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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________TO
COMMISSION FILE NUMBER 1-12305
FIRSTFED AMERICA BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3331237
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 679-8181
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of February 4, 2003, there were 8,460,563 shares of the Registrant's Common
Stock outstanding.
FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2002 (unaudited) and March 31, 2002 2
Consolidated Statements of Operations for the three months and nine months ended December 31, 2002
(unaudited) and 2001 (unaudited) 3
Consolidated Statements of Changes in Stockholders' Equity for the nine months ended December 31, 2002
(unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended December 31, 2002 (unaudited) and 2001
(unaudited) 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATIONS 25
1
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, MARCH 31,
2002 2002
---- ----
(UNAUDITED)
ASSETS
Cash on hand and due from banks $ 56,939 $ 44,159
Short-term investments - 100,890
----------- -----------
Total cash and cash equivalents 56,939 145,049
Mortgage loans held for sale 324,338 126,729
Investment securities available for sale, at fair value
(amortized cost of $32,171 and $81,602) 38,865 84,656
Mortgage-backed securities available for sale, at fair value
(amortized cost of $650,775 and $579,713) 661,372 578,618
Mortgage-backed securities held to maturity
(fair value of $1,010 and $1,235) 972 1,203
Stock in Federal Home Loan Bank of Boston, at cost 58,433 58,433
Loans receivable
Residential mortgages 625,181 641,629
Commercial real estate mortgages 139,015 115,243
Construction and land mortgages 27,529 41,992
Commercial 275,987 199,779
Consumer 175,139 146,344
Allowance for loan losses (19,267) (19,237)
----------- -----------
Loans receivable, net 1,223,584 1,125,750
Accrued interest receivable 11,192 11,124
Mortgage servicing rights 4,848 6,505
Office properties and equipment, net 38,023 37,775
Real estate owned 177 240
Bank-owned life insurance 37,099 35,652
Investment in limited partnerships 629 470
Goodwill and other intangible assets 54,248 55,779
Prepaid expenses and other assets 19,163 26,465
----------- -----------
Total assets $ 2,529,882 $ 2,294,448
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Demand $ 531,154 $ 432,082
Savings 252,550 235,339
Time 591,348 649,842
----------- -----------
Total deposits 1,375,052 1,317,263
FHLB advances and other borrowings 896,704 754,820
Company obligated, mandatorily redeemable securities 11,370 25,657
Advance payments by borrowers for taxes and insurance 5,331 6,163
Accrued interest payable 4,188 4,814
Other liabilities 51,893 30,384
----------- -----------
Total liabilities 2,344,538 2,139,101
----------- -----------
Stockholders' equity:
Common stock 107 106
Additional paid-in capital 122,938 119,149
Retained earnings 92,594 79,245
Accumulated other comprehensive income 9,692 1,401
Unallocated ESOP shares (2,323) (2,323)
Unearned stock incentive plan (118) (1,553)
Treasury stock (37,546) (40,678)
----------- -----------
Total stockholders' equity 185,344 155,347
----------- -----------
Total liabilities and stockholders' equity $ 2,529,882 $ 2,294,448
=========== ===========
See accompanying notes to consolidated financial statements.
2
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------------- ---------------------------
2002 2001 2002 2001
------------ ----------- ------------ ------------
(UNAUDITED)
Interest and dividend income:
Loans $ 22,477 $ 16,996 $ 64,920 $ 53,924
Mortgage-backed securities 8,677 7,659 27,617 24,371
Investment securities 693 305 2,862 993
Federal Home Loan Bank stock 515 458 1,614 1,657
---------- ---------- ---------- ----------
Total interest and dividend income 32,362 25,418 97,013 80,945
---------- ---------- ---------- ----------
Interest expense:
Deposits 6,397 5,935 21,253 19,280
Borrowed funds 10,275 9,959 31,339 33,790
---------- ---------- ---------- ----------
Total interest expense 16,672 15,894 52,592 53,070
---------- ---------- ---------- ----------
Net interest income before provision for loan losses 15,690 9,524 44,421 27,875
Provision for loan losses 150 300 400 900
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 15,540 9,224 44,021 26,975
---------- ---------- ---------- ----------
Non-interest income:
Service charges on deposit accounts 1,311 588 2,605 1,521
Trust fee income 350 354 1,063 1,044
Loan servicing (expense) income (834) 348 (1,703) 746
Insurance commission income 363 229 802 742
Earnings on bank-owned life insurance 484 513 1,447 1,418
Gain on sale of mortgage loans, net 7,569 1,888 19,133 3,349
Gain on sale of investment securities available for sale 1,057 - 2,628 1,003
Other income 778 714 2,120 1,237
---------- ---------- ---------- ----------
Total non-interest income 11,078 4,634 28,095 11,060
---------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits 9,223 4,441 26,280 13,566
Office occupancy and equipment 2,109 1,101 6,172 3,264
Data processing 702 475 2,352 1,474
Advertising and business promotion 408 196 799 650
Amortization of intangible assets 607 24 1,821 70
Other expense 2,318 1,221 7,012 3,069
---------- ---------- ---------- ----------
Total non-interest expense 15,367 7,458 44,436 22,093
---------- ---------- ---------- ----------
Income before income tax expense 11,251 6,400 27,680 15,942
Income tax expense 4,325 2,402 10,673 5,615
---------- ---------- ---------- ----------
Net income before cumulative effect of accounting change 6,926 3,998 17,007 10,327
Cumulative effect of change in accounting for derivative
instruments and hedging activities, net of $237 tax benefit - - - (461)
---------- ---------- ---------- ----------
Net income $ 6,926 $ 3,998 $ 17,007 $ 9,866
========== ========== ========== ==========
Basic earnings per share before cumulative effect of accounting change $ 0.85 $ 0.69 $ 2.13 $ 1.79
Cumulative effect of accounting change - - - (0.08)
---------- ---------- ---------- ----------
Basic earnings per share $ 0.85 $ 0.69 $ 2.13 $ 1.71
========== ========== ========== ==========
Diluted earnings per share before cumulative effect of accounting change $ 0.82 $ 0.68 $ 2.06 $ 1.77
Cumulative effect of accounting change - - - (0.08)
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.82 $ 0.68 $ 2.06 $ 1.69
========== ========== ========== ==========
Weighted average shares outstanding - basic 8,135,464 5,815,449 7,980,710 5,765,199
========== ========== ========== ==========
Weighted average shares outstanding - diluted 8,400,504 5,868,411 8,244,289 5,825,134
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
3
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME
------- ---------- ---------- -------------
Balance at March 31, 2002 $ 106 $119,149 $ 79,245 $ 1,401
Earned SIP stock awards - (154) - -
Earned ESOP shares charged to expense - 872 - -
Stock options exercised 1 1,288 - -
Cash dividends declared and paid
(1st quarter at $0.14 per share;
2nd and 3rd quarters at $0.15 per
share) - - (3,658) -
Common stock acquired for certain
employee benefit plans (2,751
shares at an average price
of $26.04 per share) - - - -
Common stock issued in private placement
(202,430 shares at $24.70 per share) - 1,796 - -
Common stock issuance costs - (13) - -
Comprehensive income:
Net income - - 17,007 -
Other comprehensive income, net of tax
Unrealized holding gains on
available for sale securities - - - 17,961
Reclassification adjustment for
gains included in net income - - - (2,628)
------
Net unrealized gains - - - 15,333
Tax effect - - - (7,042)
------
Net-of-tax effect - - - 8,291
Total comprehensive income - - - -
----- -------- -------- --------
Balance at December 31, 2002 $ 107 $122,938 $ 92,594 $ 9,692
===== ======== ======== ========
UNEARNED
STOCK-
UNALLOCATED BASED TOTAL
ESOP INCENTIVE TREASURY STOCKHOLDERS'
SHARES PLAN (SIP) STOCK EQUITY
----------- ----------- -------- ------------
Balance at March 31, 2002 $(2,323) $ (1,553) $ (40,678) $ 155,347
Earned SIP stock awards - 1,435 - 1,281
Earned ESOP shares charged to expense - - - 872
Stock options exercised - - - 1,289
Cash dividends declared and paid
(1st quarter at $0.14 per share;
2nd and 3rd quarters at $0.15 per
share) - - - (3,658)
Common stock acquired for certain
employee benefit plans (2,751
shares at an average price
of $26.04 per share) - - (72) (72)
Common stock issued in private placement
(202,430 shares at $24.70 per share) - - 3,204 5,000
Common stock issuance costs - - - (13)
Comprehensive income:
Net income
Other comprehensive income, net of tax - - - 17,007
Unrealized holding gains on
available for sale securities
- - - -
Reclassification adjustment for
gains included in net income - - - -
Net unrealized gains - - - -
Tax effect - - - -
Net-of-tax effect - - - 8,291
---------
Total comprehensive income - - - 25,298
-------- -------- --------- ---------
Balance at December 31, 2002 $(2,323) $ (118) $ (37,546) $ 185,344
======== ======== ========= =========
See accompanying notes to consolidated financial statements.
4
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED DECEMBER 31,
-----------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 17,007 $ 9,866
Adjustments to reconcile net income to net cash used in operating activities:
(Accretion) amortization of:
Premiums/discounts, net (2,658) 256
Deferred loan origination costs (813) (1,052)
Mortgage servicing rights 4,939 2,314
Intangible assets 1,821 70
Provision for loan losses 400 900
Gains on sales of:
Mortgage loans (18,299) (3,349)
Investment securities available for sale (1,608) (750)
Mortgage-backed securities available for sale (1,019) (253)
Office properties and equipment (13) (105)
Real estate owned (36) (27)
Net proceeds from sales of mortgage loans 1,831,813 389,083
Origination of mortgage loans held for sale (2,013,985) (418,209)
Earnings on bank-owned life insurance (1,447) (1,418)
Unrealized loss on investments in limited partnerships 216 460
Depreciation of office properties and equipment 3,170 1,201
Appreciation in fair value of ESOP shares 872 430
Earned SIP shares 1,281 1,284
Increase or decrease in:
Accrued interest receivable (68) 800
Other assets (791) (2,389)
Accrued interest payable (626) (2,434)
Other liabilities 21,509 13,436
----------- -----------
Net cash used in operating activities (158,335) (9,886)
----------- -----------
Cash flows from investing activities:
Purchase of investment securities available for sale (1,725) (14,921)
Purchase of mortgage-backed securities available for sale (348,080) (224,094)
Payments received on mortgage-backed securities 230,951 176,047
Proceeds from sale of investment securities available for sale 49,837 753
Proceeds from sale of mortgage-backed securities available for sale 46,403 19,820
Maturities of investment securities available for sale 2,886 -
Net (increase) decrease in loans (98,223) 87,695
Purchase of office properties and equipment (4,084) (903)
Proceeds from sales of office properties and equipment 679 1,099
Proceeds from sales of real estate owned 266 209
Purchase of investments in limited partnerships (375) (173)
----------- -----------
Net cash (used in) provided by investing activities (121,465) 45,532
----------- -----------
Cash flows from financing activities:
Net increase in deposits 58,667 57,871
Proceeds from FHLB advances and other borrowings 4,875,057 1,187,690
Repayments on FHLB advances and other borrowings (4,743,748) (1,236,315)
Net change in advance payments by borrowers for taxes and insurance (832) (2,297)
Cash dividends paid (3,658) (2,365)
Common stock issued in private placement 5,000 -
Payments to acquire common stock for treasury stock and stock issuance costs (85) (56)
Stock options exercised 1,289 -
----------- -----------
Net cash provided by financing activities 191,690 4,528
----------- -----------
Net (decrease) increase in cash and cash equivalents (88,110) 40,174
Cash and cash equivalents at beginning of period 145,049 23,213
----------- -----------
Cash and cash equivalents at end of period $ 56,939 $ 63,387
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 53,218 $ 55,504
=========== ===========
Income taxes $ 13,718 $ 6,031
=========== ===========
Supplemental disclosures of noncash investing activities:
Property acquired in settlement of loans $ 167 $ 27
=========== ===========
See accompanying notes to consolidated financial statements.
5
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of FIRSTFED AMERICA BANCORP, INC. (the "Company"), its wholly-owned
subsidiaries, First Federal Savings Bank of America (the "Bank"), FAB FUNDING
CORPORATION ("FAB FUNDING") and FIRSTFED INSURANCE AGENCY, LLC (the "Agency"),
People's Bancshares Capital Trust ("Capital Trust I"), People's Bancshares
Capital Trust II ("Capital Trust II"), and the Company's 65% interest in
FIRSTFED TRUST COMPANY, N.A. (the "Trust Company"). The remaining 35% interest
of the Trust Company is held by M/D Trust, LLC, a minority owner. The Bank
includes its wholly-owned subsidiaries, People's Mortgage Corporation ("PMC"),
FIRSTFED INVESTMENT CORPORATION and CELMAC INVESTMENT CORPORATION.
On February 28, 2002, the Company completed the acquisition of People's
Bancshares, Inc. ("People's"), New Bedford, Massachusetts, for $40.3 million in
cash and 1.9 million shares of the Company's common stock (the "People's
acquisition"). The People's acquisition was accounted for as a purchase in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and the total cost, including the fair value of stock
options assumed and certain merger costs, was $75.0 million. The Company
recorded goodwill of $42.5 million and other intangible assets of $12.4 million
in connection with the acquisition. The results of People's operations have been
included in the consolidated financial statements since March 1, 2002.
The interim consolidated financial statements reflect all normal and
recurring adjustments which are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. Certain amounts previously reported have
been reclassified to conform to the current presentation. The results of
operations for the nine months ended December 31, 2002 are not necessarily
indicative of the results of operations that may be expected for all of fiscal
year 2003.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report to Stockholders on Form 10-K for the fiscal year ended March 31,
2002.
(2) GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," effective April 1, 2002. As of the date of adoption, the
Company had goodwill in the amount of $43.5 million, a core deposit intangible
asset of $11.7 million and a non-compete intangible asset of $498,000, all of
which will be subject to the transition provisions of SFAS No. 142. The Company
has completed the transitional impairment testing provisions of SFAS No. 142,
and concluded that the amount of recorded goodwill was not impaired as of April
1, 2002. The Company does not currently have any other indefinite-lived
intangible assets recorded in the consolidated balance sheet. In addition, no
material reclassifications or adjustments to the useful lives of finite-lived
intangible assets were made as a result of adopting the new standard. The
estimated amortization expense of intangible assets for fiscal year 2003 is
expected to increase to $2.4 million from $294,000 in fiscal year 2002 due to
amortization of the identifiable intangible assets recorded in connection with
the People's acquisition, partially offset by discontinuing all goodwill
amortization. The retroactive adoption of SFAS No. 142 would have resulted in an
insignificant effect on net income and diluted earnings per share for the nine
months ended December 31, 2001.
6
The changes in the carrying amount of goodwill and other intangible
assets are as follows (in thousands):
CORE TOTAL
DEPOSIT NON-COMPETE IDENTIFIABLE
INTANGIBLE INTANGIBLE INTANGIBLE
GOODWILL ASSET ASSET ASSETS
------------- ----------- ------------ ------------
Balance at March 31, 2002 $ 43,535 $ 11,746 $ 498 $ 12,244
Recorded during the period 95 - - -
Amortization expense - (1,626) (195) (1,821)
Impairment recognized - - - -
Adjustment of purchase accounting estimates 201 - - -
Change in deferred taxes related to purchase
accounting adjustments (6) - - -
------------ ----------- ------------ ------------
Balance at December 31, 2002 $ 43,825 $ 10,120 $ 303 $ 10,423
============ =========== ============ ============
Estimated amortization expense for fiscal
years ended March 31:
2003 $ - $ 2,150 $ 260 $ 2,410
2004 - 1,933 238 2,171
2005 - 1,717 - 1,717
2006 - 1,500 - 1,500
2007 - 1,283 - 1,283
The components of identifiable intangible assets at December 31, 2002
are as follows (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
--------------- ------------- -------------
Core deposit intangible asset $11,926 $1,806 $10,120
Non-compete intangible asset 520 217 303
------- ------ -------
$12,446 $2,023 $10,423
======= ====== =======
(3) IMPACT OF RECENT ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets." SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows that
are expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS No. 144 requires companies to separately report discontinued
operations and extend that reporting to a component of an entity that either has
been disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less cost to sell. The Company adopted SFAS
No. 144 on April 1, 2002 with no material impact on its financial condition or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses financial accounting and reporting of gains
and losses from extinguishment of debt. SFAS No. 145 requires gains and losses
resulting
7
from the extinguishment of debt to be classified as extraordinary items only if
they meet the criteria in Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements," and amends SFAS No. 13, "Accounting for
Leases." SFAS No. 145 is effective for fiscal years beginning after May 15,
2002, with early application encouraged. The Company does not believe the
adoption of SFAS No. 145 will have a material impact on the Company's
Consolidated Financial Statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
SFAS No. 146 supercedes Emerging Issues Task Force ("EITF") Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company does not
believe the adoption of SFAS No. 146 will have a material impact on the
Company's Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 expands on the
accounting guidance of SFAS No. 5, "Accounting for Contingencies," SFAS No. 57,
"Related Party Disclosures," and SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," and incorporates without change the provisions of
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others (an interpretation of FASB Statement No. 5)," which is being superseded.
Interpretation No. 45 expands on existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit.
Interpretation No. 45 also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements.
Interpretation No. 45's initial recognition and measurement provisions apply on
a prospective basis to guarantees issued or modified after December 31, 2002,
and the disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company does not
believe the adoption of Interpretation No. 45 will have a material impact on the
Company's Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
does not permit the use of the original SFAS No. 123 prospective method of
transition for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. The Company does not expect to change to the
fair value based method of accounting for stock-based employee compensation, and
does not believe the adoption of SFAS No. 148 will have a material impact on the
Company's Consolidated Financial Statements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company's primary business is attracting retail deposits from the
general public and investing those deposits and other borrowed funds in loans,
mortgage-backed securities, U.S. Government securities and other securities. The
Company originates commercial, consumer, and mortgage loans for investment, and
mortgage loans for sale in the secondary market. The Company's primary sources
of funds are deposits, principal and interest payments on loans and
mortgage-backed securities, proceeds from the sale of loans and securities, FHLB
advances, and other borrowings.
The Company's results of operations are primarily dependent on net
interest income, which is the difference between the income earned on its loan,
investment and mortgage-backed securities portfolios, and its cost of funds,
consisting of the interest paid on deposits and borrowings. Results of
operations are also affected by the Company's provision for loan losses and
non-interest income including gains on sale of loans and investment securities,
service charges on deposit accounts, loan servicing income, revenue from the
Trust Company and Agency operations, earnings on bank-owned life insurance
("BOLI"), and other income. The Company's non-interest expense consists of
compensation and employee benefits, office occupancy and equipment expense, data
processing expense, advertising and business promotion, amortization of
intangible assets, and other expenses. Results of operations of the Company are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates, government policies and the actions of
regulatory authorities.
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Further information on the Company and its
business, including additional factors that could materially affect the
Company's financial results, is included in the Company's filings with the
Securities and Exchange Commission.
Subject to applicable laws and regulations, the Company does not
undertake - and specifically disclaims any obligation - to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
9
CRITICAL ACCOUNTING POLICIES
Certain aspects of the Company's accounting policies are based on
management's estimation techniques, valuation assumptions and other subjective
assessments. Management has identified five policies that, due to such
estimates, assumptions and judgments inherent in those policies, are critical to
an understanding of our financial statements. These policies involve
management's methodology for the determination of the Company's allowance for
loan losses, purchase accounting, valuation of goodwill and other intangible
assets, the valuation of derivatives and the valuation of mortgage servicing
rights. These policies and the estimates, assumptions and judgments are
described in greater detail in subsequent sections of Management's Discussion
and Analysis and in the Condensed Notes to Consolidated Financial Statements
included herein. Management believes that the estimates, assumptions and
judgments used in the preparation of the Company's Consolidated Financial
Statements were appropriate given the factual circumstances at the time.
However, given the sensitivity of the Company's Consolidated Financial
Statements to these critical accounting policies, the use of different
estimates, assumptions and judgments could have resulted in material variances
from the reported results of operations or financial condition.
10
RESULTS OF OPERATIONS
OVERVIEW
Net income increased $2.9 million, or 73.2%, to $6.9 million for the
third quarter of fiscal year 2003 from $4.0 million for the third quarter of
fiscal year 2002. Diluted earnings per share ("EPS") increased 20.6% to $0.82
for the third quarter of fiscal year 2003 from $0.68 for the third quarter of
fiscal year 2002. Income before income tax expense increased $4.9 million, or
75.8%, to $11.3 million for the third quarter of fiscal year 2003, as a result
of increases in net interest income after provision for loan losses of $6.3
million and non-interest income of $6.4 million, partially offset by an increase
in non-interest expense of $7.9 million.
For the first nine months of fiscal year 2003, net income was $17.0
million, an increase of $7.1 million, or 72.4%, from $9.9 million for the first
nine months of fiscal year 2002. Before the cumulative effect of the prior year
change in accounting for derivative instruments of $461,000 upon adoption of
SFAS No. 133, net income was $10.3 million for the first nine months of fiscal
year 2002. Diluted EPS increased 21.9% to $2.06 for the first nine months of
fiscal year 2003 from $1.69 for the first nine months of fiscal year 2002.
Before the cumulative effect of the prior year change in accounting for
derivative instruments of $0.08 per share, diluted EPS was $1.77 for the first
nine months of fiscal year 2002. Income before income tax expense increased
$11.7 million, or 73.6%, to $27.7 million for the first nine months of fiscal
year 2003, as a result of increases in net interest income after provision for
loan losses of $17.0 million and non-interest income of $17.0 million, partially
offset by an increase in non-interest expense of $22.3 million.
Return on average stockholders' equity increased to 14.78% for the
third quarter of fiscal year 2003 and 13.01% for the first nine months of fiscal
year 2003, compared to 12.99% and 10.95% for the respective periods of fiscal
year 2002. Return on average assets increased to 1.08% for the third quarter of
fiscal year 2003 and 0.93% for the first nine months of fiscal year 2003,
compared to 0.93% and 0.77% for the respective periods of fiscal year 2002.
The third quarter and first nine months of the fiscal year 2002 did not
include results from People's, as well as People's Savings Bank of Brockton and
its mortgage banking subsidiary, PMC, all of which were acquired on February 28,
2002. In May 2002, the Company completed the systems conversion and
consolidation of three banking offices.
NET INTEREST INCOME
Net interest income before provision for loan losses increased $6.2
million, or 64.7%, to $15.7 million for the third quarter of fiscal year 2003
from $9.5 million for the third quarter of fiscal year 2002. The net interest
rate spread and net interest margin were 2.42% and 2.68%, respectively, for the
third quarter of fiscal year 2003, compared to 2.03% and 2.36%, respectively,
for the third quarter of fiscal year 2002.
For the first nine months of fiscal year 2003, net interest income
before provision for loan losses increased $16.5 million, or 59.4%, to $44.4
million from $27.9 million for the first nine months of fiscal year 2002. The
net interest rate spread and net interest margin were 2.44% and 2.67%,
respectively, for the first nine months of fiscal year 2003, compared to 1.96%
and 2.30%, respectively, for the first nine months of fiscal year 2002.
The increases in net interest income and the average balances of
interest-earning assets and interest-bearing liabilities during the third
quarter and year to date periods of fiscal year 2003, compared to the same
periods of fiscal year 2002, were due primarily to improved balance sheet
composition and growth resulting from the People's acquisition, as well as the
pre-payment of certain FHLB advances and other borrowings during March 2002. In
addition, a low market interest rate environment and related consumer
preferences resulted in the Company's
11
continued high origination volume of fixed-rate mortgages that are generally
sold in the secondary market and increases in mortgage loans held for sale.
However, the low market interest rate environment also led to increased
prepayment speeds on portfolio mortgage loans due primarily to refinancing
activity.
The following tables set forth certain information relating to the
Company for the periods indicated. Net interest income is a function of both the
relative amounts of interest-earning assets and interest-bearing liabilities,
and the interest rates earned or paid on them. Income from BOLI is excluded from
interest income, and the BOLI cash value balances are excluded from
interest-earning assets. The average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods shown. Average
balances are derived from the best available daily or monthly data, which
management believes approximates the average balances computed on a daily basis.
The yields and the costs include fees, premiums and discounts which are
considered adjustments to yields.
FOR THE THREE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001
------------------------------------ ----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------------------------------ ----------------------------------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for sale (1) $ 1,462,294 $22,477 6.15% $ 956,329 $16,996 7.11%
Investment securities (2) 99,632 1,208 4.81 70,564 763 4.29
Mortgage-backed securities (3) 758,711 8,677 4.57 577,329 7,659 5.31
---------------------------------- ---------------------------------
Total interest-earning assets 2,320,637 32,362 5.58 1,604,222 25,418 6.34
---------------- ----------------
Noninterest-earning assets 214,077 100,441
----------- -----------
Total assets $ 2,534,714 $ 1,704,663
=========== ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $ 1,130,902 6,397 2.24 $ 669,463 5,935 3.52
FHLB advances and other borrowings 959,654 10,275 4.25 794,168 9,959 4.98
---------------------------------- ---------------------------------
Total interest-bearing liabilities 2,090,556 16,672 3.16 1,463,631 15,894 4.31
---------------- ----------------
Noninterest-bearing liabilities (5) 258,293 118,954
----------- -----------
Total liabilities 2,348,849 1,582,585
Stockholders' equity 185,865 122,078
----------- -----------
Total liabilities and stockholders' $ 2,534,714 $ 1,704,663
equity =========== ===========
Net interest rate spread (6) $15,690 2.42% $ 9,524 2.03%
================ ================
Net interest margin (7) 2.68% 2.36%
==== ====
Ratio of interest-earning assets to 111.01% 109.61%
interest bearing liabilities ============ ===========
12
FOR THE NINE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
2002 2001
--------------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------------------------------------- ------------------------------------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for sale (1) $ 1,326,233 $64,920 6.53% $ 973,917 $53,924 7.38%
Investment securities (2) 126,135 4,476 4.71 72,085 2,650 4.88
Mortgage-backed securities (3) 753,920 27,617 4.88 562,763 24,371 5.77
---------------------------------- ---------------------------------
Total interest-earning assets 2,206,288 97,013 5.86 1,608,765 80,945 6.70
---------------- ----------------
Noninterest-earning assets 220,253 102,525
------------ -----------
Total assets $ 2,426,541 $ 1,711,290
============ ===========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $ 1,149,734 21,253 2.45 $ 654,301 19,280 3.91
FHLB advances and other borrowings 889,959 31,339 4.67 830,424 33,790 5.40
---------------------------------- ---------------------------------
Total interest-bearing liabilities 2,039,693 52,592 3.42 1,484,725 53,070 4.74
---------------- ----------------
Noninterest-bearing liabilities (5) 213,376 107,006
------------ -----------
Total liabilities 2,253,069 1,591,731
Stockholders' equity 173,472 119,559
------------ -----------
Total liabilities and stockholders'
equity $ 2,426,541 $ 1,711,290
============ ===========
Net interest rate spread (6) $44,421 2.44% $27,875 1.96%
================ ================
Net interest margin (7) 2.67% 2.30%
==== ====
Ratio of interest-earning assets to
interest bearing liabilities 108.17% 108.35%
============ ===========
(1) Amount is net of deferred loan origination costs, undisbursed proceeds of
construction mortgages in process, allowance for loan losses and includes
non-performing loans.
(2) Includes short-term investments, investment securities available for sale
and FHLB stock.
(3) Consists of mortgage-backed securities available for sale and held to
maturity.
(4) Includes the net effect of interest rate swaps.
(5) Consists primarily of business checking accounts.
(6) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(7) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $150,000 for the third
quarter of fiscal year 2003 compared to $300,000 for the third quarter of fiscal
year 2002, and $400,000 for the first nine months of fiscal year 2003 compared
to $900,000 for the first nine months of fiscal year 2002. The decreases in loss
provisions were based on management's assessment of the loan loss allowance
level as influenced by several key factors, including stable trends in loan
delinquencies and charge-offs, changes in portfolio composition and current
economic conditions. For additional information on the amount of the allowance
and the process for evaluating its adequacy, see "Financial Condition - Asset
Quality."
13
NON-INTEREST INCOME
Non-interest income increased $6.4 million, or 139%, to $11.1 million
for the third quarter of fiscal year 2003 from $4.6 million for the third
quarter of fiscal year 2002, including increases of $5.7 million in gain on sale
of mortgage loans, $1.1 million in gain on sale of investment securities
available for sale and $723,000 in service charges on deposit accounts,
partially offset by a decrease of $1.2 million in loan servicing income.
For the first nine months of fiscal year 2003, non-interest income
increased $17.0 million, or 154%, to $28.1 million from $11.1 million for the
first nine months of fiscal year 2002, including increases of $15.8 million in
gain on sale of mortgage loans, $1.6 million in gain on sale of investment
securities available for sale and $1.1 million in service charges on deposit
accounts, partially offset by a decrease of $2.4 million in loan servicing
income.
The increases in gain on sale of mortgage loans for the third quarter
and the year to date were due primarily to a higher volume of loans originated
for sale, which included loans sold by PMC during fiscal year 2003. Changes in
fair value of derivative instruments utilized in secondary market hedging
activities resulted in reductions to gain on sale of mortgage loans of $582,000
and $420,000 for the third quarter and first nine months of fiscal year 2003,
respectively, compared to additions of $858,000 and $882,000 for the third
quarter and first nine months of fiscal year 2002, respectively. The combined
fair value of derivative instruments utilized in secondary market hedging
activities was a loss of $196,000 at December 31, 2002, compared to a gain of
$224,000 at March 31, 2002. Management of the Company believes that the adoption
of SFAS No. 133 has introduced greater volatility to quarterly earnings due to
valuation changes and accelerated recognition of gains or losses in the
Company's mortgage banking activities. However, such effects are expected to
offset over time as market conditions change.
The increases in gain on sale of investment securities available for sale for
the third quarter and the year to date were due to the sale of mortgage-backed
securities and other investment securities during fiscal year 2003, including
certain investments acquired as part of the People's acquisition. The increases
in service charges on deposit accounts were due primarily to growth resulting
from the People's acquisition and subsequent increases in deposit accounts.
Changes in the fair value of interest rate swaps resulted in additions to other
non-interest income of $440,000 for the first nine months of fiscal year 2003,
compared to $9,000 for the first nine months of fiscal year 2002. There were no
interest rate swap agreements at December 31, 2002, following the expiration of
an agreement on September 24, 2002.
The decreases in loan servicing income were due primarily to additions
to the valuation allowance for mortgage servicing rights of $1.2 million and
$2.6 million for the third quarter and first nine months of fiscal year 2003,
respectively, compared to $240,000 recorded in the second quarter of fiscal year
2002. No adjustments were made to the valuation allowance in the third quarter
of fiscal year 2002. The valuation allowance adjustments were based on estimated
impairment due to a combination of faster than previously expected actual payoff
experience and faster prepayment forecasts for the applicable periods.
Amortization of mortgage servicing rights, plus the addition to the valuation
allowance, totaled $4.9 million and $2.3 million for the first nine months of
fiscal year 2003 and 2002, respectively.
NON-INTEREST EXPENSE
Non-interest expense increased $7.9 million, or 106%, to $15.4 million
for the third quarter of fiscal year 2003 from $7.5 million for the third
quarter of fiscal year 2002, including increases of $4.8 million in compensation
and benefits, $1.0 million in office occupancy and equipment expenses, $227,000
in data processing costs, $212,000 in advertising and business promotion,
$583,000 in amortization of intangible assets and $1.1 million in other
non-interest expenses.
14
For the first nine months of fiscal year 2003, non-interest expense
increased $22.3 million, or 101%, to $44.4 million from $22.1 million for the
first nine months of fiscal year 2002, including increases of $12.7 million in
compensation and benefits, $2.9 million in office occupancy and equipment
expenses, $878,000 in data processing costs, $149,000 in advertising and
business promotion, $1.8 million in amortization of intangible assets and $3.9
million in other non-interest expenses.
The increases in non-interest expenses were due to several factors,
including growth resulting from the acquisition of People's and PMC and expenses
associated with increased loan origination volumes, as well as costs related to
banking office and back office consolidation during the first quarter of fiscal
year 2003, and other non-recurring integration expenses. As of December 31,
2002, the Company's full-time equivalent employee positions totaled 670,
compared to 648 at March 31, 2002 and 334 at December 31, 2001.
INCOME TAXES
Income tax expense increased $1.9 million, or 80.1%, to $4.3 million
for the third quarter of fiscal year 2003 from $2.4 million for the third
quarter of fiscal year 2002. For the first nine months of fiscal year 2003,
income tax expense increased $5.1 million, or 90.1%, to $10.7 million from $5.6
million for the first nine months of fiscal year 2002. The Company's effective
tax rate increased to 38.6% for the first nine months of fiscal year 2003 from
35.2% for the first nine months of fiscal year 2002, due primarily to the
effects of an increase in the statutory federal income tax rate based on a
higher taxable earnings threshold, increased state taxes and a consistent
earnings rate from BOLI relative to the increase in pre-tax income.
15
FINANCIAL CONDITION
OVERVIEW
Total assets increased $235.4 million, or 10.3%, to $2.530 billion at
December 31, 2002 from $2.294 billion at March 31, 2002. This growth was due
primarily to increases of $197.6 million in mortgage loans held for sale, $97.8
million in loans receivable, net, and $82.8 million in mortgage-backed
securities available for sale, partially offset by decreases of $88.1 million in
cash and cash equivalents and $45.8 million in investment securities available
for sale. The net increase in mortgage-backed securities available for sale was
due primarily to purchases of $348.1 million and sales of $46.4 million,
partially offset by principal payments received of $231.0 million. The net
decrease in investment securities available for sale was due primarily to sales
of $49.8 million, including the sale of certain securities acquired as part of
the People's acquisition. Corporate bond investments acquired from People's have
been reduced from $16.1 million at the time of acquisition to $2.0 million at
December 31, 2002. Trust preferred stock investments have been reduced from
$40.3 million at the time of the People's acquisition to $22.2 million at
December 31, 2002. During January 2003, an additional $3.5 million of trust
preferred stock investments were sold.
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated:
DECEMBER 31, 2002 MARCH 31, 2002
------------------ -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ ---------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential $ 619,446 49.33% $ 635,297 54.77%
Commercial real estate 139,015 11.07 115,243 9.93
Construction and land 46,980 3.74 63,810 5.50
---------- ------ ---------- ------
Total mortgage loans 805,441 64.14 814,350 70.20
---------- ------ ---------- ------
Commercial Loans 276,176 21.99 200,016 17.24
---------- ------ ---------- ------
Consumer Loans:
Home equity lines 125,663 10.01 83,013 7.16
Second mortgages 36,309 2.89 48,901 4.22
Other consumer loans 12,209 0.97 13,713 1.18
---------- ------ ---------- ------
Total consumer loans 174,181 13.87 145,627 12.56
---------- ------ ---------- ------
Total loans receivable 1,255,798 100.00% 1,159,993 100.00%
====== ======
Less:
Allowance for loan losses (19,267) (19,237)
Undisbursed proceeds of
construction mortgages
in process (19,451) (21,818)
Purchase premium on
loans, net 5,235 5,869
Deferred loan origination
costs, net 1,269 943
---------- ----------
Loans receivable, net $1,223,584 $1,125,750
========== ==========
Mortgage loan originations totaled $2.249 billion for the first nine
months of fiscal year 2003, including $2.014 billion originated for sale of
which $1.582 billion were originated by PMC. During this time, $1.797 billion of
mortgage loans were sold in the secondary market, including $1.402 billion sold
servicing released by PMC.
16
Mortgage loans sold to others and serviced by the Bank on a fee basis
under various agreements decreased $171.0 million, or 10.8%, to $1.417 billion
at December 31, 2002 from $1.588 billion at March 31, 2002, due primarily to
refinancing activity. Loans serviced for others are not included in the
Consolidated Balance Sheets. Mortgage servicing rights decreased $1.7 million,
or 25.5%, to $4.8 million at December 31, 2002, from $6.5 million at March 31,
2002, including adjustments for estimated impairment. The valuation allowance
related to the impairment of mortgage servicing rights increased $2.6 million to
$3.1 million at December 31, 2002, from $490,000 at March 31, 2002. Mortgage
servicing rights were 0.34% of loans serviced for others at December 31, 2002,
compared to 0.41% at March 31, 2002.
Balance sheet growth during the first nine months of fiscal year 2003
was primarily funded by increases in FHLB advances and other borrowings of
$141.9 million, or 18.8%, to $896.7 million, and total deposits of $57.8
million, or 4.4%, to $1.375 billion, at December 31, 2002. The increase in
deposits included increases in demand deposits of $99.1 million, or 22.9%, and
savings deposits of $17.2 million, or 7.3%, partially offset by a decrease in
time deposits of $58.5 million, or 9.0%. The percentage of deposits to total
assets was 54.4% at December 31, 2002.
Total stockholders' equity increased $30.0 million, or 19.3%, to $185.3
million at December 31, 2002, from $155.3 million at March 31, 2002. The
increase was due primarily to $17.0 million in net income, an $8.3 million
increase in the fair market value of available for sale securities, net of tax,
and a $5.0 million private placement of common stock issued from the Company's
treasury stock, partially offset by $3.7 million in dividends paid to
stockholders. Stockholders' equity to assets was 7.33% at December 31, 2002,
compared to 6.77% at March 31, 2002. Book value per share increased 13.4% to
$22.74 at December 31, 2002 from $20.06 at March 31, 2002. Tangible book value
per share increased 25.1% to $16.09 at December 31, 2002 from $12.86 at March
31, 2002.
17
ASSET QUALITY
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned ("REO") and other repossessed
assets. The Company ceases to accrue interest on loans 90 days or more past due
and charges off all accrued interest. Foregone interest on non-accrual loans was
$21,000 for the three months ended December 31, 2002 and $78,000 for the nine
months ended December 31, 2002.
DECEMBER 31, MARCH 31,
2002 2002
----------- ---------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family.................................... $ 1,627 $ 1,855
Commercial real estate................................ 102 724
Construction and land................................. - 814
------- -------
Total mortgage loans.............................. 1,729 3,393
------- -------
Commercial loans........................................ 1,395 144
------- -------
Consumer loans:
Home equity lines..................................... - 54
Second mortgages...................................... 75 77
Other consumer loans.................................. 21 36
------- -------
Total consumer loans.............................. 96 167
------- -------
Total non-accrual loans........................... 3,220 3,704
Non-performing investment................................. - 3,285
REO, net (1).............................................. 177 240
Other repossessed assets.................................. - 3
------- -------
Total non-performing assets........................... $ 3,397 $ 7,232
======= =======
Allowance for loan losses as a percent of loans (2)....... 1.55% 1.68%
Allowance for loan losses as a percent
of non-accrual loans (3)................................ 598% 519%
Non-accrual loans as a percent of loans (2)(3)............ 0.26% 0.32%
Non-performing assets as a percent of total assets........ 0.13% 0.31%
(1) REO balances are shown net of related valuation allowances.
(2) Loans includes loans receivable, net, excluding allowance for loan losses.
(3) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Company as presenting
uncertainty with respect to the collectability of interest or principal.
The decrease in non-performing assets during the first nine months of
fiscal year 2003 is primarily due to the sale of a non-performing investment
acquired in the People's acquisition.
Allowance for Loan Losses. The allowance for loan losses is based on
management's ongoing review and estimate of the credit losses inherent in the
loan portfolio. Management's methodology to estimate loss exposure inherent in
the portfolio includes analysis of individual loans deemed to be impaired,
performance of individual loans in relation to contract terms, and allowance
allocations for various loan types based on payment status or loss experience.
An unallocated allowance is also maintained within an established range based on
management's assessment of many factors including current market conditions,
trends in loan delinquencies and charge-offs, the
18
volume and mix of new originations, and the current type, mix, changing risk
profiles and balance of the portfolio. The Company also engages external loan
review consultants on a semi-annual basis to review commercial loan
classifications. In addition, the Office of Thrift Supervision ("OTS") and the
Federal Deposit Insurance Corporation ("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.
The allowance for loan losses totaled $19.3 million at December 31,
2002, an increase of $30,000, or less than 1%, as compared to $19.2 million at
March 31, 2002. The following table sets forth activity in the Company's
allowance for loan losses for the periods indicated:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $19,321 $13,725 $19,237 $13,233
Provision for loan losses 150 300 400 900
------- ------- ------- -------
Charge-offs:
One-to-four family mortgage loans (60) - (70) -
Commercial loans (117) - (203) (68)
Consumer Loans:
Home equity lines (8) (4) (31) (7)
Other consumer (30) (63) (81) (102)
------- ------- ------- -------
Total (215) (67) (385) (177)
Recoveries 11 91 15 93
------- ------- ------- -------
Balance at end of period $19,267 $14,049 $19,267 $14,049
======= ======= ======= =======
Ratio of net charge-offs (recoveries)
during the period to average loans
outstanding during the period 0.07% (0.01%) 0.04% 0.01%
Management was influenced by several key factors as a basis for the
level of the Company's provisions for loan losses, which resulted in the balance
of the allowance for loan losses remaining essentially flat during the first
nine months of fiscal year 2003. Although the Company's non-performing loans and
charge-offs have remained low, there has been a significant shift in the
composition of the loan portfolio at December 31, 2002, as compared to December
31, 2001, including $308.9 million of loans receivable acquired and $5.2 million
of allowance for loan losses assumed as part of the People's acquisition. The
residential mortgage portfolio has decreased due primarily to a low fixed rate
environment, which resulted in high refinancing activity, while the commercial
and consumer loan portfolios have shown significant growth. Commercial and
consumer loans bear a higher degree of risk than the one-to-four family mortgage
loans that make up substantially all of the Company's residential portfolio. In
addition, management believes that current economic conditions, including rising
unemployment rates in its key market area of southeastern New England, could
have an adverse affect on asset quality and result in higher non-performing
loans and charge-offs.
The Company will continue to monitor and modify its allowances for loan
losses as conditions dictate. While management believes the Company's allowance
for loan losses was sufficient to absorb losses inherent in its loan portfolio
at December 31, 2002, no assurances can be given that the Company's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Company or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
19
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 15 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, with the exception of loans originated by PMC,
which are sold servicing released; and (3) investing primarily in
adjustable-rate mortgage-backed securities and short-term fixed-rate CMOs. In
conjunction with its mortgage banking activities, the Company uses forward
contracts in order to reduce exposure to interest-rate risk, except for PMC,
where all loans are sold by obtaining commitments from investors on a loan by
loan basis. The amount of forward coverage of the "pipeline" of mortgages is
managed on a day-to-day basis, within Board approved policy guidelines, based on
the Company's assessment of the general direction of interest rates and levels
of mortgage origination activity. In addition, the Company has engaged in
interest rate swap agreements, from time to time, to synthetically lengthen its
liability maturities.
The Company's interest rate risk is monitored by management through the
use of a model that generates estimates of the change in the Company's net
interest income and net portfolio value ("NPV") over a range of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the estimated
market value of assets in the same scenario. The OTS produces a similar analysis
for the Bank using its own model, based upon data submitted in the Bank's
quarterly Thrift Financial Report, the results of which may vary from the
Company's internal model primarily due to differences in assumptions utilized
between the Company's internal model and the OTS model, including estimated loan
prepayment rates, reinvestment rates and deposit renewal rates.
The following table sets forth the Company's estimated NPV and NPV
ratios as of December 31, 2002 and March 31, 2002, as calculated by the Company.
December 31, 2002 March 31, 2002
----------------------------------------------------------------------------------
Change in Estimated NPV Estimated NPV
Interest Rates Net Sensitivity Net Sensitivity
in Basis Portfolio NPV in Basis Portfolio NPV in Basis
Points Value Ratio Points Value Ratio Points
------ ----- ----- ------ ----- ----- ------
(Dollars in thousands)
+ 300 $ 143,918 5.79% 58 $ 136,524 6.10% (218)
+ 200 153,797 6.12 90 161,250 7.09 (120)
+ 100 153,940 6.06 84 181,372 7.85 (43)
Unchanged 132,985 5.22 - 193,892 8.28 -
- 100 103,391 4.05 (116) 186,886 7.93 (35)
20
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented incorporates an assumption that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured, and that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
term to maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net interest income models provide an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to, and do not, provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, proceeds from the
sale of loans, FHLB advances, and other borrowings. In addition, the Company and
the Bank acquired cash and cash equivalents as part of the People's acquisition.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are influenced by general interest
rates, economic conditions and competition. The Bank used cash acquired in the
People's acquisition to fund asset growth and repay certain FHLB advances and
other borrowings. However, the Bank expects to use deposits, FHLB advances and
other borrowings, and retained earnings to fund asset growth in the future,
depending on market conditions, the pricing of deposit products, and the pricing
of FHLB advances and other borrowings.
The Bank's most liquid assets are cash, short-term investments,
mortgage loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale. The levels of these assets are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. At December 31, 2002, cash, short-term investments,
mortgage loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale totaled $1.082 billion, or 42.7%
of total assets.
The Bank has other sources of liquidity if a need for additional funds
arises, including a $25.0 million FHLB secured line of credit, FHLB advances,
and other borrowings. At December 31, 2002, the Bank had $881.7 million in
advances outstanding from the FHLB and other borrowings, and an additional
borrowing capacity from the FHLB of $266.2 million including the $25.0 million
line of credit. At December 31, 2002, the portfolio of putable FHLB advances and
reverse repurchase agreements totaled $422.5 million, with an average interest
cost of 4.52%, and an average life to maturity and estimated average life of 6.8
years. The estimated average life calculated by the Bank may or may not mirror
the counter-party's actual decision to exercise its option to terminate the
advances. The FHLB is required by regulation to offer replacement funding to the
Bank if the FHLB terminates a putable advance prior to the maturity date of the
advance, provided that the Bank is able to satisfy the FHLB's normal credit and
collateral requirements. Such replacement funding would be for the remaining
maturity of the putable advance, and at a market interest rate or a
predetermined interest rate agreed upon between the Bank and the FHLB.
The Company had two subsidiary business trusts acquired as part of the
People's acquisition, Capital Trust I and Capital Trust II, of which the Company
owned all of the common securities. On July 1, 2002, the Company completed the
redemption, at par, of the Capital Trust I 9.76% trust preferred securities
totaling $13.8 million. At December 31, 2002, Capital Trust II had $10.0 million
of 11.695% trust preferred securities outstanding, with an average interest cost
of 10.29%, that mature in July 2030 unless the Company elects and obtains
regulatory approval to accelerate the maturity date to as early as July 2010.
21
At December 31, 2002, the Bank had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $598.1 million. The Bank anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificate of
deposit accounts scheduled to mature in less than one year from December 31,
2002 totaled $458.0 million. Based on its prior experience and other factors,
the Bank currently expects that it will retain a majority of maturing
certificate accounts.
The Company opened a new banking and insurance office in East
Greenwich, Rhode Island in October 2002, bringing its total banking and
insurance offices to 26. The Company continues to consider sites for new banking
and insurance 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 establishment of additional banking and insurance
offices, loan origination centers, trust service operations, mergers and
acquisitions, and additional capital management strategies by the Company would
result in additional capital expenditures and other associated costs which the
Company has not yet estimated.
At December 31, 2002, the consolidated capital to total assets ratio of
the Company was 7.33%. During fiscal year 2003, the Company paid cash dividends
to stockholders of $0.14 per share during the first quarter and $0.15 per share
during the second and third quarters, and announced the declaration of a cash
dividend of $0.18 per share to stockholders for payment during the fourth
quarter. The Company's primary source of funding for dividends, and payments for
periodic stock repurchases, has been dividends from the Bank. The Bank's ability
to pay dividends and other capital distributions to the Company is generally
limited by OTS regulations.
At December 31, 2002, the Bank exceeded all of its regulatory capital
requirements. The Bank's Tier 1 core capital of $137.1 million, or 5.59% of
total adjusted assets, was above the required level of $98.1 million, or 4.0%;
risk-based capital of $147.2 million, or 10.29% of risk-weighted assets, was
above the required level of $114.4 million or 8.0%, and Tier 1 risk-based
capital of $137.1 million, or 9.12% of risk-weighted assets, was above the
required level of $57.2 million or 4.0%. The Bank also continued to exceed the
regulatory capital requirements for designation as a "well capitalized"
institution under the OTS prompt corrective action regulations of 5.0% for Tier
1 core capital, 10.0% for risk-based capital and 6% for Tier 1 risk-based
capital. The Trust Company is subject to similar regulatory capital
requirements, and exceeded all of its capital requirements at December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the Section of Item 2 captioned, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
- - Market Risk and Management of Interest-Rate Risk" for quantitative and
qualitative information about market risk and its potential effect on the
Company.
ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, the Company evaluates the effectiveness of the design and operation of
its disclosure controls and procedures. Based on an evaluation of such controls
and procedures within 90 days of the filing date of this quarterly report, the
Chief Executive Officer and Chief Financial Officer have concluded that these
disclosure controls and procedures are effective. The Company made no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party to routine
legal proceedings within the normal course of business. Such routine legal
proceedings in the aggregate are believed by management to be immaterial to the
Company's financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
3.1 Certificate of Incorporation of FIRSTFED AMERICA
BANCORP, INC. (1)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC., as amended (2)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC. (1)
------------
(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, 2002.
b) Reports on Form 8-k
None.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
Registrant
Date: February 14, 2003 /s/ Robert F. Stoico
--------------------------------------------
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 14, 2003 /s/ Edward A. Hjerpe, III
--------------------------------------------
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
(Principal Accounting and Financial Officer)
24
CERTIFICATION
I, Robert F. Stoico, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIRSTFED AMERICA
BANCORP, INC.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Robert F. Stoico
--------------------------------------------
Chairman of the Board, President and
Chief Executive Officer
25
CERTIFICATION
I, Edward A. Hjerpe, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FIRSTFED AMERICA
BANCORP, INC.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
d) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
e) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Edward A. Hjerpe, III
--------------------------------------------
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
26