<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended March 31, 1997
Commission File Number: 0-19609
FirstFed Bancorp, Inc.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-1048648
- ---------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) identification No.)
1630 Fourth Avenue North
Bessemer, Alabama 35020
- ---------------------------------------------- -------------------
(Address of principal executive office) Zip Code
Registrant's telephone number, including area code: (205) 428-8472
-------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
--------------------------------
(Title of Class)
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 twelve months and (2) has been subject to such filing requirements
for the past ninety days. YES X N0
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K [ X ].
---
As of June 17, 1997, there were issued and outstanding 1,235,782 shares of the
registrant's common stock.
The aggregate market value of the voting stock held by non-affiliates of the
registrant (i.e., persons other than directors, executive officers and 10%
stockholders of the registrant), based on the closing sales price of the
registrant's common stock as quoted on the NASDAQ SmallCap Market June 17, 1997,
was $22,089,603.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for the year ended March 31,
1997, are incorporated by reference into Parts I, II and IV of this
Form 10-K.
(2) Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
are incorporated by reference into Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
----
PART I.
<S> <C> <C>
ITEM I. Business
The Company............................................... 1
First Federal Savings Bank................................ 1
First State Bank of Bibb County........................... 1
Average Balances, Yields Earned and Rates Paid............ 3
Rate/Volume Analysis...................................... 4
Asset/Liability Management................................ 5
Lending Activities........................................ 7
Mortgage-Backed Securities and Other
Investment Activities.................................. 14
Deposits, Borrowings and Other
Sources of Funds....................................... 17
Competition............................................... 18
Regulation, Supervision and Governmental Policy........... 18
Taxation.................................................. 26
Personnel................................................. 26
ADDITIONAL ITEM. Executive Officers................................. 26
ITEM 2. Properties................................................. 27
ITEM 3. Legal Proceedings.......................................... 27
ITEM 4. Submission of Matters to a Vote of Security Holders........ 28
PART II.
ITEM 5. Market for the Registrant's Common Stock and
Related Stockholder Matters............................... 28
ITEM 6. Selected Financial Data.................................... 28
ITEM 7. Management's Discussion and Analysis....................... 28
ITEM 8. Financial Statements and Supplementary Data................ 28
ITEM 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure....................... 28
PART III.
ITEM 10. Directors and Executive Officers of the Registrant......... 28
ITEM 11. Executive Compensation..................................... 28
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 28
ITEM 13. Certain Relationships and Related Transactions............. 29
PART IV.
ITEM 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-k....................................... 29
</TABLE>
i.
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
THE COMPANY
FirstFed Bancorp, Inc. (the "Company") is a Delaware corporation that serves as
the holding company for First Federal Savings Bank ("First Federal"), a
federally-chartered savings bank, and First State Bank of Bibb County, an
Alabama state-chartered commercial bank ("First State"). First State is a
wholly-owned subsidiary of First State Corporation ("FSC") which was acquired by
the Company in January 1996. The discussion herein of First State relates to
its operations since its acquisition by the Company. First Federal and First
State are referred to herein as the "Banks".
The Company's assets consist primarily of its investment in the Banks, liquid
investments and real estate held for investment purposes. It engages in no
significant activity, except through the Banks' operations. The Company had
total assets of $178,124,000, total deposits of $157,970,000 and stockholders'
equity of $17,923,000 at March 31, 1997.
The Company's executive office is located at the main office of First Federal at
1630 Fourth Avenue North, Bessemer, Alabama 35020. The telephone number is
(205) 428-8472.
FIRST FEDERAL SAVINGS BANK
First Federal was organized in 1936 as a federally chartered mutual savings and
loan association under the name First Federal Savings and Loan Association of
Bessemer. In 1991, First Federal became a federally chartered mutual savings
bank and changed its name to First Federal Savings Bank. On December 9, 1991,
First Federal converted from a federally chartered mutual savings bank to a
federally chartered stock savings bank and simultaneously reorganized as a
wholly-owned subsidiary of the Company.
First Federal's principal business consists of attracting deposits from the
general public and investing those deposits, together with funds generated from
operations and from principal and interest payments on loans and mortgage-backed
securities, primarily in one-to-four-family residential mortgage loans, and to a
lesser extent, commercial mortgage loans, commercial loans and consumer loans.
First Federal is a member of the Federal Home Loan Bank ("FHLB") System and its
deposit accounts are insured by the Savings Association Insurance Fund ("SAIF")
of the Federal Deposit Insurance Corporation ("FDIC") up to the maximum amount
allowable by the FDIC. First Federal is subject to regulation, examination and
supervision by the Office of Thrift Supervision ("OTS") and the FDIC. See
"Regulation and Supervision of the Banks."
First Federal currently conducts business from four locations in Jefferson and
Shelby Counties, Alabama, consisting of its home office in Bessemer and three
other branches, one each in Pelham, Hueytown and Hoover. Each branch is a full
service facility. A new branch in Vance, Alabama, which is located in
Tuscaloosa County is currently under construction and will open in July 1997.
FIRST STATE BANK OF BIBB COUNTY
First State was formed as a state member bank in 1965 under the name The Bank of
West Blocton. In 1979, the name was changed to First State Bank of Bibb County.
FSC was formed in 1985 as a locally-owned stock corporation and purchased First
State.
First State currently conducts business from three full service locations in
Bibb County, Alabama, consisting of its main office in West Blocton and two
other branches, one each in Centreville and Woodstock. First State's primary
business consists of attracting deposits from the community and investing those
deposits, together with funds generated from operations, commercial loans,
consumer loans and one-to-four family residential mortgage loans.
1
<PAGE>
First State is a member of the Federal Reserve System and its deposit accounts
are insured by the Bank Insurance Fund ("BIF") of the FDIC up to the maximum
amount allowed by the FDIC. First State is subject to regulation, examination
and supervision by the Board of Governors of the Federal Reserve System (the
"FRB") and the State Banking Department of the State of Alabama (the "Banking
Department"). See "Regulation and Supervision of the Banks."
Earnings of First Federal and First State are primarily dependent upon net
interest income, which is the difference between the income derived from
interest-earning assets, such as loans, mortgage backed securities and
investment securities, and the interest expense incurred on interest-bearing
liabilities, primarily deposit accounts. Net interest income is affected by (i)
the difference ("interest rate spread") between rates of interest earned on
interest-earning assets and rates of interest paid on its interest-bearing
liabilities and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income.
2
<PAGE>
AVERAGE BALANCES, YIELDS EARNED AND RATES PAID
The following tables set forth certain information relating to the Company's
consolidated statements of financial condition and consolidated statements of
income for each year in the three year period ended March 31, 1997, and reflects
the average yield on assets and average cost of liabilities for the periods
indicated. Average balances are derived subject to certain adjustments from
daily balances. The average balances of loans include non-accrual delinquent
loans. For further discussion see "Management's Discussion and Analysis" in the
Company's 1997 Annual Report to Stockholders (the "Annual Report").
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------ -------------------------
Average Average Average
Balance Interest Balance Interest Balance Interest
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest-earning assets:
Mortgage loans $ 115,356 $ 9,831 $ 102,420 $ 8,147 $ 91,550 $ 6,791
Other loans 14,164 1,508 12,333 1,269 5,467 457
Mortgage-backed securities 8,489 536 4,982 345 5,938 385
Securities 17,329 1,047 8,144 496 8,984 594
Other interest-earning assets 8,479 399 6,223 285 2,252 102
------- -------- -------- -------- -------- --------
Total interest-earning assets 163,817 13,321 134,102 10,542 114,191 8,329
Non-interest-earning assets 10,195 4,997 4,344
------- -------- --------
Total assets $ 174,012 $ 139,099 $ 118,535
======= ======== ========
Interest-bearing liabilities:
Deposits $152,254 $ 7,208 $115,426 $ 5,612 $ 95,819 $ 3,684
Other borrowings 1,435 98 2,904 179 2,950 176
------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 153,689 7,306 118,330 5,791 98,769 3,860
Non-interest bearing liabilities 2,849 2,986 1,121
------- -------- -------- -------- -------- --------
$ 6,015 $ 4,751 $ 4,469
======== ======== ========
Total liabilities 156,538 121,316 99,890
Stockholders' equity 17,474 17,783 18,645
------- -------- --------
Total liabilities and stockholders' equity $174,012 $139,099 $118,535
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
March 31,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Yield on:
Mortgage loans 8.52% 7.95% 7.42%
Other loans 10.65 10.29 8.36
Mortgage-backed securities 6.31 6.92 6.48
Securities 6.04 6.09 6.61
Other interest-earning assets 4.71 4.58 4.53
All interest-earning assets 8.13 7.86 7.29
Rate paid on:
Deposits 4.73 4.86 3.84
Other borrowings 6.83 6.16 5.97
All interest-bearing liabilities 4.75 4.89 3.91
Interest rate spread (1) 3.38% 2.97% 3.38%
======== ======== =======
Net yield (2) 3.67% 3.54% 3.91%
======== ======== =======
</TABLE>
(1) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average rate of total interest-bearing
liabilities.
(2) Net yield represents net interest income as a percentage of average
interest-earning assets.
3
<PAGE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1997 March 31, 1996
Versus Versus
March 31, 1996 March 31, 1995
-------------------------- ----------------------------
Volume Rate Net Volume Rate Net
-------- ------ -------- ------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest earned on:
Interest-earning assets-
Mortgage loans $ 1,074 $610 $ 1,684 $ 847 $ 509 $ 1,356
Other loans 193 46 239 686 126 812
Mortgage-backed securities 218 (27) 191 (69) 29 (40)
Securities 555 (4) 551 (53) (45) (98)
Other interest-earning assets 106 8 114 182 1 183
------- ---- ------- ------ ------- -------
Total 2,146 633 2,779 1,593 620 2,213
------- ---- ------- ------ ------- -------
Decrease (increase) in interest paid on:
Interest-bearing liabilities-
Deposits (1,742) 146 (1,596) (839) (1,089) (1,928)
Other borrowings 106 (25) 81 10 (13) (3)
------- ---- ------- ------ ------- -------
Total (1,636) 121 (1,515) (829) (1,102) (1,931)
------- ---- ------- ------ ------- -------
Net (decrease) increase in net
interest income $ 510 $754 $ 1,264 $ 764 $ (482) $ 282
======= ==== ======= ====== ======= =======
</TABLE>
4
<PAGE>
ASSET/LIABILITY MANAGEMENT
The Banks, like other financial institutions, are subject to interest rate risk
to the degree that their interest-bearing liabilities with short and medium term
maturities mature or reprice more rapidly, or on a different basis than its
interest-earning assets. The Banks have employed various strategies intended to
minimize the adverse effect of interest rate risk on future operations by
providing a better match between the interest rate sensitivity of its assets and
liabilities. The Banks' strategies are intended to stabilize net interest
income for the long-term by protecting its interest rate spread against
fluctuations in interest rates. Such strategies include the origination for
portfolio of adjustable-rate mortgage ("ARM") loans secured by one-to-four-
family residences and, to a lesser extent, the origination of consumer and other
loans with greater interest rate sensitivities than long-term fixed-rate
residential mortgage loans. Other strategies include maintaining a significant
portion of liquid assets, such as cash and interest-bearing deposits in other
institutions, and undertaking to maintain a stable core deposit base with a
relatively high percentage of low cost deposits. The matching of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific period if it will mature or reprice within that
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest-earning assets maturing or repricing within a specific
time period and the amount of interest-bearing liabilities maturing or repricing
within that time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities, and is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Generally, during a period of rising interest rates, a negative gap would
adversely affect net interest income while a positive gap would result in an
increase in net interest income, while conversely during a period of falling
interest rates, a negative gap would result in an increase in net interest
income and a positive gap would negatively affect net interest income. At March
31, 1997, the Banks' gap is negative and a period of rising interest rates could
have an adverse effect on earnings. However, management believes that the
Banks' strong capital positions are sufficient to protect the Banks from the
negative effects on net income of interest rate changes.
Certain shortcomings are inherent in any method of any gap analysis, including
that presented in the following table. For example, the analysis does not
consider prepayments of loans or early withdrawals of certificates of deposits.
In addition, the method used assumes that each passbook and transaction account
will be withdrawn in favor of an account with a more favorable interest rate
within 90 days. This assumption maximizes the amount of liabilities repricing
during such period. Also, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Moreover, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. A change in interest rates may cause assets and liabilities to
reprice or mature on a basis significantly different from their contractual
terms.
Historically, the Banks have not experienced the level of volatility in net
interest income indicated by the cumulative one-year gap ratio. The primary
reason for this is that the Banks have a relatively large base of deposit
products that do not reprice on a contractual basis. These deposit products are
primarily traditional passbook accounts and transaction interest-bearing
accounts. Balances for the accounts are reported in the "within 90 days"
repricing category and comprise 30.1% of total interest-bearing liabilities.
The rates paid on these accounts are typically sensitive to changes in market-
interest rates only under certain conditions, such as market interest rates
falling to historically low levels.
5
<PAGE>
Interest Rate Sensitivity Analysis
- ----------------------------------
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1997, which are expected
to reprice or mature in each of the future time periods shown. The amount of
assets and liabilities shown which reprice or mature during a particular period
was determined in accordance with the contractual terms of the asset or the
liability, except as stated below. Loans that have adjustable interest rates are
shown as being due in the period during which the interest rates are next
subject to change. No prepayment assumptions have been applied to fixed-rate
loans. Certificates of deposit are shown as being due in the period of maturity.
Passbook and transaction accounts are shown as repricing within 90 days. The
assumption that assets and liabilities will reprice or mature in accordance with
their contractual terms should not be considered indicative of the actual
results that may be experienced by the Bank. The Company's outside data
processor is not providing the maturity and repricing of loans less than 90
days. The cost for manually determining the information exceeds the benefits
received.
<TABLE>
<CAPTION>
At March 31, 1997
-------------------------------------------------------------------
Within 91 To 181 Days 1 Year 3 Year
90 Days 180 Days To 1 Year To 3 Year To 5 Year
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable (3) $ 28,996 $ 16,148 $33,292 $27,800 $ 7,006
Mortgage-backed securities 5,971 --- 4,228 -- 1,242
Securities (1)(2) 1,700 251 3,293 5,398 3,355
Cash investments 8,554 -- -- -- --
-------- -------- ------- ------- -------
Total interest-earning
assets 45,221 16,399 40,813 33,198 11,603
-------- -------- ------- ------- -------
Interest-bearing
liabilities:
Passbook accounts (4) 26,093 -- -- -- --
Transaction accounts (4) 19,150 -- -- -- --
Certificate accounts 12,790 31,814 21,423 26,007 13,013
-------- -------- ------- ------- -------
Total interest-bearing
liabilities 58,033 31,814 21,423 26,007 13,013
-------- -------- ------- ------- -------
Interest sensitivity
gap per period $(12,812) $(15,415) $19,390 $ 7,191 $(1,410)
======== ======== ======= ======= =======
Cumulative interest
sensitivity gap $(12,812) $(28,227) $(8,837) $(1,646) $(3,056)
======== ======== ======= ======= =======
Percentage of cumulative
gap to total assets (7.19)% (15.85)% (4.96)% (0.92)% (1.72)%
Cumulative ratio of
interest-sensitive assets
to interest-sensitive
liabilities 77.92% 68.58% 92.06% 98.80% 97.97%
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1997
------------------------------------------------
5 Year 10 Year
to 10 Year To 20 Year 20 Years Total
---------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (3) $ 3,731 $ 7,720 $ 5,559 $130,252
Mortgage-backed securities 322 -- 1,566 13,329
Securities (1)(2) 1,769 -- 937 16,703
Cash investments -- -- -- 8,554
---------- ----------- ----------- ----------
Total interest-earning
assets 5,822 7,720 8,062 168,838
---------- ----------- ----------- ----------
Interest-bearing
liabilities:
Passbook accounts (4) -- -- -- 26,093
Transaction accounts (4) -- -- -- 19,150
Certificate accounts 25 2 -- 105,074
---------- ----------- ----------- ----------
Total interest-bearing
liabilities 25 2 -- 150,317
---------- ----------- ----------- ----------
Interest sensitivity
gap per period $ 5,797 $ 7,718 $ 8,062 $ 18,521
========== =========== =========== ==========
Cumulative interest
sensitivity gap $ 2,741 $10,459 $18,521 $ 18,521
========== =========== =========== ==========
Percentage of cumulative
gap to total assets 1.54 5.87% 10.40% 10.40%
Cumulative ratio of
interest-sensitive
assets to interest-
sensitive liabilities 101.82 106.96% 112.32% 112.32%
</TABLE>
(1) Includes $326 of FHLB-Atlanta stock, which represents the stock balance in
excess of the amount required to be held, as due in the within 90 day
category. The FHLB Atlanta stock required to be owned by the Bank is shown
as due in more than twenty years.
(2) Includes $10,330 in securities available for sale; such securities are
reflected in the above table based on their contractual maturity.
(3) Includes $331 in loans held for sale; such loans are reflected in the above
table in the within 90 days category.
(4) Assumes that each passbook and transaction account will be withdrawn in
favor of an account with a more favorable interest rate within 90 days.
This assumption maximizes the amount of liabilities repricing during such
period. Normally, the rates paid on these accounts are typically not
sensitive to changes in market interest rates. If these amounts were spread
based on expected repricing characteristics, the cumulative gap would have
been significantly reduced.
6
<PAGE>
LENDING ACTIVITIES
General
- -------
The Banks' loan portfolios are comprised primarily of first mortgage loans
secured by one-to four-family residences, a majority of which are adjustable
rate, conventional mortgage loans. At March 31, 1997, 75.25% of the total loan
portfolio consisted of one-to-four family residential loans, of which
approximately 76% were ARM loans.
The Banks originate loans on real estate located in their primary lending areas
in West Jefferson, Northern Shelby and Bibb Counties of Alabama, which include
Bessemer, Pelham, Hueytown, Hoover, West Blocton, Centreville, and the western
suburbs of Birmingham. First Federal has authority within regulatory
limitations to originate loans secured by real estate throughout the United
States but has exercised this authority outside its primary lending area only on
a limited basis.
The Banks have never purchased servicing rights. During fiscal 1997, the Banks
sold fixed rate loans in the secondary market and First Federal retained
servicing for only a portion of those loans; servicing rights are immaterial.
Residential Lending - One-to Four-Family
- ----------------------------------------
The Banks offer various adjustable rate one-to-four family residential loan
products. The Banks' ARM loans generally are subject to a limitation of 2% per
adjustment for interest rate increases and decreases, with a lifetime cap of 6%
on increases. These limits, based on the initial rate, may reduce the interest
rate sensitivity of such loans during periods of changing interest rates.
Interest rates and origination fees on ARM loans are priced to provide a profit
margin and not necessarily to be competitive in the local market. The Banks'
one-to four-family residential ARM loans do not provide for negative
amortization.
The Banks generally make one-to-four family residential mortgage loans in
amounts not to exceed 80% of the appraised value or sale price, whichever is
less, of the property securing the loan, or up to 95% if the amount in excess of
80% of the appraised value is secured by private mortgage insurance, or 80% to
85% with an increase of interest rate. First Federal usually charges an
origination fee of 1.00% to 2.00% on one-to-four family residential mortgage
loans. First Federal and First State each have loan policies that require
approval by a loan committee or their respective Board of Directors for loans
over specified amounts. The Boards of Directors of First Federal and First
State are furnished with an analysis of the respective monthly loan activity.
In addition to ARM lending, the Banks may originate fixed-rate one-to-four
family residential loans. However, at this time, the majority of all fixed rate
loans are being sold into the secondary market. The Banks have established
investor relationships with several banks and mortgage companies. In addition,
First Federal is approved by the Federal Home Loan Mortgage Corporation (FHLMC)
and the Federal National Mortgage Corporation (FNMA) to sell and service loans.
These outlets allow the Banks to offer more diversified products and enhances
the management of interest rate risk. At March 31, 1997, fixed rate loans
represented 24% of the one-to-four family residential loans. The Banks apply
the required underwriting procedures in making these fixed-rate mortgage loans.
Residential Lending - Multi-Family
- ----------------------------------
The Banks also originate loans secured by multi-family residences within 100
miles of its market area on a case-by-case basis. Loans originated on multi-
family dwellings are generally adjustable rate mortgages with terms of 15 years
but may be as long as 25 years. Generally, all such loans amortize over the
life of the loan. The Banks generally make multi-family mortgage loans up to
65% of the appraised value of the property securing the loan. Such appraised
value is determined by an independent appraiser previously approved by the
Banks. In addition, properties securing multi-family loans must be used solely
for residential purposes. The Banks had multi-family loans outstanding totaling
$14,590 at March 31, 1997. No multi-family loan was delinquent ninety days or
more at March 31, 1997.
7
<PAGE>
Commercial Real Estate Lending
- ------------------------------
Loans secured by commercial real estate totaled approximately $9.5 million, or
7.45% of the Banks' total loan portfolio, at March 31, 1997. Commercial real
estate loans are generally originated in amounts up to 65% of the appraised
value of the property. Such appraised value is determined by an independent
appraiser previously approved by each Bank. The Banks' commercial real estate
loans are permanent loans secured by improved property such as office buildings,
retail stores, warehouses, churches, hotels/motels, and other non-residential
buildings. Of the commercial real estate loans outstanding at March 31, 1997,
most are located within 100 miles of the Banks' office locations and were made
to local customers of the Banks. In addition, borrowers generally must
personally guarantee loans secured by commercial real estate. Commercial real
estate loans generally have 10 to 20 year terms and are made at rates generally
based upon market rates for the type of property. Such loans amortize over the
life of the loan. Commercial real estate loans are usually made at adjustable
rates and may carry prepayment penalties. At March 31, 1997, all commercial
real estate loans delinquent ninety days or more totaled $560,000.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to a greater extent to adverse conditions in the real
estate market or the economy. The Banks seek to minimize these risks by lending
to established customers and generally restricting such loans to its primary
market area.
Construction Lending
- --------------------
The Banks have several construction loan programs. At March 31, 1997, the Bank
had $5.5 million in construction loans outstanding or 4.34% of the Banks' loan
portfolio. Such loans are primarily classified as one-to-four family
residential loans or commercial real estate loans depending upon the character
of the property used as collateral. Of such amount, $2.5 million was
undisbursed at March 31, 1997, and consisted of loans to individuals for
construction of residential properties. The Banks presently charge adjustable
interest rates on construction and construction-permanent loans. Construction
and construction-permanent loans may be made for up to 80% of the anticipated
value of the property upon completion. Funds are disbursed based upon
percentage of completion as verified by an on site inspection.
Consumer Lending
- ----------------
As community-oriented lenders, the Banks offer certain secured and unsecured
consumer loans, including primarily loans secured by deposits, automobile loans,
mobile home loans, signature loans and other secured and unsecured loans.
Consumer loans totaled $12.4 million or 9.78% of the Banks' total loan
portfolio, at March 31, 1997. Consumer loans, while generally having higher
yields than residential mortgage loans, involve a higher credit risk. At
March 31, 1997, all consumer loans delinquent 90 days or more totaled $311,000.
The Banks also make loans secured by second mortgage loans on residential
property. The Banks' loans secured by second mortgages amounted to $2.3 million
at March 31, 1997. Second mortgage loans may be extended for up to 80% of the
appraised value of the property less existing liens. The Banks generally hold
the first mortgage loans on the properties securing the second mortgages.
Home Equity Lending
- -------------------
First Federal began offering home equity loans during fiscal 1995. Home equity
loans may be made not to exceed 80% of the first and second combined mortgage
loan to value. These loans are credit lines with a maximum loan term of 10
years. The interest rate on these lines of credit adjusts monthly at a rate
based on prime. At March 31, 1997, the outstanding home equity loan balance was
$2,302,157.
8
<PAGE>
Commercial Lending
- ------------------
The Banks originate commercial loans and commercial lines of credit. The
commercial loans are based on serving market needs while limiting risk to
reasonable standards and lending only to strong, well established businesses in
the Banks' respective market areas. Commercial loans are adjustable rate loans
and generally secured by equipment, accounts receivable and inventory.
Commercial loans totaled approximately $7.8 million or 6.15% of the Banks' total
loan portfolio, at March 31, 1997. At March 31, 1997, all commercial loans
delinquent ninety days or more, totaled $56,000.
9
<PAGE>
Analysis of Loan Portfolio and Mortgage-backed Securities
- ---------------------------------------------------------
The following table sets forth the composition of the Banks' mortgage and other
loan portfolios and mortgage-backed securities portfolio in dollar amounts and
in percentages at the dates indicated. At March 31, 1997, the Banks had no
concentrations of loans exceeding 10% of total loans that are not disclosed
below. The increase in loans to the March 31, 1996, level from March 31, 1995,
is primarily the result of the acquisition of First State.
<TABLE>
<CAPTION>
At March 31,
------------------------------------
1997 1996
----------------- ----------------
Percent Percent
of of
Amount Total Amount Total
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to-four family
residential $95,451 75.25% $100,596 79.71%
Commercial real estate 12,849 10.13 8,237 6.53
Other 1,741 1.37 4,010 3.18
-------- ------ -------- ------
Total mortgage loans 110,041 86.75 112,843 89.42
-------- ------ -------- ------
Consumer loans:
Savings accounts 927 .73 1,007 .80
Other 11,480 9.05 10,462 8.29
-------- ------ -------- ------
Total consumer loans 12,407 9.78 11,469 9.09
-------- ------ -------- ------
Commercial loans 7,804 6.15 6,527 5.17
-------- ------ -------- ------
Total loans receivable 130,252 102.68 130,839 103.68
-------- ------ -------- ------
Less:
Undisbursed portion of
mortgage loans 2,523 1.99 3,381 2.68
Escrow, net 177 .14 173 .14
Allowance for loan losses 733 .58 621 .49
Net deferred loan fees (cost) (33) (.03) 461 .37
Discount on loans purchased 3 -- 4 --
-------- ------ -------- ------
3,403 2.68 4,640 3.68
-------- ------ -------- ------
Loans receivable, net $126,849 100.00% $126,199 100.00%
======== ====== ======== ======
Mortgage-backed securities:
FNMA $ 7,038 52.80% $ 3,218 67.52%
FHLMC 225 1.69 367 7.70
GNMA 5,818 43.65 1,048 21.99
-------- ------ -------- ------
Total mortgage-backed
securities 13,081 98.14 4,633 97.21
Unearned premiums, net 248 1.86 133 2.79
-------- ------ -------- ------
Mortgage-backed
securities, net $ 13,329 100.00% $ 4,766 100.00%
======== ====== ======== ======
</TABLE>
10
<PAGE>
Loan Maturity
- -------------
The following table shows the maturity of the Banks' loan portfolio at March 31,
1997, based upon contractual maturity.
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------------------
One-to Four Multi-Family
Family and
Residential Commercial Consumer Commercial
Loans Real Estate Loans Loans Total
-------------- ------------ ----------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
One year or less $ 8,713 $ 3,179 $ 3,379 $ 5,424 $ 20,695
One year through 5 years 4,317 2,035 7,189 2,134 15,675
After 5 years 82,421 9,376 1,839 246 93,882
--------- --------- --------- --------- ----------
$ 95,451 $ 14,590 $ 12,407 $ 7,804 $ 130,252
========= ========= ========= ========= ==========
Less:
Undisbursed portion of mortgages $ 2,523
Discount on loans purchased 3
Net deferred loan fees (cost) (33)
Allowance for loan losses 733
Escrow, net 177
----------
Loans receivable, net $ 126,849
==========
</TABLE>
Scheduled contractual principal repayments of loans do not necessarily reflect
the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. The
average life of mortgage loans tends to increase when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and
tends to decrease when current mortgage loan market rates are substantially
lower than rates on existing mortgage loans.
The following table sets forth at March 31, 1997, the dollar amount of loans and
mortgage-backed securities due after March 31, 1998, based upon contractual
maturity dates, and whether such loans have fixed interest rates or adjustable
interest rates:
<TABLE>
<CAPTION>
DUE AFTER MARCH 31, 1998
------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Mortgage Loans:
One-to four-family $14,711 $72,027 $ 86,738
Multi-family and commercial real estate 1,938 9,473 11,411
------- ------- --------
Total mortgage loans 16,649 81,500 98,149
------- ------- --------
Consumer loans 9,028 -- 9,028
------- ------- --------
Commercial loans 654 1,726 2,380
------- ------- --------
Total loans receivable $26,331 $83,226 $109,557
======= ======= ========
</TABLE>
Loan Origination, Commitment and Other Loan Fees
- ------------------------------------------------
In addition to interest earned on loans, the Banks charge fees for originating
and making loan commitments (which are included in interest income), prepayments
of non-residential loans, late payments, changes in property ownership and other
miscellaneous
11
<PAGE>
services. The income realized from such fees varies with the volume of loans
made or repaid, and the fees vary from time to time depending upon the supply of
funds and other competitive conditions in the mortgage markets. Loan demand and
the availability of money also affect these conditions.
Loan Delinquencies, Nonperforming Assets and Classified Assets
- --------------------------------------------------------------
The Banks consider nonperforming assets to include nonaccruing loans, accruing
loans delinquent 90 days or more and real estate owned. The Banks' policies are
to stop accruing interest income when any loan is past due as to principal or
interest in excess of 90 days and the ultimate collection of either is in doubt.
Foreclosed real estate occurs when a borrower ultimately does not abide by the
original terms of the loan agreement and the Banks obtain title of the real
estate securing the loan in foreclosure proceedings. At March 31, 1997, the
Banks had no restructured loans within the meaning of Financial Accounting
Standards Board Statement 15. The following table is an analysis of the Banks'
nonperforming assets.
<TABLE>
<CAPTION>
At March 31,
------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 719 $ 240
Accruing loans delinquent 90 days
or more:
Mortgage loans 1,020 285
Consumer loans 116 74
Commercial loans 30 --
------- -------
Total non-performing loans 1,885 599
Real estate owned 131 12
------- -------
Total non-performing assets $ 2,016 $ 611
======= =======
Allowance for uncollected interest $ 38 $ 11
======= =======
Non-performing assets to total assets 1.13% .37%
======= =======
Non-performing loans to total loans,
net 1.49% .47%
======= =======
</TABLE>
The increase in nonperforming assets from the unusually low level of the
previous year is primarily the result of several nonperforming mortgage loans
which are considered adequately collateralized. Based on an evaluation of the
collateral for these loans, no loss is anticipated. The nonperforming loan
levels of the Banks remain favorable when compared to industry averages.
At March 31, 1997, there were no loans not included in the above table
considered potential problem loans that management expects will significantly
impact future operating results, liquidity or capital resources or for which
management is aware of any information that causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Interest income recognized on nonaccrual loans outstanding at
March 31, 1997, would have increased by approximately $38,000, had interest
income been recorded under the original terms of the loan. Interest income on
non-performing loans included in interest income for fiscal 1997 was
approximately $42,000.
Allowance for Loan Losses
- -------------------------
Losses on loans are charged to the allowance for loan losses. Additions to this
allowance are made by recoveries of loans previously charged off and, if
necessary, by provisions charged to expense. The determination of the balance of
the allowance for
12
<PAGE>
loan losses is based on an analysis of the composition of the loan portfolio,
current economic conditions, past loss histories and other factors that warrant
recognition in providing for an adequate allowance. Ultimate losses may vary
from original estimates and adjustments, as necessary, are made in the period in
which these factors and other relevant considerations become known.
The following table sets forth information regarding the Banks' allowance for
loan losses for the periods and at the dates indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1997 1996
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 621 $ 242
Provision for loan losses 186 75
Addition of First State (1) -- 320
Charge-offs:
Mortgage loans 41 42
Consumer loans 191 54
Commercial loans 10 --
------ ------
Total Charge-offs 242 96
------ ------
Recoveries:
Mortgage loans 25 59
Consumer loans 137 19
Commercial loans 6 2
------ ------
Total Recoveries 168 80
------ ------
Charge-offs, net of recoveries 74 16
------ ------
Balance at end of period $ 733 $ 621
====== ======
Ratio of allowance for loan losses to
total loans receivable at the end
of period .58% .49%
====== ======
Ratio of allowance for loan losses to
non-performing loans (2) 38.89% 103.67%
====== ======
Ratio of allowance for loan losses to
non-performing assets (3) 36.36% 101.64%
====== ======
Ratio of net charge-offs during the period
to average loans outstanding during the
period .06% .01%
====== ======
</TABLE>
(1) Reflects acquisition of First State.
(2) Non-performing loans are comprised of accruing loans delinquent 90 days or
more and nonaccrual loans.
(3) Non-performing assets include non-performing and nonaccrual loans and real
estate owned.
13
<PAGE>
The following table allocates the allowance for loan losses by category. The
allocation to each category is not necessarily indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
March 31,
------------------------------------
1997 1996
-------- --------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage $ 392 53.5% $ 396 63.8%
Consumer 173 23.6 130 20.9
Commercial 168 22.9 95 15.3
------ ------ ------ ------
Total $ 733 100.0% $ 621 100.0%
====== ====== ====== ======
</TABLE>
Classified Assets
- -----------------
Federal regulations provide for the classification of loans and other assets
such as debt and equity securities considered to be of lesser quality as
"substandard", "doubtful" or "loss" assets. Assets which do not currently
expose the insured institution to a sufficient degree of risk to warrant
classification in one of the aforementioned categories but possess credit
deficiencies or potential weaknesses are required to be designated "special
mention" by management.
When an insured institution classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for loan losses in an
amount deemed prudent by management. When an insured institution classifies
problem assets as "loss", it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by its' federal regulators, which can order the establishment
of additional general or specific loss allowances. At March 31, 1997, the Banks
had no assets classified as loss, $119,000 classified as doubtful, $2.3 million
of assets classified as substandard, and $103,000 designated as special mention.
The Banks' total adversely classified assets (defined as those assets classified
as substandard, doubtful and loss) represented 1.4% of the Banks' total assets
at March 31, 1997. At that date, primarily all of the Banks' classified assets
were one-to-four family residences and commercial mortgage loans in the Banks'
market areas.
MORTGAGE-BACKED SECURITIES AND OTHER INVESTMENT ACTIVITIES
The Banks have investments in mortgage-backed securities and have, at times,
utilized such investments as an alternative to mortgage lending. All of the
securities in the portfolio are currently insured or guaranteed by the FNMA,
GNMA or the FHLMC and have coupon rates as of March 31, 1997, ranging from
6.08% to 9.50%. At March 31, 1997, net mortgage-backed securities totaled
$13.3 million, or 7.47% of total assets.
At March 31, 1997, the Banks had 17.6% of total assets in cash, cash
equivalents, mortgage-backed securities and investment securities maturing in
five years or less. The Banks primarily invest in U. S. Government obligations
and agency obligations. The Banks hold cash equivalents in the form of amounts
due from depository institutions, overnight interest-bearing deposits in banks
and federal funds sold, the latter being generally sold for one day periods.
The Boards of Directors set the investment policy of each Bank. These policies
dictate that investments will be made based on the following criteria in order
of importance: regulatory liquidity requirements; return on investment; and
acceptable levels of interest rate risk and credit risk. The Banks' policies
authorize investment in various types of liquid assets permissible under
applicable regulations, which include United States Government obligations,
securities of various federal or federally-sponsored agency obligations, certain
municipal obligations, certain certificates of deposits of Board-approved banks
and savings institutions and federal funds sold. The Banks' policies are to
account for the investments as held to maturity or available for sale.
14
<PAGE>
Subject to various regulatory restrictions, savings institutions also may invest
in commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a savings institution is otherwise
authorized to make directly. The Banks historically have not made such
additional investments and do not presently intend to make such investments.
15
<PAGE>
The table below sets forth certain information regarding the liquidity and the
fair value, weighted average yields and contractual maturities of the Banks'
mortgage-backed and investment securities, both held to maturity and available
for sale, at March 31, 1997. Certain of the U.S. Government agency securities
could be called or prepaid prior to maturity.
<TABLE>
<CAPTION>
After One Through After Five Through
One Year or Less Five Years Ten Years After Ten Years Total
---------------- ----------------- ------------------ ----------------- ------------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Fair Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
-------- ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing
deposits $ 4,354 5.40% $---- ----% $ ---- ----% $ ---- ----% $ 4,354 $ 4,354 5.40%
Federal funds 4,200 5.44 ---- ---- ---- ---- ---- ---- 4,200 4,200 5.44
Mortgage-backed
securities 2,730 7.19 1,242 8.51 322 8.38 9,035 6.83 13,329 13,382 7.10
U.S. Government and
agency securities (2) 3,804 5.21 9,554 6.24 1,088 6.66 ---- ---- 14,446 14,320 6.00
State, County and
Municipal
securities 25 7.20 265 6.10 700 5.31 --- ---- 990 1,012 5.57
FHLB-Atlanta stock(1) 326 7.25 --- ---- --- --- 937 7.25 1,263 1,263 7.25
Federal Reserve stock 130 6.00 --- ---- --- --- --- ---- 130 130 6.00
</TABLE>
(1) The $326 amount of FHLB-Atlanta stock, which represents the stock balance
in excess of the amount required to be held, is shown as due in one year or
less. The FHLB-Atlanta stock required to be owned by First Federal is shown as
due after ten years.
(2) Includes securities held for maturity and available for sale. The
securities are reflected in the above table based on their carrying value and
contractual maturity. The weighted average yield does not include unrealized
gains and losses on fair value of available for sale securities.
16
<PAGE>
DEPOSITS, BORROWINGS AND OTHER SOURCES OF FUNDS
General
- -------
The Banks' primary sources of funds are deposits and principal, interest and
dividend payments on loans, mortgage-backed securities and investments.
Deposits
- --------
The Banks offer a variety of deposit accounts having a range of interest rates
and terms. The Banks' deposits consist of passbook savings, checking accounts,
money market deposits, IRA and certificate accounts. The Banks currently have
one ATM facility with an additional facility to be located at the Vance branch
and issue ATM cards on checking accounts. Compound interest is paid on most of
the Banks' deposits. The flow of deposits is influenced significantly by
general economic conditions, changes in money markets and prevailing interest
rates and competition. The Banks' deposits are obtained primarily from the
areas in which the branches are located. The Banks also maintain collateralized
deposits in excess of $100,000 held by the State of Alabama and certain other
depositors. Generally, the Banks price the deposit rates relative to existing
treasury market rates. The Banks rely primarily on customers as their source to
attract and retain these deposits. The Banks do not seek and have no brokered
deposits.
Average Balance and Average Rate of Deposits
- --------------------------------------------
The average balance of deposits and average yields are summarized for the
periods indicated in the following table.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
1997 1996 1995
--------------- -------------- --------------
Amount Rate Amount Rate Amount Rate
-------- ----- ------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts $ 22,813 1.71% $15,368 2.32% $14,557 2.39%
Passbook accounts 26,030 3.20 27,293 3.19 24,121 3.12
Certificates 103,411 5.79 74,078 5.91 57,141 4.50
</TABLE>
Large Certificates of Deposit
- -----------------------------
The following table indicates the amount of the Banks' certificates of deposit
of $100,000 or more by time remaining until maturity as of March 31, 1997.
<TABLE>
<CAPTION>
Maturity Period Amount
- --------------- --------------
<S> <C>
(In thousands)
Three months or less $ 1,671
Over three through six months 5,513
Over six through 12 months 4,513
Over 12 months 7,260
--------
Total $ 18,957
========
</TABLE>
Borrowings
- ----------
Deposits are the Banks' primary source of funds. The Banks' policies have been
to utilize borrowings only when necessary and when they are a less costly source
of funds or can be invested at a positive rate of return. First Federal may
obtain advances from the FHLB-Atlanta upon the security of its capital stock of
the FHLB-Atlanta and certain of its mortgage loans. Such advances may be made
pursuant to several different credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB-Atlanta
advances to a member institution generally is reduced by borrowings from any
other source.
17
<PAGE>
At March 31, 1997, First Federal had $1.0 million outstanding in advances from
the FHLB-Atlanta. First Federal also has available a fed fund line of credit
and reverse repurchase line which were not used during the year. See Note 8 of
the Notes to Consolidated Financial Statements for additional information on
First Federal's borrowings. First Federal had borrowings of $80,090 at March
31, 1997, which is a loan associated with the Employee Stock Ownership Plan
("ESOP") established in connection with First Federal's 1991 mutual-to-stock
conversion. The Company is the lender on the ESOP loan. The loan is eliminated
in consolidation.
COMPETITION
The Banks face strong competition both in making loans and in attracting
deposits. A large number of financial institutions, including commercial banks,
savings associations, credit unions, and other nonbank financial companies,
compete in the greater Birmingham, Alabama metropolitan area, in which the
primary service areas of Banks are located. Most of these companies are
competitors of the Banks to varying degrees. The Banks also compete with many
larger banks and other financial institutions that have offices over a wide
geographic area. These larger institutions have certain inherent competitive
advantages, such as the ability to finance wide ranging advertising campaigns
and promotions and to allocate their investment assets to regions offering the
highest yield and demand. In addition, competition in the Banks' service areas
may increase as a result of the lifting of restrictions on the interstate
operations of financial institutions. See "Regulation and Supervision of the
Banks."
REGULATION, SUPERVISION AND GOVERNMENTAL POLICY
General
- -------
As a bank holding company, the Company is subject to FRB regulation and
supervision under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The Company also is required to file certain reports with, and
otherwise comply with the rules and regulations of, the Securities and Exchange
Commission under the federal securities laws. The Company formerly was also
registered as a savings and loan holding company with the OTS; however,
legislation recently enacted by the United States Congress eliminated OTS
regulation and supervision of holding companies that, like the Company, have
both bank and savings association subsidiaries.
First Federal, as a federal savings bank, is subject to regulation,
supervision and regular examination by the OTS. First State, as an Alabama
commercial bank that is a member of the Federal Reserve System, is subject to
regulation, supervision and regular examination both by the Banking Department
and by the FRB. The deposits of both Banks are insured by the FDIC to the
maximum extent provided by law (a maximum of $100,000 for each insured
depositor). Federal and Alabama banking laws and regulations control, among
other things, the Banks' required reserves, investments, loans, mergers and
consolidations, issuance of securities, payment of dividends and other aspects
of the Banks' operations.
Supervision, regulation and examination of First Federal and First State by
the bank regulatory agencies are intended primarily for the protection of
depositors rather than for holders of the Company's stock or for the Company as
the holder of the stock of the Banks.
Regulation and Supervision of the Banks
- ---------------------------------------
The following is a brief summary of certain statutes, rules and regulations
affecting First State and First Federal. A number of other statutes and
regulations have an impact on their operations. The following summary of
applicable statutes and regulations does not purport to be complete and is
qualified in its entirety by reference to such statutes and regulations.
Regulatory Capital Requirements. The OTS and the FRB have adopted guidelines
regarding the capital adequacy of institutions under their respective
jurisdictions, which require such institutions to maintain specified minimum
ratios of capital to total assets and capital to risk-weighted assets.
18
<PAGE>
Under OTS regulations, savings institutions must maintain "tangible" capital
equal to 1.5% of adjusted total assets, "core" capital equal to at least 3% of
adjusted total assets, and a combination of core and "supplementary" capital
equal to 8% of "risk-weighted" assets. In addition, the federal bank
regulators, including the OTS, have adopted regulations that impose certain
restrictions on depository institutions that have a ratio of total capital to
risk-weighted assets ("total risk-based capital ratio") of less than 8% or a
ratio of Tier 1 capital to risk-weighted assets ("Tier 1 risk-based capital
ratio") of less than 4% (or 3% if the institution is rated Composite 1 under the
CAMEL examination rating system). See "Prompt Corrective Regulatory Action."
Under the OTS capital regulations, "core capital" is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Core capital is generally
reduced by the amount of the savings association's intangible assets, with
limited exceptions for purchased mortgage servicing rights ("PMSRs"), purchased
credit card relationships ("PCCRs") and certain intangible assets arising from
prior regulatory accounting practices. Tangible capital has the same definition
as core capital but is reduced by the amount of all the savings association's
intangible assets with only a limited exception for PMSRs and PCCRs. Core and
tangible capital are further reduced by the amount of a savings institution's
debt and equity investments in subsidiaries engaged in activities not
permissible for national banks. At March 31, 1997, First Federal had no such
investments.
In determining compliance with the risk-based capital requirement, a savings
institution is permitted to use both core and supplementary capital, provided
that the amount of supplementary capital does not exceed the institution's core
capital. Supplementary capital includes preferred stock that does not qualify
as core capital, certain approved subordinated debt, certain other capital
instruments and a portion of the institution's loan and lease loss allowance.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight, which
ranges from 0% to 100% as assigned by the OTS capital regulations based on the
risks the OTS believes are inherent in the type of asset. Comparable risk
weights are assigned to off-balance sheet assets.
The OTS risk-based capital regulation also includes an interest rate risk
("IRR") component that requires savings institutions with greater than normal
IRR, when determining compliance with the risk-based capital requirement, to
maintain additional total capital. The OTS has, however, indefinitely deferred
enforcement of its IRR requirements.
At March 31, 1997, First Federal's tangible capital ratio was 7.8%; its core,
or "leverage" capital ratio was 7.8%; its Tier 1 risk-based capital ratio was
13.3%; and its total risk-based capital ratio was 13.8%. Accordingly, it
satisfied all minimum regulatory capital requirements.
As a state-chartered bank that is a member of the Federal Reserve System (a
"state member bank"), First State is subject to the regulatory capital
guidelines of the FRB. The FRB's capital guidelines establish two capital
standards for state member banks: a leverage requirement and a risk-based
capital requirement. In addition, the FRB may, on a case-by-case basis,
establish individual minimum capital requirements for a state member bank that
vary from the requirements which would otherwise apply under FRB regulations. A
state member bank that fails to satisfy the capital requirements established
under the regulations will be subject to such administrative action or sanctions
as the FRB deems appropriate.
The leverage ratio adopted by the FRB requires a minimum ratio of "Tier 1
capital" to adjusted total assets of 3% for state member banks rated composite 1
under the CAMEL examination rating system. State member banks not rated
composite 1 under the CAMEL rating system are required to maintain a minimum
ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the
level and nature of risks of their operations. For purposes of the FRB's
leverage requirement, Tier 1 capital generally consists of the same components
as core capital under the OTS's capital regulations, except that no intangibles
other than certain PMSRs and PCCRs may be included in capital.
19
<PAGE>
The FRB's risk-based capital requirements require state member banks to
maintain "total capital" equal to at least 8% of total risk-weighted assets.
For purposes of the risk-based capital requirement, "total capital" means Tier 1
capital (as described above) plus "Tier 2 capital" (as described below),
provided that the amount of Tier 2 capital may not exceed the amount of Tier 1
capital, less certain assets. The components of Tier 2 capital under the FRB's
guidelines generally correspond to the components of supplementary capital under
OTS regulations. Total risk-weighted assets generally are determined under the
FRB's rules in the same manner as under the OTS's regulations.
The FRB has adopted a policy statement on sound risk management practices
that, among other things, describes prudent methods for monitoring interest rate
risk and stresses the importance of senior management oversight of an
institution's risk management activities. The FRB's policy statement does not
provide for a standardized model for measuring and monitoring interest rate risk
at individual banks. The policy statement indicates, however, that the FRB
will, in evaluating a bank's capital adequacy for interest rate risk, monitor
both the level of interest rate risk exposure and the quality of risk
management.
At March 31, 1997, First State's leverage ratio, Tier 1 risk-based capital
ratio, and total risk-based capital ratio were 8.8%, 15.0% and 16.2%,
respectively. Accordingly, it satisfied all minimum regulatory capital
requirements.
See Note 17 of the Notes to Consolidated Financial Statements for additional
information related to regulatory capital.
Federal Deposit Insurance. First Federal and First State are required to pay
assessments based on a percentage of their insured deposits to the FDIC for
insurance of their deposits by the SAIF and the BIF, respectively. Under the
FDIC's risk-based deposit insurance assessment system, the insurance assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution. Institutions are assigned by the
FDIC to one of three capital groups -- well-capitalized, adequately capitalized,
or undercapitalized -- and, within each capital category, to one of three
supervisory subgroups.
For the first half of 1997, the FDIC set the effective insurance assessment
rates for both BIF- and SAIF-insured institutions at zero to 27 basis points.
In addition, SAIF-insured institutions will be required, until December 31,
1999, to pay assessments to the FDIC at an annual rate of between 6.0 and 6.5
basis points to help fund interest payments on certain bonds issued by the
Financing Corporation ("FICO"), an agency of the federal government established
to recapitalize the predecessor to the SAIF. During this period, BIF member
banks will be assessed for payment of the FICO obligations at one-fifth the
annual rate applicable to SAIF member institutions. After December 31, 1999,
BIF and SAIF members will be assessed at the same rate (currently estimated at
approximately 2.4 basis points) to service the FICO obligations.
Standards for Safety and Soundness. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994, the federal bank
regulatory agencies were required to prescribe, by regulation, non-capital
safety and soundness standards for all insured depository institutions and
depository institution holding companies. The federal bank regulators,
including the FRB and the OTS, adopted Interagency Guidelines Establishing
Standards for Safety and Soundness and a rule establishing deadlines for
submission and review of safety and soundness compliance plans. The guidelines
required depository institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature,
and scope of the institution's business. The guidelines also establish certain
basic standards for loan documentation, credit underwriting, interest rate risk
exposure, and assets growth. The guidelines further provide that depository
institutions should maintain safeguards to prevent the payment of compensation
and benefits that are excessive or that could lead to material financial loss,
and should take into account factors such as comparable compensation practices
at comparable institutions. If the appropriate federal banking agency
determines that a depository institution is not in compliance with the safety
and soundness guidelines, it may require the institution to submit an acceptable
plan to
20
<PAGE>
achieve compliance with the guidelines.
In addition, on July 10, 1995, the federal banking agencies, including the OTS
and FRB, issued proposed guidelines relating to asset quality and earnings.
Under the proposed guidelines, an FDIC-insured depository institution should
maintain systems, commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration in those assets
as well as to evaluate and monitor earnings and ensure that earnings are
sufficient to maintain adequate capital and reserves. Management believes that
the asset quality and earnings standards, in the form proposed by the banking
agencies, would not have a material effect on the operations of the Banks.
Prompt Corrective Regulatory Action. Under FDICIA, the federal banking
regulators are required to take prompt corrective action with respect to
depository institutions that do not meet certain minimum capital requirements,
including a leverage limit and a risk-based capital requirement. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees that would cause the
institution to become undercapitalized. As required by FDICIA, the banking
regulators, including the OTS and the FRB, have issued regulations that classify
insured depository institutions by capital levels and provide that the
applicable agency will take various prompt corrective actions to resolve the
problems of any institution that fails to satisfy the capital standards.
Under the joint prompt corrective action regulations, a "well-capitalized"
bank is one that is not subject to any regulatory order or directive to meet any
specific capital level and that has or exceeds the following capital levels: a
total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%,
and a leverage ratio of 5%. An "adequately capitalized" bank is one that does
not qualify as "well capitalized" but meets or exceeds the following capital
requirements: a total risk-based capital of 8%, a Tier 1 risk-based capital
ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has
the highest composite examination rating. A bank not meeting these criteria is
treated as "undercapitalized," "significantly undercapitalized," or "critically
undercapitalized" depending on the extent to which the bank's capital levels are
below these standards. A bank that fails within any of the three
"undercapitalized" categories will be subject to certain severe regulatory
sanctions required by FDICIA and the implementing regulations. As of March 31,
1997, both First Federal and First State were "well-capitalized" as defined by
the regulations.
Transactions with Affiliates. Each of the Banks is subject to restrictions
imposed by federal law on extensions of credit to, and certain other
transactions with, the Company and other affiliates, and on investments in the
stock or other securities thereof. Such restrictions prevent the Company and
such other affiliates from borrowing from the Banks unless the loans are secured
by specified collateral, and require such transactions to have terms comparable
to terms of arms-length transactions with third persons. Further, such secured
loans and other transactions and investments by each of the Banks are generally
limited in amount as to the Company and as to any other affiliate to 10% of each
Bank's capital and surplus and as to the Company and all other affiliates to an
aggregate of 20% of each Bank's capital and surplus. These regulations and
restrictions may limit the Company's ability to obtain funds from the Banks for
its cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses. In general, these regulations do not apply to
restricted transactions between the Banks.
Dividend Limitations. The Banks are prohibited from paying any dividends or
other capital distributions if, after the distribution, they would be
undercapitalized under the prompt corrective action regulations. See "-- Prompt
Corrective Regulatory Action."
Under OTS regulations, First Federal may not pay dividends on its capital
stock if its regulatory capital would thereby be reduced below the amount then
required for the liquidation account established for the benefit of certain
depositors of First Federal at the time of its conversion to stock form. In
addition, First Federal must give the OTS 30 days prior notice of any proposed
declaration of dividends to the Company.
21
<PAGE>
OTS regulations impose additional limitations on the payment of dividends and
other capital distributions by First Federal. Under these regulations, a
savings institution that, immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution, has total capital (as defined
by OTS regulation) that is equal to or greater than the amount of its fully
phased-in capital requirements (a "Tier 1 Institution") is generally permitted
without OTS approval to make capital distributions during a calendar year in an
amount equal to the greater of (i) 75% of net income for the previous four
quarters or (ii) 100% of its net income to date during the calendar year plus an
amount that would reduce by one-half the amount by which its ratio of total
capital to assets exceeded its fully phased-in risk-based capital requirement at
the beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Institution") is permitted to make capital
distributions without OTS approval of up to 75% of its net income for the
previous four quarters, less dividends already paid for such period depending on
the institution's level of risk-based capital. A savings institution that fails
to meet current minimum capital requirements (a "Tier 3 Institution") is
prohibited from making any capital distributions without the prior approval of
the OTS. Tier 1 Institutions that have been notified by the OTS that they are
in need of more than normal supervision will be treated as either a Tier 2 or a
Tier 3 Institution. At March 31, 1997, First Federal was a Tier 1 Institution.
The approval of the FRB and the Alabama Superintendent of Banks is required if
the total of all the dividends declared by First State in any calendar year
exceeds First State's net income as defined for that year combined with its
retained net income for the preceding two calendar years.
Reserve Requirements. Pursuant to regulations of the FRB, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.4 million of transaction accounts, and reserves equal to 3% must be
maintained on the next $49.3 million of transaction accounts, plus reserves
equal to 10% on the remainder. These percentages are subject to adjustment by
the FRB. Because required reserves must be maintained in the form of vault cash
or in a noninterest-bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of March 31, 1997, the Banks met their reserve requirements.
Liquidity Requirements. First Federal is required by OTS regulation to
maintain average daily balances of liquid assets (cash, certain time deposits,
bankers' acceptances, highly rated corporate debt and commercial paper,
securities of certain mutual funds, and specified United States government,
state or federal agency obligations) equal to the monthly average of not less
than a specified percentage (currently 5%) of its net withdrawalable savings
deposits plus short-term borrowings. The average daily liquidity ratio of First
Federal for the month ended March 31, 1997 was 13.10%. First Federal is also
required to maintain average daily balances of short-term liquid assets at a
specified percentage (currently 1%) of the total of its net withdrawalable
savings accounts and borrowings payable in one year or less. First Federal was
in compliance with the 1% requirement at March 31, 1997. Monetary penalties may
be imposed for failure to meet liquidity requirements. First State is not
subject to these or any similar liquidity requirements.
The OTS has proposed to revise its liquidity regulations to decrease the
burden of compliance with such rules. Specifically, the OTS proposal would (1)
reduce the liquidity base by excluding withdrawable accounts payable in more
than one year from the definition of "net withdrawable accounts," (2) reduce the
liquidity requirement from 5% of net withdrawable accounts and short-term
borrowing to 4%, (3) remove the 1% short-term liquidity requirement, and (4)
expand the categories of liquid assets that may count toward satisfaction of the
liquidity requirement.
Federal Home Loan Bank System. The FHLB System consists of 12 district
Federal Home Loan Banks ("FHLBs") subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLBs provide a central credit
facility primarily for member institutions. As a member of the FHLB of Atlanta,
First Federal is required to
22
<PAGE>
acquire and hold shares of capital stock in the FHLB in an amount at least equal
to 1% of the aggregate unpaid principal of its home mortgage loans, home
purchase contracts, and similar obligations at the beginning of each year, or
1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever is
greater. First Federal was in compliance with this requirement, with an
investment in FHLB of Atlanta stock at March 31, 1997 of $1,263,000. Long-term
FHLB advances may only be made for the purpose of providing funds for
residential housing finance. At March 31, 1997, First Federal had $1.0 million
in advances outstanding from the FHLB of Atlanta.
Qualified Thrift Lender Test. The Home Owners' Loan Act (the "HOLA") and OTS
regulations require all savings institutions, such as First Federal, to satisfy
one of two Qualified Thrift Lender ("QTL") tests or to suffer a number
sanctions, including restrictions on activities. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code (the "Code") by maintaining at least 60% of its
total assets in specified types of assets, including cash, certain government
securities, loans secured by and other assets related to residential real
property, educational loans, and investments in premises of the institution or
(ii) satisfy the HOLA's QTL test by maintaining at least 65% of "portfolio
assets" in certain Qualified Thrift Investments ("QTIs"). For purposes of the
HOLA's QTL test, portfolio assets are defined as total assets less intangibles,
property used by a savings institution in its business and liquidity investments
in an amount not exceeding 20% of assets. QTIs consist of (a) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, (b) 50% of the dollar amount of residential mortgage loans
subject to sale under certain conditions, and (c) loans to small businesses,
education loans and credit card loans. In addition, subject to a 20% of
portfolio assets limit, savings institutions may treat as QTIs 200% of their
investments in loans to finance "starter homes" and loans for construction,
development or improvement of housing and community service facilities or for
financing small business in "credit needy" areas.
A savings institution must maintain its status as a QTL on a monthly basis in
nine out of every 12 months. An initial failure to qualify as a QTL results in a
number of sanctions, including the imposition of certain operating restrictions
imposed on national banks and a restriction on obtaining additional advances
from its FHLB. If a savings institution does not requalify under the QTL test
within the three-year period after it fails the QTL test, it would be required
to terminate any activity not permissible for a national bank and repay as
promptly as possible any outstanding advances from its FHLB. At March 31, 1997,
First Federal qualified as a QTL. The QTL test is not applicable to First State.
Regulation and Supervision of the Company
- -----------------------------------------
As a bank holding company under the BHC Act, the Company is subject to
regulation, supervision and examination by the FRB. The Company is required to
furnish annual and quarterly reports to the FRB and to furnish such additional
information as the FRB may require pursuant to the BHC Act.
Regulatory Capital Requirements. The FRB has adopted capital requirements for
bank holding companies, which require bank holding companies to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. These requirements generally parallel the capital requirements for state
member banks, described above. In addition, under the FRB capital rules, any
bank holding company experiencing or anticipating significant growth is expected
to maintain capital well above the minimum levels. The FRB has indicated that
whenever appropriate, and in particular when a bank holding company is
undertaking expansion, seeking to engage in new activities or otherwise facing
unusual risks, it will consider the level of an organization's ratio of tangible
Tier 1 capital (after deducting all intangibles) to total assets in making an
overall assessment of capital.
At March 31, 1997, the Company complied with all of its regulatory capital
requirements, with a leverage ratio of 9.4%, a Tier 1 risk-based capital ratio
of 15.9%, and a total risk-based capital of 16.7%.
23
<PAGE>
Activities Restrictions. As a bank holding company, the Company is prohibited
under the BHC Act, with certain exceptions, from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of a company that is
not a bank or a bank holding company, or from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities, such as the operation of a
savings association, that have been identified by statute or by FRB regulation
or order as activities closely related to the business of banking or managing or
controlling banks. The activities of the Company and of its non-bank
subsidiaries are subject to these legal and regulatory limitations under the BHC
Act and the FRB's regulations thereunder.
With certain limited exceptions, the Company must obtain the prior approval of
the FRB to engage in any such permissible activity or to acquire more than 5% of
the voting shares of any nonbank company. Notwithstanding the FRB's prior
approval of specific nonbanking activities, the FRB has the power to order a
holding company or its subsidiaries to terminate any activity, or to terminate
its ownership or control of any subsidiary, when it has reasonable cause to
believe that the continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness or stability of
any bank subsidiary of that holding company.
Restrictions on Acquisitions. Under the BHC Act, a bank holding company must
obtain the prior approval of the FRB before (i) acquiring direct or indirect
ownership or control of any voting shares of any bank or bank holding company
if, after such acquisition, the bank holding company would directly or
indirectly own or control more than 5% of such shares; (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
Any company must obtain approval of the FRB prior to acquiring control of the
Company. For purposes of the BHC Act, "control" is defined as ownership of more
than 25% of any class of voting securities of the Company, the ability to
control the election of a majority of the directors, or the exercise of a
controlling influence over management or policies of the Company.
Interstate Acquisition. The BHC Act, as amended by the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"),
generally permits the FRB to approve interstate bank acquisitions by bank
holding companies without regard to any prohibitions of state law. As a result,
Alabama banks and their holding companies may be acquired by out-of-state banks
or their holding companies, and Alabama banks and their holding companies may
acquire out-of-state banks without regard to whether the transaction is
prohibited by the laws of any state. Under the Riegle-Neal Act and Alabama law,
the FRB may not approve the acquisition of a bank in Alabama if such bank has
not been in existence for at least five years or, if following the acquisition,
the acquiring bank holding company and its depository institution affiliates
would control 30% or more of the deposits in depository institutions in Alabama.
In addition, the Riegle-Neal Act authorizes the federal banking agencies,
effective June 1, 1997, to approve interstate merger transactions without regard
to whether such transactions are prohibited by the law of any state, unless the
home state of one of the banks opts out of the Riegle-Neal Act by adopting a law
that applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. Alabama has enacted "opt-in"
legislation that, effective May 31, 1997, expressly authorizes Alabama banks to
participate in interstate mergers in accordance with the Riegle-Neal Act.
In addition, the State of Alabama has enacted reciprocal interstate
legislation that permits savings institutions, and their holding companies in
Alabama to be acquired by regional thrift institutions, or their holding
companies, and permits Alabama thrift institutions, and their holding companies,
to acquire thrift institutions in 15 designated jurisdictions in the Southeast,
if such jurisdictions have enacted reciprocal statutes. Most of such
jurisdictions have authorized interstate thrift acquisitions in one form or
another.
24
<PAGE>
OTS regulators generally permit federal savings institutions, like First
Federal, to branch in any state or states of the United State and its
territories. However, recently proposed federal legislation would, if enacted,
restrict First Federal's ability to open branches in states other than Alabama.
See "Proposed Legislation."
The effect of the Riegle-Neal Act and of the OTS regulation permitting
interstate branching by federal savings institutions may be to increase
competition among depository institutions in Alabama.
Dividends. The FRB has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. Under
applicable FRB policy statement, a bank holding company should pay cash
dividends only to the extent that net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is consistent
with the company's capital needs, asset quality, and overall financial
condition. The FRB also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the FRB's prompt corrective action regulations, the FRB may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized."
Stock Repurchases. Bank holding companies are required to give the FRB
prior written notice of any purchase or redemption of their outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
retained earnings. The FRB may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or
would violate any law, regulation, FRB order, or any condition imposed by, or
written agreement with, the FRB.
Effects of Governmental Policy.
- ------------------------------
The earnings and business of the Company and the Banks are affected by
the policies of various regulatory authorities of the United States,
particularly the FRB. Important functions of the FRB, in addition to those
enumerated above, include the regulation of the supply of money in light of
general economic conditions within the United States. The instruments of
monetary policy employed by the FRB for these purposes influence in various ways
the overall level of investments, loans, other extensions of credit and
deposits, and the interest rates paid on liabilities and received on interest-
earning assets. The nature and timing of any future changes in the regulatory
policies of the FRB and other federal agencies and their impact on the Banks are
not predictable.
Proposed Legislation.
- ---------------------
The United States Congress currently is considering several wide-ranging
proposals that would alter the structure, regulation and competitive
relationships of the nations's financial institutions. Among the bills under
consideration are proposals to expand the powers of commercial banks and bank
holding companies, to repeal the statutory separation of the commercial banking
industry from investment banking, and to eliminate the federal thrift charter by
requiring all federal savings institutions (such as First Federal) to convert to
a national bank or a state bank or thrift charter. If legistlation currently
pending in the House of Representatives were to be adopted in its current form,
it would eliminate certain advantages now enjoyed by federal savings
institutions, such as unrestricted interstate branching. As consideration of the
proposed legislation is in its early stages, the Company cannot predict whether,
or in what form, any of these proposals will be adopted or the extent to which
the business of the Company or the Banks may be affected thereby.
TAXATION
Federal Taxation
- ----------------
The following discussion of tax matters is intended only as a summary and does
not purport to be a comprehensive description of the tax rules applicable to
First Federal or First State. For federal income tax purposes, the Company
reported its income and
25
<PAGE>
expenses on the accrual method of accounting under SFAS No. 109 "Accounting for
Income Taxes" and files its federal income tax returns on a consolidated basis.
For its taxable year ended March 31, 1997, the Company was subject to a maximum
federal income tax rate of 34%. The Banks have not been audited by the Internal
Revenue Service for any recent year subject to audit.
Corporate Alternative Minimum Tax
- ---------------------------------
The Banks are subject to taxes based on alternative minimum taxable income
("AMTI") at a 20% tax rate. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under an experience method is treated as a preference item for
purposes of computing the corporate minimum tax. The Code provisions relating to
the alternative minimum tax ("AMT") treat as a preference item interest on
certain tax-exempt private activity bonds issued on or after August 8, 1986.
Additionally, AMTI is increased by an amount equal to 75% of the amount by which
a corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986, an environmental
tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million
is imposed on corporations, including the Banks, whether or not an AMT is paid.
See Note 10 of the Notes to Consolidated Financial Statements for additional
information related to income taxes and the bad debt reserve.
State and Local Taxation
- ------------------------
The State of Alabama imposes a 6% excise tax on the earnings of financial
institutions such as First Federal. The 6% excise tax also applies to the
Company. In addition to the excise taxes, the State of Alabama imposes an annual
state franchise tax for domestic and foreign corporations. A domestic
corporation, including a federally chartered stock savings bank domiciled in
Alabama, is assessed a domestic franchise tax of approximately 1% based solely
on the par value of its common stock. Foreign corporations, such as the Company
which is incorporated in Delaware, are assessed a foreign franchise tax of 0.3%
based on a total of capital and long-term debt deemed to be employed in the
State of Alabama. The foreign corporation's investment in the capital of an
Alabama corporation is excluded from the taxable base. The Company is subject to
the Delaware franchise tax.
PERSONNEL
As of March 31, 1997, First Federal had 39 full-time employees and 3 part-time
employee. At March 31, 1997, First State had 26 full-time employees and 3 part-
time employees. The employees are not represented by a collective bargaining
unit, and the Banks consider their relationship with the employees to be good.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT:
-------------------------------------
The following table sets forth certain information with respect to the persons
who are executive officers of the Company:
<TABLE>
<CAPTION>
Executive Officers Age Positions Held
- ------------------------ --- --------------------------------------
<S> <C> <C>
B. K. Goodwin, III 45 Chairman of the Board, Chief Executive
Officer and President
C. Larry Seale 60 Executive Vice President
Lynn J. Joyce 33 Vice President, Secretary, Treasurer
and Financial Officer
James E. Smith, Jr. 47 Vice President
</TABLE>
26
<PAGE>
ITEM 2. PROPERTIES:
-----------
First Federal conducts its business through its main office located in Bessemer,
Alabama, and three branch offices located in Pelham, Hueytown and Hoover,
Alabama. A new First Federal branch is currently under construction in Vance,
Alabama. First State conducts its business through its main office located in
West Blocton, Alabama, and two branch offices located in Woodstock and
Centreville. The Holding Company believes that the Banks' current facilities are
adequate to meet the present and immediately foreseeable needs of the Banks and
the Holding Company. The following table sets forth information relating to each
of the Banks' offices as of March 31, 1997, which totaled a net book value of
$2,642,000. See also Notes 1 and 13 of the "Notes to Consolidated Financial
Statements."
<TABLE>
<CAPTION>
Net
First Federal Leased or Date Book Value at
Locations Owned Opened March 31, 1997
------------- ---------- ------ --------------
(In thousands)
<S> <C> <C> <C>
Main Office -
1630 Fourth Avenue, No. Owned 1961 $ 956 (3)
Bessemer, Alabama 35020
Branches -
1351 Hueytown Road
Hueytown, Alabama 35023 Owned 1966 32 (3)
Food World Plaza
Pelham, Alabama 35124 Leased (1) 1973 N/A (2)
1604 Montgomery Hwy.
Hoover, Alabama 35216 Owned 1992 508 (3)
18704 Highway 11, North
Vance, Alabama 35490 Owned 1997 61 (4)
Other fixed assets, net 351
<CAPTION>
First State
Locations
-----------
<S> <C> <C> <C>
Main Office -
Main Street Owned 1965 229 (3)
West Blocton
Branches -
125 Birmingham Rd Owned 1979 150 (3)
Centreville, Alabama 35042
Highway 5 Owned 1985 214 (3)
Woodstock, Alabama 35188
Other fixed assets, net 141
------
Total $2,642
======
</TABLE>
- ----------------------------
(1) The lease expires May 31, 1999.
(2) The Bank's lease is classified as an operating lease.
(3) Includes land, building and improvements.
(4) Includes land and amounts paid on construction in process.
The branch is scheduled to open in July 1997.
ITEM 3. LEGAL PROCEEDINGS:
------------------
From time to time, the Banks are parties to routine legal proceedings occurring
in the ordinary course of business. At March 31, 1997, there were no legal
proceedings to which the Company or the Banks were a party or parties, or to
which any of their property was subject, which were expected by management to
result in a material loss.
27
<PAGE>
For a further discussion of legal matters, see Note 9 to the "Notes to
Consolidated Financial Statements" in the Company's 1997 Annual Report to
Stockholders (the "Annual Report").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
----------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year ended March 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
---------------------------------------------
RELATED STOCKHOLDER MATTERS:
----------------------------
The information contained under the caption "Common Stock Data" in the Annual
Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA:
------------------------
The information contained in the table captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS:
-------------------------------------
The information contained in the section captioned "Management's Discussion and
Analysis" in the Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
--------------------------------------------
The report of independent public accountants and consolidated financial
statements contained in the Annual Report which are listed under Item 14 herein
and contained in the Annual Report, and the information contained in the section
captioned "Quarterly Financial Data" in the Annual Report are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE:
------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
---------------------------------------------------
The information contained under the section captioned "Proposal I--Election of
Directors" in the Company's definitive proxy statement for the Company's 1997
annual meeting of stockholders (the "Proxy Statement") is incorporated herein by
reference. Information concerning executive officers who are not directors is
contained in Part I hereof and is incorporated herein by reference. Information
regarding delinquent Form 3, 4 or 5 filers is incorporated by reference to the
section entitled "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION:
-----------------------
The information contained in the sections captioned "Proposal I--Election of
Directors--Executive Compensation and Other Benefits" and "--Directors'
Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
---------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners -
Information required by this item is incorporated herein by reference to
the section captioned "Security Ownership of Certain Beneficial Owners
and Management."
28
<PAGE>
(b) Security Ownership of Management -
Information required by this item is incorporated herein by reference to
the sections captioned "Proposal I--Election of Directors" and "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement.
(c) Changes in Control -
Management of the Company is not aware of any arrangements, including
any pledge by any person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the
Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
-----------------------------------------------
The information required by this item is incorporated herein by reference to the
section captioned "Proposal I--Election of Directors -- Transactions with
Management" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
-----------------------------------------------------
ON FORM 8-K:
------------
(a) List of documents filed as part of this report.
-----------------------------------------------
(1) Financial Statements. The following statements are incorporated by
---------------------
reference from Item 8 hereof (See Exhibit 13).
Consolidated Statements of Financial Condition as of March 31, 1997 and
1996
Consolidated Statements of Income for the years ended March 31, 1997,
1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended March
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended March 31, 1997,
1996 and 1995
Notes to Consolidated Financial Statements
The remaining information appearing in the Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly
provided herein.
(2) Financial Statement Schedules.
------------------------------
All schedules have been omitted as the required information is either
inapplicable or is included in the consolidated financial statements or
notes thereto.
(3) Exhibits.
---------
A list of exhibits included in this Form 10-K or incorporated by
reference is set forth in (c) below.
(b) There were no reports on Form 8-K filed during the quarter ended March 31,
1997, except for an 8-K dated January 30, 1997, to report the commencement
of a stock repurchase program.
(c) Exhibits-The following is a list of exhibits filed as part of this Annual
Report on Form 10-K and is also the Exhibit Index
3.1 Certificate of Incorporation of FirstFed Bancorp, Inc. (A)
3.2 Bylaws of FirstFed Bancorp.Inc. (A)
4.0 Stock Certificate of FirstFed Bancorp, Inc. (A)
10.01 First Federal Savings Bank Employees' Pension Plan and Trust (A)
10.02 Employment Agreement dated May 12, 1993 and amendment one between the
First Federal Savings Bank, FirstFed Bancorp,Inc. and Fred T. Blair
(E)
29
<PAGE>
<TABLE>
<S> <C>
10.03 First Federal Savings Bank Employee Stock Ownership Plan as amended
and restated effective January 1, 1991 (C)
10.04 Employment Agreement dated February 8, 1994 and amendment one
between the First Federal Savings Bank, FirstFed Bancorp, Inc. and
C. Larry Seale (E)
10.05 First Federal Savings Bank Outside Directors' Recognition and
Retention Plan and Trust Agreement (C)
10.06 First Federal Savings Bank Recognition and Retention Plan and Trust
Agreement "B" (C)
10.07 FirstFed Bancorp, Inc. 1991 Incentive Stock Option Plan (C)
10.08 FirstFed Bancorp, Inc. 1991 Stock Option Plan for Outside Directors
as amended (C)
10.09 First Federal Savings Bank Directors' Retirement Plan as amended (C)
10.10 Form of Indemnification Agreement (B)
10.11 Severance Agreements dated December 14, 1993 between First Federal
Savings, FirstFed Bancorp and James E. Smith, Lynn J. Joyce and
Brenda M. Baswell (C)
10.12 FirstFed Bancorp, Inc. Deferred Compensation Plan and First Federal
Savings Bank Deferred Compensation Plan (C)
10.13 Employment Agreement by and between the Company, the Bank and B. K.
Goodwin, III (D)
10.14 FirstFed Bancorp, Inc. Incentive Compensation Plan (E)
10.15 Employment Agreement dated January 1, 1996 by and between FirstFed
Bancorp, Inc. and B. K. Goodwin, III (F)
10.16 Employment Agreement dated January 1, 1996 by and between First
Federal Savings Bank and B. K. Goodwin, III (F)
10.17 Employment Agreement dated January 1, 1996 by and between FirstFed
Bancorp, Inc., First Federal Savings Bank and C. Larry Seale (F)
10.18 Employment Agreement dated January 1, 1996 by and between FirstFed
Bancorp, Inc., First Federal Savings Bank and Lynn J. Joyce (F)
10.19 Severance Agreement by and between FirstFed Bancorp, Inc., First
Federal Savings Bank and James E. Smith (F)
10.20 Severance Agreement by and between FirstFed Bancorp, Inc., First
Federal Savings Bank and Brenda M. Baswell (F)
10.21 FirstFed Bancorp, Inc. 1995 Stock Option and Incentive Plan (filed
herewith)
13 1997 Annual Report - Filed herewith only as to those portions of the
Annual Report to stockholders for the year ended March 31, 1997,
which are expressly incorporated herein by reference.
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of Independent Public Accountants (filed herewith)
A Incorporated herein by reference into this document from the
Exhibits of the Form S-1, Registration Statement, filed on July 3,
1991, Registration No. 33-41540.
B Incorporated herein by reference into this document from the Annual
Report on Form 10-K for the year ended March 31, 1993.
C Incorporated herein by reference into this document from the Annual
Report on Form 10-K for the year ended March 31, 1994.
D Incorporated herein by reference into this document from the
Quarterly Report on Form 10-Q for the quarter ended December 31,
1994.
E Incorporated herein by reference into this document from the Annual
Report on Form 10-K for the year ended March 31, 1995.
F Incorporated herein by reference into this document from the Annual
Report Form 10-K for the year ended March 31, 1996.
</TABLE>
(d) There are no other financial statements and financial statement schedules
which were excluded from the Annual Report pursuant to Rule 14a-3(b) which
are required to be included herein.
30
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FIRSTFED BANCORP, INC.
Date: June 26, l997 /s/ B. K. Goodwin, III
------------------ ------------------------
B. K. Goodwin, III,
Chairman of the Board,
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ B. K. Goodwin, III Chairman of the Board, Date: June 26, 1997
----------------------- Chief Executive Officer -------------
B. K. Goodwin, III and President
(Principal Executive Officer)
/s/ Lynn J. Joyce Vice President, Date: June 26, 1997
----------------------- Secretary, Treasurer -------------
Lynn J. Joyce and Financial Officer
(Principal Financial and Accounting Officer)
/s/ Fred T. Blair Director Date: June 26, 1997
----------------------- -------------
Fred T. Blair
/s/ A. W. Kuhn Director Date: June 26, 1997
---------------------- -------------
A. W. Kuhn
/s/ James B. Koikos Director Date: June 26, 1997
---------------------- -------------
James B. Koikos
/s/ Malcolm E. Lewis Director Date: June 26, 1997
---------------------- -------------
Malcolm E. Lewis
/s/ E. H. Moore, Jr. Director Date: June 26, 1997
---------------------- -------------
E. H. Moore, Jr.
/s/ James E. Mulkin Director Date: June 26, 1997
---------------------- -------------
James E. Mulkin
/s/ Robert E. Paden Director Date: June 26, 1997
---------------------- -------------
Robert E. Paden
/s/ G. Larry Russell Director Date: June 26, 1997
---------------------- -------------
G. Larry Russell
</TABLE>
32
<PAGE>
FIRSTFED BANCORP, INC.
1995 STOCK OPTION AND INCENTIVE PLAN
____________________________________
Working copy, including 1996 Amendment
____________________________________
1. Purpose of the Plan.
The purpose of this FirstFed Bancorp, Inc. 1995 Stock Option and Incentive
Plan (the "Plan") is to advance the interests of the Company through providing
select key Employees and Directors of the Bank, the Company, and their
Affiliates with the opportunity to acquire Shares. By encouraging such stock
ownership, the Company seeks to attract, retain and motivate the best available
personnel for positions of substantial responsibility and to provide additional
incentive to Directors and key Employees of the Company or any Affiliate to
promote the success of the business.
2. Definitions.
As used herein, the following definitions shall apply.
(a) "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as such terms are defined in Section 424(e) and
(f), respectively, of the Code.
(b) "Agreement" shall mean a written agreement entered into in accordance
with Paragraph 5(c).
(c) "Awards" shall mean, collectively, Options and SARs, unless the context
clearly indicates a different meaning.
(d) "Bank" shall mean First Federal Savings Bank.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(g) "Committee" shall mean the Stock Option Committee appointed by the
Board in accordance with Paragraph 5(a) hereof.
(h) "Common Stock" shall mean the common stock, par value $.01 per share,
of the Company.
(i) "Company" shall mean FirstFed Bancorp, Inc.
<PAGE>
(j) "Continuous Service" shall mean the absence of any interruption or
termination of service as an Employee or Director of the Company or an
Affiliate. Continuous Service shall not be considered interrupted in the case
of sick leave, military leave or any other leave of absence approved by the
Company, in the case of transfers between payroll locations of the Company or
between the Company, an Affiliate or a successor, or in the case of a Director's
performance of services in an emeritus or advisory capacity.
(k) "Director" shall mean any member of the Board, and any member of the
board of directors of any Affiliate that the Board has by resolution designated
as being eligible for participation in this Plan.
(l) "Disability" shall mean a physical or mental condition, which in the
sole and absolute discretion of the Committee, is reasonably expected to be of
indefinite duration and to substantially prevent a Participant from fulfilling
his or her duties or responsibilities to the Company or an Affiliate.
(m) "Effective Date" shall mean the date specified in Paragraph 14 hereof.
(n) "Employee" shall mean any person employed by the Company, the Bank, or
an Affiliate.
(o) "Exercise Price" shall mean the price per Optioned Share at which an
Option or SAR may be exercised.
(p) "ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan, and which is intended to be and is
identified as an "incentive stock option" within the meaning of Section 422 of
the Code.
(q) "Market Value" shall mean the fair market value of the Common Stock, as
determined under Paragraph 7(b) hereof.
(r) "Non-Employee Director" shall have the meaning provided in Rule 16b-3.
(s) "Non-ISO" means an option to purchase Common Stock which meets the
requirements set forth in the Plan but which is not intended to be and is not
identified as an ISO.
(t) "Option" means an ISO and/or a Non-ISO.
(u) "Optioned Shares" shall mean Shares subject to an Award granted
pursuant to this Plan.
(v) "Participant" shall mean any person who receives an Award pursuant to
the Plan.
<PAGE>
(w) "Plan" shall mean this FirstFed Bancorp, Inc. 1995 Stock Option and
Incentive Plan.
(x) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
(y) "Share" shall mean one share of Common Stock.
(z) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, of a specified
number of shares of Common Stock.
(aa) "Year of Service" shall mean a full twelve-month period, measured from
the date of an Award and each annual anniversary of that date, during which a
Participant has continuously been an Employee or Director of the Company or an
Affiliate.
3. Term of the Plan and Awards.
(a) Term of the Plan. The Plan shall continue in effect for a term of ten
years from the Effective Date, unless sooner terminated pursuant to Paragraph 16
hereof. No Award shall be granted under the Plan after ten years from the
Effective Date.
(b) Term of Awards. The term of each Award granted under the Plan shall be
established by the Committee, but shall not exceed 10 years; provided, however,
that in the case of an Employee who owns Shares representing more than 10% of
the outstanding Common Stock at the time an ISO is granted, the term of such ISO
shall not exceed five years.
4. Shares Subject to the Plan.
(a) General Rule. The aggregate number of Shares deliverable pursuant to
Awards shall not exceed 30,000 Shares, as such number may be adjusted on and
after the Effective Date pursuant to Paragraph 11 hereof. Such Shares may
either be authorized but unissued Shares, Shares held in treasury, or Shares
held in a grantor trust created by the Company. If any Awards should expire,
become unexercisable, or be forfeited for any reason without having been
exercised, the Optioned Shares shall, unless the Plan shall have been
terminated, be available for the grant of additional Awards under the Plan.
(b) Special Rule for SARs. The number of Shares with respect to which an
SAR is granted, but not the number of Shares which the Company delivers or could
deliver to an Employee or individual upon exercise of an SAR, shall be charged
against the aggregate number of Shares remaining available under the Plan;
provided, however, that in the case of an SAR granted in conjunction with an
Option, under circumstances in which the exercise of the SAR results in
termination of the Option and vice versa, only the number of Shares subject to
the Option shall be charged against the aggregate number of Shares remaining
available
<PAGE>
under the Plan. The Shares involved in an Option as to which option rights have
terminated by reason of the exercise of a related SAR, as provided in Paragraph
10 hereof, shall not be available for the grant of further Options under the
Plan.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be administered by the
Committee, which shall consist of not less than two (2) members of the Board who
are Non-Employee Directors. Members of the Committee shall serve at the
pleasure of the Board. In the absence at any time of a duly appointed
Committee, the Plan shall be administered by those members of the Board who are
Non-Employee Directors.
(b) Powers of the Committee. Except as limited by the express provisions
of the Plan or by resolutions adopted by the Board, the Committee shall have
sole and complete authority and discretion (i) to select Participants and grant
Awards, (ii) to determine the form and content of Awards to be issued in the
form of Agreements under the Plan, (iii) to interpret the Plan, (iv) to
prescribe, amend and rescind rules and regulations relating to the Plan, and (v)
to make other determinations necessary or advisable for the administration of
the Plan. The Committee shall have and may exercise such other power and
authority as may be delegated to it by the Board from time to time. A majority
of the entire Committee shall constitute a quorum and the action of a majority
of the members present at any meeting at which a quorum is present, or acts
approved in writing by a majority of the Committee without a meeting, shall be
deemed the action of the Committee.
(c) Agreement. Each Award shall be evidenced by a written agreement
containing such provisions as may be approved by the Committee. Each such
Agreement shall constitute a binding contract between the Company and the
Participant, and every Participant, upon acceptance of such Agreement, shall be
bound by the terms and restrictions of the Plan and of such Agreement. The
terms of each such Agreement shall be in accordance with the Plan, but each
Agreement may include such additional provisions and restrictions determined by
the Committee, in its discretion, provided that such additional provisions and
restrictions are not inconsistent with the terms of the Plan. In particular,
the Committee shall set forth in each Agreement (i) the Exercise Price of an
Option or SAR, (ii) the number of Shares subject to, and the expiration date of,
the Award, (iii) the manner, time and rate (cumulative or otherwise) of exercise
or vesting of such Award, and (iv) the restrictions, if any, to be placed upon
such Award, or upon Shares which may be issued upon exercise of such Award.
The Chairman of the Committee and such other Directors and officers as
shall be designated by the Committee are hereby authorized to execute Agreements
on behalf of the Company and to cause them to be delivered to the recipients of
Awards.
(d) Effect of the Committee's Decisions. All decisions, determinations
and interpretations of the Committee shall be final and conclusive on all
persons affected thereby.
<PAGE>
(e) Indemnification. In addition to such other rights of indemnification
as they may have, the members of the Committee shall be indemnified by the
Company in connection with any claim, action, suit or proceeding relating to any
action taken or failure to act under or in connection with the Plan or any
Award, granted hereunder to the full extent provided for under the Company's
governing instruments with respect to the indemnification of Directors.
6. Grant of Options.
(a) General Rule. Only Employees shall be eligible to receive Awards. In
selecting those Employees to whom Awards will be granted and the number of
shares covered by such Awards, the Committee shall consider the position, duties
and responsibilities of the eligible Employees, the value of their services to
the Company and its Affiliates, and any other factors the Committee may deem
relevant. Notwithstanding the foregoing, the Committee shall automatically make
the Awards specified in Sections 6(b) and 9 hereof.
(b) Automatic Grants to Employees. On the Effective Date, each of the
following Employees shall receive an Option (in the form of an ISO, to the
extent permissible under the Code) to purchase the number of Shares listed
below, at an Exercise Price per Share equal to the Market Value of a Share on
the Effective Date; provided that such grant shall not be made to an Employee
whose Continuous Service terminates on or before the Effective Date:
<TABLE>
<CAPTION>
Number of Shares
Participant Subject to Option
----------- -----------------
<S> <C>
B. K. Goodwin, III 7,500
Lynn J. Joyce 3,500
C. Larry Seale 2,500
Cathy N. Ackerman 500
W. Max Adams 500
Brenda M. Baswell 500
Robert Nelson, III 500
Martha A. Peeples 500
James E. Smith, Jr. 500
Rhonda T. Wannemuehler 500
</TABLE>
With respect to each of the above-named Participants, the Option granted to
the Participant hereunder (i) shall vest in accordance with the general rule set
forth in Paragraph 8(a) of the Plan, (ii) shall have a term of ten years from
the Effective Date, and (iii) shall be subject to the general rule set forth in
Paragraph 8(c) with respect to the effect of a Participant's termination of
Continuous Service on the Participant's right to exercise his Options.
(c) Special Rules for ISOs. The aggregate Market Value, as of the date the
Option is granted, of the Shares with respect to which ISOs are exercisable for
the first time by an
<PAGE>
Employee during any calendar year (under all incentive stock option plans, as
defined in Section 422 of the Code, of the Company or any present or future
Affiliate of the Company) shall not exceed $100,000. Notwithstanding the
foregoing, the Committee may grant Options in excess of the foregoing
limitations, in which case such Options granted in excess of such limitation
shall be Options which are Non-ISOs.
7. Exercise Price for Options.
(a) Limits on Committee Discretion. The Exercise Price as to any
particular Option shall not be less than 100% of the Market Value of the
Optioned Shares on the date of grant. In the case of an Employee who owns Shares
representing more than 10% of the Company's outstanding Shares of Common Stock
at the time an ISO is granted, the Exercise Price shall not be less than 110% of
the Market Value of the Optioned Shares at the time the ISO is granted.
(b) Standards for Determining Exercise Price. If the Common Stock is
listed on a national securities exchange (including the NASDAQ National Market
System) on the date in question, then the Market Value per Share shall be the
average of the highest and lowest selling price on such exchange on such date,
or if there were no sales on such date, then the Exercise Price shall be the
mean between the bid and asked price on such date. If the Common Stock is
traded otherwise than on a national securities exchange on the date in question,
then the Market Value per Share shall be the mean between the bid and asked
price on such date, or, if there is no bid and asked price on such date, then on
the next prior business day on which there was a bid and asked price. If no
such bid and asked price is available, then the Market Value per Share shall be
its fair market value as determined by the Committee, in its sole and absolute
discretion. Notwithstanding the foregoing, in the event that either (i) the
Committee exercises its discretion to impose transfer (or other) restrictions on
the Shares subject to an Option, or (ii) the Plan requires specified transfer
restrictions, the Committee shall make an appropriate adjustment in determining
the Market Value of the Shares subject to such an Option (in order to take into
account that their fair market value may be less than the fair market value of
unrestricted Shares).
8. Exercise of Options.
(a) Generally. Unless otherwise provided by the Committee pursuant to an
applicable Agreement, each Option shall be fully (100%) exercisable immediately
upon the date of its grant, subject to Paragraph 13 hereof.
(b) Procedure for Exercise. A Participant may exercise Options, subject
to provisions relative to its termination and any limitations on its exercise,
only by (1) written notice of intent to exercise the Option with respect to a
specified number of Shares, and (2) payment to the Company (contemporaneously
with delivery of such notice) in cash, in Common Stock, or a combination of cash
and Common Stock, of the amount of the Exercise Price for the number of Shares
with respect to which the Option is then being exercised. Each such notice (and
<PAGE>
payment where required) shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at the Company's
executive offices. Common Stock utilized in full or partial payment of the
Exercise Price for Options shall be valued at its Market Value at the date of
exercise, and may consist of Shares subject to the Option being exercised. A
Participant who exercises Non-ISOs pursuant to this Paragraph may satisfy all
applicable federal, state and local income and employment tax withholding
obligations, in whole or in part, by irrevocably electing to have the Company
withhold shares of Common Stock, or to deliver to the Company shares of Common
Stock that he already owns, having a value equal to the amount required to be
withheld; provided that to the extent not inconsistent herewith, such election
otherwise complies with those requirements of Paragraphs 8 and 19 hereof.
(c) Period of Exercisability. Except to the extent otherwise provided in
the terms of an Agreement, an Option may be exercised by a Participant only
while he is an Employee and has maintained Continuous Service from the date of
the grant of the Option, or within three months after termination of such
Continuous Service (but not later than the date on which the Option would
otherwise expire), except if the Employee's Continuous Service terminates by
reason of --
(1) "Just Cause" which for purposes hereof shall have the meaning
set forth in any unexpired employment or severance agreement between the
Participant and the Bank and/or the Company (and, in the absence of any such
agreement, shall mean termination because of the Employee's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order), then the Participant's rights to exercise such
Option shall expire on the date of such termination;
(2) death, then to the extent that the Participant would have been
entitled to exercise the Option immediately prior to his death, such Option of
the deceased Participant may be exercised within two years from the date of his
death (but not later than the date on which the Option would otherwise expire)
by the personal representatives of his estate or person or persons to whom his
rights under such Option shall have passed by will or by laws of descent and
distribution;
(3) Disability, then to the extent that the Participant would have
been entitled to exercise the Option immediately prior to his or her Disability,
such Option may be exercised within one year from the date of termination of
employment due to Disability, but not later than the date on which the Option
would otherwise expire.
(d) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
<PAGE>
(e) Six-Month Holding Period. Notwithstanding any other provision of this
Plan to the contrary, Common Stock that is purchased upon exercise of an Option
or SAR may not be sold within the six-month period following the grant date of
that Option or SAR, except in the event of a Participant's death, Disability or
retirement at or after age 65, or such other event as the Board may specifically
deem appropriate.
9. Grants of Options to Non-employee Directors
(a) Automatic Grants. Notwithstanding any other provisions of this Plan,
each Director who is not an Employee but is a Director on the Effective Date
shall receive, on said date, Non-ISOs to purchase 1,125 of the Shares reserved
under Paragraph 4(a) hereof. Such Non-ISOs shall have an Exercise Price per
Share equal to the Market Value of a Share on the date of grant. Each Director
who joins the Board after the Effective Date and who is not then an Employee
shall receive, on the date of joining the Board, Non-ISOs to purchase 1,000 of
the Shares reserved under Paragraph 4(a) of the Plan, at an Exercise Price per
Share equal to its Market Value on the date of grant.
(b) Terms of Exercise. Options received under the provisions of this
Paragraph will become exercisable in accordance with the general rule set forth
in Paragraph 8(a) hereof, and may be exercised from time to time by (a) written
notice of intent to exercise the Option with respect to all or a specified
number of the Optioned Shares, and (b) payment to the Company (contemporaneously
with the delivery of such notice), in cash, in Common Stock, or a combination of
cash and Common Stock, of the amount of the Exercise Price for the number of the
Optioned Shares with respect to which the Option is then being exercised. Each
such notice and payment shall be delivered, or mailed by prepaid registered or
certified mail, addressed to the Treasurer of the Company at the Company's
executive offices. A Director who exercises Options pursuant to this Paragraph
may satisfy all applicable federal, state and local income and employment tax
withholding obligations, in whole or in part, by irrevocably electing to have
the Company withhold shares of Common Stock, or to deliver to the Company shares
of Common Stock that he already owns, having a value equal to the amount
required to be withheld; provided that to the extent not inconsistent herewith,
such election otherwise complies with those requirements of Paragraphs 8 and 19
hereof.
Options granted under this Paragraph shall have a term of ten years;
provided that Options granted under this Paragraph shall expire one year after
the date on which a Director terminates Continuous Service on the Board, but in
no event later than the date on which such Options would otherwise expire. In
the event of such Director's death during the term of his directorship, Options
granted under this Paragraph shall become immediately exercisable, and may be
exercised within two years from the date of his death by the personal
representatives of his estate or person or persons to whom his rights under such
Option shall have passed by will or by laws of descent and distribution, but in
no event later than the date on which such Options would otherwise expire. In
the event of such Director's Disability during his or her directorship, the
Director's Option shall become immediately exercisable, and such Option may be
exercised within one year of the termination of directorship due to Disability,
but not later than the date that the Option would otherwise expire. Unless
otherwise inapplicable or
<PAGE>
inconsistent with the provisions of this Paragraph, the Options to be granted
to Directors hereunder shall be subject to all other provisions of this Plan.
(c) Effect of the Committee's Decisions. The Committee's determination
whether a Participant's Continuous Service has ceased, and the effective date
thereof, shall be final and conclusive on all persons affected thereby.
10. SARs (Stock Appreciation Rights)
(a) Granting of SARs. In its sole discretion, the Committee may from time
to time grant SARs to Employees either in conjunction with, or independently of,
any Options granted under the Plan. An SAR granted in conjunction with an
Option may be an alternative right wherein the exercise of the Option terminates
the SAR to the extent of the number of shares purchased upon exercise of the
Option and, correspondingly, the exercise of the SAR terminates the Option to
the extent of the number of Shares with respect to which the SAR is exercised.
Alternatively, an SAR granted in conjunction with an Option may be an additional
right wherein both the SAR and the Option may be exercised. An SAR may not be
granted in conjunction with an ISO under circumstances in which the exercise of
the SAR affects the right to exercise the ISO or vice versa, unless the SAR, by
its terms, meets all of the following requirements:
(1) The SAR will expire no later than the ISO;
(2) The SAR may be for no more than the difference between the Exercise
Price of the ISO and the Market Value of the Shares subject to the ISO
at the time the SAR is exercised;
(3) The SAR is transferable only when the ISO is transferable, and under
the same conditions;
(4) The SAR may be exercised only when the ISO may be exercised; and
(5) The SAR may be exercised only when the Market Value of the Shares
subject to the ISO exceeds the Exercise Price of the ISO.
(b) Exercise Price. The Exercise Price as to any particular SAR shall not
be less than the Market Value of the Optioned Shares on the date of grant.
(c) Timing of Exercise. Any election by a Participant to exercise SARs
shall be made during the period beginning on the 3rd business day following the
release for publication of quarterly or annual financial information and ending
on the 12th business day following such date. This condition shall be deemed to
be satisfied when the specified financial data is first made publicly available.
<PAGE>
The provisions of Paragraph 8(c) regarding the period of exercisability of
Options are incorporated by reference herein, and shall determine the period of
exercisability of SARs.
(d) Exercise of SARs. An SAR granted hereunder shall be exercisable at
such times and under such conditions as shall be permissible under the terms of
the Plan and of the Agreement granted to a Participant, provided that an SAR may
not be exercised for a fractional Share. Upon exercise of an SAR, the
Participant shall be entitled to receive, without payment to the Company except
for applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of) the
excess of the then aggregate Market Value of the number of Optioned Shares with
respect to which the Participant exercises the SAR, over the aggregate Exercise
Price of such number of Optioned Shares. This amount shall be payable by the
Company, in the discretion of the Committee, in cash or in Shares valued at the
then Market Value thereof, or any combination thereof.
(e) Procedure for Exercising SARs. To the extent not inconsistent
herewith, the provisions of Paragraph 8(b) as to the procedure for exercising
Options are incorporated by reference, and shall determine the procedure for
exercising SARs.
11. Effect of Changes in Common Stock Subject to the Plan.
(a) Recapitalizations; Stock Splits, Etc. The number and kind of shares
reserved for issuance under the Plan, and the number and kind of shares subject
to outstanding Awards, and the Exercise Price thereof, shall be proportionately
adjusted for any increase, decrease, change or exchange of Shares for a
different number or kind of shares or other securities of the Company which
results from a merger, consolidation, recapitalization, reorganization,
reclassification, stock dividend, split-up, combination of shares, or similar
event in which the number or kind of shares is changed without the receipt or
payment of consideration by the Company.
(b) Transactions in which the Company is Not the Surviving Entity. In the
event of (i) the liquidation or dissolution of the Company, (ii) a merger or
consolidation in which the Company is not the surviving entity, or (iii) the
sale or disposition of all or substantially all of the Company's assets (any of
the foregoing to be referred to herein as a "Transaction"), all outstanding
Awards, together with the Exercise Prices thereof, shall be equitably adjusted
for any change or exchange of Shares for a different number or kind of shares or
other securities which results from the Transaction.
(c) Special Rule for ISOs. Any adjustment made pursuant to subparagraphs
(a) or (b)(1) hereof shall be made in such a manner as not to constitute a
modification, within the meaning of Section 424(h) of the Code, of outstanding
ISOs.
(d) Conditions and Restrictions on New, Additional, or Different Shares or
Securities. If, by reason of any adjustment made pursuant to this Paragraph, a
Participant
<PAGE>
becomes entitled to new, additional, or different shares of stock or securities,
such new, additional, or different shares of stock or securities shall thereupon
be subject to all of the conditions and restrictions which were applicable to
the Shares pursuant to the Award before the adjustment was made.
(e) Other Issuances. Except as expressly provided in this Paragraph, the
issuance by the Company or an Affiliate of shares of stock of any class, or of
securities convertible into Shares or stock of another class, for cash or
property or for labor or services either upon direct sale or upon the exercise
of rights or warrants to subscribe therefor, shall not affect, and no adjustment
shall be made with respect to, the number, class, or Exercise Price of Shares
then subject to Awards or reserved for issuance under the Plan.
12. Non-Transferability of Awards.
Awards may not be sold, pledged, assigned, hypothecated, transferred or
disposed of in any manner other than by will or by the laws of descent and
distribution. Notwithstanding any other provision of this Plan to the contrary,
to the extent permissible under Rule 16b-3, a Participant who is granted Non-
ISOs pursuant to this Plan may transfer such Non-ISOs to his or her spouse,
lineal ascendants, lineal descendants, or to a duly established trust, provided
that Non-ISOs so transferred may not again be transferred other than (i) to the
Participant originally receiving the grant of Non-ISOs, or (ii) to an individual
or trust to whom such Participant could have transferred Non-ISOs pursuant to
this Paragraph 12. Non-ISOs which are transferred pursuant to this Paragraph 12
shall be exercisable by the transferee subject to the same terms and conditions
as would have applied to such Non-ISOs in the hands of the Participant
originally receiving the grant of such Non-ISOs.
13. Time of Granting Awards.
The date of grant of an Award shall, for all purposes, be the later of the
date on which the Committee makes the determination of granting such Award, and
the Effective Date; provided that no Option shall be exercisable before the Plan
receives stockholder approval in accordance with Paragraph 14 hereof. Notice of
the determination shall be given to each Participant to whom an Award is so
granted within a reasonable time after the date of such grant.
14. Effective Date.
The Plan shall become effective immediately upon its approval by the Board,
provided that, only to the extent required for the Plan to be in conformity with
Rule 16b-3, the effectiveness of the Plan and any Awards shall be contingent
upon a favorable vote of stockholders owning at least a majority of the total
votes cast at a duly called meeting of the Company's stockholders held in
accordance with applicable laws.
15. Modification of Awards.
<PAGE>
At any time, and from time to time, the Board may authorize the Committee
to direct execution of an instrument providing for the modification of any
outstanding Award, provided no such modification shall confer on the holder of
said Award any right or benefit which could not be conferred on him by the grant
of a new Award at such time, or impair the Award without the consent of the
holder of the Award.
16. Amendment and Termination of the Plan.
The Board may from time to time amend the terms of the Plan and, with
respect to any Shares at the time not subject to Awards, suspend or terminate
the Plans. No amendment, suspension or termination of the Plan shall, without
the consent of any affected holders of an Award, alter or impair any rights or
obligations under any Award theretofore granted.
17. Conditions Upon Issuance of Shares.
(a) Compliance with Securities Laws. Shares of Common Stock shall not be
issued with respect to any Award unless the issuance and delivery of such Shares
shall comply with all relevant provisions of law, including, without limitation,
the Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities law, and the requirements of any
stock exchange upon which the Shares may then be listed.
(b) Special Circumstances. The inability of the Company to obtain approval
from any regulatory body or authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder shall relieve
the Company of any liability in respect of the non-issuance or sale of such
Shares. As a condition to the exercise of an Option or SAR, the Company may
require the person exercising the Option or SAR to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(c) Committee Discretion. The Committee shall have the discretionary
authority to impose in Agreements such restrictions on Shares as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.
18. Reservation of Shares.
The Company, during the term of the Plan, will reserve and keep available a
number of Shares sufficient to satisfy the requirements of the Plan.
19. Withholding Tax.
The Company's obligation to deliver Shares upon exercise of Options and/or
SARs shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and employment tax withholding obligations.
<PAGE>
20. No Employment or Other Rights.
In no event shall an Employee's or Director's eligibility to participate or
participation in the Plan create or be deemed to create any legal or equitable
right of the Employee, Director, or any other party to continue service with the
Company, the Bank, or any Affiliate of such corporations. Except to the extent
provided in Paragraphs 6(b) and 9(a), no Employee or Director shall have a right
to be granted an Award or, having received an Award, the right to again be
granted an Award. However, an Employee or Director who has been granted an Award
may, if otherwise eligible, be granted an additional Award or Awards.
21. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of
the State of Alabama, except to the extent that federal law shall be deemed to
apply.
<PAGE>
LETTER TO STOCKHOLDERS
To Our Stockholders:
This past year has been a very successful one for your Company. At year-
end, total assets had grown to $178 million, an increase of $12 million over
last year. Deposits grew 8.3% to $158 million, as compared to $146 million at
the prior year-end. Net income of over $1 million was higher than the prior
fiscal year, in spite of nonrecurring expenses totaling $626,000 after income
taxes.
As mentioned above, nonrecurring charges were incurred during fiscal
1997. The nonrecurring expense was primarily related to a special assessment
paid by all savings banks to fully capitalize the Savings Association Insurance
Fund. This payment was required by legislation signed on September 30, 1996. The
intent of the legislation was to create parity between banks and thrifts in
terms of the cost of deposit insurance. While the one-time special assessment
was costly to the industry, future deposit insurance premiums have been lowered
and this issue is now behind us.
Without nonrecurring expenses, net income exceeded $1.6 million, which was
an approximate 60% increase over the prior year. The increase in earnings was
largely a function of improvement in net interest income. Additionally, earnings
benefitted from an increase in noninterest income and a decrease in noninterest
expense.
A strong contributor to overall profitability has been the addition of
First State Bank of Bibb County. Fiscal 1997 represents the first full year to
include the results of First State.This acquisition has produced positive
results and demonstrated an effective utilization of capital by growth and
expansion. The Company still maintained a capital level at over 10% of assets,
reflecting good financial strength. Utilization of capital through future
acquisitions will be considered should opportunities arise.
The financial success of your Company created the opportunity for a two-
for-one stock split effected in the form of a 100% stock dividend paid on April
16, 1997. At about the same time, the common stock was listed on the NASDAQ
SmallCap Market under the symbol "FFDB". Liquidity and marketability should be
enhanced as a result of these actions.
Looking to next year, we are in the process of constructing a new First
Federal branch in Vance, Alabama. Vance is located in Tuscaloosa County,
adjacent to Bibb County, which is served by First State Bank. This location was
targeted to be an area of future growth, as it is home to many successful
existing businesses and the new Mercedes-Benz plant. This community is expected
to be very receptive to the community banking atmosphere of First Federal. The
new branch will allow the Company to serve an expanded customer base and market
area, resulting in increased franchise value.
In conclusion, our dedicated staff and Board of Directors are committed
to the continued success of the Company. As always, our focus will remain on
service to the customer and community. Through these efforts, we expect our
tradition of community banking service to thrive as we move forward.
Sincerely,
/s/ B. K. Goodwin, III
B. K. Goodwin, III
Chairman of the Board, Chief
Executive Officer and President
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------
1997(3) 1996(3) 1995 1994 1993
--------- --------- --------- --------- ---------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 13,321 $ 10,542 $ 8,329 $ 7,836 $ 8,417
Interest expense 7,306 5,791 3,860 3,511 3,981
--------- --------- --------- --------- ---------
Net interest income 6,015 4,751 4,469 4,325 4,436
Provision for loan losses 186 75 52 69 90
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 5,829 4,676 4,417 4,256 4,346
Noninterest income 908 496 274 293 209
Noninterest expense 5,218 3,616 3,093 3,046 2,584
--------- --------- --------- ---------
Income before provision for income taxes 1,519 1,556 1,598 1,503 1,971
Provision for income taxes 506 554 715 565 728
--------- --------- --------- --------- ---------
Net income $ 1,013(2) $ 1,002 $ 883 $ 938 $ 1,243
========= ========= ========= ========= =========
Earnings per share (1) $ .82(2) $ .77 $ .64 $ .66 $ .88
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
-----------------------------------------------------------------
1997(3) 1996(3) 1995 1994 1993
--------- --------- --------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $ 178,124 $ 166,184 $ 129,069 $ 114,449 $ 111,868
Loans receivable, net 126,849 126,199 106,224 87,445 78,863
Mortgage-backed securities 13,329 4,766 5,288 6,655 8,773
Securities 16,703 14,653 7,645 11,222 15,398
Deposits 157,970 145,858 106,428 94,939 91,384
Stockholders' equity 17,923 17,231 18,734 18,559 19,159
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------
1997(3) 1996(3) 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
KEY OPERATING DATA
Return on average assets .54%(2) .72% .74% .83% 1.13%
Returns on average equity 5.80(2) 5.63 4.74 5.03 6.66
Average equity to average assets 9.81 12.78 15.73 16.48 16.96
Dividend payout ratio .60 .83 .60 1.19 .31
Customer service facilities and
full service facilities, respectively 7-7 7-7 4-4 4-4 4-2
</TABLE>
- -----------
(1) Earnings per share data has been restated to reflect the two-for-one stock
split paid on April 16, 1997.
(2) Includes the impact of nonrecurring expenses totaling $626,000 after income
taxes.
(3) On January 2, 1996, the Company acquired FSC and its wholly owned
subsidiary, First State. Results of operations of FSC and First State are
included in financial data subsequent to that date.
2
<PAGE>
QUARTERLY FINANCIAL DATA
(UNAUDITED)
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
Fiscal 1996
June 30 September 30 December 31 March 31
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Interest income $2,387 $2,466 $2,540 $3,149
Interest expense 1,319 1,379 1,403 1,690
------ ------ ------ ------
Net interest income 1,068 1,087 1,137 1,459
Provision for loan losses 15 15 15 30
------ ------ ------ ------
Net interest income after provision for loan losses 1,053 1,072 1,122 1,429
Noninterest income 59 75 106 256
Noninterest expense 803 799 933 1,081
------ ------ ------ ------
Income before income taxes 309 348 295 604
Provision for income taxes 127 146 45 236
------ ------ ------ ------
Net income $ 182 $ 202 $ 250 $ 368(1)
====== ====== ====== ======
Earnings per share(3) $ .14 $ .15 $ .18 $ .30
====== ====== ====== ======
Fiscal 1997
Interest income $3,183 $3,372 $3,418 $3,348
Interest expense 1,724 1,876 1,869 1,837
------ ------ ------ ------
Net interest income 1,459 1,496 1,549 1,511
Provision for loan losses 30 55 50 51
------ ------ ------ ------
Net interest income after provision for loan losses 1,429 1,441 1,499 1,460
Noninterest income 194 204 219 291
Noninterest expense 1,068 2,141 928 1,081
------ ------ ------ ------
Income before income taxes 555 (496) 790 670
Provision for income taxes 195 (171) 250 232
------ ------ ------ ------
Net income $ 360 $ (325)(2) $ 540(2) $ 438
====== ====== ====== ======
Earnings per share(3) $ .29 $ (.26)(2) $ .43(2) $ .35
====== ====== ====== ======
</TABLE>
(1) On January 2, 1996, the Company acquired FSC and its wholly owned
subsidiary, First State. Results of operations of FSC and First State
are included in quarterly data subsequent to that date.
(2) Includes the impact of recording the original estimate and subsequent
adjustment of nonrecurring expenses. Actual charges totalled $626,000
after income taxes.
(3) Earnings per share data has been restated to reflect the two-for-one
stock split paid on April 16, 1997.
3
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 1997 AND 1996
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash on hand and in banks $ 5,411 $ 2,221
Interest-bearing deposits in other banks 4,354 5,018
Federal funds sold 4,200 4,875
-------- --------
13,965 12,114
-------- --------
Securities available for sale 10,330 10,845
Assets held for sale 331 1,582
Securities, fair value of $6,395 and
$3,821, respectively 6,373 3,808
Mortgage-backed securities, fair value of $13,382
and $4,778, respectively 13,329 4,766
Loans receivable, net of allowance for loan
losses of $733 and $621, respectively 126,849 126,199
Land, buildings and equipment, less
accumulated depreciation of
$1,893 and $1,654, respectively 2,642 2,606
Goodwill 1,487 1,598
Real estate owned 131 12
Real estate held for investment 931 997
Accrued interest receivable 1,450 1,326
Other assets 306 331
-------- --------
$178,124 $166,184
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $157,970 $145,858
Borrowed funds 1,000 2,002
Accrued interest payable 156 172
Income taxes payable 318 232
Dividend payable 123 97
Other liabilities 634 592
-------- --------
160,201 148,953
-------- --------
Commitments and contingencies (Notes 2, 3, 4, 5, 9 and 10)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
issued and outstanding - -
Common stock, $.01 par value, 3,000,000 shares authorized, 1,477,530
issued and 1,231,582 outstanding in 1997 and 730,084 issued and
607,410 outstanding in 1996 14 7
Paid-in capital 6,601 6,457
Retained earnings 14,256 13,831
Treasury stock, at cost (245,948 and 245,348 shares, respectively) (2,781) (2,774)
Unearned compensation (95) (204)
Unrealized loss on securities available for sale, net (72) (86)
-------- --------
17,923 17,231
-------- --------
$178,124 $166,184
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997, 1996 and 1995
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 11,339 $ 9,416 $ 7,248
Interest and dividends on securities 1,047 496 594
Interest on mortgage-backed securities 536 345 385
Other interest income 399 285 102
------- ------- ------
Total interest income 13,321 10,542 8,329
------- ------- ------
INTEREST EXPENSE
Interest on deposits 7,208 5,612 3,684
Interest on other borrowings 98 179 176
------- ------- ------
Total interest expense 7,306 5,791 3,860
------- ------- ------
Net interest income 6,015 4,751 4,469
Provision for loan losses 186 75 52
------- ------- ------
Net interest income after provision for loan losses 5,829 4,676 4,417
------- ------- ------
NONINTEREST INCOME
Fees for customer services 626 316 215
Miscellaneous income, net 282 180 59
------- ------- ------
Total noninterest income 908 496 274
------- ------- ------
NONINTEREST EXPENSE
Salaries and employee benefits 2,198 1,866 1,520
Office building and equipment expense 546 450 322
Deposit insurance expense 220 285 259
Net (gain) loss on real estate owned 20 1 (11)
Amortization of goodwill 111 27 -
Other operating expenses 1,169 987 1,003
Special deposit insurance assessment 704 - -
Litigation expense 250 - -
------- ------- ------
Total noninterest expense 5,218 3,616 3,093
------- ------- ------
Income before provision for income taxes 1,519 1,556 1,598
Provision for income taxes 506 554 715
------- ------- ------
NET INCOME $ 1,013 $ 1,002 $ 883
======= ======= ======
EARNINGS PER SHARE $ .81 $ .77 $ .64
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996, AND 1995
(Dollar amounts in thousand, except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Loss on
Securities
Unearned Available
Common Paid-In Retained Treasury Compen- for Sale
Stock Capital Earnings Stock sation Net
---------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994 $ 7 $ 6,228 $ 13,306 $ (644) $ (315) $ (23)
Amortization of unearned
compensation - - - - 80 -
Awards under stock plans - 10 - - (10) -
Net Income - - 883 - - -
Dividends declared ($.39 per share) - - (527) - - -
Exercise of stock options - 12 - - - -
Purchase of treasury stock - - - (206) - -
Change in unrealized loss on
securities available
for sale, net - - - - - (67)
---------- ----------- ------------ ------------ ------------ -------------
BALANCE, March 31, 1995 7 6,250 13,662 (850) (245) (90)
Amortization of unearned
compensation - - - - 94 -
Awards under stock plans - 29 - - (29) -
Net Income - - 1,002 - - -
Dividends declared ($.64 per share) - - (833) - - -
Exercise of stock options - 178 - - - -
Purchase of treasury stock - - - (1,924) - -
Purchase of stock for stock plan - - - - (24) -
Change in unrealized loss on
securities available for
sale, net - - - - - -
---------- ----------- ------------ ------------ ------------ -------------
BALANCE, March 31, 1996 7 6,457 13,831 (2,774) (204) (86)
Amortization of unearned
compensation - - - - 115 -
Awards under stock plans - 6 - - (6) -
Net Income - - 1,013 - - -
Dividends declared ($.48 per share) - - (588) - - -
Exercise of stock options - 145 - - - -
Purchase of treasury stock - - - (7) - -
Change in unrealized loss on
securities available for
sale, net - - - - - 14
Two-for-one stock split 7 (7) - - - -
---------- ----------- ------------ ------------ ------------ -------------
BALANCE, March 31, 1997 $ 14 $ 6,601 $ 14,256 $ (2,781) $ (95) $ (72)
========== =========== ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net income $ 1,013 $ 1,002 $ 883
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 252 202 150
Amortization of unearned compensation 115 94 80
Amortization of purchase premiums 91 45 57
Accretion of deferred income, net (33) (108) (74)
Provision (credit) for deferred income taxes (74) 93 30
Provision (credit) for loss on real estate owned - - (9)
Provision for loan losses 186 75 52
Loan fees (cost) deferred, net (127) (164) 142
(Gain) loss on sale of real estate owned, net 3 (3) (11)
Loss on sale of real estate held for investment 16 - -
(Gain) loss on sale of equipment - (8) -
Net loans (originated for sale) sold 1,251 (1,476) 76
Amortization of goodwill 111 27 -
Change in assets and liabilities, net of effect from purchase of subsidiary:
Increase in accrued interest receivable (124) (73) (180)
(Increase) decrease in other assets 25 86 (90)
Increase (decrease) in accrued interest payable (16) 15 27
Increase (decrease) in current income taxes payable 155 (36) 8
Increase (decrease) in other liabilities 42 (3) (284)
-------- ------- --------
Net cash provided by (used in) operating activities 2,886 (232) 857
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary, net of cash acquired - (1,439) -
Proceeds from maturities of securities available for sale 2,250 641 1,450
Proceeds from the sale of securities available for sale 857 - -
Proceeds from maturities of securities 1,626 2,995 2,000
Purchase of securities (4,202) - -
Purchase of securities available for sale (2,591) (1,499) -
Purchase of mortgage-backed securities (10,967) - -
Principal payments received on mortgage-backed securities 2,342 693 1,333
Proceeds from sales of real estate owned 25 18 126
Net loan repayments (originations) (823) (3,469) (18,959)
Capital expenditures (288) (131) (943)
Purchase of real estate held for investment - (2) -
Proceeds from sale of real estate held for investment 50 - -
Proceeds from sale of fixed assets - 8 -
-------- ------- --------
Net cash used in investing activities (11,721) (2,185) (14,993)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net 12,112 12,683 11,489
Proceeds from FHLB advances - 591 3,500
Payment of FHLB advances (1,002) (1,796) (293)
Repurchase of stock for stock plan - (24) -
Proceeds from exercise of stock options 145 178 12
Cash dividends paid (562) (833) (522)
Purchase of treasury stock (7) (1,924) (206)
-------- ------- --------
Net cash provided by financing activities 10,686 8,875 13,980
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,851 6,458 (156)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,114 5,656 5,812
-------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,965 $12,114 $ 5,656
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE>
FIRSTFED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
FirstFed Bancorp, Inc. (the "Company") is the holding company and sole
shareholder of First Federal Savings Bank ("First Federal") and First State
Corporation ("FSC"). FSC was acquired by the Company on January 2, 1996, and is
the sole shareholder of First State Bank of Bibb County ("First State"). First
Federal and First State are referred to herein collectively as the "Banks".
There are no material assets in FSC except for the investment in First State.
The accompanying consolidated financial statements include the accounts of the
Company, First Federal, FSC and First State. All significant intercompany
balances and transactions have been eliminated in consolidation.
Nature of Operations
The Banks, through seven branch offices located in Alabama, are engaged in a
full range of banking services. Those services consist of providing various
deposit opportunities to customers and originating primarily 1-4 family mortgage
loans and to a lesser extent commercial and installment loans in portions of the
Birmingham metropolitan areas and counties surrounding its south and west sides.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Land, Buildings and Equipment
Land, buildings and equipment are stated at cost. Depreciation is provided at
straight-line rates over the estimated service lives of the related property
(15-50 years for buildings and improvements and 3-10 years for furniture and
equipment). Expenditures for maintenance and repairs are charged to operations
as incurred; expenditures for renewals and improvements are capitalized and
written off through depreciation and amortization charges. Equipment retired or
sold is removed from the asset and related accumulated depreciation accounts and
any profit or loss resulting therefrom is reflected in the consolidated
statements of income.
Loans Receivable
Loans receivable are stated at unpaid principal balances, net of the
allowance for loan losses and deferred loan origination fees and costs. Interest
is credited to income based upon the principal amount outstanding. An allowance
is established for uncollectible interest on loans that are 90 days past due
based on management's periodic evaluation. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent that cash payments are received
until, in management's judgement, the borrower's ability to make periodic
interest and principal payments has been demonstrated, in which case the loan is
returned to accrual status.
Loan Origination Fees and Related Costs
Nonrefundable fees associated with loan originations, net of direct costs
associated with originating loans, are deferred and amortized over the
contractual lives of the loans or the repricing period for certain loans using
the level yield method. Such amortization is reflected in "Interest and fees on
loans" in the accompanying consolidated statements of income. Loan commitment
fees are recognized in income upon expiration of the commitment period, unless
the commitment results in the loan being funded.
8
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions charged to
expense at levels which management considers adequate to absorb losses inherent
in the loan portfolio at each reporting date. Management's estimation of this
amount includes a review of all loans for which full collectibility is not
reasonably assured and considers, among other factors, prior years' loss
experience, economic conditions, distribution of portfolio loans by risk class,
and the estimated value of underlying collateral, and the balance of any
impaired loans (generally considered to be nonperforming loans, excluding
residential mortgages and other homogeneous loans). Though management believes
the allowance for loan losses to be adequate, ultimate losses may vary from
their estimations; however, the allowance is reviewed periodically and as
adjustments become necessary they are reported in earnings in the periods in
which they become known. Specific allowances for impaired loans are based on
comparisons of the carrying values of the loans to the present value of these
loans' estimated cash flows at each loan's effective interest rate, the fair
value of the collateral, or the loans' observable market prices. The Company has
no loans designated as impaired at March 31, 1997 or 1996.
Income Taxes
The consolidated financial statements have been prepared on an accrual basis.
Because some income and expense items are recognized in different periods for
financial reporting purposes and for purposes of computing currently payable
income taxes, a provision or credit for deferred income taxes is made for such
temporary differences.
Statements of Cash Flows
For purposes of presenting the consolidated statements of cash flows, the
Company considers cash on hand and in banks, interest-bearing deposits in other
banks and Federal funds sold to be cash and cash equivalents.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
SUPPLEMENTAL CASH FLOW INFORMATION: (In Thousands)
<S> <C> <C> <C>
Cash paid during the period for-
Income taxes $ 425 $ 424 $ 648
Interest 7,322 5,695 3,883
====== ====== ======
Non-cash transactions-
Transfers of loans receivable to real estate owned $ 147 $ 26 $ 60
Noncash compensation under stock plans 6 24 -
Declaration of cash dividend payable 123 97 107
Change in unrealized net loss on securities available for sale,
net of deferred tax of ($7,000), ($2,000) and $37,000, respectively (14) (4) 67
====== ====== ======
</TABLE>
Assets Held for Sale
Assets held for sale are recorded at the lower of amortized cost or market
value, as such assets are not intended to be held to maturity. As of March 31,
1997 and 1996, assets held for sale consisted of mortgage loans in the process
of being sold to third-party investors.
Securities
The Company classifies securities as either trading, available for sale or
held to maturity based on management's intent at the time of purchase and the
Company's ability to hold such securities to maturity.
Securities designated as available for sale are carried at fair value. The
unrealized difference between amortized cost and fair value of securities
available for sale is excluded from earnings and is reported net of deferred
taxes as a component of stockholders' equity. This caption includes securities
that management intends to use as part of its asset/liability management
strategy or that may be sold in response to changes in interest rates, changes
in prepayment risk, liquidity needs, or for other purposes.
Securities classified as held to maturity are carried at amortized cost, as
the Company has the ability and positive intent to hold these securities to
maturity. Federal Home Loan Bank and Federal Reserve stock are required stock
holdings and are carried at amortized cost, which is deemed to approximate
market value. There are no securities classified as trading as of March 31, 1997
or 1996.
9
<PAGE>
Amortization of premium and accretion of discount are computed under the
interest method. The adjusted cost of the specific security sold is used to
compute realized gain or loss on the sale of securities.
Mortgage-Backed Securities
The Company intends and has the ability to hold mortgage-backed securities to
maturity. Accordingly, they are stated at amortized cost. Amortization of
premiums and accretion of discounts are calculated on the level yield method.
Gains and losses on sales of mortgage-backed securities are calculated based on
the adjusted cost of the specific identification of securities sold.
Earnings Per Share and Dividends
Earnings per share has been computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the year.
Common stock equivalents includes the number of shares issuable on exercise of
the outstanding stock options less the number of shares that could have been
purchased with the proceeds from the exercise of the stock options based on the
greater of the average price of the common stock during the year or the price of
the common stock as of year end. The weighted average number of shares used for
fiscal years ended March 31, 1997, 1996, and 1995 were 1,260,706, 1,299,105 and
1,393,706, respectively. Total dividends declared during the fiscal year are
based on shares outstanding.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Earlier
or retroactive application is not permitted. The Company adopted the provisions
of the Standard on January 1, 1997. Based on the Company's current operation
activities, management does not believe that the adoption of this statement will
have a material impact on the Company's financial condition or results of
operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
Statement established standards for computing and presenting earnings per share,
("EPS"). This Statement will simplify the standards for computing EPS previously
found in APB Opinion No. 15, "Earnings per Share," and will make them comparable
to international EPS standards. It will replace the presentation of primary EPS
with a presentation of basic EPS and will require dual presentation of basic and
diluted EPS on the face of the income statement and disclosure of a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This Statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods and requires restatement of all prior-period EPS
data presented. The Company will adopt the Statement at fiscal year-end 1998.
Had the Company implemented SFAS No. 128 on April 1, 1995, the pro forma EPS
results would have been as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- -------------------------------
Dilutive Dilutive
Effect of Effect of
Basic Options Diluted Basic Options Diluted
Issued Issued
----------- --------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 1,013,000 - $1,013,000 $1,002,000 - $1,002,000
Shares available to
common shareholders 1,223,052 37,654 1,260,706 1,272,482 26,623 1,299,105
----------- --------- ---------- ---------- --------- ----------
Earnings Per Share $ 0.83 - $ 0.81 $ 0.79 - $ 0.77
=========== ========= ========== ========== ========= ==========
</TABLE>
10
<PAGE>
Business Combination
On January 2, 1996, the Company acquired FSC and its wholly owned subsidiary,
First State. This transaction was accounted for under the purchase method of
accounting and, accordingly, the consolidated statements of income include FSC
and First State's results of operations subsequent to that date. The purchase
price was approximately $4,275,000 for the acquisition of all outstanding shares
of FSC. The total purchase price exceeded the fair value of net assets acquired
by approximately $1,600,000, which is being amortized over 15 years as goodwill.
Assuming the acquisition of First State had been consummated at April 1,
1994, the consolidated results of operations on a pro forma basis for the years
ended March 31, 1996, and March 31, 1995, would have been as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net Interest Income $5,749,000 $5,716,000
Net Income $1,162,000 $1,010,000
Earnings Per Share $ .90 $ .72
</TABLE>
Stock Split
On February 18, 1997, the Board of Directors declared a two-for-one stock
split, effected in the form of a 100% stock dividend on the Company's
outstanding common stock to stockholders of record on April 1, 1997. Common
stock and paid-in capital as of March 31, 1997, have been restated to reflect
the split. All share and per share data included in this Annual Report have been
restated to reflect the split.
2. INTEREST RATE SENSITIVITY:
A portion of the Company's interest-earning assets are long-term fixed-rate
mortgage loans and mortgage-backed securities (approximately 14%); likewise, one
source of funds is savings deposits with maturities longer than three years
(approximately 8%). Because of the short-term nature of most savings deposits,
their cost generally reflects returns currently available in the money market.
Accordingly, the savings deposits have a high degree of interest rate
sensitivity. Long-term fixed-rate loans in the mortgage loan portfolio have much
less sensitivity to changes in current market rates. As a result, the Banks
focus on originating adjustable-rate mortgage loans and holding adjustable-rate
mortgage-backed securities (approximately 67% of total loans). Even so, changes
in market interest rates may affect the level of net interest income as related
to such fixed rate loans.
3. EQUITY:
In December 1991, the Company sold 690,000 shares of common stock through
subscription offerings in connection with First Federal's conversion from a
federally chartered mutual savings bank to a federally chartered stock savings
bank (the "Conversion"). Net proceeds of the offering were approximately $5.4
million.
As required by the Office of Thrift Supervision ("OTS") regulations, First
Federal established a liquidation account at the time of the Conversion for the
benefit of the remaining eligible account holders. The initial balance of this
liquidation account was equal to First Federal's net worth as defined by OTS
regulations as of the date of the latest statement of financial condition at the
time of conversion. In the event of a complete liquidation of First Federal (and
only in such event) each eligible holder shall be entitled to receive a
liquidation distribution from this account in the amount of the then current
adjusted balance for deposits then held, before any liquidation distribution may
be made to any stockholders. The liquidation account will not restrict First
Federal's use or application of net worth except for the repurchase of First
Federal's stock and the payment of dividends, if such payments would cause a
reduction in First Federal's net worth below the liquidation account.
Furthermore, First Federal may be prohibited from declaring cash dividends and
repurchasing its own stock based upon various other regulatory restrictions.
4. INCENTIVE COMPENSATION AND EMPLOYEE BENEFITS:
Defined Benefit Pension Plan
First Federal has a noncontributory defined benefit pension plan available to
all eligible employees. The following table sets forth the plan's funded status
as of March 31, 1997, 1996 and 1995:
11
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of ($754), ($1,018), and ($980) at March 31, 1997, 1996,
and 1995, respectively $ (808) $ (1,096) $ (1,049)
=========== ========= ==========
Projected benefit obligation for services rendered to date $ (1,241) $ (1,495) $ (1,405)
Plan assets at fair value, primarily pooled stock and bond funds 989 1,403 1,208
----------- --------- ----------
Projected benefit obligation in excess of plan assets (252) (92) (197)
Unrecognized transitional asset (18) (32) (35)
Unrecognized prior service cost 2 3 3
Unrecognized net loss 157 54 188
----------- --------- ----------
Accrued pension expense included in other liabilities $ (111) $ (67) $ (41)
=========== ========= ==========
</TABLE>
The components of net pension expense consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 76 $ 65 $ 49
Interest cost 75 110 83
Actual return on assets (91) (238) 5
Net amortization and deferral 67 114 (112)
----------- --------- ----------
Net periodic pension expense $ 127 $ 51 $ 25
=========== ========= ==========
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted-average discount rate was 7% and the rate of increase
in future compensation levels was 5% for 1997, 1996 and 1995. The expected long-
term rate of return on assets was 9.0% for 1997, 9.5% for 1996 and 9.0% for
1995.
Employee Stock Ownership Plan
During fiscal 1992, the Company established an Employee Stock Ownership Plan
(ESOP) for eligible employees. The ESOP purchased 82,800 shares of the Company's
common stock with the proceeds from a $414,000 third party bank note. During
fiscal 1994, the Company replaced the third party as lender on the note. The
balance on the note at March 31, 1997, was $80,100. The note is secured by the
common stock owned by the ESOP. Principal payments under the note are due in
equal and annual installments through December 1998; interest is payable
quarterly at a rate of 8.5%. The compensation expense related to the ESOP for
fiscal 1997, 1996 and 1995 was approximately $59,000 in each year. Unearned
compensation was also reduced by $38,000 representing a payment on the note with
dividends paid on unallocated ESOP shares. Unearned compensation related to the
ESOP was approximately $61,000 and $158,000 at March 31, 1997 and 1996, and is
shown as a reduction of stockholders' equity in the accompanying consolidated
statements of financial condition.
Recognition and Retention Plans
During fiscal 1992, the Company established two Recognition and Retention
Plans (RRPs) which purchased 33,796 shares of the Company's common stock issued
in the Conversion and 21,404 shares on the open market subsequent to the
Conversion. The RRPs provide for awards of common stock to directors and
officers of the Bank at no cost to these participants. During fiscal 1996, an
additional 2,040 shares were purchased on the open market and awarded to
directors elected subsequent to the Conversion. The aggregate fair market value
of the shares purchased by the RRPs is considered unearned compensation at the
time of purchase and compensation is earned ratably over the stipulated period.
The compensation expense related to the RRPs for fiscal 1997, 1996 and 1995 was
approximately $7,000, $21,000 and $20,000, respectively. At March 31, 1997 and
1996, unearned compensation related to the RRPs was approximately $12,000 and
$19,000, respectively, and is shown as a reduction to stockholders' equity in
the accompanying consolidated statements of financial condition.
Directors' Retirement Plan
During fiscal 1992, the Company established the Outside Directors' Retirement
Plan (DRP) whereby nonmanagement directors or their beneficiaries will be
provided specific amounts of annual retirement benefits for a period of 10 years
12
<PAGE>
following retirement. During fiscal 1994, the DRP was amended to include all
directors and was renamed the Directors' Retirement Plan. The amendment also
reduced the vesting period for the directors. The related compensation expense
for the DRP was approximately $43,000 and $40,000 for fiscal 1996 and 1995,
respectively. There was no compensation expense for the DRP for fiscal 1997 due
to appreciation of trust assets. During fiscal 1995, a trust was established and
funds were transferred to the trust. As of March 31, 1997 and 1996, the trust
was fully funded.
Stock Option Plans
The Company has three stockholder-approved stock option plans; the Incentive
Stock Option Plan for senior officers and key employees (the "Stock Plan"), the
Stock Option Plan for Outside Directors (the "Directors' Plan") and the 1995
Stock Option and Incentive Plan (the "1995 Plan"). All plans provide for the
grant of options at an exercise price equal to the fair market value on the date
of grant. Options under the Stock Plan become exercisable on a basis as
determined by the Stock Option Committee. Options granted under the Directors'
Plan and 1995 Plan are immediately exercisable. Options under all plans expire
no later than 10 years from date of grant.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 63,908 $ 7.07 95,500 $ 6.22 89,900 $ 5.81
Granted 57,000 11.98 2,408 11.56 10,000 10.50
Exercised (12,400) 7.50 (34,000) 5.00 (2,400) 5.00
Forfeited - - - - (2,000) 10.56
-------- ------- -------
Outstanding at end of year 108,508 9.60 63,908 7.07 95,500 6.22
======== ======= =======
Exercisable at end of year 101,608 9.47 47,508 6.42 62,500 5.20
Weighted average fair value
of options granted $ 2.39 $ 1.72 N/A
</TABLE>
32,600 of the 108,508 options outstanding at March 31, 1997, have an exercise
price of $5.00 and a weighted average remaining contractual life of 4.75 years.
All of these options are exercisable. The remaining 75,908 options have exercise
prices between $10.50 and $13.00, with a weighted average remaining contractual
life of 8.50 years. 69,008 of these options are exercisable; their weighted
average exercise price is $11.58.
Incentive Compensation Plan
During fiscal 1995, the Company established the stockholder-approved FirstFed
Bancorp, Inc. Incentive Compensation Plan whereby eligible employees and
directors may receive cash bonuses in the event the Company achieves certain
performance goals indicative of its profitability and stability. In addition,
key employees and directors are eligible to receive "Restricted Stock" awards
and stock option awards. The Restricted Stock awards are considered unearned
compensation at the time of award and compensation is earned ratably over the
stipulated three year vesting period. There were 492 and 2,456 shares of
restricted stock awarded in fiscal 1997 and 1996, respectively. The compensation
expense related to the Restricted Stock awards for fiscal 1997, 1996 and 1995
was approximately $11,000, $15,000 and $1,000. At March 31, 1997 and 1996,
unearned compensation related to the Restricted Stock awards was approximately
$22,000 and $27,000, and is shown as a reduction to stockholders' equity in the
accompanying consolidated statements of financial condition.
The stock option awards are incentive stock options for employees and non-
incentive stock options for non-employee directors. Both provide for the grant
of options at an exercise price equal to the fair market value on the date of
grant. Options granted are immediately exercisable. Options expire no later than
10 years from date of grant.
13
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 16,580 $ 11.50 5,010 $ 10.50 - $ -
Granted 2,460 12.50 12,280 11.88 5,010 10.50
Exercised (4,470) 11.55 (710) 11.03 - -
Forfeited (320) 11.88 - - - -
-------- ------- ------
Outstanding at end of year 14,250 11.64 16,580 11.50 5,010 10.50
======== ======= ======
Exercisable at end of year 14,250 11.64 16,580 11.50 5,010 10.50
Weighted average fair value
of options granted $ 2.55 $ 2.17 N/A
</TABLE>
The Company reserved 48,000 shares of common stock for issuance to
participants as options and restricted stock awards. There are 24,620 shares
available for future grants at March 31, 1997.
Savings Plan
First State sponsors a 401(k) savings plan covering substantially all of its
employees and makes matching contributions up to 4% of employee contributions.
First State's matching contributions for the three months ended March 31, 1996,
totalled $3,041 and for the year ended March 31, 1997, totalled $12,676.
Stock Based Compensation
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation", the Company has elected to continue to apply APB Opinion 25
and related Interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost for options granted at market
value. If the Company had elected to recognize compensation cost for options
granted in 1997 and 1996, based on the fair value of the options granted at
grant date as permitted by SFAS No. 123, net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands except
per share amounts):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net income - as reported $ 1,013 $ 1,002
========= =========
Net income - pro forma $ 891 975
========= =========
Earnings per share - as reported $ .81 $ .77
========= =========
Earnings per share - pro forma $ .70 $ .75
========= =========
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro-forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Expected dividend yield 3.69% 3.96%
Expected stock price volatility 23% 23%
Risk-free interest rate 6.48% 5.54%
Expected life of options 4 years 4 years
</TABLE>
14
<PAGE>
5. LOANS RECEIVABLE:
Loans receivable at March 31, 1997 and 1996, consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Mortgage loans:
One to four family residential $ 95,451 $100,596
Commercial real estate 12,849 8,237
Other 1,741 4,010
Commercial loans 7,804 6,527
Consumer loans 12,407 11,469
-------- --------
130,252 130,839
======== ========
Less--
Undisbursed portion of
mortgage loans 2,523 3,381
Escrow, net 177 173
Discount on loans purchased 3 4
Allowance for loan losses 733 621
Net deferred loan fees (costs) (33) 461
-------- --------
$126,849 $126,199
======== ========
</TABLE>
First Federal and First State have a credit concentration in residential real
estate mortgage loans. Substantially all of the customers are located in the
trade areas of Jefferson, Shelby and Bibb Counties in Alabama, primarily in the
cities of Bessemer, Hoover, Hueytown, Pelham and West Blocton. Although the
Banks generally have conservative underwriting standards, including a collateral
policy calling for low loan to collateral values, the ability of their borrowers
to meet their residential mortgage obligations is dependent upon local economic
conditions.
In the ordinary course of business, First Federal and First State make loans
to officers, directors, employees and other related parties. These loans are
made on substantially the same terms as those prevailing for comparable
transactions with others. Such loans do not involve more than normal risk of
collectibility nor do they present other unfavorable features. The amounts of
such related party loans and commitments at March 31, 1997 and 1996, were
$2,254,000 and $2,348,000, respectively. During fiscal 1997, new loans totalled
$1,137,000, repayments were $1,103,000 and loans that are no longer related
totalled $128,000.
An analysis of the allowance for loan losses is detailed below:
<TABLE>
<CAPTION>
For the Year Ended March 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Balance, beginning
of year $ 621 $ 242 $ 215
Provision 186 75 52
Charge-offs (242) (96) (55)
Recoveries 168 80 30
Addition of First State - 320 -
----- ----- -----
Balance, end of year $ 733 $ 621 $ 242
----- ----- -----
</TABLE>
6. REAL ESTATE OWNED AND HELD FOR INVESTMENT:
Foreclosed real estate owned is carried at the lower of the recorded
investment in the loan or fair value of the property, less estimated costs of
disposition. Real estate held for investment is recorded at cost which does not
exceed fair value and primarily represents commercial property located in
Hoover, Alabama, which is currently under a lease contract with a purchase
option. Holding costs related to real estate owned and real estate held for
investment are expensed as incurred. Valuations are periodically performed by
management and a provision for estimated losses on real estate is charged to
earnings when such losses are anticipated.
7. DEPOSITS:
The weighted average rates payable on all deposits at March 31, 1997 and
1996, were 4.73% and 4.81% respectively. Deposits at March 31 and the related
range of interest rates payable for deposits outstanding at March 31, 1997, were
as follows:
15
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------- ----------
Types and rates: (In thousands)
<S> <C> <C>
Transaction accounts,
0.00% to 3.25% $ 26,803 $ 25,588
Passbook savings,
3.00% to 3.50% 26,093 27,548
Savings certificates,
3.00% to 8.00% 105,074 92,722
---------- ----------
$ 157,970 $ 145,858
========== ==========
</TABLE>
The aggregate amount of jumbo savings certificates with a minimum denomination
of $100,000 was $18,957,000 and $17,967,000 at March 31, 1997 and 1996,
respectively.
Interest on deposits for the fiscal years ended March 31, 1997, 1996 and 1995
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Transaction accounts $ 389 $ 357 $ 348
Passbook savings 819 873 752
Savings certificates 6,000 4,382 2,584
---------- ---------- ----------
$ 7,208 $ 5,612 $ 3,684
========== ========== ==========
</TABLE>
At March 31, 1997 and 1996, the scheduled maturities of savings certificates
were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(In thousands)
<S> <C> <C>
Within one year $ 66,027 $ 52,284
One to three years 26,006 18,536
Three to five years 13,041 21,902
---------- ----------
$ 105,074 $ 92,722
========== ==========
</TABLE>
8.BORROWED FUNDS:
The following table presents federal funds purchased and short-term FHLB
advances.
<TABLE>
<CAPTION>
Federal
Funds FHLB
Purchased Advances
---------- ----------
(Dollars in thousands)
<S> <C> <C>
March 31, 1996:
Balance $ - $ 1,002
Maximum indebtedness at any month end 2,000 2,207
Daily average indebtedness outstanding 257 1,578
Average rate paid for the year 5.30% 6.52%
Average rate on period-end borrowings - 6.16%
March 31, 1997:
Balance $ - $ 1,000
Maximum indebtedness at any month end - 1,943
Daily average indebtedness outstanding - 1,418
Average rate paid for the year - 6.83%
Average rate on period-end borrowings - 7.26%
</TABLE>
Additionally, the Company had long-term FHLB advances outstanding at March 31,
1996, of $1,000,000 at a rate of 7.26% that matures in fiscal 1998. There were
no long-term FHLB advances outstanding at March 31, 1997.
16
<PAGE>
9.COMMITMENTS AND CONTINGENCIES:
Off-Balance Sheet Items
The Banks' policies as to collateral and assumption of credit risk for off-
balance sheet items are essentially the same as those for extensions of credit
to its customers. At March 31, 1997, the Banks' off-balance sheet activities
include outstanding commitments to originate and fund adjustable-rate single-
family mortgage loans, home equity loans and lines of credit of $4.9 million.
Leases
First Federal has a lease agreement for the building in which a branch office
is located. Rental expense under this lease was $25,690, $24,900 and $24,135 for
the years ended March 31, 1997, 1996 and 1995, respectively. The lease agreement
expires May 31, 1999. Future minimum lease payments under the lease in effect at
March 31, 1997, are $28,000 for 1998, $29,000 for 1999 and $5,000 for 2000.
Stock Repurchase Program
The Company has approved a stock repurchase program of up to 10% of its
outstanding common stock at the time of announcement. As of March 31, 1997,
approximately 122,000 shares can be repurchased under this program.
Special Dividend Declared
Subsequent to year end, the Company declared a special dividend of $.10 per
share payable on June 12, 1997, to stockholders of record on June 2, 1997. The
total cash payments required for this dividend will be approximately $123,000.
Employment Agreements
The Company has employment agreements with three executive officers. These
agreements provide for salary continuation for the remaining term of the
contract and insurance benefits for a six month period in the event of a change
in control of the Company or the death of the officer. These contracts currently
expire December 31, 1999, and the maximum aggregate liability to the Company at
March 31, 1997, is approximately $876,000.
Lease/Purchase Contract
During May 1995, the Company entered into a contract for the lease of its
investment property located in Hoover, Alabama. The contract contains a purchase
option that expires February 1998.
Branch Construction Contract
During fiscal 1997, First Federal entered into a contract for the construction
of a branch in Vance, Alabama. The branch is scheduled to open in July, 1997.
Litigation
The Company and the Banks are parties to litigation and claims arising in the
normal course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such litigation and claims
will not be material to the consolidated financial statements.
17
<PAGE>
10. INCOME TAXES:
The provision for income taxes was as follows:
<TABLE>
<CAPTION>
For the Year Ended
March 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 508 $ 407 $ 611
State 72 54 74
---------- ---------- ---------
580 461 685
Deferred, net (74) 93 30
---------- ---------- ---------
Totals $ 506 $ 554 $ 715
========== ========== =========
</TABLE>
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before taxes
were as follows:
<TABLE>
<CAPTION>
For the Year Ended
March 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Pre-tax income at statutory rates $ 516 $ 529 $ 544
Add (deduct):
State income tax, net of federal
tax benefit 39 34 49
Restoration of deferred tax liability - - 103
Other, net (49) (9) 19
---------- ---------- ----------
Totals $ 506 $ 554 $ 715
========== ========== ==========
</TABLE>
The components of the net deferred tax liability as of March 31, 1997, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Deferred tax asset:
Retirement and other benefit plans $ 196 $ 178 $ 233
Unrealized loss on securities
available for sale 53 60 50
Other 110 51 90
---------- ---------- ----------
Total deferred tax asset 359 289 373
Deferred tax liability:
Deferred loan fees (194) (220) (151)
FHLB stock dividend (203) (203) (181)
Depreciation (51) (54) (58)
Other (70) (38) (65)
---------- ---------- ----------
Total deferred tax liability (518) (515) (455)
---------- ---------- ----------
Net deferred tax liability $ (159) $ (226) $ (82)
========== ========== ==========
</TABLE>
Thrift institutions, in determining taxable income, have historically been
allowed special bad debt deductions based on specified experience formula or on
a percentage of taxable income before such deductions. The bad debt deduction
based on the latter has been gradually reduced to 8%. On August 2, 1996,
Congress passed the Small Business Job Protection Act that will, among other
things, repeal the tax bad debt reserve method for thrifts effective for taxable
years beginning after December 31, 1995. As a result, thrifts must recapture
into taxable income the amount of their post-1987 tax bad debt reserves over a
six-year period beginning after 1995. This recapture can be deferred for up to
two years if the thrift satisfies a residential loan portfolio test. The Bank is
expected to recapture approximately $545,000, $338,000 tax effected, of its tax
18
<PAGE>
bad debt reserves into taxable income over six years as a result of this new
law. The recapture will not have any effect on the Company's net income because
the related tax expense has already been accrued.
Because of such repeal, thrifts such as First Federal may only use the same
tax bad debt reserve that is allowed for commercial banks. Accordingly, a thrift
with assets of $500 million or less may only add to its tax bad debt reserves
based upon its moving six-year average experience of actual loan losses (i.e.,
the experience method).
The portion of a thrift's tax bad debt reserve that is not recaptured under
this new law is only subject to recapture at a later date under certain
circumstances. These include stock repurchases, redemptions by the thrift or if
the thrift converts to a type of institution (such as credit union) that is not
considered a commercial bank for tax purposes. However, no further recapture
would be required if the thrift converted to a commercial bank charter or was
acquired by a commercial bank.
11. SECURITIES AVAILABLE FOR SALE, AND SECURITIES AND MORTGAGE-BACKED
SECURITIES:
The amortized cost, approximate fair value and gross unrealized gains and
losses of the Banks' securities as of March 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
SECURITIES AND MORTGAGE-BACKED SECURITIES
-------------------------------------------------------------------------------------------------
March 31, 1997 March 31, 1996
---------------------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain (Loss) Value Cost Gain (Loss) Value
-------------- -------------- ----------- ------- --------- ---------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government Agency
securities $ 3,990 $ - $ - $ 3,990 $ 1,512 $ - $ (12) $1,500
FHLB and Federal Reserve
stock, at cost 1,393 - - 1,393 1,282 - - 1,282
Obligations of states and
political subdivisions 990 23 (1) 1,012 1,014 27 (2) 1,039
--------- -------- --------- -------- -------- ------- ------- ------
$ 6,373 $ 23 $ (1) $ 6,395 $ 3,808 $ 27 $ (14) $3,821
========= ======== ========= ======== ======== ======= ======= ======
Mortgage-backed securities $ 13,329 $ 107 $ (54) $ 13,382 $ 4,766 $ 47 $ (35) $4,778
========= ======== ========= ======== ======== ======= ======= ======
<CAPTION>
SECURITIES AVAILABLE FOR SALE
-------------------------------------------------------------------------------------------------
March 31, 1997 March 31, 1996
---------------------------------------------------- -------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gain (Loss) Value Cost Gain (Loss) Value
-------------- -------------- ----------- ------- --------- ---------- ----------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government Agency
securities $ 10,456 $ - $ (126) $ 10,330 $ 10,991 $ 8 $ (154) $10,845
========= ======== ========= ======== ======== ======= ======= =======
</TABLE>
The amortized cost and estimated fair value of securities and securities
available for sale at March 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Securities Securities
Available for Sale
--------------------- --------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 25 $ 25 $ 3,804 $ 3,770
Due after one year through five years 4,255 4,258 5,563 5,491
Due after five years through ten years 700 719 1,089 1,069
------- ------- -------- --------
4,980 5,002 10,456 10,330
FHLB and Federal Reserve stock 1,393 1,393 - -
------- ------- -------- --------
$ 6,373 $ 6,395 $ 10,456 $ 10,330
======= ======= ======== ========
</TABLE>
19
<PAGE>
Securities and mortgage-backed securities totaling $4,771,000 have been
pledged as collateral against certain large public deposits at March 31, 1997.
Deposits associated with pledged securities and mortgage-backed securities had
an aggregate balance of $3,664,000 at March 31, 1997. The mortgage-backed
securities held at March 31, 1997, bear interest at fixed and adjustable rates
ranging from 6.08% to 9.50% and mature at various dates ranging from April 1997
to February 2026. Proceeds from sales of securities were $857,000 in 1997. Gross
gains of $5,017 and gross losses of $5,811 were realized on those sales in 1997.
There were no sales of securities or mortgage-backed securities during fiscal
1996 or 1995.
12. ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable at March 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Securities $ 109 $ 220
Securities available for sale 100 24
Mortgage-backed securities 93 48
Loans receivable 1,148 1,034
------ ------
$1,450 $1,326
====== ======
</TABLE>
13. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings and equipment at March 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Land $ 566 $ 506
Buildings and improvements 2,379 2,307
Equipment 1,590 1,447
------ ------
4,535 4,260
Less: Accumulated depreciation 1,893 1,654
------ ------
Net carrying amounts $2,642 $2,606
====== ======
</TABLE>
14. SUPPLEMENTAL INCOME STATEMENT INFORMATION:
The following provides further analysis of other operating expenses for the
years ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -------
(In thousands)
<S> <C> <C> <C>
Professional services $ 216 $ 163 $ 202
Computer services 246 210 171
Advertising 82 96 132
Stationary and supplies 114 92 66
Other 511 426 432
------ ----- ------
$1,169 $ 987 $1,003
====== ===== ======
</TABLE>
15. PARENT COMPANY FINANCIAL STATEMENTS:
Separate condensed financial statements of FirstFed Bancorp, Inc., (the
"Parent Company") as of and for the years ended March 31, 1997 and 1996, are
presented below:
20
<PAGE>
STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND 1996
(In thousands)
<TABLE>
<CAPTION>
ASSETS: 1997 1996
--------- ---------
<S> <C> <C>
Interest-bearing deposits $ 1,487 $ 1,832
Investment in subsidiaries 15,548 14,522
Real estate held for investment 931 997
Other assets 270 73
------- -------
Total assets $18,236 $17,424
======= =======
LIABILITIES:
Dividend payable $ 123 $ 97
Other liabilities 190 96
------- -------
Total liabilities 313 193
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 14 7
Paid-in-capital 6,601 6,457
Retained earnings 14,256 13,831
Treasury stock (2,781) (2,774)
Unearned compensation (95) (204)
Unrealized loss on securities available
for sale, net (72) (86)
------- -------
Total stockholders' equity 17,923 17,231
------- -------
Total liabilities and stockholders'
equity $18,236 $17,424
======= =======
</TABLE>
STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- --------------
<S> <C> <C> <C>
Income from subsidiaries:
Dividends $ - $ 7,177 $ 915
Interest 50 36 53
Interest income 13 18 24
Rental income 129 77 10
------ ------- ------
Total income 192 7,308 1,002
Operating expense (302) (382) (172)
------ ------- ------
Income (loss) before income taxes
and equity in undistributed
(distribution in excess of)
current year subsidiaries
earnings (110) 6,926 830
Income taxes 35 108 (10)
------ ------- ------
Income (loss) before equity in
undistributed (distribution in
excess of) current year
subsidiaries earnings (75) 7,034 820
Equity in undistributed current
year subsidiaries earnings 1,088 - 63
Distribution in excess of current
year subsidiaries earnings - (6,032) -
------ ------- ------
Net income $1,013 $ 1,002 $ 883
====== ======= ======
</TABLE>
21
<PAGE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
Operating Activities: 1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Net income $ 1,013 $ 1,002 $ 883
Distribution in excess of (equity
in undistributed) current year
earnings of subsidiary (1,088) 6,032 (63)
------- ------- ------
(75) 7,034 820
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of unearned
compensation 115 95 80
Other, net (11) (22) 2
------- ------- ------
Net cash provided by operating
activities 29 7,107 902
------- ------- ------
Investing Activities:
Capital contribution to First
Federal - - (5)
Purchase of FSC - (4,275) -
Capital expenditures - (2) -
Proceeds from the sale of real
estate held for investment 50 - -
------- ------- ------
Net cash provided by (used
in, investing activities 50 (4,277) (5)
------- ------- ------
Financing Activities:
Repurchase of stock for stock plans - (24) -
Proceeds from exercise of
stock options 145 178 12
Dividends paid (562) (833) (522)
Purchase of treasury stock (7) (1,924) (206)
------- ------- ------
Net cash used in financing
activities (424) (2,603) (716)
------- ------- ------
Increase (decrease) in cash and
cash equivalents (345) 227 181
Cash and cash equivalents at
beginning of year 1,832 1,605 1,424
------- ------- ------
Cash and cash equivalents at end
of year $ 1,487 $ 1,832 $1,605
======= ======= ======
</TABLE>
First Federal is restricted by the OTS as to the amount of dividends it may
pay to FirstFed Bancorp, Inc. Under the capital distribution rule, which
includes dividend payments from First Federal to FirstFed Bancorp, Inc., the
ability of an institution to pay dividends will depend on which of three
categories it is in: Tier 1, Tier 2, or Tier 3. Tier 1 institutions currently
meet fully phased-in capital requirements, Tier 2 institutions currently meet
minimum capital requirements and Tier 3 institutions currently fail minimum
capital requirements. First Federal is a Tier 1 institution and, accordingly,
can pay dividends up to 100% of net income and 50% of surplus capital existing
at the beginning of the year, as long as the payment of such dividends does not
reduce capital to a level below First Federal's regulatory capital requirements
as defined by the OTS without prior OTS approval. Accordingly, under these
regulations approximately $2.1 million was available for dividend at March 31,
1997, without prior OTS approval.
Banking laws and other regulations limit the amount of dividends a bank
subsidiary may pay without prior regulatory approval. At March 31, 1997,
approximately $400,000 was available for dividend payment from First State
without such prior approval.
16. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The Company's fair values of financial instruments as presented in accordance
with the requirements of SFAS No. 107 and their related carrying amounts are as
follows:
22
<PAGE>
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
---------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 5,411 $ 5,411 $ 2,221 $ 2,221
Interest bearing deposits in banks 4,354 4,354 5,018 5,018
Federal funds sold 4,200 4,200 4,875 4,875
Securities available for sale 10,330 10,330 10,845 10,845
Securities 6,373 6,395 3,808 3,821
Mortgage-backed securities 13,329 13,382 4,766 4,778
Loans, net 126,849 127,392 126,199 127,405
Accrued interest receivable 1,450 1,450 1,326 1,326
FINANCIAL LIABILITIES:
Deposits $ 157,970 $ 159,251 $ 145,858 $ 147,987
Borrowed Funds 1,000 1,000 2,002 2,002
Accrued interest payable 156 156 172 172
</TABLE>
In cases where quoted market prices are not available, fair values have been
estimated using present value or other valuation techniques. These methods are
highly sensitive to the assumptions used, such as those concerning appropriate
discount rates and estimates of future cash flows. In that regard, estimates
presented herein are not necessarily indicative of the amounts the Company could
realize in a current settlement of the underlying financial instruments, and
they are not intended to represent a measure of the underlying value of the
Company.
The following methods and assumptions were used by the Company in estimating
the fair values provided above:
Cash and Due from Banks, Interest Bearing Deposits in Banks, and Federal
Funds Sold
The carrying value of highly liquid instruments, such as cash on hand,
interest and noninterest bearing deposits in financial institutions, and federal
funds sold are considered to approximate their fair values.
Securities Available for Sale, Securities and Mortgage-Backed Securities
Substantially all of the Company's securities, securities available for sale
and mortgage-backed securities have a readily determinable fair value. Fair
values for these securities are based on quoted market prices, where available.
If not available, fair values are based on market prices of comparable
instruments. The carrying amount of accrued interest on securities available for
sale, securities and mortgage-backed securities approximates fair value.
Loans, Net
For loans with rates that are repriced in coordination with movements in
market rates and with no significant change in credit risk, fair value estimates
are based on carrying values. The fair values for other types of loans are
estimated by discounting future cash flows using current rates at which loans
with similar terms would be made to borrowers of similar credit ratings. The
carrying amount of accrued interest on loans approximates fair value.
Deposits
The fair value of deposit liabilities with no stated maturity are disclosed
as the amount payable on demand at the reporting date (i.e., at their carrying
or book value). The fair values of fixed maturity deposits are estimated using a
discounted cash flow calculation that applies rates currently offered for time
deposits of similar remaining maturities.
The economic value attributable to the long-term relationship with
depositors who provide low-cost funds to the Company is considered to be a
separate intangible asset and is excluded from the presentation above. The
carrying amount of accrued interest on deposits approximates fair value.
Borrowed Funds
The carrying amounts of borrowed funds approximates fair values due to their
short-term nature. The carrying amount of accrued interest on borrowed funds
approximates fair value.
23
<PAGE>
Off-Balance-Sheet Instruments
Off-balance-sheet financial instruments include commitments to extend credit
and standby letters of credit. The fair value of such instruments is negligible
since the arrangements are at current rates, are for short periods, and have no
significant credit exposure.
17. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal and state banking agencies. The quantitative
measures to ensure capital adequacy require the Company to maintain minimum
amounts and ratios, set forth in the table below, of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined) and of Tier
I capital (as defined) to average assets (as defined). Failure to meet minimum
capital requirements can initiate certain actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Management believes, as of March 31, 1997, that the Company meets
all capital adequacy requirements to which it is subject.
As of March 31, 1997, the most recent notification from the regulatory
agencies categorized the Company and the Banks as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Company and the Banks must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the institution's category.
Actual capital amounts as well as required and well capitalized Tier I total
and Tier I leverage ratios as of March 31 for the Company and bank subsidiaries
are as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
(Dollar amounts in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -----------------
Amount Rate Amount Rate Amount Rate
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital
FirstFed Bancorp, Inc. $16,508 15.9% $4,139 4.0% N/A N/A
First Federal Savings Bank 10,934 13.3% 3,298 4.0% $4,947 6.0%
First State Bank 3,113 15.0% 830 4.0% 1,246 6.0%
Total Capital
FirstFed Bancorp, Inc. $17,241 16.7% $8,278 8.0% N/A N/A
First Federal Savings Bank 11,361 13.8% 6,596 8.0% $8,246 10.0%
First State Bank 3,373 16.2% 1,662 8.0% 2,077 10.0%
Tier I Leverage
FirstFed Bancorp, Inc. $16,508 9.4% $7,050 4.0% N/A N/A
First Federal Savings Bank 10,934 7.8% 5,618 4.0% $7,022 5.0%
First State Bank 3,113 8.8% 1,414 4.0% 1,767 5.0%
<CAPTION>
1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier I Capital
FirstFed Bancorp, Inc. $15,719 17.0% $3,694 4.0% N/A N/A
First Federal Savings Bank 10,069 13.3% 3,018 4.0% $4,527 6.0%
First State Bank 2,734 16.2% 677 4.0% 1,015 6.0%
Total Capital
FirstFed Bancorp, Inc. $16,340 17.7% $7,389 8.0% N/A N/A
First Federal Savings Bank 10,366 13.7% 6,036 8.0% $7,545 10.0%
First State Bank 2,947 17.4% 1,353 8.0% 1,692 10.0%
Tier I Leverage
FirstFed Bancorp, Inc. $15,719 9.6% $6,521 4.0% N/A N/A
First Federal Savings Bank 10,069 7.7% 5,245 4.0% $6,557 5.0%
First State Bank 2,734 8.6% 1,276 4.0% 1,595 5.0%
</TABLE>
24
<PAGE>
18. NONRECURRING EXPENSES
FDIC Assessment
On September 30, 1996, an omnibus appropriations bill was signed into law to
fund a number of government agencies in the 1997 fiscal year. Banking provisions
to resolve the deposit insurance premium disparity between the SAIF, and the
BIF were included in the legislation. The deposits of First Federal are insured
by SAIF while the deposits of First State are insured by BIF. The banking
provisions also included extensive regulatory relief for thrifts and banks. The
major banking provisions contained in the bill included a one-time special
assessment on SAIF deposits to bring the fund's reserve ratio to the statutorily
required minimum level of 1.25 percent of deposits. The assessment rate for
First Federal was 65.7 basis points and applied to First Federal's deposits as
of March 31, 1995. First Federal paid $704,000 for the special assessment.
The bill also provides that pro-rata sharing of the Financing Corporation
("FICO") obligation among BIF and SAIF members will begin by January 1, 2000.
From 1997 through 1999, partial sharing will occur, with SAIF deposits assessed
6.44 basis points and BIF deposits assessed 1.20 basis points. The new
assessment rate for institutions with SAIF deposits represents a reduction from
the existing rate of 23 basis points for First Federal, which will have a
positive impact on future earnings. In addition, under the bill, the BIF and
SAIF will merge to form the Deposit Insurance Fund on January 1, 1999, if there
are no savings associations (not including state savings banks) in existence on
that date. Also, the Treasury Department has been directed to report to Congress
with its recommendations on a common charter for banks and savings institutions.
Litigation Expense
A jury verdict was rendered in the Circuit Court of Jefferson County,
Alabama, against First Federal in connection with a civil lawsuit. The total
amount of the damages was $325,000. First Federal settled the lawsuit for
$250,000 after a motion for judgement notwithstanding the verdict or, in the
alternative, for a new trial was filed. The lawsuit arose from a customer's
claim for disability insurance benefits to be paid by an insurance company to
cover monthly mortgage payments.
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FirstFed Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of FirstFed Bancorp, Inc. (a Delaware Corporation) and subsidiaries as
of March 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FirstFed
Bancorp, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Birmingham, Alabama
May 7, 1997
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
FirstFed Bancorp, Inc. (the "Company") is a financial institution holding
company headquartered in Bessemer, Alabama. The Company owns 100% of the
outstanding shares of common stock of its wholly-owned subsidiaries, First
Federal Savings Bank ("First Federal") and First State Corporation ("FSC"). FSC
owns 100% of the outstanding shares of common stock of First State Bank of Bibb
County ("First State"). The Company's assets consist primarily of its investment
in its financial institution subsidiaries, real estate held for investment and
liquid investments.
COMPARISON OF FINANCIAL CONDITION
AS OF MARCH 31, 1997 AND 1996,
AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED
MARCH 31, 1997 AND 1996
CHANGES IN FINANCIAL CONDITION
Total assets were $178.1 million at March 31, 1997, compared to $166.2
million at March 31, 1996. This increase was primarily the result of additional
investment by the Company in mortgage-backed securities and securities of $8.6
million and $2.6 million, respectively. Loans increased only slightly from
fiscal 1996. Loan originations for fiscal 1997 were consistent with fiscal 1996;
however, payoffs of adjustable rate loans increased from the prior year.
Deposits grew $12.1 million to $158.0 million at March 31, 1997. The increase
was primarily related to a 60th Anniversary certificate of deposit program
implemented and completed during the first quarter of fiscal 1997. In summary,
funds generated from the increase in deposits were invested primarily in
securities and mortgage-backed securities.
Stockholders' equity increased $692,000, to $17.9 million at March 31, 1997.
The increase in equity during fiscal 1997 was primarily due to earnings of
$1,031,000 partially offset by dividends declared of $588,000. Earnings per
share were $.81 for the year ended March 31, 1997.
The Banks meet all regulatory requirements related to liquidity and capital.
If needed, sources of additional liquidity include certain securities which have
been designated as available for sale and borrowing ability from the FHLB-
Atlanta of approximately $53 million at March 31, 1997. See Notes 3 and 17 of
the "Notes to Consolidated Financial Statements" regarding liquidity and capital
resources.
GENERAL RESULTS OF OPERATIONS
Net income for the year ended March 31, 1997, was $1,013,000, an increase of
1.0% from the prior year's amount of $1,002,000. This increase was the result of
owning First State for a full year, an increase in interest rate spread and an
increase in fee income, largely offset by the impact of $626,000 (net of tax) of
nonrecurring expenses recorded during the current year. See Note 18 of the
"Notes to Consolidated Financial Statements."
INTEREST INCOME
Total interest income increased $2.8 million to $13.3 million for fiscal
1997 from $10.5 million for fiscal 1996. This increase was primarily due to an
increase in the average yield on interest earning assets to 8.1% during fiscal
1997 from 7.9% for fiscal 1996, and a 22.7% increase in the average balance of
interest earning assets. The higher average balance of loans during fiscal 1997
as compared to fiscal 1996 resulted from including First State's average loan
balance for a full year and consistent loan volumes. There was an increase in
the average yield on mortgage loans to 8.5% in fiscal 1997 from 8.0% in fiscal
1996, and an increase in the average yield on other loans to 10.6% from 10.3%.
Interest earned on securities increased $551,000, to $1,047,000 in fiscal 1997
from $496,000 in fiscal 1996. The increase was primarily the result of a 112.7%
increase in the average balance resulting from First State being included for a
full year and purchases of additional securities. Interest earned on mortgage-
backed securities increased in fiscal 1997 to $536,000, from $345,000 in fiscal
1996. This reflected a 70.4% increase in the average balance of mortgage-backed
securities to $8.5 million during fiscal 1997, from $5.0 million during fiscal
1996, as a result of purchases net of principal repayments and prepayments
during fiscal 1997. The yield on mortgage-backed securities increased slightly
from fiscal 1996.
INTEREST EXPENSE
Total interest expense for fiscal 1997 increased $1.5 million to $7.3
million in 1997 from $5.8 million in fiscal 1996. The increase was the result of
a higher level of deposits, net of a decline in rates paid on deposits in fiscal
1997. The average level of deposits increased $36.8 million, or 31.9%, to $152.2
million in fiscal 1997 from the fiscal 1996 average level of $115.4 million,
while the average rate paid on deposits decreased to 4.73% in fiscal 1997 from
4.86% in fiscal 1996. Average borrowings were $1.4 million at an average rate of
6.9%.
NET INTEREST INCOME
Net interest income for the year ended March 31, 1997, increased $1.3
million, or 26.6%, to $6.0 million
27
<PAGE>
from the fiscal 1996 level of $4.8 million. This increase was primarily due to
the increase in average total interest-earning assets to $165.6 million for
fiscal 1997, an increase of $31.5 million from fiscal 1996. Average deposits
also increased $36.8 million in fiscal 1997 over 1996. The interest rate spread
was 3.3% in fiscal 1997, up from 3.0% in fiscal 1996. The increase in the
average balance of interest-earning assets and deposits is primarily the result
of owning First State for a full year.
PROVISION FOR LOAN LOSSES
During fiscal 1997, the provision made to the allowance for loan losses was
$186,000. This provision maintained the general loan loss allocation at a level
within the Banks' acceptable range of estimated loss exposure and was based on
historical loss experience, current economic conditions and distribution of
portfolio loans by risk class. The $242,000 in gross charge-offs for fiscal 1997
were partially offset by recoveries of $168,000. In the opinion of management,
the allowance $733,000 for loan losses at March 31, 1997, was adequate to cover
losses inherent in the loan portfolios of First Federal and First State. See
Note 5 of the "Notes to Consolidated Financial Statements".
NONINTEREST INCOME
Noninterest income for fiscal 1997 totalled $908,000, as compared to
$496,000 for fiscal 1996. The increase was the result of an increase in services
offered and service charge rates, plus the addition of First State for a full
year.
NONINTEREST EXPENSE
Noninterest expense for fiscal 1997 totalled $5.2 million as compared to
$3.6 million for fiscal 1996. Included in noninterest expense is the payment of
the SAIF special assessment by First Federal of $704,000 and the payment of
litigation expense of $250,000. Without these two nonrecurring expense items,
noninterest expense would have been $4.3 million for fiscal 1997 compared to
$3.6 million for fiscal 1996. The increase, net of nonrecurring items, is solely
the result of including First State for a full year in fiscal 1997 compared to
three months in fiscal 1996. Noninterest expense decreased slightly for First
Federal in response to an expense reduction strategy. See Notes 14 and 18 to the
"Notes to Consolidated Financial Statements" for an analysis of significant
other operating expense items and the FDIC assessment.
INCOME TAXES
Federal and state income taxes decreased $48,000, or 8.7%, to $506,000 in
fiscal 1997 from $554,000 in fiscal 1996. The Company's effective tax rate for
fiscal 1997 was 33%, compared to 36% in fiscal 1996.
COMPARISON OF FINANCIAL CONDITION
AS OF MARCH 31, 1996 AND 1995,
AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED
MARCH 31, 1996 AND 1995
CHANGES IN FINANCIAL CONDITION
Total assets were $166.2 million at March 31, 1996, compared to $129.1
million at March 31, 1995. This $37.1 million increase resulted from continued
growth and, to a greater extent, the purchase of FSC. The purchase of FSC was
consummated on January 2, 1996. FSC was acquired in a cash transaction for $4.2
million and resulted in the recording of approximately $1.6 million of goodwill,
which is being amortized over 15 years. First State assets totaled approximately
$34.2 million at March 31, 1996. This acquisition resulted in an increase in
loans, securities and deposits of $16.3 million, $9.4 million and $26.7 million,
respectively. During the year ended March 31, 1996, First Federal experienced
growth in both loans and deposits of $3.4 million and $12.7 million,
respectively. Deposits increased primarily because of the implementation of a
new checking account program, ATM cards and competitive pricing of longer term
certificates of deposit.
Stockholders' equity decreased $1.4 million to $17.2 million at
March 31, 1996. The decrease in equity during fiscal 1996 was primarily due to
$833,000 in dividends declared and the purchase of 164,774 (adjusted for stock
split) shares of treasury stock for $1,924,000, partially offset by 1996
earnings of $1,002,000. Earnings per share were $.77 for the year ended
March 31, 1996.
At March 31, 1996, the Banks met all regulatory requirements related to
liquidity and capital. If needed, sources of additional liquidity include
certain securities which have been designated as available for sale and
borrowing ability from the FHLB-Atlanta of approximately $58.5 million at March
31, 1996. See Notes 3 and 17 of the "Notes to Consolidated Financial Statements"
regarding liquidity and capital resources.
GENERAL RESULTS OF OPERATIONS
Net income for the year ended March 31, 1996, was $1,002,000, an increase of
13.5% from the prior year's amount of $883,000. This increase was the result of
both the acquisition of First State, which contributed $85,000,
28
<PAGE>
net of goodwill amortization, to earnings during the quarter ended March 31,
1996, and increased earnings for First Federal and the Company as discussed
further below.
INTEREST INCOME
Total interest income increased $2.2 million to $10.5 million for fiscal
1996 from $8.3 million for fiscal 1995. This increase was primarily due to an
increase in the average yield on interest earning assets to 7.9% during fiscal
1996 from 7.3% for fiscal 1995, and a 17.3% increase in the average balance of
interest earning assets. The higher average balance of loans during fiscal 1996
as compared to fiscal 1995 resulted from increased mortgage, commercial and
consumer lending activity in fiscal 1996 and the acquisition of First State.
There was an increase in the average yield on mortgage loans to 8.0% in fiscal
1996 from 7.4% in fiscal 1995, and an increase in the average yield on other
loans to 10.3% from 8.4%. Interest earned on securities decreased $98,000, to
$496,000 in fiscal 1996 from $594,000 in fiscal 1995. The decrease was primarily
the result of a 9.3% decrease in the average balance and a decrease in yield to
6.1% in fiscal 1996, from 6.6% in fiscal 1995. Interest earned on mortgage-
backed securities decreased in fiscal 1996 to $345,000 from $385,000 in fiscal
1995. This reflected a 16.1% decrease in the average balance of mortgage-backed
securities to $5.0 million during fiscal 1996, from $5.9 million during fiscal
1995, as a result of principal repayments and prepayments during fiscal 1996.
The yield on mortgage-backed securities decreased slightly from fiscal 1995. In
summary, relatively more funds were used to fund higher yielding loans than
investing in securities.
INTEREST EXPENSE
Total interest expense for fiscal 1996 increased $1.9 million, to
$5.8 million in 1996 from $3.9 million in fiscal 1995. The increase was the
result of a higher level of deposits and higher market rates paid on deposits in
fiscal 1996. The average level of deposits increased $19.6 million, or 20.5%, to
$115.4 million in fiscal 1996 from the fiscal 1995 average level of $95.8
million, while the average rate paid on deposits increased to 4.86% in fiscal
1996 from 3.84% in fiscal 1995. Average borrowings were $2.6 million at an
average rate of 6.8%.
NET INTEREST INCOME
Net interest income for the year ended March 31, 1996, increased $282,000,
or 6.3%, to $4.8 million from the fiscal 1995 level of $4.5 million. This
increase was primarily due to the increase in average total interest-earning
assets to $134.1million for fiscal 1996, an increase of $19.9 million from
fiscal 1995. On the other hand, average deposits also increased $19.6 million in
fiscal 1996 over 1995. The interest rate spread was 3.0% in fiscal 1996 as
compared to 3.4% in fiscal 1995.
PROVISION FOR LOAN LOSSES
During fiscal 1996, the provision made to the allowance for loan losses was
$75,000. This provision maintained the general loan loss allowance at a level
within the Banks' acceptable range of estimated loss exposure and was based on
historical loss experience, current economic conditions and distribution of
portfolio loans by risk class. The $96,000 in gross charge-offs for fiscal 1996
were partially offset by recoveries of $80,000. Additionally, the existing
allowance for First State of $320,000 was consolidated to bring the allowance to
its March 31, 1996, level of $621,000. In the opinion of management, the
allowance for loan losses at March 31, 1996, was adequate to cover losses
inherent in the loan portfolios of First Federal and First State. See Note 5 of
the "Notes to Consolidated Financial Statements".
NONINTEREST INCOME
Noninterest income for fiscal 1996 totalled $496,000 as compared to $274,000
for fiscal 1995. The increase was the result of increased service charges, the
sale of loans in the secondary market and the addition of First State, which
contributed noninterest income of $82,000 during the quarter ended
March 31, 1996.
NONINTEREST EXPENSE
Noninterest expense for fiscal 1996 totalled $3.6 million as compared to
$3.1 million for fiscal 1995. See Note 14 to the "Notes to Consolidated
Financial Statements" for an analysis of significant other operating expense
items. The increase in noninterest expense was primarily related to the addition
of First State, which incurred noninterest expense of $246,000 during the
quarter ended March 31, 1996, and increased salary expense. The increase in
salary expense was attributable to annual compensation adjustments and the
addition of First State.
INCOME TAXES
Federal and state income taxes decreased $161,000, or 22.5% to $554,000 in
fiscal 1996 from $715,000 in fiscal 1995. The Company's effective tax rate for
fiscal 1996 was 37%, compared to 45% in fiscal 1995. The higher effective tax
rate in fiscal 1995 was primarily due to additional deferred provisions recorded
in connection with the Company's liability related to its tax bad debt reserve.
The fiscal 1996 rate returned to its approximate historical level. See Note 10
to the "Notes to Consolidated Financial Statements".
29
<PAGE>
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS FirstFed Bancorp, Inc. and First Federal Savings Bank
- --------------------------------------------------------------------------------
B. K. Goodwin, III
Chairman of the Board, Chief Executive Officer and President
Fred T. Blair
Retired
James B. Koikos
Owner/ Partner, Bright Star Restaurant and The Merritt House
A. W. Kuhn
Retired
Malcolm E. Lewis
Retired
E. H. Moore, Jr.
Consultant
James E. Mulkin
President, Mulkin Enterprises
Robert E. Paden
Attorney, Paden & Paden
G. Larry Russell
Certified Public Accountant
First State Bank of Bibb County
- --------------------------------------------------------------------------------
B. K. Goodwin, III
Chairman of the Board
Milton R. Fulgham
Chief Executive Officer and President
William Elbert Belcher, III
Owner, Belcher Forest Products, Inc.
R. Hugh Edmonds
Real Estate Agent
Randall J. Gilmore
Chairman and CEO
Moultrie Enterprises, Inc.
Albert L. Green
Manager, N.D. Cass., Co.
Howard C. Pate
Retired
Joe E. Weeks
Restaurateur
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
OFFICERS FirstFed Bancorp, Inc. and First Federal Savings Bank
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF FIRSTFED BANCORP, INC. AND FIRST FEDERAL SAVINGS BANK
B. K. Goodwin, III
Chairman of the Board, Chief Executive Officer and President
C. Larry Seale
Executive Vice President
Lynn J. Joyce
Vice President, Secretary and Treasurer
James E. Smith, Jr.
Vice President
OFFICERS OF FIRST FEDERAL SAVINGS BANK
Cathy N. Ackerman
Assistant Vice President and Branch Manager
W. Max Adams
Assistant Vice President and Branch Manager
Brenda M. Baswell
Assistant Vice President
Robert Nelson, III
Assistant Vice President and Loan Officer
Martha P. Peeples
Assistant Vice President and Branch Manager
Rhonda T. Wannemuehler
Compliance Officer
First State Bank of Bibb County
- --------------------------------------------------------------------------------
OFFICERS OF FIRST STATE BANK OF BIBB COUNTY
Milton R. Fulgham
Chief Executive Officer and President
William Paul Province, Jr.
Executive Vice President
Charlotte White
Vice President
Melanie M. Seagle
Cashier
Pamela Johnson
Loan Officer
- --------------------------------------------------------------------------------
31
<PAGE>
COMMON STOCK DATA
Prior to April 1, 1997, the Company's common stock was traded through the
National Daily Quotation Service "Pink Sheets" published by the National
Quotation Bureau, Inc. On that date the Company's common stock began
trading on the NASDAQ SmallCap Market under the symbol "FFDB." Trading
information regarding the common stock appears in The Wall Street Journal
under the abbreviation "FrstFdB". There currently are 1,231,582 shares of
common stock outstanding and approximately 335 holders of record of the
common stock. The following table sets forth certain information known to
management as to the range of the high and low bid prices for the Company's
common stock and cash dividends declared per share of common stock for the
calendar quarters indicated. Amounts have been restated to reflect the two-
for-one stock split.
<TABLE>
<CAPTION>
Dividends
Declared
Low Bid (1) High Bid (1) Per Share
------------ ------------ ---------
<S> <C> <C> <C>
Fiscal 1996
First Quarter $ 11.00 $ 11.50 $.40
Second Quarter 11.625 11.875 .08
Third Quarter 11.00 11.75 .08
Fourth Quarter 11.75 12.00 .08
Fiscal 1997
First Quarter $ 12.00 $12.625 $.18
Second Quarter 12.125 13.50 .10
Third Quarter 12.25 13.50 .10
Fourth Quarter 12.875 16.00 .10
</TABLE>
__________
(1) Quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission, and may not represent actual transactions.
32
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
------------------------------
<TABLE>
<CAPTION>
State of Percentage
Subsidiary Incorporation Ownership
- ---------------------------------- ------------- ----------
<S> <C> <C>
First Federal Savings Bank United States 100%
First State Corporation Alabama 100%
Subsidiaries of First State
Corporation:
First State Bank of Bibb County Alabama 100%
</TABLE>
The operations of the Company's subsidiaries are included in
the Company's consolidated statements.
31
<PAGE>
EXHIBIT 23
<PAGE>
[LETTERHEAD OF ARTHUR ANDERSEN LLP APPEARS HERE]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements File Nos. 33-51662, 33-58260, and
33-81798.
/s/ Arthur Andersen LLP
Birmingham, Alabama
June 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 5,411
<INT-BEARING-DEPOSITS> 4,354
<FED-FUNDS-SOLD> 4,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,661
<INVESTMENTS-CARRYING> 19,702
<INVESTMENTS-MARKET> 19,777
<LOANS> 126,849
<ALLOWANCE> 733
<TOTAL-ASSETS> 178,124
<DEPOSITS> 157,970
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 1,231
<LONG-TERM> 0
0
0
<COMMON> 14
<OTHER-SE> 17,909
<TOTAL-LIABILITIES-AND-EQUITY> 178,124
<INTEREST-LOAN> 11,339
<INTEREST-INVEST> 1,583
<INTEREST-OTHER> 399
<INTEREST-TOTAL> 13,321
<INTEREST-DEPOSIT> 7,208
<INTEREST-EXPENSE> 7,306
<INTEREST-INCOME-NET> 6,015
<LOAN-LOSSES> 186
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,218
<INCOME-PRETAX> 1,519
<INCOME-PRE-EXTRAORDINARY> 506
<EXTRAORDINARY> 1,013
<CHANGES> 0
<NET-INCOME> 1,013
<EPS-PRIMARY> .83
<EPS-DILUTED> .81
<YIELD-ACTUAL> 8.13
<LOANS-NON> 719
<LOANS-PAST> 1,166
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 621
<CHARGE-OFFS> 242
<RECOVERIES> 168
<ALLOWANCE-CLOSE> 733
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 733
</TABLE>
