<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-KSB
(Mark One)
[_] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended __________________.
OR
[X] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Transition Period from April 1, 1998 To December 31, 1998.
------------- -----------------
Commission File Number: 0-19609
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FirstFed Bancorp, Inc.
-------------------------------------------------------------------------
(Exact name of small business issuer 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(g) of the Act:
Common Stock, $.01 par value
--------------------------------------------
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES X NO ___
---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure 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-KSB
or any amendment to this Form 10-KSB [ X ].
---
State issuer's revenues for its most recent fiscal year $10,698,000.
-----------
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 March 9, 1999,
was $15,217,027.
As of March 15, 1999, there were issued and outstanding 2,476,449 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for the nine months ended
December 31, 1998 are incorporated by reference into Parts I and II of this
Form 10-KSB.
(2) Portions of the Proxy Statement for the December 31, 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-
KSB.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I.
ITEM I. Description of Business
The Company................................................ 1
First Federal Savings Bank................................. 1
First State Bank of Bibb County............................ 1
Key Operating Data......................................... 2
Average Balances, Yields Earned and Rates Paid............. 3
Rate/Volume Analysis....................................... 4
Asset/Liability Management................................. 5
Lending Activities......................................... 7
Investment Activities...................................... 13
Deposits, Borrowings and Other Sources of Funds............ 15
Competition................................................ 16
Regulation, Supervision and Governmental Policy............ 16
Taxation................................................... 21
Personnel ................................................. 21
ITEM 2. Description of Property............................................. 22
ITEM 3. Legal Proceedings................................................... 23
ITEM 4. Submission of Matters to a Vote of Security Holders................. 23
PART II.
ITEM 5. Market for Common Equity and Related Stockholder Matters............ 23
ITEM 6. Management's Discussion and Analysis or Plan of Operation........... 23
ITEM 7. Financial Statements................................................ 23
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure................................ 23
PART III.
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................. 23
ITEM 10. Executive Compensation.............................................. 23
ITEM 11. Security Ownership of Certain Beneficial Owners and Management...... 23
ITEM 12. Certain Relationships and Related Transactions...................... 24
ITEM 13. Exhibits, List and Report on Form 8-K............................... 24
</TABLE>
i.
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF 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 ("First
State"), an Alabama state-chartered commercial bank. First State is a wholly-
owned subsidiary of First State Corporation ("FSC") which was acquired by the
Company in January 1996. First Federal and First State are referred to herein
as the "Banks".
The Company's assets consist primarily of its investment in the Banks and liquid
investments. It engages in no significant activity, except through the Banks'
operations. The Company had total assets of $186,150,000, total deposits of
$167,257,000 and stockholders' equity of $18,203,000 at December 31, 1998.
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 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 five locations in Jefferson,
Shelby and Tuscaloosa Counties, Alabama, consisting of its home office in
Bessemer and four other branches, one each in Pelham, Hueytown, Hoover and
Vance. Each branch is a full service facility.
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 North Bibb. First State's primary
business consists of attracting deposits from the community and investing those
deposits in commercial loans, consumer loans and one-to-four family residential
mortgage loans.
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."
1
<PAGE>
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 and securities, and the interest expense
incurred on interest-bearing liabilities, primarily deposit accounts. Net
interest income is affected by (i) the difference between rates of interest
earned on interest-earning assets and rates of interest paid on its interest-
bearing liabilities ("interest rate spread") 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.
KEY OPERATING DATA
The following table summarizes certain key operating ratios for the nine months
ended December 31, 1998 and the year ended March 31, 1998.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
December 31, 1998 March 31, 1998
------------------ ---------------
<S> <C> <C>
Return on average assets .79% (1) .93%
Return on average equity 8.04% (1) 9.55%
Average equity to average assets 9.86% 10.24%
Dividend payout ratio 62% 44%
</TABLE>
(1) Net income for the nine months ended December 31, 1998 was annualized to
calculate these ratios.
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 the nine months ended December 31, 1998 and the year ended March 31,
1998 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 December 31, 1998 Annual Report to Stockholders
(the "Annual Report").
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
December 31, 1998 March 31, 1998
------------------------ --------------
Average Average
Balance Interest Balance Interest
---------- ------------ -------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $116,914 $ 8,031 $123,193 $11,084
Securities 26,080 1,131 28,843 1,789
Other interest-earning assets 23,890 916 11,737 644
-------- -------- --------- ----------
Total interest-earning assets 166,884 10,078 163,773 13,517
Non-interest-earning assets 15,377 15,755
-------- ---------
Total assets $182,261 $179,528
======== =========
Interest-bearing liabilities:
Deposits $161,949 $ 5,466 $157,813 $ 7,252
Other borrowings - - 516 37
-------- -------- -------- ---------
Total interest-bearing liabilities 161,949 5,466 158,329 7,289
Non-interest bearing liabilities 2,371 -------- 3,786 -
-------- -------- ---------
$ 4,612 $ 6,228
======== ========
Total liabilities 164,320 162,115
Stockholders' equity 17,941 17,413
-------- --------
Total liabilities and stockholders' equity $182,261 $179,528
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
December 31, 1998(1) March 31, 1998
------------------- --------------
<S> <C> <C>
Yield on:
Loans 9.16% 9.00%
Securities 5.78 6.20
Other interest-earning assets 5.11 5.49
All interest-earning assets 8.05 8.25
Rate paid on:
Deposits 4.50 4.60
Other borrowings 7.17
All interest-bearing liabilities 4.50 4.60
Interest rate spread (2) 3.55% 3.65%
======== ========
Net yield (3) 3.68% 3.80%
======== ========
</TABLE>
(1) The yields and rates for the nine months ended December 31, 1998 were
calculated by annualizing the interest for the nine months ended December
31, 1998 in the table above.
(2) Interest rate spread represents the difference between the average yield on
total interest-earning assets and the average rate of total interest-
bearing liabilities.
(3) 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.
Net interest income decreased $1,616,000 for the nine months ended December 31,
1998 compared to the year ended March 31, 1998. Interest income and interest
expense for the nine months ended December 31, 1998 were annualized to prepare
the following rate/volume analysis to properly reflect the changes in volume and
rate which occurred during the period.
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998
(Annualized) Year Ended
Versus March 31, 1998
Year Ended Versus
March 31, 1998 March 31, 1997
----------------------------- ----------------------------
Volume Rate Net Volume Rate Net
-------- -------- --------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest earned on:
Loans $(579) $ 202 $(377) $(608) $353 $(255)
Securities (164) (116) (280) 188 18 206
Other interest-earning assets 618 (41) 577 171 74 245
-------- ------- ------- -------- ------- --------
Total (125) 45 (80) (249) 445 196
-------- -------- --------- -------- -------- --------
Decrease (increase) in interest paid on:
Deposits (217) 180 (37) (178) 134 (44)
Other borrowings 19 18 37 66 (5) 61
-------- -------- --------- -------- -------- --------
Total (198) 198 - (112) 129 17
-------- -------- --------- -------- -------- --------
Net (decrease) increase in net
interest income $(323) $ 243 $ (80) $(361) $574 $ 213
======== ======== ========= ======== ======== ========
</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 their
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 their assets
and liabilities. The Banks' strategies are intended to stabilize net interest
income for the long-term by protecting their 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
December 31, 1998 the Banks' cumulative one-year 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 of interest rate changes on net
income.
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 35.5% 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 December 31, 1998 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 Banks. 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 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Within 91 To 181 Days 1 Year 3 Years 5 Years 10 Years Over
90 Days 180 Days To 1 Year To 3 Years To 5 Years To 10 Years To 20 Years 20 Years
----------- ----------- ----------- ----------- ----------- ----------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (3) $ 31,103 $ 12,952 $ 24,149 $ 21,750 $ 6,117 $ 8,309 $ 7,695 $ 2,843
Securities (1)(2) 745 202 566 4,356 2,894 1,117 1,121 12,584
Cash Investments 37,250 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- -------
Total interest-earning
assets 69,098 13,154 24,715 26,106 9,011 9,426 8,816 15,427
-------- -------- -------- -------- -------- -------- ------- -------
Interest-bearing
liabilities:
Savings accounts (4) 26,813 -- -- -- -- -- -- --
Transaction accounts (4)
Certificate accounts 32,633 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- ------- -------
Total interest-bearing
liabilities 89,191 20,650 28,137 23,883 5,289 77 30 --
-------- -------- -------- -------- -------- -------- ------- -------
Interest sensitivity gap
per period $(20,093) $ (7,496) $ (3,422) $ 2,223 $ 3,722 $ 9,349 $ 8,786 $15,427
======== ======== ======== ======== ======== ======== ======= =======
Cumulative interest
sensitivity gap $(20,093) $(27,589) $(31,011) $(28,788) $(25,066) $(15,717) $(6,931) $ 8,496
======== ======== ======== ======== ======== ======== ======= =======
Percentage of cumulative
gap to total assets (10.79)% (14.82)% (16.66)% (15.47)% (13.47)% (8.44)% (3.72)% 4.56%
Cumulative ratio of
interest-sensitive assets
to interest-sensitive
liabilities 77.47% 74.88% 77.52% 82.21% 85.00% 90.60% 95.87% 105.08%
<CAPTION>
------------
Total
------------
<S> <C>
Interest-earning assets:
Loans receivable (3) $114,918
Securities (1)(2) 23,585
Cash Investments 37,250
--------
Total interest-earning
assets 175,753
--------
Interest-bearing
liabilities:
Savings accounts (4) 26,813
Transaction accounts (4) 32,633
Certificate 107,811
--------
Total interest-bearing
liabilities 167,257
--------
Interest sensitivity gap
per period $ 8,496
========
Cumulative interest
sensitivity gap $ 8,496
========
Percentage of cumulative
gap to total assets 4.56%
Cumulative ratio of
interest-sensitive assets
to interest-sensitive
liabilities 105.08%
</TABLE>
(1) Includes $508 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 First Federal is
shown as due in more than twenty years.
(2) Includes $6,609 in securities available for sale; such securities are
reflected in the above table based on their contractual maturity.
(3) Includes $2,218 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 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. 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 not purchased servicing rights. The Banks routinely sell fixed
rate loans in the secondary market and First Federal retains servicing for only
a small 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
annum 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 increased 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 Boards 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 enhance the
management of interest rate risk. The Banks apply the required underwriting
procedures in making these fixed rate mortgage loans.
Commercial Real Estate Lending
- ------------------------------
Loans secured by commercial real estate totaled approximately $13.2 million, or
12.13% of the Banks' total loan portfolio, at December 31, 1998. 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 December 31,
1998, 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.
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.
7
<PAGE>
Construction Lending
- --------------------
The Banks have several construction loan programs. At December 31, 1998, the
Banks had $9.9 million in construction loans outstanding or 9.1% 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, $4.6 million was
undisbursed at December 31, 1998 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 $9.3 million or 8.51% of the Banks' total loan portfolio
at December 31, 1998. Consumer loans, while generally having higher yields than
residential mortgage loans, involve a higher credit risk.
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 December 31, 1998, the outstanding home equity loan balance
was $4.2 million.
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 are generally secured by equipment, accounts receivable and inventory.
Commercial loans totaled approximately $9.0 million or 8.21% of the Banks' total
loan portfolio at December 31, 1998.
8
<PAGE>
Analysis of Loan Portfolio
- --------------------------
The following table sets forth the composition of the Banks' mortgage and other
loan portfolios in dollar amounts and in percentages at the dates indicated. At
December 31, 1998, the Banks had no concentrations of loans exceeding 10% of
total loans that are not disclosed below.
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------------- -------------------
Percent Percent
of of
Amount Total Amount Total
--------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family residential $ 83,399 76.37% $ 86,965 73.99%
Commercial real estate 13,251 12.13 15,179 12.91
-------- ------ -------- ------
Total mortgage loans 96,650 88.50 102,144 86.90
-------- ------ -------- ------
Consumer loans:
Savings accounts 962 .88 880 .75
Other 8,336 7.63 11,309 9.62
-------- ------ -------- ------
Total consumer loans 9,298 8.51 12,189 10.37
-------- ------ -------- ------
Commercial loans 8,970 8.21 7,912 6.73
-------- ------ -------- ------
Total loans receivable 114,918 105.22 122,245 104.00
-------- ------ -------- ------
Less:
Undisbursed portion of
mortgage loans 4,601 4.21 3,459 2.94
Escrow, net (5) - - 143 .12
Allowance for loan losses 1,081 .99 1,106 .94
Net deferred loan costs 32 .02 (4) - -
-------- ------ -------- ------
5,709 5.22 4,704 4.00
-------- ------ -------- ------
Loans receivable, net $109,209 100.00% $117,541 100.00%
======== ====== ======== ======
</TABLE>
9
<PAGE>
Loan Maturity
- -------------
The following table shows the maturity of the Banks' loan portfolio at December
31, 1998 based upon contractual maturity.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------
One-to-Four
Family Commercial
Residential Real Estate Consumer Commercial
Loans Loans Loans Loans Total
-------- ----------- ----------- -------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
One year or less $ 19,879 $ 3,107 $ 3,135 $ 4,775 $ 30,896
One year through 5 years 4,493 3,023 5,008 858 13,382
After 5 years 59,027 7,121 1,155 3,337 70,640
-------- ----------- ----------- -------- ----------
$ 83,399 $ 13,251 $ 9,298 $ 8,970 114,918
======== =========== =========== ========
Less:
Undisbursed portion of mortgages 4,601
Net deferred loan fees (cost) 32
Allowance for loan losses 1,081
Escrow, net (5)
----------
Loans receivable, net $ 109,209
==========
</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 December 31, 1998 the dollar amount of
loans due after December 31, 1999 based upon contractual maturity dates,
and whether such loans have fixed interest rates or adjustable interest
rates:
<TABLE>
<CAPTION>
Due After December 31, 1999
------------------------------
Fixed Adjustable Total
-------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Mortgage Loans:
One-to-four family $13,525 $49,995 $63,520
Commercial real estate 1,695 8,449 10,144
------- ------- -------
Total mortgage loans 15,220 58,444 73,664
------- ------- -------
Consumer loans 6,163 -- 6,163
------- ------- -------
Commercial loans 1,603 2,592 4,195
------- ------- -------
Total loans receivable, gross $22,986 $61,036 $84,022
======= ======= =======
</TABLE>
10
<PAGE>
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 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 December 31, 1998,
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 at December 31, 1998 and March 31, 1998.
<TABLE>
<CAPTION>
12/31/98 03/31/98
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans $ 659 $ 1,207
Accruing loans delinquent 90 days or more:
Mortgage loans 1,230 397
Consumer loans 257 128
Commercial loans 379 3
--------- ---------
Total non-performing loans 2,525 1,735
Real estate owned 724 665
--------- ---------
Total non-performing assets $ 3,249 $ 2,400
========= =========
Allowance for uncollected interest $ 22 $ 70
========= =========
Non-performing assets to total assets 1.74% 1.32%
========= =========
Non-performing loans to total loans, net 2.31% 1.48%
========= =========
</TABLE>
At December 31, 1998, 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 December
31, 1998 would have increased by approximately $22,000, had interest income been
recorded under the original terms of the loan. Interest income on non-
performing loans included in interest income for the nine months ended December
31, 1998 was approximately $36,000.
Allowance for Loan Losses
- -------------------------
Confirmed 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, as losses occur, by provisions charged to expense. The determination
of the balance of the allowance for 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. Losses ultimately confirmed will vary from original
estimates and adjustments, as necessary, are made in the period in which these
factors and other relevant considerations become known.
11
<PAGE>
The following table sets forth information regarding the Banks' allowance for
loan losses for the nine months ended December 31, 1998 and the year ended March
31, 1998.
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
12/31/98 03/31/98
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 1,106 $ 733
Provision for loan losses 86 532
Charge-offs:
Mortgage loans 40 87
Consumer loans 76 137
Commercial loans 18 1
--------- ---------
Total Charge-offs 134 225
--------- ---------
Recoveries:
Mortgage loans 2 9
Consumer loans 19 50
Commercial loans 2 7
--------- ---------
Total Recoveries 23 66
--------- ---------
Charge-offs, net of recoveries 111 159
--------- ---------
Balance at end of period $ 1,081 $ 1,106
========= =========
Ratio of allowance for loan losses to total loans
receivable at the end of period .99% .94%
========= =========
Ratio of allowance for loan losses to non-performing
loans (1) 42.81% 63.75%
========= =========
Ratio of net charge-offs during the period to average
loans outstanding during the period .11% .13%
========= =========
</TABLE>
(1) Non-performing loans are comprised of accruing loans delinquent 90 days or
more and nonaccrual loans. Specific reviews are performed to determine the
collectibility and related allowance for loan losses on nonperforming loans.
12
<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.
See further discussion regarding the allowance for loan losses in "Management's
Discussion and Analysis" in the Annual Report.
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
---------------------- -----------------------
Amount Percent Amount Percent
------------ -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage $ 599 55.4% $ 587 53.1%
Consumer 347 32.1 301 27.2
Commercial 135 12.5 218 19.7
------ ----- ------ -----
Total $1,081 100.0% $1,106 100.0%
====== ===== ====== =====
</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 December 31, 1998, the
Banks had $125,000 of assets classified as loss, $265,000 of assets classified
as doubtful, $2.7 million of assets classified as substandard, and no assets
designated as special mention. The Banks' total adversely classified assets
(defined as those assets classified as substandard, doubtful and loss)
represented 1.7% of the Banks' total assets at December 31, 1998. 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.
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 December 31, 1998 ranging from
4.93% to 9.50%. At December 31, 1998, mortgage-backed securities totaled $13.6
million or 7.3% of total assets.
At December 31, 1998, the Banks had 24.96% of total assets in cash, cash
equivalents, mortgage-backed securities and investment securities maturing in
five years or less. 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 deposit 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 based on
intent and ability.
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.
13
<PAGE>
The table below sets forth certain information regarding the liquidity and the
fair value, weighted average yields and contractual maturities of the Banks'
investment securities, both held to maturity and available for sale, at December
31, 1998. 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
-------------------- -------------------- --------------------- -----------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits $ 6,025 4.70% $ -- --% $ -- --% $ -- --%
Federal funds 31,225 4.60 -- -- -- -- -- --
U.S. Government and agency
securities (1) 1,303 6.03 6,749 6.44 658 6.58 12,458 6.52
State, County and Municipal
securities 60 7.20 455 5.29 450 5.54 -- --
<CAPTION>
Total
--------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
--------- ------- ---------
<S> <C> <C> <C>
Interest bearing deposits $ 6,025 $ 6,025 4.70%
Federal funds 31,225 31,225 4.60
U.S. Government and agency
securities (1) 21,168 21,387 6.47
State, County and Municipal
securities 965 1,013 5.52
</TABLE>
(1) Includes securities held to 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.
14
<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
two ATM facilities 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 rates are summarized for the periods
indicated in the following table.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
December 31, 1998 March 31, 1998
--------------------- ------------------
Amount Rate Amount Rate
--------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Transaction accounts $ 30,896 1.59% $ 27,377 1.56%
Savings accounts 25,778 2.93 25,764 3.07
Certificates 105,275 5.77 104,672 5.77
</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 December 31,1998.
Maturity Period Amount
- --------------- --------------
(In thousands)
Three months or less $ 4,145
Over three through six months 4,141
Over six through 12 months 7,275
Over 12 months 5,093
-------
Total $20,654
=======
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.
15
<PAGE>
At December 31, 1998, there were no outside borrowings. First Federal has
available a fed fund line of credit and reverse repurchase line which were not
used during the year. The Banks had internal borrowings totaling $859,000 at
December 31, 1998, which represented a loan associated with the Employee Stock
Ownership Plan ("ESOP"). The Company is the lender on the ESOP loan and 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 the 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. 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.
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 State 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.
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
CAMELS 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 mortgage servicing rights ("MSRs") and purchased credit
card relationships ("PCCRs"). 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 MSRs and PCCRs.
16
<PAGE>
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 December 31, 1998, 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 the IRR component of its risk-based capital rules.
At December 31, 1998, First Federal's tangible capital ratio was 8.2%; its core,
or "leverage" capital ratio was 8.2%; its Tier 1 risk-based capital ratio was
14.1%; and its total risk-based capital ratio was 15.0%. 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 CAMELS examination rating system. State member banks not rated
composite 1 under the CAMELS 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.
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.
In addition, the FRB has amended its risk-based capital guidelines to specify
that it will include, in its evaluation of a bank's capital adequacy, an
assessment of the bank's interest rate risk (that is, the bank's exposure to
declines in the economic value of its capital due to changes in interest rates).
The FRB also 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 December 31, 1998, First State's leverage ratio, Tier 1 risk-based capital
ratio, and total risk-based capital ratio were 7.6%, 14.1% and 15.3%,
respectively. Accordingly, it satisfied all minimum regulatory capital
requirements.
See Note 15 of the Notes to Consolidated Financial Statements for additional
information related to regulatory capital.
17
<PAGE>
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 1999, 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.
Prompt Corrective Regulatory Action. The federal bank regulatory agencies have
issued joint regulations that classify insured depository institutions by
capital levels and provide that the appropriate agency will take various prompt
corrective actions to resolve the problems of any insured 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 falls within any of the three "undercapitalized" categories will be subject
to certain severe regulatory sanctions required by FDICIA and the implementing
regulations. As of December 31, 1998, 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 impose restrictions on 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, OTS regulations impose restrictions on the amount of dividends that
may be paid by savings institutions. Under such regulations, a savings
institution that qualifies for expedited treatment of applications by
maintaining specified supervisory examination ratings and that is not otherwise
restricted in making capital distributions may, without prior approval by the
OTS, make capital distributions during a calendar year equal to its net income
for such year plus its retained net income for the preceding two years. Capital
distributions in excess of such amount would require prior OTS approval.
Under applicable provisions of the Federal Reserve Act and Alabama Law, 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
$4.9 million of transaction accounts, and reserves equal to 3% must be
maintained on the next $46.5 million of transaction accounts, plus reserves
equal
18
<PAGE>
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 December 31, 1998, 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,
qualifying mortgage-related securities and mortgage loans, 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 4%) of its net withdrawable savings deposits plus short-
term borrowings. The average daily liquidity ratio of First Federal for the
month ended December 31, 1998 was 25.7%. Monetary penalties may be imposed for
failure to meet liquidity requirements. First State is not subject to these or
any similar liquidity requirements.
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 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 December 31, 1998 of
$1,262,000. Long-term FHLB advances may only be made for the purpose of
providing funds for residential housing finance. At December 31, 1998, First
Federal had no 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 of
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".
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 December 31,
1998, 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 December 31, 1998, the Company complied with all of its regulatory capital
requirements, with a leverage ratio of 9.3%, a Tier 1 risk-based capital ratio
of 18.6%, and a total risk-based capital of 19.8%.
19
<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 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 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 located 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. In addition, OTS regulators
generally permit federal savings institutions, like First Federal, to establish
branches in any state or states of the United State and its territories. 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."
20
<PAGE>
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.
Pending Legislation
- -------------------
Legislation currently pending before the United States Congress would, if
enacted, significantly alter the competitive structure of the nation's financial
services industry by, among other things, expanding the nonbanking powers of the
bank holding companies and repealing the statutory separation of the commercial
banking industry from investment banking and insurance. Based on the provisions
of the pending legislation, the Company does not believe that the bill's
enactment would materially affect the business of the Company or of the Banks.
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 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 December 31, 1998, 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. 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). See Note 11 of the Notes to Consolidated Financial
Statements for additional information related to income taxes.
State and Local Taxation
- ------------------------
The State of Alabama imposes a 6% excise tax on the earnings of financial
institutions such as the Banks. 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 December 31, 1998, First Federal had 43 full-time employees and 2 part-
time employees. At December 31, 1998, First State had 25 full-time employees
and 4 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.
21
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY:
------------------------
First Federal conducts its business through its main office located in Bessemer,
Alabama, and four branch offices located in Pelham, Hueytown, Hoover and Vance,
Alabama. First State conducts its business through its main office located in
West Blocton, Alabama, and two branch offices located in North Bibb 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 December 31, 1998 which totaled a net book
value of $3,065,000. See also Notes 1 and 4 of the Notes to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
Leased
Or Date Net Book Value at
First Federal Locations Owned Opened December 31, 1998
- ------------------------ ----- ------ ------------------
(In thousands)
<S> <C> <C> <C>
Main Office -
1630 Fourth Avenue, No. Owned 1961 $ 903 (3)
Bessemer, Alabama 35020
Branches -
1351 Hueytown Road
Hueytown, Alabama 35023 Owned 1966 29 (3)
Food World Plaza
Pelham, Alabama 35124 Leased (1) 1973 N/A (2)
1604 Montgomery Hwy.
Hoover, Alabama 35216 Owned 1992 486 (3)
18704 Highway 11, North
Vance, Alabama 35490 Owned 1997 454 (3)
Other fixed assets, net 543
First State Locations
- ---------------------
Main Office -
Main Street Owned 1965 229 (3)
West Blocton, Alabama 35184
Branches -
125 Birmingham Rd Owned 1979 137 (3)
Centreville, Alabama 35042
Highway 5 Owned 1985 204 (3)
North Bibb, Alabama 35188
Other fixed assets, net 80
-------
Total $ 3,065
=======
</TABLE>
____________________
(1) The lease expires May 31, 2004.
(2) The Bank's lease is classified as an operating lease.
(3) Includes land, building and improvements.
22
<PAGE>
ITEM 3. LEGAL PROCEEDINGS:
------------------
From time to time, the Banks are parties to routine legal proceedings occurring
in the ordinary course of business. At December 31, 1998, 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.
For a further discussion of legal matters, see Note 9 to the "Notes to
Consolidated Financial Statements" in the Company's December 31, 1998 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 third quarter
of the nine months ended December 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
---------------------------------------------------------
The information contained under the caption "Common Stock Data" in the Annual
Report is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION:
----------------------------------------------------------
The information contained in the section captioned "Management's Discussion and
Analysis" in the Annual Report is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS:
---------------------
The report of independent public accountants and consolidated financial
statements contained in the Annual Report (Exhibit 13) are incorporated herein
by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE:
- ---------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
- -------------------------------------------------
The information contained under the section captioned "Proposal I--Election of
Directors" in the Company's definitive proxy statement for the Company's annual
meeting of stockholders (the "Proxy Statement") is incorporated herein by
reference. Information regarding Form 3, 4 or 5 filers is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance."
ITEM 10. 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 11. 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."
23
<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 12. 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.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K:
---------------------------------------
(a) Exhibits-The following is a list of exhibits filed as part of this Annual
Report on Form 10-KSB 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 Outside Directors' Recognition and
Retention Plan and Trust Agreement (C)
10.02 First Federal Savings Bank Recognition and Retention Plan and Trust
Agreement "B" (C)
10.03 FirstFed Bancorp, Inc. 1991 Incentive Stock Option Plan (C)
10.04 FirstFed Bancorp, Inc. 1991 Stock Option Plan for Outside Directors
as amended (C)
10.05 Form of Indemnification Agreement (B)
10.06 FirstFed Bancorp, Inc. Deferred Compensation Plan, as amended (filed
herewith)
10.07 FirstFed Bancorp, Inc. Incentive Compensation Plan, as amended (D)
10.08 Employment Agreement dated January 1, 1996 by and between FirstFed
Bancorp, Inc. and B. K. Goodwin, III, as amended (D)
10.09 Employment Agreement dated January 1, 1996 by and between First
Federal Savings Bank and B. K. Goodwin, III, as amended (D)
10.10 Employment Agreement dated January 1, 1996 by and between FirstFed
Bancorp, Inc., First Federal Savings Bank and C. Larry Seale, as
amended (D)
10.11 Employment Agreement dated January 1, 1996 by and between FirstFed
Bancorp, Inc., First Federal Savings Bank and Lynn J. Joyce, as
amended (D)
10.12 FirstFed Bancorp, Inc. 1995 Stock Option and Incentive Plan, as
amended (D)
11.0 Statement of Computation of Earnings Per Share (E)
13.0 December 31, 1998 Annual Report - Filed herewith only as to those
portions of the Annual Report to stockholders for the nine month
ended December 31, 1998, which are expressly incorporated herein by
reference.
21.0 Subsidiaries of the Registrant (filed herewith)
23.0 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.
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 Annual
Report on Form 10-KSB for the year ended March 31, 1998.
E. Incorporated herein by reference into this document from the December
31, 1998 Annual Report.
(b) There were no reports on Form 8-K filed during the quarter ended December
31, 1998.
24
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRSTFED BANCORP, INC.
Date: March 29, 1999 /s/ B. K. Goodwin, III
---------------------- ---------------------------------------
B. K. Goodwin, III
Chairman of the Board, Chief Executive
Officer and President
In accordance with the 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, Chief Date: March 29, 1999
- -------------------------- --------------------
B. K. Goodwin, III Executive Officer and
President
/s/ Lynn J. Joyce Chief Financial Officer, Vice Date: March 29, 1999
- -------------------------- --------------------
Lynn J. Joyce President, Secretary and
Treasurer
/s/ Fred T. Blair Director Date: March 29, 1999
- -------------------------- ---------------------
Fred T. Blair
/s/ A. W. Kuhn Director Date: March 29, 1999
- -------------------------- ---------------------
A. W. Kuhn
/s/ James B. Koikos Director Date: March 29, 1999
- -------------------------- ---------------------
James B. Koikos
/s/ Malcolm E. Lewis Director Date: March 29, 1999
- -------------------------- --------------------
Malcolm E. Lewis
/s/ E. H. Moore, Jr. Director Date: March 29, 1999
- -------------------------- ---------------------
E. H. Moore, Jr.
/s/ James E. Mulkin Director Date: March 29, 1999
- -------------------------- ---------------------
James E. Mulkin
/s/ Robert E. Paden Director Date: March 29, 1999
- -------------------------- ---------------------
Robert E. Paden
/s/ G. Larry Russell Director Date: March 29, 1999
- -------------------------- ---------------------
G. Larry Russell
</TABLE>
<PAGE>
EXHIBIT 10.06
FIRSTFED BANCORP, INC.
DEFERRED COMPENSATION PLAN
_______________________________
As Amended and Restated
Effective June 17, 1998*
_______________________________
The Board of Directors of FirstFed Bancorp, Inc. has amended and restated
this Plan, effective June 17, 1998, and in the process has merged into this
Plan both the First Federal Savings Bank Directors' Retirement Plan and the
First Federal Savings Bank Deferred Compensation Plan.
ARTICLE I
DEFINITIONS
-----------
The following words and phrases, when used in the Plan with an initial
capital letter, shall have the meanings set forth below unless the context
clearly indicates otherwise.
1.1 "Account" shall mean a bookkeeping account maintained by the Company in
the name of the Participant.
1.2 "Affiliate" shall mean any "parent corporation" or "subsidiary
corporation" of the Company, as the terms are defined in Section 424(e) and (f),
respectively, of the Internal Revenue Code of 1986, as amended.
1.3 "Bank" shall mean First Federal Savings Bank, and any successor to its
interest.
1.4 "Beneficiary" shall mean the person or persons whom a Participant may
designate as the beneficiary of the Participant's Benefits under Article II (and
shall mean the Participants' estate in the event of a valid designation). A
Participant's election of a Beneficiary shall be made on the Distribution
Election Form, shall be revocable by the Participant during his or her lifetime,
and shall be effective only upon its delivery to, and acceptance by, the
Committee, which acceptance shall be presumed unless, within ten business days
of delivery of the Participant's election, the Committee provides the
Participant with a written notice detailing the reasons for its rejection.
1.5 "Benefits" shall mean any and all benefits that are or may become
payable under Article II of the Plan.
1.6 "Board" shall mean the Board of Directors of the Company.
1.7 "Change in Control" shall mean any one of the following events: (i)
the acquisition of ownership, holding or power to vote more than 25% of the
voting stock of the Bank or the Company thereof, (ii) the acquisition of the
ability to control the election of a majority of the Bank's or the Company's
Directors, (iii) the acquisition of a controlling influence over the management
or policies of the Bank or of the Company by any person or by persons acting as
a
____________________
* Includes 1999 Amendment.
<PAGE>
"group" (within the meaning of Section 13(d) of the Securities Exchange Act of
1934), or (iv) during any period of two consecutive years, individuals (the
"Continuing Directors") who at the beginning of such period constitute the Board
of Directors of the Bank or of the Company (the "Existing Board") cease for any
reason to constitute at least two-thirds thereof, provided that any individual
whose election or nomination for election as a member of the Existing Board was
approved by a vote of at least two-thirds of the Continuing Directors then in
office shall be considered a Continuing Director. For purposes of this
paragraph only, the term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
1.8 "Committee" shall mean any committee that the Board may appoint to
administer and effectuate the Plan, and shall mean the Board in the absence, at
any time, of a duly appointed Committee. The Committee shall act only by a
majority of its members, and may act through meetings or written consents.
Notwithstanding the foregoing, the Board may at any time act in lieu of the
Committee with respect to any action that the Committee may take pursuant to the
Plan.
1.9 "Common Stock" shall mean the common stock of the Company.
1.10 "Company" shall mean FirstFed Bancorp, Inc., and any successor to its
interest.
1.11 "Deferral Election Form" shall mean the form attached as Exhibit "A."
1.12 "Director" shall mean a member of the Board.
1.13 "Distribution Election Form" shall mean the form attached hereto as
Exhibit "B."
1.14 "Effective Date" shall mean June 17, 1998.
1.15 "Employee" shall mean any person who is employed by the Company, the
Bank, or an Affiliate.
1.16 "Investment Election Form" shall mean the form attached as Exhibit
"C."
1.17 "Just Cause" shall mean misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful
violations of any law, rule or regulation (other than traffic violations or
similar offenses), or final cease-and-desist orders.
1.18 "Participant" shall mean (i) an individual who serves as a Director of
the Company, the Bank, or an Affiliate on or after the Effective Date,
regardless of whether or not the Director is an Employee, and (ii) any Employee
whom the Board has specifically selected for participation in the Plan, provided
that an Employee shall be eligible for Plan participation only if the Employee
is a member of a select group of the Bank's or the Company's management or
highly compensated employees for purposes of Title I of the Employee Retirement
Income Security Act of 1974, as amended from time to time.
1.19 "Plan" shall mean this FirstFed Bancorp, Inc. Deferred Compensation
Plan.
2
<PAGE>
1.20 "Plan Year" shall mean the Company's fiscal year.
1.21 "Special Distribution Election" shall mean the form attached hereto as
Exhibit "D".
1.22 "Trust" shall mean the trust created under the Trust Agreement.
1.23 "Trust Agreement" shall mean the agreement entered into between the
Company and the Trustee, pursuant to the terms hereof.
1.24 "Trustee" shall mean the person(s) or entity appointed by the Board
pursuant to the Trust Agreement to hold legal title to the Plan assets for the
purposes set forth herein.
1.25 "Year of Service" shall mean each full year of a Director's service on
the Board (measured from the date the Director joined the Board, whether that
date is before or after the Effective Date).
ARTICLE II
CREDITS TO ACCOUNTS
-------------------
2.1 On the Effective Date. The following Participants shall have their
Accounts credited on the Effective Date with the amounts listed below, with
"Deferrals" referring to credits made under both Bank's and the Company's
----
current deferred compensation plans through the Effective Date:
3/31/98 6/17/98 Total Credit
Participant Deferrals Retirement Credit to Account
----------- --------- ----------------- ----------
2.2 Future Credits. Each Director who first joins the Board after the
Effective Date shall have his or her Account credited with $71,000. No
Participant may receive more than ten years of credits to his or her Account.
2.3 Elective Deferrals. Prior to each Plan Year, each Director may elect
to defer the receipt of all or part of his or her future fees (including
retainers), and each other Participant may elect to defer up to 25% of salary or
100% of bonus compensation. Such elections shall be (i) made on the Deferral
Election Form, and (ii) effective on the first day of the Plan Year following
their acceptance by the Committee, provided that elections made within 30 days
of either the Effective Date, or a Participant's initial service with the Bank
------ --
as an Employee or a Director, shall be effective as of the first day of the
month following their acceptance by the Committee. Any such elections shall be
irrevocable until the end of the Plan Year in which they are made, except that
the Board may permit suspension of a Participant's deferral election in the
event of "hardship" within the meaning of Article III.
2.4 Investment Return. From the date of any credits through distribution
under the terms of the Plan, each Participant's Account shall be credited with a
rate of return based on the Participant's selection from the choices presented
on the Investment Election Form (and in the
3
<PAGE>
absence of a valid election, based on the interest rate paid by the Bank on one-
year certificates of deposit as of the first day of each Plan Year). A
Participant may change his or her investment selection on a prospective basis
only, effective as of the first day of the calendar quarter that begins after
the Committee accepts a new election. If a Participant has, before the Effective
Date, selected a measure for the rate of return on compensation deferred through
the Bank's or the Company's deferred compensation plans, such election shall be
honored and remain in effect until a superseding election becomes effective.
2.5 Short-swing Profit Rule. If a Participant elects to have his or her
Account appreciate or depreciate based on the Common Stock fund, the
effectiveness of any investment election that the Participant makes shall be
deferred until the next following date on which said election would not result
in an "opposite way" transaction for purposes of SEC Rule 16b-3. For purposes
of this paragraph, an "opposite way" transaction shall be defined as an election
that affects a "sale" of the Common Stock by a Participant within six months of
an election that affects a "purchase" (and vice versa), whether under this Plan
or another plan maintained by the Company or the Bank. This six-month "opposite
way" rule will not apply, however, if the Participant elects to receive a
distribution in connection with his or her death or termination of employment.
2.6 Vesting; Forfeiture for Just Cause. Amounts credited to Participants'
Accounts shall be fully vested at all times, except that the portion of the
Participant's Account that is attributable to June 17, 1998 Retirement Credits
listed in Sections 2.1 hereof shall (i) be automatically forfeited in the event
that the Participant's service with the Bank or the Company terminates for Just
Cause, and (ii) become vested according to the following schedule:
Years of Service Vested Interest
---------------- ---------------
Less than 3 0%
At least 3 but fewer than 6 50%
At least 6 but fewer than 10 75%
10 or more 100%
ARTICLE III
DISTRIBUTION FROM ACCOUNTS; ELECTION FORMS
------------------------------------------
3.1 General Rule. The Company shall distribute the vested balance credited
to a Participant's Account in accordance with the Participant's Distribution
Election Form (subject to Section 2.6 hereof). In the absence of a valid
election, the Company shall distribute the Participant's Account in
substantially equal annual installments over a period of five (5) years,
beginning on the first day of the second month following the Participant's
termination from the Bank or the Company for any reason other than Just Cause.
The Participant may elect on the Distribution Election Form to receive his or
her distribution in cash or Common Stock (but only to the extent that shares of
Common Stock are then held in the Trust for the Participant's benefit.)
Notwithstanding the preceding sentence, to the extent that a Participant has
selected an investment return for his or her Account that is measured in shares
of Common Stock, distributions form the Account shall be made in Common Stock.
3.2 Distribution Elections. To be effective, a Participant's initial
Distribution Election Form must be submitted either (i) more than one year
------
before the date on which the Participant's service as a Director or Employee
terminates for any reason, (ii) within 30 days of the Plan's
4
<PAGE>
Effective Date or the Participant's initial service with the Company or the Bank
as a Director or an Employee, or (iii) more than 90 days before a Change in
--
Control closes. Distribution elections made pursuant to this Article III shall
become irrevocable one year before the Participant first becomes entitled to
receive a distribution pursuant to this Article III. Nevertheless, Beneficiary
designations made pursuant to executed Distribution Election Forms shall be
revocable during the Participant's lifetime and the Participant may, by
submitting an effective superseding Distribution Election Form at any time or
from time to time, prospectively change the designated Beneficiary and the
manner of payment to a Beneficiary.
3.3 Hardship. If the Participant or a member of the Participant's
immediate family (or a legal dependent of the Participant) should suffer one or
more of the following unforeseen hardships, the Participant may apply to the
Board for a withdrawal of all or part of his or her Account:
(i) extraordinary medical expenses, or
--
(ii) other unforeseeable and severe financial hardships that the Company's
Board of Directors may generally recognize.
The Board shall have sole and complete discretion over whether or not to
grant a Participant's request for a hardship withdrawal, provided that (i) the
Board shall make its decisions in a uniform and nondiscriminatory manner, and
(ii) the Participant who requests a withdrawal shall abstain from participation
in, and voting on, such request. If the Board approves a withdrawal, the
Company shall pay the approved amount to the Participant as soon as practicable,
and shall treat said amount as constituting a pro rata reduction in any deemed
investment fund for the Participant's Account (unless the Participant's
application for a withdrawal specifies its payment from a particular fund).
3.4 Change in Control. In the event of a Change in Control each
Participant's Account shall be due and payable within ten days following such
Change in Control, unless the Participant has delivered a superseding Special
------
Distribution Election, to the Company at least 90 days before the closing date
of the Change in Control. A Participant may amend a Special Distribution
Election made pursuant to Article III at any time and from time to time prior to
the date that is 90 days before a Change in Control, except that the Participant
may at any time change a designation of a Beneficiary and term of payments for
death benefits. Once a Change in Control closes, subsequent appreciation or
depreciation in unpaid amounts will be determined in accordance with the
investment elections made in the Participant's Investment Election Form.
3.5 Death Benefits. If a Participant dies before receiving all Benefits
payable pursuant to the preceding paragraph, then the remaining balance of the
Participant's Account shall be distributed in a lump sum payment of cash and
Common Stock (if applicable) to the Participant's designated Beneficiary not
later than the first day of the second month following the date of the
Participant's death; provided that a Participant may specify on the Distribution
Election Form a distribution period that effectuates the annual installment
payments selected by the Participant (with payments made as though the
Participant survived to collect all benefits and retired on the date of his or
her death if payments had not previously commenced).
5
<PAGE>
ARTICLE IV
SOURCE OF BENEFITS
------------------
4.1 General Rule. The rights of the Participants under this Plan and of
their Beneficiaries (if any) shall be solely those of unsecured creditors of the
Company. Benefits shall constitute an unfunded, unsecured promise by the
Company to pay such payments in the future, as and to the extent such Benefits
become payable. Benefits shall be paid from the general assets of the Company,
and no person shall, by virtue of this Plan, have any interest in such assets,
other than as an unsecured creditor of the Company. For any fiscal year during
which a Trust is maintained, (i) the Trustee shall inform the Board annually
prior to the commencement of each fiscal year as to the manner in which such
Trust assets shall be invested, and (ii) the Board shall, as soon as practicable
after the end of each fiscal year of the Company, provide the Trustee with a
schedule specifying the amounts payable to each Participant, and the date for
making such payments.
4.2 Change in Control. In the event of a Change in Control, the Company
shall contribute to the Trust an amount sufficient to provide the Trust with
assets having an overall value equivalent to the value of the aggregate Account
balances under the Plan.
ARTICLE V
ASSIGNMENT
----------
Except as otherwise provided by this Plan, it is agreed that neither the
Participant nor his or her Beneficiary nor any other person or persons shall
have any right to commute, sell, assign, transfer, encumber and pledge or
otherwise convey the right to receive any Benefits hereunder, which Benefits and
the rights thereto are expressly declared to be nontransferable.
Notwithstanding the foregoing, or any other provision of this Plan, a
Participant may transfer all or any part of his or her Account, and the rights
associated therewith, to his or her spouse, lineal ascendants, lineal
descendants, or to a duly established trust for the benefit of one or more of
these individuals. Plan Benefits so transferred may thereafter be transferred
only to the Participant who was originally entitled to receive said Benefits or
to an individual or trust to whom the Participant could have initially
transferred the Benefits pursuant to this Article V. The Benefits, and the
rights thereto, which are transferred pursuant to this Article V shall be
exercisable by the transferee according to the same terms and conditions as
applied to the Participant.
ARTICLE VI
NO RETENTION OF SERVICES
------------------------
The Benefits payable under this Plan shall be independent of, and in
addition to, any other compensation payable by the Company to a Participant,
whether in the form of fees, bonus, retirement income under employee benefit
plans sponsored or maintained by the Company or otherwise. This Plan shall not
be deemed to constitute a contract of employment between the Company and any
Participant.
6
<PAGE>
ARTICLE VII
REORGANIZATION
--------------
The Company agrees that it will not merge or consolidate with any other
corporation or organization, or permit its business activities to be taken over
by any other organization, unless and until the succeeding or continuing
corporation or other organization shall expressly assume the rights and
obligations of the Company herein set forth. The Company further agrees that it
will not cease its business activities or terminate its existence, other than as
heretofore set forth in this Article VII, without having made adequate provision
for the fulfillment of its obligation hereunder.
ARTICLE VIII
AMENDMENT AND TERMINATION
-------------------------
The Board may amend or terminate the Plan at any time, provided that no
such amendment or termination shall, without the written consent of an affected
Participant, alter or impair any accrued rights of the Participant under the
Plan.
ARTICLE IX
STATE LAW
---------
This Plan shall be construed and governed in all respects under and by the
laws of the State of Alabama, except to the extent preempted by federal law. If
any provision of this Plan shall be held by a court of competent jurisdiction to
be invalid or unenforceable, the remaining provisions hereof shall continue to
be fully effective.
ARTICLE X
HEADINGS; GENDER
----------------
Headings and subheadings in this Plan are inserted for convenience and
reference only and constitute no part of this Plan. This Plan shall be
construed, where required, so that the masculine gender includes the feminine.
ARTICLE XI
INTERPRETATION OF THE PLAN
--------------------------
The Board shall have sole and absolute discretion to administer, construe,
and interpret the Plan, and the decisions of the Board shall be conclusive and
binding on all affected parties, unless such decisions are arbitrary and
capricious.
ARTICLE XII
LEGAL FEES
----------
In the event any dispute shall arise between a Participant and the Company
as to the terms or interpretation of this Plan, whether instituted by formal
legal proceedings or otherwise, including any action taken by a Participant to
enforce the terms of this Plan or in defending against any action taken by the
Company, the Company shall reimburse the Participant for all costs and expenses,
including reasonable attorneys' fees, arising from such dispute, proceedings
7
<PAGE>
or actions; provided that the Participant shall return such amounts to the
Company if he fails to obtain a final judgment by a court of competent
jurisdiction or obtain a settlement of such dispute, proceedings, or actions
substantially in his or her favor. Such reimbursements to a Participant shall be
paid within ten days of the Participant furnishing to the Company written
evidence, which may be in the form, among other things, of a canceled check or
receipt, of any costs or expenses incurred by the Participant. Any such request
for reimbursement by a Participant shall be made no more frequently than at 30
day intervals.
ARTICLE XIII
DURATION OF PLAN
----------------
Unless terminated earlier in accordance with Article VIII, this Plan shall
remain in effect during the term of service of the Participants and until all
Benefits payable hereunder have been made.
8
<PAGE>
EXHIBIT 13
================================================================================
CONTENTS
LETTER TO STOCKHOLDERS .................................................... 2
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS ............................................. 3
CONSOLIDATED FINANCIAL STATEMENTS ......................................... 4
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS .............................................. 8
MANAGEMENT'S DISCUSSION AND ANALYSIS ...................................... 25
COMMON STOCK DATA ......................................................... 29
BOARDS OF DIRECTORS ....................................................... 30
OFFICERS .................................................................. 31
COMPANY DATA .............................................................. 32
================================================================================
CORPORATE PROFILE
FirstFed Bancorp, Inc. (the "Company") is a financial institution holding
company located in Bessemer, Alabama. It serves portions of the greater
Birmingham metropolitan area and counties to the south and west through its
financial institution subsidiaries, First Federal Savings Bank ("First Federal")
and First State Bank of Bibb County ("First State"). First Federal is a
first-tier subsidiary of the Company and First State is a wholly-owned
subsidiary of First State Corporation ("FSC") which is a first-tier subsidiary
of the Company.
First Federal is a federally chartered savings bank originally chartered in
1936. First Federal offers traditional deposit and mortgage loan products,
principally one-to-four family residential loans and, to a lesser extent,
commercial and consumer loans. First Federal conducts its business through five
offices, one each in Bessemer, Hueytown, Pelham, Hoover and Vance, Alabama.
FSC and First State were acquired by the Company on January 2, 1996. First
State is an Alabama chartered commercial bank that offers traditional deposit
products and commercial, mortgage and consumer loans. First State conducts its
business through three offices, one each located in West Blocton, Centreville
and North Bibb, Alabama.
1
<PAGE>
LETTER TO STOCKHOLDERS
To Our Stockholders:
The current year annual report is for the nine-month period ended December
31, 1998. The Company has changed its fiscal year-end from March 31 to December
31 to conform its financial reporting to standard regulatory reporting periods
for bank holding companies. As reflected in the financial statements for this
period, the Company has continued to deliver solid operating results. Net income
for the nine months ended December 31, 1998, was $1.1 million. In addition, the
Company reached record levels of assets and deposits, totaling $186.2 million
and $167.3 million, respectively, at December 31, 1998.
The results of operations and financial condition contributed to a
favorable stock performance that supported the Company's decision to declare a
two-for-one stock split in the form of a 100% stock dividend in August 1998.
Also, the Company increased the quarterly dividend by 12%, to $.07 per share
from $.0625 per share. A special dividend was declared subsequent to year-end
equal to a quarterly dividend of $.07 per share, payable on March 10, 1999.
For the second year in a row, the Company was ranked #12 in a list of "Top
50 Alabama Companies" as published in The Birmingham News in January 1999. This
ranking was based on a two-year return to stockholders. The Company is proud of
its performance and this recognition.
During the past fiscal year, actions have been taken that often will, and
do, have an impact on current earnings. But, such actions are intended to insure
long-term profitability. In this regard, the current interest rate environment
has caused a narrowing of interest rate spreads in the banking industry. This
has occurred at a time when the Company has a relatively high liquidity
position. Rather than take additional risks to achieve higher spreads, the
Company has chosen to continue its historical lending and investing
philosophies, together with its management of interest rate risk.
In addition, at the expense of current earnings, the Company opened a new
branch in Vance, Alabama, during the prior fiscal year. This decision is
expected to contribute to future growth and earnings.
It has been a busy year in the area of technology and data processing. We
have been diligent in our efforts to prepare for the Year 2000. Also, and in
connection with our Year 2000 efforts, First State Bank converted to the same
third party processor utilized by First Federal. Based upon testing and other
preparation steps that have been performed, the Company believes it will be
ready for the Year 2000 and beyond in the area of technology.
Your support and interest in FirstFed Bancorp, Inc. is greatly appreciated.
We continue to be focused on our stockholders and communities in order to
enhance both our stockholders' investment and personal banking services to our
customers.
Sincerely,
B. K. Goodwin, III
Chairman of the Board, Chief
Executive Officer and President
2
<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 December 31, 1998 and March 31, 1998, and the related consolidated statements
of income, stockholders' equity and cash flows for the nine months ended
December 31, 1998 and the year ended March 31, 1998. 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 December 31, 1998 and March 31, 1998, and
the results of their operations and their cash flows for the nine months ended
December 31, 1998 and the year ended March 31, 1998, in conformity with
generally accepted accounting principles.
Birmingham, Alabama
February 2, 1999
3
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of December 31, 1998 and March 31, 1998
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents
Cash on hand and in banks $ 6,385 $ 3,443
Interest-bearing deposits in other banks 6,025 5,592
Federal funds sold 31,225 19,050
-------- --------
43,635 28,085
Securities available for sale 6,609 9,191
Loans held for sale 2,219 778
Securities held to maturity, fair value of $17,180 and
$19,291, respectively 16,976 19,118
Loans receivable, net of allowance for loan losses of
$1,081 and $1,106, respectively 109,209 117,541
Land, building and equipment, less accumulated
depreciation of $2,242 and $2,055, respectively 3,065 2,922
Goodwill 1,308 1,389
Real estate owned 724 665
Accrued interest receivable 1,345 1,399
Income taxes receivable 602 --
Other assets 458 380
-------- --------
$186,150 $181,468
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $167,257 $162,859
Accrued interest payable 141 197
Income taxes payable -- 111
Dividend payable 178 150
Other liabilities 371 518
-------- --------
167,947 163,835
-------- --------
<CAPTION>
Commitments and contingencies (Notes 3, 7, 8 and 9)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 par value, 10,000,000 shares authorized, 3,031,646
issued and 2,301,713 outstanding at December 31, 1998 and 2,981,696
issued and 2,401,794 outstanding at March 31, 1998 30 28
Paid-in capital 7,502 7,084
Retained earnings 15,622 15,204
Deferred compensation obligation (Note 7) 1,199 --
Deferred compensation treasury stock (150,031 shares at December
31, 1998) (1,373) --
Treasury stock, at cost (579,902 shares at December 31, 1998
and March 31, 1998) (3,752) (3,752)
Unearned compensation (1,064) (948)
Unrealized gain on securities available for sale, net 39 17
--------- ---------
18,203 17,633
--------- ---------
$ 186,150 $ 181,468
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended December 31, 1998 and the Year Ended March 31, 1998
(Dollar amounts in thousands, except per share amounts)
9 Months Ended Year Ended
December 31, March 31,
1998 1998
--------------- -------------
INTEREST INCOME
Interest and fees on loans $ 8,031 $ 11,084
Interest and dividends on securities 1,131 1,789
Other interest income 916 644
---------- ----------
Total interest income 10,078 13,517
---------- ----------
INTEREST EXPENSE
Interest on deposits 5,466 7,252
Interest on other borrowings -- 37
---------- ----------
Total interest expense 5,466 7,289
---------- ----------
Net interest income 4,612 6,228
Provision for loan losses 86 532
---------- ----------
Net interest income after provision for loan losses 4,526 5,696
---------- ----------
NONINTEREST INCOME
Fees and other noninterest income 620 883
Net gain on sale of real estate -- 491
---------- ----------
Total noninterest income 620 1,374
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,994 2,456
Office building and equipment expense 437 562
Deposit insurance expense 63 90
Amortization of goodwill 81 108
Other operating expense 959 1,276
---------- ----------
Total noninterest expense 3,534 4,492
---------- ----------
Income before provision for income taxes 1,612 2,578
Provision for income taxes 530 925
---------- ----------
NET INCOME $ 1,082 $ 1,653
========== ==========
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 2,342,026 2,340,804
========== ==========
BASIC EARNINGS PER SHARE $ .46 $ .71
========== ==========
AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 2,462,872 2,447,414
========== ==========
DILUTED EARNINGS PER SHARE $ .44 $ .68
========== ==========
DIVIDENDS DECLARED PER SHARE $ .2725 $ .30
========== ==========
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Months Ended December 31, 1998 and the Year Ended March 31, 1998
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Deferred Gain (Loss)
Deferred Compen- on Securities Compre-
Compen- sation Unearned Available hensive
Common Paid-In Retained sation Treasury Treasury Compen- for Sale, Income
Stock Capital Earnings Obligation Stock Stock sation Net (Note 1)
------- ------- -------- ---------- -------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1997 $ 14 $ 6,601 $ 14,256 $ -- $ -- $(2,781) $ (95) $ (72)
Net income -- -- 1,653 -- -- -- -- -- $ 1,653
Change in unrealized gain
(loss) on securities
available for sale, net
of tax of $67 -- -- -- -- -- -- -- 89 89
-------
Comprehensive income -- -- -- -- -- -- -- -- $ 1,742
=======
Amortization of unearned
compensation -- -- -- -- -- -- 102 --
Awards under stock plans -- 5 -- -- -- -- (5) --
Dividends declared ($.30
per share) -- -- (705) -- -- -- -- --
Exercise of stock options -- 80 -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- -- (1,539) -- --
Stock issued under Dividend
Reinvestment Plan -- 30 -- -- -- -- -- --
Issuance of treasury stock
to Employee Stock
Ownership Plan -- 382 -- -- -- 568 (950)
Two-for-one stock split 14 (14) -- -- -- -- -- --
------ -------- ------- -------- -------- ------- -------- --------
BALANCE, March 31, 1998 28 7,084 15,204 -- -- (3,752) (948) 17
Net income -- -- 1,082 -- -- -- -- -- $ 1,082
Change in unrealized gain
(loss) on securities
available for sale, net
of tax of $8 -- -- -- -- -- -- -- 22 22
-------
Comprehensive income -- -- -- -- -- -- -- -- $ 1,104
=======
Amortization of unearned
compensation -- -- -- -- -- -- 107 --
Awards under stock plans 1 222 -- -- -- -- (223) --
Dividends declared ($.2725
per share) -- -- (664) -- -- -- -- --
Exercise of stock options 1 89 -- -- -- -- -- --
Change in stock value in
Employee Stock
Ownership Plan -- 10 -- -- -- -- -- --
Recording of Deferred
Compensation Plan -- -- -- 1,199 (1,373) -- -- --
Stock issued under Dividend
Reinvestment Plan -- 97 -- -- -- -- --
------ -------- ------- -------- -------- ------- -------- --------
BALANCE, December 31, 1998 $ 30 $ 7,502 $ 15,622 $ 1,199 $ (1,373) $(3,752) $ (1,064) $ 39
====== ======== ======== ======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS For
the Nine Months Ended December 31, 1998 and the Year Ended March 31, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
9 Months Ended Year Ended
December 31, March 31,
1998 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,082 $ 1,653
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 185 250
Amortization of unearned compensation 107 102
Amortization of purchase premiums, net 206 53
(Accretion) amortization of deferred (income) expense, net (219) 41
Credit for deferred income taxes (111) (258)
Provision for loan losses 86 532
Loan fees (cost) deferred, net 216 (35)
(Gain) loss on sale of real estate, net 25 (491)
Origination of loans held for sale (12,863) (9,569)
Proceeds from loans held for sale 11,422 9,122
Amortization of goodwill 81 108
Change in assets and liabilities:
Decrease in accrued interest receivable 54 51
Increase in current income taxes receivable (469) --
Increase in other assets (78) (74)
Increase (decrease) in accrued interest payable (56) 41
Decrease in current income taxes payable (141) (18)
Decrease in other liabilities (147) (116)
--------- ---------
Net cash provided by (used in) operating activities (620) 1,392
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 4,919 5,692
Proceeds from maturities and payments received on securities held to maturity 12,170 6,399
Purchase of securities held to maturity (10,242) (5,877)
Purchase of securities available for sale (2,299) (4,396)
Proceeds from sale of real estate and repossessed assets 392 1,906
Net loan repayments 7,810 7,819
Capital expenditures (356) (597)
--------- ---------
Net cash provided by investing activities 12,394 10,946
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net 4,398 4,889
Payment of FHLB advances -- (1,000)
Proceeds from exercise of stock options 90 80
Proceeds from dividend reinvestment 97 30
Cash dividends paid (635) (678)
Purchase of treasury stock -- (1,539)
Purchase of treasury stock for Deferred Compensation Plan (174) --
--------- ---------
Net cash provided by financing activities 3,776 1,782
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,550 14,120
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,085 13,965
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,635 $ 28,085
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE>
FIRSTFED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1998
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 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.
The Company changed its fiscal year-end from March 31 to December 31 of
each year. This change was effective December 31, 1998. The following is a
disclosure for the nine months ended December 31, 1997 (unaudited) as compared
to the nine months ended December 31, 1998.
Nine Months Ended
----------------------------------
12/31/98 12/31/97
-------- --------
(In thousands, except earnings per share)
Interest Income $ 10,078 $ 10,137
Net Interest Income $ 4,612 $ 4,667
Income Tax Expense $ 530 $ 734
Net Income $ 1,082 $ 1,267
Basic Earnings Per Share $ .46 $ .54
Diluted Earnings Per Share $ .44 $ .52
Nature of Operations
The Banks, through eight 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
borders.
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. The primary
estimate is the allowance for loan losses.
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. There are no securities
classified as trading as of December 31, 1998 and March 31, 1998.
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 cost, as there is no market for these shares.
8
<PAGE>
Loans Held for Sale
Loans 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 December
31, 1998 and March 31, 1998, loans held for sale consisted of mortgage loans in
the process of being sold to third-party investors.
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 recorded investment.
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 and, 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.
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 currently
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,
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 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 the 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 had no loans designated as
impaired at either December 31, 1998 or March 31, 1998.
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.
Long-Lived Assets
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 building 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.
Goodwill is amortized on a straight-line basis over 15 years.
The Company continually evaluates whether events and circumstances have
occurred that indicate that such long-lived assets have been impaired.
Measurement of any impairment of such long-lived assets is based on those
assets' fair values and is recognized through a valuation allowance with the
resulting charge recorded as a loss. There were no significant impairment losses
recorded during either period reported herein.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income". Comprehensive income is the total of net income and all
other non-owner changes
9
<PAGE>
in equity. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is displayed in the Consolidated
Statements of Stockholders' Equity. There were no sales of securities available
for sale during either the nine months ended December 31, 1998 or the year ended
March 31, 1998, therefore no reclassification adjustments were necessary.
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>
Nine
Months Year
Ended Ended
12/31/98 03/31/98
---------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION: (In Thousands)
<S> <C> <C>
Cash paid during the period for-
Income taxes $ 1,243 $ 1,201
Interest 5,522 7,248
Non-cash transactions-
Transfers of loans receivable to real estate owned 448 951
Noncash compensation under stock plans 223 5
Declaration of cash dividend payable 178 150
Recording of deferred compensation obligation 1,199 -
</TABLE>
Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
are exercised or converted into common stock. A reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
December 31, 1998 March 31, 1998
----------------------------------- ------------------------------------
Dilutive Dilutive
Effect of Effect of
Options Options
Basic Issued Diluted Basic Issued Diluted
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income $1,082,000 - $1,082,000 $1,653,000 - $ 1,653,000
Shares available to
common stockholders 2,342,026 120,846 2,462,872 2,340,804 106,610 2,447,414
---------- -------- ---------- ---------- --------- -----------
Earnings Per Share $ .46 - $ .44 $ 0.71 - $ 0.68
========== ========= ========== ========== ========= ==========
</TABLE>
Authorized Shares Outstanding
On July 14, 1998, upon stockholder approval, the Company increased the
number of shares of common stock authorized from 3,000,000 to 10,0000,000.
Stock Split
On July 21, 1998, 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 July 31, 1998. Common
stock and paid-in capital as of March 31, 1998 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.
10
<PAGE>
2. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY:
The amortized cost, approximate fair value and gross unrealized gains and
losses of the Banks' securities as of December 31, 1998 and March 31, 1998 were
as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
---------------------------------------------------------------------------------------------------
December 31, 1998 March 31, 1998
----------------------------------------------- ------------------------------------------------
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 $ 6,548 $ 61 $ - $ 6,609 $ 9,160 $ 42 $ (11) $ 9,191
===================================== ========== ========== ============ ============ ==========
SECURITIES HELD TO MATURITY
----------------------------------------------------------------------------------------------------
December 31, 1998 March 31, 1998
----------------------------------------------- ------------------------------------------------
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 $ 1,000 $ 10 $ - $ 1,010 $ 3,990 $ 39 $ - $ 4,029
FHLB and Federal Reserve
stock, at cost 1,390 - - 1,390 1,391 - - 1,391
Obligations of states and
political subdivisions 965 48 - 1,013 965 42 - 1,007
Mortgage-backed securities 13,621 173 (27) 13,767 12,772 137 (45) 12,864
--------- --------- --------- ------- --------- ---------- ---------- ---------
$ 16,976 $ 231 $ (27) $17,180 $ 19,118 $ 218 $ (45) $ 19,291
========= ========= ========= ======= ========= ========== ========== =========
</TABLE>
The amortized cost and estimated fair value of securities available for
sale and securities held to maturity at December 31, 1998, 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 Held to Maturity
------------------------ -------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ---------- ----------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 4,744 $ 4,790 $ 60 $ 60
Due after one year through five years 1,303 1,309 1,456 1,483
Due after five years through ten years 501 510 449 480
----------- ---------- ------------ ------------
6,548 6,609 1,965 2,023
FHLB and Federal Reserve stock - - 1,390 1,390
Mortgage-backed securities - - 13,621 13,767
----------- ---------- ------------ ------------
$ 6,548 $ 6,609 $ 16,976 $ 17,180
=========== ========== ============ ============
</TABLE>
Securities totaling $9,678,000 and $8,136,000 were pledged as collateral
against certain large public deposits at December 31, 1998 and March 31, 1998,
respectively. Deposits associated with pledged securities had an aggregate
balance of $7,250,000 and $7,944,000 at December 31, 1998 and March 31, 1998,
respectively. There were no sales of securities available for sale during either
the nine months ended December 31, 1998 or the year ended March 31, 1998.
11
<PAGE>
3. LOANS RECEIVABLE:
Loans receivable at December 31, 1998 and March 31, 1998 consisted of the
following:
12/31/98 03/31/98
----------- ----------
(In thousands)
Mortgage loans:
One to four family residential $ 82,710 $ 86,965
Commercial real estate 13,251 14,127
Other 689 1,052
Commercial loans 8,970 7,912
Consumer loans 9,298 12,189
----------- ----------
114,918 122,245
Less --
Undisbursed portion of
mortgage loans 4,601 3,459
Escrow, net (5) 143
Allowance for loan losses 1,081 1,106
Net deferred loan fees (costs) 32 (4)
----------- ----------
$ 109,209 $ 117,541
=========== ==========
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. 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 December 31, 1998 and March 31, 1998
were $2,049,000 and $2,519,000, respectively. During the nine months ended
December 31, 1998, new loans totaled $1,387,000, repayments were $1,743,000 and
loans to parties who are no longer related totaled $114,000.
An analysis of the allowance for loan losses is detailed below.
Nine
Months Year
Ended Ended
12/31/98 03/31/98
---------- ----------
(In thousands)
Balance, beginning of period $ 1,106 $ 733
Provision 86 532
Charge-offs (134) (225)
Recoveries 23 66
---------- ----------
Balance, end of period $ 1,081 $ 1,106
========== ==========
4. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings and equipment at December 31, 1998 and March 31, 1998 are
summarized as follows:
12/31/98 03/31/98
---------- ----------
(In thousands)
Land $ 796 $ 585
Buildings and improvements 2,778 2,740
Equipment 1,733 1,652
---------- ----------
5,307 4,977
Less: Accumulated depreciation 2,242 2,055
---------- ----------
Net carrying amounts $ 3,065 $ 2,922
========== ==========
12
<PAGE>
5. REAL ESTATE OWNED:
Real estate owned was $724,000 and $665,000 at December 31, 1998 and March
31, 1998, respectively. 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. Holding costs related to real estate owned 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 determined.
6. DEPOSITS:
Deposits at December 31, 1998 and March 31, 1998 were as follows:
12/31/98 03/31/98
---------- ----------
(In thousands)
Transaction accounts $ 32,633 $ 32,932
Savings accounts 26,813 25,752
Savings certificates 107,811 104,175
---------- ----------
$ 167,257 $ 162,859
========== ==========
The aggregate amount of jumbo savings certificates with a minimum
denomination of $100,000 was $20,654,000 and $20,260,000 at December 31, 1998
and March 31, 1998, respectively.
Interest on deposits for the nine months ended December 31, 1998 and the
year ended March 31, 1998 consisted of the following:
12/31/98 03/31/98
---------- ----------
(In thousands)
Transaction accounts $ 359 $ 426
Passbook savings 563 791
Savings certificates 4,544 6,035
---------- ----------
$ 5,466 $ 7,252
========== ==========
At December 31, 1998 and March 31, 1998, the scheduled maturities of
savings certificates were as follows:
12/31/98 03/31/98
---------- ----------
(In thousands)
Within one year $ 78,460 $ 65,839
One to three years 23,955 35,463
Three to five years 5,396 2,873
---------- ----------
$ 107,811 $ 104,175
========== ==========
7. INCENTIVE COMPENSATION AND EMPLOYEE BENEFITS:
Defined Benefit Pension Plan
First Federal has a noncontributory defined benefit pension plan available
to all eligible employees. First State employees were added to the plan on
January 1, 1998. On April 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosure about Pension and Other Postretirement Benefits." This statement
revises employers' disclosures about pension plans. The prior year's disclosure
was revised to conform to SFAS No. 132. The following table sets forth the
plan's funded status and amounts recognized in the Company's consolidated
financial statements at December 31, 1998 and March 31, 1998:
13
<PAGE>
<TABLE>
<CAPTION>
12/31/98 03/31/98
---------- ---------
Change in projected benefit obligation: (In thousands)
<S> <C> <C>
Projected benefit obligation at beginning of year $ 1,468 $ 1,270
Service cost 110 104
Interest cost 80 94
Actuarial loss 284 48
Benefits and expenses paid (30) (48)
---------- ---------
Projected benefit obligation at end of year 1,912 1,468
---------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year 1,343 989
Actual return on plan assets 207 181
Employer contribution 218 221
Benefits and expenses paid (30) (48)
---------- ---------
Fair value of plan assets at end of year 1,738 1,343
---------- ---------
Funded status of plan:
Funded status of plan (174) (125)
Unrecognized actuarial loss 319 147
Unrecognized prior service cost 2 2
Unrecognized net transition obligation (15) (16)
---------- ---------
Net asset recognized $ 132 $ 8
========== =========
</TABLE>
<TABLE>
<CAPTION>
Nine
Months
Ended Year Ended
12/31/98 03/31/98
---------- ---------
Components of net periodic benefit cost: (In thousands)
<S> <C> <C>
Service cost $ 110 $ 104
Interest cost 80 94
Expected return on plan assets (96) (97)
Amortization of transitional (asset) or obligation (1) (2)
Recognized actuarial loss - 4
---------- ---------
Net periodic benefit cost $ 93 $ 103
========== =========
</TABLE>
In determining the actuarial present value of the projected benefit
obligation, the weighted-average discount rate was 7.00% for the nine months
ended December 31, 1998 and 7.25% for the year ended March 31, 1998, and the
rate of increase in future compensation levels was 5% for both periods. The
expected long-term rate of return on assets was 9.0% for the nine months ended
December 31, 1998 and the year ended March 31, 1998.
Employee Stock Ownership Plan
During fiscal 1992, the Company established an Employee Stock Ownership
Plan (ESOP) for eligible employees. First State employees were added to the ESOP
on January 1, 1998. The ESOP purchased 165,600 shares of the Company's common
stock with the proceeds from a $414,000 loan. The balance on the note at March
31, 1997, was $80,100 and was repaid during the year ended March 31, 1998. In
the prior year, the ESOP purchased 87,862 shares from treasury with the proceeds
from a $950,000 note from the Company. The note is secured by the common stock
owned by the ESOP and has been eliminated in consolidation. Principal payments
under the note are due in equal and annual installments through December 2007;
interest is payable at a rate of prime + 1%. The compensation expense related to
the ESOP for the nine months ended December 31, 1998 and the year ended March
31, 1998 was approximately $71,000 and $81,000, respectively. Unearned
compensation related to the ESOP was approximately $859,000 and $930,000 at
December 31, 1998 and March 31, 1998, respectively, 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 110,400 shares of the Company's common stock. 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 4,080 shares
were purchased on the open market and awarded to directors.
14
<PAGE>
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 the nine months ended December 31, 1998 and the year ended March
31, 1998 was approximately $3,000, and $5,000, respectively. At December 31,
1998 and March 31, 1998, unearned compensation related to the RRPs was
approximately $4,000 and $7,000, respectively, and is shown as a reduction to
stockholders' equity in the accompanying consolidated statements of financial
condition.
Director's Retirement Plan
The Company maintained a Director's Retirement Plan (DRP) whereby directors
or their beneficiaries would be provided specific amounts of annual retirement
benefits for a period of 10 years following retirement. As more fully explained
below in "Deferred Compensation Plan", the DRP was merged with and into the
Deferred Compensation Plan in June 1998.
Deferred Compensation Plan
The Company maintains a Deferred Compensation Plan pursuant to which
directors, officers and select employees may annually elect to defer the receipt
of Board fees and up to 25% of their salary, as applicable. In June 1998, the
Company merged the DRP with and into the Deferred Compensation Plan. Associated
with the Deferred Compensation Plan is a separate grantor trust to which all fee
and salary deferrals may be contributed. The trust assets will be used to pay
benefits to participants, but are subject to the claims of general creditors of
the Company until distributed from the trust. Subject to the guidelines under
the Deferred Compensation Plan, each participant may elect (i) the time and
manner under which his or her Plan benefit will be paid, and (ii) the measure of
the deemed investment return on his or her deferred compensation account. Such
return may be based in whole or in part on either the rate of return on the
Company's common stock or First Federal's highest yielding one-year certificate
of deposit. A participant who elects the Company's common stock rate of return
will be distributed shares of the Company's common stock when his or her plan
benefit is paid. Each director of the Company, whenever elected or appointed and
whether or not also employed by the Company, is also entitled to receive an
initial credit to his or her account of $71,000 from the previous DRP, which
will vest based on his or her overall years of service as a director of the
Company. Vested benefits become payable at the election of a participant as made
one year prior to distribution. If a participant dies prior to collecting his or
her entire vested benefit under the Deferred Compensation Plan, the value of
such vested but unpaid benefit will be paid to the director's designated
beneficiary or estate. The trust assets equal or exceed the amount of the
individual participant accounts as of December 31, 1998. In accordance with
Emerging Issues Task Force No. 97-14, the Company shares owned by the trust are
recorded as treasury stock and the amount owed to participants is recorded in
the equity section of the balance sheet. The trust owns 150,031 shares of the
Company's common stock as of December 31, 1998.
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. An analysis of stock options for the
nine months ended December 31, 1998 and the year ended March 31, 1998 follows.
<TABLE>
<CAPTION>
12/31/98 03/31/98
------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- ------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 212,116 $ 5.35 217,016 $ 4.80
Granted 3,800 6.32 16,000 9.39
Exercised (20,900) 4.88 (20,900) 3.24
Forfeited (800) 5.28 - -
-------- --------
Outstanding at end of year 194,216 5.42 212,116 5.35
======== ========
Exercisable at end of year 194,216 5.42 206,916 5.35
======== ========
Weighted average fair value
of options granted $ 3.60 $ 2.33
======== ========
</TABLE>
15
<PAGE>
Options outstanding at December 31, 1998 totaling 36,600 with an exercise
price of $2.50 have a weighted average contractual life of 3 years. Options
outstanding at December 31, 1998 totaling 137,816 with an exercise price between
$5.25 and $6.50 have a weighted average contractual life of 6.75 years and a
weighted average exercise price of $5.80. Options outstanding at December 31,
1998 totaling 19,800 with an exercise price between $8.94 and $12.34 have a
weighted average remaining contractual life of 8.75 years and a weighted average
exercise price of $9.95. All of these options are exercisable at December 31,
1998.
During the nine months ended December 31, 1998, the 1995 Plan was amended
to allow for the grant of restricted stock awards. Each director of the Company
received a restricted stock award for 2,000 shares of common stock that vests at
the rate of 20% per year of service. Participants may elect to defer receipt of
all or a percentage of shares. The compensation expense related to the
restricted stock awards for the nine months ended December 31, 1998 was
approximately $24,000. At December 31, 1998, unearned compensation related to
these awards was approximately $182,000.
Incentive Compensation Plan
The Company maintains a 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 1,437 and 542 shares of restricted stock awarded
during the periods ended December 31, 1998 and March 31, 1998, respectively. The
compensation expense related to the Restricted Stock awards for the nine months
ended December 31, 1998 and the year ended March 31, 1998 was approximately
$8,000 and $16,000, respectively. At December 31, 1998 and March 31, 1998,
unearned compensation related to the Restricted Stock awards was approximately
$19,000 and $11,000, respectively, 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. An analysis for the nine months ended December
31, 1998 and the year ended March 31, 1998 follows.
<TABLE>
<CAPTION>
12/31/98 03/31/98
------------------ ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- ------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 29,190 $ 6.08 28,500 $ 5.82
Granted 7,185 11.00 2,710 8.88
Exercised - - (2,020) 6.15
Forfeited - - - -
------- -------
Outstanding at end of year 36,375 7.05 29,190 6.08
======= =======
Exercisable at end of year 36,375 7.05 29,190 6.08
======= =======
Weighted average fair value
of options granted $ 2.87 $ 2.14
======= =======
</TABLE>
Options outstanding at December 31, 1998 totaling 26,700 with an exercise
price between $5.25 and $6.25 have a weighted average remaining contractual life
of 6.75 years and a weighted average exercise price of $5.82. Options
outstanding at December 31, 1998 totaling 9,675 with an exercise price between
$8.875 and $11.00 have a weighted average remaining contractual life of 9.50
years and a weighted average exercise price of $10.45.
The Company reserved 96,000 shares of common stock for issuance to
participants as options and restricted stock awards. There were 37,358 and
45,980 shares available for future grants at December 31, 1998 and March 31,
1998, respectively.
Savings Plan
First State sponsored a 401(k) savings plan covering substantially all of
its employees and made matching contributions up to 4% of employee
contributions. First State's matching contributions for the year ended March 31,
1998, totaled $9,103. As of January 1, 1998, the plan was terminated. The
employees of First State were added to the ESOP and Pension Plan on January 1,
1998.
16
<PAGE>
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 during the nine months ended December 31, 1998 and the year
ended March 31, 1998, based on the fair value of the options granted at grant
date as required 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):
12/31/98 03/31/98
--------- ---------
Net income - as reported $ 1,082 $ 1,653
Net income - pro forma 1,052 1,620
Earnings per share - as reported - basic .46 .71
Earnings per share - pro forma - basic .45 .69
Earnings per share - as reported - diluted .44 .68
Earnings per share - pro forma - diluted .43 .66
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:
12/31/98 03/31/98
--------- ---------
Expected dividend yield 3.06% 3.38%
Expected stock price volatility 30% 24%
Risk-free interest rate 4.79% 6.11%
Expected life of options 5 years 5 years
8. 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 December 31, 1998, the Banks' off-balance sheet
activities include outstanding commitments to originate and fund single-family
mortgage loans, commercial loans, home equity loans and lines of credit of $7.1
million.
Leases
First Federal has a lease agreement for the building in which a branch
office is located. Rental expense under this lease was $20,470 and $27,000 for
the nine months ended December 31, 1998 and the year ended March 31, 1998,
respectively. The lease agreement expires May 31, 2004. Future minimum lease
payments under the lease in effect at December 31, 1998 are $27,500 for 1999,
$28,000 for 2000, $29,000 for 2001, $30,000 for 2002, $31,000 for 2003 and
$13,000 for 2004.
Special Dividend Declared
Subsequent to December 31, 1998, the Company declared a special dividend of
$.07 per share payable on March 10, 1999 to stockholders of record on March 1,
1999. The total cash payments required for this dividend will be approximately
$178,000.
17
<PAGE>
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, 2001, and the maximum aggregate liability to the Company at
December 31, 1998 is approximately $1,330,000.
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.
9. STOCKHOLDERS' EQUITY:
In December 1991, the Company sold 690,000 shares (before consideration of
stock splits) 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.
OTS regulations impose restrictions on the amount of dividends that may be
paid by First Federal to FirstFed Bancorp, Inc. Under such regulations an
institution maintaining specified supervisory examination ratings may make
capital distributions during a calendar year equal to its net income for such
year plus its retained net income for the preceding two years. Accordingly,
under these regulations, approximately $2.5 million was available for dividend
at December 31, 1998, without prior OTS approval.
Banking laws and other regulations limit the amount of dividends a bank
subsidiary may pay without prior regulatory approval. At December 31, 1998,
approximately $755,000 was available for dividend payment from First State
without such prior approval.
Effective January 1, 1998, the Company established the Dividend
Reinvestment and Stock Purchase Plan. Under this plan, participating
stockholders may elect to reinvest dividends into additional shares of the
Company's common stock. In addition, monthly optional cash payments, not less
than $50 and up to $2,000 per month, may be made into the plan by participating
stockholders to purchase shares of the Company's common stock. There were
500,000 shares of common stock reserved for participants of the plan. At
December 31, 1998 and March 31, 1998, 6,500 shares and 3,174 shares,
respectively, had been purchased for participants under the plan. The costs
associated with this plan were immaterial during the nine months ended December
31, 1998 and the year ended March 31, 1998.
18
<PAGE>
10. 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:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
---------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 6,385 $ 6,385 $ 3,443 $ 3,443
Interest bearing deposits in banks 6,025 6,025 5,592 5,592
Federal funds sold 31,225 31,225 19,050 19,050
Securities available for sale 6,609 6,609 10,191 9,191
Loans held for sale 2,219 2,219 778 778
Securities held to maturity 16,976 17,180 19,118 19,291
Loans, net 109,209 112,112 117,541 119,789
Accrued interest receivable 1,345 1,345 1,399 1,399
FINANCIAL LIABILITIES:
Deposits $ 167,257 $ 170,052 $ 162,859 $ 163,522
Accrued interest payable 141 141 197 197
</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
Fund 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 and Securities Held to Maturity
Substantially all of the Company's 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
approximates fair value.
Loans Held for Sale
All of the Company's loans held for sale are to third-party investors and
have a readily determinable 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
19
<PAGE>
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.
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.
11. INCOME TAXES:
The provision for income taxes for the nine months ended December 31, 1998
and the year ended March 31, 1998 was as follows:
<TABLE>
<CAPTION>
12/31/98 03/31/98
-------- ----------
(In thousands)
<S> <C> <C>
Current:
Federal $ 560 $ 1,048
State 81 135
-------- ----------
641 1,183
Deferred, net (111) (258)
-------- ----------
Totals $ 530 $ 925
======== ==========
</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
taxes for the nine months ended December 31, 1998 and the year ended March 31,
1998 were as follows:
<TABLE>
<CAPTION>
12/31/98 03/31/98
-------- ----------
(In thousands)
<S> <C> <C>
Pre-tax income at statutory rates $ 548 $ 877
Add (deduct):
State income tax, net of federal
tax benefit 44 70
Other, net (62) (22)
-------- ----------
Totals $ 530 $ 925
======== ==========
</TABLE>
The components of the net deferred tax asset as of December 31, 1998 and
March 31, 1998 were as follows:
12/31/98 03/31/98
-------- ----------
(In thousands)
Deferred tax asset:
Retirement and other benefit plans $ 225 $ 258
Allowance for loan losses 325 265
Other 80 22
-------- ----------
630 545
-------- ----------
Deferred tax liability:
Deferred loan fees (158) (194)
FHLB stock dividend (203) (203)
Depreciation (46) (40)
Unrealized gain on securities
available for sale (22) (14)
Other (68) (64)
-------- ----------
(497) (515)
-------- ----------
Net deferred tax asset $ 133 $ 30
======== ==========
20
<PAGE>
12. SUPPLEMENTAL INCOME STATEMENT INFORMATION:
The following provides further analysis of other operating expenses for the
nine months ended December 31, 1998 and the year ended March 31, 1998:
<TABLE>
<CAPTION>
12/31/98 03/31/98
-------- ----------
(In thousands)
<S> <C> <C>
Professional services $ 88 $ 126
Computer services 205 289
Advertising 51 81
Stationary and supplies 95 126
Other 520 654
-------- ----------
$ 959 $ 1,276
======== ==========
</TABLE>
13. PARENT COMPANY FINANCIAL STATEMENTS:
Separate condensed financial statements of FirstFed Bancorp, Inc. (the
"Parent Company") as of and for the nine months ended December 31, 1998 and the
year ended March 31, 1998 are presented below:
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND MARCH 31, 1998
(In thousands)
12/31/98 03/31/98
-------- ----------
ASSETS:
Interest-bearing deposits $ 1,120 $ 1,897
Investment in subsidiaries 17,185 15,946
Other assets 164 42
-------- ----------
$ 18,469 $ 17,885
======== ==========
LIABILITIES:
Dividend payable $ 178 $ 150
Other liabilities 88 102
-------- ----------
266 252
-------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 30 28
Paid-in-capital 7,502 7,084
Retained Earnings 15,622 15,204
Deferred Compensation Obligation 1,199 -
Deferred Compensation Treasury Stock (1,373) -
Treasury stock (3,752) (3,752)
Unearned compensation (1,064) (948)
Unrealized gain on securities
available for sale, net 39 17
-------- ----------
18,203 17,633
-------- ----------
$ 18,469 $ 17,885
======== ==========
21
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND THE YEAR ENDED MARCH 31, 1998
(In thousands)
12/31/98 03/31/98
-------- ----------
Income from subsidiaries:
Dividends $ - $ 1,200
Interest 95 57
Gain on sale of real estate held for investment - 511
Rental income - 90
-------- ----------
Total income 95 1,858
Operating expense (312) (385)
-------- ----------
Income (loss) before income taxes and equity in
undistributed current year subsidiaries'
earnings (217) 1,473
(Provision) benefit for income taxes 76 (167)
-------- ----------
Income (loss) before equity in undistributed
current year subsidiaries' earnings (141) 1,306
Equity in undistributed current year
subsidiaries' earnings 1,223 347
-------- ----------
Net income $ 1,082 $ 1,653
======== ==========
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND THE YEAR ENDED MARCH 31, 1998
(In thousands)
12/31/98 03/31/98
---------- ----------
<S> <C> <C>
Operating Activities:
Net income $ 1,082 $ 1,653
Equity in undistributed
current year earnings of subsidiaries' (1,223) (347)
---------- ----------
(141) 1,306
---------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of unearned compensation 107 102
Gain on sale of real estate held for investment - (511)
Other, net (577) 178
---------- ----------
Net cash provided by (used in) operating activities (470) 1,075
---------- ----------
Investing Activities:
Proceeds from the sale of real estate held for investment - 1,442
---------- ----------
Net cash provided by investing activities - 1,442
---------- ----------
Financing Activities:
Proceeds from exercise of stock options 90 80
Proceeds from dividend reinvestment 97 30
Dividends paid (635) (678)
Purchase of treasury stock - (1,539)
---------- ----------
Net cash used in financing activities (448) (2,107)
---------- ----------
Increase (decrease) in cash and cash equivalents (777) 410
Cash and cash equivalents at beginning of year 1,897 1,487
---------- ----------
Cash and cash equivalents at end of year $ 1,120 $ 1,897
========== ==========
</TABLE>
22
<PAGE>
14. SEGMENT DISCLOSURE:
During the nine months ended December 31, 1998, the Company adopted SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information."
This Statement required disclosure of certain information about reportable
operating segments of a company. The holding company is considered a separate
reportable segment from the banking operations since it does not offer products
or services or interact with customers, but does meet the quantitative threshold
as outlined in the Statement.
The Company's segment disclosure is as follows for the nine months ended
December 31, 1998 and the year ended March 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
Banking Holding Total
Operations Company Eliminations Company
---------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Net interest income $ 4,517 $ 95 $ - $ 4,612
Provision for loan losses 86 - - 86
Noninterest income 620 - - 620
Noninterest expense 3,222 312 - 3,534
---------- ----------- ----------- -----------
Income (loss) before
income taxes 1,829 (217) - 1,612
Income tax expense (benefit) 606 (76) - 530
---------- ----------- ----------- -----------
Net income $ 1,223 $ (141) $ - $ 1,082
========== =========== =========== ===========
Total assets $ 184,866 $ 18,469 $ (17, 185) $ 186,150
========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1998
-------------------------------------------------------------------
Banking Holding Total
Operations Company Eliminations Company
---------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Net interest income $ 6,171 $ 57 $ - $ 6,228
Provision for loan losses 532 - - 532
Noninterest income 773 601 - 1,374
Noninterest expense 4,107 385 - 4,492
---------- ----------- ----------- -----------
Income before
income taxes 2,305 273 - 2,578
Income tax expense 758 167 - 925
---------- ----------- ----------- -----------
Net income $ 1,547 $ 106 $ - $ 1,653
========== =========== =========== ===========
Total assets $ 179,529 $ 17,885 $ (15,946) $ 181,468
========== =========== =========== ===========
</TABLE>
15. REGULATORY MATTERS:
The Banks are subject to various regulatory capital requirements
administered by the federal and state banking agencies. The quantitative
measures to ensure capital adequacy require the Banks to maintain minimum
amounts and ratios, set forth in the table below, of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined), of Tier 1
capital (as defined) to average assets (as defined), and tangible capital to
average assets. 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
December 31, 1998 and March 31, 1998, that the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998 and March 31, 1998, the most recent notification
from the regulatory agencies categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' category.
Actual capital amounts in addition to required amounts and amounts needed
to be well capitalized for Tier 1, Total, Tier 1 Leverage, and Tangible ratios
for the Company and the Banks, as applicable, are as follows:
23
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------
(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 1 Risk-Based Capital
Consolidated $ 16,856 18.6% N/A N/A N/A N/A
First Federal Savings Bank 11,627 14.1% $ 3,305 4.0% $ 4,959 6.0%
First State Bank 3,314 14.1% 941 4.0% 1,411 6.0%
Total Risk-Based Capital
Consolidated $ 17,937 19.8% N/A N/A N/A N/A
First Federal Savings Bank 12,397 15.0% $ 6,611 8.0% $ 8,264 10.0%
First State Bank 3,608 15.3% 1,882 8.0% 2,352 10.0%
Tier 1 Leverage
Consolidated $ 16,856 9.3% N/A N/A N/A N/A
First Federal Savings Bank 11,627 8.2% $ 5,650 4.0% $ 7,062 5.0%
First State Bank 3,314 7.6% 1,745 4.0% 2,182 5.0%
Tangible Capital
First Federal Savings Bank $ 11,627 8.2% $ 2,119 1.5% N/A N/A
<CAPTION>
March 31, 1998
----------------------------------------------------------------------
(Dollar amounts in thousands)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ----------------- -------------------
Amount Rate Amount Rate Amount Rate
--------- ------- --------- ------- --------- -------
Tier 1 Risk-Based Capital
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 16,228 16.3% N/A N/A N/A N/A
First Federal Savings Bank 10,679 13.3% $ 3,217 4.0% $ 4,826 6.0%
First State Bank 2,895 12.3% 943 4.0% 1,415 6.0%
Total Risk-Based Capital
Consolidated $ 17,334 17.4% N/A N/A N/A N/A
First Federal Savings Bank 11,470 14.3% $ 6,435 8.0% $ 8,043 10.0%
First State Bank 3,190 13.5% 1,886 8.0% 2,358 10.0%
Tier 1 Leverage
Consolidated $ 16,228 9.0% N/A N/A N/A N/A
First Federal Savings Bank 10,679 7.7% $ 5,545 4.0% $ 6,931 5.0%
First State Bank 2,895 7.1% 1,635 4.0% 2,044 5.0%
Tangible Capital
First Federal Savings Bank $ 10,679 7.7% $ 2,079 1.5% N/A N/A
</TABLE>
24
<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 and liquid investments.
COMPARISON OF FINANCIAL CONDITION AS OF DECEMBER 31, 1998 AND MARCH 31,
1998, AND RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND
THE YEAR ENDED MARCH 31, 1998
CHANGES IN FINANCIAL CONDITION
Total deposits grew to $167.3 million at December 31, 1998, a record level
for the Company, compared to $162.9 million at March 31, 1998. The increase was
primarily in savings accounts and certificates of deposit as the result of
normal growth. Total assets increased to a record level of $186.1 million at
December 31, 1998, compared to $181.5 million at March 31, 1998. Loan
originations for the nine months ended December 31,1998 were slightly higher
than the year ended March 31, 1998; however, fixed-rate loans sold into the
secondary market represented a higher percentage of the loan originations. The
result was a decrease in loans held in portfolio. This operating activity
created an increase of $12.1 million in fed funds to a total of $31.2 million at
December 31, 1998. The repayments, calls and maturities of securities were
slightly more than purchases, which resulted in a slight decrease in securities
to $23.5 million at December 31, 1998. In summary, funds generated from the
increase in deposits, decrease in loan balances and decrease in securities were
primarily invested in fed funds.
Stockholders' equity increased $600,000 to $18.2 million at December 31,
1998. The net increase in equity during the nine months ended December 31, 1998
was primarily attributable to earnings of $1,082,000 partially offset by
dividends declared of $664,000, or $.2725 per share. Diluted earnings per share
were $.44 for the nine months ended December 31, 1998.
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. See Notes 9 and 15 of the "Notes to Consolidated Financial
Statements" regarding capital resources.
GENERAL RESULTS OF OPERATIONS
Net income for the nine months ended December 31, 1998 was $1,082,000, a
decrease of 34.5% from the prior year's amount of $1,653,000. The decrease was
primarily the result of comparing a nine-month income period to a twelve-month
income period. However, earnings from the comparable nine month period in 1997
have also decreased somewhat because of a slight reduction in net interest
spread and an increase in noninterest expense primarily related to opening the
Vance branch of First Federal during the prior year.
INTEREST INCOME
Total interest income decreased $3.4 million to $10.1 million for the nine
months ended December 31, 1998, from $13.5 million for the year ended March 31,
1998. This decrease was primarily the result of comparing a nine-month period to
a twelve-month period, plus a decrease in the average yield on interest earning
assets to 8.0% during the nine months ended December 31, 1998, from 8.3% for the
year ended March 31, 1998, net of a slight increase in the average balance of
interest earning assets. There was a slight increase in the average yield on
loans to 9.2% for the nine months ended December 31, 1998, from 9.0% for the
year ended March 31, 1998. Interest earned on securities decreased $658,000 to
$1,131,000 for the nine months ended December 31, 1998, from $1,789,000 for the
year ended March 31, 1998. The decrease was primarily the result of comparing a
nine-month period to a twelve-month period. Also, the average yield on
investments decreased to 5.8% for the nine months ended December 31, 1998,
compared to 6.2% for the year ended March 31, 1998. This decrease in yield was
partially offset by a slight increase in the average balance of securities.
INTEREST EXPENSE
Total interest expense for the nine months ended December 31, 1998 was $5.5
million compared to $7.3 million for the year ended March 31, 1998. This
decrease was primarily the result of comparing a nine-month period to a
twelve-month period. The
25
<PAGE>
average level of deposits increased by $6.0 million, or 3.8%, to $161.9 million
at December 31, 1998, from the March 31, 1998 average level of $155.9 million,
while the average rate paid on deposits decreased slightly to 4.50%, from 4.67%
for the year ended March 31, 1998.
NET INTEREST INCOME
Net interest income for the nine months ended December 31, 1998 decreased
approximately $1.6 million, to $4.6 million from $6.2 million for the previous
year. This decrease was primarily the result of comparing a nine-month period to
a twelve- month period, in addition to a decrease in net interest spread to
3.55% from 3.60% in the prior period. The decrease in spread is partially offset
by an increase in average interest earning assets and interest bearing
liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses is a function of the evaluation of the
allowance for loan losses. The total allowance for loan losses was $1,081,000 at
December 31, 1998 and $1,106,000 at March 31, 1998. During the nine months ended
December 31, 1998, the provision for loan losses was $86,000. Net recoveries and
charge-offs were also recognized during this nine-month period. The ratios of
the allowance to total loans of 0.99% at December 31, 1998 and 0.94% at March
31, 1998 were considered reasonable in relation to estimated loss exposure.
The Company's allowance for loan losses is based upon an estimated range of
loss exposure. This effort is coordinated with regulators of the Banks to
include recommendations and comments from examination reports. Actual losses on
loans can vary significantly from the estimate. The methods and assumptions used
to calculate the allowance are continually reviewed to insure that current
factors are considered in the estimation process. For instance, changes occur in
the loan portfolio mix. In the past few years, the Company has somewhat
broadened its lending, resulting in a shift from a traditional thrift portfolio
to a community bank portfolio. Consumer and commercial real estate loans have
risen to comprise a consistently higher percentage of the loan portfolio. Other
considerations include historical loss experiences, current economic conditions,
distribution of the loan portfolio by risk class and the estimated value of the
underlying collateral.
In determining the allowance for loan losses, First Federal separates its
loans into two primary categories: classified and non-classified loans. Within
the primary categories, the loans are further categorized by collateral as
mortgage and nonmortgage. These categories are used for assessment of the
estimated level of allowance for loan losses needed. The allowance for
non-classified loans is determined by applying an estimated loss factor which
considers, among other things, the average of the last five years' losses.
Classified loans include problem loans determined by an internal loan review
committee or established classification criteria. The allowance for classified
loans is determined by various methods including specific evaluation of
collateral fair value, historical loss criteria and other specific analysis as
needed. First State determines the allowance for loan losses based on specific
review of all problem loans. This detailed analysis primarily determines the
allowance on problem loans by specific evaluation of collateral fair value. The
allowance for nonproblem loans considers historical losses and other relevant
factors. The allowances are reviewed several times throughout the year to
consider changes in loan portfolio and classification of loans which results in
a self-correction mechanism.
NONINTEREST INCOME
Noninterest income for the nine months ended December 31, 1998 totaled
$620,000 as compared to $1,374,000 for the year ended March 31, 1998. The
decrease was primarily the result of a gain of $511,000 recorded on the sale of
real estate held for investment during the prior period, as well as comparing a
nine-month period to a twelve-month period.
NONINTEREST EXPENSE
Noninterest expense for the nine months ended December 31, 1998 totaled
$3.5 million as compared to $4.5 million for the year ended March 31, 1998. This
decrease is primarily the result of comparing a nine-month period to a
twelve-month period.
INCOME TAXES
Federal and state income taxes decreased $395,000, or 42.7%, to $530,000 in
the nine months ended December 31, 1998, from $925,000 for the year ended March
31, 1998. The decrease was primarily the result of the approximate 37.5%
decrease in income before taxes for the nine months ended December 31, 1998, as
compared to the year ended March 31, 1998. The Company's effective tax rate for
the nine months ended December 31, 1998 was 33% compared to 36% for the year
ended March 31, 1998.
26
<PAGE>
COMPARISON OF FINANCIAL CONDITION AS OF MARCH 31, 1998 AND 1997, AND
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
CHANGES IN FINANCIAL CONDITION
Total deposits grew to $162.9 million at March 31, 1998, compared to $158.0
million at March 31, 1997. The increase was primarily in transaction NOW
accounts as the result of normal growth, including additional local municipal
accounts. Total assets increased to $181.5 million at March 31, 1998, compared
to $178.1 million at March 31, 1997. Loan originations for fiscal 1998 were
slightly higher than fiscal 1997; however, fixed-rate loans sold into the
secondary market represented a higher percentage of the loan originations. The
result was a decrease in loans held in portfolio. This operating activity
created an increase of $14.8 million in fed funds to a total of $19.0 million at
March 31, 1998. The purchase of securities approximated pay-offs received, which
resulted in a slight decrease in securities to $28.3 million at March 31, 1998.
In summary, funds generated from the increase in deposits and decrease in loan
balances were primarily invested in fed funds.
Stockholders' equity decreased $290,000 to $17.6 million at March 31, 1998.
The net decrease in equity during fiscal 1998 was primarily attributable to the
purchase of treasury stock totaling $1,539,000, and dividends declared of
$705,000, or $.60 per share, offset by earnings of $1,653,000. Diluted earnings
per share were $1.35 for the year ended March 31, 1998.
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. See Notes 9 and 15 of the "Notes to Consolidated Financial
Statements" regarding capital resources.
GENERAL RESULTS OF OPERATIONS
Net income for the year ended March 31, 1998 was $1,653,000, an increase of
63.2% from the prior year's amount of $1,013,000. The increase was primarily
attributable to two nonrecurring expense items recorded in the prior year: the
SAIF special assessment of approximately $461,000 (after taxes) and the accrual
of a lawsuit judgement in the amount of $165,000 (after taxes).
INTEREST INCOME
Total interest income increased $200,000 to $13.5 million for fiscal 1998
from $13.3 million for fiscal 1997. This increase was primarily due to an
increase in the average yield on interest earning assets to 8.3% during fiscal
1998 from 8.1% for fiscal 1997, offset by the effect of a 0.5% decrease in the
average balance of interest earnings assets. There was a slight increase in the
average yield on mortgage loans to 8.6% in fiscal 1998 from 8.5% in fiscal 1997
and an increase in the average yield on other loans to 12.0% from 10.6%.
Interest earned on securities increased $206,000 to $1,789,000 in fiscal 1998
from $1,583,000 in fiscal 1997. The increase was primarily the result of an
11.7% increase in the average balance.
INTEREST EXPENSE
Total interest expense for fiscal 1998 of $7.3 million remained the same as
fiscal 1997. The average level of deposits increased $3.7 million, or 2.4%, to
$155.9 million in fiscal 1998 from the fiscal 1997 average level of $152.2
million, while the average rate paid on deposits decreased to 4.67% in fiscal
1998 from 4.73% in fiscal 1997.
NET INTEREST INCOME
Net interest income for the year ended March 31, 1998 increased
approximately $200,000, or 3.3%, to $6.2 million from the fiscal 1997 level of
$6.0 million. This increase was primarily due to the increase in the average
yield on interest-earning assets, net of a slight decline in average total
interest-earning assets to $163.8 million for fiscal 1998, from $165.6 million
for fiscal 1997. Average deposits increased in fiscal 1998 over 1997 but the
average rate paid on deposits decreased. The interest rate spread was 3.6% in
fiscal 1998, up from 3.3% in fiscal 1997.
PROVISION FOR LOAN LOSSES
Management recorded a provision for loan losses of $532,000 during fiscal
1998 as compared to $186,000 during fiscal 1997. The 1998 provision raised the
Company's allowance for loan losses to a higher level within its estimated range
of loss exposure. During 1998 management reevaluated its methodology for
establishing the allowance, and the resulting increase was considered
appropriate given a change in loan portfolio mix. The Company has somewhat
broadened its lending, resulting in a
27
<PAGE>
shift from a traditional thrift portfolio to a community bank portfolio.
Consumer and commercial real estate loans have risen to comprise a consistently
higher percentage of the loan portfolio. After the provision, the ratio of the
allowance to total loans of 0.94% is considered reasonable in relation to
estimated loss exposure. The allowance for loan losses is based on management's
evaluation of losses currently in the loan portfolio, and considers, among other
factors, historical loss experience, current economic conditions, distribution
of the loan portfolio by risk class and the estimated value of the underlying
collateral.
NONINTEREST INCOME
Noninterest income for fiscal 1998 totaled $1,374,000 as compared to
$908,000 for fiscal 1997. The increase was primarily the result of a gain of
$511,000 recorded on the sale of real estate held for investment.
NONINTEREST EXPENSE
Noninterest expense for fiscal 1998 totaled $4.5 million as compared to
$5.2 million for fiscal 1997. Included in noninterest expense for fiscal 1997
were two nonrecurring expenses: 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. The increase, net of nonrecurring items, is
primarily the result of added operating expenses of the Vance branch opened by
First Federal in July 1997.
INCOME TAXES
Federal and state income taxes increased $419,000, or 82.8% , to $925,000
in fiscal 1998 from $506,000 in fiscal 1997. The increase was primarily the
result of the approximate 70.0% increase in income before tax for fiscal 1998
compared to fiscal 1997. The Company's effective tax rate for fiscal 1998 was
36% compared to 33% in fiscal 1997.
OTHER MATTERS
YEAR 2000
The Company has addressed, and will continue to address, the issue of Year
2000, which relates to software originally being written using a two digit
format rather than a four digit format to represent the year. The date change
format requires modification to some software and computer systems so that dates
beyond December 31, 1999 will be properly recognized. The Banks have formed
committees to assess, test, prepare and overview the applicable software,
equipment and related technologies related to Year 2000 readiness.
The Banks rely primarily upon a third party processor and other vendors
rather than internally generated software. Based on the analysis of software and
equipment, in addition to ongoing discussions with vendors, the Company believes
that upgrades, modifications or conversion of software planned by the Company
and the third party vendors will properly address the Year 2000 issue. The third
party processor, which processes all customer related data, has represented to
the Banks that the testing of the software was substantially completed at
December 31, 1998. The Banks have adopted Year 2000 Test Plans, which have
already been tested and evaluated, or the Banks are in the process of conducting
testing and evaluating results. If modifications to existing systems and
conversions to new systems proceed as scheduled, management presently believes
that the Year 2000 issue will not pose a substantial internal operating risk to
the Company.
Additionally, the Company has implemented a process for assessing readiness
of various suppliers of other services. There can be no guarantee, however, that
the systems of the Banks' third party processor and other outside parties will
be Year 2000 compliant on a timely basis. In turn, this could result in
disruption to the operations of the Company. The Banks have adopted a Year 2000
Contingency Plan which would replace their computerized operations with a manual
system, if necessary.
The Banks are educating and assisting customers in identifying their Year
2000 issues. It has been determined that this is a relatively low risk area in
that the Banks have a minimal number of customers that place reliance on
computers to conduct business.
Total Year 2000 costs include such items as payroll costs, upgrading
existing software applications, and replacing certain hardware. The Banks do not
have a system that specifically tracks all costs and time spent on the Year 2000
issues. The Company is in the process of estimating total expense related to
Year 2000. Such expenses incurred during the nine months ended December 31, 1998
are not considered significant.
28
<PAGE>
COMMON STOCK DATA
The Company's common stock trades on the NASDAQ SmallCap Stock Market under
the symbol "FFDB". Trading information regarding the common stock appears in The
Wall Street Journal under the abbreviation "FirstFdB". There currently are
2,472,927 shares of common stock outstanding and approximately 345 holders of
record of the common stock. The following table sets forth the stock market
price ranges of FirstFed Bancorp, Inc. as reported by NASDAQ SmallCap Market
Systems and cash dividends declared per share of common stock for the calendar
quarters as indicated.
<TABLE>
<CAPTION>
Stock Market
Price Range Dividends
----------- Declared
Low High Per Share
------- -------- ---------
Year Ended March 31, 1998:
<S> <C> <C> <C>
First Quarter $ 7.625 $ 9.50 $ .1125
Second Quarter 8.375 9.125 .0625
Third Quarter 9.875 12.50 .0625
Fourth Quarter 10.50 12.75 .0625
Nine Months Ended December 31, 1998:
First Quarter $ 11.125 $ 12.50 $ .1325
Second Quarter 11.00 12.50 .07
Third Quarter 9.50 11.125 .07
</TABLE>
29
<PAGE>
BOARDS 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, Bright Star Restaurant
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
Owner, Hugh Edmonds Realty
Randall J. Gilmore
Chairman and C.E.O., Moultrie Enterprises, Inc.
Albert L. Green
Manager, N.D. Cass, Co.
Howard C. Pate
Retired
Joe E. Weeks
Owner, J & J Metal and Salvage
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
Chief Financial Officer, Vice President, Secretary and Treasurer
Officers of First Federal Savings Bank
James E. Smith, Jr.
Vice President
Cathy N. Ackerman
Assistant Vice President and Branch Manager
W. Max Adams
Assistant Vice President and Branch Manager
John F. Ammons
Assistant Vice President and Branch Manager
Brenda M. Baswell
Assistant Vice President
F. Scott Morris
Compliance Officer
Robert Nelson, III
Assistant Vice President and Loan Officer
Martha P. Peeples
Assistant Vice President and Branch Manager
J. Alton Yeager
Assistant Vice President
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 Gamble
Loan Officer
31
<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%
Subsidiary 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.
<PAGE>
EXHIBIT 23
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-KSB, into the Company's
previously filed Registration Statements (File Nos. 33-51662, 33-58260, 33-
81798, 33-40559 and 333-61165).
/s/ Arthur Andersen LLP
- ---------------------------------
Arthur Andersen LLP
Birmingham, Alabama
March 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,385
<INT-BEARING-DEPOSITS> 6,025
<FED-FUNDS-SOLD> 31,225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,609
<INVESTMENTS-CARRYING> 16,976
<INVESTMENTS-MARKET> 17,180
<LOANS> 109,209
<ALLOWANCE> 1,081
<TOTAL-ASSETS> 186,150
<DEPOSITS> 167,257
<SHORT-TERM> 0
<LIABILITIES-OTHER> 371
<LONG-TERM> 0
0
0
<COMMON> 30
<OTHER-SE> 18,173
<TOTAL-LIABILITIES-AND-EQUITY> 186,150
<INTEREST-LOAN> 8,031
<INTEREST-INVEST> 1,131
<INTEREST-OTHER> 916
<INTEREST-TOTAL> 10,078
<INTEREST-DEPOSIT> 5,466
<INTEREST-EXPENSE> 5,466
<INTEREST-INCOME-NET> 4,612
<LOAN-LOSSES> 86
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 959
<INCOME-PRETAX> 1,612
<INCOME-PRE-EXTRAORDINARY> 1,612
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,082
<EPS-PRIMARY> .46
<EPS-DILUTED> .44
<YIELD-ACTUAL> 8.05
<LOANS-NON> 659
<LOANS-PAST> 1,866
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,106
<CHARGE-OFFS> 134
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 1,081
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,081
</TABLE>
