fall River, Attleboro, New Bedford, Seekonk, Somerset, and Taunton,
Massachusetts and Pawtucket, Providence, East Providence, Warwick, and Cranston,
Rhode Island, and its five loan origination centers located in Yarmouth, Auburn,
Agawam and Burlington, Massachusetts, and East Greenwich, Rhode Island. The
Company plans to open a sixteenth banking office in Middletown, Rhode Island in
the third quarter of fiscal year 2002.

The Company's principal business has been and continues to be attracting
retail and business deposits in the areas surrounding its banking offices and
investing those deposits, together with funds generated from operations and
borrowings, primarily in residential, commercial, and consumer loans and
mortgage-backed securities ("MBS"). Through its 15 banking offices and five loan
origination centers, the Company originates loans for investment and loans for
sale in the secondary market, generally retaining the servicing rights to loans
sold. Loan sales are made from loans designated as being held for sale or
originated for sale during the period. The Company's revenues are derived
principally from interest on its loan portfolios, and interest and dividends on
its investment and mortgage-backed securities and loan servicing income. The
Company's primary sources of funds are deposits, principal and interest payments
on loans and mortgage-backed securities, proceeds from the sale of loans,
Federal Home Loan Bank of Boston ("FHLB") advances and other borrowings.

In January 1999, the Company formed the FIRSTFED INSURANCE AGENCY, LLC
("Agency"). In March 2000, the Agency purchased two local independent agencies,
Smith-Cochrane Insurance Agency, Inc. and All Risk Insurance Agency of Swansea,
bringing the total number of customers of the Agency to over 4,000. The Agency
offers a comprehensive insurance product line including auto, home, life,
accident and health insurance to consumers and businesses. In February 2000, the
Company formed the FIRSTFED TRUST COMPANY, N.A. ("Trust Company") to provide
investment and fiduciary services in the Rhode Island and southeastern
Massachusetts marketplace. The Trust Company is a joint venture with certain
members of the Metcalf and Danforth families of Rhode Island. In addition to
their 35% ownership interest, the families are also significant clients of the
Trust Company.

The Company's executive offices are located at ONE FIRSTFED PARK, Swansea
Mall Drive, Swansea, Massachusetts 02777. The telephone number is (508)
679-8181.

Information required by Guide 3 to be contained in the description of
business which is not contained in Item 1 is incorporated by reference to Items
6, 7 and 8 herein.

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MARKET AREA AND COMPETITION

The Company is a community-oriented financial institution offering a
variety of financial products and services to meet the needs of the communities
it serves in Massachusetts, Rhode Island and, to a lesser degree, Connecticut.
The Company's deposit gathering is concentrated in the communities surrounding
its 15 full service banking offices. The Company's main banking office is
located in Fall River, Massachusetts. Fall River is located in the southeastern
region of Massachusetts and is adjacent to Rhode Island. All of the Company's 15
banking offices are located within 30 miles of Fall River. The Southeastern
Massachusetts and Rhode Island suburbs are generally low to middle income
residential communities with individuals employed primarily in Fall River and
New Bedford, Massachusetts, Providence, Rhode Island and areas along Interstates
195, 95 and 495 and Route 24.

While the economy in Southeastern New England has generally been positive
in recent years, the area still lags behind the rest of New England and the rest
of the nation. Unemployment rates in the Providence-Fall River area and in New
Bedford are currently higher than the national and state averages but have
improved from the mid-1990s. Small businesses, service firms and tourism form
the backbone of the region's economy. Cuts to the defense industry and
uncertainty in the technology industry have resulted in decreased employment
opportunities in the region. However, many significant employers, such as The
Acushnet Company, Fidelity Investments, Textron, American Power Conversion, ON
Semiconductor and Hasbro are located in the region.

The Company faces significant competition in generating loans and in
attracting deposits, as well as in the Insurance Agency and Trust Company
businesses. The Company's primary market area is highly competitive and the
Company faces direct competition from a significant number of financial
institutions, many with a statewide or regional presence and, in some cases, a
national presence. Some of these financial institutions are significantly larger
and have greater financial resources than the Company. The Company's competition
for loans comes principally from commercial banks, savings banks, credit unions,
mortgage brokers, mortgage banking companies and insurance companies. Its most
direct competition for deposits has historically come from local savings,
cooperative and commercial banks and credit unions. In addition, the Company
faces increasing competition for deposits from non-bank institutions such as
brokerage firms and insurance companies in such instruments as short-term money
market funds, corporate and government securities funds, mutual funds and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. In
Southeastern New England, the Company has experienced significant competition
from credit unions, which have a competitive advantage because they do not pay
state or federal income taxes. Such competitive advantage has placed increased
pressure on the Bank with respect to its loan and deposit pricing.

From the mid-1980s through the early 1990s, the Bank's operating strategy
was to control growth while building its loan servicing portfolio and the
resultant fee income. As part of this strategy, the Bank increased market share
through its mortgage banking activities. Interest-rate risk was managed by
generally retaining adjustable rate one-to-four family loans and selling longer
term fixed-rate one-to-four family loans in the secondary market on a servicing
retained basis. Beginning in 1993, the Bank began to focus more heavily on
building its loan and deposit franchise and increasing its level of
interest-earning assets and retail deposits. At that time, the Bank began to
expand its franchise in its existing market area and other areas in Southeastern
Massachusetts and Rhode Island through the establishment of de novo banking
offices and new loan origination facilities. Since 1994, the Bank has opened
eight banking offices in Seekonk, Swansea and New Bedford, Massachusetts and
Providence, East Providence, Pawtucket, Warwick and Cranston, Rhode Island and a
loan origination office in Burlington, Massachusetts. In addition, the Company
opened a centralized administrative and operations center in October 1997 in
Swansea, Massachusetts. Pursuant to this expansion strategy, the Company seeks
new banking and loan production offices within its primary market area.

LENDING ACTIVITIES

Loan Portfolio Composition. The Company's loan portfolio consists
primarily of first mortgage loans secured by one-to-four family residences. At
March 31, 2001, total loans receivable was $1.008 billion, of

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which $677.5 million were one-to-four family residential mortgage loans, or
67.2% of the Company's total loans receivable. At such date, the remainder of
the loan portfolio consisted of: $3.0 million of multi-family residential loans,
or .3% of total loans receivable; $44.4 million of commercial real estate loans,
or 4.4% of total loans receivable; $72.2 million of construction and land loans,
or 7.2% of total loans receivable; $94.7 million of commercial loans, or 9.4% of
total loans receivable; and $116.6 million of consumer loans, or 11.6% of total
loans receivable, consisting of $45.2 million of home equity lines of credit,
$61.8 million of second mortgages and $9.7 million of other consumer loans.
After including allowance for loan losses, undisbursed proceeds of construction
mortgages in process, and deferred loan origination fees, loans receivable, net
was $977.2 million at March 31, 2001. At that same date, 64.6% of the Company's
residential mortgage loans and construction and land loans, excluding mortgage
loans held for sale, had adjustable interest rates, most of which are indexed to
the one-year Constant Maturity Treasury ("CMT") Index. The Company had $39.1
million of mortgage loans held for sale at March 31, 2001, consisting of
one-to-four family fixed-rate mortgage loans.

The Board of Directors establishes the Company's lending policies and loan
approval limits. The types of loans that the Company may originate are subject
to federal and state laws and regulations. Interest rates charged by the Company
on loans are affected by the demand for such loans and the supply of money
available for lending purposes and the rates offered by competitors. These
factors are, in turn, affected by, among other things, economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, and legislative tax policies.

For additional information on the composition of the Company's loan
portfolio, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Loans Receivable."

The Company has established an allowance for loan losses relating to
specifically identified impaired loans and all other loans. For additional
information on the amount of the allowance and the process for evaluating its
adequacy, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financial Condition -- Asset Quality."

Origination, Sale and Servicing of Loans. The Company's mortgage lending
activities are conducted primarily by its loan personnel operating at its 15
banking offices and five loan origination centers and through a network of
approximately 50 approved loan correspondents, wholesale loan brokers and other
financial institutions approved by the Company. All loans originated by the
Company, either through internal sources or through loan correspondents are
underwritten by the Company pursuant to the Company's policies and procedures.
For the fiscal year ended March 31, 2001, the Company's loan correspondents
originated $208.0 million in loans. The Company originates both adjustable-rate
and fixed-rate loans. The Company's ability to originate fixed- or
adjustable-rate loans is dependent upon the relative customer demand for such
loans, which is affected by the current and expected future level of interest
rates.

Generally, adjustable-rate residential mortgage loans are originated by the
Company for investment in its own portfolio while longer-term fixed-rate
residential mortgage loans are originated for sale. While the Company has in the
past, from time to time, retained fixed-rate one-to-four family loans and sold
adjustable-rate one-to four-family loans, it is the general policy of the
Company to sell substantially all of the one-to-four family fixed-rate mortgage
loans with maturities over 10 years that it originates and to retain
substantially all fixed-rate loans with maturities of up to and including 10
years and all adjustable-rate one-to-four family mortgage loans which it
originates. The one-to-four family loan products currently originated for sale
by the Company include a variety of mortgage loans which conform to the
underwriting standards specified by the Federal National Mortgage Association
("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac")
("conforming loans") and, to a lesser extent, loans which do not conform to
Fannie Mae or Freddie Mac standards due to loan amounts ("jumbo loans"), or
which otherwise vary from agency underwriting standards. The Company also sells
all mortgage loans insured by the Federal Housing Administration ("FHA") and the
Veterans' Administration ("VA"). All one-to-four family loans sold by the
Company are sold pursuant to master commitments negotiated with Fannie Mae,
Freddie Mac, FHLB and other investors to purchase loans meeting such investors'
defined criteria. Although the Company has entered

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into master commitment contracts, such contracts generally do not require the
purchasers to buy or the Company to deliver a specific amount of mortgage loans.

The Company currently sells substantially all longer-term fixed-rate
conforming mortgage loans it originates to Fannie Mae, Freddie Mac and FHLB.
Sales of loans are made without recourse to the Company in the event of default
by the borrower, except in the case of FHLB loans, which are sold with limited
recourse, and in the case of VA loans, which are subject to limitations on the
VA's loan guarantees. The Company generally retains the servicing rights on the
mortgage loans sold to Fannie Mae, Freddie Mac and FHLB but generally sells all
VA, FHA, long-term jumbo loans and non-conforming loans to institutional
investors on a servicing released basis.

Between the time the Company issues loan commitments and the time such
loans or the securities into which they are converted are sold, the Company is
exposed to movements in the market price due to changes in market interest
rates. The Company manages this risk by utilizing forward cash sales of loans or
mortgage-backed securities primarily to Fannie Mae, Freddie Mac and FHLB (such
forward sales of loans or mortgage-backed securities are collectively referred
to as "forward sale commitments"). Generally, the Company attempts to cover
between 60% and 70% of the principal amount of the loans that it has committed
to fund at specified interest rates with forward sale commitments. However, the
type, amount and delivery date of forward sale commitments the Company will
enter into is based upon anticipated movements in market interest rates, bond
market conditions and management's estimates of closing volumes and the length
of the origination or purchase commitments. Differences between the volume and
timing of actual loan origination and purchases and management's estimates can
expose the Company to losses. If the Company is not able to deliver the mortgage
loans or mortgage-backed securities during the appropriate delivery period
called for by the forward sale commitment, the Company may be required to pay a
non-delivery fee, repurchase the delivery commitments at current market prices
or purchase whole loans at a premium for delivery. The above activity is managed
continually; however, there can be no assurances that the Company will be
successful in its effort to minimize interest-rate risk between the time
origination or purchase commitments are issued and the ultimate sale of the
loan. At March 31, 2001, the Company had $69.6 million of forward sales
commitments.

At March 31, 2001, the Company was servicing its portfolio of $1.016
billion of loans receivable, net and mortgage loans held for sale and $1.531
billion of loans for others, primarily consisting of conforming fixed-rate loans
sold by the Company. Loan servicing includes collecting and remitting loan
payments, accounting for principal and interest, contacting delinquent
mortgagors, supervising foreclosures and property dispositions in the event of
unremedied defaults, making certain insurance and tax payments on behalf of the
borrowers and generally administering the loans. All of the loans currently
being serviced for others are loans which have been sold by the Company. The
gross servicing fee income from loans originated and purchased is generally .25
to .38% of the total balance of the loan serviced.

During the fiscal years ended March 31, 2001 and March 31, 2000, the
Company originated $368.5 million and $408.4 million of residential mortgage
loans, respectively, of which $248.8 million and $243.2 million, respectively,
were retained by the Company. The fixed-rate loans retained by the Company
consisted primarily of loans with terms of 10 years or less. The Company
recognizes, at the time of sale, the cash gain or loss on the sale of the loans
based on the difference between the net cash proceeds received and the carrying
value of the loans sold. The book value of mortgage servicing rights recognized
as an asset by the Company, at March 31, 2001, net of amortization, was $4.9
million.

One-to-Four Family Mortgage Lending. The Company offers both fixed-rate
and adjustable-rate mortgage ("ARM") loans secured by one-to-four family
residences with maturities of up to 30 years. Substantially, all of such loans
are secured by properties located in Southern New England. Loan originations are
generally obtained from the Company's commissioned loan representatives, banking
offices, correspondent banking relationships and wholesale brokers and their
contacts with the local real estate industry, existing or past customers, and
members of the local communities. At March 31, 2001, residential one-to-four
family mortgage loans totaled $677.5 million, or 67.2% of the Company's total
loans receivable. Of the Company's one-to-four family residential mortgage
loans, $246.8 million, or 36.4%, were fixed-rate loans and $430.7 million, or
63.6%, were adjustable-rate loans.

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The Company currently offers a number of ARM loan programs with interest
rates which are fixed for a period of one, three, four, five, seven or ten years
and adjust annually thereafter. The Company's ARM loans generally provide for
periodic (not more than 2%) and overall (not more than 6%) caps on the increase
or decrease in the interest rate at any adjustment date and over the life of the
loan, respectively. The interest rate adjustment on these loans is generally
indexed to the one-year U.S. Treasury CMT Index.

The Company's policy is to originate one-to-four family residential
first-mortgage loans in amounts up to 80% of the lower of the appraised value or
the selling price of the property securing the loan and up to 100% of the
appraised value or selling price if private mortgage insurance is obtained with
the exception of FHA and VA loans. Mortgage loans originated by the Company
include due-on-sale clauses which provide the Company with the contractual right
to deem the loan immediately due and payable in the event the borrower transfers
ownership of the property without the Company's consent. Due-on-sale clauses are
an important means of adjusting the rates on the Company's fixed-rate mortgage
loan portfolio and the Company has generally exercised its rights under these
clauses.

The origination of adjustable-rate residential mortgage loans, as opposed
to fixed-rate residential mortgage loans, helps reduce the Company's exposure to
increases in interest rates. However, adjustable-rate loans may pose credit
risks not inherent in fixed-rate loans, primarily because as interest rates
rise, the underlying payments of the borrower rise, thereby increasing the
potential for default. Periodic and lifetime caps on interest rate increases
reduce the credit risk associated with its adjustable-rate loans but also limit
the interest rate sensitivity of its adjustable-rate mortgage loans.

In an effort to provide financing for first-time and moderate income home
buyers, the Company offers FHA and VA loans and also has its own first-time home
buyer program. These programs offer single-family residential mortgage loans to
qualified individuals. These loans are offered with terms of up to 30 years.
Such loans must be secured by a one-to-four family owner-occupied unit. These
loans are originated using modified underwriting guidelines with reduced down
payments and loan fees. Such loans are originated in amounts up to 100% of the
lower of the property's appraised value or the sales price. Private mortgage
insurance is normally required. The Company expects to achieve a lower rate of
return on loans originated under the first-time home buyer program when compared
to other residential mortgage loans because the Company typically charges: a
lower rate of interest; a lower mortgage origination fee; or lower closing costs
on such loan programs.

Multi-Family Lending. The Company originates adjustable-rate multi-family
mortgage loans generally secured by five to 12 unit residential apartment
buildings. In reaching its decision on whether to make a multi-family loan, the
Company considers the value of the underlying property as well as the
experience, financial strength and other qualifications of the borrower. Other
factors relating to the property to be considered are: the net operating income
of the mortgaged premises before debt service and depreciation; the debt service
ratio; and the ratio of the loan amount to appraised value. The maximum amount
of a multi-family loan is limited by the Company's loans-to-one borrower limit
which, at March 31, 2001, was $16.0 million. In making its assessment of the
creditworthiness of the borrower, the Company generally reviews the financial
statements, employment and credit history of the borrower, as well as other
related documentation. Generally, multi-family loans made to corporations,
partnerships and other business entities require personal guarantees by the
principals. The Company's multi-family loan portfolio at March 31, 2001, totaled
$3.0 million, or .3% of total loans receivable.

Loans secured by apartment buildings and other multi-family residential
properties generally involve a greater degree of risk than one-to-four family
residential mortgage loans. Because payments on loans secured by multi-family
properties are generally dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
prevailing conditions in the real estate market or the economy. The Company
seeks to minimize these risks through its underwriting policies.

Commercial Real Estate Lending. The Company originates commercial real
estate loans that are generally secured by properties such as manufacturing
facilities, office buildings, retail facilities, recreation facilities, or
apartment buildings located in the Company's primary market area. The Company's
commercial real estate underwriting policy provides that commercial real estate
loans may generally be made in amounts
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up to 80% of the appraised value of the property. To a lesser extent, the
Company originates construction, acquisition and development loans to
experienced developers known to the Company for the construction of residential
or commercial properties. Construction and land loans to commercial developers
are generally originated in amounts up to 70% of the lesser of the appraised
value of the property, as improved, or the sales price. Generally, if the
borrower is a corporation, partnership or other business entity, personal
guarantees by the principals are required. Commercial real estate lending is
limited by the Bank's regulatory loans-to-one borrower limit which at March 31,
2001 was $16.0 million. In reaching its decision on whether to make a commercial
real estate loan, the Company considers the net operating income of the
property, the borrower's expertise, credit history, and profitability and the
value of the underlying property. The Company's commercial real estate loan
portfolio at March 31, 2001 was $44.4 million, or 4.4% of total loans
receivable.

Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than one-to-four family residential mortgage
loans. Because payments on loans secured by commercial real estate properties
are often dependent on successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to prevailing
conditions in the real estate market or the economy. The Company seeks to
minimize these risks through its underwriting standards.

Construction and Land Lending. The Company originates construction and
land loans primarily for the development of single-family residences. Such loans
are made principally to individuals building their primary residence. In the
case of construction and land mortgage loans to individuals building their
primary residence, such loans are originated in amounts up to 90% of the
appraised value of the property, as improved. Proceeds of construction and land
loans are disbursed as phases of the construction are completed. At March 31,
2001, the Company had $72.2 million of construction and land loans which
amounted to 7.2% of the Company's total loans receivable.

Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied
residential real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Company may be confronted with a project, when completed, having
a value which is insufficient to assure full repayment.

Commercial Lending. The Company also originates commercial loans to
businesses generally operating in the Company's primary market area. Such loans
are generally secured by equipment, inventory, accounts receivable, and real
estate, in the case of owner-occupied commercial property where repayment is
significantly dependent on the underlying business. The Company offers
commercial loans in the form of term loans and lines of credit.

When appraising commercial loans, the Company considers primarily the
financial resources of the borrower, the borrower's ability to repay the loan
out of cash flow, the Company's lending history with the borrower and the value
of the collateral. At March 31, 2001, the Company had $94.7 million of
commercial loans which amounted to 9.4% of the Company's total loans receivable.

Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment or other
income, and which are secured by real property whose value tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower's ability to repay from the cash flow of the
borrower's business. As a result, the availability of funds for the repayment of
commercial loans is substantially dependent on the success of the business
itself. Further, any collateral securing such loans may depreciate over time,
may be difficult to appraise and may fluctuate in value based on many factors,
including the success of the business.

Consumer Lending. Consumer loans at March 31, 2001 amounted to $116.6
million, or 11.6% of the Company's total loans receivable, and consisted
primarily of home equity lines of credit and second mortgage loans, and, to a
significantly lesser extent, secured and unsecured personal loans and new and
used automobile loans. Such loans are generally originated in the Company's
primary market area and generally are secured by

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real estate, deposit accounts, personal property and automobiles. These loans
are typically shorter term and generally have higher interest rates than
one-to-four family mortgage loans.

The Company offers two types of home equity loans: a variable-rate
"open-end line of credit" and a fixed-rate "second mortgage." Substantially all
of the Company's home equity loans are secured by second liens on one-to-four
family residences located in the Company's primary market area. At March 31,
2001, home equity loans totaled $107.0 million, or 10.6% of the Company's total
loans receivable and 91.7% of total consumer loans. Home equity lines of credit
have variable rates of interest, which can generally adjust on a monthly basis.
The interest rate on such loans is indexed to the prime rate as reported in The
Wall Street Journal and generally have an 18% lifetime limit on interest rates.
Generally, the maximum combined loans-to-value ratio ("LTV") on home equity
loans is 80%; however, fixed-rate second mortgage loans up to $50,000 and lines
of credit up to $25,000 can have an LTV of up to 100% on the property as long as
other underwriting criteria are satisfied. At March 31, 2001, the Company had
$99.4 million of variable-rate home equity lines of credit with an outstanding
balance of $45.2 million, which was 4.5% of total loans receivable and 38.8% of
total consumer loans. Second mortgage loans are generally offered with terms of
up to 15 years and only with fixed-rates of interest, which vary depending on
the amortization period chosen by the borrower. At March 31, 2001, fixed-rate
second mortgage loans totaled $61.8 million, or 6.1% of the Company's total
loans receivable and 53.0% of total consumer loans. The underwriting standards
employed by the Company for home equity lines of credit and second mortgage
loans include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment and, additionally, from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration.

The Company also originates other types of consumer loans consisting of
secured and unsecured personal loans and new and used automobile loans. Secured
personal loans are generally secured by deposit accounts, stocks or bonds.
Unsecured personal loans generally have a maximum borrowing limitation of
$10,000 and generally allow a maximum debt ratio (the ratio of debt service to
net earnings) of 40%. Automobile loans have a maximum borrowing limitation of
95% of the sale price of a new automobile and 80% of the lesser of the purchase
price or fair market value of a used automobile. At March 31, 2001, personal
loans totaled $6.1 million, or .6% of the Company's total loans receivable and
5.3% of consumer loans; and automobile loans totaled $3.5 million, or .4% of
total loans receivable and 3.0% of consumer loans.

Loans secured by rapidly depreciable assets such as automobiles or that are
unsecured entail greater risks than one-to-four family residential mortgage
loans. In such cases, repossessed collateral for a defaulted loan may not
provide an adequate source of repayment of the outstanding loan balance, since
there is a greater likelihood of damage, loss or depreciation of the underlying
collateral. Further, consumer loan collections on these loans are dependent on
the borrower's continuing financial stability and, therefore, are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Finally, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default. At March 31, 2001, consumer
loans 90 days or more delinquent totaled $80,000.

INVESTMENT ACTIVITIES

Federally-chartered savings institutions have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements, federal
funds and Small Business Investment Company Program investments. Subject to
various restrictions, federally-chartered savings institutions may also invest
their assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally-chartered
savings institution is otherwise authorized to make directly. Historically, the
Company has maintained liquid assets at a level considered to be adequate to
meet its normal daily activities.

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The investment policy of the Company, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Company's lending activities. The Company primarily
invests in mortgage-related securities (consisting of mortgage-backed
pass-through securities and collateralized mortgage obligations) guaranteed by
government agencies or, if privately issued, rated A or better by either Moody's
or Standard & Poor's. The Company designates investment securities as held to
maturity, available for sale, or held for trading. The Company generally invests
in securities as part of a wholesale leverage strategy as well as to manage
interest-rate risk and to maintain liquidity levels deemed appropriate by
management. At March 31, 2001, the Company had short-term investments of
$200,000 consisting of overnight deposits. As of the same date, the Company also
maintained investments in trading securities of $815,000. At March 31, 2001, the
Company's investment securities available for sale portfolio had a fair value of
$7.8 million, or 0.5% of assets, and an amortized cost of $6.4 million. At March
31, 2001, the Company had no investment securities held to maturity.

At March 31, 2001, the Company had invested $503.4 million, or 30.1% of
assets, in mortgage-backed securities issued by the Government National Mortgage
Association ("Ginnie Mae"), Fannie Mae and Freddie Mac or by private mortgage
security issuers. The portfolio consisted of $501.2 million of mortgage-backed
securities classified as available for sale, or 99.6% of total mortgage-backed
securities, and $2.1 million of mortgage-backed securities classified as held to
maturity, or 0.4% of total mortgage-backed securities. Of the $503.4 million in
mortgage-backed securities, $417.6 million were adjustable-rate securities and
$85.8 million were fixed-rate securities.

Of the $417.6 million of adjustable-rate securities, $203.4 million were
Ginnie Mae one year CMT indexed ARMs with 1% maximum annual rate adjustments and
5% maximum lifetime rate adjustments, $18.3 million were Fannie Mae and Freddie
Mac one-year CMT indexed ARMs with initial fixed-rate periods of one to five
years, and 2% maximum annual rate adjustments and 6% maximum lifetime rate
adjustments, $55.8 million were Fannie Mae and Freddie Mac Eleventh District
Cost of Funds ("COFI") indexed monthly resetting ARMs with no annual rate caps,
but with lifetime caps of 9.28% to 13.07%, $94.1 were Fannie Mae and privately
issued COFI indexed collateralized mortgage obligation ("CMO") bonds, $36.5
million were Ginnie Mae and privately issued LIBOR indexed CMO bonds, and $9.5
million were privately issued CMO bonds indexed to the one-year CMT.

Of the $85.8 million of fixed-rate securities, $63.0 million were AAA-rated
privately issued CMO bonds with average lives of approximately 5 years or less,
$12.0 million were Fannie Mae and Freddie Mac 7 year securities with
approximately 3 years until required repayment, and $600,000 were Ginnie Mae and
Freddie Mac pass-through securities with an average remaining term of 78 months.

Investments in mortgage-backed securities involve a risk that actual
prepayments will differ from estimated prepayments over the life of the
security. Mortgage-backed securities may require adjustments to the amortization
of any premium or accretion of any discount relating to such instruments thereby
changing the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. In addition, the market value and/or
interest rates of such securities may be adversely affected by changes in
interest rates.

SOURCES OF FUNDS

General. Deposits, loan and mortgage-backed security principal and
interest payments, proceeds from sales of loans, cash flows generated from
operations and FHLB advances and other borrowings are the primary sources of the
Company's funds for use in lending, investing and for other general purposes.

Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of business checking,
money market, savings, NOW and certificate accounts. For the fiscal year ended
March 31, 2001, core deposits (defined as total deposits less certificate
accounts) represented 39.0% of total average deposits. The flow of deposits is
influenced significantly by general economic conditions, changes in money market
rates, prevailing interest rates and competition. The Company's deposits are
obtained predominantly from the areas in which its banking offices are located.
The
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Company has historically relied primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Company's ability to attract and retain deposits. The
Company uses traditional means of advertising its deposit products, including
radio and print media and generally does not solicit deposits from outside its
market area. While the Company does not actively solicit certificate accounts in
excess of $100,000 or use brokers to obtain deposits, the Company may, from time
to time, solicit such deposits or utilize brokered deposits depending upon
market conditions. The Company's average certificate balances decreased to
$407.0 million, or 61.0% of total average deposits, during the year ended March
31, 2001 from $418.8 million, or 63.4% of total average deposits, during the
year ended March 31, 2000. The Company's cost of average deposits increased to
3.93% for the year ended March 31, 2001 from 3.76% for the year ended March 31,
2000. At March 31, 2001, the weighted average remaining maturity of the
Company's certificate accounts was 9.4 months.

Borrowings. The Company utilizes advances from the FHLB and reverse
repurchase agreements with securities dealers as alternatives to retail deposits
to fund its operations as part of its operating strategy. During the year ended
March 31, 2001, the Company used FHLB borrowings to a greater extent to fund its
purchase of mortgage-backed securities. FHLB advances are collateralized
primarily by certain of the Company's mortgage loans and mortgage-backed
securities. FHLB advances are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. The
maximum amount that the FHLB will advance to member institutions, including the
Bank, fluctuates from time to time in accordance with the policies of the
Federal Housing Finance Board and the FHLB. At March 31, 2001, the Company had
$814.8 million in outstanding advances from the FHLB and other borrowings.

SUBSIDIARY ACTIVITIES

First Federal Savings Bank of America includes its wholly-owned
subsidiaries: FIRSTFED MORTGAGE CORPORATION, a Massachusetts corporation which
is currently inactive; FIRSTFED INVESTMENT CORPORATION, a Massachusetts security
corporation; and CELMAC INVESTMENT CORPORATION, also a Massachusetts security
corporation.

FAB FUNDING CORPORATION ("FAB FUNDING"), a Massachusetts corporation, is a
wholly-owned subsidiary of the Company formed primarily to finance stock
purchases by the Company's Employee Stock Ownership Plan and related trust
("ESOP"). The financing from FAB FUNDING is collateralized by the shares of
stock of the Company purchased by the ESOP, which are released for distribution
to eligible employees of the Company as payments are made on the loan. Except
for the loan to the ESOP, FAB FUNDING has no significant operations.

FIRSTFED INSURANCE AGENCY, LLC, a Massachusetts limited liability
corporation, was formed in January 1999 and is jointly owned by the Company and
FAB FUNDING. The Agency offers a comprehensive insurance product line including
auto, home, life, accident and health insurance to consumers and businesses. The
Agency is licensed to sell insurance in Massachusetts, Rhode Island and
Connecticut and is subject to regulations of and periodic examinations by these
states.

FIRSTFED TRUST COMPANY, N.A., a nationally chartered organization
headquartered in Massachusetts, was formed in February 2000. The Trust Company
provides investment and fiduciary services in the Rhode Island and southeastern
Massachusetts marketplace and is 65% owned by the Company.

PERSONNEL

As of March 31, 2001, the Company had 304 authorized full-time employee
positions and 49 authorized part-time employee positions, for a total of
approximately 329 full-time equivalents. The employees are not represented by a
collective bargaining unit and the Company considers its relationship with its
employees to be good.

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REGULATION AND SUPERVISION

GENERAL

As a savings and loan holding company, the Company is required by federal
law to file reports with, and otherwise comply with, the rules and regulations
of the OTS. The Bank, as a federally chartered savings association, is subject
to extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of
the Federal Home Loan Bank System and, with respect to deposit insurance, of the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Trust
Company, a nationally chartered trust company, is subject to extensive
regulation, examination and supervision by its federal regulator, the Office of
the Comptroller of the Currency ("OCC"), the agency that charters national
banks. The Trust Company does not accept deposits and is not insured by the
FDIC.

The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other institutions. The OTS and/or the FDIC conduct periodic
examinations to test the Bank's safety and soundness and compliance with various
regulatory requirements. Similarly, the Trust Company reports to, and is subject
to examination and supervision by, the OCC. This regulation and supervision
establishes a comprehensive framework of activities, in which an institution can
engage and is intended primarily to facilitate the institution's safety and
soundness. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including, with respect to the Bank,
policies regarding the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in the
applicable regulatory requirements and policies, whether by the OTS, the FDIC,
the OCC or the Congress, could have a material adverse impact on the Company,
the Bank, the Trust Company and their operations. Certain of the regulatory
requirements applicable to the Bank, the Trust Company and to the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank, the
Trust Company and the Company.

HOLDING COMPANY REGULATION

The Company is a nondiversified unitary savings and loan holding company
within the meaning of federal law. Under prior law, a unitary savings and loan
holding company, such as the Company, was not generally restricted as to the
types of business activities in which it may engage, provided that the Bank
continued to be a qualified thrift lender. See "Regulation of the Bank and Trust
Company -- QTL Test." The Gramm-Leach-Bliley Act of 1999 provides that no
company may acquire control of a savings association after May 4, 1999 unless it
engages only in the financial activities permitted for financial holding
companies under the law or for multiple savings and loan holding companies as
described below. Further, the Gramm-Leach-Bliley Act specifies that existing
savings and loan holding companies may only engage in such activities. The
Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority for
activities with respect to unitary savings and loan holding companies existing
prior to May 4, 1999, such as the Company, so long as the Bank continues to
comply with the QTL Test. Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation.

A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the OTS and from acquiring or retaining control of a depository institution
that is not insured by the FDIC. In evaluating applications by holding companies
to acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect
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of the acquisition on the risk to the deposit insurance funds, the convenience
and needs of the community and competitive factors.

The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.

Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to the Company. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.

REGULATION OF THE BANK AND TRUST COMPANY

Business Activities. The activities of federal savings institutions, such
as the Bank, are governed by federal law and regulations. These laws and
regulations delineate the nature and extent of the activities in which federal
associations may engage. In particular, many types of lending authority for
federal associations, e.g., commercial, non-residential real property loans and
consumer loans, are limited to a specified percentage of the institution's
capital or assets.

The activities of the Trust Company are limited to providing fiduciary and
related services and are also subject to federal law and regulation. Generally,
the Trust Company is subject to all of the laws and regulations applicable to
national banks except where clearly inapplicable due to the Trust Company's
limited activities.

Capital Requirements. OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4%
leverage ratio (3% for institutions receiving the highest rating on the CAMELS
rating system) and an 8% risk-based capital ratio. In addition, the prompt
corrective action standards discussed below also establish, in effect, a minimum
2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest rating on the CAMELS rating system), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.

The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.

The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating

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their risk-based capital requirements. For the present time, the OTS has
deferred implementation of the interest rate risk capital charge. At March 31,
2001, the Bank met each of its capital requirements.

The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. At March 31, 2001, the
Trust Company met each of its capital requirements.

Both the OTS and OCC have the discretion to establish higher capital
requirements in individual cases where deemed justified by the institution's
condition or risk profile.

Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.

Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semiannually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points for the riskiest.

In addition to the assessment for deposit insurance, FDIC-insured
institutions are required to make payments on bonds issued in the late 1980s by
the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF.
During 2000, FICO payments for SAIF members approximated 2.07 basis points. By
law, there was equal sharing of FICO payments between SAIF and Bank Insurance
Fund ("BIF") members, which began on January 1, 2000.

The Bank's assessment rate for fiscal 2001 ranged from 1.96 to 2.08 basis
points and the premium paid for this period was $138,000. Payments toward the
FICO bonds amounted to $138,000. The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would likely have
an adverse effect on the operating expenses and results of operations of the
Bank. Management cannot predict what insurance assessment rates will be in the
future.

Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.

The Trust Company does not accept deposits and is not insured by the FDIC.

Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily

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marketable collateral. At March 31, 2001, the Bank's limit on loans to one
borrower was $16.0 million, and the Bank's largest aggregate outstanding balance
of loans to one borrower was $10.0 million.

QTL Test. The HOLA requires savings institutions such as the Bank to meet
a qualified thrift lender test. Under the test, a savings association is
required to either qualify as a "domestic building and loan association" under
the Internal Revenue Code or maintain at least 65% of its "portfolio assets"
(total assets less: (i) specified liquid assets up to 20% of total assets; (ii)
intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain "qualified thrift investments" (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
in at least 9 months out of each 12-month period.

A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
commercial bank charter. As of March 31, 2001, the Bank maintained 86.1% of its
portfolio assets in qualified thrift investments and, therefore, met the
qualified thrift lender test. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered "qualified thrift investments."

Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the OTS regulation, an
application to and the prior approval of the OTS is required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions
for the calendar year exceed net income for that year plus the amount of
retained net income for the preceding two years, the institution would be
undercapitalized following the distribution or the distribution would otherwise
be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution must still provide prior notice to
the OTS of the capital distribution if, like the Bank, it is a subsidiary of a
holding company. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.

Under OCC regulations, a national trust company may not, without OCC
approval, pay dividends in excess of the total of the Bank's retained net income
for the year combined with retained net income for the prior two years.

Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a
semi-annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries and off-balance sheet activity, as reported
in the Bank's latest quarterly thrift financial report. Assessments paid by the
Bank for the fiscal year ended March 31, 2001 totaled $271,000.

The Trust Company must pay semi-annual assessments to the OCC to fund its
operations. The OCC has recently adopted a change to the manner in which
national trust companies with less than $1 billion in managed assets, such as
the Trust Company, are assessed. The revision implements both a component based
on the amount of balance sheet assets and a flat fee. Assessments paid by the
Trust Company for the fiscal year ended March 31, 2001 totaled $14,000.

Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited.
Transactions with affiliates must be on terms and under circumstances that are
at least as favorable to the

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institution as those prevailing at the time for comparable transactions with
non-affiliated companies. The Trust Company is subject to similar restrictions.
In addition, savings institutions are prohibited from lending to any affiliate
that is engaged in activities that are not permissible for bank holding
companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.

The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. There is an exception for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees. The law limits both the individual and aggregate amount of
loans the Bank may make to insiders based, in part, on the Bank's capital
position and requires certain board approval procedures to be followed.

Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.

Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.

The OCC has similar enforcement authority with respect to the Trust
Company.

FEDERAL HOME LOAN BANK SYSTEM

The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a member
of the Federal Home Loan Bank of Boston, is required to acquire and hold shares
of capital stock in that Federal Home Loan Bank in an amount at least equal to
1.0% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the Federal Home Loan Bank, whichever is greater. The Bank was
in compliance with this requirement with an investment in Federal Home Loan Bank
stock at March 31, 2001 of $40.4 million.

FEDERAL RESERVE SYSTEM

The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally provide
that reserves be maintained against aggregate transaction accounts as follows:
for accounts aggregating $42.8 million or less (subject to adjustment by the
Federal Reserve Board), the reserve requirement is 3%; and for accounts
aggregating greater than $42.8 million, the reserve requirement is $1.284
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $42.8
million. The first $5.5 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.

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FEDERAL SECURITIES LAWS

The Company's common stock is registered with the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to
the information and proxy solicitation requirements, insider trading
restrictions, and other requirements under the Exchange Act.

Shares of the common stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company will be subject to the resale restrictions of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed in any three-month period
the greater of (i) 1% of the outstanding shares of the Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provisions may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances.

FEDERAL AND STATE TAXATION

FEDERAL TAXATION

General. The Company and the Bank report their income on a fiscal year,
consolidated basis and the accrual method of accounting, and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to the Company, the Bank or other subsidiaries. The Company was last audited by
the IRS in 1983, which covered the tax years 1980 to 1981. For its 2000 taxable
year, the Company is subject to a federal income tax rate of 34%.

Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.

The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to make any distributions
that would result in a recapture of any portion of its bad debt reserves.

STATE AND LOCAL TAXATION

Commonwealth of Massachusetts Taxation. For fiscal year 2001 the tax rate
applicable for financial institutions was 10.5%. Net income for years beginning
before January 1, 1999 includes gross income as defined under the provisions of
the Code, plus interest from bonds, notes and evidences of indebtedness of any
state, including Massachusetts, less the deductions, excluding the deductions
for dividends received, state taxes, and net operating losses, as defined under
the provisions of the Code. For taxable years beginning on or after January 1,
1999, the definition of state taxable income is modified to allow a deduction
for 95% of dividends received from stock where the Company owns 15% or more of
the voting stock of the institution

16
18

paying the dividend and to allow deductions from certain expenses allocated to
federally tax exempt obligations. Subsidiary corporations of the Company
conducting business in Massachusetts must file separate Massachusetts state tax
returns and are taxed as financial institutions, with certain modifications and
grandfathering for taxable years before 1996.

Corporations which qualify as "securities corporations," as defined by the
Massachusetts tax code, are taxed at a special rate of 1.32% of their gross
income. FIRSTFED INVESTMENT CORPORATION and CELMAC INVESTMENT CORPORATION
qualified for this reduced tax rate.

Rhode Island Taxation. Subsidiary corporations of the Company conducting
business in Rhode Island are subject to a Rhode Island excise tax and must file
separate Rhode Island state tax returns. The tax is based upon an apportioned
percentage of net income related to activities conducted within the State. The
apportionment percentage is determined by adding the taxpayer's receipts factor,
property factor, and payroll factor and dividing the sum by three. For fiscal
year 2001, the tax rate was 9%.

Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.

ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth certain information regarding the executive
officers of the Company and the Bank who are not also directors.

AGE AT
NAME MARCH 31, 2001 POSITION
- ---- -------------- -----------------------------------------

Edward A. Hjerpe, III..................... 42 Executive Vice President, Chief Operating
Officer, and Chief Financial Officer of
the Company and the Bank
Kevin J. McGillicuddy..................... 61 Executive Vice President of the Company
and the Bank
Frederick R. Sullivan..................... 59 Executive Vice President of the Company
and the Bank

17
19

ITEM 2. PROPERTIES.

The Company currently conducts its business through a centralized
administrative, operations, and banking office located in Swansea and 14 other
full service banking offices and five loan origination centers. The Company
believes that its current facilities are adequate to meet the needs of the Bank
and the Company.

NET BOOK VALUE
ORIGINAL OF PROPERTY OR
LEASED YEAR DATE OF LEASEHOLD
OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 2001
- -------- ------ --------- -------------- ---------------
(IN THOUSANDS)

ADMINISTRATIVE/OPERATIONS/
BANKING OFFICE:
ONE FIRSTFED PARK..................... Owned 1994 -- $ 7,788
Swansea, MA 02777
BANKING OFFICES:
27 Park Street........................ Owned 1990 -- 1,562
Attleboro, MA 02703
33 Sullivan Drive..................... Owned 1979 -- 1,343
Fall River, MA 02721
1450 Plymouth Avenue.................. Owned 1972 -- 298
Fall River, MA 02721
278 Union Street...................... Owned 1972 -- 287
New Bedford, MA 02740
480 Rockdale Avenue................... Owned 1983 -- 669
New Bedford, MA 02740
265 Newport Avenue.................... Owned 1996 -- 674
Pawtucket, RI 02860
40 Westminster Street................. Leased 2000 May 2010 626
Providence, RI 02903
741 Willett Avenue.................... Owned 1995 -- 635
East Providence, RI 02915
1519 Newman Avenue.................... Owned 1994 -- 584
Seekonk, MA 02771
149 Grand Army Highway................ Owned 1963 -- 392
Somerset, MA 02725
2 Washington Street................... Owned 1976 -- 632
Taunton, MA 02780
2100 Warwick Avenue................... Owned 1996 -- 606
Warwick, RI 02889
975 Ashley Boulevard.................. Leased 1996 (1) 635
New Bedford, MA 02745
1215 Park Avenue...................... Owned 1998 -- 1,424
Cranston, RI 02910
LOAN ORIGINATION CENTERS:
12 White's Path, Unit 7............... Leased 1992 October 2001(2) --
Yarmouth, MA 02664
62 Auburn Street...................... Leased 1990 June 2001(2) --
Auburn, MA 01501
1325 Springfield Street............... Leased 1992 June 2001(2) --
Agawam, MA 01089
10 Wall Street........................ Leased 1994 January 2003 --
Burlington, MA 01803
333 Main Street....................... Leased 1990 September 2004 --
East Greenwich, RI 02818

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20

NET BOOK VALUE
ORIGINAL OF PROPERTY OR
LEASED YEAR DATE OF LEASEHOLD
OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MARCH 31, 2001
- -------- ------ --------- -------------- ---------------
(IN THOUSANDS)

OTHER FACILITIES:
1 North Main Street................... Owned 1956 -- 579
Fall River, MA 02720
246 Gardner's Neck Road............... Leased 2000 March 2002(2) 8
Swansea, MA 02777
-------
Total......................... $18,742
=======

- ---------------
(1) In 1996, the Company entered into a lease agreement for the land. The lease
has a commencement date of November 1, 1996 and a term of 20 years with four
five-year renewal options. Subsequent to entering into the lease agreement,
the Company constructed a banking office which the Company owns at the
location.

(2) The Company has options to renew these leases from 1 to 5 years. The Company
is reviewing leases with expirations dates in 2001 for potential renewal,
extension or renegotiation.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Shareholder Information" opposite the
inside back cover in the Registrant's 2001 Annual Report to Stockholders and is
incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA.

The above-captioned information appears under "Selected Consolidated
Financial and Other Data of the Company" in the Registrant's 2001 Annual Report
to Stockholders on pages 10 and 11 and is incorporated herein by reference.

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21

ITEM 7. 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. Mortgage loan sales are made
from mortgage loans held in the Company's portfolio designated as being held for
sale or originated for sale during the period. The Company's revenues are
derived principally from interest on its loans, and to a lesser extent,
dividends and interest on its investments and mortgage-backed securities, fees
and loan servicing income. The Company's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed securities,
proceeds from the sale of loans, FHLB advances, and other borrowings.

The Company's results of operations are primarily dependent on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses and non-interest income including loan sale
activities, loan servicing income, and revenue from the Trust Company and Agency
operations. The Company's non-interest expense consists of compensation and
employee benefits, office occupancy and equipment expense, federal deposit
insurance premiums, advertising and business promotion, data processing expense,
and other expenses. Results of operations of the Company are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and the actions of regulatory authorities.
The Company had no material assets, liabilities or operations prior to January
15, 1997, and accordingly, the results of operations and other data discussed
below occurring prior to that date reflect only those of the Bank and its
subsidiary.

This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. 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.

The Company does not undertake -- and specifically disclaims any
obligation -- to publicly release the result of any revisions that 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.

20
22

RESULTS OF OPERATIONS

OVERVIEW

Net income for the year ended March 31, 2001 was $9.2 million, or $1.56
diluted earnings per share ("EPS"), compared to $8.2 million, or $1.31 diluted
EPS for the year ended March 31, 2000 and $7.6 million, or $1.09 diluted EPS for
the year ended March 31, 1999. Pre-tax income increased $1.5 million, or 12.7%,
to $13.4 million during fiscal year 2001 as compared to fiscal year 2000, the
net result of increases in net interest income of $2.6 million, non-interest
income of $2.4 million and non-interest expense of $3.5 million. Pre-tax income
increased $436,000, or 3.8%, to $11.9 million during fiscal year 2000 as
compared to fiscal year 1999, the net result of a $1.7 million increase in net
interest income, a $1.1 million decrease in non-interest income, and a $176,000
increase in non-interest expense. Growth in EPS was caused by the growth in net
income and a reduction in outstanding shares of the Company's stock primarily as
a result of stock repurchases.

NET INTEREST INCOME

Net interest income before provision for loan losses increased $2.6
million, or 8.2%, to $34.7 million for the year ended March 31, 2001 from $32.1
million for the year ended March 31, 2000, following an increase of $1.7
million, or 5.7%, from $30.3 million for the year ended March 31, 1999. The net
interest rate spread decreased 13 basis points to 1.93% for the year ended March
31, 2001 from 2.06% for the year ended March 31, 2000, following an increase of
15 basis points from 1.91% for the year ended March 31, 1999, while the net
interest margin decreased 11 basis points to 2.25% for the year ended March 31,
2001 from 2.36% for the year ended March 31, 2000, following an decrease of five
basis points from 2.41% for the year ended March 31, 1999.

Net interest income before provision for loan losses represents the
difference between income on interest-earning assets and expense on
interest-bearing liabilities. Net interest income before provision for loan
losses also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on each.

The following table sets forth certain information relating to the Company
at fiscal year end 2001 and for fiscal years 2001, 2000 and 1999. 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.

21
23

FOR THE YEARS ENDED MARCH 31,
--------------------------------------------------------
2001 2000
AT ------------------------------- ---------------------
MARCH 31, 2001 AVERAGE
----------------------- AVERAGE YIELD/ AVERAGE
BALANCE YIELD/COST BALANCE INTEREST COST BALANCE INTEREST
---------- ---------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)

ASSETS:
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale(1)............ $1,016,277 7.88% $ 986,116 $77,116 7.82% $ 809,945 $61,005
Investment securities(2)............ 49,221 6.35 50,745 3,452 6.80 47,061 2,775
Mortgage-backed securities(3)....... 503,368 6.56 507,584 33,507 6.60 503,062 30,041
---------- ---- ---------- ------- ----- ---------- -------
Total interest-earning
assets....................... 1,568,866 7.38 1,544,445 114,075 7.39 1,360,068 93,821
---- ------- ----- -------
Non-interest-earning assets........... 102,199 99,692 98,808
---------- ---------- ----------
Total assets................... $1,671,065 $1,644,137 $1,458,876
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts............. $ 53,075 4.24 $ 38,053 1,156 3.04 $ 33,377 780
Savings accounts.................. 102,884 1.76 101,038 1,777 1.76 99,014 1,743
NOW accounts...................... 72,241 0.98 64,895 637 0.98 56,973 558
Certificate accounts(4)........... 407,797 5.71 406,979 22,682 5.57 418,815 21,731
---------- ---- ---------- ------- ----- ---------- -------
Total interest-bearing
deposits..................... 635,997 4.42 610,965 26,252 4.30 608,179 24,812
FHLB advances and other
borrowings........................ 814,764 6.18 842,701 53,143 6.31 667,352 36,959
---------- ---- ---------- ------- ----- ---------- -------
Total interest-bearing
liabilities.................. 1,450,761 5.42 1,453,666 79,395 5.46 1,275,531 61,771
---- ------- ----- -------
Non-interest-bearing liabilities(5)... 108,746 85,281 78,268
---------- ---------- ----------
Total liabilities.............. 1,559,507 1,538,947 1,353,799
Stockholders' Equity.................. 111,558 105,190 105,077
---------- ---------- ----------
Total liabilities and
stockholders' equity......... $1,671,065 $1,644,137 $1,458,876
========== ========== ==========
Net interest rate spread(6)........... 1.96% $34,680 1.93% $32,050
==== ======= ===== =======
Net interest margin(7)................ 2.25%
=====
Ratio of interest-earning assets to
Interest-bearing liabilities........ 108.15% 106.24% 106.63%
========== ========== ==========

FOR THE YEARS ENDED MARCH 31,
------------------------------------------
2000 1999
------- -------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
COST BALANCE INTEREST COST
------- ---------- -------- -------
(DOLLARS IN THOUSANDS)

ASSETS:
Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale(1)............ 7.53% $ 873,335 $65,352 7.48%
Investment securities(2)............ 5.90 64,356 3,634 5.65
Mortgage-backed securities(3)....... 5.97 319,068 17,791 5.58
----- ---------- ------- ----
Total interest-earning
assets....................... 6.90 1,256,759 86,777 6.90
----- ------- ----
Non-interest-earning assets........... 75,582
----------
Total assets................... $1,332,341
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market accounts............. 2.34 $ 31,871 849 2.66
Savings accounts.................. 1.76 93,118 1,875 2.01
NOW accounts...................... 0.98 50,760 498 0.98
Certificate accounts(4)........... 5.19 441,556 24,350 5.51
----- ---------- ------- ----
Total interest-bearing
deposits..................... 4.08 617,305 27,572 4.47
FHLB advances and other
borrowings........................ 5.54 514,507 28,871 5.61
----- ---------- ------- ----
Total interest-bearing
liabilities.................. 4.84 1,131,812 56,443 4.99
----- ------- ----
Non-interest-bearing liabilities(5)... 88,751
----------
Total liabilities.............. 1,220,563
Stockholders' Equity.................. 111,778
----------
Total liabilities and
stockholders' equity......... $1,332,341
==========
Net interest rate spread(6)........... 2.06% $30,334 1.91%
===== ======= ====
Net interest margin(7)................ 2.36% 2.41%
===== ====
Ratio of interest-earning assets to
Interest-bearing liabilities........ 111.04%
==========

- ---------------
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction mortgages in process, allowance for loan losses and includes
non-performing loans.

(2) Includes short-term investments, investments in trading securities,
investment securities available for sale and held to maturity, and FHLB
stock.

(3) Consists of mortgage-backed securities available for sale and held to
maturity.

(4) Includes the net effect of interest rate swaps.

(5) Consists primarily of business checking accounts.

(6) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.

(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.

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24

The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to:
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated on a proportional
basis between changes in rate and volume.

YEAR ENDED MARCH 31, 2001 YEAR ENDED MARCH 31, 2000
COMPARED TO COMPARED TO
YEAR ENDED MARCH 31, 2000 YEAR ENDED MARCH 31, 1999
----------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- -------------------
VOLUME RATE NET VOLUME RATE NET
-------- -------- ------- -------- -------- -------
(IN THOUSANDS)

Interest-earning assets:
Loans receivable, net and mortgage
loans held for sale................. $13,702 $ 2,409 $16,111 $(4,772) $ 425 $(4,347)
Investment securities.................. 229 448 677 (1,014) 155 (859)
Mortgage-backed securities............. 273 3,193 3,466 10,907 1,343 12,250
------- ------- ------- ------- ------- -------
Total interest-earning
assets....................... 14,204 6,050 20,254 5,121 1,923 7,044
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Money market accounts.................. 119 257 376 39 (108) (69)
Savings accounts....................... 34 -- 34 114 (246) (132)
NOW accounts........................... 79 -- 79 61 (1) 60
Certificate accounts................... (621) 1,572 951 (1,220) (1,399) (2,619)
------- ------- ------- ------- ------- -------
Total interest-bearing
deposits..................... (389) 1,829 1,440 (1,006) (1,754) (2,760)
FHLB advances and other borrowings..... 10,575 5,609 16,184 8,470 (382) 8,088
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities.................. 10,186 7,438 17,624 7,464 (2,136) 5,328
------- ------- ------- ------- ------- -------
Net change in net interest income........ $ 4,018 $(1,388) $ 2,630 $(2,343) $ 4,059 $ 1,716
======= ======= ======= ======= ======= =======

PROVISION FOR LOAN LOSSES

The Company's provision for loan losses amounted to $1.2 million for each
of the years ended March 31, 2001, 2000 and 1999, due to management's assessment
of the loan loss reserve level, the existing loan portfolio, current market
conditions, and the volume and mix of new originations. To the extent the
Company experiences further increases in the overall balance of its loan
portfolio or increases its concentrations of loans which bear a higher degree of
risk than one-to-four family loans, the Company anticipates further increases in
its allowance for loan losses through continued provisions for loan losses.
While management of the Company believes that the current level of its allowance
for loan losses is sufficient based on information currently available at this
time, no assurances can be made that future events, conditions or regulatory
directives will not result in increased provisions for loan losses or additions
to the Company's allowance for loan losses which may adversely affect net
income. 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 $2.4 million, or 37.1%, to $9.0 million for
the year ended March 31, 2001 from $6.5 million for the year ended March 31,
2000, following a decrease of $1.1 million, or 14.5%, from $7.6 million for the
year ended March 31, 1999.

The increase during fiscal year 2001 as compared to fiscal year 2000 was
due primarily to an increase of $1.5 million in gain (loss) on sale of mortgage
loans, net, and increases in trust fee income of $1.0 million,

23
25

insurance commission income of $602,000 and service charges on deposit accounts
of $278,000, partially offset by decreases in loan servicing income of $547,000
and other non-interest income of $541,000. The improvement in gain (loss) on
sale of mortgage loans reflected more favorable secondary market conditions,
partially offset by a decrease in the origination of saleable fixed rate
mortgages, during fiscal year 2001 as compared to fiscal year 2000. The increase
in trust fee income was due to the first full year of operations of the Trust
Company, which opened in February 2000. The increase in insurance commission
income was due primarily to additional business resulting from the purchase of
two insurance agencies by the Agency in March 2000. The decrease in loan
servicing income was due primarily to a decline in the Company's loans serviced
for others during fiscal year 2001, and a $237,000 reduction in the valuation
reserve for mortgage servicing rights during fiscal year 2000. The decreases in
other non-interest income were due primarily to reductions in the fair value of
investments in certain employee benefit plans.

The decrease during fiscal year 2000 as compared to fiscal year 1999 was
due primarily to a $3.0 million decrease in gain (loss) on sale of mortgage
loans, net, partially offset by a $977,000 increase of earnings on BOLI, a
$248,000 increase in service charges, a $299,000 increase in the unrealized gain
(loss) on trading securities, and a $368,000 increase in insurance commissions.
The decrease in gain (loss) on sale of mortgage loans is due to lower volume of
saleable mortgages and unfavorable secondary market conditions during fiscal
year 2000.

NON-INTEREST EXPENSE

Total non-interest expense increased $3.5 million, or 13.9%, to $29.1
million for the year ended March 31, 2001 from $25.5 million for year ended
March 31, 2000, following an increase of $176,000, or 0.7%, from $25.3 million
for year ended March 31, 1999.

The increase during fiscal year 2001 as compared to fiscal year 2000 was
due primarily to increases in compensation and benefits of $3.1 million, office
occupancy and equipment of $542,000, and data processing of $372,000. These
increases were partially offset by decreases in advertising and business
promotion of $121,000, deposit insurance premiums of $196,000 and other
non-interest expense of $107,000. The higher overall level of expenses reflected
costs associated with the Company's new retail banking and business banking
offices in downtown Providence, Rhode Island, both of which opened in early
fiscal year 2001, the expansion of Agency operations, the first full year of
Trust Company operations, and the net impact of increases in the cost of certain
employee benefit plans.

The increase during fiscal year 2000 as compared to fiscal year 1999 was
due primarily to a $117,000 increase in compensation and benefits, a $124,000
increase in office occupancy and equipment, a $363,000 increase in advertising
and business promotion due to the introduction of online banking, and a $277,000
increase in data processing due to increased online processing charges. These
increases were partially offset by a $254,000 decrease in deposit insurance
premiums and a $451,000 decrease in other non-interest expense. The decrease in
other non-interest expense was primarily the result of lower costs for
telephone, postage, and supplies due to decreased loan origination activity.

INCOME TAXES

Income tax expense increased $532,000, or 14.4%, to $4.2 million for the
year ended March 31, 2001 from $3.7 million for the year ended March 31, 2000,
following a decrease of $129,000, or 3.4%, from $3.8 million for the year ended
March 31, 1999. These changes were due primarily to the changes in pre-tax
income, and the Company's implementation of certain tax strategies during the
year ended March 31, 1999. Overall, the Company's effective tax rate was 31.5%
for the year ended March 31, 2001, compared to 31.1% for the year ended March
31, 2000 and 33.4% for the year ended March 31, 1999.

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26

FINANCIAL CONDITION

OVERVIEW

Total assets were $1.671 billion at March 31, 2001, an increase of $91.1
million, or 5.8%, from $1.580 billion at March 31, 2000, following an increase
of $186.8 million, or 13.4%, from $1.393 billion at March 31, 1999. The growth
during fiscal year 2001 was primarily attributable to increases in loans
receivable, net of $88.4 million and mortgage loans held for sale of $35.7
million, partially offset by a decrease of $42.4 million in mortgage-backed
securities available for sale. Balance sheet growth was primarily funded by
increases of $42.7 million in deposit balances and $35.1 million in FHLB
advances and other borrowings during fiscal year 2001. The growth during fiscal
year 2000 was primarily attributable to increases in mortgage-backed securities
available for sale of $135.2 million and loans receivable, net of $122.1
million, partially offset by decreases in mortgage loans held for sale of $48.9
million and cash and cash equivalents of $18.1 million. Balance sheet growth was
primarily funded by a $193.7 million increase in FHLB advances and other
borrowings during fiscal year 2000.

Total stockholders' equity was $111.6 million at March 31, 2001, an
increase of $9.9 million, or 9.7%, from $101.7 million at March 31, 2000,
following a decline of $1.3 million, or 1.2%, from $103.0 million at March 31,
1999. The increase during fiscal year 2001 was primarily attributable to $9.2
million in net income, a $7.0 million increase in the fair market value of
available for sale securities, net of tax, and $1.4 million in earned
Stock-based Incentive Plan awards, partially offset by $6.3 million in treasury
stock purchases and $2.4 million in dividends paid to stockholders. The decline
during fiscal year 2000 was primarily attributable to two 5.0% stock repurchase
programs, the payment of four quarterly dividends to shareholders, and a decline
in the fair value of securities available for sale, net of tax. The Company has
repurchased 2,486,903 shares since May 15, 1998 through seven stock repurchase
programs, reducing the legal number of shares outstanding to 6,220,249.
Stockholders' equity to assets was 6.68% at March 31, 2001, compared to 6.44% at
March 31, 2000 and 7.39% at March 31, 1999. Book value per share was $19.57 at
March 31, 2001, compared to $16.88 at March 31, 2000 and $16.27 at March 31,
1999. The leveraging of stockholders' equity has had a favorable impact on
return on average stockholders' equity ("ROE"). ROE increased to 8.71% for
fiscal year 2001 as compared to 7.79% for fiscal year 2000 and 6.82% for fiscal
year 1999.

25
27

INVESTMENTS AND MORTGAGE-BACKED SECURITIES

The following table sets forth certain information regarding the amortized
cost and fair value of the Company's short-term investments and investment
securities at the dates indicated:

AT MARCH 31,
-------------------------------------------------------------
2001 2000 1999
------------------ ------------------ -------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------ --------- ------ --------- -------
(IN THOUSANDS)

Short-term investments.............. $ 200 $ 200 $ 250 $ 250 $14,422 $14,422
====== ====== ====== ====== ======= =======
Investment securities:
Trading:
Limited Partnership............ $ 815 $ 815 $ 587 $ 587 $ 94 $ 94
------ ------ ------ ------ ------- -------
Available for sale:
Marketable equity securities... 5,802 7,235 5,660 5,043 5,660 5,575
U.S. Government and agency
obligations.................. 603 602 600 600 -- --
------ ------ ------ ------ ------- -------
Total available for
sale.................... 6,405 7,837 6,260 5,643 5,660 5,575
------ ------ ------ ------ ------- -------
Held to maturity:
U.S. Government and agency
obligations.................. -- -- -- -- 9,998 10,030
Federal Home Loan Bank note.... -- -- -- -- -- --
------ ------ ------ ------ ------- -------
Total held to maturity.... -- -- -- -- 9,998 10,030
------ ------ ------ ------ ------- -------
Total investment
securities.............. $7,220 $8,652 $6,847 $6,230 $15,752 $15,699
====== ====== ====== ====== ======= =======

The following table sets forth certain information regarding the amortized
cost and fair values of the Company's mortgage-backed securities at the dates
indicated:

AT MARCH 31,
---------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ------------------------------- -------------------------------
AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR AMORTIZED PERCENT FAIR
COST OF TOTAL VALUE COST OF TOTAL VALUE COST OF TOTAL VALUE
--------- -------- -------- --------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)

Mortgage-backed securities
and collateralized
mortgage obligations:
Available for sale:
Fixed-rate.............. $ 84,904 17.0% $ 85,186 $ 70,842 12.8% $ 69,000 $ 78,661 19.0% $ 78,071
Adjustable-rate......... 413,440 82.6 416,044 479,267 86.7 474,627 329,824 79.6 330,380
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total available for
sale.................... 498,344 99.6 501,230 550,109 99.5 543,627 408,485 98.6 408,451
-------- ----- -------- -------- ----- -------- -------- ----- --------
Held to maturity:
Fixed-rate.............. 569 0.1 569 732 0.1 732 1,055 0.3 1,127
Adjustable-rate......... 1,569 0.3 1,585 2,087 0.4 2,121 4,553 1.1 4,606
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total held to maturity.... 2,138 0.4 2,154 2,819 0.5 2,853 5,608 1.4 5,733
-------- ----- -------- -------- ----- -------- -------- ----- --------
Total mortgage-backed
securities and
collateralized mortgage
obligations............. $500,482 100.0% $503,384 $552,928 100.0% $546,480 $414,093 100.0% $414,184
======== ===== ======== ======== ===== ======== ======== ===== ========

26
28

The table below sets forth certain information regarding the fair value,
weighted average yields and contractual maturities of the Company's investment
securities and mortgage-backed securities as of March 31, 2001:

AT MARCH 31, 2001
--------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
------------------ ------------------ ------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE FAIR AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
------- -------- ------- -------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Investment
securities(1):
Available for sale:
U.S. Government and
agency
obligations....... $ -- --% $ 402 6.89% $ 200 6.00% $ -- --% $ 602 6.60%
------- ------- ------- -------- --------
Total investment
securities............ $ -- --% $ 402 6.89% $ 200 6.00% $ -- --% $ 602 6.60%
======= ======= ======= ======== ========
Mortgage-backed
securities and
collateralized-
mortgage obligations:
Held to maturity:
Fixed-rate.......... $ -- --% $ 32 8.66% $ 537 8.88% $ -- --% $ 569 8.87%
Adjustable-rate..... -- -- -- -- -- -- 1,585 8.69 1,585 8.69
------- ------- ------- -------- --------
Total mortgage-backed
securities held to
maturity............ -- -- 32 8.66 537 8.88 1,585 8.69 2,154 8.73
------- ------- ------- -------- --------
Available for sale:
Fixed-rate.......... -- -- 12,196 7.00 -- -- 72,990 6.52 85,186 6.59
Adjustable-rate..... -- -- 10,059 6.54 37,506 6.68 368,479 6.64 416,044 6.64
------- ------- ------- -------- --------
Total mortgage-backed
securities available
for sale............ -- -- 22,255 6.79 37,506 6.68 441,469 6.62 501,230 6.63
------- ------- ------- -------- --------
Total mortgage-backed
securities and
collateralized-mortgage
obligations........... $ -- --% $22,287 6.80% $38,043 6.71% $443,054 6.63% $503,384 6.64%
======= ======= ======= ======== ========

- ---------------
(1) Does not include $7,235 of marketable equity securities available for sale
at fair value at March 31, 2001.

27
29

LOANS RECEIVABLE

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:

AT MARCH 31,
----------------------------------------------------------------------------
2001 2000 1999 1998
--------------------- ------------------- ------------------- --------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
---------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Mortgage Loans:
Residential:
One-to-four family... $ 677,512 67.19% $671,586 73.59% $583,692 74.13% $691,675
Multi-family......... 3,015 .30 2,568 .28 3,082 .39 3,899
Commercial real
estate............... 44,375 4.40 37,274 4.09 38,760 4.92 45,723
Construction and
land................. 72,225 7.16 39,205 4.30 31,671 4.02 27,145
---------- ------ -------- ------ -------- ------ --------
Total mortgage
loans.......... 797,127 79.05 750,633 82.26 657,205 83.46 768,442
---------- ------ -------- ------ -------- ------ --------
Commercial Loans......... 94,681 9.39 70,484 7.72 56,196 7.14 26,689
---------- ------ -------- ------ -------- ------ --------
Consumer Loans:
Home equity lines...... 45,191 4.48 31,351 3.44 25,482 3.24 26,252
Second mortgages....... 61,759 6.12 51,488 5.64 40,630 5.16 38,862
Other consumer loans... 9,665 .96 8,616 .94 7,872 1.00 7,828
---------- ------ -------- ------ -------- ------ --------
Total consumer
loans.......... 116,615 11.56 91,455 10.02 73,984 9.40 72,942
---------- ------ -------- ------ -------- ------ --------
Total loans
receivable..... 1,008,423 100.00% 912,572 100.00% 787,385 100.00% 868,073
====== ====== ======
Less:
Allowance for loan
losses............... (13,233) (12,275) (12,016) (10,937)
Undisbursed proceeds of
construction
mortgages in
process.............. (19,445) (11,983) (7,903) (7,164)
Deferred loan
origination costs
(fees), net.......... 1,429 446 (779) (1,420)
---------- -------- -------- --------
Loans receivable,
net.................. 977,174 888,760 766,687 848,552
Mortgage loans held for
sale................. 39,103 3,417 52,334 84,867
---------- -------- -------- --------
Loans receivable, net
and mortgage loans
held for sale...... $1,016,277 $892,177 $819,021 $933,419
========== ======== ======== ========

AT MARCH 31,
------------------------------
1998 1997
-------- -------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
-------- -------- --------
(DOLLARS IN THOUSANDS)

Mortgage Loans:
Residential:
One-to-four family... 79.68% $666,942 82.08%
Multi-family......... .45 4,416 .54
Commercial real
estate............... 5.27 33,057 4.07
Construction and
land................. 3.13 23,919 2.95
------ -------- ------
Total mortgage
loans.......... 88.53 728,334 89.64
------ -------- ------
Commercial Loans......... 3.07 20,062 2.47
------ -------- ------
Consumer Loans:
Home equity lines...... 3.02 25,021 3.08
Second mortgages....... 4.48 32,122 3.95
Other consumer loans... .90 6,985 .86
------ -------- ------
Total consumer
loans.......... 8.40 64,128 7.89
------ -------- ------
Total loans
receivable..... 100.00% 812,524 100.00%
====== ======
Less:
Allowance for loan
losses............... (8,788)
Undisbursed proceeds of
construction
mortgages in
process.............. (5,274)
Deferred loan
origination costs
(fees), net.......... (2,107)
--------
Loans receivable,
net.................. 796,355
Mortgage loans held for
sale................. 23,331
--------
Loans receivable, net
and mortgage loans
held for sale...... $819,686
========

28
30

The following table shows the remaining contractual maturity of the
Company's loans at March 31, 2001. The table does not include the effect of
future principal prepayments:

AT MARCH 31, 2001
-----------------------------------------------------------------------------------
ONE- TO
FOUR- MULTI- COMMERCIAL CONSTRUCTION TOTAL
FAMILY FAMILY REAL ESTATE AND LAND COMMERCIAL CONSUMER LOANS
-------- ------ ----------- ------------ ---------- -------- ----------
(IN THOUSANDS)

Amounts due:
One year or less................ $ 348 $ -- $ 7,936 $58,794 $45,191 $ 46,002 $ 158,271
-------- ------ ------- ------- ------- -------- ----------
After one year:
More than one year to three
years....................... 5,015 33 10,672 16 16,682 6,233 38,651
More than three years to five
years....................... 9,968 50 13,169 109 20,770 11,613 55,679
More than five years to 10
years....................... 110,021 582 9,352 837 11,370 19,719 151,881
More than 10 years to 20
years....................... 112,347 1,214 3,246 11,496 668 29,817 158,788
More than 20 years............ 439,813 1,136 -- 973 -- 3,231 445,153
-------- ------ ------- ------- ------- -------- ----------
Total due after one year...... 677,164 3,015 36,439 13,431 49,490 70,613 850,152
-------- ------ ------- ------- ------- -------- ----------
Total amount due.............. $677,512 $3,015 $44,375 $72,225 $94,681 $116,615 1,008,423
======== ====== ======= ======= ======= ========
Less:
Allowance for loan
losses................. (13,233)
Undisbursed proceeds of
construction mortgages
in process............. (19,445)
Deferred loan origination
costs, net............. 1,429
----------
Loans receivable, net......... $ 977,174
==========

The following table sets forth, at March 31, 2001, the dollar amount of
loans, excluding mortgage loans held for sale, contractually due after March 31,
2002, and whether such loans have fixed interest rates or adjustable interest
rates:

DUE AFTER MARCH 31, 2002
----------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)

Mortgage loans:
One-to-four family............................... $246,498 $430,666 $677,164
Multi-family..................................... 347 2,668 3,015
Commercial real estate........................... 32,977 3,462 36,439
Construction and land............................ 407 13,024 13,431
-------- -------- --------
Total mortgage loans..................... 280,229 449,820 730,049
Commercial loans................................... 46,454 3,036 49,490
Consumer loans..................................... 70,613 -- 70,613
-------- -------- --------
Total loans.............................. $397,296 $452,856 $850,152
======== ======== ========

29
31

The following table sets forth the Company's loan originations for the
periods indicated:

FOR THE YEAR ENDED MARCH 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Loans originated:
Mortgage loans:
One-to-four family............................ $293,114 $366,511 $663,999
Multi-family.................................. 154 190 --
Commercial real estate........................ 19,176 6,524 31,601
Construction and land......................... 76,604 41,683 36,985
-------- -------- --------
Total mortgage loans..................... 389,048 414,908 732,585
-------- -------- --------
Commercial......................................... 59,188 47,560 19,851
-------- -------- --------
Consumer loans:
Home equity lines................................ 48,585 26,853 17,185
Second mortgages................................. 29,327 29,773 20,869
Other consumer loans............................. 8,042 7,081 6,028
-------- -------- --------
Total consumer loans..................... 85,954 63,707 44,082
-------- -------- --------
Total loans originated............................. $534,190 $526,175 $796,518
======== ======== ========

DEPOSITS

The following table sets forth the distribution of the Company's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize average month-end balances.

FOR THE YEAR ENDED MARCH 31,
---------------------------------------------------------------------------------------------
2001 2000 1999
----------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS COST BALANCE DEPOSITS COST BALANCE DEPOSITS COST
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)

Business checking accounts.... $ 56,299 8.4% --% $ 51,997 7.9% --% $ 58,408 8.6% --%
Money market accounts......... 38,053 5.7 3.04 33,377 5.1 2.34 31,871 4.7 2.66
Savings accounts.............. 101,038 15.2 1.76 99,014 15.0 1.76 93,118 13.8 2.01
NOW accounts.................. 64,895 9.7 0.98 56,973 8.6 0.98 50,760 7.5 0.98
-------- ----- -------- ----- -------- -----
Total core
deposits........... 260,285 39.0 1.37 241,361 36.6 1.28 234,157 34.6 1.37
Certificate accounts.......... 406,979 61.0 5.57 418,815 63.4 5.19 441,556 65.4 5.51
-------- ----- -------- ----- -------- -----
Total average
deposits........... $667,264 100.0% 3.93% $660,176 100.0% 3.76% $675,713 100.0% 4.08%
======== ===== ======== ===== ======== =====

30
32

The following table presents, by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at March 31, 2001:

PERIOD TO MATURITY FROM MARCH 31, 2001 AT MARCH 31,
------------------------------------------------------------- ------------------------------
LESS THAN ONE TO TWO TO THREE TO FOUR TO
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS FIVE YEARS 2001 2000 1999
--------- --------- ----------- ---------- ---------- -------- -------- --------
(IN THOUSANDS)

Certificate accounts:
0 to 4.00%................ $ -- $ -- $ -- $ -- $ -- $ -- $ 1,339 $ 4,185
4.01 to 5.00%............. 23,506 1,391 113 -- -- 25,010 137,876 226,612
5.01 to 6.00%............. 208,613 32,599 4,947 2,154 697 249,010 218,830 157,068
6.01 to 7.00%............. 81,217 40,697 9,189 434 2,240 133,777 44,278 27,977
7.01 to 8.00%............. -- -- -- -- -- -- 4,569 12,143
Over 8.01%................ -- -- -- -- -- -- -- 4
-------- ------- ------- ------ ------ -------- -------- --------
Total.............. $313,336 $74,687 $14,249 $2,588 $2,937 $407,797 $406,892 $427,989
======== ======= ======= ====== ====== ======== ======== ========

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds are deposits, principal and interest
payments on loans and mortgage-backed securities, proceeds from the sale of
loans, FHLB advances, and other borrowings. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are influenced by general interest rates, economic
conditions and competition.

The Company's most liquid assets are cash, short-term investments, mortgage
loans held for sale, investments in trading securities, investment securities
available for sale, and mortgage-backed securities available for sale. The
levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At March 31, 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 $572.2 million, or 34.2%
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 March 31, 2001, the Company had $814.8 million in
advances outstanding from the FHLB and other borrowings, and an additional
borrowing capacity from the FHLB of $153.7 million including a $25.0 million
line of credit. During year-end 2001, the Company used FHLB advances and other
borrowings to fund asset growth, along with an increase in deposits, and may
continue to do so in the future, depending on market conditions, the pricing of
deposit products, and the pricing of FHLB advances and other borrowings.

At March 31, 2001, the Company had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $236.6 million. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificate of deposit accounts scheduled to mature in less than one year from
March 31, 2001 totaled $313.3 million. The Company expects that it will retain a
majority of maturing certificate accounts.

The Company plans to open a new banking office in Middletown, Rhode Island
in the latter part of fiscal year 2002, bringing total banking offices to
sixteen. The Company continues to consider sites for new banking offices and
loan origination centers in or adjacent to its market area. In addition, the
Company may, from time to time, consider expanding its market share and/or
market area through the acquisition of assets or other banking institutions and
may consider acquisitions of other types of financial services companies.

The Company completed its sixth 5% stock repurchase program and initiated
its seventh 5% stock repurchase program in fiscal year 2001, which reduced
outstanding legal shares in the Company to 6,220,249 from the 8,707,152 shares
originally issued. The Company also paid one $0.07 dividend and three $0.10
dividends to stockholders during the fiscal year 2001. The establishment of
additional banking offices, loan origination centers, trust service operations,
mergers and acquisitions, and additional capital management

31
33

strategies by the Company would result in additional capital expenditures and
other associated costs which the Company has not yet estimated.

At March 31, 2001, the consolidated capital to total assets ratio of the
Company was 6.68%. As of March 31, 2001, the Bank exceeded all of its regulatory
capital requirements.

The following table presents the Bank's capital position at March 31, 2001:

CAPITAL
-------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)

Tangible.................................. $103,942 $33,155 $70,787 6.27% 2.00%
Core (Leverage)........................... 103,942 66,310 37,632 6.27 4.00
Tier 1 Risk-based......................... 103,942 34,620 69,322 12.33 8.00
Risk-based................................ 112,964 66,536 46,428 13.58 8.00

The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. The following table
presents the Trust Company's capital position at March 31, 2001:

CAPITAL
-------------------
ACTUAL REQUIRED EXCESS ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)

Tangible..................................... $2,781 $ 22 $2,759 257.50% 2.00%
Core (Leverage).............................. 2,781 120 2,661 92.58 4.00
Risk-based................................... 2,781 86 2,695 257.50 8.00

At the time of conversion, the Bank was required to establish a liquidation
account in an amount equal to its retained earnings as of September 30, 1996,
which provides a liquidation preference to eligible account holders of the Bank
prior to conversion based on such account holder's qualifying deposits. The
liquidation account will be reduced to the extent that such account holders
reduce their qualifying deposits. In the unlikely event of a complete
liquidation of the Bank, each such account holder will be entitled to receive a
distribution from the liquidation account. The Bank is not permitted to declare
or pay dividends on its capital stock, or repurchase any of its outstanding
stock, if the effect thereof would cause its stockholders' equity to be reduced
below the amount required for the liquidation account or applicable regulatory
capital requirements. The balance of the liquidation account at March 31, 2001
was approximately $15.7 million.

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 CMOs. In addition, the
Company

32
34

engaged in two interest rate swap agreements with a total notional principal
amount of $50 million to synthetically lengthen its liability maturities.

The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring a bank's interest rate sensitivity "gap." An asset or liability is
said to be interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period. At March 31,
2001, the Company's cumulative one-year interest rate gap (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 8.47%. 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.

The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 2001 which, based upon
certain assumptions, are anticipated by the Company to reprice or mature in each
of the future time periods shown (the "GAP table"). Except as stated below, the
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual maturity of the asset or liability. The table sets
forth an approximation of the projected repricing of assets and liabilities at
March 31, 2001, on the basis of contractual maturities, anticipated prepayments,
and scheduled rate adjustments within a three month period and subsequent
selected time intervals.

The loan amounts in the table reflect principal balances expected to be
redeployed and/or repriced as a result of maturities, contractual amortization,
and anticipated prepayments of adjustable-rate loans and fixed-rate loans, and
as a result of contractual rate adjustments on adjustable-rate loans. Annual
market prepayment rates for one-to-four family and multi-family mortgage loans,
and mortgage-backed securities are assumed to range from 20.9% to 37.2% for
adjustable-rates and 13.3% to 20.6% for fixed-rates, respectively. COFI
floating-rate CMOs and adjustable-rate MBS are assumed to fully reprice over a
two year period based on projected index changes and principal repayments under
a constant interest rate scenario.

Money market deposit accounts and negotiable order of withdrawal ("NOW")
accounts are assumed to reprice evenly over a three-year period, while regular
savings accounts are viewed as composed of two equally weighted components -- a
longer-term "core" deposit that reprices evenly over a thirty-year term, and a
more active secondary tier that reprices evenly over three years. In-the-money
putable FHLB advances (where the Company is short the put option) were repriced
at their put dates while out-of-the-money putable FHLB advances were repriced at
their contractual maturities.

These assumptions may or may not be indicative of actual prepayment and
withdrawals experienced by the Company. The table does not necessarily indicate
the impact of general interest rate movements on the Company's net interest
income because the actual repricing dates of various assets and liabilities are
subject to customer discretion and competitive and other pressures and,
therefore, actual experience may vary from that indicated.

33
35

The following table shows the estimated gap position of the Company at
March 31, 2001:

3 MORE THAN MORE THAN MORE THAN MORE THAN MORE
MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 3 YEARS TO THAN TOTAL
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 5 YEARS AMOUNT
-------- ----------- ----------- --------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)

Interest-earning assets:
Short-term investments....... $ 200 $ -- $ -- $ -- $ -- $ -- $ 200
Investment securities........ 815 -- -- 603 -- 7,234 8,652
Loans receivable(1).......... 213,161 97,566 169,199 283,763 158,693 93,895 1,016,277
Mortgage-backed securities... 162,149 109,429 138,479 69,251 11,343 12,717 503,368
Stock in FHLB-Boston......... 40,369 -- -- -- -- -- 40,369
-------- -------- -------- --------- -------- -------- ----------
Total interest-earning
assets.............. 416,694 206,995 307,678 353,617 170,036 113,846 1,568,866
-------- -------- -------- --------- -------- -------- ----------
Interest-bearing liabilities:
Money market accounts........ 4,423 4,423 8,846 35,383 -- -- 53,075
Savings accounts............. 4,658 5,907 9,317 37,266 3,388 42,348 102,884
NOW accounts................. 6,020 6,020 12,040 48,161 -- -- 72,241
Certificate accounts......... 111,816 68,620 85,278 56,302 3,104 -- 325,120
IRA and KEOGH accounts....... 13,227 13,487 20,908 32,634 2,421 -- 82,677
FHLB advances and other
borrowings................. 237,268 138,144 64,460 249,753 74,330 50,809 814,764
-------- -------- -------- --------- -------- -------- ----------
Total interest-bearing
liabilities......... 377,412 236,601 200,849 459,499 83,243 93,157 1,450,761
-------- -------- -------- --------- -------- -------- ----------
Interest-rate swaps:
Pay fixed.................... -- (25,000) -- (25,000) -- -- (50,000)
Receive floating............. 25,000 25,000 -- -- -- -- 50,000
-------- -------- -------- --------- -------- -------- ----------
Interest-rate gap after
swaps........................ $ 64,282 $(29,606) $106,829 $(130,882) $ 86,793 $ 20,689 $ 118,105
======== ======== ======== ========= ======== ======== ==========
Cumulative interest-rate gap... $ 64,282 $ 34,676 $141,505 $ 10,623 $ 97,416 $118,105
======== ======== ======== ========= ======== ========
Cumulative interest-rate gap as
a percentage of total assets
at March 31, 2001............ 3.85% 2.08% 8.47% 0.64% 5.83% 7.07%
Cumulative interest-rate gap as
a percentage of total
interest-earning assets at
March 31, 2001............... 4.10 2.21 9.02 0.68 6.21 7.53
Cumulative interest-earning
assets as a percentage of
interest-bearing liabilities
at March 31, 2001............ 110.41 101.58 114.30 100.83 107.18 108.14
Cumulative interest-rate gap as
a percentage of total assets
at March 31, 2000............ (4.75) (8.73) (7.30) (11.18) (1.12) 5.66
Cumulative interest-rate gap as
a percentage of total
interest-earning assets at
March 31, 2000............... (5.08) (9.34) (7.81) (11.97) (1.20) 6.06
Cumulative interest-earning
assets as a percentage of
interest-bearing liabilities
at March 31, 2000............ 76.46 73.76 83.03 86.77 98.68 106.45

- ---------------
(1) Includes total loans receivable and mortgage loans held for sale (including
non-performing loans), net of deferred loan origination costs, undisbursed
proceeds of construction mortgages in process, and allowance for loan
losses.

34
36

Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of borrowers to
service their adjustable-rate loans may decrease in the event of an interest
rate increase.

The Company's interest rate sensitivity is also monitored by management
through the use of a model which generates estimates of the change in the
Company's net interest income ("NII") and net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario divided
by the estimated market value of assets in the same scenario. The OTS produces a
similar analysis for the Bank using its own model, based upon data submitted on
the Bank's quarterly Thrift Financial Report, the results of which may vary from
the Company's internal model primarily due to differences in assumptions
utilized between the Company's internal model and the OTS model, including
estimated loan prepayment rates, reinvestment rates and deposit renewal rates.

The following table sets forth the Company's estimated NPV and NPV ratios
as of March 31, 2001 and 2000, as calculated by the Company.

MARCH 31, 2001 MARCH 31, 2000
---------------------------------------- -------------------------------
CHANGE IN ESTIMATED NPV ESTIMATED NPV
INTEREST RATES NET SENSITIVITY NET SENSITIVITY
IN BASIS PORTFOLIO NPV BOARD IN BASIS PORTFOLIO NPV IN BASIS
POINTS VALUE RATIO LIMITS POINTS VALUE RATIO POINTS
- -------------- --------- ----- ------ ----------- --------- ----- -----------
(DOLLARS IN THOUSANDS)

+300 $142,547 8.49% 4.00% (128) $ 73,976 4.85% (377)
+200 157,685 9.24 4.25 (53) 100,026 6.42 (220)
+100 167,422 9.68 5.00 (9) 121,970 7.69 (93)
Unchanged 170,823 9.77 6.00 -- 138,896 8.62 --
-100 163,736 9.31 5.00 (46) 148,019 9.09 47
-200 150,633 8.54 4.25 (123) 147,723 9.02 40
-300 139,480 7.86 4.00 (191) 141,974 8.63 1

As in the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require certain assumptions which may or may not reflect the manner in
which actual yields and costs respond to changes in market interest rates. In
this regard, the NPV model presented incorporates an assumption that the
composition of the Company's interest sensitive assets and liabilities existing
at the beginning of a period remains constant over the period being measured,
and that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the term to maturity or repricing of specific assets
and liabilities. Accordingly, although the NPV measurements and net interest
income models provide an indication of the Company's interest rate risk exposure
at a particular point in time, such measurements are not intended to, and do
not, provide a precise forecast of the effect of changes in market interest
rates on the Company's net interest income.

During fiscal year-end 2001, the Company continued to follow its practice
of selling certain fixed-rate and adjustable-rate mortgage loans while generally
retaining the servicing rights of such loans. In conjunction with this mortgage
banking activity, the Company uses forward contracts in order to reduce exposure
to interest-rate risk. The amount of forward coverage of the "pipeline" of
mortgages is managed on a day-to-day basis by an operating officer, within Board
approved policy guidelines, based on the Company's assessment of the general
direction of interest rates and levels of mortgage origination activity.

35
37

ASSET QUALITY

Delinquencies and Classified Assets. Reports listing all delinquent
accounts are generated and reviewed by management on a monthly basis and the
Board of Directors performs a monthly review of all loans or lending
relationships delinquent 90 days or more and all real estate owned ("REO"). The
procedures taken by the Company with respect to delinquencies vary depending on
the nature of the loan, term and cause of delinquency and whether the borrower
is habitually delinquent. When a borrower fails to make a required payment on a
loan, the Company takes a number of steps to have the borrower cure the
delinquency and restore the loan to current status. The Company generally sends
the borrower a written notice of non-payment after the loan is first past due.
The Company's guidelines provide that telephone, written correspondence and/or
face-to-face contact will be attempted to ascertain the reasons for delinquency
and the prospects of repayment. When contact is made with the borrower at any
time prior to foreclosure, the Company will attempt to obtain full payment,
offer to provide budget and finance counseling services, work out a repayment
schedule with the borrower to avoid foreclosure or, in some instances, accept a
deed in lieu of foreclosure. In the event payment is not then received or the
loan is not otherwise satisfied, additional letters and telephone calls are
generally made. If the loan is still not brought current or satisfied and it
becomes necessary for the Company to take legal action, which typically occurs
after a loan is 90 days or more delinquent, the Company will commence
foreclosure proceedings against any real property that secures the loan. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the property securing the loan
generally is sold at foreclosure and, if purchased by the Company, becomes REO.

Federal regulations and the Company's Credit Risk Review Policy require
that the Company utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Company has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Company currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the credit weaknesses make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets which do not currently expose the insured institution
to sufficient risk to warrant classification in one of the aforementioned
categories, but possess weaknesses, are required to be designated "Special
Mention."

When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss", it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.

A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at

36
38

this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.

The Company's Credit Risk Review Committee reviews and classifies the
Company's assets on a quarterly basis and the Board of Directors reviews the
reports on a quarterly basis. The Company classifies assets in accordance with
the management guidelines described above. At March 31, 2001, the Company had
$3.1 million of loans designated as Substandard. As of March 31, 2001, the
Company had loans totaling $9.1 million designated as Special Mention. These
loans are designated as Special Mention because of inherent weaknesses that
currently exist, but might be correctable in a twelve-month cycle. Accordingly,
they require additional monitoring.

The following table sets forth loans 60-89 days delinquent in the Company's
loan portfolio as of the dates indicated:

AT MARCH 31,
--------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)

Mortgage Loans:
One-to-four family................... 4 $210 2 $110 6 $283
Multi-family......................... -- -- -- -- -- --
Commercial real estate............... -- -- 2 46 -- --
Construction and land................ -- -- -- -- -- --
-- ---- -- ---- -- ----
Total mortgage loans......... 4 210 4 156 6 283
-- ---- -- ---- -- ----
Commercial Loans....................... 5 81 2 93 1 9
-- ---- -- ---- -- ----
Consumer Loans:
Home equity lines.................... -- -- -- -- 1 162
Second mortgages..................... -- -- -- -- -- --
Other consumer loans................. 1 1 1 6 1 1
-- ---- -- ---- -- ----
Total consumer loans......... 1 1 1 6 2 163
-- ---- -- ---- -- ----
Total loans............................ 10 $292 7 $255 9 $455
== ==== == ==== == ====
Delinquent loans to loans receivable,
net.................................. 0.03% 0.03% 0.06%

37
39

Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and real estate owned ("REO"). It is the policy of
the Company to cease accruing interest on loans 90 days or more past due and to
charge off all accrued interest. For fiscal years ended 2001 and 2000 the amount
of additional interest income that would have been recognized on non-accrual
loans if such loans were performing in accordance with their regular terms and
amounts recognized were $46,000 and $29,000, respectively.

AT MARCH 31,
------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)

Non-accrual loans:
Mortgage loans:
One-to-four family............................... $ 431 $ 941 $ 971 $1,073 $1,908
Multi-family..................................... -- -- -- 101 268
Commercial real estate........................... -- -- 1,142 1,199 976
Construction and land............................ -- -- 117 169 232
------ ------ ------ ------ ------
Total mortgage loans........................ 431 941 2,230 2,542 3,384
------ ------ ------ ------ ------
Commercial loans.................................... 821 345 280 74 --
------ ------ ------ ------ ------
Consumer loans:
Home equity lines................................ -- -- 36 425 114
Second mortgages................................. 56 12 -- -- 95
Other consumer loans............................. 24 12 4 7 69
------ ------ ------ ------ ------
Total consumer loans........................ 80 24 40 432 278
------ ------ ------ ------ ------
Total nonaccrual loans...................... 1,332 1,310 2,550 3,048 3,662
Real estate owned, net(1)............................. 175 -- 344 595 665
------ ------ ------ ------ ------
Total non-performing assets................. $1,507 $1,310 $2,894 $3,643 $4,327
====== ====== ====== ====== ======
Allowance for loan losses as a percent of loans(2).... 1.34% 1.36% 1.54% 1.27% 1.09%
Allowance for loan losses as a percent of
non-performing loans(3)............................. 993 937 471 359 240
Non-performing loans as a percent of loans(2)(3)...... 0.13 0.15 0.33 0.35 0.45
Non-performing assets as a percent of total
assets(4)........................................... 0.09 0.08 0.21 0.28 0.44

- ---------------
(1) REO balances are shown net of related valuation allowances.

(2) Loans includes loans receivable, net, excluding allowance for loan losses.

(3) Non-performing loans consist of all loans 90 days or more past due and other
loans which have been identified by the Company as presenting uncertainty
with respect to the collectibility of interest or principal.

(4) Non-performing assets consist of non-performing loans and REO.

Impaired Loans. Impaired loans are commercial and commercial real estate
loans for which it is probable that the Company will not be able to collect all
amounts due according to the contractual terms of the loan agreement. The
definition of "impaired loans" is not the same as the definition of "non-accrual
loans," although the two categories overlap. Non-accrual loans include impaired
loans and are those on which the accrual of interest is discontinued when
collectibility of principal or interest is uncertain or payments of principal or
interest have been contractually past due 90 days. The Company may choose to
place a loan on non-accrual status due to payment delinquency or uncertain
collectibility, while not classifying the loan as impaired, if (i) it is
probable that the Company will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is not a commercial or a
commercial real estate loan. Factors considered by management in determining
impairment include payment status and collateral value. The amount of impairment
for these types of impaired loans is determined by the difference between the
present value of the expected cash flows related to the loan, using the original
contractual interest rate, and its

38
40

recorded value, or, in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loan. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. Residential mortgage and consumer loans are measured for impairment
collectively. Loans that experience insignificant payment delays and
insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed.

At March 31, 2001 and 2000, total impaired loans of $1.1 million and
$556,000 required impairment allowances of $193,000 and $228,000, respectively.
Impaired loans of $798,000 and $244,000 were on non-accrual at March 31, 2001
and 2000, respectively. During fiscal year-end 2001, the average recorded value
of impaired loans was $847,000. For these loans, $46,000 of interest income was
recognized while $77,000 of interest income would have been recognized under the
original terms.

Allowance for Loan Losses. The allowance for loan losses is based on
management's estimate of the credit losses inherent in the loan portfolio. The
level of the allowance is based on management's ongoing review of the existing
loan portfolio and current market conditions, as well as the volume and mix of
new originations. Management's methodology to estimate loss exposure inherent in
the portfolio also includes analysis of individual loans deemed to be impaired,
allowance allocations for various loan types based on payment status or loss
experience, and an unallocated allowance that is maintained based on
management's assessment of many factors including trends in loan delinquencies
and charge-offs, current type, mix and balance of the portfolio, performance of
individual loans in relation to contract terms, and the perceived risk in the
relatively new and rapidly growing commercial loan portfolio. In addition, the
OTS and the FDIC, as an integral part of their examination process, periodically
review the 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. As of March 31, 2001, the
Company's allowance for loan losses was 1.34% of total loans receivable and 993%
of total non-performing loans as compared to 1.36% and 937%, respectively, as of
March 31, 2000. Non-accrual loans totaled $1.3 million at both March 31, 2001
and March 31, 2000. The allowance for loan losses totaled $13.2 million at March
31, 2001 as compared to $12.3 million at March 31, 2000. The increase in the
allowance of $958,000 reflects management's assessment of the loan portfolio and
was based upon the growth of "higher" credit risk components of the portfolio.
The Company will continue to monitor and modify its allowances for loan losses
as conditions dictate. While management believes the Company's allowance for
loan losses was sufficient to absorb losses inherent in its loan portfolio at
March 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.

39
41

The following table sets forth activity in the Company's allowance for loan
losses for the periods indicated:

AT OR FOR THE YEAR ENDED MARCH 31,
--------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS)

Balance at beginning of period............ $12,275 $12,016 $10,937 $ 8,788 $5,607
Provision for loan losses................. 1,200 1,200 1,200 2,350 3,750
Charge-offs:
Mortgage loans:
One-to-four family................... (99) (41) (12) (188) (331)
Multi-family......................... -- -- -- -- (82)
Commercial real estate............... -- (759) -- -- --
Construction and land................ -- -- -- -- --
Commercial loans:....................... (58) (140) (74) -- (87)
Consumer Loans:
Home equity lines.................... (5) -- (30) -- (116)
Second mortgages..................... (73) -- (9) (15) (10)
Other consumer....................... (46) (18) (13) (9) (11)
------- ------- ------- ------- ------
Total........................... (281) (958) (138) (212) (637)
Recoveries................................ 39 17 17 11 68
------- ------- ------- ------- ------
Balance at end of period.................. $13,233 $12,275 $12,016 $10,937 $8,788
======= ======= ======= ======= ======
Ratio of net charge-offs during the period
to average loans outstanding during the
period.................................. 0.02% 0.12% 0.01% 0.02% 0.07%

The Company has developed an internal asset classification system which
classifies assets depending on risk of loss characteristics. At March 31, 2001,
2000 and 1999, the Company classified (excluding REO) $3.1 million, $7.0
million, and $3.9 million of substandard loans, respectively. In the opinion of
management, the performing substandard loans evidence one or more weaknesses or
potential weaknesses, and depending on the regional economy and other factors,
may become non-performing assets in future periods.

40
42

The following tables set forth the Company's percent of allowance for loan
losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.

AT MARCH 31,
---------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)

Mortgages:
Residential............. $ 2,664 20.13% 74.65% $ 2,529 20.60% 78.17% $ 2,517 20.95% 78.54%
Commercial.............. 2,269 17.14 4.40 1,749 14.25 4.09 2,725 22.68 4.92
------- ------ ------ ------- ------ ------ ------- ------ ------
Total............. 4,933 37.27 79.05 4,278 34.85 82.26 5,242 43.63 83.46
Commercial................ 4,843 36.60 9.39 4,523 36.85 7.72 3,111 25.89 7.14
Consumer.................. 1,869 14.13 11.56 1,647 13.42 10.02 1,320 10.99 9.40
Unallocated............... 1,588 12.00 -- 1,827 14.88 -- 2,343 19.49 --
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance
for loan
losses.......... $13,233 100.00% 100.00% $12,275 100.00% 100.00% $12,016 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======

AT MARCH 31,
----------------------------------------------------------------
1998 1997
------------------------------- ------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)

Mortgages:
Residential............. $ 2,959 27.05% 83.26% $2,769 31.51% 85.57%
Commercial.............. 3,023 27.64 5.27 2,239 25.48 4.07
------- ------ ------ ------ ------ ------
Total............. 5,982 54.69 88.53 5,008 56.99 89.64
Commercial................ 1,309 11.97 3.07 932 10.60 2.47
Consumer.................. 1,358 12.42 8.40 1,151 13.10 7.89
Unallocated............... 2,288 20.92 -- 1,697 19.31 --
------- ------ ------ ------ ------ ------
Total allowance
for loan
losses.......... $10,937 100.00% 100.00% $8,788 100.00% 100.00%
======= ====== ====== ====== ====== ======

41
43

IMPACT OF NEW ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends the
accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and hedging activities. These amendments include the application of
the normal purchases and sales exception in SFAS No. 133, and redefinition of
hedged risk. SFAS No. 138 also amended SFAS No. 133 for decisions made by the
Financial Accounting Standards Board relating to the Derivatives Implementation
Group process. The Company adopted SFAS No. 133 and SFAS No. 138 on April 1,
2001, and recognized an after-tax loss from the cumulative effect of adoption of
$461,000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

See the Section of Item 7 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See the Index on page F-1 and the Consolidated Financial Statements which
begin on F-3.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to "Additional Item -- Executive
Officers of the Registrant" contained herein and the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 26, 2001, at
pages 5 through 7.

ITEM 11. EXECUTIVE COMPENSATION.

The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on July 26, 2001, at pages 9 through 16 (excluding the
Compensation and Audit Committee Reports and Stock Performance Graph).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on July 26, 2001, at
pages 3 and 4.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on July 26, 2001, at pages 18 and 19.

42
44

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents are filed as a part of this report:

(1) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated
financial statements or the notes thereto.

(2) Exhibits

(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP,
INC.(1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC.(1)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC.(1)
10.1 Form of Employment Agreement between the Bank and Robert F.
Stoico(1)
10.2 Forms of Employment Agreement between the Company and Kevin
J. McGillicuddy and Employment Agreement between the Bank
and Kevin J. McGillicuddy(1)
10.3 Forms of Employment Agreement between the Company and
Frederick R. Sullivan and Employment Agreement between the
Bank and Frederick R. Sullivan(1)
10.4 Form of Employment Agreement between the Bank and Edward A.
Hjerpe, III(2)
10.5 Employment Agreement between the Company and Robert F.
Stoico(3)
10.6 Employment Agreement between the Company and Edward A.
Hjerpe, III(3)
10.7 First Federal Savings Bank of America Employee Stock
Ownership Plan and Trust(1)
10.8 FIRSTFED AMERICA BANCORP, INC. 1997 Stock-Based Incentive
Plan, as amended and restated(4)
10.9 First Federal Savings Bank of America 1997 Supplemental
Executive Retirement Plan(1)
10.10 FIRSTFED AMERICA BANCORP, INC. 1998 Stock Option Plan(5)
11.0 Computation of earnings per share is incorporated by
reference to the Consolidated Statements of Operations on
page F-4.
13.0 Portions of the 2001 Annual Report to Stockholders (filed
herewith)
21.0 Subsidiary information is incorporated herein by reference
to "Part I -- Subsidiary Activities" in "Item 1.
Business -- General"
23.1 Consent of Independent Auditors (filed herewith)

- ---------------
(1) Incorporated by reference into this document from the Exhibits to Form
S-1, Registration Statement, and any amendments thereto, filed on
September 27, 1996, Registration No. 333-12855.

(2) Incorporated by reference into this document from the Exhibits to the
Annual Report on Form 10-K for the fiscal year ended March 31, 1998.

(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, 1999.

(4) Incorporated by reference into this document from the Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.

(5) Incorporated by reference into this document from the Proxy Statement
for the 1998 Annual Meeting of Stockholders dated June 15, 1998.

(b) Reports on Form 8-K.

None.

43
45

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FIRSTFED AMERICA BANCORP, INC.

By: /s/ ROBERT F. STOICO
------------------------------------
Robert F. Stoico
President and Chief Executive
Officer
DATED: June 22, 2001

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

NAME TITLE DATE
---- ----- ----

/s/ ROBERT F. STOICO President and Chief Executive June 22, 2001
- --------------------------------------------------- Officer and Chairman of the
Robert F. Stoico Board (Principal Executive
Officer)

/s/ EDWARD A. HJERPE, III Executive Vice President, Chief June 22, 2001
- --------------------------------------------------- Operating Officer and Chief
Edward A. Hjerpe, III Financial Officer (Principal
Accounting and Financial
Officer)

/s/ GILBERT C. OLIVEIRA Director June 22, 2001
- ---------------------------------------------------
Gilbert C. Oliveira

/s/ THOMAS A. RODGERS, JR. Director June 22, 2001
- ---------------------------------------------------
Thomas A. Rodgers, Jr.

/s/ RICHARD W. CEDERBERG Director June 22, 2001
- ---------------------------------------------------
Richard W. Cederberg

/s/ JOHN S. HOLDEN, JR. Director June 22, 2001
- ---------------------------------------------------
John S. Holden, Jr.

/s/ DR. PAUL A. RAYMOND Director June 22, 2001
- ---------------------------------------------------
Dr. Paul A. Raymond

/s/ ANTHONY L. SYLVIA Director June 22, 2001
- ---------------------------------------------------
Anthony L. Sylvia

44
46

INDEX TO FINANCIAL STATEMENTS

Independent Auditors' Report................................ F-2

Consolidated Balance Sheets as of March 31, 2001 and 2000... F-3
Consolidated Statements of Operations for the Fiscal Years
Ended March 31, 2001, 2000 and 1999....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended March 31, 2001, 2000, and
1999...................................................... F-5 to F-6
Consolidated Statements of Cash Flows for the Fiscal Years
Ended March 31, 2001, 2000 and 1999....................... F-7 to F-8
Notes to Consolidated Financial Statements.................. F-9 to F-37

F-1
47

INDEPENDENT AUDITORS' REPORT

The Board of Directors
FIRSTFED AMERICA BANCORP, INC.:

We have audited the accompanying consolidated balance sheets of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries, (the "Company") as of March 31, 2001 and
2000, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended March 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FIRSTFED
AMERICA BANCORP, INC. and subsidiaries at March 31, 2001 and 2000, and the
results of their operations and cash flows for each of the years in the
three-year period ended March 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.

/s/ KPMG LLP

Boston, Massachusetts
April 19, 2001

F-2
48

FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)

2001 2000
ASSETS ---------- ----------

Cash on hand and due from banks............................. $ 23,013 $ 20,720
Short-term investments...................................... 200 250
---------- ----------
Total cash and cash equivalents........................... 23,213 20,970
Mortgage loans held for sale................................ 39,103 3,417
Investment in trading securities, at fair value (note 5).... 815 587
Investment securities available for sale, at fair value
(amortized cost of $6,405 and $6,260) (note 5)............ 7,837 5,643
Mortgage-backed securities available for sale, at fair value
(amortized cost of $498,344 and $550,109) (notes 5 and
10)....................................................... 501,230 543,627
Mortgage-backed securities held to maturity (fair value of
$2,154 and $2,853) (note 5)............................... 2,138 2,819
Stock in Federal Home Loan Bank of Boston, at cost (notes 5
and 10)................................................... 40,369 30,928
Loans receivable, net of allowance for loan losses of
$13,233 and $12,275 (notes 6 and 10)...................... 977,174 888,760
Accrued interest receivable................................. 7,928 7,018
Mortgage servicing rights (note 7).......................... 4,881 6,288
Office properties and equipment, net (note 8)............... 24,038 25,187
Real estate owned, net...................................... 175 --
Bank-Owned Life Insurance................................... 33,764 32,127
Goodwill.................................................... 1,145 1,124
Prepaid expenses and other assets........................... 7,255 11,500
---------- ----------
Total assets...................................... $1,671,065 $1,579,995
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9)......................................... $ 707,416 $ 664,682
FHLB advances and other borrowings (note 10).............. 814,764 779,662
Advance payments by borrowers for taxes and insurance..... 5,868 5,984
Accrued interest payable.................................. 5,997 4,620
Other liabilities......................................... 25,462 23,342
---------- ----------
Total liabilities................................. 1,559,507 1,478,290
---------- ----------
Commitments and contingencies (notes 4, 6, 8, 10, 11, 13, 14
and 15)
Stockholders' equity (notes 3 and 4):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 8,707,152 shares issued.................... 87 87
Additional paid-in capital................................ 85,585 85,449
Retained earnings (notes 2 and 3)......................... 70,048 63,270
Accumulated other comprehensive income (loss)............. 2,551 (4,470)
Unallocated ESOP shares (note 14)......................... (3,098) (3,872)
Unearned 1997 stock-based incentive plan (note 14)........ (2,998) (4,438)
Treasury stock; at cost (2,571,285 and 2,100,847 shares at
2001 and 2000)......................................... (40,617) (34,321)
---------- ----------
Total stockholders' equity........................ 111,558 101,705
---------- ----------
Total liabilities and stockholders' equity........ $1,671,065 $1,579,995
========== ==========

See accompanying notes to consolidated financial statements.
F-3
49

FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

2001 2000 1999
-------- ------- -------

Interest and dividend income:
Loans..................................................... $ 77,116 $61,005 $65,352
Investment securities..................................... 719 803 2,100
Mortgage-backed securities................................ 33,507 30,041 17,791
Federal Home Loan Bank stock.............................. 2,733 1,972 1,534
-------- ------- -------
Total interest and dividend income................ 114,075 93,821 86,777
-------- ------- -------
Interest expense:
Deposits (note 9)......................................... 26,252 24,812 27,572
Borrowed funds............................................ 53,143 36,959 28,871
-------- ------- -------
Total interest expense............................ 79,395 61,771 56,443
-------- ------- -------
Net interest income before provision for loan
losses.......................................... 34,680 32,050 30,334
Provision for loan losses (note 6).......................... 1,200 1,200 1,200
-------- ------- -------
Net interest income after provision for loan
losses.......................................... 33,480 30,850 29,134
-------- ------- -------
Non-interest income:
Service charges on deposit accounts....................... 1,622 1,344 1,096
Loan servicing income..................................... 1,456 2,003 1,909
Insurance commission income............................... 1,048 446 78
Trust fee income.......................................... 1,028 16 --
Earnings on Bank-Owned Life Insurance..................... 1,637 1,552 575
Gain (loss) on sale of mortgage loans, net (note 7)....... 583 (952) 2,046
Gain on sale of investments securities available for
sale................................................... -- -- 9
Other income.............................................. 1,584 2,125 1,925
-------- ------- -------
Total non-interest income......................... 8,958 6,534 7,638
-------- ------- -------
Non-interest expense:
Compensation and employee benefits (note 14).............. 17,786 14,732 14,615
Office occupancy and equipment............................ 4,447 3,905 3,781
Data processing........................................... 1,694 1,322 1,045
Advertising and business promotion........................ 1,038 1,159 796
Federal deposit insurance premiums........................ 138 334 588
Other..................................................... 3,950 4,057 4,508
-------- ------- -------
Total non-interest expense........................ 29,053 25,509 25,333
-------- ------- -------
Income before income tax expense.................. 13,385 11,875 11,439
Income tax expense (note 13)................................ 4,221 3,689 3,818
-------- ------- -------
Net income........................................ $ 9,164 $ 8,186 $ 7,621
======== ======= =======
Basic earnings per share.................................... $ 1.57 $ 1.31 $ 1.09
======== ======= =======
Diluted earnings per share.................................. $ 1.56 $ 1.31 $ 1.09
======== ======= =======
Weighted average shares outstanding -- basic................ 5,854 6,256 6,980
======== ======= =======
Weighted average shares outstanding -- diluted.............. 5,864 6,256 6,980
======== ======= =======

See accompanying notes to consolidated financial statements.
F-4
50

FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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,
1998.................... $87 $85,016 $50,422 $ 1,616 $(5,421) $(4,734) $ -- $126,986
Common stock acquired
for SIP............... -- -- -- -- -- (2,502) -- (2,502)
Earned SIP stock
awards................ -- (150) -- -- -- 1,367 -- 1,217
Earned ESOP shares
charged to expense.... -- 541 -- -- 774 -- -- 1,315
Cash dividends declared
and paid ($0.15 per
share)................ -- -- (1,151) -- -- -- -- (1,151)
Common stock repurchased
(1,615,123 shares at
an average price of
$17.43 per share)..... -- -- -- -- -- -- (28,152) (28,152)
Common stock acquired
for certain employee
benefit plans (34,545
shares at an average
price of $17.58 per
share)................ -- -- -- -- -- -- (607) (607)
Comprehensive income
(loss):
Net income............ -- -- 7,621 -- -- -- -- 7,621
Other comprehensive
income, net of tax
Unrealized holding
gains (losses) on
available for sale
securities........ -- -- -- (2,924) -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- (9) -- -- -- --
-------
Net unrealized
(losses) gains.... -- -- -- (2,933) -- -- -- --
Tax effect.......... -- -- -- 1,167 -- -- -- --
-------
Net-of-tax effect... -- -- -- (1,766) -- -- -- (1,766)
--------
Total
comprehensive
income.......... -- -- -- -- -- -- -- 5,855
--- ------- ------- ------- ------- ------- -------- --------
Balance at March 31,
1999.................... 87 85,407 56,892 (150) (4,647) (5,869) (28,759) 102,961
Earned SIP stock
awards................ -- (154) -- -- -- 1,431 -- 1,277
Earned ESOP shares
charged to expense.... -- 196 -- -- 775 -- -- 971
Cash dividends declared
and paid ($0.26 per
share)................ -- -- (1,808) -- -- -- -- (1,808)
Common stock repurchased
(428,801 shares at an
average price of
$12.24 per share)..... -- -- -- -- -- -- (5,271) (5,271)
Common stock acquired
for certain employee
benefit plans (24,086
shares at an average
price of $13.32 per
share)................ -- -- -- -- -- -- (320) (320)
Common stock sold for
certain employee
benefit plans (1,708
shares at an average
price of $16.57 per
share)................ -- -- -- -- -- -- 29 29
Comprehensive income
(loss):
Net income............ -- -- 8,186 -- -- -- -- 8,186
Other comprehensive
income, net of tax
Unrealized holding
gains (losses) on
available for sale
securities........ -- -- -- (6,981) -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- -- -- -- -- --
-------
Net unrealized
(losses) gains.... -- -- -- (6,981) -- -- -- --
Tax effect.......... -- -- -- 2,661 -- -- -- --
-------
Net-of-tax effect... -- -- -- (4,320) -- -- -- (4,320)
--------
Total
comprehensive
income.......... -- -- -- -- -- -- -- 3,866
--- ------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2000.................... $87 $85,449 $63,270 $(4,470) $(3,872) $(4,438) $(34,321) $101,705
=== ======= ======= ======= ======= ======= ======== ========

F-5
51
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (CONTINUED)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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,
2000.................... $87 $85,449 $63,270 $(4,470) $(3,872) $(4,438) $(34,321) $101,705
Earned SIP stock
awards................ -- (154) -- -- -- 1,440 -- 1,286
Earned ESOP shares
charged to expense.... -- 290 -- -- 774 -- -- 1,064
Cash dividends declared
and paid ($0.37 per
share)................ -- -- (2,386) -- -- -- -- (2,386)
Common stock repurchased
(442,979 shares at an
average price of
$13.42 per share)..... -- -- -- -- -- -- (5,963) (5,963)
Common stock acquired
for certain employee
benefit plans (34,425
shares at an average
price of $12.64 per
share)................ -- -- -- -- -- -- (435) (435)
Common stock sold for
certain employee
benefit plans (6,966
shares at an average
price of $14.68 per
share)................ -- -- -- -- -- -- 102 102
Comprehensive income
(loss):
Net income............ -- -- 9,164 -- -- -- -- 9,164
Other comprehensive
income, net of tax
Unrealized holding
gains (losses) on
available for sale
securities........ -- -- -- 11,419 -- -- -- --
Reclassification
adjustment for
losses (gains)
included in net
income............ -- -- -- -- -- -- -- --
-------
Net unrealized
(losses) gains.... -- -- -- 11,419 -- -- -- --
Tax effect.......... -- -- -- (4,398) -- -- -- --
-------
Net-of-tax effect... -- -- -- 7,021 -- -- -- 7,021
--------
Total
comprehensive
income.......... 16,185
--- ------- ------- ------- ------- ------- -------- --------
Balance at March 31,
2001.................... $87 $85,585 $70,048 $ 2,551 $(3,098) $(2,998) $(40,617) $111,558
=== ======= ======= ======= ======= ======= ======== ========

See accompanying notes to consolidated financial statements.
F-6
52

FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(IN THOUSANDS)

2001 2000 1999
----------- ----------- -----------

Cash flows from operating activities:
Net income................................................ $ 9,164 $ 8,186 $ 7,621
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Amortization (accretion) of:
Premium (discount) on investment and
mortgage-backed securities....................... (413) 272 1,154
Deferred loan origination costs.................... (454) (155) (50)
Mortgage servicing rights.......................... 2,450 2,070 1,704
Goodwill........................................... 84 2 --
Provisions for loan losses.............................. 1,200 1,200 1,200
(Gains) losses on sales of:
Office property and equipment......................... (4) (30) --
Real estate owned..................................... (41) (56) (104)
Mortgage loans........................................ (583) 952 (2,046)
Investment and mortgage-backed securities
available-for-sale................................. -- -- (9)
Net proceeds from sales of mortgage loans................... 119,710 250,326 629,772
Origination of mortgage loans held for sale................. (155,855) (204,182) (600,204)
Income from bank-owned life insurance....................... (1,637) (1,552) (575)
Unrealized (gain) loss on trading securities................ (128) (293) 6
Real estate owned valuation adjustments..................... -- (43) 38
Depreciation of office properties and equipment............. 2,640 2,542 2,251
Appreciation in fair value of ESOP shares................... 290 195 541
Earned SIP shares........................................... 1,286 1,277 1,217
Increase or decrease in:
Accrued interest receivable............................. (910) (649) (377)
Prepaid expenses and other assets....................... (258) (2,256) (629)
Accrued interest payable................................ 1,377 1,562 445
Other liabilities....................................... 2,120 2,635 (12,949)
----------- ----------- -----------
Net cash (used in) provided by operating
activities....................................... (19,962) 62,003 29,006
----------- ----------- -----------

F-7
53
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEARS ENDED MARCH 31, 2001, 2000 AND 1999
(IN THOUSANDS)

2001 2000 1999
----------- ----------- -----------

Cash flows from investing activities:
Purchase of investment securities available for sale...... $ (342) $ (600) $ (3,845)
Purchase of trading securities............................ (100) (200) (100)
Purchase of mortgage-backed securities available for
sale.................................................... (45,163) (249,028) (346,219)
Payments received on mortgage-backed securities available
for sale................................................ 97,340 107,134 127,442
Proceeds from sale of mortgage-backed securities available
for sale................................................ -- -- 3,906
Payments received on mortgage-backed securities held to
maturity................................................ 680 2,784 6,874
Purchase of the Federal Home Loan Bank Stock.............. (9,441) (2,246) (10,737)
Maturities of investment securities held to maturity...... -- 10,000 12,500
Maturities of investment securities available for sale.... 200 -- 4,000
Maturities of mortgage-backed securities available for
sale.................................................... -- -- 19,473
Net (increase) decrease in loans.......................... (89,639) (123,349) 80,280
Proceeds from sale of office equipment.................... 46 104 --
Proceeds from sales of real estate owned.................. 345 674 752
Purchase of bank-owned life insurance..................... -- -- (30,000)
Purchases of office properties and equipment.............. (1,533) (2,548) (2,629)
----------- ----------- -----------
Net cash used in investing activities.............. (47,607) (257,275) (138,303)
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits....................... 42,734 (10,188) (33,618)
Proceeds from FHLB advances and other borrowings.......... 3,799,213 2,867,106 1,584,786
Repayments on FHLB advances and other borrowings.......... (3,764,111) (2,673,425) (1,402,670)
Net change in advance payments by borrowers for taxes and
insurance............................................... (116) 324 (564)
Payments to acquire SIP shares............................ -- -- (2,502)
Cash dividends paid....................................... (2,386) (1,808) (1,151)
Common stock repurchased, net............................. (6,296) (5,562) (28,759)
Reduction in unearned ESOP shares......................... 774 775 774
----------- ----------- -----------
Net cash provided by financing activities.......... 69,812 177,222 116,296
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 2,243 (18,050) 6,999
Cash and cash equivalents at beginning of year.............. 20,970 39,020 32,021
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 23,213 $ 20,970 $ 39,020
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 78,018 $ 60,209 $ 55,998
=========== =========== ===========
Income taxes............................................ $ 4,456 $ 1,951 $ 3,933
=========== =========== ===========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans.................. $ 479 $ 231 $ 435
=========== =========== ===========

See accompanying notes to consolidated financial statements.
F-8
54

FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001, 2000 AND 1999

(1) ORGANIZATION

FIRSTFED AMERICA BANCORP, INC. (the "Company") is a holding company for
First Federal Savings Bank of America (the "Bank"), FAB FUNDING CORPORATION
("FAB FUNDING"), FIRSTFED INSURANCE AGENCY, LLC, and the FIRSTFED TRUST COMPANY,
N.A. The Company owns all of the issued and outstanding shares of common stock
of the Bank and FAB FUNDING. The FIRSTFED INSURANCE AGENCY, LLC (the "Agency")
is owned jointly by the Company and FAB FUNDING, with the Company's ownership
share being a substantial majority. The Company owns a 65% interest in FIRSTFED
TRUST COMPANY, N.A. (the "Trust Company"), with the remaining 35% interest being
held by M/D Trust, LLC, a minority owner.

The Bank provides a full range of banking services to individual and
business customers in Massachusetts, Rhode Island and, to a lesser degree, in
Connecticut. The Bank is subject to competition from other financial
institutions, mortgage banking companies and other financial service providers
doing business in the area. The Bank and the Company are subject to regulations
of, and periodic examinations by, the Office of Thrift Supervision ("OTS") and
the Federal Deposit Insurance Corporation ("FDIC"). The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") of the FDIC up to
$100,000. To provide protection for customers' retirement account balances in
excess of FDIC coverage, the Bank participates in the "Deposit Collateralization
Bailee Program" with the Federal Home Loan Bank of Boston. To participate, the
Company must pledge investment securities and mortgage loans as collateral with
the Federal Home Loan Bank of Boston.

As more fully described in note 3, the Bank converted from a mutual savings
bank to a capital stock savings bank on January 15, 1997.

The Agency was formed on January 7, 1999. The Agency offers a comprehensive
insurance product line including auto, home, life, accident and health insurance
to consumers and businesses. The Agency is licensed to sell insurance in
Massachusetts, Rhode Island and Connecticut and is subject to regulations of,
and periodic examinations by, both of these states.

In March 2000, the Agency purchased two local independent agencies,
Smith-Cochrane Insurance Agency, Inc. and All Risk Insurance Agency of Swansea
for a total of $1.1 million. Since these acquisitions were accounted for under
the purchase method of accounting, the results of the acquisitions are included
for the periods subsequent to the acquisition date. Goodwill of approximately
$1.1 million was recorded and is being amortized on a straight-line basis
between five and fifteen years. The Agency made a payment of $95,000 in March
2001, which was recorded as goodwill, and will also make additional payments of
$375,000 over two years, which also will be recorded as goodwill.

The Trust Company was formed on February 1, 2000 as a limited purpose
national bank, which provides comprehensive fiduciary products and services in
Massachusetts and Rhode Island. The Trust Company is subject to the regulations
of, and periodic examination by the Office of the Comptroller of the Currency
("OCC"), as well as the states in which it operates.

FAB FUNDING is a business corporation formed at the direction of the
Company under the laws of the Commonwealth of Massachusetts in October 1996. FAB
FUNDING was established to lend funds to a Bank sponsored employee stock
ownership plan and related trust for the purchase of stock in the initial public
offering.

The Bank includes its wholly-owned subsidiaries: FIRSTFED Mortgage Corp.
(an inactive company), FIRSTFED INVESTMENT CORP. (a Massachusetts security
corporation), and CELMAC INVESTMENT CORP. (a Massachusetts security
corporation).

F-9
55
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (DOLLARS IN THOUSANDS)

Principles of Consolidation

In preparing these financial statements, management is required to make
estimates that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets, and income and expense for the periods. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses.

All significant intercompany accounts and transactions have been eliminated
in consolidation. Certain amounts previously reported have been reclassified to
conform to the current year's presentation.

Cash and Due From Banks

The Bank is required to maintain cash and reserve balances with the Federal
Reserve Bank. Such reserve is calculated based upon deposit levels and amounted
to $868 at March 31, 2001.

Investments and Mortgage-Backed Securities

Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at amortized
cost. Debt and equity securities that are bought and held principally for the
purpose of being resold in the near term are classified as trading and reported
at fair value, with unrealized gains and losses included in earnings. Debt and
equity securities not classified as either held-to-maturity or trading are
classified as available-for-sale and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of related income taxes.

Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income using a method that approximates the interest
method. If a decline in fair value below the amortized cost basis of an
investment or mortgage-backed security is judged to be other than temporary, the
cost basis of the investment is written down to fair value as a new cost basis
and the amount of the write-down is included as a charge against gain (loss) on
sale of investment securities. Gains and losses on the sale of investment and
mortgage-backed securities are recognized at the time of sale on a specific
identification basis.

Loans

Loans are reported at the principal amount outstanding, adjusted for net
deferred loan origination fees or costs. Mortgage loans held for sale are
carried at the lower of aggregate cost or market. Considered in the calculation
of cost are unamortized deferred loan origination fees and costs and mortgage
servicing rights. Generally, all longer term (typically mortgage loans with
terms greater than fifteen years) fixed-rate residential single-family mortgage
loans are originated for sale and shorter term fixed-rate and adjustable-rate
loans are originated for portfolio.

Loan origination fees are offset with related direct incremental loan
origination costs and the resulting net amount is deferred and amortized over
the contractual life of the related loans using the interest method. When loans
are sold in the secondary market, the remaining balance of the amount deferred
is included in the determination of gain or loss on sale.

Accrual of interest on loans is discontinued when collectibility of
principal or interest is uncertain or payments of principal or interest have
become contractually past due 90 days or more. When a loan is placed on
non-accrual, all income that has been accrued but remains unpaid is reversed
against current period income and all amortization of deferred loan fees is
discontinued. Interest received on non-accrual loans is either recorded as
income or applied against the principal balance depending on management's
evaluation of the collectibility of principal. Loans are removed from
non-accrual status when they have been current as to

F-10
56
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

principal and interest for a period of time, the borrower has demonstrated an
ability to comply with the repayment terms, and when, in management's opinion,
the loans are considered fully collectible.

Impaired loans are commercial and commercial real estate loans for which it
is probable that the Bank will not be able to collect all amounts due according
to the contractual terms of the loan agreement. The definition of "impaired
loans" is not the same as the definition of "nonaccrual loans," although the two
categories overlap. Nonaccrual loans include impaired loans and are those on
which the accrual of interest is discontinued when collectibility of principal
or interest is uncertain or payments of principal or interest have been
contractually past due 90 days. The Bank may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if (i) it is probable that the Bank will
collect all amounts due in accordance with the contractual terms of the loan or
(ii) the loan is not a commercial or a commercial real estate loan. Factors
considered by management in determining impairment include payment status and
collateral value.

The amount of impairment for these types of impaired loans is determined by
the difference between the present value of the expected cash flows related to
the loan, using the original contractual interest rate, and its recorded value,
or, as a practical expedient in the case of collateralized loans, the difference
between the fair value of the collateral and the recorded amount of the loan.
When foreclosure is probable, impairment is measured based on the fair value of
the collateral. Residential mortgage and consumer loans are measured for
impairment collectively. Loans that experience insignificant payment delays and
insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.

Allowance for Loan Losses

The allowance for loan losses is maintained for credit losses inherent in
the portfolio. Loans (or portions thereof) deemed to be uncollectible are
charged against the allowance and recoveries of amounts previously charged-off
are added to the allowance. The provisions for loan losses charged to earnings
are added to the allowance to bring it to the desired level.

The level of the allowance is based on management's ongoing review of the
existing loan portfolio and current market conditions, as well as the volume and
mix of new originations. Management's methodology to estimate loss exposure
inherent in the portfolio also includes analysis of individual loans deemed to
be impaired, allowance allocations for various loan types based on payment
status or loss experience, and an unallocated allowance that is maintained based
on management's assessment of many factors including trends in loan
delinquencies and charge-offs, current type, mix and balance of the portfolio,
performance of individual loans in relation to contract terms, and the perceived
risk in the relatively new and rapidly growing commercial loan portfolio.

While management believes that the allowance for loan losses is adequate to
absorb probable loan losses, future additions to the allowance may be necessary
based on changes in the above factors. In addition, the OTS and FDIC
periodically review the Bank's allowance for loan losses. Such agencies may
require the recognition of additions to the allowance based on their judgments
about information available to them at the time of their examination.

Gain or Loss on Sale of Mortgage Loans

Gain or loss on sale of mortgage loans is recognized at the time of sale.
Such gain or loss results from the combination of (1) the difference between the
net cash paid by the investor for the loan and the loan's

F-11
57
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

carrying value; (2) the calculated present value of the difference between the
interest rate paid by the borrower on the loan sold and the interest rate
guaranteed to the investor, adjusted for mortgage servicing fees and considering
estimated loan prepayments; and (3) any origination fees, net of applicable
origination costs, retained by the Bank.

Capitalized mortgage servicing rights are recognized, based on the
allocated fair value of the rights to service mortgage loans for others.
Mortgage servicing rights are amortized to loan servicing fee income using a
method which approximates the level yield method in proportion to, and over the
period of, estimated net servicing income. Mortgage servicing rights are
assessed for impairment based on the fair value of those rights. Prepayment
experience on mortgage servicing rights is reviewed periodically and, when
actual repayments exceed estimated prepayments, the balance of the mortgage
servicing assets is reduced by a charge to earnings through a valuation
allowance. The risk characteristics of the underlying loans used to measure
impairment include loan type, interest rate, loan origination date, and term to
maturity.

Office Properties and Equipment

Land is carried at cost. Office properties and equipment are recorded at
cost less accumulated depreciation. Depreciation of office properties and
equipment is determined on the straight-line basis over the estimated useful
lives of the related assets (3 to 40 years). Expenditures for major additions
and improvements are capitalized while the costs of current maintenance and
repairs are charged to operating expenses.

Real Estate Owned

Real estate owned is acquired through foreclosure or by accepting a deed in
lieu of foreclosure. Real estate acquired in settlement of loans is recorded at
the lower of the carrying value of the loan or the fair value, less disposal
costs, of the property constructively or actually received, thereby establishing
a new cost basis. Subsequent write-downs are recorded if the cost basis exceeds
current net fair value. Related operating costs, net of rental income, are
reflected in operations when incurred. Realized gains and losses upon
disposition are recognized in income.

Management believes that the net carrying value of real estate acquired
through foreclosure reflects the lower of its cost basis or estimated net fair
value. Factors similar to those considered in the evaluation of the allowance
for loan losses, including regulatory requirements, are considered in the
evaluation of the net fair value of real estate acquired through foreclosure.

Bank Owned Life Insurance

Bank owned life insurance ("BOLI") represents life insurance on certain
employees. The Company is the beneficiary of the insurance policies. Increases
in the cash value of the policies, as well as insurance proceeds received, are
recorded in other income, and are not subject to income taxes. BOLI is reported
on the balance sheet at cash value.

Goodwill

Goodwill arises in a business combination accounted for under the purchase
method. It represents the difference between the cost of an acquired company and
the sum of the fair values of the tangible and identifiable intangible assets
acquired less the fair value of the tangible liabilities assumed. Goodwill is
amortized on a straight-line basis over a period not exceeding fifteen years,
and is reviewed for possible impairment when it is determined that events or
changed circumstances may affect the underlying basis of the asset. Goodwill is
reported on the balance sheet as a component of prepaid expenses and other
assets.

F-12
58
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the accounting basis and the
tax basis of the Company's assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
realized or settled. The Company's deferred tax asset is reviewed periodically
and adjustments to such asset are recognized as deferred income tax expense or
benefit based upon management's judgments relating to the realizability of such
asset.

Pension

The Company accounts for pension benefits on the net periodic pension cost
method for financial reporting purposes. This method recognizes the compensation
cost of an employee's benefit over that employee's approximate service period.

Stock Options

The Company continues to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees. However, the Company provides expanded disclosures of
pro-forma net income and earnings per share and other disclosure information in
Note 14 to the consolidated financial statements as if the fair value method had
been applied.

Interest Rate Risk Management Agreements

The Company uses off-balance sheet financial instruments from time to time
as part of its interest rate risk management strategy. Interest rate swap
agreements are entered into as hedges against future interest rate fluctuations
on specifically identified assets or liabilities. The Company does not enter
into agreements for trading or speculative purposes. Therefore, these agreements
are not marked to market.

The net amounts to be paid or received on outstanding interest rate risk
management agreements are recognized on the accrual basis as an adjustment to
the related interest income or expense over the life of the agreements.

Earnings Per Share

Basic EPS is computed by dividing net income by the weighted average number
of shares of common stock outstanding during the year adjusted for the weighted
average number of unallocated shares held by the Employee Stock Ownership Plan
("ESOP") and the unearned shares relating to the 1997 Stock-Based Incentive Plan
("SIP"). Diluted EPS reflects the effect to weighted average shares outstanding
of the number of additional shares outstanding if dilutive stock options and
dilutive SIP shares were converted into common stock using the treasury stock
method.

A reconciliation of the weighted average shares outstanding for the years
ended March 31, 2001, 2000 and 1999 follows (in thousands):

2001 2000 1999
----- ----- -----

Basic shares................................................ 5,854 6,256 6,980
Dilutive impact of stock options............................ 10 -- --
Dilutive impact of SIP shares............................... -- -- --
----- ----- -----
Diluted shares.............................................. 5,864 6,256 6,980
===== ===== =====

F-13
59
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Comprehensive Income

Comprehensive income is defined as all changes to equity except investments
by and distribution to shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income.

Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents consist of
cash on hand and due from banks and short-term investments. Short-term
investments have original maturities of 90 days or less.

Trust Assets

Securities and other property held in a fiduciary or agency capacity are
not included in the consolidated balance sheets because they are not assets of
the Company. Trust assets under administration were $455,800 at March 31, 2001
and $445,000 at March 31, 2000. Income from trust activities is reported on an
accrual basis.

Recent Accounting Developments

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of the hedge
the method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which amends the
accounting and reporting standards of SFAS No. 133 for certain derivative
instruments and hedging activities. These amendments include the application of
the normal purchases and sales exception in SFAS No. 133, and redefinition of
hedged risk. SFAS No. 138 also amended SFAS No. 133 for decisions made by the
Financial Accounting Standards Board relating to the Derivatives Implementation
Group process. The Company adopted SFAS No. 133 and SFAS No. 138 on April 1,
2001, and recognized an after-tax loss from the cumulative effect of adoption of
$461.

(3) CONVERSION TO STOCK FORM OF OWNERSHIP

The Company is a business corporation formed at the direction of the Bank
under the laws of Delaware on September 6, 1996. On January 15, 1997, (i) the
Bank converted from a federally chartered mutual savings bank to a federally
chartered stock savings bank, (ii) the Bank issued all of its outstanding
capital stock to the Company and (iii) the Company consummated its initial
public offering of common stock, par value $.01 per share (the "Common Stock"),
by selling at a price of $10.00 per share 7,364,762 shares of Common Stock to
certain of the Bank's eligible account holders who had subscribed for such
shares (collectively, the "Conversion"), by selling 697,010 shares to the Bank's
Employee Stock Ownership Plan and related trust ("ESOP") and by contributing
645,380 shares of Common Stock to The FIRSTFED Charitable Foundation (the
"Foundation"). The Conversion resulted in net proceeds of $77.6 million, after
expenses of $3.0 million. Net proceeds of $43.4 million were invested in the
Bank to increase the Bank's tangible capital to 10% of the Bank's total adjusted
assets. The Company established the Foundation dedicated to the communities
served by the Bank. In connection with the Conversion, the common stock
contributed by the Company to the Foundation at a value of $6.5 million was
charged to expense.

F-14
60
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Prior to the initial public offering and as a part of the subscription
offering, in order to grant priority to eligible depositors, the Bank
established a liquidation account at the time of Conversion in an amount equal
to the retained earnings of the Bank as of the date of its latest balance sheet
date, September 30, 1996, contained in the final Prospectus used in connection
with the Conversion. In the unlikely event of a complete liquidation of the Bank
(and only in such an event), eligible depositors who continue to maintain
accounts at the Bank shall be entitled to receive a distribution from the
liquidation account. The total amount at the liquidation account is decreased if
the balances of eligible depositors decrease at the annual determination dates.
The liquidation account approximated $15.7 million (unaudited) at March 31,
2001.

The Company may not declare or pay dividends on its stock if such
declaration and payment would violate statutory or regulatory requirements.

In addition to the 25,000,000 authorized shares of common stock, the
Company authorized 1,000,000 shares of preferred stock with a par value of $0.01
per share (the "Preferred Stock"). The Board of Directors is authorized, subject
to any limitations by law, to provide for the issuance of the shares of
preferred stock in series, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restriction thereof. As of March 31, 2001, there
were no shares of preferred stock issued.

(4) STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)

The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of risk-based core and tangible capital (as defined). As of March 31,
2001, the Bank meets all capital adequacy requirements to which it is subject.

As of December 11, 2000, the most recent notification from the OTS
categorized the Bank as "well capitalized" by regulatory definition. To be
categorized as "well capitalized" the Bank must maintain minimum total
risk-based, core, tangible, and Tier 1 risk-based capital ratios as set forth in
the table. As of March 31, 2001, the Bank is categorized as "well capitalized"
based on its ratios of risk-based, core, tangible, and Tier 1 risk-based
capital. There are no conditions or events since that notification that
management believes have changed the Bank's category.

F-15
61
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Bank's actual and required capital amounts and ratios are presented in
the following table. No deduction was taken from capital for interest-rate risk.

TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
----------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- ------

As of March 31, 2001:
Risk-based capital................. $112,964 13.58% $66,536 8.0% $83,170 10.0%
Core capital....................... 103,942 6.27 66,310 4.0 82,888 5.0
Tangible capital................... 103,942 6.27 33,155 2.0 82,888 5.0
Tier 1 risk-based.................. 103,942 12.33 34,620 4.0 51,254 6.0
As of March 31, 2000:
Risk-based capital................. $109,319 15.06% $58,052 8.0% $72,565 10.0%
Core capital....................... 100,267 6.35 63,179 4.0 78,974 5.0
Tangible capital................... 100,267 6.35 31,590 2.0 78,974 5.0
Tier 1 risk-based.................. 100,267 13.82 29,026 4.0 43,539 6.0

The Trust Company is subject to similar capital standards under OCC
regulations with respect to its balance sheet assets. The Trust Company's
capital amounts and ratios are presented in the following table.

CAPITAL
EXCESS ------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
------ -------- ------------ ------ --------

As of March 31, 2001:
Tangible capital........................ $2,781 $ 22 $2,759 257.50% 2.00%
Core capital............................ 2,781 120 2,661 92.58 4.00
Risk-based capital...................... 2,781 86 2,695 257.50 8.00
As of March 31, 2000:
Tangible capital........................ $2,809 $ 56 $2,753 100.43% 2.00%
Core capital............................ 2,809 112 2,697 100.43 4.00
Risk-based capital...................... 2,809 224 2,585 486.83 8.00

(5) INVESTMENT AND MORTGAGE-BACKED SECURITIES (DOLLARS IN THOUSANDS)

Available For Sale

A summary of investment securities available for sale follows:

MARCH 31, 2001
---------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- ------

Investment securities:
U.S. Government Agency
obligations...................... 6.7% $ 603 $ 2 $ (3) $ 602
Marketable equity securities........ 5,802 1,603 (170) 7,235
------ ------ ----- ------
Total investment
securities................ $6,405 $1,605 $(173) $7,837
====== ====== ===== ======

F-16
62
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MARCH 31, 2000
---------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- ------

Investment securities:
U.S. Government Agency
obligations...................... 6.2% $ 600 $ -- $ -- $ 600
Marketable equity securities........ 5,660 1,353 (1,970) 5,043
------ ------ ------- ------
Total investment
securities................ $6,260 $1,353 $(1,970) $5,643
====== ====== ======= ======

A summary of mortgage-backed and collateralized mortgage obligation
securities available for sale follows:

MARCH 31, 2001
-----------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- --------

Mortgage-backed securities due:
Less than five years.............. 7.0% $ 12,029 $ 167 $ -- $ 12,196
After ten years................... 6.7 272,689 3,369 (101) 275,957
-------- ------ ------- --------
Total mortgage-backed
securities.............. 6.7 284,718 3,536 (101) 288,153
-------- ------ ------- --------
Collateralized mortgage obligations
due:
Less than five years.............. 6.5 9,997 62 -- 10,059
Within five to ten years.......... 6.7 37,654 85 (233) 37,506
After ten years................... 6.5 165,975 291 (754) 165,512
-------- ------ ------- --------
Total collateralized
mortgage obligations.... 6.6 213,626 438 (987) 213,077
-------- ------ ------- --------
Total..................... 6.6% $498,344 $3,974 $(1,088) $501,230
======== ====== ======= ========

MARCH 31, 2000
-----------------------------------------------------------------
WEIGHTED AMORTIZED UNREALIZED UNREALIZED FAIR
AVERAGE RATE COST GAINS LOSSES VALUE
------------ --------- ---------- ---------- --------

Mortgage-backed securities due:
Less than five years.............. 7.0% $ 15,254 $ -- $ (306) $ 14,948
After ten years................... 6.0 348,559 132 (4,140) 344,551
-------- ---- ------- --------
Total mortgage-backed
securities.............. 6.0 363,813 132 (4,446) 359,499
-------- ---- ------- --------
Collateralized mortgage obligations
due:
Less than five years.............. 7.2 9,996 54 -- 10,050
Within five to ten years.......... 6.0 35,168 -- (532) 34,636
After ten years................... 6.4 141,132 744 (2,434) 139,442
-------- ---- ------- --------
Total collateralized
mortgage obligations.... 6.3 186,296 798 (2,966) 184,128
-------- ---- ------- --------
Total..................... 6.1% $550,109 $930 $(7,412) $543,627
======== ==== ======= ========

Adjustable-rate mortgage-backed securities and collateralized mortgage
obligations available for sale had total amortized costs and fair values of
$413,440 and $416,044 respectively, at March 31, 2001 and $479,266 and $474,627,
respectively, at March 31, 2000.

F-17
63
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Held To Maturity

A summary of mortgage-backed securities held to maturity follows:

MARCH 31, 2001
-----------------------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ------

Mortgage-backed securities due:
Less than five years.................. 8.7% $ 32 $-- $-- $ 32
Within five to ten years.............. 8.9 537 -- -- 537
After ten years....................... 8.7 1,569 16 -- 1,585
------ --- --- ------
Total mortgage-backed
securities held to
maturity.................... 8.7% $2,138 $16 $-- $2,154
====== === === ======

MARCH 31, 2000
-----------------------------------------------------------
WEIGHTED
AVERAGE AMORTIZED UNREALIZED UNREALIZED FAIR
RATE COST GAINS LOSSES VALUE
-------- --------- ---------- ---------- ------

Mortgage-backed securities due:
Less than five years.................. 8.7% $ 40 $-- $-- $ 40
Within five to ten years.............. 8.8 692 -- -- 692
After ten years....................... 7.2 2,087 34 -- 2,121
------ --- --- ------
Total mortgage-backed
securities held to
maturity.................... 7.7% $2,819 $34 $-- $2,853
====== === === ======

Adjustable-rate mortgage-backed securities held to maturity had total
amortized cost and fair value of $1,569 and $1,585, respectively, at March 31,
2001 and $2,087 and $2,121, respectively, at March 31, 2000.

Maturities of mortgage-backed securities are based on contractual
maturities with scheduled amortization. Actual maturities will differ from
contractual maturities due to prepayments.

Mortgage-backed securities with a book value of approximately $444 and $560
were pledged as collateral for certain deposits in the "Deposit
Collateralization Bailee Program" at the Federal Home Loan Bank of Boston at
March 31, 2001 and 2000, respectively.

As a member of the Federal Home Loan Bank ("FHLB") system, the Company is
required to maintain a minimum investment in FHLB stock. The current investment
exceeds the required level at March 31, 2001. Any excess may be redeemed by the
Company or called by the FHLB at par. At its discretion, the FHLB may declare
dividends on this stock.

Trading Securities

The Company maintains an investment position in a venture-capital limited
partnership, which is classified as a trading security.

(6) LOANS RECEIVABLE (DOLLARS IN THOUSANDS)

The Company's lending activities are conducted principally in
Massachusetts, Rhode Island and, to a lesser degree, in Connecticut. The Company
grants one-to four-family and multifamily residential loans, commercial real
estate loans, commercial loans and a variety of consumer loans. In addition, the
Company grants loans for the construction of residential homes, multifamily
properties and commercial real estate properties. The ability and willingness of
one-to four-family and multifamily residential and consumer

F-18
64
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

borrowers to honor their repayment commitments is generally dependent on real
estate values and the level of overall economic activity within the borrowers'
geographic areas. The ability and willingness of commercial, commercial real
estate and construction loan borrowers to honor their repayment commitments is
generally dependent on the health of the real estate economic sector in the
borrowers' geographic areas and the general economy.

The following is a comparative summary of loans receivable classified by
type at March 31:

2001 2000
---------- --------

Mortgage loans:
Residential 1 - 4 family........................... $ 677,512 $671,586
Multi-family....................................... 3,015 2,568
Commercial real estate............................. 44,375 37,274
Construction and land.............................. 72,225 39,205
---------- --------
Total mortgage loans....................... 797,127 750,633
---------- --------
Commercial loans..................................... 94,681 70,484
---------- --------
Consumer loans and other loans:
Home equity lines.................................. 45,191 31,351
Second mortgages................................... 61,759 51,488
Other consumer loans............................... 9,665 8,616
---------- --------
Total consumer loans....................... 116,615 91,455
---------- --------
Total loans receivable............................... 1,008,423 912,572
---------- --------
Less:
Allowance for loan losses.......................... (13,233) (12,275)
Undisbursed proceeds of construction mortgages in
process......................................... (19,445) (11,983)
Deferred loan origination costs, net............... 1,429 446
---------- --------
(31,249) (23,812)
---------- --------
Loans receivable, net...................... $ 977,174 $888,760
========== ========

At March 31, 2001 and 2000, mortgage loans sold to others and serviced by
the Bank on a fee basis under various agreements amounted to $1,531,300 and
$1,594,696, respectively. Loans serviced for others are not included in the
Consolidated Balance Sheets.

Loans placed on nonaccrual status totaled approximately $1,332 and $1,310
at March 31, 2001 and 2000, respectively.

The following table summarizes information regarding the reduction of
interest income on nonaccrual loans for the years ended March 31:

2001 2000 1999
---- ---- ----

Income in accordance with original items.................... $127 $107 $231
Income recognized........................................... 81 78 194
---- ---- ----
Foregone interest income during year........................ $ 46 $ 29 $ 37
==== ==== ====

At March 31, 2001, there were no commitments to lend additional funds to
those borrowers whose loans were classified as impaired or nonaccrual.

F-19
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At March 31, 2001 and 2000, total impaired loans of $1,138 and $556
required impairment allowances of $193 and $228, respectively. All impaired
loans have been measured using the fair value of the collateral method. The
average recorded value of impaired loans was $847 during 2001 and $771 in 2000.
The Company follows the same policy for recognition of income on impaired loans
as it does for all other loans. Impaired loans of $798 and $244 were on
nonaccrual at March 31, 2001 and 2000, respectively.

The following table summarizes information regarding the reduction of
interest income on impaired loans for the years ended March 31:

2001 2000 1999
------- ------- -------

Income in accordance with original terms.............. $ 77 $ 114 $ 227
Income recognized..................................... 46 75 122
------- ------- -------
Foregone interest income during the year.............. $ 31 $ 39 $ 105
======= ======= =======

An analysis of the allowance for loan losses for the years ended March 31
is as follows:

2001 2000 1999
------- ------- -------

Balance at beginning of year.......................... $12,275 $12,016 $10,937
Provision for loan losses........................... 1,200 1,200 1,200
Charge-offs......................................... (281) (958) (138)
Recoveries.......................................... 39 17 17
------- ------- -------
Balance at end of year................................ $13,233 $12,275 $12,016
======= ======= =======

In the ordinary course of business, the Company makes loans to its
directors, executive officers, and their related interests, at the same
prevailing terms as those of other borrowers. The following is a summary of
related party loan activity for the years ended March 31:

2001 2000 1999
------- ------- -------

Balance, beginning of year............................ $ 888 $ 685 $ 828
Originations........................................ 630 313 56
Principal repayments................................ (222) (110) (199)
------- ------- -------
Balance, end of year.................................. $ 1,296 $ 888 $ 685
======= ======= =======

Not included in the amounts stated above are unused portions of lines of
credit. These amounted to $235 and $228 at March 31, 2001 and 2000,
respectively.

Loans with a book value of $9,841 and $8,973 were pledged as collateral for
the "Deposit Collateralization Bailee Program" with the Federal Home Loan Bank
of Boston at March 31, 2001 and March 31, 2000, respectively.

F-20
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) SALE OF MORTGAGE LOANS (DOLLARS IN THOUSANDS)

The following summarizes mortgage loan sales and the components of gain or
(loss) on sale of mortgage loans for the years ended March 31:

2001 2000 1999
-------- --------- ---------

Gain (loss) on sale of mortgage loans:
Cash proceeds from sales of loans.............. $119,677 $ 250,265 $ 630,044
Buy-up (down) fees received, net............... 33 61 (272)
-------- --------- ---------
Net cash proceeds from sales of loans.......... 119,710 250,326 629,772
Principal balance of loans sold................ (119,719) (251,768) (631,107)
Deferred origination (costs) fees recognized at
time of sale................................ (451) (1,331) (1,480)
Change in unrealized loss on mortgage loans
held for sale............................... -- -- (150)
Capitalized mortgage servicing rights.......... 1,043 1,821 5,011
-------- --------- ---------
Gain (loss) on sale of mortgage loans,
net....................................... $ 583 $ (952) $ 2,046
======== ========= =========

The following is a summary of capitalized mortgage servicing rights for the
years ended March 31:

2001 2000
------- -------

Beginning balance........................................ $ 6,288 $ 6,537
Capitalized mortgage servicing rights.................... 1,043 1,821
Amortization............................................. (2,450) (2,070)
------- -------
Balance at March 31...................................... $ 4,881 $ 6,288
======= =======

Capitalized mortgage servicing rights are periodically evaluated for
impairment. The balance of the valuation allowance amounted to $250 at of March
31, 2001 and 2000.

(8) OFFICE PROPERTIES AND EQUIPMENT (DOLLARS IN THOUSANDS)

Office properties and equipment consist of the following at March 31:

2001 2000
-------- --------

Land................................................... $ 1,882 $ 1,882
Office building and improvements....................... 20,368 19,542
Furniture, fixtures and equipment...................... 14,520 13,052
Construction in progress............................... 139 945
-------- --------
36,909 35,421
Less accumulated depreciation.......................... (12,871) (10,234)
-------- --------
$ 24,038 $ 25,187
======== ========

F-21
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company leases certain office space under various non-cancelable
operating leases. A summary of future minimum rental payments under such leases
at March 31, 2001 follows:

MINIMUM RENTAL
YEAR ENDING MARCH 31, EXPENSE
- --------------------- --------------

2002.................................................. $ 320
2003.................................................. 278
2004.................................................. 226
2005.................................................. 226
2006.................................................. 226
After 2006............................................ 1,088

Rent expense was $330, $181 and $127 for the years ended March 31, 2001,
2000 and 1999, respectively.

(9) DEPOSITS (DOLLARS IN THOUSANDS)

Deposits at March 31 are as follows:

WEIGHTED
AVERAGE 2001 2000
RATES AT ----------------- -----------------
MARCH 31, 2001 AMOUNT % AMOUNT %
-------------- -------- ----- -------- -----

Money market........................... 4.08% $ 53,075 7.5% $ 36,094 5.4%
Business checking...................... -- 71,419 10.1 57,729 8.7
Savings................................ 1.75 102,884 14.5 102,167 15.4
NOW.................................... 0.98 72,241 10.2 61,800 9.3
-------- ----- -------- -----
299,619 42.3 257,790 38.8
-------- ----- -------- -----
Certificates:
Six months to one year............... 5.53 114,637 16.2 186,937 28.1
Over one year........................ 6.10 159,733 22.6 112,881 17.0
Jumbo................................ 4.93 7,876 1.1 7,532 1.1
IRA & Keogh.......................... 5.74 82,677 11.7 82,245 12.4
Business statement................... 5.27 760 0.1 3,436 0.5
7-91 day............................. 5.32 42,114 6.0 13,861 2.1
-------- ----- -------- -----
Total certificate accounts... 407,797 57.7 406,892 61.2
-------- ----- -------- -----
$707,416 100.0% $664,682 100.0%
======== ===== ======== =====

At March 31, 2001 and 2000, the weighted average stated interest rate of
deposits was 3.98% and 3.74%, respectively.

The remaining contractual maturities of certificate accounts at March 31
are summarized as follows:

2001 2000
----------------- -----------------
AMOUNT % AMOUNT %
-------- ----- -------- -----

Within twelve months.................................. $313,336 76.8% $311,461 76.5%
More than thirteen months to thirty-six months........ 88,936 21.8 90,543 22.3
Beyond thirty-six months.............................. 5,525 1.4 4,888 1.2
-------- ----- -------- -----
$407,797 100.0% $406,892 100.0%
======== ===== ======== =====

F-22
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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At March 31, 2001, the Company had $64,975 in certificate accounts in
amounts of $100 or more maturing as follows:

WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------- ------- ------------

Three months or less.................................. $18,686 5.56%
Over 3 through 6 months............................... 15,035 5.41
Over 6 through 12 months.............................. 15,290 5.94
Over 12 months........................................ 15,964 6.31
-------
Total................................................. $64,975 5.80%
=======

In the ordinary course of business, the Company accepts deposits from
brokerage companies on behalf of their clients. These monies are invested in
certificates of deposit. Brokered deposits amounted to $1,391 and $1,194 at
March 31, 2001 and 2000, respectively.

Interest expense on deposits consisted of the following for the years ended
March 31:

2001 2000 1999
------- ------- -------

Money market.......................................... $ 1,156 $ 780 $ 849
Regular and club...................................... 1,777 1,743 1,875
NOW................................................... 637 558 498
Certificates.......................................... 22,682 21,731 24,350
------- ------- -------
$26,252 $24,812 $27,572
======= ======= =======

(10) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (DOLLARS IN THOUSANDS)

At March 31, 2001 and 2000, advances from the Federal Home Loan Bank of
Boston ("FHLB") with a weighted average interest rate of 5.99% and 5.84%,
respectively, mature as follows:

YEAR ENDING MARCH 31, 2001 2000
- --------------------- -------- --------

2001................................................. $ -- $369,068
2002................................................. 275,854 47,909
2003................................................. 179,499 61,459
2004................................................. 39,785 25,000
2005................................................. 20,317 104,544
After 2005........................................... 218,787 --
-------- --------
$734,242 $607,980
======== ========

F-23
69
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At March 31, 2001, the preceding totals include the following putable
advances which are exercisable at the discretion of the FHLB:

CONTRACTUAL
ADVANCE MATURITY PUT EXERCISE INTEREST
DATE DATE DATE TYPE BALANCE RATE
- -------- ----------- -------- -------- -------- --------

9/17/98 9/17/03 9/17/01 One Time $ 25,000 4.99%
1/19/99 1/20/09 1/21/03 One Time 15,000 4.98
10/8/99 10/8/09 10/9/01 Quarterly 24,000 5.58
2/16/00 2/16/10 2/19/02 Quarterly 10,000 6.47
2/16/00 2/16/10 2/18/03 Quarterly 10,000 6.69
11/8/00 11/8/05 5/8/01 Quarterly 45,000 5.97
12/20/00 12/20/10 12/20/01 Quarterly 15,000 4.95
2/5/01 2/7/11 2/5/03 Quarterly 10,000 4.58
3/5/01 3/7/11 6/5/01 Quarterly 30,000 3.99
--------
$184,000
========

Of the $275,854 maturing between April 1, 2001 and March 31, 2002, $25,000
have an adjustable rate that reprice monthly based on the one month London
Inter-Bank Offer Rate ("LIBOR").

In accordance with the FHLB collateral requirements, a portion of the
Bank's first mortgage loans on residential property and all otherwise
unencumbered deposits and securities issued, insured or guaranteed by the United
States government or an agency thereof, are pledged as collateral to secure such
advances.

The Bank has a $25,000 secured line of credit available and additional
borrowing capacity of $153,656 with the FHLB at March 31, 2001.

The Bank also had $80,522 at March 31,2001 and $171,682 at March 31, 2000
of other borrowings primarily consisting of reverse repurchase agreements with
securities dealers that were collateralized by mortgage-backed securities. The
following table shows information pertaining to these agreements for the years
ended March 31:

2001 2000 1999
-------- -------- -------

Reverse repurchase agreements....................... $ 80,000 $171,467 $55,092
Book value of pledged collateral.................... 85,882 186,802 59,074
Fair value of pledged collateral.................... 87,171 185,254 59,226
Maximum amount outstanding at any month end......... 172,003 191,538 73,065
Average amount outstanding during the year.......... 140,451 105,559 49,861
Weighted average interest rate during the period.... 6.36% 5.51% 5.28%
Weighted average interest rate at end of period..... 6.32 5.88 4.81

The following table shows information pertaining to the maturity of these
agreements for the years ended March 31:

YEAR ENDING MARCH 31, 2001 2000
- --------------------- ------- --------

2001.................................................. $ -- $171,467
2002.................................................. 80,000 --
------- --------
$80,000 $171,467
======= ========

F-24
70
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(11) LITIGATION

Various legal proceedings are pending against the Company which have arisen
out to the normal course of business. In the opinion of management, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the consolidated financial position, the annual results of operations, or
liquidity of the Company.

(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (IN THOUSANDS)

The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage interest-rate risk exposure. These financial instruments primarily
include commitments to originate and sell loans, unadvanced lines of credit, and
interest rate swap agreements. The instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated balance sheet. The contract amounts of those instruments
reflect the extent of the Company's involvement in these particular classes of
financial instruments.

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and unadvanced
lines of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.

2001 2000
------- -------

Financial instruments whose contractual amount represents
credit risk:
Commitments to originate loans to be sold.............. $41,285 $ 5,462
Commitments to originate loans to be held in
portfolio........................................... 17,633 52,805
Unadvanced home equity lines of credit................. 54,213 40,794
Unadvanced commercial lines of credit.................. 34,432 19,635
Unadvanced residential construction loans.............. 19,445 11,983
Financial instruments whose contractual amount exceeds
the amount of credit risk:
Commitments to sell residential mortgage loans......... 69,575 7,264
Financial instruments whose notional amount exceeds the
amount of credit risk:
Interest rate swap agreements.......................... 50,000 50,000

At March 31, 2001 and 2000, commitments to originate loans to be sold with
maturities ranging from 12 years to 30 years had interest rates ranging from
4.95% to 7.88% and 7.38% to 8.78%, respectively. Commitments to originate loans,
unadvanced commercial lines of credit, unadvanced home equity lines of credit
and unadvanced residential construction loans are agreements to lend to a
customer provided there is no violation of any condition established in the
contract.

Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower.

The Company also enters into contracts to sell mortgage loans in the
secondary market. Risks arise from the possible inability of the Company to
originate loans to fulfill these contracts, in which case the Company

F-25
71
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

would normally purchase loans or securities in the open market to deliver
against these contracts. All loans are sold without recourse.

In addition, the Company uses interest rate swap agreements as part of its
interest-rate risk management strategy. Swaps are agreements in which the
Company agrees with another party to exchange interest payments (e.g. fixed-rate
for floating-rate payments) computed on a notional amount. The credit risk
associated with swap agreements is the risk of default by the counterparty. To
minimize this risk, the Company enters into swap agreements only with highly
rated counterparties that management believes to be creditworthy. The notional
amounts of these agreements do not represent amounts exchanged by the parties
and, thus, are not a measure of the Company's potential loss exposure.

(13) INCOME TAXES (DOLLARS IN THOUSANDS)

Income tax expense for the years ended March 31 is summarized as follows:

2001 2000 1999
------ ------ ------

Current income tax expense:
Federal income tax..................................... $4,512 $2,642 $3,107
State income tax....................................... 374 178 96
------ ------ ------
4,886 2,820 3,203
------ ------ ------
Deferred income tax (benefit) expense:
Federal income tax..................................... (398) 841 531
State income tax....................................... (267) 28 84
------ ------ ------
(665) 869 615
------ ------ ------
Income tax expense....................................... $4,221 $3,689 $3,818
====== ====== ======

The reasons for the differences between the effective tax rates and the
statutory federal income tax rate for the years ended March 31 were as follows:

2001 2000 1999
------ ------ ------

Statutory federal income tax rate........................ 34.0% 34.0% 34.0%
Items affecting federal income tax rate:
State tax, net of federal benefit................... 0.5 1.1 1.1
Appreciation of stock contributed to ESOP........... 0.7 0.3 1.6
Earnings on Bank-Owned Life Insurance............... (4.2) (4.4) (1.7)
Other, net.......................................... 0.5 0.1 (1.6)
------ ------ ------
Effective income tax rate.............................. 31.5% 31.1% 33.4%
====== ====== ======

F-26
72
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at March 31 are
presented below:

2001 2000
------ ------

Deferred tax assets:
Accrued interest income.................................. $ 31 $ 40
Deferred loan fees, net.................................. 142 158
Accrued stock awards..................................... 884 1,080
Allowance for loan losses................................ 5,322 4,803
Contribution to the Foundation carryforward.............. -- 377
Unrealized loss on investments available for sale........ -- 2,629
Other.................................................... 49 12
------ ------
Gross deferred tax asset.............................. 6,428 9,099
------ ------
Deferred tax liabilities:
Depreciation............................................. 610 594
Mortgage servicing rights................................ 2,100 2,676
Other.................................................... 58 207
Unrealized gain on investments available for sale........ 1,767 --
------ ------
Gross deferred tax liability.......................... 4,535 3,477
------ ------
Deferred income tax assets, net....................... $1,893 $5,622
====== ======

The net deferred federal income tax asset of $1,893 at March 31, 2001 is
supported by the potential recovery of taxes previously paid by the Company in
the carryback period. Since there is no carryback provision for state purposes,
management believes the existing net deductible temporary differences which give
rise to the net deferred state income tax asset of $939 will reverse during
periods in which the Company generates net taxable income.

As a result of the Tax Reform Act of 1996, the special tax bad debt
provisions were amended to eliminate the reserve method. However, the base year
reserve of approximately $7,398 remains subject to recapture in the event that
the Company pays dividends in excess of its earnings and profits or redeems its
stock.

(14) PENSION PLAN AND OTHER BENEFITS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)

Employee Stock Ownership Plan

Effective January 15, 1997 the Company adopted the ESOP. The ESOP is
designed to provide retirement benefits for eligible employees of the Bank.
Because the ESOP invests primarily in the stock of the Company, it will also
give eligible employees an opportunity to acquire an ownership interest in the
Company. Employees are eligible to participate in the ESOP after reaching age
twenty-one, completing one year of service and working at least one thousand
hours of consecutive service during the previous year. Contributions are
allocated to eligible participants on the basis of compensation.

During January 1997, the Company issued a total of 697,010 shares to the
trust administering the ESOP at a total purchase price of $6,970. The purchase
was made from the proceeds of a $6,970 loan from FAB FUNDING CORPORATION, a
wholly-owned subsidiary of the Company, bearing interest at the prime rate. The
loan will be repaid over a period of approximately nine years, principally with
funds from the Company's future contributions to ESOP, subject to IRS
limitations. The Company recognized a charge to compensation and employee
benefits expense of $1,064, $971, and $1,315 during fiscal years 2001, 2000, and
1999, respectively.

F-27
73
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Shares used as collateral to secure the loan are released and available for
allocation to eligible employees as the principal and interest on the loan is
paid. Employees vest in their ESOP account at a rate of 20% annually commencing
after the completion of one year of credited service or immediately if service
was terminated due to death, retirement, disability, or change in control.
Dividends on both released and unreleased shares are credited to the
participants' ESOP accounts.

At March 31, 2001, shares held in suspense to be released annually as the
loan is paid down amounted to 309,787. The fair value of unallocated ESOP shares
was $4,650 at March 31, 2001. Dividends on allocated ESOP shares are charged to
retained earnings, dividends on unallocated ESOP shares are charged to
compensation and employee benefits expense and ESOP shares committed-to-be
released are considered outstanding in determining earnings per share.

1997 Stock-Based Incentive Plan

On August 5, 1997, the Company's stockholders approved the SIP, which was
subsequently amended, restated and approved by the stockholders in 1998. The
objective of the SIP is to enable the Company to provide officers, key employees
and directors with a proprietary interest in the Company as an incentive to
encourage such persons to remain with the Company. The SIP acquired 348,286
shares in the open market at an average price of $20.78 per share. This
acquisition represents deferred compensation which is initially recorded as a
reduction in stockholders' equity and charged to compensation expense over the
vesting period of the award.

Awards are granted in the form of common stock held by the SIP and vest in
five annual installments commencing one year from the date of the award.
Recipients are entitled to all voting and other stockholder rights. As of March
31, 2001, 366 shares remain unallocated under the SIP. A summary of award
activity follows:

NUMBER OF
SHARES
---------

Balance at March 31, 1998................................. 330,007
Granted................................................. 15,190
Distributed............................................. (65,808)
Forfeited............................................... (966)
-------
Balance at March 31, 1999................................. 278,423
Granted................................................. 3,000
Distributed............................................. (68,846)
Forfeited............................................... (291)
-------
Balance at March 31, 2000................................. 212,286
Granted................................................. 1,000
Distributed............................................. (69,318)
Forfeited............................................... --
-------
Balance at March 31, 2001................................. 143,968
=======

Compensation expense in the amount of the fair value of the stock at the
date of the grant, will be recognized over the applicable service period for the
portion of each award that vests equally over a five-year period. The Company
recognized $765, $1,253, and $2,065 in compensation and benefits expense for
these awards during fiscal years 2001, 2000 and 1999, respectively.

F-28
74
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Option Plans

The Company adopted a stock option plan in 1997 as part of the SIP (the
"1997 Plan") for officers, key employees and directors. The 1997 Plan was
subsequently amended and restated in 1998. Pursuant to the terms of the 1997
Plan, the number of common shares reserved for issuance is 870,715, of which
none remain unawarded. All options have been issued at not less than fair market
value at the date of the grant. Options are exercisable in accordance with the
terms of each individual's award agreement, however no option will be
exercisable more than 10 years after the date of the grant. All stock options
granted vest over a five year period from the date of the grant.

In 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan").
Pursuant to the terms of the 1998 Plan, the number of common shares reserved for
issuance is 413,590, of which 171,403 remain unawarded. All options have been
issued at not less than fair market value at the date of the grant and expire in
10 years from the date of the grant. Options are exercisable in accordance with
the terms of each individual's award agreement, however no option will be
exercisable more than 10 years after the date of the grant. All stock options
granted vest over a five year period from the date of the grant.

A summary of option activity follows:

WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------

Balance at March 31, 1998........................... 783,654 $18.50
Granted........................................... 75,630 19.25
Forfeited......................................... (1,934) 18.50
--------- ------
Balance at March 31, 1999........................... 857,350 $18.57
Granted........................................... 20,000 19.25
Expired........................................... (388) 18.50
Forfeited......................................... (579) 18.50
--------- ------
Balance at March 31, 2000........................... 876,383 $18.58
Granted........................................... 235,494 12.94
Forfeited......................................... (2,000) 12.94
--------- ------
Balance at March 31, 2001........................... 1,109,877 $17.39
========= ======

A summary of options outstanding and exercisable by price range as of March 31
follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AS OF REMAINING EXERCISE AS OF EXERCISE
MARCH 31, 2001 CONTRACTUAL LIFE PRICE MARCH 31, 2001 PRICE
- -------------- ---------------- -------- -------------- --------

780,753 6.3 years $18.50 465,938 $18.50

55,630 7.3 years 19.25 22,252 19.25

20,000 7.6 years 19.25 8,000 19.25

10,000 8.3 years 19.25 2,000 19.25

10,000 8.9 years 19.25 2,000 19.25

233,494 9.7 years 12.94 -- --

--------- --------- ------ ------- ------

1,109,877 7.1 years $17.39 500,190 $18.55

========= ========= ====== ======= ======

The Company applies APB Opinion No. 25 in accounting for stock options and,
accordingly, no compensation expense has been recognized in the financial
statements. Had the Company determined

F-29
75
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compensation expense based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:

2001 2000 1999
------ ------ ------

Net income as reported................................... $9,164 $8,186 $7,621
Pro forma net income..................................... 8,869 8,046 7,375
Basic earning per share as reported...................... 1.57 1.31 1.09
Diluted earnings per share as reported................... 1.56 1.31 1.09
Pro forma basic earnings per share....................... 1.51 1.29 1.06
Pro forma diluted earnings per share..................... 1.51 1.29 1.06

The per share weighted average fair value of stock options granted during
fiscal years 2001, 2000, and 1999 was $2.56, $1.55, and $2.80, respectively,
determined by using the binomial option pricing model. All were adjusted for the
non-exercisable vesting window. The following assumptions were inputs to the
model:

2001 2000 1999
------ ------ ------

Expected dividend yield.................................. 2.66% 1.95% 1.25%
Risk-free interest rate.................................. 5.05% 6.51% 5.46%
Expected volatility...................................... 18.49% 23.95% 30.72%
Expected life in years................................... 7.1 7.5 8.5

Pension Plan

All eligible officers and employees of the Company, who have reached the
age of twenty-one and completed one year of service, are included in a
noncontributory, defined benefit pension plan (the "Pension Plan") provided by
the Company. The Pension Plan is administered by Pentegra (the "Fund"). The Fund
does not segregate the assets or liabilities of all participating employers and,
accordingly, disclosure of accumulated vested and nonvested benefits is not
possible. Contributions are based on each individual employer's experience.
According to the Fund's administrators, as of June 30, 2000, the date of the
latest actuarial valuation, the market value of the Fund's net assets exceeded
the actuarial present value of vested and nonvested benefits in the aggregate.

The Company's contribution to the pension plan was $785, $104 and $7 for
the years ended March 31, 2001, 2000 and 1999.

Postretirement Benefits

On April 1, 1995, the Company adopted SFAS No. 106, Employers' Accounting
for Postretirement Benefits Other than Pensions. Under SFAS No. 106, the Company
changed its method of accounting for postretirement benefits other than pensions
from the pay-as-you-go method to the method of accruing these costs over
employees' service periods. The effect of adopting SFAS No. 106 can be charged
to expense immediately or spread over no more than the lesser of twenty years or
the average life expectancy of the participants. The Company currently provides
postretirement benefits for a limited number of retirees. The Company is
amortizing the cumulative effect of this change of $71 over the average life
expectancy of the participants, which is 10 years.

Supplemental Retirement Plan

In 1986, the Internal Revenue Service issued regulations that limit the
benefits of certain individuals under qualified retirement plans. During 1993,
the Company adopted a supplemental retirement plan which provides for certain
Company executives to receive benefits upon retirement subject to certain
limitations as

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76
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

set forth in the plan. The Company's expense under this Plan was $268, $216 and
$204 for the years ended March 31, 2001, 2000 and 1999, respectively. At March
31, 2001, the Company holds restricted assets in an irrevocable grantor's trust
with a cost basis of $2,899 and a market value of $2,631, of which $1,233 are
common stock of the Company and are classified as treasury stock, and the
remaining $1,398 are included in other assets and offset by an accrued liability
of $2,665. These treasury shares are considered retired in the computation of
earnings per share.

Employee Tax Deferred Thrift Plan

The Company has an employee tax deferred thrift plan (the "401k Plan")
under which employee contributions to the 401k Plan are matched within certain
limitations by the Company. Full-time employees are eligible to participate in
the 401k Plan. The amounts matched by the Company are included in compensation
and benefits expense. The amounts matched for the years ended March 31, 2001,
2000 and 1999 were $204, $192 and $126 respectively.

Executive Officer Employment Agreements

The Bank and the Company have entered into Employment Agreements with its
President and Chief Executive Officer, Executive Vice President and Chief
Operating Officer, two other Executive Vice Presidents and a Senior Vice
President. The agreements generally provide for the continued payment of
specified compensation and benefits for five years for the President and Chief
Executive and Executive Vice President and Chief Operating Officer, and for two
years for the other three executives. They also provide payments for the
remaining term of the agreement after the officers are terminated, unless the
termination is for "cause" as defined in the Employment Agreement. In the event
of a change in control, as defined in the agreements, payments will also be
provided to the officer upon voluntary or involuntary termination. In addition,
the Bank entered into change in control agreements with certain other executives
which provide for the payment, under certain circumstances, to the executive
upon the executives termination after a change in control, as defined in their
change in control agreements.

Employee Severance Compensation Plan

The Bank established the First Federal Savings Bank of America Employee
Severance Compensation Plan (the "Plan") on January 15, 1997. The Plan provides
eligible employees with severance pay benefits in the event of a change in
control of the Bank or Company. Generally, employees are eligible to participate
in the Plan if they have completed at least one year of service with the Bank
and are not eligible to receive benefits under the executive officer employment
agreements. The Plan provides for the payment, under certain circumstances, of
lump-sum amounts upon termination following a change in control, as defined in
the Plan.

(15) FAIR VALUES OF FINANCIAL INSTRUMENTS (DOLLARS IN THOUSANDS)

Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include real estate acquired by
foreclosure, the deferred income tax asset, office properties and equipment, and
core deposit and other intangibles. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument.
F-31
77
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Because no actual market exists for some of the Company's financial instruments,
fair value estimates are based on judgments regarding future expected loss
experience, cash flows, current economic conditions, risk characteristics and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions and changes in the loan, debt
and interest rate markets could significantly affect the estimates. Further, the
income tax ramifications related to the realization of the unrealized gains and
losses can have a significant effect on the fair value estimates and have not
been considered.

The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments:

Cash on Hand and Due from Banks

The fair values for cash on hand and due from banks approximate the
carrying amount as reported in the balance sheet.

Short-term Investments

The fair values for short-term investments approximate the carrying amount
as reported because of the short-term nature of these financial instruments.

Investment and Mortgage-backed Securities

Fair values for investment and mortgage-backed securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.

Mortgage Loans Held for Sale

Fair values for mortgage loans held for sale are based on quoted market
prices. Commitments to originate loans and forward commitments to sell loans
have been considered in the value of mortgage loans held for sale.

Loans

The fair values of loans are estimated using discounted cash flow analyses
and interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The incremental credit risk for
nonperforming loans has been considered in the determination of the fair value
of loans.

Accrued Interest Receivable

The fair value of accrued interest receivable approximates its carrying
amount as reported in the balance sheet because of the short-term nature of
these financial instruments.

Stock in FHLB of Boston

The fair value for FHLB stock approximates the carrying amount as reported
in the balance sheet. If redeemed, the Company expects to receive an amount
equal to the par value of the stock.

Deposits and Advance Payments by Borrowers for Taxes and Insurance

The fair values of demand deposits (e.g., NOW, business checking, savings
accounts, certain types of money market accounts and advance payments by
borrowers for taxes and insurance) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a discounted
cash flow technique that applies interest rates
F-32
78
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

currently being offered on certificates to a schedule of aggregated expected
monthly maturities on such time deposits.

FHLB Advances

The fair value of FHLB overnight advances approximates their carrying value
due to their short term nature. All other advances are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on advances to a schedule of aggregated expected monthly maturities on
FHLB advances.

Other Borrowings

Other borrowings consist primarily of reverse repurchase agreements with
securities dealers. The fair value of other borrowings are estimated using a
discounted cash flow technique that applies interest rates currently being
offered on reverse repurchase agreements to a schedule of aggregated expected
monthly maturities on other borrowings.

Accrued Interest Payable

The fair value of accrued interest payable approximates its carrying amount
as reported in the balance sheet because of the short-term nature of these
financial instruments.

Interest Rate Swap Agreements

The fair value of the off-balance sheet interest rate swap agreements is
the net of the present values of the pay fixed/receive floating payments,
discounted at current swap rates for the appropriate remaining term of the
existing swaps.

Other Off-balance Sheet Instruments

Fair values for the Company's off-balance-sheet instruments are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing. The
difference between the fair value of commitments to originate loans and their
book value is considered to be immaterial based on a comparison to current
offering rates for similar loan products. The contractual value of commitments
to sell loans was considered in determining the fair value of loans held for
sale. The Company's commitments for unused lines and outstanding standby letters
of credit and unadvanced portions of loans are at floating rates, and therefore,
there is no fair value adjustment.

F-33
79
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying amounts and fair values of the Company's financial instruments
at March 31 are as follows:

2001 2000
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------

Financial assets:
Cash on hand and due from banks............... $ 23,013 $ 23,013 $ 20,720 $ 20,720
Short-term investments........................ 200 200 250 250
Mortgage loans held for sale.................. 39,103 39,103 3,417 3,417
Investment in trading securities.............. 815 815 587 587
Investment securities available for sale...... 7,837 7,837 5,643 5,643
Mortgage-backed securities available.......... 501,230 501,230 543,627 543,627
Mortgage-backed securities held to maturity... 2,138 2,154 2,819 2,853
Stock in FHLB of Boston....................... 40,369 40,369 30,928 30,928
Loans receivable, net......................... 977,174 993,357 888,760 870,084
Accrued interest receivable................... 7,928 7,928 7,018 7,018

Financial liabilities:
Deposits...................................... $707,416 $710,876 $664,682 $664,240
FHLB advances and other borrowings............ 814,764 828,768 779,662 773,869
Advance payments by borrowers for taxes and
insurance.................................. 5,868 5,868 5,984 5,984
Accrued interest payable...................... 5,997 5,997 4,620 4,620

Off-balance sheet:
Interest rate swap agreements................. -- (743) -- 340

F-34
80
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16) PARENT COMPANY ONLY FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS)

The following are the condensed financial statements for FIRSTFED AMERICA
BANCORP, INC. (the "Parent Company") only at March 31:

Balance Sheet

2001 2000
-------- --------

ASSETS
Cash and amounts due from banks........................ $ 153 $ 1,146
Investment in trading securities....................... 815 587
Investment securities available for sale (amortized
cost of $5,798 and $6,256)........................... 6,062 3,908
Investment in subsidiaries, at equity.................. 111,753 103,655
Deferred tax asset..................................... 1,518 2,342
-------- --------
Total assets................................. $120,301 $111,638
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.................................. $ 327 $ --
Accrued expenses and other liabilities................. 8,416 9,933
-------- --------
Total liabilities............................ 8,743 9,933
Stockholders' equity................................... 111,558 101,705
-------- --------
Total liabilities and stockholders' equity... $120,301 $111,638
======== ========

Statement of Operations

2001 2000 1999
------- ------- --------

Income:
Dividends received from subsidiaries............... $ 5,750 $ 5,550 $ 21,000
Interest and dividend income....................... 152 119 357
Gain on sale of securities......................... -- -- 8
Other non-interest income (expense)................ 128 293 (5)
------- ------- --------
6,030 5,962 21,360
------- ------- --------
Expenses:
Interest expense................................... 52 -- --
Non-interest expense............................... 468 355 510
Income tax (benefit) expense....................... (103) 30 (70)
------- ------- --------
417 385 440
------- ------- --------
Income before equity in net income of subsidiaries... 5,613 5,577 20,920
Equity in undistributed net income (loss) of
subsidiaries....................................... 3,551 2,609 (13,299)
------- ------- --------
Net income........................................... $ 9,164 $ 8,186 $ 7,621
======= ======= ========

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81
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Statement of Cash Flows

2001 2000 1999
------- ------- --------

Net cash flows from operating activities:
Net income......................................... $ 9,164 $ 8,186 $ 7,621
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of premiums on investments and
mortgage-backed securities available for
sale.......................................... -- -- 19
(Gain) on sales of investment securities
available
for sale...................................... -- -- (9)
Equity in undistributed earnings of
subsidiaries.................................. (3,551) (2,609) 13,299
Appreciation in fair value of ESOP shares....... 290 196 541
Unrealized (gain) loss on trading securities.... (128) (293) 5
Decrease in accrued interest receivable......... -- -- 33
Decrease in prepaid expenses and other assets... -- -- 1,128
Increase (decrease) in accrued expenses and
other liabilities............................. (1,517) (681) (1,065)
------- ------- --------
Net cash provided by operating
activities............................... 4,258 4,799 21,572
------- ------- --------
Cash flow from investing activities:
Purchase of trading securities..................... (100) (200) (100)
Purchase of investment securities available for
sale............................................ (142) -- (3,845)
Principal paydowns on mortgage-backed securities
available for sale.............................. -- -- 583
Maturities of investment securities available for
sale............................................ -- -- 4,000
Proceeds from sales of mortgage-backed securities
available for sale.............................. -- -- 3,888
Change in investment in subsidiaries............... 1,286 (196) 199
------- ------- --------
Net cash provided by (used in) investing
activities...................................... 1,044 (396) 4,725
------- ------- --------
Cash flow from financing activities:
Net increase in short-term borrowings.............. 327 -- --
Cash dividends paid................................ (2,386) (1,808) (1,151)
Payments to acquire treasury shares................ (6,296) (5,271) (28,759)
Payments to acquire stock-based incentive plan
shares.......................................... -- -- (2,502)
Reduction in unearned 1997 stock-based incentive
plan shares..................................... 1,286 1,277 1,217
Reduction in allocated ESOP shares................. 774 774 773
------- ------- --------
Net cash used in financing activities...... (6,295) (5,028) (30,422)
------- ------- --------
Net decrease in cash and cash
equivalents.............................. (993) (625) (4,125)
Cash and cash equivalents at beginning of year....... 1,146 1,771 5,896
------- ------- --------
Cash and cash equivalents at end of year............. $ 153 $ 1,146 $ 1,771
======= ======= ========

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FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Summaries of consolidated operating results on a quarterly basis for the
year ended March 31 follows:

2001 QUARTERS 2000 QUARTERS
------------------------------------- -------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Interest and dividend income...... $28,855 $29,044 $28,826 $27,350 $25,439 $24,116 $22,690 $21,576
Interest expense.................. 20,066 20,670 20,088 18,571 17,023 15,983 14,737 14,028
------- ------- ------- ------- ------- ------- ------- -------
Net interest income............... 8,789 8,374 8,738 8,779 8,416 8,133 7,953 7,548
Provision for loan losses......... 300 300 300 300 300 300 300 300
Non-interest income............... 2,416 2,164 2,412 1,966 1,986 1,627 1,495 1,426
Non-interest expense.............. 7,266 7,142 7,647 6,998 6,675 6,280 6,303 6,250
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes........ 3,639 3,096 3,203 3,447 3,427 3,180 2,845 2,424
Income tax expense................ 1,174 966 1,007 1,074 1,066 979 922 722
------- ------- ------- ------- ------- ------- ------- -------
Net income........................ $ 2,465 $ 2,130 $ 2,196 $ 2,373 $ 2,361 $ 2,201 $ 1,923 $ 1,702
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share.......... $ 0.43 $ 0.37 $ 0.37 $ 0.40 $ 0.39 $ 0.35 $ 0.30 $ 0.27
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share........ $ 0.43 $ 0.37 $ 0.37 $ 0.40 $ 0.39 $ 0.35 $ 0.30 $ 0.27
======= ======= ======= ======= ======= ======= ======= =======

F-37