10KSB 1 firstfed10ksb59216.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2003. OR |_| Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ____________ To ____________. Commission File Number: 0-19609 FirstFed Bancorp, Inc. (Exact name of small business issuer in its charter) Delaware 63-1048648 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) identification No.) 1630 Fourth Avenue North Bessemer, Alabama 35020 (Address of principal executive office) Zip Code Registrant's telephone number, including area code: (205) 428-8472 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| N0 |_| Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB |X|. State issuer's revenues for its most recent fiscal year $12,897,000. 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 23, 2004, was $11,404,024. As of March 23, 2004, there were issued and outstanding 2,383,144 shares of the registrant's common stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2003, are incorporated by reference into Parts I and II of this Form 10-KSB. (2) Portions of the Proxy Statement for the December 31, 2003, Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-KSB. TABLE OF CONTENTS
Page ---- PART I. ITEM I. Description of Business ..................................................... 1 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 ................... 20 ITEM 7. Financial Statements ........................................................ 20 ITEM 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure ....................................... 20 ITEM 8A. Controls and Procedures ..................................................... 20 PART III. ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ......................... 20 ITEM 10. Executive Compensation ...................................................... 21 ITEM 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....................................................... 21 ITEM 12. Certain Relationships and Related Transactions .............................. 21 ITEM 13. Exhibits and Reports on Form 8-K ............................................ 21 ITEM 14. Principal Accountant Fees and Services ...................................... 22
i. PART I ITEM 1. DESCRIPTION OF BUSINESS: THE COMPANY FirstFed Bancorp, Inc. (the "Company"), a Delaware corporation, is a bank holding company that has registered as a financial holding company. As of December 31, 2002, the Company served as the holding company for First State Corporation ("FSC"). FSC is the sole shareholder for First Financial Bank ("First Financial" or the "Bank"). In the prior year, the Company was the holding company and sole shareholder of First Federal Savings Bank ("First Federal") and FSC. FSC was the sole shareholder of First State Bank of Bibb County ("First State"). During 2002, First Federal and First State were merged and the name changed to First Financial. The Company's assets consist primarily of its subsidiary investment and liquid investments. It engages in no significant independent activity. The Company had total assets of $194,211,000, total deposits of $151,109,000 and stockholders' equity of $18,552,000 at December 31, 2003. The Company's earnings were primarily dependent upon the net interest income of First Financial, 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. The Company's executive office is located at the main office at 1630 Fourth Avenue North, Bessemer, Alabama 35020. The telephone number is (205) 428-8472. FIRST FINANCIAL BANK As of December 31, 2003, the Bank's principal business consisted of attracting deposits from the general public and investing those deposits in one-to-four-family residential mortgage loans, commercial mortgage loans, commercial loans and consumer loans. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts all insured by the Federal Deposit Insurance Corporation ("FDIC") up to the maximum amount allowable by the FDIC. The Bank was subject to regulation, examination and supervision by the FDIC and the State Banking Department of the State of Alabama (the "Banking Department"). The Bank conducts business from eight locations in Bibb, Jefferson, Shelby and Tuscaloosa Counties, Alabama, consisting of its home office in Bessemer and seven other branches, one each in Centreville, Hoover, Hueytown, Pelham, Vance, West Blocton and Woodstock. Each branch is a full-service facility. CRITICAL ACCOUNTING POLICIES The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices followed by the banking industry. Critical accounting policies relate to securities, loans, allowance for loan losses, stock-based compensation and intangibles. These policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized in Note 1, "Summary of Business and Significant Accounting Policies", in the Notes to Consolidated Financial Statements in the Annual Report to Stockholders (Exhibit 13). LIQUIDITY Liquidity refers to the ability of the Company to meet its cash flow requirements in the normal course of business, including loan commitments, deposit withdrawals, liability maturities and ensuring that the Company is in a position to take advantage of investment opportunities in a timely and cost-efficient manner. Management monitors the Company's liquidity position, and reports to the Board of Directors monthly. The Company may achieve its desired liquidity objectives through management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, the possible sale of available- for-sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits. The Company also has accessibility to market sources of funds such as FHLB advances, purchase of Fed Funds and correspondent bank borrowings. The 1 Consolidated Statements of Cash Flows, included in the Annual Report, provides an analysis of cash from operating, investing, and financing activities for each of the two years in the period ended December 31, 2003. Sources of liquidity discussed in Notes to Consolidated Financial Statements in the Annual Report include: Note 2 - "Maturity of Securities Portfolio" and Note 8 - "Maturity Distribution of Deposits". Also, see "Loan Maturity" and "Deposits, Borrowings and Other Sources of Funds" herein for additional sources of liquidity. No trends in the sources or uses of cash by the Company are expected to have a significant impact on the Company's liquidity position. The Company believes that the level of liquidity is sufficient to meet current and future liquidity requirements. KEY OPERATING DATA The following table summarizes certain key operating ratios for the years ended December 31, 2003 and 2002. 2003 2002 ---- ----- Return on average assets .21% .11% Return on average equity 2.15% 1.08% Average equity to average assets 9.94% 10.46% Dividend payout ratio 206% 389% 2 AVERAGE BALANCES, YIELDS EARNED AND RATES PAID The following tables set forth certain information relating to the Company's consolidated statements of financial condition for the years ended December 31, 2003 and 2002, 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 loans. For further discussion, see "Management's Discussion and Analysis" in the Company's December 31, 2003, Annual Report to Stockholders (the "Annual Report"), Exhibit 13 hereto.
2003 2002 --------------------- --------------------- Average Average Balance Interest Balance Interest -------- -------- -------- -------- (In thousands) Interest-earning assets: Loans $123,023 $ 7,473 $106,603 $ 8,429 Securities 27,940 1,373 33,280 1,916 Other interest-earning assets 18,243 159 27,519 320 -------- -------- -------- -------- Total interest-earning assets 169,206 9,005 167,402 10,665 -------- -------- Non-interest-earning assets 18,611 14,585 -------- -------- Total assets $187,817 $181,987 ======== ======== Interest-bearing liabilities: Deposits $148,092 $ 3,137 $145,094 $ 4,021 Borrowings 18,285 900 17,504 895 -------- -------- -------- -------- Total interest-bearing liabilities 166,377 4,037 162,598 4,916 Non-interest bearing liabilities 2,694 808 -------- -------- -------- -------- $ 4,968 $ 5,749 ======== ======== Total liabilities 169,071 163,406 Stockholders' equity 18,746 18,581 -------- -------- Total liabilities and stockholders' equity $187,817 $181,987 ======== ========
2003 2002 ---- ---- Yield on: Loans 6.07% 7.91% Securities (1) 4.92 5.76 Other interest-earning assets 0.87 1.16 All interest-earning assets 5.32 6.37 Rate paid on: Deposits 2.12 2.77 Borrowings 4.92 5.11 All interest-bearing liabilities 2.43 3.02 Interest rate spread (2) 2.89% 3.35% ==== ==== Net yield (3) 2.94% 3.43% ==== ==== (1) Yields on tax-exempt obligations have been computed on a full federal tax-exempt basis using an income tax rate of 34% for 2003 and 2002. (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 RATE/VOLUME ANALYSIS The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Net interest income decreased $781,000 for the year ended December 31, 2003, compared to the year ended December 31, 2002.
Year Ended Year Ended December 31, 2003 December 31, 2002 Versus Versus Year Ended Year Ended December 31, 2002 December 31, 2001 --------------------------------- --------------------------------- Volume Rate Net Volume Rate Net ------- ------- ------- ------- ------- ------- (In thousands) Increase (decrease) in interest earned on: Loans $ 1,874 $(2,830) $ (956) $ (906) $(1,259) $(2,165) Securities (284) (259) (543) 56 (143) (87) Other interest-earning assets (92) (69) (161) 692 (1,044) (352) ------- ------- ------- ------- ------- ------- Total 1,498 (3,158) (1,660) (158) (2,446) (2,604) ------- ------- ------- ------- ------- ------- Decrease (increase) in interest paid on: Deposits 54 (938) (884) 10 (1,975) (1,965) Other borrowings 8 (3) 5 40 (12) 28 ------- ------- ------- ------- ------- ------- Total 62 (941) (879) 50 (1,987) (1,937) ------- ------- ------- ------- ------- ------- Net (decrease) increase in net interest income $ 1,436 $(2,217) $ (781) $ (208) $ (459) $ (667) ======= ======= ======= ======= ======= =======
4 ASSET/LIABILITY MANAGEMENT The Company is subject to interest rate risk to the degree that its interest-bearing liabilities with short and medium term maturities mature or reprice more rapidly, or on a different basis, than its interest-earning assets. The Company has 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 assets and liabilities. The strategies are intended to stabilize net interest income for the long-term by protecting the interest rate spread against fluctuations in market interest rates. Such strategies include the origination for portfolio of adjustable-rate mortgage loans secured by one-to-four-family residences and commercial mortgage 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 seeking 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. 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, 2003, the cumulative one-year gap is slightly negative using the indicated assumptions. Management believes that the Company's strong capital position is sufficient to protect against 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 savings and transaction accounts 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 Company has 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 a relatively large base of deposit products do not reprice on a contractual basis. These deposit products are primarily traditional savings accounts and transaction interest-bearing accounts. Balances for the accounts are reported in the "within 90 days" repricing category and comprise 30.6% 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 Interest Rate Sensitivity Analysis The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003, which are expected to reprice or mature in each of the future time periods shown. The amount of assets and liabilities shown which reprice or mature during a particular period was determined in accordance with the contractual terms of the asset or the liability, except as stated below. Loans that have adjustable interest rates are shown as being due in the period during which the interest rates are next subject to change. No prepayment assumptions have been applied to fixed-rate loans. Certificates of deposit are shown as being due in the period of maturity. Passbook and transaction accounts are shown as repricing within 90 days. The assumption that assets and liabilities will reprice or mature in accordance with their contractual terms should not be considered indicative of the actual results that may be experienced by the Bank. The Company's outside data processor is not providing the maturity and repricing of loans less than 90 days. The cost for manually determining the information exceeds the benefits received.
At December 31, 2003 --------------------------------------------------------------------- Within 91 To 181 Days 1 Year 3 Years 90 Days 180 Days To 1 Year To 3 Years To 5 Years --------- --------- --------- ---------- ---------- (Dollars in thousands) Interest-earning assets: Loans receivable (2) $ 30,943 $ 22,259 $ 40,437 $ 16,011 $ 10,238 Securities (1) -- -- -- 19,433 6,771 Cash investments 4,669 -- -- -- -- --------- --------- --------- --------- --------- Total interest-earning assets 35,612 22,259 40,437 35,444 17,009 --------- --------- --------- --------- --------- Interest-bearing liabilities: Savings accounts (3) 25,519 -- -- -- -- Transaction accounts (3) 27,990 -- -- -- -- Certificate accounts 13,084 15,531 15,500 32,642 12,982 Borrowings 5,700 1,080 -- 17,000 -- --------- --------- --------- --------- --------- Total interest-bearing liabilities 72,293 16,611 15,500 49,642 12,982 --------- --------- --------- --------- --------- Interest sensitivity gap per period $ (36,681) $ 5,648 $ 24,937 $ (14,198) $ 4,027 ========= ========= ========= ========= ========= Cumulative interest sensitivity gap $ (36,681) $ (31,033) $ (6,096) $ (20,294) $ (16,267) ========= ========= ========= ========= ========= Percentage of cumulative gap to total assets (18.89)% (15.98)% (3.14)% (10.45)% (8.38)% Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities 49.26% 65.09% 94.16% 86.83% 90.26% At December 31, 2003 ------------------------------------------------------- 5 Years 10 Years Over To 10 Years To 20 Years 20 Years Total ----------- ----------- -------- --------- (Dollars in thousands) Interest-earning assets: Loans receivable (2) $ 9,274 $ 4,965 $ 3,621 $ 137,748 Securities (1) 88 494 2,609 29,395 Cash investments -- -- -- 4,669 --------- --------- --------- --------- Total interest-earning assets 9,362 5,459 6,230 171,812 --------- --------- --------- --------- Interest-bearing liabilities: Savings accounts (3) -- -- -- 25,519 Transaction accounts (3) -- -- 7,854 35,844 Certificate accounts 7 -- -- 89,746 Borrowings -- -- -- 23,780 --------- --------- --------- --------- Total interest-bearing liabilities 7 -- 7,854 174,889 --------- --------- --------- --------- Interest sensitivity gap per period $ 9,355 $ 5,459 $ (1,624) $ (3,077) ========= ========= ========= ========= Cumulative interest sensitivity gap $ (6,912) $ (1,453) $ (3,077) $ (3,077) ========= ========= ========= ========= Percentage of cumulative gap to total assets (3.56)% (0.75)% (1.58)% (1.58)% Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities 95.86% 99.13% 98.24% 98.24%
(1) Includes $29,395 in securities available-for-sale; such securities are reflected in the above table based on their contractual maturity. (2) Includes $1,033 in loans held for sale; such loans are reflected in the above table in the within 90 days category. (3) Assumes that each savings 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 particularly 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. The noninterest-bearing checking accounts were included in the over 20 years category. 6 LENDING ACTIVITIES General The Company's loan portfolio is comprised primarily of first mortgage loans secured by one-to-four family residences and commercial property, a majority of which are adjustable rate. The Company originates loans on real estate located in its 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. The Company has not purchased servicing rights. The Company routinely sells fixed rate loans in the secondary market with servicing released. During 2002, the Company sold approximately $10 million of mortgage loans to FNMA where servicing was retained. Mortgage servicing rights are capitalized based on relative fair value. Residential Lending - One-to-Four Family The Company offers various adjustable rate one-to-four family residential loan products ("ARMs"). ARMs 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 ARMs are priced to provide a profit margin and not necessarily to be competitive in the local market. One-to-four family residential ARMs do not provide for negative amortization. The Company generally makes 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. The Company usually charges an origination fee of 1.00% on one-to-four family residential mortgage loans. The Company's loan policy requires approval by a loan committee or the Board of Directors for loans over specified amounts. The Board of Directors is furnished with an analysis of the respective monthly loan activity. In addition to ARM lending, the Company may originate fixed rate one-to-four family residential loans. However, at this time, almost all fixed rate loans are being sold into the secondary market, servicing released. Investor relationships have been established with several banks and mortgage companies. In addition, the Company is approved by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) to sell and service loans. These outlets allow more diversified products and enhance the management of interest rate risk. The Company applies the required underwriting procedures in making these fixed rate mortgage loans. Commercial Real Estate Lending Loans secured by commercial real estate totaled approximately $41.9 million, or 30.8% of the total loan portfolio, at December 31, 2003. Commercial real estate loans are generally originated in amounts up to 80% of the appraised value of the property. Such appraised value is determined by an independent appraiser previously approved by the Company. Commercial real estate loans are permanent loans secured by improved property such as office buildings, retail stores, warehouses, churches, hotels/motels, and other non-residential buildings. Of the commercial real estate loans outstanding at December 31, 2003, most are located within 100 miles of the Company's office locations and were made to local customers. 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 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. 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 Company seeks to minimize these risks by lending to established customers and generally restricting such loans to its primary market area. 7 Construction Lending The Company has several construction loan programs. At December 31, 2003, the Company had $27.3 million in construction loans or 20.0% of the 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, $14.6 million was undisbursed at December 31, 2003, and consisted primarily of loans to individuals for construction of residential properties. The Company presently charges 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 a community-oriented lender, the Company offers 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 $7.6 million or 5.6% of the total loan portfolio at December 31, 2003. 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 90% 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, 2003, the outstanding home equity loan balance was $7.8 million. Commercial Lending The Company originates 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 Company's market areas. Commercial loans are adjustable rate loans and are generally, secured by equipment, accounts receivable and inventory. Commercial loans totaled approximately $7.5 million or 5.5% of the total loan portfolio at December 31, 2003. 8 Analysis of Loan Portfolio The following table sets forth the composition of the Company's mortgage and other loan portfolios in dollar amounts and in percentages at the dates indicated. At December 31, 2003, the Company had no concentrations of loans exceeding 10% of total loans that are not disclosed below.
December 31, December 31, 2003 2002 -------------------- -------------------- Percent Percent of of Amount Total Amount Total -------- ------- -------- ------- (Dollars in thousands) Mortgage Loans: One-to-four family residential $ 53,569 39.36% $ 47,903 45.92% Construction 27,277 20.04 24.542 16.70 Commercial real estate 41,854 30.75 17,415 23.53 -------- ------ -------- ------ Total mortgage loans 122,700 90.15 89,860 86.15 -------- ------ -------- ------ Consumer loans: Savings accounts 220 .16 497 .47 Other 7,343 5.40 7,674 7.36 -------- ------ -------- ------ Total consumer loans 7,563 5.56 8,171 7.83 -------- ------ -------- ------ Commercial loans 7,485 5.50 7,406 7.10 -------- ------ -------- ------ Total loans receivable 137,748 101.21 105,437 101.08 -------- ------ -------- ------ Less: Allowance for loan losses 1,397 1.03 1,059 1.02 Net deferred loan fees 252 .18 68 .06 -------- ------ -------- ------ 1,649 1.21 1,127 1.08 -------- ------ -------- ------ Loans receivable, net $136,099 100.00% $104,310 100.00% ======== ====== ======== ======
9 Loan Maturity The following table shows the maturity, without regard to repricing dates, of the loan portfolio at December 31, 2003, based upon contractual maturity. See page 6, "Interest Rate Sensitivity Analysis", for an analysis of loans based on expected repricing or maturity.
December 31, 2003 ---------------------------------------------------------------------- One-to-Four Family Residential and Commercial Construction Real Estate Consumer Commercial Loans Loans Loans Loans Total ------------ ---------- -------- ---------- -------- (In thousands) Amounts Due: One year or less $ 20,253 $ 3,087 $ 357 $ 5,830 $ 29,527 One year through 5 years 10,362 5,800 6,705 1,473 24,340 After 5 years 50,231 32,967 501 182 83,881 -------- -------- -------- -------- -------- $ 80,846 $ 41,854 $ 7,563 $ 7,485 137,748 ======== ======== ======== ======== Less: Allowance for loan losses 1,397 Net deferred loan fees 252 -------- Loans receivable, net $136,099 ========
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, 2003, the dollar amount of loans due after December 31, 2004, based upon contractual maturity dates, and whether such loans have fixed interest rates for the life of the loan or adjustable interest rates: Due After December 31, 2004 ---------------------------------- Fixed Adjustable Total -------- ---------- -------- (In thousands) Mortgage Loans: One-to-four family & Construction $ 19,784 $ 40,809 $ 60,593 Commercial real estate 5,709 33,058 38,767 -------- -------- -------- Total mortgage loans 25,493 73,867 99,360 -------- -------- -------- Consumer loans 7,206 -- 7,206 -------- -------- -------- Commercial loans 1,420 235 1,655 -------- -------- -------- Total loans receivable, gross $ 34,119 $ 74,102 $108,221 ======== ======== ======== 10 Loan Origination, Commitment and Other Loan Fees In addition to interest earned on loans, the Company charges 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 Nonperforming assets include nonaccruing loans and real estate owned. The Company's policy is 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 Company obtains title of the real estate securing the loan in foreclosure proceedings. At December 31, 2003, the Company had no restructured loans within the meaning of Financial Accounting Standards Board Statement 114. The following table is an analysis of the nonperforming assets and accruing loans 90 days or more past due at December 31, 2003, and December 31, 2002. 2003 2002 ------ ------ (Dollars in thousands) Mortgage loans $ 36 $ 198 Consumer loans 24 41 Commercial loans 229 180 ------ ------ Total non-performing loans 289 419 Real estate owned 4,216(1) 1,898 ------ ------ Total non-performing assets $4,505 $2,317 Accruing loans 90 days or more past due 162 236 ------ ------ Total non-performing assets and accruing loans 90 days or more past due $4,667 $2,553 ====== ====== Non-performing assets and accruing loans 90 days or more past due to total assets 2.40% 1.44% ====== ====== Non-performing loans to total loans, net 0.21% 0.40% ====== ====== (1) Subsequent to December 31, 2003, $2.5 million of the real estate owned was under lease with a purchase option. At December 31, 2003, there were no loans included in the above table considered potential problem loans that management expects will significantly impact future operating results, liquidity or capital resources or for which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Interest income recognized on nonaccrual loans outstanding at December 31, 2003, would have increased by approximately $15,000, 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, 2003, was approximately $8,000. The Company had $145,000 and $27,000 of specific allowance related to the non-performing loans at December 31, 2003 and 2002. 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, as losses occur, and 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 The following table sets forth information regarding the allowance for loan losses for the years ended December 31, 2003 and 2002.
2003 2002 ------ ------ (Dollars in thousands) Balance at beginning of period $1,059 $ 775 Provision for loan losses 1,141 1,956 Charge-offs: Mortgage loans 578 389 Consumer loans 223 259 Commercial loans 81 1,081 ------ ------ Total Charge-offs 882 1,726 ------ ------ Recoveries: Mortgage loans 34 15 Consumer loans 44 39 Commercial loans 1 -- ------ ------ Total Recoveries 79 54 ------ ------ Charge-offs, net of recoveries 803 1,672 ------ ------ Balance at end of period $1,397 $1,059 ====== ====== Ratio of allowance for loan losses to total loans receivable at the end of period 1.03% 1.02% ====== ====== Ratio of allowance for loan losses to non-performing loans (1) 483.39% 252.74% ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period 0.65% 1.58% ====== ======
(1) Non-performing loans are comprised of nonaccrual loans. Specific reviews are performed to determine the collectibility and related allowance for loan losses on nonperforming loans. 12 The following table details the approximate allocation of the allowance for loan losses by category as of December 31, 2003 and 2002. See further discussion regarding the allowance for loan losses in "Management's Discussion and Analysis" in the Annual Report. 2003 2002 ---------------- ---------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) Mortgage loans $ 827 59.0% $ 212 20.0% Consumer loans 320 23.0 317 30.0 Commercial loans 250 18.0 530 50.0 ------ ----- ------ ----- Total $1,397 100.0% $1,059 100.0% ====== ===== ====== ===== Classified Assets 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 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 various regulators, which can order the establishment of additional general or specific loss allowances. At December 31, 2003, the Company had no assets classified as loss, $186,000 of assets classified as doubtful, $6.7 million of assets classified as substandard, and $2.9 million in assets designated as special mention. Total adversely classified assets (defined as those assets classified as substandard, doubtful and loss) represented 2.9% of total assets at December 31, 2003. At that date, primarily all of the classified assets were one-to-four family residences and commercial mortgage loans in the Company's market areas. INVESTMENT ACTIVITIES The Company had investments in mortgage-backed securities in the portfolio which are currently insured or guaranteed by the FNMA, GNMA or the FHLMC and have coupon rates as of December 31, 2003, ranging from 2.00% to 9.50%. At December 31, 2003, mortgage-backed securities totaled $1.3 million or 0.7% of total assets. At December 31, 2003, the Company had 15.90% of total assets in cash, cash equivalents, mortgage-backed securities and investment securities maturing in five years or less. The Company holds cash equivalents in the form of amounts due from depository institutions, overnight interest-bearing deposits in banks, and federal funds sold, the latter being generally sold for one day periods. The Board of Directors sets the investment policy. This policy dictates that investments will be made based on the following criteria: liquidity requirements, return on investment, and acceptable levels of interest rate risk and credit risk. The policy authorizes 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 corporate bonds, certain certificates of deposit of Board-approved banks and savings institutions and federal funds sold. The policy is to account for the investments as held-to-maturity or available-for-sale based on intent and ability. 13 The table below sets forth certain information regarding the liquidity and the fair value, weighted average yields and contractual maturities of the Company's investment securities designated as available-for-sale, at December 31, 2003. Certain of the U.S. Government agency securities could be called or prepaid prior to maturity.
After One Through After Five Through One Year or Less Five Years Ten Years -------------------- -------------------- -------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Interest bearing deposits $ 4,440 0.86% $ -- --% $ -- --% Federal funds 229 0.78 -- -- -- -- U.S. Government and agency securities (1) -- -- 12,017 3.12 84 6.00 Corporate Bonds -- -- 13,392 7.25 -- -- State, County and Municipal securities -- -- 100 6.00 -- -- After Ten Years Total -------------------- --------------------------------- Weighted Weighted Amortized Average Amortized Fair Average Cost Yield Cost Value Yield --------- -------- --------- ------- -------- (Dollars in thousands) Interest bearing deposits $ -- --% $ 4,440 $ 4,440 0.86% Federal funds -- -- 229 229 0.78 U.S. Government and agency securities (1) 1,219 3.82 13,320 13,379 3.20 Corporate Bonds 1,622 6.55 15,014 15,804 7.17 State, County and Municipal securities 100 5.00 200 212 5.50
(1) 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 DEPOSITS, BORROWINGS AND OTHER SOURCES OF FUNDS General The Company's primary sources of funds are deposits and borrowings and principal, interest and dividend payments on loans, mortgage-backed securities and investments, as applicable. Deposits The Company offers a variety of deposit accounts having a range of interest rates and terms. Deposits consist of savings accounts, checking accounts, money market deposits, IRA and certificate accounts. The Company currently has four ATM facilities and issues ATM/Debit cards on checking accounts. Compound interest is paid on most deposits. The flow of deposits is influenced significantly by general economic conditions, changes in money markets and prevailing interest rates and competition. Deposits are obtained primarily from the areas in which the branches are located. The Company also maintains collateralized deposits in excess of $100,000 held by the State of Alabama and certain other depositors. Generally, deposit rates are priced relative to existing treasury market rates. The Company relies primarily on customers as their source to attract and retain these deposits. The Company does not seek and has no brokered deposits as of December 31, 2003. Average Balance and Average Rate of Deposits The average balance of deposits and average rates are summarized for the years ended December 31, 2003 and 2002, in the following table. Year Ended Year Ended December 31, 2003 December 31, 2002 ----------------- ----------------- Amount Rate Amount Rate ------ ---- ------ ---- (Dollars in thousands) Transaction accounts $34,146 0.13% $30,842 0.25% Savings accounts 25,164 0.62 23,457 0.98 Certificates 87,727 3.35 90,795 4.09 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, 2003. Maturity Period Amount --------------- ------- (In thousands) Three months or less $ 2,009 Over three through six months 2,447 Over six through 12 months 3,393 Over 12 months 11,862 ------- Total $19,711 ======= Borrowings/FHLB Advances Deposits are the Company's primary source of funds. The Company's policy has been to utilize borrowings only when necessary and when they are a less costly source of funds or can be invested at a positive rate of return. The Company 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. At December 31, 2003, there were $17 million in FHLB advances. The advances are at a fixed rate of 5.20% and have a contractual maturity of January 12, 2011. On January 12, 2006, the FHLB has the option to convert the whole advance to a three month floating LIBOR, at which time the Company may terminate the advance. At December 31, 2003, there were $5.7 million in FHLB overnight borrowings. The borrowings are at an adjustable rate with a rate of 1.15% at December 31, 2003. 15 The Company has a line of credit for $1,500,000, with an outstanding balance of $1,080,000 at December 31, 2003. The line of credit is at a variable rate based on London Interbank Offered Rate ("LIBOR") plus 2.25% and has a maturity date of May 20, 2003. CONTRACTUAL OBLIGATIONS The following table indicates the Company's contractual obligations as of December 31, 2003: Term ------------------------------------------------------------ Less Than Total 1 Year 1-3 Years 3-5 Years 5+ Years -------- --------- --------- --------- -------- (In thousands) FHLB Advances $ 17,000 $ -- $ -- $ -- $ 17,000 Time Deposits 89,746 44,115 32,642 12,989 -- -------- -------- -------- -------- -------- Total $106,746 $ 44,115 $ 32,642 $ 12,989 $ 17,000 ======== ======== ======== ======== ======== The Company has no capital lease obligations and the operating lease obligations are not material. COMPETITION The Company faces 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 Company are located. Most of these companies are competitors of the Company to varying degrees. The Company also competes with many larger banks and other financial institutions that have offices over a wide geographic area. REGULATION, SUPERVISION AND GOVERNMENTAL POLICY General The Company is a bank holding company that has elected to be a financial holding company under the Gramm-Leach- Bliley Act of 1999 (the "GLB Act"). As a financial 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 ("SEC") under the federal securities laws including the Securities Exchange Act of 1934, as amended (the "Exchange Act"). First Financial Bank, as an Alabama commercial bank that is not a member of the Federal Reserve System, is subject to regulation, supervision and regular examination both by the Banking Department and by the FDIC. The deposits of the Company 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 Company's required reserves, investments, loans, mergers and consolidations, issuance of securities, payment of dividends and other aspects of the Company's operations. Supervision, regulation and examination 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 First Financial Bank. These regulators 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 Note 18 of Notes to Consolidated Financial Statements. First Financial Bank is prohibited from paying any dividends or other capital distributions if, after the distribution, it would be undercapitalized under the applicable regulations. In addition, under Alabama Law, the approval of the Alabama Superintendent of Banks is required if the total of all the dividends declared by First Financial Bank in any calendar year exceeds net income as defined for that year combined with its retained net income for the preceding two calendar years. See Note 13 to Consolidated Financial Statements. 16 Sarbanes-Oxley Act of 2002 The Sarbanes- Oxley Act of 2002 provides for sweeping changes with respect to corporate governance, accounting policies and disclosure requirements for public companies, and also for their directors and officers. Pursuant to the Sarbanes-Oxley Act, the SEC has adopted new financial reporting requirements and rules concerning corporate governance. A reporting company's chief executive and chief financial officers are required to certify certain financial and other information included in the company's quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the company's disclosure controls and procedures; that they have made certain disclosures to the auditors and to the audit committee of the board of directors about the company's controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. Certifications by the Company's Chief Executive Officer and Chief Financial Officer of the financial statements and other information have been filed as exhibits to this Annual Report on Form 10-KSB. See Item 8A ("Controls and Procedures") hereof for the Company's evaluation of disclosure controls and procedures. The certifications required by Section 906 of the Sarbanes-Oxley Act have also been filed as exhibits to this Form 10-KSB. USA Patriot Act The President of the United States signed the USA Patriot Act into law in 2001. The USA Patriot Act authorizes new regulatory powers to combat international terrorism. The provisions that affect financial institutions most directly provide the federal government with enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the USA Patriot Act prohibits financial institutions from doing business with foreign "shell" banks and requires increased due diligence for private banking transactions and correspondent accounts for foreign banks. In addition, financial institutions have to follow new minimum verification of identity standards for all new accounts and are permitted to share information with law enforcement authorities under circumstances that were not previously permitted. Financial Modernization Act The GLB Act significantly changed the regulatory structure and oversight of the financial services industry and expanded financial affiliation opportunities for bank holding companies. Among other changes, the GLB Act permits "financial holding companies" to engage in a range of activities that are "financial in nature" or "incidental" thereto, such as banking, insurance, securities activities, and merchant banking. To qualify to engage in expanded financial activities, a financial holding company must make certain required regulatory filings, and subsidiary depository institutions must be well-capitalized, well-managed and rated "satisfactory" or better under the Community Reinvestment Act. The Company meets these requirements and has become a financial holding company. The GLB Act prohibits financial institutions from sharing non-public financial information on their customers to non- affiliated third parties unless the customer is provided the opportunity to opt-out or the customer consents. However, the GLB Act allows a financial institution to disclose confidential information to non-affiliated third parties pursuant to a joint marketing agreement (after full disclosure to the customer), to perform services on behalf of the institution, to market the institution's own products, and to protect against fraud. The federal banking agencies have issued regulations implementing privacy provisions of the GLB Act. Effects of Governmental Policy The earnings and business of the Company 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 Company are not predictable. 17 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 the Company. 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, 2003, the Company was subject to a maximum federal income tax rate of 34%. The Company has not been audited by the Internal Revenue Service for any recent year subject to audit. See Notes to Consolidated Financial Statements for additional information related to income taxes. Corporate Alternative Minimum Tax The Company is 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). State and Local Taxation The State of Alabama imposes a 6.5% excise tax on the earnings of financial institutions such as First Financial Bank. The 6.5% 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, 2003, the Company had 80 full-time employees and 2 part-time employees. The employees are not represented by a collective bargaining unit, and the Company considers its relationship with the employees to be good. ITEM 2. DESCRIPTION OF PROPERTY: First Financial Bank conducts its business through its main office located in Bessemer, Alabama, and seven branch offices located in Centreville, Hoover, Hueytown, Pelham, Vance, West Blocton and Woodstock, Alabama. The Company believes that the current facilities are adequate to meet its present and immediately foreseeable needs. The following table sets forth information relating to each of the offices as of December 31, 2003, which totaled a net book value of $4,908,000. See also Notes 1 and 5 of Notes to Consolidated Financial Statements. 18 Leased Or Date Net Book Value at Owned Opened December 31, 2003 ----- ------ ----------------- (In thousands) Main Office - 1630 Fourth Avenue, No Owned 1961 $ 859(3) Bessemer, Alabama 35020 Branches - 125 Birmingham Rd Owned 1979 47(3) Centreville, Alabama 35042 1604 Montgomery Hwy Hoover, Alabama 35216 Owned 1992 440(3) 1351 Hueytown Road Hueytown, Alabama 35023 Owned 1966 889(3) Food World Plaza Pelham, Alabama 35124 Leased(1) 1973 N/A(2) 3304 Pelham Parkway Pelham, Alabama 35124 Owned 5/2004 632(4) 18704 Highway 11, North Vance, Alabama 35490 Owned 1997 401(3) Main Street Owned 1965 262(3) West Blocton, Alabama 35184 Highway 5 Owned 1985 154(3) Woodstock, Alabama 35188 Other fixed assets, net 1,224 ------ Total $4,908 ====== ---------- (1) The lease expires May 31, 2004. See (4) below. (2) The lease is classified as an operating lease. (3) Includes land, building and improvements. (4) This represents a new Pelham office under construction which will be opened in May 2004. ITEM 3. LEGAL PROCEEDINGS: From time to time, the Company is a party to routine legal proceedings occurring in the ordinary course of business. At December 31, 2003, there were no legal proceedings to which the Company was a party, or to which any of its 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, 2003 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, 2003. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS: The information contained under the caption "Introduction" in the Annual Report is incorporated herein by reference. 19 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 reports of independent public accountants and consolidated financial statements contained in Exhibit 13 are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: The information contained in the section captioned "Management's Discussion and Analysis - Change In Independent Public Accountants" in the Annual Report is incorporated herein by reference. ITEM 8A. CONTROLS AND PROCEDURES: The Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2003, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company's Chief Executive Officer and the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures, as designed and implemented, are effective in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. In addition, the company reviewed its internal controls. There has been no change in the Company's internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and transactions are properly recorded and reported. Any control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are achieved. The design of a control system inherently has limitations, including the controls' cost relative to their benefits. Additionally, controls can be circumvented. No cost-effective control system can provide absolute assurance that all control issues and instances of fraud, will be detected. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: The information contained under the section captioned "Proposal I--Election of Directors" in the Company's definitive proxy statement for the Company's 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 in the Proxy Statements entitled "Section 16(a) Beneficial Ownership Reporting Compliance." The Company has adopted a Code of Ethics that applies to all employees, including without exception, the principal executive officer, principal financial officer, principal accounting officer and/or controller, or persons performing similar functions. The Code of Ethics is attached as Exhibit 14 to this Form 10-KSB. The Company has adopted an Audit Committee Charter and a Nominating and Corporate Governance Committee Charter, both of which are attached as appendices to the Company's definitive proxy statement dated March 22, 2004. 20 The Code of Ethics, Audit Committee Charter and Nominating and Corporate Governance Committee Charter are not currently available on the Company's website. ITEM 10. EXECUTIVE COMPENSATION: The information contained in the sections captioned "Proposal I--Election of Directors --Executive Compensation and Other Benefits" and "--Directors' Compensation" in the Proxy Statement is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS: (a) Equity Compensation Plans - Information required by this item is incorporated herein by reference to the section in the Proxy Statement captioned "Equity Compensation Plans". (b) 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." (c) 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. (d) 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 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 0xhibit 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 Lynn J. Joyce, as amended (D) 10.11 FirstFed Bancorp, Inc. 1995 Stock Option and Incentive Plan, as amended (D) 10.12 FirstFed Bancorp, Inc. 2001 Stock Incentive Plan (F) 11.0 Statement of Computation of Earnings Per Share (G) 21 13.0 December 31, 2003 Annual Report - Filed herewith only as to those portions of the Annual Report to stockholders for the year ended December 31, 2003, which are expressly incorporated herein by reference. 14.0 FirstFed Bancorp, Inc. Code of Ethics 21.0 Subsidiaries of the Registrant (filed herewith) 23.0 Consent of Independent Public Accountants (filed herewith) 31.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 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 Annual Report on Form 10-KSB for the year ended December 31, 2000. G. Incorporated herein by reference into this document from the December 31, 2003 Annual Report, Exhibit 13.0 hereto. (b) Reports on Form 8-K: Current Report on Form 8-K dated October 27, 2003, reporting under Item 12 ("Results of Operations and Financial Conditions") the Company's results of operations for the quarter ended September 30, 2003. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES: The information required by this item is incorporated herein by reference to the sections captured "Proposal II - Ratification of Appointment of Independent Auditors - Audit Fees and Other Matters" and "- - Pre-approval Policy" in the Proxy Statement. 22 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 26, 2004 /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. /s/ B. K. Goodwin, III Chairman of the Board, Chief Date: March 26, 2004 ------------------------- Executive Officer and B. K. Goodwin, III President /s/ Lynn J. Joyce Chief Financial Officer, Date: March 26, 2004 ------------------------- Executive Vice President, Lynn J. Joyce Secretary and Treasurer /s/ Fred T. Blair Director Date: March 26, 2004 ------------------------- Fred T. Blair /s/ James B. Koikos Director Date: March 26, 2004 ------------------------- James B. Koikos /s/ E. H. Moore, Jr. Director Date: March 26, 2004 ------------------------- E. H. Moore, Jr. /s/ James E. Mulkin Director Date: March 26, 2004 ------------------------- James E. Mulkin /s/ G. Larry Russell Director Date: March 26, 2004 ------------------------- G. Larry Russell 23