SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
Commission file number: 0-19609
FirstFed Bancorp.
------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 63-104864
-------------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1630 Fourth Avenue North Bessemer, Alabama. 35020
-------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
Securities registered under Section 12(b) of the Exchange Act: None
----
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $.01 per share
(Title of Class)
(205) 428-8472
------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for the fiscal year ended December 31, 1999 were
$13,368,000.
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, 2000,
was $16,508,183.
As of March 15, 2000, there were issued and outstanding 2,509,487
shares of the registrant's common stock.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1999, are incorporated by reference into Parts I and II of
this Form 10-KSB.
(2) Portions of the Proxy Statement for the December 31, 1999, Annual
Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-KSB.
<PAGE>
TABLE OF CONTENTS
PART I.
ITEM I. Description of Business Page
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.................................................17
Personnel . . . . . . . . . . . . . . . . ........ . . . 17
ITEM 2. Description of Property.....................................18
ITEM 3. Legal Proceedings...........................................19
ITEM 4. Submission of Matters to a Vote of Security Holders.........19
PART II.
ITEM 5. Market for Common Equity and Related Stockholder Matters....19
ITEM 6. Management's Discussion and Analysis or Plan of Operation...19
ITEM 7. Financial Statements........................................19
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure..................19
PART III.
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act....19
ITEM 10. Executive Compensation......................................19
ITEM 11. Security Ownership of Certain Beneficial Owners
and Management..............................................19
ITEM 12. Certain Relationships and Related Transactions..............20
ITEM 13. Exhibits, List and Report on Form 8-K.......................20
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 $171,247,000, total deposits of
$151,579,000 and stockholders' equity of $18,980,000 at December 31, 1999.
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'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 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."
Earnings of First Federal and First State are primarily dependent upon net
<PAGE>
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.
1
<PAGE>
KEY OPERATING DATA
The following table summarizes certain key operating ratios for the year ended
December 31, 1999, and the nine months ended December 31, 1998.
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998
Return on average assets .77% .79% (1)
Return on average equity 7.56% 8.04% (1)
Average equity to average assets 10.86% 9.86%
Dividend payout ratio 63% 62%
(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 year ended December 31, 1999, and the nine months ended December
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, 1999, Annual Report to
Stockholders (the "Annual Report").
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998
--------------------- --------------------------
Average Average
Balance Interest Balance Interest
------- -------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $ 110,977 $ 10,003 $ 116,914 $ 8,031
Securities 26,102 1,594 26,080 1,131
Other interest-earning assets 26,957 1,335 23,890 916
--------- --------- --------- --------
Total interest-earning assets 164,037 12,932 166,884 10,078
Non-interest-earning assets 18,127 15,377
--------- ----------
Total assets $ 182,163 $ 182,261
========= =========
Interest-bearing liabilities:
Deposits $ 161,115 $ 6,607 $ 161,949 $ 5,466
Other borrowings -- -- -- --
--------- --------- --------- --------
Total interest-bearing liabilities 161,115 6,607 161,949 5,466
Non-interest bearing liabilities 2,485 -- 2,371 --
--------- --------- --------- --------
$ 6,325 $ 4,612
========= =========
Total liabilities 163,600 164,320
Stockholders' equity 18,563 17,941
--------- ---------
Total liabilities and stockholders' equity $ 182,163 $ 182,261
========= =========
</TABLE>
Year Nine Months
Ended Ended
December 31, 1999 December 31, 1998(1)
------------------ --------------------
Yield on:
Loans 9.01% 9.16%
Securities 6.11 5.78
Other interest-earning assets 4.95 5.11
All interest-earning assets 7.88 8.05
<PAGE>
Rate paid on:
Deposits 4.10 4.50
Other borrowings -- --
All interest-bearing liabilities 4.10 4.50
Interest rate spread (2) 3.78% 3.55%
========== ==========
Net yield (3) 3.86% 3.68%
========== ==========
(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 increased $1,713,000 for the year ended December 31, 1999,
compared to the nine months ended December 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>
Year Ended Nine Months Ended
December 31, 1998 December 31, 1999
Versus (Annualized)
Nine Months Ended Versus
December 31, 1998 Year Ended
(Annualized) March 31, 1998
--------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
--------- ------ ----- -------- ------ ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest earned on:
Loans $(1,584) $ 880 $ (704) $ (579) $ 202 $ (377)
Securities 1 84 85 (164) (116) (280)
Other interest-earning assets 148 (34) 114 618 (41) 577
--------- ---------- ---------- --------- --------- ------
Total (1,435) 930 (505) (125) 45 (80)
-------- ---------- ---------- --------- --------- -------
Decrease (increase) in interest paid on:
Deposits 376 306 682 (217) 180 (37)
Other borrowings - - - 19 18 37
---------- ----------- ----------- ---------- ---------- ---------
Total 376 306 682 (198) 198 -
-------- -------- --------- --------- --------- ----------
Net (decrease) increase in net
interest income $(1,059) $ 1,236 $ 177 $ (323) $ 243 $ (80)
======= ======= ======== ======== ====== ========
</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 market 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, 1999, 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
<PAGE>
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, 1999, 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, 1999
-------------------------------------------------------------------------------
Within 91 To 181 Days 1 Year 3 Years 5 Years
90 Days 180 Days To 1 Year To 3 Years To 5 Years To 10 Years
------- -------- --------- ---------- ---------- -----------
(Dollars in thousands) Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable (2) ............... $ 32,156 $ 18,695 $ 31,135 $ 17,683 $ 11,026 $ 5,602
Securities (1) ..................... 2,366 1,368 3,515 6,713 13,766 1,030
Cash investments ................... 11,705 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total interest-earning assets ............... 46,227 20,063 34,650 24,396 24,792 6,632
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings accounts (3) ............... 25,728 -- -- -- -- --
Transaction accounts (3) ........... 30,862 -- -- -- -- --
Certificate accounts ........................ 18,197 18,756 28,059 17,408 12,569 --
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .......... 74,787 18,756 28,059 17,408 12,569 --
-------- -------- -------- -------- -------- --------
Interest sensitivity gap per period ......... $(28,560) $ 1,307 $ 6,591 $ 6,988 $ 12,223 $ 6,632
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap ......... $(28,560) $(27,253) $(20,662) $(13,674) $ (1,451) $ 5,181
======== ======== ======== ======== ======== ========
Percentage of cumulative gap to total assets (16.68)% (15.91)% (12.07)% (7.98)% (0.85)% 3.03%
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities ........... 61.81% 70.87% 83.01% 90.16% 99.04% 103.42%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------
10 Years Over
To 20 Years 20 Years Total
----------- -------- ----------
(Dollars in thousands) Interest-earning assets:
<S> <C> <C> <C>
Loans receivable (2) ............... $ 1,477 $ 2,908 $120,682
Securities (1) ..................... 448 2,002 31,208
Cash investments ................... -- -- 11,705
-------- -------- --------
Total interest-earning assets ............... 1,925 4,910 163,595
-------- -------- --------
Interest-bearing liabilities:
Savings accounts (3) ............... -- -- 25,728
Transaction accounts (3) ........... -- -- 30,862
Certificate accounts ........................ -- -- 94,989
-------- -------- --------
Total interest-bearing liabilities .......... -- -- 151,579
-------- -------- --------
Interest sensitivity gap per period ......... $ 1,925 $ 4,910 $ 12,016
======== ======== ========
Cumulative interest sensitivity gap ......... $ 7,106 $ 12,016 $ 12,016
======== ======== ========
Percentage of cumulative gap to total assets 4.15% 7.02% 7.02%
Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities ........... 104.69% 107.93% 107.93%
</TABLE>
(1) Includes $12,383 in securities available-for-sale; such securities are
reflected in the above table based on their contractual maturity.
(2) Includes $255 in loans held for sale; such loans are reflected in the
above table in the within 90 days category.
(3) 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 $14.7 million, or
12.88% of the Banks' total loan portfolio, at December 31, 1999. 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
<PAGE>
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, 1999,
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, 1999, the
Banks had $15.8 million in construction loans outstanding or 13.1% 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, $5.2 million was undisbursed
at December 31, 1999, 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 $11.1 million or 9.72% of the Banks' total loan portfolio
at December 31, 1999. Consumer loans, while generally having higher yields than
residential mortgage loans, involve a higher credit risk.
Home Equity Lending
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, 1999, the outstanding home equity loan balance
was $5.4 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 $11.7 million or 10.2% of the Banks'
total loan portfolio at December 31, 1999.
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, 1999, the Banks had no concentrations of loans exceeding 10% of
total loans that are not disclosed below.
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------------------ ----------------------
Percent Percent
of of
Amount Total Amount Total
------ --------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage Loans:
One-to-four family residential $ 83,164 72.69% $ 83,399 76.37%
Commercial real estate ....... 14,731 12.88 13,251 12.13
--------- ------ --------- ------
Total mortgage loans .................. 97,895 85.57 96,650 88.50
--------- ------ --------- ------
Consumer loans:
Savings accounts ............. 926 .81 962 .88
Other ........................ 10,191 8.91 8,336 7.63
--------- ------ --------- ------
Total consumer loans .................. 11,117 9.72 9,298 8.51
--------- ------ --------- ------
Commercial loans ...................... 11,670 10.20 8,970 8.21
--------- ------ --------- ------
Total loans receivable ....... 120,682 105.49 114,918 105.22
--------- ------ --------- ------
Less:
Undisbursed portion of
mortgage loans ............ 5,211 4.55 4,601 4.21
Escrow, net .................. 19 .02 (5) --
Allowance for loan losses .... 1,038 .91 1,081 .99
Net deferred loan fees ....... 10 .01 32 .02
--------- ------ --------- ------
6,278 5.49 5,709 5.22
--------- ------ --------- ------
Loans receivable, net ... $ 114,404 100.00% $ 109,209 100.00%
========= ====== ========= ======
</TABLE>
9
<PAGE>
Loan Maturity
The following table shows the maturity of the Banks' loan portfolio at December
31, 1999, based upon contractual maturity.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------------
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 $ 30,102 $ 4,043 $ 8,003 $ 7,807 $ 49,955
One year through 5 years 6,816 2,125 2,444 1,325 12,710
After 5 years 46,246 8,563 670 2,538 58,017
--------- ---------- ----------- ---------- -----------
$ 83,164 $ 14,731 $ 11,117 $ 11,670 120,682
======== ======== ======== ========
Less:
Undisbursed portion of mortgages 5,211
Net deferred loan fees 10
Allowance for loan losses 1,038
Escrow, net 19
------------
Loans receivable, net $ 114,404
==========
</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, 1999, the dollar amount of loans
due after December 31, 2000, based upon contractual maturity dates, and whether
such loans have fixed interest rates or adjustable interest rates:
<PAGE>
Due After December 31, 2000
---------------------------
Fixed Adjustable Total
-------- ------------ ------
(In thousands)
Mortgage Loans:
One-to-four family $ 11,539 $ 41,523 $ 53,062
Commercial real estate 2,536 8,152 10,688
-------- --------- ----------
Total mortgage loans 14,075 49,675 63,750
-------- --------- ---------
Consumer loans 3,114 -- 3,114
-------- --------- ----------
Commercial loans 2,883 980 3,863
-------- --------- ----------
Total loans receivable, gross $ 20,072 $ 50,655 $ 70,727
======== ======== ========
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, 1999, 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, 1999, and December 31, 1998.
12/31/99 12/31/98
-------- ---------
(Dollars in thousands)
Nonaccrual loans $ 308 $ 659
Accruing loans delinquent 90 days or more:
Mortgage loans 1,074 1,230
Consumer loans 587 257
Commercial loans 58 379
---------- ---------
Total non-performing loans 2,027 2,525
Real estate owned 709 724
--------- --------
Total non-performing assets $ 2,736 $ 3,249
======= =======
Allowance for uncollected interest $ 26 $ 22
========= =========
Non-performing assets to total assets 1.60% 1.74%
======== =========
Non-performing loans to total loans, net 1.77% 2.31%
======== =========
At December 31, 1999, 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
<PAGE>
31, 1999, would have increased by approximately $26,000, had interest income
been recorded under the original terms of the loan. Interest income on
non-performing loans included in interest income for the year ended December 31,
1999, was approximately $15,000.
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 year ended December 31, 1999, and the nine months ended
December 31, 1998.
<TABLE>
<CAPTION>
Year Nine Months
Ended Ended
12/31/99 12/31/98
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $1,081 $1,106
Provision for loan losses 114 86
Charge-offs:
Mortgage loans 24 40
Consumer loans 140 76
Commercial loans 43 18
------ ------
Total Charge-offs 207 134
------ ------
Recoveries:
Mortgage loans 19 2
Consumer loans 31 19
Commercial loans -- 2
------ ------
Total Recoveries 50 23
------ ------
Charge-offs, net of recoveries 157 111
------ ------
Balance at end of period $1,038 $1,081
====== ======
Ratio of allowance for loan losses to total loans
receivable at the end of period .91% .99%
====== ======
Ratio of allowance for loan losses to non-performing
loans (1) 60.38% 42.81%
====== ======
Ratio of net charge-offs during the period to average
loans outstanding during the period .15% .11%
====== ======
</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. See
further discussion regarding the allowance for loan losses in "Management's
Discussion and Analysis" in the Annual Report.
December 31, December 31,
1999 1998
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Mortgage $ 629 60.6% $ 599 55.4%
Consumer 319 30.7 347 32.1
Commercial 90 8.7 135 12.5
------ ----- ------ -----
Total $1,038 100.0% $1,081 100.0%
====== ===== ====== =====
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, 1999, the
Banks had $25,000 of assets classified as loss, $117,000 of assets classified as
doubtful, $2.9 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 1.8% of the Banks' total assets at December 31, 1999. 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,
made such investments as an alternative to mortgage lending. All of the
mortgage-backed securities in the portfolio are currently insured or guaranteed
by the FNMA, GNMA or the FHLMC and have coupon rates as of December 31, 1999,
ranging from 4.20% to 9.50%. At December 31, 1999, mortgage-backed securities
totaled $7.0 million or 4.1% of total assets.
At December 31, 1999, the Banks had 23.56% 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
<PAGE>
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.
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, 1999. 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>
Interest bearing deposits $ 6,455 4.25% $ -- --% $ -- --% $ -- --%
Federal funds 5,250 4.93 -- -- -- -- -- --
U.S. Government and agency
securities (1) 2,699 5.96 20,281 6.26 620 6.30 6,126 6.00
State, County and Municipal
securities -- -- 455 5.29 450 5.56 -- --
</TABLE>
<TABLE>
<CAPTION>
Total
--------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
------------ ----- --------
(Dollars in thousands)
<S> <C> <C> <C>
Interest bearing deposits $ 6,455 $ 6,455 4.25%
Federal funds 5,250 5,250 4.93
U.S. Government and agency
securities (1) 29,726 29,183 6.18
State, County and Municipal
securities 905 921 5.42
</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, as
applicable.
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.
Year Ended Nine Months Ended
December 31, 1999 December 31, 1998
----------------- -----------------
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in thousands)
Transaction accounts $ 33,070 1.44% $ 30,896 1.59%
Savings accounts 26,132 2.72 25,778 2.93
Certificates 101,913 5.33 105,275 5.77
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 31,1999.
Maturity Period Amount
--------------- ----------
(In thousands)
Three months or less $ 3,952
Over three through six months 3,224
Over six through 12 months 4,137
Over 12 months 8,350
--------
Total $ 19,663
========
Borrowings
Deposits are the Banks' primary source of funds. The Banks' policies have been
<PAGE>
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, 1999, 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 $760,000 at
December 31, 1999, 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.
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. 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. See Notes to Consolidated
Financial Statements.
The Banks are prohibited from paying any dividends or other capital
distributions if, after the distribution, they would be undercapitalized under
the applicable regulations. In addition, 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. See Notes to Consolidated Financial Statements.
<PAGE>
Financial Modernization Legislation
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the "GLB Act") was
signed into law. The GLB Act includes a number of provisions intended to
modernize and to increase competition in the American financial services
industry, including authority for bank holding companies to engage in a wider
range of nonbanking activities, including securities underwriting and general
insurance activities. Under the GLB Act, a bank holding company that elects to
become a financial holding company may engage in any activity that the FRB, in
consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The GLB Act specifies certain activities that
are deemed to be financial in nature, including lending, exchanging,
transferring, investing for others, or safeguarding money or securities;
underwriting, and selling insurance; providing financial, investment, or
economic advisory services; underwriting, dealing in or making a market in,
securities; and any activity currently permitted for bank holding companies by
the FRB under section 4(c)(8) of the Bank Holding Company Act. A bank holding
company may elect to be treated as a financial holding company only if all
depository institution subsidiaries of the holding company are and continue to
be well-capitalized and well-managed and have at least a satisfactory rating
under the Community Reinvestment Act.
16
<PAGE>
National banks are also authorized by the GLB Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the FRB, determines is financial in nature or
incidental to any such financial activity, except (i) insurance underwriting,
(ii) real estate development or real estate investment activities (unless
otherwise permitted by law), (iii) insurance company portfolio investments and
(iv) merchant banking. The authority of a national bank to invest in a financial
subsidiary is subject to a number of conditions, including, among other things,
requirements that the bank must be well-managed and well-capitalized (after
deducting from capital the bank's outstanding investments in financial
subsidiaries). The GLB Act also provides that state banks may invest in
financial subsidiaries (assuming they have the requisite investment authority
under applicable state law) subject to the same conditions that apply to
national bank investments in financial subsidiaries.
The GLB Act also adopts a number of consumer protections, including provisions
intended to protect privacy of bank customers' financial information and
provisions requiring disclosure of ATM fees imposed by banks on customers of
other banks. Most of the GLB Act's provisions have delayed effective dates and
require the adoption of implementing regulations to implement the statutory
provisions. Accordingly, at this time the Company is unable to predict the
eventual impact of the GLB Act on its operations.
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.
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, 1999, 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 Notes to Consolidated Financial Statements for additional
information related to income taxes.
<PAGE>
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
privilege tax for domestic and foreign corporations. The privilege tax is
assessed on corporations doing business in the State of Alabama and is applied
to each taxpayer's capital employed in the State of Alabama. Each corporation's
investment in the capital of a taxpayer doing business in Alabama is excluded
from the taxable base. The Company is subject to the Delaware franchise tax.
PERSONNEL
As of December 31, 1999, First Federal had 45 full-time employees and 4
part-time employees. At December 31, 1999, First State had 27 full-time
employees and no 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.
17
<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 Company believes that the Banks' current facilities are
adequate to meet the present and immediately foreseeable needs of the Banks and
the Company. The following table sets forth information relating to each of the
Banks' offices as of December 31, 1999, which totaled a net book value of
$3,151,000. 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, 1999
- -------------------------- ----- ------ -----------------
(In thousands)
<S> <C> <C> <C>
Main Office -
1630 Fourth Avenue, No. Owned 1961 $ 874 (3)
Bessemer, Alabama 35020
Branches -
1351 Hueytown Road
Hueytown, Alabama 35023 Owned 1966 28 (3)
Food World Plaza
Pelham, Alabama 35124 Leased (1) 1973 N/A (2)
1604 Montgomery Hwy.
Hoover, Alabama 35216 Owned 1992 475 (3)
18704 Highway 11, North
Vance, Alabama 35490 Owned 1997 443 (3)
Other fixed assets, net 558
First State Locations
Main Office -
Main Street Owned 1965 287 (3)
West Blocton, Alabama 35184
Branches -
125 Birmingham Rd Owned 1979 221 (3)
Centreville, Alabama 35042
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Highway 5 Owned 1985 212 (3)
North Bibb, Alabama 35188
Other fixed assets, net 53
-------
Total $ 3,151
=======
</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.
18
<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, 1999, 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 Notes to Consolidated Financial
Statements in the Company's December 31, 1999 Annual Report to Stockholders (the
"Annual Report").
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1999.
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)
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 Forms 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
<PAGE>
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."
19
<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 (E)
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 (F)
13.0 December 31, 1999 Annual Report - Filed herewith only as to those
portions of the Annual Report to stockholders for the year ended
December 31, 1999, which are expressly incorporated herein by
reference.
21.0 Subsidiaries of the Registrant (filed herewith)
23.0 Consent of Independent Public Accountants (filed herewith)
<PAGE>
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
Annual Report on Form 10-KSB for nine months ended December 31,
1998.
F. Incorporated herein by reference into this document from the
December 31, 1999 Annual Report, Exhibit 13.0 hereto.
(b) There were no reports on Form 8-K filed during the quarter ended
December 31, 1999.
20
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 27, 2000 /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>
<CAPTION>
<S> <C> <C>
/s/ B. K. Goodwin, III Date: March 27, 2000
- ------------------------------ Chairman of the Board, -----------------------
B. K. Goodwin, III Chief Executive Officer and
President
/s/ Lynn J. Joyce Date: March 27,2000
- ------------------------------ Chief Financial Officer, Vice ------------------------
Lynn J. Joyce President, Secretary and
Treasurer
/s/ Fred T. Blair Director Date: March 27, 2000
- ------------------------------ -----------------------
Fred T. Blair
/s/ A. W. Kuhn Director Date: March 27, 2000
- ------------------------------ -----------------------
A. W. Kuhn
/s/ James B. Koikos Director Date: March 27, 2000
- ------------------------------ -----------------------
James B. Koikos
/s/ Malcolm E. Lewis Director Date: March 27, 2000
- ------------------------------ -----------------------
Malcolm E. Lewis
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ E. H. Moore, Jr. Director Date: March 27, 2000
- ------------------------------ -----------------------
E. H. Moore, Jr.
/s/ James E. Mulkin Director Date: March 27, 2000
- ------------------------------ -----------------------
James E. Mulkin
/s/ Robert E. Paden Director Date: March 27, 2000
- ------------------------------ -----------------------
Robert E. Paden
/s/ G. Larry Russell Director Date: March 27, 2000
- ------------------------------ -----------------------
G. Larry Russell
</TABLE>
22
<PAGE>
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
<PAGE>
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
federally chartered savings bank originally chartered in 1936. First Federal
conducts its business through five offices, one each in Bessemer, Hueytown,
Pelham, Hoover and Vance, Alabama. First State is an Alabama chartered
commercial bank that conducts its business through three offices, one each
located in West Blocton, Centreville and North Bibb, Alabama.
<PAGE>
LETTER TO STOCKHOLDERS
To Our Stockholders:
1999 has been another successful year for FirstFed Bancorp, Inc. I am
pleased to report that one of our successes was completing the Year 2000
rollover with no significant problems. The Company dedicated considerable
resources to Year 2000 readiness during the past couple of years, and such
resources can now be allocated to new challenges.
Another success of the Company was the reporting of net income for 1999 of
$1.4 million. These operating results were obtained during a time of increasing
pressure on interest rate spreads in the financial industry. Our net interest
spread actually increased slightly as a result of steps we took in fiscal 1998
and 1999 to manage interest rate risk. The Company did experience a decline in
deposits and assets during the year primarily due to year-end cash needs of
customers and the movement of rate-sensitive funds. The result was an
improvement in net income since the cost of funds decreased and investment yield
increased.
A special dividend was declared subsequent to year-end equal to a quarterly
dividend of $.07 per share, payable on March 10, 2000. With total payments
during the year of $.35 per share, the Company continues to pay dividends in
excess of 50% of earnings which we believe provides a good return to our
stockholders. It has been a volatile year for financial institution stocks;
however, FirstFed continues to maintain a relatively stable stock price level.
The Company will continue to focus its efforts on delivering successful
financial results to our stockholders and personal banking services to our
customers and community. We appreciate your confidence and interest in the
Company.
Sincerely,
/S/ B. K. Goodwin, III
---------------------------
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, 1999 and 1998, and the related consolidated statements of
income, stockholders' equity and cash flows for the year ended December 31, 1999
and the nine months ended December 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, 1999 and 1998, and the results
of their operations and their cash flows for the year ended December 31, 1999
and the nine months ended December 31, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Birmingham, Alabama
February 4, 2000
3
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of December 31, 1999 and 1998
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
--------------- -----------
ASSETS Cash and cash equivalents:
<S> <C> <C>
Cash on hand and in banks $ 6,132 $ 6,385
Interest-bearing deposits in other banks 6,455 6,025
Federal funds sold 5,250 31,225
-------- --------
17,837 43,635
Securities available-for-sale 12,383 6,609
Loans held for sale 255 2,219
Securities held-to-maturity, fair value of $18,602 and $17,180, respectively 18,825 16,976
Loans receivable, net of allowance for loan losses of $1,038 and $1,081,
respectively 114,404 109,209
Land, buildings and equipment, less accumulated depreciation of
$2,368 and $2,242, respectively 3,151 3,065
Goodwill 1,200 1,308
Real estate owned 709 724
Accrued interest receivable 1,603 1,345
Other assets 880 1,060
-------- --------
$171,247 $186,150
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $151,579 $167,257
Accrued interest payable 147 141
Dividend payable 175 178
Other liabilities 366 371
-------- ---------
152,267 167,947
-------- ---------
Commitments and contingencies (Notes 3, 7, 8 and 9)
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, 3,084,133
issued and 2,347,886 outstanding at December 31, 1999 and 3,031,646
issued and 2,301,713 outstanding at December 31, 1998 31 30
Paid-in capital 7,773 7,502
Retained earnings 16,155 15,622
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred compensation obligation (Note 7) 1,307 1,199
Deferred compensation treasury stock (156,345 shares at December
31, 1999 and 150,031 shares at December 31, 1998) (Note 7) (1,433) (1,373)
Treasury stock, at cost (579,902 shares at December 31, 1999
and 1998) (3,752) (3,752)
Unearned compensation (934) (1,064)
Accumulated other comprehensive income (167) 39
-------- ---------
18,980 18,203
-------- ---------
$171,247 $186,150
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1999 and the Nine Months Ended December 31, 1998
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended 9 Months Ended
December 31, December 31,
1999 1998
<S> <C> <C>
Interest and fees on loans $ 10,003 $ 8,031
Interest and dividends on securities 1,594 1,131
Other interest income 1,335 916
---------- ----------
Total interest income 12,932 10,078
---------- ----------
INTEREST EXPENSE
Interest on deposits 6,607 5,466
---------- ----------
Total interest expense 6,607 5,466
---------- ----------
Net interest income 6,325 4,612
Provision for loan losses 114 86
----------
Net interest income after provision for loan losses 6,211 4,526
---------- ----------
NONINTEREST INCOME
Fees and other noninterest income 936 620
---------- ----------
Total noninterest income 936 620
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 2,804 1,994
Office building and equipment expense 615 437
Amortization of goodwill 108 81
Data processing expense 412 205
Other operating expense 995 817
---------- ----------
Total noninterest expense 4,934 3,534
---------- ----------
Income before provision for income taxes 2,213 1,612
Provision for income taxes 810 530
---------- ----------
NET INCOME $ 1,403 $ 1,082
========== ==========
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 2,410,800 2,342,026
========== ==========
BASIC EARNINGS PER SHARE $ .59 $ .46
========== ==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED 2,475,266 2,462,872
========== ==========
DILUTED EARNINGS PER SHARE $ .56 $ .44
========== ==========
DIVIDENDS DECLARED PER SHARE $ .35 $ .2725
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1999 and the Nine Months Ended December 31, 1998
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Deferred
Accumulated
Deferred Compen- Other Compre-
Compen- sation Unearned Compre- hensive
Common Paid-In Retained sation Treasury Treasury Compen- hensive Income
Stock Capital Earnings Obligation Stock Stock sation Income (Note 1)
---------------- -------- ---------- ---------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 of
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
Net income - - 1,403 - - - - $ 1,403
Change in unrealized gain
(loss) on securities
available for sale, net
of tax of $159 - - - - - - - (206) (206)
---------
Comprehensive income - - - - - - - - $ 1,197
========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortization of unearned
compensation - - - - - - 150 -
Awards under stock plans - 20 - - - - (20) -
Dividends declared ($.35
per share) - - (870) - - - - -
Exercise of stock options 1 114 - - - - - -
Change in stock value of
Employee Stock
Ownership Plan - (16) - - - - - -
Purchase of Deferred
Compensation Treasury - - - 60 (60) - - -
Amortization of Deferred
Compensation - - - 48 - - - -
Stock issued under Dividend
Reinvestment Plan - 153 - - - - -
------ ------- --------- -------- -------- -------- ------- ------
BALANCE, December 31, 1999 $ 31 $ 7,773 $ 16,155 $ 1,307 $ (1,433) $ (3,752) $ (934) $ (167)
====== ======= ========= ======== ======== ======== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE>
FIRSTFED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1999 and the Nine Months Ended December 31,
1998 (Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended 9 Months Ended
December 31, December 31,
1999 1998
---------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,403 $ 1,082
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation, amortization and accretion 399 279
Provision (credit) for deferred income taxes (118) (111)
Provision for loan losses 114 86
Loan fees deferred, net 257 216
Loss on sale of real estate, net 30 25
Origination of loans held for sale (11,973) (12,863)
Proceeds from loans held for sale 13,937 11,422
Amortization of goodwill 108 81
Provision for deferred compensation 60 --
Decrease (increase) in assets:
Accrued interest receivable (258) 54
Other assets 457 (547)
Increase (decrease) in liabilities:
Accrued interest payable
6 (56)
Current income taxes payable -- (141)
Other liabilities (5) (147)
-------- --------
Net cash provided by (used in) operating activities 4,417 (620)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 3,050 4,919
Proceeds from maturities and payments received on securities held-to-maturity 8,012 12,170
Purchase of securities held-to-maturity (10,000) (10,242)
Purchase of securities available-for-sale (9,184) (2,299)
Proceeds from sale of real estate and repossessed assets 796 392
Net loan (originations) repayments (6,161) 7,810
Capital expenditures (385) (356)
-------- --------
Net cash (used in) provided by investing activities (13,872) 12,394
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits, net (15,678) 4,398
Proceeds from exercise of stock options 115 90
Proceeds from dividend reinvestment 153 97
Cash dividends paid (873) (635)
Purchase of treasury stock for Deferred Compensation Plan (60) (174)
-------- --------
Net cash (used in) provided by financing activities (16,343) 3,776
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25,798) 15,550
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 43,635 28,085
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,837 $ 43,635
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
7
<PAGE>
FIRSTFED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. SUMMARY OF BUSINESS AND 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
Provision for Income Taxes $ 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 herein 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
<PAGE>
Company's ability to hold such securities to maturity. There are no securities
classified as trading as of December 31, 1999 and 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 in accumulated other comprehensive
income. 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 loans are not intended to be held to maturity. As of December 31,
1999 and 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 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,
1999 or 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
<PAGE>
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 to the income statement. There were no significant impairment
losses recorded during either period reported herein.
Comprehensive Income
Comprehensive income is the total of net income and all other non-owner
changes in equity. Comprehensive income is displayed in the Consolidated
Statements of Stockholders' Equity. There were no sales of securities
available-for-sale during either the year ended December 31, 1999 or the nine
months ended December 31, 1998, therefore no reclassification adjustments
9
<PAGE>
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.
Nine
Year Months
Ended Ended
12/31/99 12/31/98
SUPPLEMENTAL CASH FLOW INFORMATION: (In Thousands)
Cash paid during the period for-
Income taxes $ 782 $1,243
Interest 6,601 5,522
Non-cash transactions-
Transfers of loans receivable to real estate owned 773 448
Noncash compensation under stock plans 20 223
Declaration of cash dividend payable 175 178
Recording of deferred compensation obligation -- 1,199
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>
Year Ended Nine Months Ended
December 31, 1998 December 31, 1999
-------------------------------------------- -----------------------------------
Dilutive Dilutive
Effect of Effect of
Options Options
Basic Issued Diluted Basic Issued Diluted
------------- ------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Income $1,403,000 -- $1,403,000 $1,082,000 -- $1,082,000
Shares available to
common stockholders 2,410,800 64,466 2,475,266 2,342,026 120,846 2,462,872
---------- ---------- ---------- ---------- ---------- ----------
Earnings Per Share $ .59 -- $ .56 $ 0.46 -- $ 0.44
========== ========== ========== ========== ========== ==========
</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.
<PAGE>
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.
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, 1999 and 1998, were as
follows:
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
---------------------------------------------------------------------------------------------------
December 31, 1999 December 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>
U. S. Government Agency
securities $ 12,687$ $ -- $ (304) $12,383 $ 6,548 $ 61 $ -- $ 6,609
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY
---------------------------------------------------------------------------------------------------
December 31, 1998 December 31, 1999
--------------------------------------------------- ----------------------------------------------
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>
U. S. Government Agency
securities $10,000$ $ -- $ (176) $ 9,824 $ 1,000 $ 10 $ -- $ 1,010
FHLB and Federal Reserve
stock, at cost 881 -- -- 881 1,390 -- -- 1,390
Obligations of states and
political subdivisions 905 17 (1) 921 965 48 -- 1,013
Mortgage-backed securities 7,039 13 (76) 6,976 13,621 173 (27) 13,767
-------- -------- -------- -------- ------ -------- -------- --------
$ 18,825 $ 30 $ (253) $ 18,602 $ 16,976 $ 231 $ (27) $ 17,180
======== ======= ======== ======== ======== ======== ======== ========
</TABLE>
The amortized cost and estimated fair value of securities
available-for-sale and securities held-to-maturity at December 31, 1999, 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.
<PAGE>
<TABLE>
<CAPTION>
Securities Securities
Held-to-Maturity Available-for-Sale
------------------- --------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(In thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 1,699 $ 1,693 $ 1,000 $ 1,000
Due after one year through five years 10,487 10,229 9,455 9,283
Due after five years through ten years 501 461 450 462
------- ------- ------- -------
12,687 12,383 10,905 10,745
FHLB and Federal Reserve stock -- -- 881 881
Mortgage-backed securities -- -- 7,039 6,976
------- ------- ------- -------
$12,687 $12,383 $18,825 $18,602
======= ======= ======= =======
</TABLE>
Securities totaling $10,726,000 and $9,678,000 were pledged as collateral
against certain large public deposits at December 31, 1999 and 1998,
respectively. Deposits associated with pledged securities had an aggregate
balance of $7,294,000 and $7,250,000 at December 31, 1999 and 1998,
respectively. There were no sales of securities available-for-sale during either
the year ended December 31, 1999, or the nine months ended December 31, 1998.
11
<PAGE>
3. LOANS RECEIVABLE:
Loans receivable at December 31, 1999 and 1998, consisted of the following:
12/31/99 12/31/98
----------- ----------
(In thousands)
Mortgage loans:
One-to-four family residential $ 80,973 $ 82,710
Commercial real estate 14,731 13,251
Other 2,191 689
Commercial loans 11,670 8,970
Consumer loans 11,117 9,298
--------- ---------
120,682 114,918
Less --
Undisbursed portion of
mortgage loans 5,211 4,601
Escrow, net 19 (5)
Allowance for loan losses 1,038 1,081
Net deferred loan fees 10 32
---------
$ 114,404 $ 109,209
========= =========
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, the Banks 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 at December 31, 1999 and 1998, were $5,669,000 and $2,049,000,
respectively. During the year ended December 31, 1999, new loans totaled
$6,074,000, repayments were $2,317,000 and loans to parties who are no longer
related totaled $137,000.
An analysis of the allowance for loan losses is detailed below.
Year Nine Months
Ended Ended
12/31/99 12/31/98
----------- -----------
(In thousands)
Balance, beginning of period $ 1,081 $ 1,106
Provision 114 86
Charge-offs (207) (134)
Recoveries 50 23
---------- --------
Balance, end of period $ 1,038 $ 1,081
============ ==========
<PAGE>
4. LAND, BUILDINGS AND EQUIPMENT:
Land, buildings and equipment at December 31, 1999 and 1998, are summarized
as follows:
12/31/99 12/31/98
--------- ----------
(In thousands)
Land $ 846 $ 796
Buildings and improvements 2,791 2,778
Equipment 1,882 1,733
------ ------
5,519 5,307
Less: Accumulated depreciation 2,368 2,242
------ ------
$3,151 $3,065
====== ======
12
<PAGE>
5. REAL ESTATE OWNED:
Real estate owned was $709,000 and $724,000 at December 31, 1999 and 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. There was no valuation allowance on real estate owned at either
December 31, 1999 or 1998.
6. DEPOSITS:
Deposits at December 31, 1999 and 1998, were as follows:
12/31/99 12/31/98
---------- ---------
(In thousands)
Transaction accounts $ 30,862 $ 32,633
Savings accounts 25,728 26,813
Savings certificates 94,989 107,811
-------- --------
$151,579 $167,257
======== ========
The aggregate amount of jumbo savings certificates with a minimum
denomination of $100,000 was $19,663,000 and $20,654,000 at December 31, 1999
and 1998, respectively.
Interest on deposits for the year ended December 31, 1999, and the nine
months ended December 31, 1998, consisted of the following:
1999 1998
--------- ---------
(In thousands)
Transaction accounts $ 474 $ 359
Passbook savings 709 563
Savings certificates 5,424 4,544
------ ------
$6,607 $5,466
====== ======
At December 31, 1999 and 1998, the scheduled maturities of savings
certificates were as follows:
12/31/99 12/31/98
-------- --------
(In thousands)
Within one year $ 65,012 $ 78,460
One to three years 17,408 23,955
Three to five years 12,569 5,396
-------- --------
$ 94,989 $107,811
======== ========
<PAGE>
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. The following table sets forth the plan's funded status and
amounts recognized in the Company's consolidated financial statements at/or
during the periods ended December 31, 1999, and December 31, 1998:
13
<PAGE>
<TABLE>
<CAPTION>
12/31/99 12/31/98
-------- ---------
(In thousands)
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $ 1,912 $ 1,468
Service cost 182 110
Interest cost 134 80
Actuarial (gain) loss (267) 284
Benefits and expenses paid (223) (30)
------- -------
Projected benefit obligation at end of year 1,738 1,912
-------
Change in plan assets:
Fair value of plan assets at beginning of year 1,738 1,343
Actual return on plan assets 119 207
Employer contribution 200 218
Benefits and expenses paid (223) (30)
------- -------
Fair value of plan assets at end of year 1,834 1,738
------- -------
Funded status of plan:
Funded status of plan 96 (174)
Unrecognized actuarial loss 87 319
Unrecognized prior service cost 1 2
Unrecognized net transition obligation (12) (15)
------- -------
Net asset recognized $ 172 $ 132
======= =======
Weighted average assumptions:
Discount rate 8.00% 7.00%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 5.00% 5.00%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine
Year Months
Ended Ended
12/31/99 12/31/98
-------- --------
(In thousands)
<S> <C> <C>
Components of net periodic benefit cost:
Service cost $ 182 $ 110
Interest cost 134 80
Expected return on plan assets (162) (96)
Amortization of transitional (asset) or obligation (3) (1)
Recognized actuarial loss 10 --
Net periodic benefit cost $ 161 $ 93
</TABLE>
Employee Stock Ownership Plan
The Company maintains an Employee Stock Ownership Plan (ESOP) for eligible
employees. In December 1997, 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 year ended December 31, 1999,
and the nine months ended December 31, 1998, was approximately $95,000 and
$71,000, respectively. Unearned compensation related to the ESOP was
approximately $764,000 and $859,000 at December 31, 1999 and 1998, respectively,
and is shown as a reduction of stockholders' equity in the accompanying
consolidated statements of financial condition.
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 Director Retirement Plan ("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
14
<PAGE>
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
equaled or exceeded the amount of the individual participant accounts as of
December 31, 1999 and 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 stockholders' equity section
of the accompanying consolidated statements of financial condition. The trust
owned 156,345 and 150,031 shares of the Company's common stock as of December
31, 1999 and 1998, respectively.
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. All of these options are exercisable
at December 31, 1999. An analysis of stock options for the year ended December
31, 1999, and the nine months ended December 31, 1998, follows.
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 194,216 $ 5.42 212,116 $ 5.35
Granted -- -- 3,800 6.32
Exercised (29,500) 3.26 (20,900) 4.88
Forfeited -- -- (800) 5.28
Outstanding at end of year 164,716 6.02 194,216 5.42
======== ========
Exercisable at end of year 164,716 6.02 194,216 5.42
======== ========
Weighted average fair value
of options granted $ - $ 3.60
======== ========
</TABLE>
<PAGE>
The following table summarizes information about stock options at December
31, 1999:
Weighted
Average Weighted
Remaining Average
Range of Number Outstanding Contractual Exercise
Exercise Prices at December 31, 1999 Life Price
--------------- -------------------- -------------- ---------
$2.50 13,600 2.00 years $2.50
$5.25 - $6.50 131,316 5.75 years $5.80
$8.94 - $12.34 19,800 7.75 years $9.95
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 year ended December 31, 1999, and the nine
months ended December 31, 1998, was approximately $41,000 and $24,000. At
December 31, 1999 and 1998, unearned compensation related to these awards was
approximately $141,000 and $182,000.
15
<PAGE>
Incentive Compensation Plan
The Company maintains the stockholder-approved FirstFed Bancorp, Inc.
Incentive Compensation Plan whereby eligible employees and directors may receive
cash bonuses in the event the Company achieves certain performance goals
indicative of its profitability and stability. In addition, key employees and
directors are eligible to receive "Restricted Stock" awards and stock option
awards. The Restricted Stock awards are considered unearned compensation at the
time of award and compensation is earned ratably over the stipulated three year
vesting period. There were 2,231 and 1,437 shares of restricted stock awarded
during the periods ended December 31, 1999 and 1998, respectively. The
compensation expense related to the Restricted Stock awards for the year ended
December 31, 1999, and the nine months ended December 31, 1998, was
approximately $10,000 and $8,000, respectively. At December 31, 1999 and 1998,
unearned compensation related to the Restricted Stock awards was approximately
$29,000 and $19,000, 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 year ended December 31,
1999, and the nine months ended December 31, 1998, follows.
<TABLE>
<CAPTION>
12/31/99 12/31/98
--------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 36,375 $ 7.05 29,190 $ 6.08
Granted 11,155 9.00 7,185 11.00
Exercised (2,915) 6.46 - -
Forfeited - - - -
-------- --------
Outstanding at end of year 44,615 7.58 36,375 7.05
======== ========
Exercisable at end of year 44,615 7.58 36,375 7.05
======== ========
Weighted average fair value
of options granted $ 2.67 $ 2.87
======== ========
</TABLE>
The following table summarizes information about stock options at December
31, 1999:
Weighted
Average Weighted
Remaining Average
Range of Number Outstanding Contractual Exercise
Exercise Prices at December 31, 1999 Life Price
--------------- -------------------- --------------- ---------
$5.25 - $6.25 24,360 5.65 years $5.82
$8.88 - $11.00 20,255 9.00 years $9.70
<PAGE>
The Company reserved 96,000 shares of common stock for issuance to
participants as options and restricted stock awards. There were 23,972 and
37,358 shares available for future grants at December 31, 1999 and 1998,
respectively.
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 year ended December 31, 1999, and the nine months
ended December 31, 1998, based on the fair value of the options granted at the
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):
16
<PAGE>
1999 1998
---- ----
Net income - as reported $ 1,403 $ 1,082
Net income - pro forma 1,377 1,052
Earnings per share - as reported - basic .59 .46
Earnings per share - pro forma - basic .57 .45
Earnings per share - as reported - diluted .56 .44
Earnings per share - pro forma - diluted .56 .43
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:
1999 1998
---- ----
Expected dividend yield 3.89% 3.06%
Expected stock price volatility 34% 30%
Risk-free interest rate 5.89% 4.79%
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, 1999, 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 $7.3
million.
Leases
First Federal has a lease agreement for a building in which a branch office
<PAGE>
is located. Rental expense under this lease was $27,457 and $20,470 for the year
ended December 31, 1999, and the nine months ended December 31, 1998,
respectively. The lease agreement expires May 31, 2004. Future minimum lease
payments under the lease in effect at December 31, 1999, are $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, 1999, the Company declared a special dividend of
$.07 per share payable on March 10, 2000, to stockholders of record on March 1,
2000. The total cash payments required for this dividend will be approximately
$175,000.
Employment Agreements
The Company has employment agreements with three executive officers. These
agreements provide for salary continuation for the remaining term of the
contract and insurance benefits for a six-month period in the event of a change
in control of the Company or the death of the officer. These contracts currently
expire on either December 31, 2001, or December 31, 2002, and the maximum
aggregate liability to the Company at December 31, 1999, is approximately
$1,115,000.
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
17
<PAGE>
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 $3.3 million was available for dividend
at December 31, 1999, 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, 1999,
approximately $1.1 million 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, 1999, and December 31, 1998, 29,800 shares and 12,000 shares,
respectively, had been purchased for participants under the plan. The costs
associated with this plan were immaterial during the year ended December 31,
1999, and the nine months ended December 31, 1998.
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:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 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 $ 6,132 $ 6,132 $ 6,385 $ 6,385
Interest bearing deposits in banks 6,455 6,455 6,025 6,025
Federal funds sold 5,250 5,250 31,225 31,225
Securities available-for-sale 12,383 12,383 6,609 6,609
Loans held-for-sale 255 255 2,219 2,219
Securities held-to-maturity 18,825 18,602 16,976 17,180
Loans, net 114,404 114,329 109,209 112,112
Accrued interest receivable 1,603 1,603 1,345 1,345
FINANCIAL LIABILITIES:
Deposits $151,579 $150,917 $167,257 $170,052
Accrued interest payable 147 147 141 141
</TABLE>
<PAGE>
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
18
<PAGE>
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 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 year ended December 31, 1999, and
the nine months ended December 31, 1998, was as follows:
<PAGE>
1999 1998
---------- --------
(In thousands)
Current:
Federal $ 832 $ 560
State 96 81
---------- ----------
928 641
Deferred, net (118) (111)
---------- ----------
Totals $ 810 $ 530
========== ==========
19
<PAGE>
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 year ended December 31, 1999, and the nine months ended December
31, 1998, were as follows:
1999 1998
--------- --------
(In thousands)
Pre-tax income at statutory rates $ 752 $ 548
Add (deduct):
State income tax, net of federal
tax benefit 56 44
Other, net 2 (62)
------- --------
Totals $ 810 $ 530
======= =======
The components of the net deferred tax asset as of December 31, 1999 and
1998, were as follows:
12/31/99 12/31/98
-------- --------
(In thousands)
Deferred tax asset:
Retirement and other benefit plans $ 317 $ 225
Allowance for loan losses 361 325
Unrealized loss on securities
available-for-sale 137 -
Other 35 80
------- -------
850 630
------- -------
Deferred tax liability:
Deferred loan fees (103) (158)
FHLB stock dividend (203) (203)
Depreciation (22) (46)
Unrealized gain on securities
available-for-sale - (40)
Other (94) (50)
------- --------
(422) (497)
-------- --------
Net deferred tax asset $ 428 $ 133
======== ========
20
<PAGE>
12. PARENT COMPANY FINANCIAL STATEMENTS:
Separate condensed financial statements of FirstFed Bancorp, Inc. (the
"Parent Company") as of and for the year ended December 31, 1999, and the nine
months ended December 31, 1998, are presented below:
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(In thousands)
ASSETS: 12/31/99 12/31/98
---------- ---------
Interest-bearing deposits $ 500 $ 1,120
Investment in subsidiaries 17,867 16,313
Other assets 824 1,036
-------- --------
$ 19,191 18,469
========
LIABILITIES:
Dividend payable $ 175 $ 178
Other liabilities 36 88
-------- --------
211 266
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 31 30
Paid-in-capital 7,773 7,502
Retained Earnings 16,155 15,622
Deferred Compensation Obligation 1,307 1,199
Deferred Compensation Treasury Stock (1,433) (1,373)
Treasury stock (3,752) (3,752)
Unearned compensation (934) (1,064)
Unrealized (loss) gain on securities
available for sale, net (167) 39
-------- --------
18,980 18,203
19,191 $ 18,469
======== ========
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE NINE MONTHS ENDED DECEMBER 31, 1998
(In thousands)
12/31/99 12/31/98
-------- --------
Interest income from subsidiaries $ 91 $ 95
Operating expense (512) (312)
------- -------
Loss before income taxes and equity in
undistributed current year subsidiaries'
earnings (421) (217)
Benefit for income taxes 147 76
------- -------
Loss before equity in undistributed current
year subsidiaries' earnings (274) (141)
Equity in undistributed current year
subsidiaries' earnings 1,677 1,223
------- -------
Net income $ 1,403 $ 1,082
======= =======
21
<PAGE>
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE NINE MONTHS ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Operating Activities: 12/31/99 12/31/98
---------- ---------
Net income $ 1,403 $ 1,082
Equity in undistributed
current year earnings of subsidiaries' (1,677) (1,223)
--------- ----------
(274) (141)
--------- ----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of unearned compensation 150 107
Other, net 103 (295)
--------- ----------
Net cash provided by (used in) operating activities 253 (188)
--------- ----------
Financing Activities:
Proceeds from exercise of stock options 115 90
Proceeds from dividend reinvestment 153 97
Dividends paid (867) (635)
--------- ----------
Net cash used in financing activities (599) (448)
--------- ----------
Decrease in cash and cash equivalents (620) (777)
Cash and cash equivalents at beginning of year 1,120 1,897
--------- ---------
Cash and cash equivalents at end of year $ 500 $ 1,120
========= =========
</TABLE>
13. 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 requires 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 year ended December
31, 1999, and the nine months ended December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------
Banking Holding Total
Operations Company Eliminations Company
---------- ------- ------------ --------
(In thousands)
<S> <C> <C> <C> <C>
Net interest income $ 6,234 $ 91 $ -- $ 6,325
Provision for loan losses 114 -- -- 114
Noninterest income 936 -- -- 936
Noninterest expense 4,422 512 -- 4,934
-------- -------- --------- --------
Income (loss) before
income taxes 2,634 (421) -- 2,213
Income tax expense (benefit) 957 (147) -- 810
-------- -------- --------- --------
Net income $ 1,677 $ (274) $ -- $ 1,403
======== ======== ========= ========
Total assets $170,773 $ 19,191 $ (18,717) $171,247
======== ======== ========= ========
</TABLE>
22
<PAGE>
1998
---------------------------------------------------
Banking Holding Total
Operations Company Eliminations Company
---------- ------- ------------ -------
(In thousands)
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 before
income taxes 1,829 (217) -- 1,612
Income tax expense 606 (76) -- 530
-------- -------- -------- --------
Net income 1,223 $ (141) $ -- $ 1,082
======== ======== ======== ========
Total assets $184,866 $ 18,469 $(17,185) $186,150
======== ======== ======== ========
14. 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, 1999 and 1998, that the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1999 and 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:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------
(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 $ 17,947 17.4% N/A N/A N/A N/A
First Federal Savings Bank 13,006 16.1% $ 3,231 4.0% $ 4,846 6.0%
First State Bank 3,774 14.7% 1,027 4.0% 1,540 6.0%
Total Risk-Based Capital
Consolidated $ 18,960 18.4% N/A N/A N/A N/A
First Federal Savings Bank 13,744 17.0% $ 6,462 8.0% $ 8,078 10.0%
First State Bank 4,049 15.8% 2,054 8.0% 2,567 10.0%
Tier 1 Leverage
Consolidated $ 17,947 10.0% N/A N/A N/A N/A
First Federal Savings Bank 13,006 10.3% $ 5,044 4.0% $ 6,304 5.0%
First State Bank 3,774 8.2% 1,829 4.0% 2,287 5.0%
Tangible Capital
First Federal Savings Bank $ 13,006 10.3% $ 1,891 1.5% N/A N/A
</TABLE>
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
</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.
During 1999, the Company dedicated considerable resources to Year 2000
readiness. The Company did not experience any significant problems during the
Year 2000 rollover. No problems are anticipated with any other date changes
during 2000.
COMPARISON OF FINANCIAL CONDITION AS OF DECEMBER 31, 1999, AND DECEMBER 31,
1998, AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, AND THE
NINE MONTHS ENDED DECEMBER 31, 1998
CHANGES IN FINANCIAL CONDITION
Total deposits decreased $15.7 million to $151.6 million at December 31,
1999, compared to $167.3 million at December 31, 1998. This decrease occurred
substantially as a result of year-end cash needs by customers and the movement
of rate sensitive funds. Corresponding to the decrease in deposits is a decrease
in total assets from $186.1 million at December 31, 1998, to $171.2 million at
December 31, 1999. The primary decrease in assets was $25.9 million in fed funds
to $5.2 million at December 31, 1999. A portion of the fed funds were reinvested
in securities which increased to $31.2 million at December 31, 1999, compared to
$23.6 million at December 31, 1998. Total loans increased to $114.4 at December
31, 1999, compared to $109.2 million at December 31, 1998.
The increase is the result of increased portfolio loans, specifically commercial
mortgage loans. Stockholders' equity increased $777,000 to $19.0 million at
December 31, 1999. The net increase in equity during the year ended December 31,
1999, was primarily attributable to earnings of $1,403,000 partially offset by
dividends declared of $870,000, or $.35 per share. Diluted earnings per share
were $.56 for the year ended December 31, 1999.
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 Note 9 of the "Notes to Consolidated Financial Statements"
regarding capital resources.
GENERAL RESULTS OF OPERATIONS
Net income for the year ended December 31, 1999, was $1,403,000, an
increase of 29.7% from the prior year's amount of $1,082,000. The increase was
primarily the result of comparing a twelve-month period to a nine-month period.
However, earnings from the twelve month period in 1998 approximate the 1999
results.
INTEREST INCOME
Total interest income increased $2.8 million to $12.9 million for the year
<PAGE>
ended December 31, 1999, from $10.1 million for the nine months ended December
31, 1998. This increase was primarily the result of comparing a twelve-month
period to a nine-month period, offset by a slight decrease in the average yield
on interest earning assets to 7.9% during the year ended December 31, 1999, from
8.0% for the nine months ended December 31, 1998, combined with a slight
decrease in the average balance of interest earning assets. There was a decrease
in the average yield on loans to 9.0% for the twelve months ended December 31,
1999, from 9.2% for the nine months ended December 31, 1998. Interest earned on
securities increased $463,000 to $1,594,000 for the year ended December 31,
1999, from $1,131,000 for the nine months ended December 31, 1998. The increase
was primarily the result of comparing a twelve-month period to a nine-month
period, and an increase in the average yield on investments to 6.1% for the year
ended December 31, 1999, compared to 5.8% for the nine months ended December 31,
1998. This increase in yield is accompanied by a slight increase in the average
balance of securities.
INTEREST EXPENSE
Total interest expense for the year ended December 31, 1999, was $6.6
million compared to $5.5 million for the nine months ended December 31, 1998.
This increase was primarily the result of comparing a twelve-month period to a
nine-month period. The average level of deposits decreased slightly to $161.1
million at December 31, 1999, from the December 31, 1998, average level of
$161.9 million, while the average rate paid on deposits decreased to 4.10%, from
4.50% for the nine months ended
25
<PAGE>
December 31, 1998.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1999, increased
approximately $1.7 million, to $6.3 million from $4.6 million for the previous
year. This increase was primarily the result of comparing a nine-month period to
a twelve- month period, and an increase in net interest spread to 3.78% from
3.55% in the prior period.
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 $1,038,000 at
December 31, 1999, and $1,081,000 at December 31, 1998. During the year ended
December 31, 1999, the provision for loan losses was $114,000. The ratios of the
allowance to total loans of 0.91% at December 31, 1999, and 0.99% at December
31, 1998, were considered reasonable by management in relation to estimated loss
exposure.
The Company's allowance for loan losses is based upon estimated loss
exposure. 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. This
effort includes discussions with regulators of the Banks to include
recommendations and comments from examination reports. Other considerations in
determining the allowance level 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 segregates its portfolio into problem and non-problem loans.
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
non-problem loans considers historical losses and other relevant factors. The
allowances are reviewed 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 year ended December 31, 1999, totaled $936,000
as compared to $620,000 for the nine months ended December 31, 1998. The
increase was primarily the result of comparing a twelve-month period to a
nine-month period, but is also accompanied by a slight increase in fee income.
26
<PAGE>
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1999, totaled $4.9
million as compared to $3.5 million for the nine months ended December 31, 1998.
This increase is primarily the result of comparing a twelve-month period to a
nine-month period.
INCOME TAXES
Federal and state income taxes increased $280,000, or 52.8%, to $810,000 in
the year ended December 31, 1999, from $530,000 for the nine months ended
December 31, 1998. The increase was primarily the result of the approximate
37.2% increase in income before taxes for the year ended December 31, 1999, as
compared to the nine months ended December 31, 1998. The Company's effective tax
rate for the year ended December 31, 1999, was 37% compared to 33% for the nine
months ended December 31, 1998.
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 Note 9 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 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
27
<PAGE>
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
<PAGE>
$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.
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
2,507,011 shares of common stock outstanding and approximately 344 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.
Stock Market Dividends
Nine Months Ended December 31, 1998: Price Range Declared
----------- -----------
Low High Per Share
----- ------ -----------
First Quarter $ 11.125 $ 12.50 $ .1325
Second Quarter 11.00 12.50 .07
Third Quarter 9.50 11.125 .07
Year Ended December 31, 1999:
First Quarter $ 9.00 $ 11.00 $ .14
Second Quarter 8.25 10.43 .07
Third Quarter 8.00 10.00 .07
Fourth Quarter 7.75 10.00 .07
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.
President and Owner, Buddy Moore Trucking, Inc.
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, 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>
COMPANY DATA
- --------------------------------------------------------------------------------
ANNUAL MEETING
FirstFed Bancorp, Inc.'s Annual Meeting of Stockholders will be held at the main
office, 1630 4th Avenue North, Bessemer, Alabama, 35020 on Tuesday, April 25,
2000, at 4:30 P.M.
REGISTRAR AND TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Birmingham, Alabama
ANNUAL REPORT ON FORM 10-KSB
The December 31, 1999, Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission is available on or after March 30, 2000, upon request to
all stockholders free of charge from the following:
Lynn J. Joyce, Secretary
FirstFed Bancorp, Inc.
1630 4th Avenue North
Post Office Box 340
Bessemer, AL 35021-9988
OFFICE LOCATIONS
First Federal Savings Bank
Main Office: 1630 4th Avenue North 35020
Hueytown Office: 1351 Hueytown Road 35023
Pelham Office: 56 Pelham Plaza Shopping Center 35124
Hoover Office: 1604 Montgomery Highway 35216
Vance Office: 18704 Highway 11 North 35490
First State Bank of Bibb County
West Blocton Office: Main Street 35184
Centreville Office: 125 Birmingham Road 35042
North Bibb Office: Highway 5 35188
32
EXHIBIT 21
Subsidiaries of the Registrant
State of Percentage
Subsidiary Incorporation Ownership
- ----------------------------- ------------- ---------
First Federal Savings Bank United States 100%
First State Corp. Alabama 100%
Subsidiary of First State
Corp.:
First State Bank of Bibb County Alabama 100%
The operations of the Company's subsidiaries are included in the
Company's consolidated statements.
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 21, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,132,000
<INT-BEARING-DEPOSITS> 6,455,000
<FED-FUNDS-SOLD> 5,250,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,383,000
<INVESTMENTS-CARRYING> 18,825,000
<INVESTMENTS-MARKET> 18,602,000
<LOANS> 114,404,000
<ALLOWANCE> 1,038,000
<TOTAL-ASSETS> 171,247,000
<DEPOSITS> 151,579,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 366,000
<LONG-TERM> 0
0
0
<COMMON> 31,000
<OTHER-SE> 18,949,000
<TOTAL-LIABILITIES-AND-EQUITY> 171,247,000
<INTEREST-LOAN> 10,003,000
<INTEREST-INVEST> 1,594,000
<INTEREST-OTHER> 1,335,000
<INTEREST-TOTAL> 12,932,000
<INTEREST-DEPOSIT> 6,607,000
<INTEREST-EXPENSE> 6,607,000
<INTEREST-INCOME-NET> 6,325,000
<LOAN-LOSSES> 114,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 995,000
<INCOME-PRETAX> 2,213,000
<INCOME-PRE-EXTRAORDINARY> 2,213,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,403,000
<EPS-BASIC> .59
<EPS-DILUTED> .56
<YIELD-ACTUAL> 7.9
<LOANS-NON> 308,000
<LOANS-PAST> 1,719,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,081,000
<CHARGE-OFFS> 207,000
<RECOVERIES> 50,000
<ALLOWANCE-CLOSE> 1,038,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,038,000
</TABLE>
