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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12305
FIRSTFED AMERICA BANCORP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 04-3331237
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE FIRSTFED PARK, SWANSEA, MASSACHUSETTS 02777
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 679-8181
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
As of February 5, 2004, there were 18,973,099 shares of the Registrant's Common
Stock outstanding.
FIRSTFED AMERICA BANCORP, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION............................................................... 2
Item 1. Financial Statements................................................................ 2
Consolidated Balance Sheets......................................................... 2
Consolidated Statements of Income................................................... 3
Consolidated Statements of Changes in Stockholders' Equity.......................... 4
Consolidated Statements of Cash Flows............................................... 5
Notes to Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. ......................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 17
Item 4. Controls and Procedures............................................................. 17
PART II OTHER INFORMATION................................................................... 17
Item 1. Legal Proceedings................................................................... 17
Item 2. Changes in Securities and Use of Proceeds........................................... 18
Item 3. Defaults Upon Senior Securities..................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................. 18
Item 5. Other Information................................................................... 18
Item 6. Exhibits and Reports on Form 8-K.................................................... 18
SIGNATURES.......................................................................... 19
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2003 2003
------------ ------------
ASSETS
Cash on hand and due from banks ................................................. $ 44,642 $ 53,529
Short-term investments .......................................................... 2,113 2,000
------------ ------------
Total cash and cash equivalents ............................................... 46,755 55,529
Mortgage loans held for sale .................................................... 57,103 245,745
Investment securities available for sale, at fair value
(amortized cost of $6,441 and $16,659) ..................................... 11,715 22,730
Mortgage-backed securities available for sale, at fair value
(amortized cost of $815,772 and $623,841) .................................. 817,749 634,965
Mortgage-backed securities held to maturity (fair value of $715 and $956) ....... 715 934
Stock in Federal Home Loan Bank of Boston, at cost .............................. 58,433 58,433
Loans receivable
Residential mortgages ..................................................... 665,271 605,507
Commercial real estate mortgages .......................................... 192,608 142,974
Construction and land mortgages ........................................... 44,539 43,946
Commercial ................................................................ 275,768 282,955
Consumer .................................................................. 235,958 185,284
Allowance for loan losses ................................................. (19,362) (19,335)
------------ ------------
Loans receivable, net .................................................. 1,394,782 1,241,331
Accrued interest receivable ..................................................... 8,102 7,588
Mortgage servicing rights, net of valuation allowance of $2,074 and $3,095 ...... 7,743 5,971
Office properties and equipment, net ............................................ 36,744 38,298
Bank-owned life insurance ....................................................... 38,807 37,513
Goodwill and other intangible assets ............................................ 52,000 53,659
Prepaid expenses and other assets ............................................... 25,791 11,782
------------ ------------
Total assets ........................................................... $ 2,556,439 $ 2,414,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits
Demand .................................................................... $ 601,064 $ 573,344
Savings ................................................................... 316,076 286,719
Time ...................................................................... 548,921 567,044
------------ ------------
Total deposits ......................................................... 1,466,061 1,427,107
FHLB advances and other borrowings ............................................ 822,068 723,577
Advance payments by borrowers for taxes and insurance ......................... 4,346 5,974
Accrued interest payable ...................................................... 3,656 3,607
Other liabilities ............................................................. 31,210 61,129
------------ ------------
Total liabilities ...................................................... 2,327,341 2,221,394
------------ ------------
Stockholders' equity:
Common stock .................................................................. 234 216
Additional paid-in capital .................................................... 154,694 125,198
Retained earnings ............................................................. 107,387 97,100
Accumulated other comprehensive income ........................................ 4,627 9,777
Unallocated ESOP shares ....................................................... (1,549) (1,549)
Unearned 1997 stock-based incentive plan ...................................... (39) (112)
Treasury stock ................................................................ (36,256) (37,546)
------------ ------------
Total stockholders' equity ............................................. 229,098 193,084
------------ ------------
Total liabilities and stockholders' equity ............................. $ 2,556,439 $ 2,414,478
============ ============
See accompanying notes to consolidated financial statements.
2
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
---------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Interest and dividend income:
Loans $ 19,907 $ 22,477 $ 66,302 $ 64,920
Mortgage-backed securities 6,449 8,677 18,901 27,617
Investment securities 167 693 740 2,862
Federal Home Loan Bank stock 405 515 1,313 1,614
-------- -------- -------- --------
Total interest and dividend income 26,928 32,362 87,256 97,013
-------- -------- -------- --------
Interest expense:
Deposits 5,317 6,397 16,751 21,253
Borrowed funds 7,910 10,275 25,176 31,339
-------- -------- -------- --------
Total interest expense 13,227 16,672 41,927 52,592
-------- -------- -------- --------
Net interest income before provision for loan losses 13,701 15,690 45,329 44,421
Provision for loan losses 275 150 650 400
-------- -------- -------- --------
Net interest income after provision for loan losses 13,426 15,540 44,679 44,021
-------- -------- -------- --------
Non-interest income:
Service charges on deposit accounts 978 1,311 2,711 2,605
Trust fee income 430 350 1,207 1,063
Loan servicing income (expense) (41) (834) 105 (1,703)
Insurance commission income 452 363 1,119 802
Earnings on Bank-Owned Life Insurance 423 484 1,293 1,447
Gain on sale of mortgage loans, net 5,674 7,569 22,289 19,133
Gain on sale of investment securities available for sale 5,033 1,057 7,171 2,628
Other income 1,084 778 3,049 2,120
-------- -------- -------- --------
Total non-interest income 14,033 11,078 38,944 28,095
-------- -------- -------- --------
Non-interest expense:
Compensation and employee benefits 12,267 9,223 34,665 26,280
Office occupancy and equipment 2,333 2,109 6,647 6,172
Data processing 716 702 2,021 2,352
Advertising and business promotion 402 408 1,184 799
Amortization of intangible assets 553 607 1,659 1,821
Other expense 3,721 2,318 9,490 7,012
-------- -------- -------- --------
Total non-interest expense 19,992 15,367 55,666 44,436
-------- -------- -------- --------
Income before income tax expense 7,467 11,251 27,957 27,680
Income tax expense 2,995 4,325 11,303 10,673
-------- -------- -------- --------
Net income $ 4,472 $ 6,926 $ 16,654 $ 17,007
======== ======== ======== ========
Basic earnings per share $ 0.25 $ 0.43 $ 0.96 $ 1.07
======== ======== ======== ========
Diluted earnings per share $ 0.24 $ 0.41 $ 0.95 $ 1.03
======== ======== ======== ========
Weighted average shares outstanding - basic 18,051 16,271 17,274 15,961
======== ======== ======== ========
Weighted average shares outstanding - diluted 18,254 16,801 17,453 16,489
======== ======== ======== ========
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, 2003
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
UNEARNED
1997
ACCUMULATED STOCK-BASED
ADDITIONAL OTHER UNALLOCATED INCENTIVE
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP PLAN (SIP) TREASURY
STOCK CAPITAL EARNINGS INCOME SHARES SHARES STOCK
------ ---------- -------- ------------- ----------- ----------- ---------
Balance at March 31, 2003......................... $ 216 $125,198 $ 97,100 $ 9,777 $ (1,549) $ (112) $(37,546)
Earned SIP stock awards......................... -- (5) -- -- -- 73 --
Earned ESOP shares charged to expense........... -- 1,754 -- -- -- -- --
Stock options exercised, including
related tax benefits of $9,601.............. 18 24,822 -- -- -- -- --
Cash dividends declared and paid
(1st quarter at $0.10 per share; 2nd and
3rd quarters at $0.13 per share)........... -- -- (6,367) -- -- -- --
Common stock acquired for certain
employee benefit plans (5,396 shares at
an average price of $14.85 per share)........ -- -- -- -- -- -- (80)
Common stock sold for certain employee
benefit plans (176,150 shares at an
average price of $24.38 per share)........... -- 2,925 -- -- -- -- 1,370
Comprehensive income:
Net income.................................... -- -- 16,654 -- -- -- --
Other comprehensive income (loss),
net of tax
Unrealized holding losses on
available for sale securities,
net of taxes of ($1,337)................. -- -- -- (1,436) -- -- --
Reclassification adjustment for
gains included in net income,
net of taxes of $3,457................... -- -- -- (3,714) -- -- --
--------
Net unrealized losses...................... -- -- -- (5,150) -- -- --
Total comprehensive income............... -- -- -- -- -- -- --
------ -------- -------- -------- --------- --------- --------
Balance at December 31, 2003...................... $ 234 $154,694 $107,387 $ 4,627 $ (1,549) $ (39) $(36,256)
====== ======== ======== ======== ========= ========= ========
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance at March 31, 2003......................... $193,084
Earned SIP stock awards......................... 68
Earned ESOP shares charged to expense........... 1,754
Stock options exercised, including
related tax benefits of $9,601.............. 24,840
Cash dividends declared and paid
(1st quarter at $0.10 per share; 2nd and
3rd quarters at $0.13 per share)........... (6,367)
Common stock acquired for certain
employee benefit plans (5,396 shares at
an average price of $14.85 per share)........ (80)
Common stock sold for certain employee
benefit plans (176,150 shares at an
average price of $24.38 per share)........... 4,295
Comprehensive income:
Net income.................................... 16,654
Other comprehensive income (loss),
net of tax
Unrealized holding losses on
available for sale securities,
net of taxes of ($1,337)................. --
Reclassification adjustment for
gains included in net income,
net of taxes of $3,457................... --
Net unrealized losses...................... (5,150)
--------
Total comprehensive income............... 11,504
--------
Balance at December 31, 2003...................... $229,098
========
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,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income ................................................................. $ 16,654 $ 17,007
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization (accretion) of:
Discounts, net ...................................................... (2,020) (2,658)
Deferred loan origination costs ..................................... 1,270 813
Mortgage servicing rights ........................................... 2,466 2,334
Intangible assets ................................................... 1,659 1,821
Provision for loan losses .............................................. 650 400
Provision for estimated impairment on mortgage servicing rights ........ 171 2,605
Gains on sales of:
Mortgage loans ...................................................... (22,289) (19,133)
Investment and mortgage-backed securities available-for-sale ........ (7,171) (2,627)
Office property and equipment ....................................... (2) (13)
Net proceeds from sales of mortgage loans .............................. 2,529,631 1,831,813
Origination of mortgage loans held for sale ............................ (2,326,060) (2,013,985)
Earnings on bank-owned life insurance .................................. (1,293) (1,447)
Depreciation of office properties and equipment ........................ 3,358 3,170
Appreciation in fair value of ESOP shares .............................. 1,754 872
Earned SIP shares ...................................................... 68 1,281
Increase or decrease in:
Accrued interest receivable ......................................... (514) (68)
Other assets ........................................................ (6,205) 114
Accrued interest payable ............................................ 49 (626)
Other liabilities ................................................... (29,919) 21,509
------------ ------------
Net cash provided by (used in) operating activities ................. 162,257 (156,818)
------------ ------------
Cash flows from investing activities:
Purchase of investment securities available for sale ....................... (3,010) (1,725)
Purchase of mortgage-backed securities available for sale .................. (541,550) (348,080)
Payments received on mortgage-backed securities ............................ 263,029 230,951
Proceeds from sale of investments securities available for sale ............ 14,996 49,837
Proceeds from sale of mortgage-backed securities available for sale ........ 87,777 46,403
Maturities of investment securities available for sale ..................... 3,689 2,886
Net increase in loans ...................................................... (156,286) (99,849)
Proceeds from sale of office properties and equipment ...................... 12 679
Purchases of office properties and equipment ............................... (1,814) (4,084)
------------ ------------
Net cash used in investing activities ............................... (333,157) (122,982)
------------ ------------
Cash flows from financing activities:
Net increase in deposits ................................................... 39,212 58,667
Proceeds from FHLB advances and other borrowings ........................... 17,247,941 4,875,057
Repayments on FHLB advances and other borrowings ........................... (17,146,087) (4,743,748)
Net change in advance payments by borrowers for taxes and insurance ........ (1,628) (832)
Cash dividends paid ........................................................ (6,367) (3,658)
Proceeds from sale of (payments to acquire) common stock, net .............. 4,215 (85)
Common stock issued in private placement ................................... -- 5,000
Stock options exercised, including related tax benefits .................... 24,840 1,289
------------ ------------
Net cash provided by financing activities ........................... 162,126 191,690
------------ ------------
Net decrease in cash and cash equivalents .................................... (8,774) (88,110)
Cash and cash equivalents at beginning of period ............................. 55,529 145,049
------------ ------------
Cash and cash equivalents at end of period ................................... $ 46,755 $ 56,939
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................................. $ 41,878 $ 53,218
============ ============
Income taxes ............................................................. $ 4,527 $ 13,718
============ ============
See accompanying notes to consolidated financial statements.
5
FIRSTFED AMERICA BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of FIRSTFED AMERICA BANCORP, INC. (the "Company"), its wholly-owned
subsidiaries, First Federal Savings Bank of America (the "Bank"), FAB FUNDING
CORPORATION ("FAB FUNDING") and FIRSTFED INSURANCE AGENCY, LLC (the "Agency"),
People's Bancshares Capital Trust II ("Capital Trust II"), and the Company's 65%
interest in FIRSTFED TRUST COMPANY, N.A. (the "Trust Company"). The remaining
35% interest of the Trust Company is held by M/D Trust, LLC, a minority owner.
The Bank includes its wholly-owned subsidiaries, People's Mortgage Corporation
("PMC"), FIRSTFED INVESTMENT CORPORATION, and CELMAC INVESTMENT CORPORATION.
The interim consolidated financial statements reflect all normal and
recurring adjustments which are, in the opinion of management, considered
necessary for a fair presentation of the financial condition and results of
operations for the periods presented. Certain amounts previously reported have
been reclassified to conform to the current year's presentation. The results of
operations for the nine months ended December 31, 2003 are not necessarily
indicative of the results of operations that may be expected for all of fiscal
year 2004.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. These unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2003.
(2) STOCK SPLIT
On June 26, 2003, the Company's Board of Directors declared a 2-for-1
common stock split that was distributed on July 17, 2003 to shareholders of
record as of July 7, 2003. In the accompanying unaudited consolidated financial
statements, Management's Discussion and Analysis of Financial Condition and
Results of Operation, and Other Information, the numbers of shares and per share
amounts of the Company's common stock have been retroactively restated to
reflect the increased number of common shares outstanding.
(3) RECENT DEVELOPMENTS
On October 7, 2003, the Company announced that it had reached a
definitive agreement to be acquired by Webster Financial Corporation
("Webster"), headquartered in Waterbury, Connecticut. Webster is the holding
company for Webster Bank. Pursuant to the agreement, the Bank will be merged
with and into Webster Bank, and the Company's shareholders will be entitled to
receive either 0.5954 shares of Webster common stock or $24.50 in cash for each
share of the Company's common stock, subject to proration. On the day it was
announced, the transaction was valued at approximately $465 million, payable 60%
in Webster stock and 40% in cash. Following consummation of the merger, the
combined bank will rank as the 45th largest in the United States, with $16
billion in assets, market capitalization of $2.2 billion and a 141-branch retail
footprint in Connecticut, Massachusetts and Rhode Island. The transaction, which
is subject to approval by regulatory authorities and the Company's shareholders,
is expected to close in the second calendar quarter of 2004.
The proposed transaction will be submitted to the Company's
shareholders for their consideration. Webster and the Company filed with the SEC
a registration statement, a preliminary proxy statement/prospectus and other
relevant documents concerning the proposed transaction with the SEC.
Shareholders of the Company are urged to read the registration statement and the
proxy statement/prospectus and any other relevant documents filed with the SEC,
as well as any amendments or supplements to those documents, because they will
contain important information.
6
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill and other intangible
assets for the nine months ended December 31, 2003 are as follows (in
thousands):
CORE TOTAL
DEPOSIT NON-COMPETE IDENTIFIABLE
INTANGIBLE INTANGIBLE INTANGIBLE
GOODWILL ASSET ASSET ASSETS
---------- ---------- ---------- -----------
Balance at March 31, 2003 $ 43,825 $ 9,596 $ 238 $ 9,834
Recorded during the period -- -- -- --
Amortization expense -- (1,464) (195) (1,659)
Impairment recognized -- -- -- --
---------- ---------- ---------- -----------
Balance at December 31, 2003 $ 43,825 $ 8,132 $ 43 $ 8,175
========== ========== ========== ===========
Estimated amortization expense for fiscal years ended March 31:
2004 $ 1,933 $ 238 $ 2,171
2005 1,717 -- 1,717
2006 1,500 -- 1,500
2007 1,283 -- 1,283
2008 1,066 -- 1,066
After 2008 2,097 -- 2,097
The components of identifiable intangible assets at December 31, 2003
are as follows (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Core deposit intangible asset $ 11,926 $ 3,794 $ 8,132
Non-compete intangible asset 520 477 43
-------------- ------------ ------------
$ 12,446 $ 4,271 $ 8,175
============== ============ ============
(5) STOCK OPTION PLANS
The Company continues to follow the intrinsic value method for
accounting for its stock option plans. Accordingly, no compensation expense has
been recognized in the financial statements. Had the Company determined
compensation expense based on the fair value at the grant date for its stock
options, the Company's net income would have been reduced to the pro forma
amounts indicated below (dollars in thousands, except per share data):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- -------------------
2003 2002 2003 2002
-------- ---------- -------- ---------
Net income as reported................................... $ 4,472 $ 6,926 $ 16,654 $ 17,007
Pro forma net income..................................... 4,393 6,819 16,418 16,687
Basic earning per share as reported...................... 0.25 0.43 0.96 1.07
Diluted earnings per share as reported................... 0.24 0.41 0.95 1.03
Pro forma basic earnings per share....................... 0.24 0.42 0.95 1.05
Pro forma diluted earnings per share..................... 0.24 0.41 0.94 1.01
The fair value of stock options was determined by using the trinomial
option pricing model. No stock options have been granted since fiscal year 2001.
(6) IMPACT OF RECENT ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation ("FIN") 46-R, "Consolidation of Variable Interest
Entities - Revised." FIN 46-R revises FIN 46, "Consolidation of Variable
Interest Entities" which is an interpretation of Accounting Research Bulletin
51, "Consolidated Financial Statements." FIN 46-R provides guidance regarding
the consolidation of special purpose entities, and removed uncertainty over
whether FIN 46 required consolidation or deconsolidation of special purpose
entities that issue trust preferred securities. FIN 46-R clarified that even
those entities that issue trust preferred securities with call options must be
deconsolidated. FIN 46-R is effective for financial statements for periods
ending after December 15, 2003, with no requirement for restatement of previous
periods. The Company adopted FIN 46-R on December 31, 2003, and therefore has
deconsolidated its trust subsidiary as of that date. Adoption of this
Interpretation did not have a material impact on the Company's financial
position or results of operations.
7
In April 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149 "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." SFAS No. 149 requires derivatives contracts with
comparable characteristics be accounted for similarly. In particular, SFAS No.
149 (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in paragraph 6(b)
of Statement 133, (2) clarifies when a derivative contains a financing
component, and (3) amends the definition of an underlying event to conform it to
language used in FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and (4) amends certain other existing pronouncements.
This Statement is effective for contracts entered into or modified after June
30, 2003. The Company does not believe the adoption of SFAS No. 149 will have a
material impact on the Company's Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150, which was effective July 1, 2003, requires an issuer to classify a
financial instrument within the scope of the statement as a liability if the
financial instrument embodies an obligation of the issuer. The adoption of SFAS
No. 150 did not have a material impact on the Company's Consolidated Financial
Statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106". SFAS No. 132 (revised 2003)
revises employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132 (revised 2003), which is effective for financial
statements with fiscal years ending after December 15, 2003, does not change the
measurement or recognition of those plans required by SFAS No. 87, 88, and 106,
but augments the disclosure requirements of the original SFAS No. 132 with
additional disclosure requirements. The Company does not believe the adoption of
SFAS No. 132 (revised 2003) 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.
The following discussion should be read in conjunction with the
financial statements, notes, discussion and tables included in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 2003.
RESULTS OF OPERATIONS
OVERVIEW
Net income decreased $2.5 million, or 35%, to $4.5 million for the
third quarter of fiscal year 2004 from $6.9 million for the third quarter of
fiscal year 2003. Diluted earnings per share ("EPS") decreased 41% to $0.24 for
the third quarter of fiscal year 2004 from $0.41 for the third quarter of fiscal
year 2003. Income before income tax expense decreased $3.8 million, or 34%, to
$7.5 million, the net result of a decrease in net interest income after
provision for loan losses of $2.1 million, and increases in non-interest income
of $3.0 million and non-interest expense of $4.6 million.
For the first nine months of fiscal year 2004, net income was $16.7
million, a decrease of $353,000, or 2%, from $17.0 million for the first nine
months of fiscal year 2003. Diluted EPS decreased 8% to $0.95 for the first nine
months of fiscal year 2004 from $1.03 for the first nine months of fiscal year
2003. Income before income tax expense increased $277,000, or 1%, to $28.0
million, the net result of increases in net interest income after provision for
loan losses of $658,000, non-interest income of $10.8 million, and non-interest
expense of $11.2 million. Weighted average diluted shares outstanding increased
9% for the third quarter and 6% for the first nine months due primarily to 1.4
million of common shares issued for stock options exercised subsequent to the
announcement of the agreement to merge with Webster.
9
Return on average stockholders' equity was 8.45% for the third quarter
of fiscal year 2004 and 10.90% for the first nine months of fiscal year 2004,
compared to 14.78% and 13.01% for the respective periods of fiscal year 2003.
Return on average assets was 0.72% for the third quarter of fiscal year 2004 and
0.86% for the first nine months of fiscal year 2004, compared to 1.08% and 0.93%
for the respective periods of fiscal year 2003.
NET INTEREST INCOME
Net interest income before provision for loan losses decreased $2.0
million, or 13%, to $13.7 million for the third quarter of fiscal year 2004 from
$15.7 million for the third quarter of fiscal year 2003. The net interest rate
spread and net interest margin were 2.20% and 2.40%, respectively, for the third
quarter of fiscal year 2004, compared to 2.42% and 2.68%, respectively, for the
third quarter of fiscal year 2003. For the first nine months of fiscal year
2004, net interest income before provision for loan losses increased $908,000,
or 2%, to $45.3 million for the first nine months of fiscal year 2004 from $44.4
million for the first nine months of fiscal year 2003. The net interest rate
spread and net interest margin were 2.29% and 2.53%, respectively, for the first
nine months of fiscal year 2004, compared to 2.44% and 2.67%, respectively, for
the first nine months of fiscal year 2003. The decreases in the net interest
rate spread and net interest margin reflected declines in market interest rates,
with reductions in the Company's interest yields on interest-earning assets,
including the effects of reduced balances of mortgage loans held for sale,
exceeding the reductions in its interest costs on interest-bearing liabilities.
The following tables set forth certain information relating to the
Company for the periods indicated. The annualized average yields and costs are
derived by dividing annualized 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,
--------------------------------------------------------------------------
2003 2002
------------------------------------ ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------ ------------ ------- ------------ ------------ -------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for sale (1) $ 1,477,895 $ 19,907 5.39% $ 1,462,294 $ 22,477 6.15%
Investment securities (2) 108,335 572 2.10 99,632 1,208 4.81
Mortgage-backed securities (3) 689,231 6,449 3.74 758,711 8,677 4.57
------------ ------------ ---- ------------ ------------ ----
Total interest-earning assets 2,275,461 26,928 4.73 2,320,637 32,362 5.58
------------ ---- ------------ ----
Noninterest-earning assets 202,672 214,077
------------ ------------
Total assets $ 2,478,133 $ 2,534,714
============ ============
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $ 1,355,791 5,317 1.56 $ 1,130,902 6,397 2.24
FHLB advances and other borrowings 720,909 7,910 4.37 959,654 10,275 4.25
------------ ------------ ---- ------------ ------------ ----
Total interest-bearing liabilities 2,076,700 13,227 2.53 2,090,556 16,672 3.16
------------ ---- ------------ ----
Noninterest-bearing liabilities (5) 190,930 258,293
------------ ------------
Total liabilities 2,267,630 2,348,849
Stockholders' equity 210,503 185,865
------------ ------------
Total liabilities and stockholders'
equity $ 2,478,133 $ 2,534,714
============ ============
Net interest rate spread(6) $ 13,701 2.20% $ 15,690 2.42%
============ ==== ============ ====
Net interest margin (7) 2.40% 2.68%
==== ====
Ratio of interest-earning assets to interest-
bearing liabilities 109.57% 111.01%
============ ============
10
FOR THE NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------------
2003 2002
--------------------------------- -------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------------------------------- -------------------------------
(DOLLARS IN THOUSANDS)
Assets:
Interest-earning assets:
Loans receivable, net and
mortgage loans held for sale (1) $1,628,111 $ 66,302 5.43% $1,326,233 $ 64,920 6.53%
Investment securities (2) 93,644 2,053 2.92 126,135 4,476 4.71
Mortgage-backed securities (3) 661,282 18,901 3.81 753,920 27,617 4.88
---------- ---------- ------- ---------- -------- -------
Total interest-earning assets 2,383,037 87,256 4.88 2,206,288 97,013 5.86
---------- ------- -------- -------
Noninterest-earning assets 196,335 220,253
---------- ----------
Total assets $2,579,372 $2,426,541
========== ==========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Deposits (4) $1,338,601 16,751 1.67 $1,149,734 21,253 2.45
FHLB advances and other borrowings 815,749 25,176 4.11 889,959 31,339 4.67
---------- ---------- ------- ---------- -------- -------
Total interest-bearing liabilities 2,154,350 41,927 2.59 2,039,693 52,592 3.42
---------- ------- -------- -------
Noninterest-bearing liabilities (5) 221,766 213,376
---------- ----------
Total liabilities 2,376,116 2,253,069
Stockholders' equity 203,256 173,472
---------- ----------
Total liabilities and stockholders'
equity $2,579,372 $2,426,541
========== ==========
Net interest rate spread (6) $ 45,329 2.29% $ 44,421 2.44%
========== ======= ======== =======
Net interest margin (7) 2.53% 2.67%
======= =======
Ratio of interest-earning assets to interest-
bearing liabilities 110.62% 108.17%
========== ==========
------------------------
(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 $275,000 for the third
quarter of fiscal year 2004, compared to $150,000 for the third quarter of
fiscal year 2003. For the first nine months of fiscal year 2004, the provision
for loan losses was $650,000, compared to $400,000 for the first nine months of
fiscal year 2003. These provisions were based primarily on management's
assessment of several key factors, including portfolio growth and composition
changes, charge-offs, internal loan review classifications, and current economic
conditions. For additional information on the amount of the allowance and the
process for evaluating its adequacy, see "Financial Condition -- Asset Quality
-- Allowance for Loan Losses."
NON-INTEREST INCOME
Non-interest income increased $3.0 million, or 27%, to $14.0 million
for the third quarter of fiscal year 2004 from $11.1 million for the third
quarter of fiscal year 2003, due primarily to increases of $4.0 million in gain
on sale of investment securities available for sale, and $793,000 in loan
servicing income, partially offset by a decrease of $1.9 million in gain on sale
of mortgage loans. For the first nine months of fiscal year 2004, non-interest
income increased $10.8 million, or 39%, to $38.9 million from $28.1 million for
the first nine months of fiscal year 2003, due primarily to increases of $4.5
million in gain on sale of investment securities available for sale, $3.2
million in gain on sale of mortgage loans, and $1.8 million in loan servicing
income.
The decrease in gain on sale of mortgage loans for the third quarter
was due primarily to a lower volume of loans originated for sale, partially
offset by changes in fair value of derivative instruments utilized in secondary
market hedging activities, as required by SFAS No. 133, that resulted in an
addition to the gain of $1.3 million for the third quarter of fiscal year 2004,
compared to a reduction of $582,000 for the third quarter of fiscal year 2003.
This $1.3 million addition to the gain in the third quarter of fiscal year 2004
reflected declines in commitments to originate mortgage loans for sale and
commitments to sell mortgage loans. The increase in gain on sale of mortgage
loans for the first nine months was due primarily to a higher volume of loans
originated for sale, and changes in fair value of derivative
11
instruments utilized in secondary market hedging activities that resulted in an
addition to the gain of $388,000 for first nine months of fiscal year 2004,
compared to a reduction of $420,000 for the first nine months of fiscal year
2003. In accordance with generally accepted accounting principles, the Company
has not recognized $160,000 of unrealized gains as of December 31, 2003 on
mortgage loans held for sale that are carried at the lower of cost or market
value.
The increase in loan servicing income for the third quarter of fiscal
year 2004 was due primarily to a $1.2 million addition to the valuation
allowance for mortgage servicing rights for the third quarter of fiscal year
2003. No valuation allowance adjustments were required for the third quarter of
fiscal year 2004. The increase in loan servicing income for the first nine
months was due primarily to a $1.4 million addition to the valuation allowance
offset by a $1.2 million recovery for the first nine months of fiscal year 2004,
compared to a $2.6 million addition to the valuation allowance for the first
nine months of fiscal year 2003. The valuation allowance adjustments were based
on estimated impairment due to a combination of actual payoff experience and
prepayment forecasts for the applicable periods. The recovery in the second
quarter of fiscal year 2004 resulted from an increase in the present value of
the Company's mortgage servicing rights. Amortization of mortgage servicing
rights totaled $903,000 for the third quarter of fiscal year 2004 and $2.5
million for the first nine months of fiscal year 2004, compared to $785,000 and
$2.3 million for the respective periods of fiscal year 2003.
NON-INTEREST EXPENSE
Non-interest expense increased $4.6 million, or 30%, to $20.0 million
for the third quarter of fiscal year 2004 from $15.4 million for the third
quarter of fiscal year 2003, due primarily to increases of $3.0 million in
compensation and benefits and $1.4 million in other non-interest expense. For
the first nine months of fiscal year 2004, non-interest expense increased $11.2
million, or 25%, to $55.7 million from $44.4 million for the first nine months
of fiscal year 2003, due primarily to increases of $8.4 million in compensation
and benefits and $2.5 million in other non-interest expense. The increase in
non-interest expense for the third quarter was due primarily to expenses related
to the pending acquisition by Webster totaling approximately $2.7 million. In
addition, the increase in non-interest expense for the first nine months was due
primarily to higher costs related to growth in mortgage originations, the net
accounting impact of market price increases of FAB stock held by certain
employee benefit plans, and higher employee health and pension plan costs.
INCOME TAXES
Income tax expense decreased $1.3 million, or 31%, to $3.0 million for
the third quarter of fiscal year 2004 from $4.3 million for the third quarter of
fiscal year 2003. For the first nine months of fiscal year 2004, income tax
expense increased $630,000, or 6%, to $11.3 million from $10.7 million for the
first nine months of fiscal year 2003. The Company's effective tax rate
increased to 40.4% for the first nine months of fiscal year 2004 from 38.6% for
the first nine months of fiscal year 2003, due primarily to the effects of
increased appreciation of FAB stock contributed to the ESOP that is not tax
deductible.
12
FINANCIAL CONDITION
OVERVIEW
Total assets increased $142.0 million, or 6%, to $2.556 billion at
December 31, 2003 from $2.414 billion at March 31, 2003, due primarily to an
increase of $153.5 million in loans receivable, net.
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated:
DECEMBER 31, 2003 MARCH 31, 2003
--------------------- -----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Mortgage Loans:
Residential $ 660,357 46.20% $ 601,063 47.21%
Commercial real estate 192,608 13.47 142,974 11.23
Construction and land 66,165 4.63 61,698 4.85
---------- -------- ---------- ----------
Total mortgage loans 919,130 64.30 805,735 63.29
---------- -------- ---------- ----------
Commercial Loans 275,683 19.29 283,137 22.24
---------- -------- ---------- ----------
Consumer Loans:
Home equity lines 194,513 13.61 140,189 11.01
Second mortgages 31,505 2.20 32,914 2.58
Other consumer loans 8,650 0.60 11,158 0.88
---------- -------- ---------- ----------
Total consumer loans 234,668 16.41 184,261 14.47
---------- -------- ---------- ----------
Total loans receivable 1,429,481 100.00% 1,273,133 100.00%
======== ==========
Less:
Allowance for loan losses (19,362) (19,335)
Undisbursed proceeds of
construction mortgages
in process (21,626) (17,752)
Purchase premium on
loans, net 2,522 3,377
Deferred loan origination
costs, net 3,767 1,908
---------- ----------
Loans receivable, net $1,394,782 $1,241,331
========== ==========
Mortgage loan originations totaled $2.668 billion for the first nine
months of fiscal year 2004, including $2.326 billion originated for sale of
which $1.829 billion were originated by PMC. During this time, $2.492 billion of
mortgage loans were sold in the secondary market, including $1.929 billion sold
servicing released by PMC.
Mortgage loans sold to others and serviced by the Bank on a fee basis
under various agreements decreased $126.0 million, or 9%, to $1.286 billion at
December 31, 2003 from $1.412 billion at March 31, 2003, due primarily to
refinancing activity. Loans serviced for others are not included in the
Consolidated Balance Sheets. Mortgage servicing rights, net of the valuation
allowance, increased $1.8 million, or 30%, to $7.7 million at December 31, 2003,
from $6.0 million at March 31, 2003. The valuation allowance related to the
impairment of mortgage servicing rights decreased $1.0 million to $2.1 million
at December 31, 2003, from $3.1 million at March 31, 2003, due to a valuation
recovery of $1.2 million and a write-down of $1.2 million for permanent
impairment, less an addition for estimated impairment of $1.4 million during the
first nine months of fiscal year 2004. Mortgage servicing rights were 0.60% of
loans serviced for others at December 31, 2003, compared to 0.42% at March 31,
2003.
Balance sheet growth during the first nine months of fiscal year 2004
was primarily funded by increases of $98.5 million in FHLB advances and other
borrowings, and $39.0 million in deposit balances. The 3% increase in deposits,
to $1.466 billion at December 31, 2003, included increases in demand deposits of
$27.7 million, or 5%, and savings deposits of $29.4 million, or 10%, partially
offset by a decline in time deposits of $18.1 million, or 3%. The Company's
demand and savings accounts, or core deposits, were 62.6% of total deposits at
December 31, 2003, compared to 60.3% at March 31, 2003.
13
Total stockholders' equity increased $36.0 million, or 19%, to $229.1
million at December 31, 2003, from $193.1 million at March 31, 2003. The
increase was due primarily to $16.7 million in net income and increases of $24.8
million from common shares issued for stock options exercised, including related
tax benefits, and $6.1 million from other stock-based employee benefit plans,
partially offset by $6.4 million in dividends paid to stockholders and a $5.2
million decrease in the fair market value of available for sale securities, net
of tax. Stockholders' equity to assets was 8.96% at December 31, 2003, compared
to 8.00% at March 31, 2003. Book value per share increased to $12.30 at December
31, 2003 from $11.63 at March 31, 2003. Tangible book value per share increased
to $9.51 at December 31, 2003 from $8.40 at March 31, 2003.
ASSET QUALITY
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans and real estate owned ("REO"). The Company ceases to
accrue interest on loans 90 days or more past due and charges off all accrued
interest. Foregone interest on non-accrual loans was $117,000 for the three
months ended December 31, 2003 and $136,000 for the nine months ended December
31, 2003.
DECEMBER 31, MARCH 31,
2003 2003
------------- -------------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Mortgage loans:
One-to-four family.............................................. $ 982 $ 1,699
Commercial real estate.......................................... 7,643 96
------------- -------------
Total mortgage loans....................................... 8,625 1,795
------------- -------------
Commercial loans................................................... 1,065 1,388
------------- -------------
Consumer loans:
Second mortgages................................................ 97 107
Other consumer loans............................................ 20 15
------------- -------------
Total consumer loans....................................... 117 122
------------- -------------
Total non-accrual loans.................................... 9,807 3,305
REO, net (1)......................................................... 140 194
------------- -------------
Total non-performing assets................................ $ 9,947 $ 3,499
============= =============
Allowance for loan losses as a percent of loans (2).................. 1.37% 1.53%
Allowance for loan losses as a percent of non-performing loans (3)... 197% 585%
Non-accrual loans as a percent of loans (2)(3)....................... 0.69% 0.26%
Non-performing assets as a percent of total assets................... 0.39% 0.14%
--------------------------
(1) REO balances are shown net of related valuation allowances.
(2) Loans includes loans receivable, net, excluding allowance for loan
losses.
(3) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Company as presenting
uncertainty with respect to the collectability of interest or
principal.
The increase of $6.4 million in non-performing assets during the first
nine months of fiscal year 2004 was due primarily to one non-delinquent
commercial real estate loan placed on non-accrual status during the third
quarter of fiscal year 2004 based on the Company's uncertainty that it will
collect all amounts due under the terms of the loan.
Allowance for Loan Losses. The allowance for loan losses is based on
management's ongoing review and estimate of the credit losses inherent in the
loan portfolio. Management's methodology to estimate loss exposure inherent in
the portfolio includes analysis of individual loans deemed to be impaired,
performance of individual loans in relation to contract terms, and allowance
allocations for various loan types based on payment status or loss experience.
An unallocated allowance is also maintained within an established range based on
management's assessment of many factors including current market conditions,
trends in loan delinquencies and charge-offs, the volume and mix of new
originations, and the current type, mix, changing risk profiles and balance of
the portfolio. In addition, the OTS, as an integral part of their examination
process, periodically reviews the Company's allowance for loan losses. The OTS
and the FDIC may require the Company to adjust the allowance for loan losses
based upon judgments different from those of management.
14
The allowance for loan losses totaled $19.4 million at December 31,
2003, compared to $19.3 million at March 31, 2003. The following table sets
forth activity in the Company's allowance for loan losses for the periods
indicated:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period........................ $ 19,318 $ 19,321 $ 19,335 $ 19,237
Provision for loan losses............................. 275 150 650 400
--------- --------- --------- ---------
Charge-offs:
One-to-four family mortgage loans.................. - (60) (63) (70)
Commercial loans................................... (191) (117) (489) (203)
Consumer Loans:
Home equity lines............................... (5) (8) (16) (31)
Other consumer.................................. (38) (30) (87) (81)
--------- --------- --------- ---------
Total (234) (215) (655) (385)
Recoveries............................................ 3 11 32 15
--------- --------- --------- ---------
Balance at end of period.............................. $ 19,362 $ 19,267 $ 19,362 $ 19,267
========= ========= ========= =========
Ratio of net charge-offs during the period to
average loans outstanding during the period........ 0.06% 0.07% 0.06% 0.04%
Management was influenced by several key factors as a basis for the
level of the Company's provisions for loan losses, which resulted in the changes
to the provision of loan losses and the allowance for loan losses during the
past year. Although the Company's non-performing loans and charge-offs have
remained low, there has been a shift in the composition of the loan portfolio at
December 31, 2003 as compared to December 31, 2002. The residential mortgage
portfolio has increased due primarily to the origination and retention of
certain adjustable-rate and fixed-rate mortgage loans with terms of 15 years or
less, and high refinancing activity reflecting the low fixed rate environment.
The commercial and consumer loan portfolios have also continued to show
significant growth. Commercial and consumer loans bear a higher degree of risk
than the one-to-four family mortgage loans that make up substantially all of the
Company's residential portfolio. Management also considered internal loan review
classifications and current economic conditions, including unemployment rates in
the Company's key market area of southeastern New England, which could have an
adverse affect on asset quality and result in higher non-performing loans and
charge-offs.
The Company will continue to monitor and modify its allowances for loan
losses as conditions dictate. While management believes the Company's allowance
for loan losses was sufficient to absorb losses inherent in its loan portfolio
at December 31, 2003, no assurances can be given that the Company's level of
allowance for loan losses will be sufficient to cover future loan losses
incurred by the Company or that future adjustments to the allowance for loan
losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for loan losses.
MARKET RISK AND MANAGEMENT OF INTEREST-RATE RISK
The principal market risk affecting the Company is interest-rate risk.
The principal objective of the Company's interest rate risk management function
is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given the Company's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with Board of Directors'
approved guidelines. Through such management, the Company seeks to reduce the
vulnerability of its operations to changes in interest rates. The Company
monitors its interest rate risk as such risk relates to its operating
strategies. The Company's Board of Directors has established an Asset/Liability
Committee, responsible for reviewing its asset/liability policies and interest
rate risk position, which meets on a monthly basis and reports trends and
interest rate risk position to the Board of Directors on a quarterly basis. The
extent of the movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.
The Company has primarily utilized the following strategies to manage
interest rate risk: (1) the origination and retention of certain adjustable-rate
and shorter-term (generally 15 years or less) fixed-rate, one-to-four family
mortgage loans; (2) selling mortgage loans originated for sale in the secondary
market with either servicing rights retained or servicing rights released; and
(3) investing primarily in adjustable-rate mortgage-backed securities and
short-term fixed-rate CMOs. In conjunction with its mortgage banking activities,
the Company uses forward contracts in order to reduce exposure to interest-rate
risk. The Company obtains commitments from investors on a loan-by-loan basis for
mortgage loans sold with servicing rights released. The amount of forward
coverage of the "pipeline" of mortgages is managed on a day-to-day basis, within
Board approved policy guidelines, based on the Company's assessment of the
general direction of interest rates and levels of mortgage origination activity.
In addition, the Company has engaged in interest rate swap agreements, from time
to time, to synthetically lengthen its liability maturities.
15
The Company's interest rate risk is monitored by management through the
use of a model that generates estimates of the change in the Company's net
interest income and net portfolio value ("NPV") over a range of interest rate
scenarios. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts. The NPV ratio, under any interest
rate scenario, is defined as the NPV in that scenario divided by the estimated
market value of assets in the same scenario. The OTS produces a similar analysis
for the Bank using its own model, based upon data submitted in the Bank's
quarterly Thrift Financial Report, the results of which may vary from the
Company's internal model primarily due to differences in assumptions utilized
between the Company's internal model and the OTS model, including estimated loan
prepayment rates, reinvestment rates and deposit renewal rates.
The following table sets forth the Company's estimated NPV and NPV
ratios as of December 31, 2003 and March 31, 2003, as calculated by the Company.
DECEMBER 31, 2003 MARCH 31, 2003
------------------------------- -------------------------------
CHANGE IN ESTIMATED NPV ESTIMATED NPV
INTEREST RATES NET SENSITIVITY NET SENSITIVITY
IN BASIS PORTFOLIO NPV IN BASIS PORTFOLIO NPV IN BASIS
POINTS VALUE RATIO POINTS VALUE RATIO POINTS
-------------- --------- ----- ----------- --------- ----- -----------
(DOLLARS IN THOUSANDS)
300 $ 127,765 5.22% (223) $ 179,199 7.57% 123
200 154,324 6.19 (126) 181,195 7.54 120
100 177,459 6.99 (47) 172,562 7.09 75
Unchanged 192,344 7.46 -- 155,172 6.34 --
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented incorporates an assumption that the composition of the Company's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured, and that a particular change in
interest rates is reflected uniformly across the yield curve regardless of the
term to maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net interest income models provide an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to, and do not, provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, principal and
interest payments on loans and mortgage-backed securities, proceeds from the
sale of loans, FHLB advances, and other borrowings. While maturities and
scheduled amortization of loans are predictable sources of funds, deposit flows
and mortgage prepayments are influenced by general interest rates, economic
conditions and competition. The Bank expects to use deposits, FHLB advances and
other borrowings, and retained earnings to fund asset growth in the future,
depending on market conditions, the pricing of deposit products, and the pricing
of FHLB advances and other borrowings.
The Bank's most liquid assets are cash, short-term investments,
mortgage loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale. The levels of these assets are
dependent on the Bank's operating, financing, lending and investing activities
during any given period. At December 31, 2003, cash, short-term investments,
mortgage loans held for sale, investment securities available for sale, and
mortgage-backed securities available for sale totaled $933.3 million, or 36.5%
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, 2003, the Bank had $800.6 million in
advances outstanding from the FHLB and other borrowings, and an additional
borrowing capacity from the FHLB of $197.2 million including the $25.0 million
line of credit. At December 31, 2003, the portfolio of putable FHLB advances and
putable reverse repurchase agreements totaled $407.5 million, with an average
effective interest rate of 4.50%, and an average life to maturity and estimated
average life of 5.9 years. The estimated average life calculated by the Bank may
or may not mirror the counter-party's actual decision to exercise its option to
terminate the advances. The FHLB is required by regulation to offer replacement
funding to the Bank if the FHLB terminates a putable advance prior to the
maturity date of the advance, provided that the Bank is able to satisfy the
FHLB's normal credit and collateral requirements. Such replacement funding would
be for the remaining maturity of the putable advance, and at a market interest
rate or a predetermined interest rate agreed upon between the Bank and the FHLB.
At December 31, 2003, the Company deconsolidated Capital Trust II.
Capital Trust II had $10.0 million of 11.695% trust preferred securities
outstanding, with an average interest cost of 10.29%, that mature in July 2030
unless the Company elects and obtains regulatory approval to accelerate the
maturity date to as early as July 2010.
16
At December 31, 2003, the Bank had commitments to originate loans and
unused outstanding lines of credit and undistributed balances of construction
loans totaling $387.8 million. The Bank anticipates that it will have sufficient
funds available to meet its current loan origination commitments. Certificate of
deposit accounts scheduled to mature in less than one year from December 31,
2003 totaled $400.9 million. Based on its prior experience and other factors,
the Bank currently expects that it will retain a majority of maturing
certificate accounts.
At December 31, 2003, the consolidated capital to total assets ratio of
the Company was 8.59%. During fiscal year 2004, the Company paid a quarterly
cash dividend to stockholders of $0.10 per share in the first quarter and $0.13
per share in the second and third quarters, and announced the declaration of a
cash dividend of $0.13 per share to stockholders for payment in the fourth
quarter. The Company's primary sources of funding for dividends, and payments
for periodic stock repurchases, have been dividends from the Bank and proceeds
from exercises of employee stock options. The Bank's ability to pay dividends
and other capital distributions to the Company is generally limited by OTS
regulations.
As of December 31, 2003, the Company had repurchased 360,616 shares of
Company stock at an average price of $7.09 per share, or 56% of the 640,056
shares authorized for repurchase under the Company's seventh stock repurchase
program announced on September 29, 2000. There was no stock repurchase activity
during the first nine months of fiscal year 2004. The Company has repurchased
4,973,806 shares since May 15, 1998.
At December 31, 2003, the Bank exceeded all of its regulatory capital
requirements. The Bank's Tier 1 core capital of $159.7 million, or 6.42% of
total adjusted assets, was above the required level of $99.6 million, or 4.0%;
risk-based capital of $170.8 million, or 11.69% of risk-weighted assets, was
above the required level of $116.9 million or 8.0%, and Tier 1 risk-based
capital of $159.7 million, or 10.59% of risk-weighted assets, was above the
required level of $58.4 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, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the Section of Item 2 captioned, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition
- Market Risk and Management of Interest-Rate Risk" for quantitative and
qualitative information about market risk and its potential effect on the
Company.
ITEM 4. CONTROLS AND PROCEDURES.
The Company's management, including the Company's principal executive
officer and principal financial officer, have evaluated the effectiveness of the
Company's "disclosure controls and procedures," as such term is defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended,
(the "Exchange Act"). Based upon their evaluation, the principal executive
officer and principal financial officer concluded that, as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the Company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure. In
addition, based on that evaluation, no change in the Company's internal control
over financial reporting occurred during the quarter ended December 31, 2003
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the normal course of the Company's business, there are various
outstanding legal proceedings. In the opinion of management, based on
consultation with legal counsel, the financial position of the Company will not
be affected materially as a result of the outcome of such legal proceedings.
In January 2003, a claim was filed against the Trust Company, of which
the Company owns a 65% equity interest, seeking recovery of approximately $1
million in unidentifiable damages resulting from the foreclosure of a property
the mortgage of which was held by an account holder of the Trust Company. During
the third quarter of fiscal year 2004, the claim was settled without the Trust
Company incurring any expenses or losses in connection with the action.
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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
2.1 Agreement and Plan of Merger by and among Webster Financial
Corporation and FIRSTFED AMERICA BANCORP, INC. (1)
3.1 Certificate of Incorporation of FIRSTFED AMERICA BANCORP,
INC. (2)
3.2 Bylaws of FIRSTFED AMERICA BANCORP, INC. (3)
4.0 Stock Certificate of FIRSTFED AMERICA BANCORP, INC. (2)
10.1 Employment Agreement by and between Robert F. Stoico,
FIRSTFED AMERICA BANCORP, INC., First Federal Bank of
America and Webster Financial Corporation (filed herewith)
10.2 Employment Agreement by and between Edward A. Hjerpe, III,
FIRSTFED AMERICA BANCORP, INC., First Federal Bank of
America and Webster Financial Corporation (filed herewith)
10.3 Employment Agreement by and between Kevin J. McGillicuddy,
FIRSTFED AMERICA BANCORP, INC., First Federal Bank of
America and Webster Financial Corporation (filed herewith)
10.4 Employment Agreement by and between Frederick R. Sullivan,
FIRSTFED AMERICA BANCORP, INC., First Federal Bank of
America and Webster Financial Corporation (filed herewith)
10.5 Employment Agreement by and between Terrence M. Tyrrell,
FIRSTFED AMERICA BANCORP, INC., First Federal Bank of
America and Webster Financial Corporation (filed herewith)
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
-------------------------
(1) Incorporated by reference into this document from the Exhibit to the Form
8-K filed by Webster Financial Corporation (Commission File Number
001-31486) on November 4, 2003.
(2) Incorporated by reference into this document from the Exhibits to Form S-1,
Registration Statement, and any amendments thereto, filed on September 27,
1996, Registration No. 333-12855.
(3) Incorporated by reference into this document from the Exhibits to the
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.
b) Reports on Form 8-K
A current report on Form 8-K was filed on October 9, 2003, attaching a
press release dated October 7, 2003 announcing that the Company had reached
a definitive agreement to be acquired by Webster Financial Corporation and
certain other information regarding the Merger.
A current report on Form 8-K was filed on November 5, 2003 that
incorporated by reference the Agreement and Plan of Merger to the Current
Report on Form 8-K filed by Webster Financial Corporation on November 4,
2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRSTFED AMERICA BANCORP, INC.
Registrant
Date: February 12, 2004 /s/ Robert F. Stoico
--------------------------------
Robert F. Stoico
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: February 12, 2004 /s/ Edward A. Hjerpe, III
--------------------------------
Edward A. Hjerpe, III
Executive Vice President, Chief
Operating Officer and Chief
Financial Officer
(Principal Accounting and Financial Officer)
19