<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 1993
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from N/A to
------- -------
COMMISSION FILE NO. 1-9566
FIRSTFED FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4087449
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
401 WILSHIRE BOULEVARD, SANTA MONICA, CALIFORNIA 90401-1490
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (310) 319-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 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
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 3, 1994: $148,644,715.
The number of shares of Registrant's $0.01 par value common stock
outstanding as of March 1, 1994 was 10,533,186.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Stockholders,
April 20, 1994 (Parts III & IV).
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K (SUB-SECTION 229.405 OF THIS CHAPTER) IS NOT
CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S
KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED
BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM
10-K. [X]
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<PAGE>
PART I
ITEM 1--BUSINESS
General Description
FirstFed Financial Corp., a Delaware corporation ["FFC", and collectively
with its sole and wholly-owned subsidiary, First Federal Bank of
California, fsb ("Bank"), "Company"], was incorporated on February 3, 1987.
Since September 22, 1987, FFC has been a savings and loan holding company
engaged primarily in the business of owning the Bank. Because FFC does not
presently engage in any independent business operations, substantially all
earnings and performance figures herein reflect the operations of the Bank.
The Bank was organized in 1929 as a state-chartered savings and loan
association, and, in 1935, converted to a federal mutual charter.
In February, 1983 the Bank obtained a federal savings bank charter, and,
in December, 1983, converted from mutual to stock ownership.
The principal business of the Bank is attracting savings and checking
deposits from the general public, and using such deposits, together with
borrowings and other funds, to make real estate secured loans.
At December 31, 1993, the Company had assets totaling $3.7 billion
compared to $3.4 billion at December 31, l992. The Company recorded
a net loss of $2.0 million for the year ended December 31, 1993.
The Company recorded net earnings of $22.1 million and $28.4 million for
the years ended December 31, 1992 and December 31, l991, respectively.
The following table shows the Company's returns on average assets
("ROAA") and equity ("ROAE"), and ratios of average equity to average
assets for each of the years indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1993 1992 1991
------ ----- -----
<S> <C> <C> <C>
ROAA (1)............................................... (0.06)% 0.65% 0.91%
ROAE (1)............................................... (1.01)% 11.09% 16.09%
Average Equity to Assets Ratio (1)..................... 5.61 % 5.88% 5.63%
</TABLE>
- - - - --------
(1) Monthly average basis.
The Bank derives its revenues principally from interest on loans and
investments, gain on sale of loans originated, and servicing fees on
loans sold. Its major items of expense are interest on deposits and
borrowings, and general and administrative expense.
As of March 15, 1994, the Bank operated 25 retail savings branches
and 8 loan origination offices, all located in Southern California. The
Bank acquired 7 retail savings branches from the Resolution Trust
Corporation ("RTC") in 1992 and 2 retail savings branches from the RTC
in 1993. The two branches acquired in 1993 were consolidated on December
31, 1993. In addition to the retail branches, the Bank has telemarketing
programs which expand the geographical scope of its deposit activities.
Permission to operate all full-service branches must be approved by the
Office of Thrift Supervision.
The Bank's principal market for loan originations continues to be
Southern California.
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation, Oceanside Insurance Agency, Inc. and Santa Monica Capital
Group, all of which are California corporations. See "Subsidiaries."
Current Operating Environment
The Company's operating results are significantly influenced by national
and regional economic conditions, monetary and fiscal policies of the
federal government, housing demand and affordability and general levels of
interest rates.
2
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On January 17, 1994, the Southern California area experienced a
substantial earthquake. Although centered in Northridge, some 10 miles
away from the Company's Santa Monica headquarters, the earthquake caused
substantial damage within the City of Santa Monica. However, there was
no major damage to the home office or any of the Bank's other operating
facilities. Because the earthquake occurred on a national holiday, the
Bank was able to resume operations the following day.
As of December 31, 1993, the Bank's portfolio of loans, including loans
sold with full or limited recourse, totaled $3.8 billion. Approximately
$1.1 billion of these loans were collateralized by properties in areas
directly affected by the earthquake. The property composition of the
portfolio in those areas is as follows: single family loans, $351 million
(3,049 loans); multi-family loans, $665 million (1,321 loans) and commercial
property loans, $65 million (134 loans).
Management is still in the process of determining the extent to which
the collateral supporting the Bank's loan portfolio and real estate was
damaged by the earthquake. Property inspections are being conducted on
multi-family and commercial properties in the earthquake-impacted areas.
To date, inspections show that 66 properties on loans totaling $54.4
million have sustained significant cosmetic damage and 53 properties on
loans totaling $43.3 million have sustained significant structural damage.
Loan losses of $2.5 million have been recorded to date during 1994 due to
the earthquake.
The Bank has received 364 calls regarding earthquake-related issues from
single family borrowers representing $71.3 million in loans. The Bank is
working with these borrowers to determine the nature and extent of the
damage to their homes.
There are unique circumstances surrounding each property and borrower
affected by the earthquake. A borrower may have alternative sources of
funds or remedies available to offset any potential loss exposure to
the Bank. These alternative sources could include earthquake insurance,
federal disaster assistance and other financial resources of the borrower.
The process of obtaining inspections, receiving estimates of repair to the
property, and deciding on a course of action can take borrowers several
months. Because of the dynamic nature of this situation, management
is unable to predict the Bank's total loss exposure resulting from the
earthquake with any reasonable certainty at this time.
The Bank's primary market area is Los Angeles County. This area of
Southern California has been especially affected during the current
economic recession. The metropolitan Los Angeles area has had the
state's largest economic decline with a widely reported loss of 500,000
jobs from 1990 to 1993. In addition to the recession, Los Angeles County
has experienced civil unrest (1992), major firestorms (1993) and a
devastating earthquake (1994). Despite some reported improvement in the
economy, many economists believe that California, and especially Southern
California, will lag behind the rest of the country during the general
nationwide economic recovery. While many reasons are cited, the primary
cause is the structural changes that have taken place in the defense and
aerospace industries. It is not anticipated that the jobs lost in these
business sectors will be replaced in the foreseeable future.
Because the Bank typically lends less than 80% of the appraised value
of the underlying collateral of loans originated, borrowers originally
have equity in their properties. However, when the value of the
underlying collateral declines, borrowers may have little or no remaining
equity. This makes foreclosure by the Bank more likely. Additionally,
multi-family property values have been impacted by decreased rental
income resulting from ncreased vacancies and a general lowering of market
rents. Upon foreclosure, or when foreclosure becomes likely, the assets
are recorded at fair value less estimated cost to sell. Due to declines
in real estate values in Southern California, loan charge-offs have
increased to $49 million in 1993 from $27 million in 1992 and $9 million
in 1991.
In response to the current economic climate in Southern California, the
Bank continually monitors the sufficiency of the collateral supporting its
loan portfolio. The portfolio is evaluated on a number of factors
including property location, date of origination and loan-to-value ratio.
The Bank has added substantial amounts to its general allowance for loan
losses as a result of these evaluations, particularly during 1992 and 1993
when the recession worsened in Southern California.
As a result of the increased provisions, the ratio of general loan loss
allowances to loans with loss exposure (the Bank's loan portfolio plus
loans sold with recourse) grew to 1.48% at the end of 1993 from 0.93% at
the end of 1992 and 0.41% at the end of 1991.
3
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Management remains concerned about the Southern California economy and
the impact that the continued recession and the Northridge earthquake could
have on the collateral securing its mortgage portfolio. On March 9, 1994 the
Company issued a press release which indicated that loan charge-offs were
approximately $12.7 million for the first two months of the year. Of this
amount, $2.5 million was for the earthquake-related losses mentioned
above. The remaining loan charge-offs resulted mainly from losses on multi-
family loans which are continuing to be disproportionately adversely affected
by the Southern California recession.
Current Interest Rate Environment. The declining interest rate trend,
which started in 1989 due to Federal Reserve Board actions to spur the
national economy, continued throughout 1993. In a declining interest rate
environment, the Bank earns a higher interest margin due to a time lag
inherent in the adjustable loan portfolio. During these periods, interest
costs on deposits and borrowings decrease faster than yields earned on
loans and investments. The time lag inherent in the loan portfolio is due
to operational and regulatory constraints which do not allow the Bank to
pass through monthly changes in its cost of funds to its adjustable rate
loan customers for a period of ninety days after such changes are incurred.
See "Asset-Liability Management" on page 23 of the 1993 Annual Report to
Stockholders and "Yields Earned and Rates Paid" in Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Early in 1994, the Federal Reserve Board took steps to increase interest
rates in response to growth in the national economy. Because of the time
lag mentioned above, if interest rates continue to increase, the Bank's
interest margin will decrease as interest rates paid on savings and
borrowings increase faster than rates earned on loans and investments.
Competition. The Bank experiences strong competition in attracting and
retaining deposits and in originating real estate loans. It competes for
deposits with many of the nation's largest savings institutions and
commercial banks which have significant operations in Southern California.
The Bank also competes for deposits with credit unions, thrift and loan
associations, money market mutual funds, issuers of corporate debt
securities and the government. In addition to the rates of interest offered to
depositors, the Bank's ability to attract and retain deposits depends upon
the quality and variety of services offered, the convenience of its branch
locations and its perceived financial strength.
The Bank competes for real estate loans primarily with savings
institutions, commercial banks, mortgage banking companies and
insurance companies. The primary factors in competing for loans are
interest rates, loan fees, interest rate caps, interest rate adjustment
provisions and the quality and extent of service to borrowers and mortgage
brokers. In order to compete more effectively for new loans, the Bank
began a mortgage banking program in October of 1993 in which competitively-
priced fixed and adjustable rate mortgages are originated for sale in the
secondary loan markets. Since this program was recently initiated, loans
originated for the mortgage banking purposes did not materially impact the
level of loans originated during 1993 or the amounts of loan interest income
or loan servicing income for the year.
Environmental Concerns. Real estate lenders may have liability for any
properties securing their loans found to have pollutant or toxic features.
Environmental protection laws are strict and impose joint and several
liability on numerous parties. Liability will generally be imposed on the
entity from which an agency can collect. It is possible for the cost of
cleanup of environmental problems to exceed the value of the security
property.
The Bank has adopted stringent environmental underwriting requirements
when considering loans secured by environmentally high risk property (e.g.
commercial, industrial, new construction of all types, and older properties
of all types which may contain friable asbestos.)
Business Concentration. The Bank has no single customer or group of
customers either as depositors or borrowers, the loss of any one or more
of which would have a material adverse effect on the Bank's operations
or earnings prospects.
Yields Earned and Rates Paid. Net interest income, the major component
of core earnings for the Bank, depends primarily upon the difference
between the combined average yield earned on the loan and investment
security portfolios and the combined average interest rate paid on deposits
and borrowings, as well as the relative balances of interest-earning
4
<PAGE>
assets and interest-bearing liabilities.
The following table sets forth the Bank's average daily dollar amounts of,
average yields earned on and interest income on loans and investment
securities; the average dollar amounts of, rates paid on and interest
expense on savings and borrowings; differences between interest-earning
assets and interest-bearing liabilities; net interest income, interest
rate spreads and the effective net spreads during the periods indicated.
The effective net spread is defined as net interest income divided by
average interest-earning assets.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1993
-----------------------------------
AVERAGE INTEREST
DOLLAR YIELDS EARNED INCOME OR
AMOUNT(1) OR RATES PAID EXPENSE(2)
---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans and mortgage-backed securities....... $3,331,352 6.64% $221,178 I
Investment securities...................... 134,986 4.70 6,343
---------- --------
Interest-earning assets.................... 3,466,338 6.56 227,521
Savings deposits........................... 2,065,867 3.76 77,767
Borrowings................................. 1,309,658 4.09 53,558
---------- --------
Interest-bearing liabilities............... 3,375,525 3.89 131,325
----------
Excess of interest-earning assets over in- $ 90,813
terest-bearing liabilities................ ========== --------
Net Interest Income........................ $ 96,196
========
Interest Rate Spread....................... 2.67
Effective Net Spread....................... 2.77
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1992
-----------------------------------
AVERAGE INTEREST
DOLLAR YIELDS EARNED INCOME OR
AMOUNT(1) OR RATES PAID EXPENSE(2)
--------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans and mortgage-backed securities....... $3,144,596 7.92% $248,964
Investment securities...................... 123,481 4.24 5,238
---------- --------
Interest-earning assets.................... 3,268,077 7.78 254,202
Savings deposits........................... 1,884,436 4.66 87,841
Borrowings................................. 1,241,011 5.10 63,230
---------- --------
Interest-bearing liabilities............... 3,125,447 4.83 151,071
----------
Excess of interest-earning assets over in- $ 142,630
terest-bearing liabilities................ ========== --------
Net Interest Income........................ $103,131
========
Interest Rate Spread....................... 2.95
Effective Net Spread....................... 3.16
</TABLE>
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(1) Non-accrual loans were included in the average dollar amount of loans
outstanding but no income was recognized during the period that the
loan was on non-accrual status.
(2) Dividends on Federal Home Loan Bank stock and miscellaneous interest
income were not considered in this analysis.
5
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1991
-----------------------------------
AVERAGE INTEREST
DOLLAR YIELDS EARNED INCOME OR
AMOUNT(1) OR RATES PAID EXPENSE(2)
---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans and mortgage-backed securities....... $2,891,298 9.96% $287,909
Investment securities...................... 105,289 6.03 6,349
---------- --------
Interest-earning assets.................... 2,996,587 9.82 294,258
Savings deposits........................... 1,726,059 6.70 115,659
Borrowings................................. 1,123,247 7.08 79,477
---------- --------
Interest-bearing liabilities............... 2,849,306 6.85 195,136
----------
Excess of interest-earning assets over in- $ 147,281
terest-bearing liabilities................ ========== --------
Net Interest Income........................ $ 99,122
========
Interest Rate Spread....................... 2.97
Effective Net Spread....................... 3.29
</TABLE>
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(1) Non-accrual loans were included in the average dollar amount of loans
outstanding but no income was recognized during the period that the
loan was on non-accrual status.
(2) Dividends on Federal Home Loan Bank stock and miscellaneous interest
income were not considered in this analysis.
The tables above reflect the decreasing trend in interest rates over
the past three years. The Bank's adjustable rate loan portfolio is based
primarily on changes in the Federal Home Loan Bank's Eleventh District
Cost of Funds Index ("Index"). Changes in the Index closely parallel
changes in the Bank's cost of funds. Therefore, the yield on the loan
portfolio has decreased along with the cost of deposits and borrowings
over the years. As previously mentioned, in a decreasing rate environment,
the cost of the Bank's deposits and borrowings typically decrease faster
than the yield on loans and investments. However, increased non-performing
assets had a negative impact on the loan portfolio yield over the last three
years. The effect was more pronounced in 1993 when the interest rate margin
fell to 2.67% from 2.95% in 1992 due to a 31% increase in non-performing
assets.
Non-performing assets also caused the excess of average interest-earning
assets over interest-bearing liabilities to decrease to $91 million in 1993
from $143 million in 1992 and $147 million in 1991. A reduction in the excess
of average interest-earning assets over interest-bearing liabilities has a
negative impact on the dollar amount of net interest income earned by the
Bank.
Despite the decreasing interest rate trend in the financial marketplace,
the yield on the investment security portfolio increased in 1993 compared
to 1992 because management lengthened the maturities of securities in the
Bank's investment portfolio.
Interest expense for 1993, 1992 and 1991 includes accruals for additional
interest expense on possible Internal Revenue Service ("IRS") adjustments.
The Bank is undergoing an IRS audit in the normal course of business.
The possible IRS adjustments relate to industry-wide issues that may
involve litigation and may not be resolved for several years.
The table below sets forth certain information regarding changes in the
interest income and interest expense of the Bank for the periods indicated.
For each category of interest-earning asset and interest-bearing liability,
information is provided on changes attributable to (i) changes in volume
(changes in average balance multiplied by old rate) and (ii) changes in
rates (changes in rate multiplied by prior year average balance.)
6
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 VERSUS 1992
--------------------------
CHANGES DUE TO
--------------------------
VOLUME RATE TOTAL
------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Loans............................................ $14,144 $(41,930) $(27,786)
Investments...................................... 513 592 1,105
------- -------- --------
Total interest income.......................... 14,657 (41,338) (26,681)
Interest Expense:
Deposits......................................... 7,914 (17,988) (10,074)
Borrowings....................................... 3,346 (13,018) (9,672)
------- -------- --------
Total interest expense......................... 11,260 (31,006) (19,746)
------- -------- --------
Net interest income (expense)................ $ 3,397 $(10,332) $ (6,935)
======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1992 VERSUS 1991
--------------------------
CHANGES DUE TO
--------------------------
VOLUME RATE TOTAL
------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Loans............................................ $23,675 $(62,620) $(38,945)
Investments...................................... 977 (2,088) (1,111)
------- -------- --------
Total interest income.......................... 24,652 (64,708) (40,056)
Interest Expense:
Deposits......................................... 9,864 (37,682) (27,818)
Borrowings....................................... 7,697 (23,944) (16,247)
------- -------- --------
Total interest expense......................... 17,561 (61,626) (44,065)
------- -------- --------
Net interest income (expense)................ $ 7,091 $ (3,082) $ 4,009
======= ======== ========
</TABLE>
7
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1991 VERSUS 1990
-------------------------
CHANGES DUE TO
-------------------------
VOLUME RATE TOTAL
------ ---- -----
<S> <C> <C> <C>
Interest Income:
Loans.............................................. $31,417 $(24,797) $ 6,620
Investments........................................ 1,240 (2,083) (843)
------- -------- -------
Total interest income............................ 32,657 (26,880) 5,777
Interest Expense:
Deposits........................................... 6,116 (21,070) (14,954)
Borrowings......................................... 17,956 (14,863) 3,093
------- -------- -------
Total interest expense........................... 24,072 (35,933) (11,861)
------- -------- -------
Net interest income............................ $ 8,585 $ 9,053 $17,638
======= ======== =======
</TABLE>
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Note: Changes in rate/volume (change in rate multiplied by the change in
average volume) have been allocated to the change in rate or the change
in volume based upon the respective percentages of the combined totals.
Dividends on Federal Home Loan Bank Stock and miscellaneous interest income
were not considered in this analysis.
Lending Activities
General. The Bank's primary lending activity has been and continues
to be the origination of loans for the purpose of enabling borrowers to
purchase, refinance or construct improvements on residential real property.
The loan portfolio primarily consists of loans made to home buyers and
homeowners on the security of single family dwellings and multi-family
dwellings. The loan portfolio also includes loans secured by commercial and
industrial real properties.
For an analysis of loan portfolio composition and an analysis of the
types of loans originated, see Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Origination and Sale of Loans. The Bank engages exclusive loan
consultants on an incentive compensation basis to procure applicants
for loans. The Bank also derives business from traditional sources
of non-exclusive brokers and borrower referrals. Loan originations were
$746 million in 1993, $841 million in 1992 and $647 million in 1991.
The decrease in loan originations during 1993 compared to 1992 was the
result of a slow down in real estate activity and increased competition
in the Bank's lending areas.
In October 1993, the Bank established a new mortgage banking program
in response to consumer demand for fixed rate loans in a falling interest
rate environment, to formalize the fixed rate loan origination activities
that the Bank had been conducting during 1993. Under this program, the
Bank offers competitively-priced fixed rate loans and certain adjustable
rate loans which the Bank would not typically retain in its portfolio.
These products are sold in the secondary loan markets. Management believes
that this expanded array of loan products will allow the Bank to compete
more effectively during periods in which the Bank's traditional AMLs are
less in demand. Because the new mortgage banking program was started late
in 1993, it did not have a substantial impact on loan originations or
loan sales during the year.
In early 1994, interest rates began to rise and the demand for fixed
rate loans began to decrease. Accordingly, the Bank does not believe
that the origination of loans for sale in 1994 will constitute a
significant portion of its loan origination activity unless interest
rates begin to decrease.
For the years ended December 31, 1993, 1992 and 1991, $87.2 million,
$154.1 million and $60.0 million, respectively, of loans were originated
for sale, constituting 11.7%, 18.3% and 9.3%, respectively, of the Bank's
8
<PAGE>
total loan originations. The high level of loans originated for sale in
1992 was attributable to an influx of fixed rate loans brought to
the Bank by non-exclusive loan brokers. The level of loans originated
for sale in 1993 was attributable to stronger consumer preference during
such period for fixed rate loans.
Loans and mortgage-backed securities held for sale at December 31, 1993,
1992 and 1991 were $23.6 million, $91.6 million and $154.1 million,
respectively, constituting .7%, 2.8% and 5.1%, respectively, of the Bank's
total loans and mortgage-backed securities held at such dates. Gains on
sales of loans and mortgage-backed securities for the years ended
December 31, 1993, 1992 and 1991 were $4.3 million, $2.1 million and
$1.1 million, respectively. The decreases in loans and mortgage-backed
securities held for sale, and the increases in gains from sales of such
securities, were attributable to sales of loans and mortgage-backed
securities which the Bank had held for several years.
The Bank's loan servicing fees during the years ended December 31, 1993,
1992 and 1991 were $4.1 million, $3.7 million and $3.9 million,
respectively, constituting 1.8%, 1.5% and 1.3%, respectively, of total
interest income for such periods.
Loans originated for resale are recorded at the lower of cost or market.
The time from origination to sale may take up to three months due to
packaging requirements.
The Bank structures mortgage-backed securities with loans from its own
loan portfolio for use in collateralized borrowing arrangements.
In exchange for the improvement in credit risk when the mortgage-backed
securities are formed, guarantee fees are paid to FHLMC or FNMA.
$112 million, $187 million and $157 million in loans were converted into
mortgage-backed securities during 1993, 1992 and 1991, respectively. All
mortgage-backed securities included in the Bank's loan portfolio were
originated by the Bank. Therefore, the mortgage-backed securities
generally have the same experience with respect to prepayment,
repayment, delinquencies and other factors as the remainder of the Bank's
portfolio.
The Bank serviced $787 million in loans for other investors as of December
31, 1993. $318 million of these loans were sold under recourse
arrangements. Due to regulatory requirements, the Bank maintains capital
for loans sold with recourse as if those loans had not been sold. The Bank
had been active in these types of transactions in the past, but has not
entered into any new recourse arrangements since 1989 when the new
regulations took effect. Loans sold with recourse are considered along
with the Bank's own loans in determining the adequacy of general loan
valuation allowances. The principal balance of loans sold with recourse
decreased from $405 million at the end of 1992 and $448 million at the
end of 1991 due to loan payoffs and foreclosures.
Interest Rates, Terms and Fees. First Federal aggressively markets
adjustable mortgage loans ("AMLs") with 30 year terms and interest
rates which adjust each month based upon the Index. (See "Asset--
Liability Management" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.) The monthly payment is changed
annually, but the maximum annual change in that payment is limited to
7.5%. Any additional interest due is added to the principal balance of
the loan. Payments are adjusted every five years without regard to the
7.5% limitation to provide for full amortization during the balance of
the loan term. Although the interest rates are adjusted monthly, these loans
have a lifetime cap ranging from 400 to 750 basis points above their
initial interest rate. Generally, these loans may be assumed at any time
during their term provided that the Bank enters into a separate written
agreement with the current borrower and the qualified borrower to whom
the property is transferred. Additionally, the new borrower is required
to pay assumption fees customarily charged for similar transactions.
The Bank offers two variations of the AML based on the Index, the "AML
IIC" and the "AML IID". The initial rate on the AML IIC is below market
for the first three months of the loan term. The AML IID has no below
market initial rate but starts with a pay rate similar to the AML IIC.
This results in immediate negative amortization but allows the loan to
earn at the fully indexed rate immediately. The difference in negative
amortization on these two products is minor. Most of the Bank's new AML
volume is comprised of these two products.
The Bank also offers a loan product with the interest rate and payment
fixed for three years, the "AML IIH". Thereafter, the loan becomes a
typical, monthly adjustable AML except that the first payment adjustment
has a 15% limitation.
9
<PAGE>
Additionally, a six month AML based on the six month LIBOR is offered,
the "AML IIIP". Rate changes are subject to a 2% cap per annum. There
is no negative amortization on this product. The AML IIH and AML IIIP
comprise only a minor portion of new loan originations for the Bank.
The Bank requires that borrowers obtain private mortgage insurance on
loans in excess of 80% of the appraised property value. On certain loans
the Bank charges premium rates and/or fees in exchange for waiving the
insurance requirement. Loans on which the insurance requirement has been
waived represent less than 10% of the loan portfolio. The Bank's loss
experience on these loans is comparable to that of the remaining portfolio.
Because AML loan-to-value ratios may increase above those established
at the time of loan origination due to negative amortization, the Bank
rarely lends in excess of 90% of the appraised value on AMLs. The amount
of negative amortization recorded by the Bank decreases during periods of
declining interest rates. As of December 31, 1993, negative amortization
on all loans serviced by the Bank totaled $602 thousand.
The Bank will lend up to 95% of the appraised value on fixed rate loans.
Under current loan programs, the Bank normally lends less than or equal
to 80% of a single family property's appraised value and less than or equal
to 70% of a multi-family property's appraised value at the time of loan
origination.
Although regulations permit a maximum amortization period of 40 years for
real property secured home loans and 30 years for other real estate loans,
virtually all of the Bank's real estate loans provide for a maximum
amortization term of 30 years or less. The Bank is in the early stages of
implementing a loan product based on an amortization period of 40 years.
The following table shows the contractual maturities of the Bank's loans
at December 31, 1993.
<TABLE>
<CAPTION>
LOAN MATURITY ANALYSIS
MATURITY PERIOD
------------------------------------------------------
>1 YEAR
TOTAL 1 YEAR TO 5 >5-10 >10-20 OVER 20
BALANCE OR LESS YEARS YEARS YEARS YEARS
---------- ------- ------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
loans:
AMLs.................. $2,660,691 $3,006 $4,940 $39,993 $ 89,233 $2,523,519
Mortgage-backed secu-
rities............... 697,705 -- -- -- -- 697,705
---------- ------ ------ ------- -------- ----------
Total interest rate sen-
sitive loans........... 3,358,396 3,006 4,940 39,993 89,233 3,221,224
Fixed rate loans:
1st mortgages......... 52,474 25 3,708 10,050 23,835 14,856
2nd mortgages......... 448 -- 79 274 95 --
Mortgage-backed secu-
rities............... 10,578 -- -- -- 10,578 --
Consumer and other
loans................ 2,050 1,773 277 -- -- --
---------- ------ ------ ------- -------- ----------
Total fixed rate loans.. 65,550 1,798 4,064 10,324 34,508 14,856
---------- ------ ------ ------- -------- ----------
$3,423,946 $4,804 $9,004 $50,317 $123,741 $3,236,080
========== ====== ====== ======= ======== ==========
</TABLE>
Risk Elements
Non-accrual, Past Due and Restructured Loans. The Bank establishes
allowances for delinquent interest equal to the amount of accrued
interest on all loans 90 days or more past due or in foreclosure.
This practice effectively places such loans on non-accrual status
for financial reporting purposes.
10
<PAGE>
The following is a summary of non-accrual loans as of the end of
each of the periods indicated for which delinquent interest reserves
had been established.
<TABLE>
<CAPTION>
% OF % OF % OF % OF % OF
1993 TOTAL 1992 TOTAL 1991 TOTAL 1990 TOTAL 1989 TOTAL
-------- ----- ------- ----- ------- ----- ------- ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual Loans:
Single family.......... $ 25,317 24% $24,634 35% $21,441 37% $ 6,063 24% $3,849 43%
Multi-family........... 70,207 66 42,481 60 34,347 60 18,937 75 432 5
Commercial............. 10,307 10 3,623 5 1,536 3 -- -- 4,476 50
Other.................. 245 -- 271 -- 194 -- 388 1 229 2
-------- --- ------- --- ------- --- ------- --- ------ ---
Total Non-accrual
Loans............... $106,076 100% $71,009 100% $57,518 100% $25,388 100% $8,986 100%
======== === ======= === ======= === ======= === ====== ===
</TABLE>
The additional amount of interest that would have been reported had there
been no loans 90 days or more contractually delinquent would have been
$6 million, $4 million, $3 million, $1 million and $437 thousand at
December 31, 1993, 1992, 1991, 1990 and 1989, respectively.
For a discussion of non-performing assets, see Management's Discussion
and Analysis of Financial Condition and Results of Operations.
The Bank has debt restructurings which result from temporary
modifications of principal and interest payments. Under these arrangements,
loan terms are typically reduced to no less than a monthly interest payment
required under the note. Any loss of revenues under the modified terms
would be immaterial to the Bank. If the borrower is unable to return
to scheduled principal and interest payments at the end of the modification
period, foreclosure procedures are initiated. As of December 31, 1993, t
he Bank had modified loans totaling $66.2 million. The Bank had established
loan loss allowances of $4.1 million for these loans. No modified loans
were 90 days or more delinquent as of December 31, 1993.
Loan Loss Experience Summary. The Bank maintains a general valuation
allowance to absorb possible future losses that may be realized on its
loan portfolio and foreclosed real estate. The allowance is reviewed
and adjusted at least quarterly based upon a number of factors,
including asset classifications, economic trends, industry experience,
industry and geographic concentrations, estimated collateral values,
management's assessment of credit risk inherent in the portfolio,
historical loss experience and the Bank's underwriting practices.
In response to the above factors, the general loan allowance has
increased over the last three years to 1.48% of loans with loss
exposure at December 31, 1993 from 0.93% at December 31, 1992 and
0.41% at December 31, 1991. As a result of continued weaknesses in
the economy and real estate markets in which the Bank operates,
further increases in the general valuation allowance may be required
in future periods. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Bank's general valuation allowance. These agencies may require
the Bank to establish additional general valuation allowances based
on their judgments of the information available at the time of the
examination.
11
<PAGE>
The following is an analysis of the activity in the Bank's general
valuation allowances for the periods indicated.
GENERAL VALUATION ALLOWANCES AND LOAN CHARGE-OFF ACTIVITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Beginning General Valuation
Allowances.............................. $ 27,854 $ 13,937 $ 11,181 $ 8,394 $ 7,692
Provisions for Loan Losses................ 67,679 41,384 11,833 4,126 824
Charge-Offs:
Single Family........................... (8,605) (4,863) (1,690) (260) (7)
Multi-Family............................ (38,178) (22,470) (7,696) (800) -
Commercial ............................. (1,574) - 440 (200) -
Non-Real Estate......................... (276) (134) (131) (79) (115)
Total Charge-Offs....................... (48,633) (27,467) (9,077) (1,339) (122)
-------- -------- -------- ------- --------
Ending General Valuation
Allowances.............................. $46,900 $27,854 $ 13,937 $ 11,181 $ 8,394
======== ======== ======== ======== ======
Charge-Offs as Percentage of Average
Loans Receivable (Excluding MBS)........ 1.82% 1.11% 0.40% 0.06% 0.01%
===== ===== ===== ===== =====
</TABLE>
The progressive increase in loan charge offs since 1989 is due to
recessionary factors such as increased vacancies on multi-family
properties, decreased real estate values, layoffs and slower rates of
real estate sales. These recessionary factors have negatively impacted
the ability of borrowers to make loan payments on a timely basis or
sell their properties prior to foreclosure.
Whether the trend continues depends on the length and severity of
the recession and the impact of loan losses resulting from the Northridge
earthquake. A continuation of the trend of increased charge-offs would
adversely impact the Company's future loan loss provisions and earnings.
As mentioned previously, as of March 15, 1994, the Bank had recorded
an additional provision for loan losses totaling $12.7 million, of which
$2.5 million was attributable to earthquake losses and the remainder was
attributable to declines in real estate values resulting from the continued
recession in Southern California. Management is still in the preliminary
stages of evaluating the impact of the earthquake on the collateral
supporting the Bank's loans.
12
<PAGE>
The following schedule details the allowances for loan losses as a
percentage of total loans (excluding mortgage-backed securities), total
loans with recourse, and non-accrual loans as of the dates indicated
(dollars in thousands).
<TABLE>
<CAPTION>
<S> <C>
1993
General Valuation Allowance...................................... $ 46,900
Loans............................................................ $2,781,836
Allowance as % of Total Loans.................................... 1.69%
Allowance as % of Total Loans with Loss Exposure................. 1.48%
Allowance as % of Non-accrual Loans.............................. 44.21%
1992
General Valuation Allowance...................................... $ 27,854
Loans............................................................ $2,549,822
Allowance as % of Total Loans.................................... 1.09%
Allowance as % of Total Loans with Loss Exposure................. 0.93%
Allowance as % of Non-accrual Loans.............................. 39.23%
1991
General Valuation Allowance...................................... $ 13,937
Loans............................................................ $2,408,859
Allowance as % of Total Loans.................................... 0.58%
Allowance as % of Total Loans with Loss Exposure................. 0.41%
Allowance as % of Non-accrual Loans.............................. 24.23%
1990
General Valuation Allowance...................................... $ 11,181
Loans............................................................ $2,166,731
Allowance as % of Total Loans.................................... 0.52%
Allowance as % of Non-accrual Loans.............................. 44.04%
1989
General Valuation Allowance...................................... $ 8,394
Loans............................................................ $2,052,370
Allowance as % of Total Loans.................................... 0.41%
Allowance as % of Non-accrual Loans.............................. 93.41%
</TABLE>
The Bank begins foreclosure proceedings on single family loans after they
have been delinquent for 15 days after the grace period and begins foreclosure
proceedings on multi-family loans after they have been delinquent for 10 days
after the grace period. All loans greater than 90 days delinquent are placed
into foreclosure and a valuation allowance is established, if necessary. The
Bank acquires title to the property in most foreclosure actions that are not
reinstated by the borrower. Once real estate is acquired in settlement of a
loan, the Bank ceases to accrue and reserve for interest income and the
property is recorded at fair value less estimated costs to sell.
Following the acquisition of foreclosed real estate ("REO"), the Bank
evaluates the property and establishes a plan for marketing and disposition.
The Bank inspects the property, using independent professionals when
necessary. After inspecting such property, the Bank determines whether
the property may be disposed of in its present condition or whether repairs,
rehabilitation or improvements are necessary. In response to the increased
levels of REO, the Bank has established a committee that meets weekly for
the purpose of supervising the disposition of the Bank's REO.
13
<PAGE>
The following table provides information regarding the Bank's REO activity
for the periods indicated:
<TABLE>
<CAPTION>
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS ACTIVITY
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance............ $ 23,858 $ 8,172 $ 422
Additions.................... 93,010 76,121 28,647
Sales........................ (89,990) (60,435) (20,897)
--------- --------- --------
Ending Balance............... $ 26,878 $ 23,858 $ 8,172
========= ========= ========
</TABLE>
The following table details general loan valuations by loan type for
the periods indicated.
<TABLE>
<CAPTION>
% OF % OF % OF % OF
1993 TOTAL 1992 TOTAL 1991 TOTAL 1990 TOTAL
------- ----- ------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Single Family......... $ 6,607 14% $ 3,935 14% $ 4,084 29% $ 2,905 26%
Multi-Family.......... 37,691 81 20,708 75 7,581 54 6,093 55
Commercial and Indus-
trial................ 2,551 5 3,154 11 2,194 16 2,066 18
Non Real Estate Loans... 51 - 57 - 78 1 117 1
------- --- ------- --- ------- --- ------- ---
Total................. $46,900 100% $27,854 100% $13,937 100% $11,181 100%
======= === ======= === ======= === ======= ===
The Bank's Asset Classification Committee meets at least monthly to test and
monitor the condition of the loan portfolio on an ongoing basis.
Additionally, a special workout group of the Bank's officers meets at least
weekly to resolve delinquent loan situations and to initiate actions
enforcing the Bank's rights in security properties pending foreclosure
and liquidation.
Other Interest-Earning Assets. The Bank owned no other contractually
delinquent interest-earning assets other than loans as of December 31, 1993.
Investment Activities
Savings institutions are required by federal regulations to maintain a
minimum ratio of liquid assets which may be invested in certain government
and other specified securities. This level is adjusted from time to time
in response to prevailing economic conditions and as a means of controlling
the amount of available mortgage credit. At December 31, 1993, the
liquidity requirement was 5.00% and the Bank's regulatory liquidity
percentage was 5.17%.
It is the Bank's policy to keep long term investments at a modest level
and to use available cash to originate mortgages which normally command
higher yields. Therefore, interest income on investments generally represents
less than 3% of total revenues.
Investment securities are carried at cost (with any premium or discount
amortized over the term of the security using the interest method) because
management has the intent and ability to hold the securities until maturity.
14
<PAGE>
Gross unrealized gains totaled $618 thousand at December 31, 1993.
Gross unrealized losses as of that date totaled $170 thousand.
The following table summarizes the total investment portfolio (including
liquid investments) by type at the end of the periods indicated.
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1993 1992 1991 1990 1989
-------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities....... $ 5,111 $ 7,113 $ 7,115 $ 9,020 $ 5,009
U.S. Agency Securities......... 42,600 11,034 6,054 -- 5,000
Corporate Bonds................ -- -- 3,003 3,005 --
Repurchase Agreements.......... -- -- 95,000 60,000 45,000
Overnight Investments.......... -- -- -- -- 80,000
Certificates of Deposit........ -- -- -- 4,228 6,259
Collateralized Mortgage Obliga-
tions......................... 47,352 22,235 -- -- --
Mortgage Backed Securities..... 8,773 3,354 -- -- --
-------- ------- -------- ------- --------
$103,836 $43,736 $111,172 $76,253 $141,268
======== ======= ======== ======= ========
Weighted average yield on in-
terest-earnings investments
end of period................. 5.16% 6.18% 4.90% 7.74% 8.42%
======== ======= ======== ======= ========
</TABLE>
The following is a summary of the maturities, and market values of
investment securities as of December 31, 1993.
<TABLE>
<CAPTION>
MATURITY
--------------------------------- TOTAL CARRYING
WITHIN 1 YEAR 1-5 YEARS VALUE
---------------- ---------------- -----------------
WEIGHTED WEIGHTED WEIGHTED TOTAL AVERAGE
AVERAGE AVERAGE AVERAGE MARKET MATURITY
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE YRS/MOS
------- -------- ------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securi-
ties................... $ 2,102 7.39% $ 3,009 8.28% $ 5,111 7.91% $ 5,371 1/ 0
U.S. Agency Securities.. 2,009 7.55 40,591 5.32 42,600 5.42 42,683 3/ 0
Collateral Mortgage Ob-
ligations.............. 7,472 4.56 39,880 4.56 47,352 4.56 47,389 4/ 1
Mortgage Backed Securi- 118 8,655 8,773 8,839
ties................... ------- 5.53 ------- 5.53 -------- 5.53 -------- 3/10
$11,701 5.59% $92,135 5.11% $103,836 5.16% $104,282 3/ 0
======= ======= ======== ========
</TABLE>
Sources of Funds
General. The Bank's principal sources of funds are savings deposits, advances
from the Federal Home Loan Bank of San Francisco ("FHLBSF") and other
borrowings.
Deposits. The Bank obtains deposits through three different sources:
1) its retail branch system; 2) its telemarketing department (phone
solicitations by employees); and 3) national brokerage houses.
15
<PAGE>
The cost of funds, operating margins and net income of the Bank
associated with brokered and telemarketing deposits are generally
comparable to the cost of funds, operating margins and net income
of the Bank associated with retail deposits, FHLB borrowings and
repurchase agreements. As the cost of each source of funds
fluctuates from time to time, based on market rates of interest
generally offered by the Bank and other depository institutions and
associated costs, the Bank seeks funds from the lowest cost source until
the relative costs change. As the costs of funds, operating margins and
net income of the Bank associated with each source of funds are
generally comparable, the Bank does not deem the impact of its use of
any one of the specific sources of funds at a given time to be material.
Deposits acquired through the telemarketing department are typically
placed by managers of pension funds and represented 12%, 19% and 25% of
total deposits at December 31, 1993, 1992 and 1991, respectively.
The percentage of deposits in telemarketing funds decreased during
1993 and 1992 due to competition from other investment instruments
providing higher yields to depositors.
Deposits acquired through national brokerage houses represented 23%,
14% and 17% of total deposits at December 31, 1993, 1992 and 1991,
respectively. Any fees paid to deposit brokers are amortized over
the term of the deposit. Based on historical renewal percentages,
management believes that these deposits are a stable source of funds.
The Bank accepted brokered deposits during 1993 pursuant to a waiver
obtained from the Federal Deposit Insurance Corporation ("FDIC").
Institutions with regulatory risk-based capital ratios in excess of 10%
with MACRO ratings of 1 or 2 are not required to obtain a waiver
from the FDIC.
Retail deposits were $1.5 billion at the end of 1993, $1.3 billion
at the end of 1992 and $1.0 billion at the end of 1991. Increased
deposits during 1993 resulted from branch acquisitions. Increased
deposits during 1992 resulted from branch acquisitions and additional
deposits brought in by the overall branch system.
The Bank acquired two retail branches from the Resolution Trust
Corporation ("RTC") in December of 1993 with deposits totaling
$113 million. At December 31, 1993, $103 million of those deposits
remained. One of the two branches was closed and the deposits were
merged into the other acquired branch. The Bank operated 25 retail
branches at the end of 1993.
During 1992 the Bank acquired 7 retail branches with deposits totaling
$290 million from the RTC. One previously-existing branch which was
located nearby an acquired branch was merged with that acquired branch.
The interest rates paid on deposits are a major determinant of the
average cost of lendable funds. The following tables set forth
information regarding the amount of deposits in the various types of
savings programs offered by the Bank at the end of the years indicated
and the average balances and rates for those years.
16
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1993 1992 1991
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Variable rate non-term
accounts:
Money market deposit
accounts (weighted
average rate 2.40%,
2.75% and 4.08%)..... $ 196,467 9% $ 186,721 9% $ 144,440 8%
Interest-bearing
checking accounts
(weighted average
rate 2.18%, 2.39% and
3.85%)............... 148,460 6 127,985 7 72,846 4
Passbook accounts
(2.29%, 2.64% and
4.25%)............... 118,455 5 106,247 5 61,700 4
Non-interest bearing
checking
accounts............. 44,868 2 33,177 2 16,070 1
---------- ---- ---------- ---- ---------- ----
508,250 22 454,130 23 295,056 17
Fixed term rate cer-
tificate accounts:
Under six month term
(weighted average
rate of 2.77%, 3.20%
and 5.23%)........... 69,132 3 117,954 6 120,841 7
Six month term
(weighted average
rate of 3.13%, 3.50%
and 5.68%)........... 299,368 13 230,489 12 123,040 7
Nine month term
(weighted average of
3.36%, 3.77% and
6.45%)............... 200,269 9 45,852 2 118,249 7
One year to 18 month
term (weighted aver-
age rate of 3.67%,
4.14% and 6.39%)..... 474,853 20 333,798 17 308,945 18
Two year or 30 month
term (weighted aver-
age rate of 4.67%,
6.16% and 7.13%)..... 148,993 7 186,473 9 107,866 6
Over 30 month term
(weighted average
rate of 5.80%, 6.56%
and 7.77%)........... 307,513 13 141,713 7 68,152 4
Discounted accounts
(weighted average
rate of 7.50%)....... -- -- -- -- 34 --
Negotiable certifi-
cates of $100,000 and
greater, 30 day to
one year terms
(weighted average
rate of 3.43%, 3.82%
and 5.84%)........... 297,102 13 472,336 24 597,920 34
---------- ---- ---------- ---- ---------- ----
1,797,230 78 1,528,615 77 1,445,047 83
---------- ---- ---------- ---- ---------- ----
Total deposits
(weighted average
rate of 3.60%, 3.97%
and 5.74%)........... $2,305,480 100% $1,982,745 100% $1,740,103 100%
========== ==== ========== ==== ========== ====
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DURING THE YEAR DECEMBER 31,
--------------------------------------------------------
1993 1992 1991
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts....... $ 105,780 2.25% $ 85,202 3.32% $ 67,412 4.92%
Money Market Deposit
Accounts............... 191,023 2.34 142,627 3.43 61,302 5.14
Interest-bearing Check-
ing Accounts........... 178,640 1.73 152,200 2.30 131,241 3.34
Fixed term Certificate
Accounts............... 1,590,424 4.25 1,504,407 5.09 1,466,104 7.15
---------- ---- ---------- ---- ---------- ----
$2,065,867 3.76% $1,884,436 4.66% $1,726,059 6.70%
========== ==== ========== ==== ========== ====
</TABLE>
The following table shows the maturity distribution of jumbo certificates
of deposit ($100,000 and greater) as of December 31, 1993 (in thousands).
<TABLE>
<CAPTION>
Maturing in:
<S> <C>
1 month or less................................................. $ 74,665
Over 1 month to 3 months........................................ 134,175
Over 3 months to 6 months....................................... 43,140
Over 6 months to 12 months...................................... 45,122
--------
Total......................................................... $297,102
========
</TABLE>
Based on historical renewal percentages at maturity, management believes
that jumbo certificates of deposit are a stable source of funds. For
additional information with respect to deposits, see note 6 of the
Notes to Consolidated Financial Statements.
Borrowings. The FHLB System functions as a source of credit to
financial institutions which are members of a regional Federal
Home Loan Bank. The Bank may apply for advances from the FHLBSF
secured by the FHLB capital stock owned by the Bank, certain of the Bank's
mortgages and other assets (principally obligations issued or guaranteed
by the United States government or agencies thereof). Advances can be
requested for any sound business purpose which an institution is authorized
to pursue. However, as a result of the enactment of FIRREA (see "Summary
of Material Legislation and Regulations"), any institution not meeting
the qualified thrift lender test will be subject to restrictions on its
ability to obtain advances from the FHLBSF. In granting advances, the FHLBSF
also considers a member's creditworthiness and other relevant factors.
Total advances from the FHLBSF were $515 million at December 31,
1993 at a weighted average rate of 4.70%. This compares with advances
of $654 million at December 31, 1992 and $524 million at December 31,
1991 at weighted average rates of 5.20% and 5.86%, respectively.
The decrease during 1993 was due to advances repaid after the branches were
acquired in December.
The Bank enters into sales of securities and whole loans under agreements
to repurchase (reverse repurchase agreements) which require the repurchase
of the same securities or loans. The agreements are treated as borrowings
in the Bank's statement of financial condition. There are certain risks
involved with doing these types of transactions. In order to minimize
these risks, the Bank's policy is to enter into agreements only with
primary dealers. Borrowings under reverse repurchase agreements totaled
$549 million at December 31, 1993 and were secured by mortgage-backed
securities with principal balances totaling $559 million. Borrowings under
reverse repurchase agreement totaled $491 million at December 31, 1992
and $624 million at December 31, 1991.
18
<PAGE>
Borrowings from all sources totaled $1.1 billion, $1.2 billion and
$1.3 billion at weighted average rates of 3.99%, 4.48% and 5.47% at
December 31, 1993, 1992, and 1991, respectively.
The Bank's portfolio of short term borrowings includes reverse
repurchase agreements, short-term variable rate credit advances from
the FHLBSF and other short term borrowings.
The following schedule summarizes short term borrowings for the last
three years.
<TABLE>
<CAPTION>
MAXIMUM
MONTH-END
OUTSTANDING
END OF PERIOD BALANCE AVERAGE FOR PERIOD
---------------- DURING THE --------------------
OUTSTANDING RATE PERIOD OUTSTANDING RATE
----------- ---- ----------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1993
Short term variable rate
credit advances........... $ 30,000 3.94% $245,000 $ 116,538 3.56%
Securities sold under
agreements to repurchase.. $548,649 3.32% $650,033 $ 594,314 3.06%
Other short term
borrowings................ $ 29,800 3.95% $ 76,650 $ 48,473 3.38%
1992
Short term variable rate
credit advances........... $140,000 3.34% $195,000 $ 88,462 4.07%
Securities sold under
agreements to repurchase.. $491,091 3.61% $594,680 $ 527,528 4.16%
Other short term
borrowings................ $ 50,650 3.73% $157,950 $ 93,069 3.96%
1991
Short term variable rate
credit advances........... $ 95,000 5.06% $105,000 $ 44,167 6.41%
Securities sold under
agreements to repurchase.. $623,572 4.94% $645,783 $ 598,655 4.94%
Other short term
borrowings................ $ 71,800 4.92% $ 87,050 $ 55,583 6.12%
</TABLE>
Other Sources
Other sources of funds include loan sales and principal payments on loans.
Loan sales were $153 million in 1993 compared with $154 million during 1992
and $55 million in 1991. The volume of loans sold varies based on a number
of factors, including the dollar amount of fixed rate loans originated.
Principal payments were $355 million in 1993, $322 million in 1992 and
$278 million in 1991. Principal payments include both amortization and
prepayments and are a function of real estate activity and general levels
of interest rates. Principal payments have increased over the last three
years due to growth in average loans outstanding and increased mortgage
refinancing due to low interest rates.
Subsidiaries
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation ("Seaside"), Oceanside Insurance Agency, Inc. ("Oceanside"),
and Santa Monica Capital Group ("SMCG"), all of which are California
corporations.
As of December 31, 1993 the Bank had invested $457 thousand (primarily
equity) in Seaside, Oceanside and SMCG. Revenues and operating results
of these subsidiaries accounted for less than 1% of consolidated operating
results in 1993, and no material change is presently foreseen. The only
subsidiary active during 1993 was Seaside Financial Corporation.
Real Estate Development Activities. Seaside has not been involved in
any real estate development activity for the last 3 years and there are
19
<PAGE>
no plans for future real estate projects. Therefore, no gains or losses
on real estate activities were recorded during 1993, 1992 or 1991.
Seaside continues to hold three condominium units which are rented to
the Bank for use by its employees. At December 31, 1993, Seaside's
investment in the units totaled $371 thousand. There were no loans
outstanding against the properties at December 31, 1993. All three
units are located in California.
Trustee Activities. Seaside acts as trustee on the Bank's loans. Trustee
fees for this activity amounted to $612 thousand, $599 thousand and
$218 thousand 1993, 1992 and 1991, respectively. Increases are due
to additional foreclosure activity by the Bank.
Employees
As of December 31, 1993, the Bank had a total of 499 full time equivalent
employees, including 78 part-time employees, none of whom were represented
by a collective bargaining group. At present, the Company has no employees
who are not also employees of the Bank. The Bank provides its regular full-
time employees with a comprehensive benefits program that includes basic
and major medical insurance, long-term disability coverage, sick leave,
a pension plan, and a profit sharing employee stock ownership plan.
The Bank considers its employee relations to be excellent.
Summary of Material Legislation and Regulations
General. FFC is a savings and loan holding company by virtue of its
ownership and control of the Bank. As such, it is subject to the
regulation, supervision, examination and reporting requirements of
the Office of Thrift Supervision ("OTS"). The Director of the OTS is
authorized to impose assessments on the Bank to fund OTS operations.
As a federally-chartered savings bank, the Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC") through
the Savings Association Insurance Fund ("SAIF"). The Bank is also
subject to the regulation, examination, supervision and reporting
requirements of the FDIC.
First Federal is a member of the FHLBSF and is required to own shares
of FHLBSF stock. The average dividend rate on FHLBSF stock was 3.63%
in 1993. The dividend rate for the first two quarters of 1992 averaged
2.92%. No dividends were paid on FHLBSF stock during the last two
quarters of 1992. The average dividend rate on FHLBSF stock was 5.86% in
1991. The increase in 1993 dividends and the decrease in 1992 dividends
did not have a material impact on the Bank's earnings.
The Bank is also subject to certain reserve requirements under
Federal Reserve Board regulations. (See "Investment Activities" above.)
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), was enacted on December 19, 1991. FDICIA increases
the authority of the OTS and FDIC over the operations of savings
institutions. Among other things, FDICIA made several changes to
the deposit insurance system and expanded the authority of the federal
regulatory agencies to ensure that savings institutions have sound
management and adequate capital. The following sets forth some of the
more significant provisions of FDICIA.
FDICIA contains a number of measures intended to promote early
identification of management problems at depository institutions and
to ensure that regulators intervene promptly to require corrective
action by institutions with insufficient capital or inadequate operational
and managerial standards. Starting in 1993, the Company must prepare
a management report, signed by the chief executive officer and chief
financial officer, on the effectiveness of the institution's internal
control structure over financial reporting, and on the institution's
compliance with designated laws and regulations relating to safety
and soundness. KPMG Peat Marwick, the Company's independent auditors
must be engaged to attest to, and report separately on, management's
assertions regarding the internal control structure over financial
reporting and on compliance with designated laws. Management's report
and the attestations, along with financial statements and such other
disclosure requirements as the FDIC and OTS may prescribe, must be
submitted to the FDIC and OTS. The Company's annual report and
independent accountant's attestation as to internal controls will
be made available in March of 1994.
20
<PAGE>
FDICIA required the OTS to prescribe minimum acceptable operational
and managerial standards and standards for asset quality, earnings,
and valuation of publicly-traded shares. Among other things, the
operational standards must cover internal controls, asset quality and
employee compensation. On November 18, 1993, a proposed regulation addressing
these safety and soundness issues was released. Any institution that fails to
meet such standards must submit a plan for corrective action within 30 days,
and will be subject to other restrictive sanctions if it fails to implement
the plan. At this time, the date that these regulations will become final
is not known.
FDICIA revised the capital standards and imposed a system of prompt
regulatory action that requires institutions to be divided into the
following categories based upon capital levels: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Regulatory
sanctions are required with regard to institutions that are
undercapitalized, with sanctions growing more severe if the
institution is significantly or critically undercapitalized.
FDICIA further required the regulatory agencies to implement a
system requiring regulatory sanctions against institutions that are not
adequately capitalized. Although, in general, financial institutions that
are adequately capitalized are not subject to such sanctions; the OTS can
treat an adequately capitalized institution as if it were undercapitalized
if : (1) the OTS determines, that after notice and opportunity for a
hearing, an institution is in an unsafe and unsound condition, or (2)
an institution received, in its most recent report of examination, a
less-than-satisfactory rating for asset quality, management, earnings,
or liquidity, and the deficiency has not been corrected. In such a case,
the OTS would be authorized to restrict an institution's asset growth,
capital distributions, payment of management fees, and to require prior OTS
approval for any new line of business.
Capital Requirements. The Bank is subject to OTS regulations which
establish the capital standards for savings institutions. The regulations
require savings institutions to maintain tangible capital of at least 1.5%
of adjusted total assets, core capital of at least 3% of adjusted total
assets, and risk-based capital of at least 8% of risk-weighted assets
as of December 31, 1993. Special rules govern the ability of savings
institutions to include in their capital computations: (i) supervisory
goodwill, (ii) purchased mortgage servicing rights, and (iii) investments
in subsidiaries engaged in activities not permissible for national banks.
Sanctions for noncompliance with these capital standards include
restrictions on asset growth and required compliance with a capital plan
or capital directive. The Bank met all three capital requirements as of
December 31, 1993 as indicated by the chart below.
<TABLE>
<CAPTION>
DECEMBER 31,
1993
--------------
AMOUNT %
-------- -----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Tangible capital requirement................................. $ 54,921 1.50%
Bank's tangible capital...................................... 206,616 5.64
-------- -----
Excess tangible capital.................................... $151,695 4.14%
======== =====
Core capital requirement..................................... $109,843 3.00%
Bank's core capital.......................................... 206,616 5.64
-------- -----
Excess tangible capital.................................... $ 96,773 2.64%
======== =====
Risk-based capital requirement............................... $180,406 8.00%
Bank's risk-based capital.................................... 231,081 10.25
-------- -----
Excess risk-based capital.................................. $ 50,675 2.25%
======== =====
</TABLE>
On February 17, 1994, the Bank paid a $5 million dividend to FFC which
brought the risk-based capital ratio to 10.03% and the core and tangible
ratios to 5.51%.
21
<PAGE>
"Tangible capital" is defined as capital determined in accordance
with generally accepted accounting principles minus certain intangible
assets.
"Core capital" is the same as tangible capital for the Bank. The OTS
has proposed amendments to the required ratio of core capital to adjusted
total assets. The proposed amendment is designed to make the required
ratio for savings institutions no less stringent than the equivalent
ratio adopted for national banks. The OTS amendment, if adopted as
proposed, would retain the current 3.0% core capital ratio only for
savings institutions that have well-diversified risks, excellent control
systems, good earnings, high asset quality, high liquidity, well-managed
activities, and that receive the highest rating from the OTS on the MACRO
financial institutions rating system. All other savings institutions would
have to meet a minimum core capital ratio of 4.0% to 5.0%. The OTS has
not yet taken final action on this proposed amendment, but could do so
at any time.
"Risk-based capital" is defined as total capital divided by total assets
after the assets have been risk-weighted in accordance with certain percentages
developed by the OTS and the other bank regulatory agencies. Total capital
for purposes of the risk-based capital requirement consists of core capital
and supplementary capital. Supplementary capital includes, among other things,
general loan valuation allowances, subject to certain limitations. General
loan valuation allowances may generally be included up to 1.50% of risk-
weighted assets through December 1992 and up to 1.25% of risk-weighted
assets thereafter. Supplementary capital may be used to satisfy an
institution's risk-based capital only to the extent of its core capital.
At December 31, 1993, $28.2 million of the Bank's $46.9 million in general
valuation allowances was included in supplementary capital.
In the computation of the risk-based capital requirement, the Bank must
include its loan sales with recourse although the Bank no longer owns the
assets. The Bank was active in these types of loan sales in the past but
has not been involved in such sales since the change in regulation.
As required by FDICIA, the OTS published a final regulation in
September of 1993 which, among other things, added an interest rate risk
component ("IRR component") to its risk-based capital rule. The regulation
requires that institutions deemed to have above normal interest rate risk
be subject to a deduction from capital for purposes of calculating their
risk-based capital requirement. The effective date of the regulation was
January 1, 1994. Institutions will be required to incorporate interest
rate risk into their risk-based capital calculations as of July 1, 1994,
based on data as of December 31, 1993. Under the new regulation, interest
rate exposure will be measured as the decline in net portfolio value due
to a 200 basis point shock in market interest rates. Net portfolio value
is defined as the present value of expected cash inflows from existing assets
minus the present value of expected cash outflows from existing
liabilities plus the present value of net expected cash flows from
existing off-balance sheet contracts. At no time during 1993 would the
Bank's interest rate exposure calculation under the regulation have
required additional capital.
The Director of the OTS has the authority, on a case-by-case basis,
to establish a higher minimum capital requirement for a savings
institution if the Director determines such action to be necessary or
appropriate in light of the particular circumstances of the institution.
The Director may treat the failure of a savings institution to comply with an
individual capital requirement as an unsafe and unsound practice.
Holding Company Regulation. FFC is generally prohibited from acquiring
control of any insured institution or savings and loan holding company
without prior approval of the OTS Director. FFC may acquire up to 5 percent
of the voting shares of a non-subsidiary savings institution or savings and
loan holding company. No director, officer or controlling shareholder of
FFC may acquire control of any savings association which is not a
subsidiary of FFC, except with the prior approval of the OTS.
The OTS may impose restrictions when it has reasonable cause to believe
that the continuation of any particular activity by a savings and loan
holding company constitutes a serious risk to the financial safety,
soundness or stability of such holding company's savings institution.
Specifically, the OTS may, as necessary, (i) limit the payment of
dividends by the savings institution; (ii) limit transactions between
the savings institution and its holding company or its affiliates; and (iii)
limit any activities of the savings institution that create a serious
risk that the liabilities of the holding company and its affiliates may
be imposed on the savings institution. Any such limits will be issued
in the form of a directive having the effect of a cease-and-desist order.
22
<PAGE>
Deposit Insurance. The FDIC is responsible for maintaining two
separate insurance funds: the Bank Insurance Fund ("BIF") which insures
commercial bank deposits and deposits of other institutions insured by the
FDIC prior to FIRREA and the Savings Association Insurance Fund ("SAIF")
which insures the deposits of savings institutions. Separate insurance
premium assessments are applicable to each fund and FIRREA restricts
conversions from one fund to the other.
FDICIA required the FDIC to implement a risk-based assessment system,
under which an institution's assessment is based on the probability that the
deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. The FDIC adopted a transitional risk-based assessment
system effective January 1, 1993.
During 1993, the FDIC adopted a final rule to implement the risk-
based assessment system, effective January 1, 1994. The final rule
uses the same assessment rates as a percentage of deposits and the
same assessment categories as specified in the transitional risk-based
assessment system. Under the risk-based assessment system, a savings
institution is categorized into one of three capital categories:
well capitalized, adequately capitalized, and undercapitalized.
A savings institution is also classified into one of three supervisory
subgroup categories based on evaluations by the OTS: Group A,
financially sound with only a few minor weaknesses; Group B,
demonstrates weaknesses that could result in significant deterioration;
and Group C, poses a substantial probability of loss to the SAIF. The
capital ratios used by the FDIC to define well-capitalized, adequately-
capitalized and undercapitalized are the same as defined in the OTS's
prompt corrective action regulation.
A schedule detailing the FDIC assessments rates as a percentage of
deposits follows:
GROUP A GROUP B GROUP C
------- ------- -------
[S] [C] [C] [C]
Well Capitalized.................................. 23 26 29
Adequately Capitalized............................ 26 29 30
Undercapitalized.................................. 29 30 31
In addition to the above deposit insurance assessments, the OTS has
imposed assessments and examination fees on savings institutions. OTS
assessments increased to $531 thousand in 1993, from $482 thousand in
1992 and $433 thousand in 1991.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires each savings institution, as well as other lenders, to identify
the communities served by the institution's offices and to identify the
types of credit the institution is prepared to extend within such
communities. The CRA also requires the OTS to assess the performance of
the institution in meeting the credit needs of its community and to
take such assessment into consideration in reviewing applications
for mergers, acquisitions, and other transactions. An unsatisfactory
CRA rating may be the basis for denying such an application.
In connection with its assessment of CRA performance, the OTS assigns
a rating of "outstanding," "satisfactory," "needs to improve," or
"substantial noncompliance." Based on the last CRA examination, conducted
in 1992, the Bank was rated satisfactory.
A new CRA regulation has been proposed which would significantly change
the manner in which the OTS assesses CRA compliance. It is not known at
this time whether the proposal will be accepted.
Loans to One Borrower. Savings institutions are subject to the same
loans-to- one borrower ("LTOB") restrictions that are applicable to
national banks, with limited provisions for exceptions. In general,
the national bank standard restricts loans to a single borrower to no
more than 15% of a bank's "unimpaired capital" and "unimpaired
surplus", plus an additional 10% if the loan is collateralized by
certain readily marketable collateral. The Bank's loans were within
the LTOB limitations at December 31, 1993.
23
<PAGE>
QTL Status. In general, the Qualified Thrift Lender ("QTL") test
requires that 65% of an institution's portfolio assets be invested in
loans, securities and other investments related to housing, measured
by a daily or weekly average of such investments as a percentage of
portfolio assets for each two-year period beginning on July 1, 1991.
Any savings institution that fails to meet the QTL test must either
convert to a bank charter or become subject to national bank-type
restrictions on branching, business activities, and dividends, and
become subject to restrictions on its ability to obtain Federal
Home Loan Bank advances. The Bank met the QTL test as of December
31, 1993.
Junk Bonds. Savings institutions and their subsidiaries are prohibited
from acquiring or retaining any corporate debt security that, at the
time of acquisition, is not rated in one of the four highest rating
categories by at least one nationally recognized statistical rating
organization, so called "junk bonds". The Bank has no impermissible
equity investments or "junk bonds" in its investment portfolio.
Commercial Real Estate Lending. Absent an exemption, loans of a
federal savings institution that are secured by nonresidential real
property may not exceed 400% of the institution's capital. The Bank's
loans were within the commercial real estate lending limits at December
31, 1993.
Brokered Deposits. The FDIC adopted regulations during 1992 which
permit only "well capitalized" institutions to obtain brokered deposits.
An "adequately capitalized" institution can obtain brokered deposits if
it applies for and receives a waiver from the FDIC. The Bank obtained
brokered deposits during 1993 pursuant to a waiver obtained from the FDIC.
Payment of Dividends. The payment of dividends, stock repurchases, and
other distributions by the Bank is subject to regulation by the OTS.
Currently, 30 days prior notice to the OTS of any capital distribution
is required. The OTS has promulgated a regulation that measures a savings
institution's ability to make a capital distribution according to the
institution's capital position.
The rule establishes "safe-harbor" amounts of capital distributions
that institutions can make after providing notice to the OTS, but without
needing prior approval. Institutions can distribute amounts in excess of
the safe-harbor only with the prior approval of the OTS.
For institutions that meet their fully phased-in capital requirements
(the requirements that will apply when the phase-out of supervisory
goodwill and investments in certain subsidiaries from capital is complete),
the safe harbor amount is the sum of (1) the current year's net income
and (2) the amount that causes the excess of the institution's total
capital-to-risk weighted assets ratio over 8% to be only one-half of
such excess at the beginning of the year. For institutions that meet
their current capital requirements but do not meet their fully phased-
in requirements, the safe harbor distribution is 75% of net income for
the prior four quarters. Savings institutions that do not meet their
current capital requirements may not make any capital distributions,
with the exception of repurchases or redemptions of the institution's
shares that are made in connection with the issuance of additional shares
and that will improve the institution's financial condition.
Federal Reserve System. Federal Reserve Board regulations require savings
institutions to maintain non-interest bearing reserves against their
transaction accounts (primarily NOW accounts and Super NOW accounts).
The reserve for transaction accounts is 3% of the first $42.2 million
of such accounts and 10% (subject to adjustment by the Federal Reserve
Board between 8% and 14%) of the balance of such accounts. The Federal
Reserve Board eliminated its reserve requirements for non-personal time
deposits during 1990. A depository institution is exempt from reserve
requirements with respect to amounts not in excess of $3.4 million,
applied first to transaction accounts and then to non-personal time
deposits, if any. The Bank is in compliance with these requirements.
Accounting Matters
The Director of the OTS must prescribe uniform accounting and
disclosure standards for savings institutions. The uniform accounting
standards must incorporate Generally Accepted Accounting Principles
("GAAP") to the same degree used to determine compliance with
federal banking agency regulations, with an exception for the
regulatory capital requirement described above. No allowance for a
deviation from full compliance with such standards may be permitted after
24
<PAGE>
December 31, 1993. All regulations and policies of the OTS governing the
safe and sound operation of savings institutions, including regulation
of the Bank and policies governing asset classification and appraisals,
must be no less stringent than those established by the Office of the
Comptroller of the Currency ("OCC") for national banks. The Bank's
financial statements are prepared in accordance with GAAP.
A policy statement issued by the OTS and applicable to all savings
associations clarifies and re-emphasizes that the investment activities of
a savings association must be in compliance with approved and documented
investment policies and strategies and must be accounted for in
accordance with GAAP. Management must support its classification of
and accounting for loans and securities (i.e., whether held for investment,
sale or trading) with appropriate documentation.
See note 1 of the Notes to Consolidated Financial Statements for a
summary of recent accounting pronouncements.
Taxation
The Company, the Bank and its subsidiaries file a consolidated federal
income tax return on a calendar year basis using the accrual method.
The Bank can elect annually one of two methods to compute its additions to
the bad debt reserve on qualifying real property loans: (i) the percentage
of taxable income method or (ii) the experience method. Qualifying real
property loans are generally loans secured by an interest in real property,
and non-qualifying loans are all other loans. The deduction with respect to
non-qualifying loans must be computed under the experience method. The
Bank intends to compute its annual bad debt reserve deduction for qualifying
real property loans under the method which permits the maximum allowable
deduction.
The allowable deduction under the percentage of taxable income method is
available only if at least 60% of the total assets were qualifying assets.
Qualifying assets included, among other things, cash, U.S. government
obligations, certificates of deposit, loans secured by an interest in
residential real property and loans made for payment of expenses
of college or university education. Qualifying savings banks, such as
the Bank, which file consolidated income tax returns as part of an
affiliated group, are required to reduce the basis for computing their
bad debt reserve deduction (if computed under the percentage of
taxable income method) for tax losses attributable to activities of the
non-savings and loan members of the group that are functionally related
to the activities of the savings and loan members. The percentage of
taxable income method deduction is also subject to other limitations which
did not affect the Bank's bad debt deduction under the percentage
of taxable income method in 1991 when the Bank deducted an amount equal
to 8% of its taxable income as an addition to its bad debt reserve.
In 1993 and 1992, the Bank was allowed an addition to its tax bad debt
reserves under the experience method equal to the amount necessary to bring
the tax reserve balance to the level that was established as of December
31, 1987. In accordance with the Tax Reform Act of 1986, the Bank may
maintain the balance of its tax bad debt reserve at the December 31, 1987
level even if the result would be less using the experience method.
For state tax purposes, the Bank is allowed an addition to its tax bad
debt reserves in an amount necessary to fill up to its tax reserve balance
calculated using the experience method.
The maximum marginal federal corporate income tax rate was 34% in
1991 and 1992. Under the Omnibus Tax Act of 1993, the maximum marginal
corporate tax rate was increased to 35%.
The Company implemented Statement of Financial Accounting Standards No.
109 ("SFAS No. 109") on a prospective basis during 1992. SFAS No. 109
establishes new accounting principles for calculating income taxes using
the asset and liability method instead of the deferred method. In
applying the asset and liability method using SFAS No. 109, deferred
tax assets and liabilities are established as of the reporting date for the
realizable cumulative temporary differences between the financial
reporting and tax return bases of the Bank's assets and liabilities.
The tax rates applied are the statutory rates expected to be in effect
when the temporary differences are realized or settled. The application of
SFAS No. 109 entitled the Bank to a tax benefit of $4.1 million during
1992, due primarily to the fact that the difference between the federal
and state tax bad debt reserves and the book bad debt reserves is now
deductible as a timing difference under SFAS No. 109.
25
<PAGE>
At December 31, 1993, the Bank had $20 million in deferred tax assets.
No valuation allowance was established because it is more likely than not
that the deferred tax assets will be realized. Deferred tax liabilities
totaled $37 million at December 31, 1993.
The Bank is subject to an alternative minimum tax if such tax is larger
than the tax otherwise payable. Generally, alternative minimum taxable
income is a taxpayer's regular taxable income, increased by the taxpayer's
tax preference items for the year and adjusted by computing certain
deductions in a special manner which negates the acceleration of such
deductions under the regular tax. The adjusted income is then reduced by
an exemption amount and is subject to tax at a 20% rate. (In addition,
the Bank is subject to an additional environmental tax of 0.12% of its
alternative minimum taxable income with certain adjustments and
exclusions.) No alternative minimum taxes were applicable to the
Bank for tax years 1993, 1992 or 1991.
California tax laws have generally conformed to federal tax laws
since several provisions of the Tax Act of 1986 were adopted in September
of 1987.
For California franchise tax purposes, federal savings banks are taxed
as "financial corporations" at a higher rate than that applicable to
non-financial corporations because of exemptions from certain state and
local taxes. Under present law, the California franchise tax rate applicable
to financial corporations may vary each year. The tax rates for 1991,
1992 and 1993 were 10.741%, 11.007% and 11.107%, respectively. The tax
rate for 1994 will be 11.469%.
In 1991, the California Supreme Court's decision in California Federal
Savings and Loan Association vs. City of Los Angeles which upheld the
statutory exemption of savings institutions and other non-bank financial
corporations from local business taxes, became final. The Bank was a
plaintiff in this lawsuit and received a $365 thousand settlement during
1992.
The Company's tax returns have been audited by the IRS through December
31, 1983 and by the California Franchise Tax Board through December
31, 1988. For additional information regarding the federal income and
California franchise taxes payable by the Company, see note 9 of the
Notes to Consolidated Financial Statements.
Tax years 1984, 1985 and 1986 have been under examination by the
IRS since 1989. There are pending industry issues which relate to the
timing of income recognition on loan sales and loan fees. While the
Company has provided for deferred taxes, a change in the period
of income recognition could result in additional interest due to
the government. Although the outcome of the audit is not known at
this time, and it may take several years to resolve any disputed
matters, the Bank booked $1.8 million, $3.4 million and $2.3 million
in 1993, 1992 and 1991, respectively as accrued interest on possible
tax adjustments. The estimated interest accruals will be continually
updated in the future based on relevant tax rulings and the progression
of the audit and other cases in the courts. In December of 1993 the
IRS began examining tax years 1987 and 1988.
ITEM 2--PROPERTIES
At December 31, 1993, the Bank owned the building and land for seven of
its branch offices, owned the building but leased the land for three
additional offices, and leased its remaining offices. Properties leased
by the Bank include its home and executive offices located in a 12-story
office tower in downtown Santa Monica, loan offices in Los Angeles, Ventura
and Orange counties and a general services and corporate operations office
building in Santa Monica. FFC does not lease or own properties. For
information concerning rental obligations, see note 5 of the Notes to
Consolidated Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
The Company and the Bank are involved as plaintiffs or defendants in
various legal actions incident to their businesses, none of which are
believed by management to be material to the financial condition of the
Company, based on the written opinion of the Bank's legal counsel.
26
<PAGE>
ITEM 4--SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a). Market Information. The Company's common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "FED". Prior to the Company's
acquisition of all the Bank's common stock in September, 1987, the Bank's stock
was traded in the national over-the-counter market under the symbol "FFSB".
Included in the Management's Discussion and Analysis of Financial Condition
and Results of Operations is a chart representing the range of high and low
stock prices for the Company's common stock for each quarterly period for
the last five years.
(b). Holders. As of March 1, 1994, the Company had 10,533,186 shares of
its common stock outstanding, representing approximately 1,375 certificated
stockholders, which total does not include the number of stockholders whose
shares are held in street name.
(c). Dividends. As publicly traded companies, neither the Bank nor the
Company has any history of dividend payments on its Common Stock.
However, the Company may in the future adopt a policy of paying dividends,
depending on its net earnings, financial position and capital requirements,
as well as regulatory restrictions, tax consequences and the ability of
the Company to obtain a dividend from the Bank for payment to stockholders.
OTS regulations limit amounts that the Bank can pay as a dividend to the
Company. No dividend may be paid if the Bank's net worth falls below
regulatory requirements. (See "Dividend Restrictions" above for other
restrictions on dividends). Within these regulations, the Board of
Directors of the Bank declared and paid dividends to FFC totaling
$3.0 million, $4.3 million and $1.0 million in 1993, 1992 and 1991,
respectively.
27
<PAGE>
<TABLE>
<CAPTION>
ITEM 6--SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below:
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
For the Year Ended De-
cember 31:
Interest income....... $ 229,445 $ 255,612 $ 296,530 $ 291,436 $ 245,101
Interest expense...... 131,616 151,510 195,756 207,817 185,059
Net interest income... 97,829 104,102 100,774 83,619 60,042
Provision for loan
losses............... 67,679 41,384 11,833 4,126 824
Other income.......... 12,054 12,634 7,059 7,025 7,963
Non-interest expense.. 45,298 46,125 40,482 39,355 32,817
Income taxes (bene-
fit)................. (1,046) 11,198 27,091 20,112 13,862
Earnings (loss) before
income taxes
(benefit) and cumula-
tive effect of
change in accounting
principle............ (3,094) 29,227 55,518 47,163 34,364
Earnings (loss) before
cumulative effect
of change in account-
ing principle........ (2,048) 18,029 28,427 27,051 20,502
Net earnings (loss)... (2,048) 22,104 28,427 27,051 20,502
Earnings (loss) per
share before cumula-
tive effect of change
in accounting princi-
ple.................. (0.19) 1.66 2.61 2.49 1.88
Earnings (loss) per
share (1)(2)......... (0.19) 2.04 2.61 2.49 1.88
End of Year:
Loans receivable...... 2,715,663 2,496,700 2,368,796 2,131,917 2,024,336
Mortgage-backed secu-
rities............... 708,283 769,155 644,264 614,306 307,733
Investment securities. 103,836 43,736 111,172 76,253 141,268
Total assets.......... 3,661,117 3,446,573 3,287,059 3,051,808 2,583,705
Deposits.............. 2,305,480 1,982,745 1,740,103 1,739,653 1,552,789
Borrowings............ 1,093,149 1,196,241 1,280,372 1,062,804 815,101
Liabilities........... 3,452,825 3,239,062 3,096,883 2,890,370 2,448,734
Net Worth............. 208,292 207,511 190,176 161,438 134,971
Book value per share
(1).................. 19.78 19.98 18.28 15.81 13.14
Selected Ratios:
Return on average as-
sets................. (0.06)% 0.65% 0.91% 0.97% 0.87%
Return on average eq-
uity................. (1.01)% 11.09% 16.09% 18.31% 16.71%
Ratio of non-perform-
ing assets to total
assets............... 3.23% 2.62% 1.83% 0.82% 0.33%
Other Data:
Number of Bank full
service branches..... 25 24 18 18 16
- - - - --------
(1) Adjusted for three-for-two stock splits declared August 22, 1985,
June 19,1986 and September 24, 1987 and five-for-four stock
splits declared October 27, 1988 and September 26, 1991.
(2) Fully diluted basis.
</TABLE>
28
<PAGE>
Also see summarized results of operations on a quarterly basis for
1991, 1992 and 1993 in note 13 of the Notes to Consolidated
Financial Statements.
Inflation substantially impacts the financial position and operations
of financial intermediaries, such as banks and savings institutions.
These entities primarily hold monetary assets and liabilities and,
as such, can experience significant purchasing power gains and losses
over relatively short periods of time. In addition, interest rate changes
during inflationary periods change the amounts and composition of assets
and liabilities held by financial intermediaries and often result in
creditor and regulatory pressures for additional equity investment.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are affected by its levels of net
interest income, provisions for loan losses, non-interest income,
non-interest expense and income taxes. The Company's results are strongly
influenced by the Southern California economy in which it operates.
A net loss of $2.0 million or $0.19 per share was recorded in 1993.
Net earnings of $22.1 million were reported in 1992 and $28.4 million
in net earnings were reported in 1991. Earnings per share for 1992 and
1991 were $2.04 and $2.61, respectively. The return on average assets
was (0.06)% for 1993, compared with 0.65% for 1992 and 0.90% for 1991.
The return on average equity was (0.99)% for 1993, compared with 11.12%
for 1992 and 16.17% for 1991.
Core earnings reflect the Company's results from basic operations and
were $62.2 million in 1993 compared to $71.5 million in 1992 and $69.9
million in 1991. Core earnings are defined as net interest income before
bad debt deductions plus other income (excluding gain on sale of loans
and securities) less non-interest expense and non-recurring items.
Although core earnings have decreased in 1993 due to growth in non-
performing assets, these earnings have remained at a level nearly
sufficient to offset the impact of higher provisions for loan losses
required in the current economic climate.
At December 31, 1993, total non-performing assets (primarily loans
90 days past due or in foreclosure plus foreclosed real estate) were
$118.2 million or 3.23% of total assets. This figure compares to
$90.3 million or 2.62% of total assets at the end of 1992 and $60.3
million or 1.83% of total assets at the end of 1991. The increase
in non-performing assets over the last two years reflects higher
delinquencies and foreclosures resulting primarily from increased
unemployment and decreased real estate values in Southern
California.
<TABLE>
<CAPTION>
RETURN ON RETURN ON
AVERAGE AVERAGE
ASSETS EQUITY
---------- ----------
<S> <C> <C>
1989................................. .87 % 16.48 %
1990................................. .96 % 18.25 %
1991................................. .90 % 16.17 %
1992................................. .65 % 11.12 %
1993................................. (.06)% (.99)%
</TABLE>
Risks and Uncertainties
Southern California was impacted by a significant earthquake on
January 17, 1994. As January 17th was a national holiday, the Bank
was able to resume operations the following day. The Company is still
in the early stages of assessing the damage to the real property
collateral securing the Bank's loans. It is estimated that less than 30%
of the Bank's loans are in areas severely affected by the earthquake
and preliminary inspections indicate that approximately 2% of the
properties may have had damage. At this time, the extent to which
the collateral securing the Bank's loans has been affected by the
earthquake is not known.
29
<PAGE>
In the normal course of business, the Company encounters two
significant types of risk: economic risk and regulatory risk.
There are three main components of economic risk: interest rate risk,
credit risk and market risk. The Company is subject to interest rate
risk when its interest-earning assets reprice in different time frames,
or on a different basis than its interest-bearing liabilities. (See
"Asset--Liability Management.") Credit risk is the risk of default on
the Company's loan portfolio that results from the borrowers' inability
to make contractually required payments. (See "Loan Loss Provisions"
and "Non-performing Assets.") Market risk reflects changes in the
value of the collateral underlying loans receivable and the valuation of
real estate held by the Company.
The determination of the allowance for loan losses and the
valuation of real estate collateral is based on estimates that are
highly susceptible to changes in the economic environment and market
conditions. Management believes that the allowance for loan losses
as of December 31, 1993 was adequate based on information available
at that time. A continuation of the current economic climate, together
with the adverse consequences of the earthquake, would increase the
likelihood of losses due to credit and market risks. This could create
the need for more additions to loan loss allowances.
Regulatory risk is the risk that the regulators will reach different
conclusions than management regarding the financial position of the
Company. The Office of Thrift Supervision ("OTS") examines the Bank's
financial results annually. Its next examination began in late February
of 1994. The OTS reviews the allowance for loan losses and may require
the Bank to adjust the allowance based on information available at the
time of examination.
Other Risks
The Bank has been named as a defendant in various lawsuits. The outcome
of the lawsuits cannot be predicted but the Bank intends to vigorously
defend the actions. Management is of the opinion that no pending lawsuit
will have a materially adverse effect on the Company.
COMPONENTS OF EARNINGS
Net Interest Income
Net interest income was $97.8 million in 1993 compared with $104.1
million in 1992 and $100.8 million in 1991. Net interest income is
the difference between interest earned on loans and investments and
interest expense on deposits and borrowings. The dollar amounts of
interest-earning assets and interest-bearing liabilities and the interest
rates earned or paid thereon are the chief determinants of net interest
income. The greater the excess of average interest- earning assets over
average interest-bearing liabilities, the more beneficial is the impact
on net interest income. Average interest-earning assets exceeded average
interest-bearing liabilities by $90.8 million in 1993 compared to $142.6
million in 1992 and $147.3 million in 1991. The decrease in the excess of
average interest-earning assets over interest-bearing liabilities in 1993
compared to 1992 was primarily the result of increased non-performing assets.
The decrease in the excess of average interest-earning assets over average
interest-bearing liabilities during 1992 compared to 1991 was also due
to increased non-performing assets. As a result, the interest rate margin
(the yield on loans and investments less the cost of funds) dropped to 2.67%
in 1993 from 2.95% in 1992 and 2.97% in 1991. The yield on the investment
portfolio increased because management extended the terms of the investments
in the liquidity-qualifying portfolio. An increased investment portfolio
yield helped to offset the lower loan yields during 1993.
30
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SPREADS AND YIELD ON AVERAGE INTEREST EARNINGS ASSETS
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1989 1990 1991 1992 1993
-------------- -------------- ------------- ------------- -------------
DURING END OF DURING END OF DURING END OF DURING END OF DURING END OF
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average yield
on loan portfolio...... 10.84% 10.94% 10.87% 10.45% 9.96% 9.20% 7.92% 7.25% 6.64% 6.20%
Weighted average yield
on investment portfolio
(1).................... 9.46 8.42 8.16 7.74 6.03 4.90 4.24 6.18 4.70 5.16
Weighted average yield
on all interest-earning
assets................. 10.80 10.80 10.78 10.37 9.82 9.05 7.78 7.24 6.56 6.17
Weighted average rate
paid on deposits....... 8.19 8.21 7.93 7.67 6.70 5.74 4.66 3.97 3.76 3.60
Weighted average rate
paid on borrowings and
FHLB advances.......... 9.39 8.82 8.59 8.07 7.08 5.47 5.10 4.48 4.09 3.99
Weighted average rate
paid on all interest-
bearing liabilities.... 8.58 8.42 8.16 7.82 6.85 5.63 4.83 4.16 3.89 3.73
Net yield on average in-
terest-earning assets
(2).................... 2.54 3.02 3.29 3.16 2.77
Interest rate spread
(3).................... 2.22% 2.38% 2.62% 2.55% 2.97% 3.42% 2.95% 3.08% 2.67% 2.44%
- - - - --------
(1) Includes earnings on certificates of deposit and investments. Does not
include earnings on FHLB stock.
(2) Net interest income (the difference the dollar amounts of interest earned
and paid) dividend by average interest earning assets.
(3) Weighted average yield on all interest-earnings assets less weighted
average rate paid on all interest-bearing liabilities.
</TABLE>
Loss Provisions
Loan loss provisions were $67.7 million in 1993 compared with $41.4 million
in 1992 and $11.8 million in 1991. The Bank has a policy of providing for
general valuation allowances, unallocated to any specific loan, but
available to offset any future loan losses. The allowance is maintained
at an amount that management believes adequate to cover estimable and
probable loan losses. General valuation allowances totaled $46.9 million
and $27.9 million at December 31, 1993 and December 31, 1992, respectively.
Management performs regular risk assessments of the Bank's general loan
portfolio to maintain an appropriate general valuation allowance.
Additional loan loss provisions may be required to the extent that the
allowance is used for loan charge-offs. Loan charge-offs increased to
$48.6 million in 1993 from $27.5 million in 1992 and $9.1 million in 1991.
The increased charge-offs were due to specific valuation allowances provided
for certain problem assets based on declines in the estimated value of the
underlying collateral. The Southern California area has experienced declines
in real estate values and other economic problems for the past three years
resulting from increased unemployment, reductions in defense spending,
and natural disasters. The Bank's loan portfolio, 38% of which is
secured by multi-family properties, has required additional loss provisions
because of these recessionary factors. During the first quarter of 1993,
management noted the continuing decline in multi- family property values
and recorded a $44.1 million loan loss provision in anticipation of the
effects that these property declines would have on the Bank's loan portfolio.
Because of these economic concerns and increased loan charge-offs,
management increased the ratio of general valuation allowances to loans
with loss exposure to 1.48% at the end of 1993 from 0.93% at the end of
1992 and 0.41% at the end of 1991. Loans with loss exposure consist of
the Bank's loan portfolio plus any loans sold with recourse.
31
<PAGE>
Non-interest Income
Loan and other fees increased to $6.5 million in 1993 compared to $5.9
million in 1992 and $6.0 million in 1991 primarily as a result of
additional fees earned on loans serviced for others.
Gain on sale of loans and securities increased to $4.3 million in 1993
from $2.1 million in 1992 and $1.1 million in 1991. $2.0 million of the
gain recognized during 1993 resulted from the sale of a mortgage-backed
security from the Bank's portfolio of loans and securities held for sale.
Real estate operations recorded a net loss of $437 thousand in 1993
compared to a net gain of $2.6 million in 1992 and a net loss of $1.3
million in 1991. Losses recorded in 1993 resulted primarily from the
operation of foreclosed properties prior to sale. Foreclosed multi-family
properties, which have provided net income from operations in the past,
have been severely affected by the recession.
During 1993 the Bank incurred various charges on these properties
including delinquent property taxes, unpaid utility charges and
rehabilitation costs. Many of the properties were in a general state
of disrepair with high vacancy rates and rent collection problems.
These problems can take several months to correct. The Bank normally
sells these properties within a few months after foreclosure, usually
after the property has been rehabilitated. Gains recorded during 1992
were due to recoveries of loss allowances which had been established prior
to the sale of foreclosed properties.
Other operating income consists primarily of fees earned for services
provided by the retail savings branches. The decrease to $1.7 million
in 1993 from $2.1 million in 1992 was because a lawsuit settlement and
a refund of business license taxes from the City of Los Angeles were
received in 1992.
Non-interest Expense
Non-interest expense decreased to 1.26% of average total assets in 1993
from 1.36% of average total assets in 1992 and 1.28% of total assets in
1991. The increased ratio in 1992 resulted from data processing conversion
costs and expenses associated with the acquisition of seven branches from
the Resolution Trust Corporation ("RTC") in that year. One new branch was
acquired from the RTC during 1993. However, since the acquisition occurred
in December, it had little impact on the expenses for the year.
Management has continuing programs to control general and administrative
expenses.
Salary and benefit costs decreased slightly in 1993 compared to 1992
because lower amounts were contributed to the bonus and profit sharing
plans in 1993 based on decreased earnings. Salary and benefit costs
increased 9% in 1992 compared to 1991 due to employment costs associated
with the branches acquired from the RTC during 1992.
Occupancy expense increased by 3% in 1993 compared to 1992 due to higher
lease costs resulting from the effect of lease escalation clauses.
Occupancy expense increased by 16% in 1992 compared to 1991 due to the
cost of the additional branches plus the effect of lease escalation clauses.
Advertising expense increased by 11% in 1993 due to advertising campaigns
promoting various savings and loan products, particularly during the fourth
quarter when the Bank advertised its new mortgage banking efforts. The 29%
increase in advertising expense during 1992 over 1991 was primarily due to
savings promotions for the seven branches acquired in that year.
Federal deposit insurance increased by 11% in 1993 compared to 1992 due
to growth in average savings deposits. This increase was offset by a lower
insurance rate for the first half of the year because the Bank achieved
a 10% risk-based capital ratio at the end of 1992. Deposit insurance
increased by 7% during 1992 compared to 1991 due to growth in average
total deposits.
Other operating expenses decreased 12% in 1993 compared to 1992 primarily
as a result of decreased charitable contributions and data processing costs.
The Bank converted to a new data processing system during 1992 which
caused other operating costs in 1992 to increase 27% from the 1991 level.
32
<PAGE>
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
1989 1990 1991 1992 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Salaries....................... $10,720 $11,697 $12,776 $15,399 $16,636
Employee benefits.............. 7,100 9,072 8,769 8,054 6,244
Occupancy expense.............. 3,847 3,992 4,424 5,119 5,531
Equipment...................... 1,111 1,294 1,290 1,523 1,285
Advertising.................... 1,168 1,579 1,731 2,235 2,486
Federal deposit insurance...... 2,742 3,205 3,890 4,156 4,622
Outside data processing........ 768 938 1,147 2,213 1,036
Insurance...................... 383 499 537 556 570
Contributions.................. 520 784 761 751 591
Stockholders' relations........ 213 257 576 251 143
Professional services.......... 566 331 580 709 755
Lawsuit........................ -- 1,400 -- -- --
Other operating expense........ 3,679 4,307 4,001 5,159 5,399
------- ------- ------- ------- -------
Total........................ $32,817 $39,355 $40,482 $46,125 $45,298
======= ======= ======= ======= =======
Non-interest expense as
% of average assets........... 1.39% 1.40% 1.28% 1.36% 1.26%
======= ======= ======= ======= =======
</TABLE>
Income Taxes
The Company implemented Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109") during 1992 and recorded a one-time benefit
of $4.1 million. Unlike APB 11, SFAS No. 109 treats financial
statement loan loss allowances as a temporary difference, thereby lowering
the Company's expected tax rates for 1993 and 1992 as compared to 1991.
BALANCE SHEET ANALYSIS
Consolidated assets at year end 1993 were $3.7 billion, 6% greater than
$3.4 billion at the end of 1992. Assets grew 5% from 1991 to 1992. The
growth in assets was the result of increases in the loan portfolio and in
the investment portfolio.
Loan Portfolio
During the fourth quarter of 1993, the Bank started a new mortgage
banking program to take advantage of current borrower demand for fixed
rate and other loan products the Bank does not keep in its portfolio.
Under this new program, competitively priced loans are originated for
immediate sale in the secondary market. The Bank continues its long-standing
policy of originating only monthly adjustable rate loans for its loan
portfolio. At the end of 1993, nearly all of the Bank's loan portfolio
was adjustable monthly based on changes in the Eleventh District Federal
Home Loan Bank Cost of Funds Index. The Bank has maintained the level
of adjustable loans in its portfolio at over 90% for the last seven years.
Management believes that the high level of adjustable rate mortgages
will help insulate the Bank from fluctuations in interest rates,
notwithstanding the 90-day time lag between a change in its monthly cost
of funds and a corresponding change in its loan rates. (See
"Asset--Liability Management".)
New loan originations were $746 million in 1993 compared to $841 million
in 1992 and $647 million in 1991. Loan originations decreased during 1993
as a result of borrower demand for fixed rate mortgages. Since the new
mortgage banking program started late in the year, it did not substantially
impact loan originations for 1993. 88% of new loans originated during 1993
were adjustable rate loans. 54% of new loans originated were for the
purpose of refinancing existing mortgages. Loans made on the security of
single family properties comprised 67% of new originations by dollar
amount; loans made on the security of multi-family properties comprised
32% of new originations; and loans made on the security of commercial real
estate properties comprised 1% of new originations. No construction loans
were originated in 1993.
33
<PAGE>
The following table details loan originations by loan type for the
periods indicated:
<TABLE>
<CAPTION>
LOAN ORIGINATIONS BY TYPE
1989 1990 1991 1992 1993
---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Single Family.................... $ 575,108 $535,822 $357,906 $590,152 $499,560
Multi-Family..................... 391,053 345,348 273,194 237,720 236,211
Commercial....................... 27,755 18,583 14,462 9,104 9,638
Other............................ 11,350 7,277 1,692 3,779 419
---------- -------- -------- -------- --------
Total.......................... $1,005,266 $907,030 $647,254 $840,755 $745,828
========== ======== ======== ======== ========
</TABLE>
Loans originated upon the sale of the Bank's real estate owned were
$69.8 million or 9% of total originations in 1993. $8.5 million of these
loans were originated based on the security of single family properties.
$61.3 million of these loans were originated based on the security of
multi-family properties.
New loan originations increased 30% in 1992 over 1991 due to an increase
in loans brought to the Bank by wholesale loan brokers. All qualifying
loans brought to the Bank by wholesale loan brokers are underwritten and
funded through the Bank's origination process.
The Bank converted $111.7 million in loans into mortgage-backed securities
in 1993 to take advantage of lower interest rates on securitized borrowings.
In 1992, $187.5 million in loans were securitized compared with $157.3
million in loans securitized in 1991. Securitized loans also have a lower
risk weighting for regulatory risk-based capital purposes.
The Bank's adjustable rate loan products often provide for first-year
monthly payments which are lower than the fully-indexed interest and
principal due. Any interest not fully paid by such lower first-year
payments is added to the principal balance of the loan. This causes
negative amortization until payments increase to cover interest and
principal shortfalls. Due to negative amortization, loan-to-value ratios
may increase above those calculated at the inception of the loan.
To date, the Bank's loss experience on loans with negative amortization
has been no different than that on the fully-amortizing portfolio. The
amount of negative amortization recorded by the Bank decreases in periods
of declining interest rates. The balance of negative amortization on all
loans serviced by the Bank decreased to $602 thousand in 1993 from $3.1
million in 1992 and $21.2 million in 1991.
The Bank does not normally lend in excess of 90% of the appraised
collateral value on adjustable mortgage loans ("AMLs"). Mortgage insurance
is required on loans in excess of 80% or premium rates and/or fees are
charged if the mortgage insurance requirement is waived. Loans in the
Bank's portfolio on which the mortgage insurance requirement has been
waived totaled $155 million at December 31, 1993 compared to $201 million
at December 31, 1992 and $203 million at December 31, 1991.
Loan Composition
Loans based on the security of single family dwellings (one to four
units) comprise the largest category of the loan portfolio. The loan
portfolio also includes loans secured by multi-family and commercial
properties. At December 31, 1993, approximately 54% of the loan portfolio
consisted of first liens on single family properties. First liens on
multi-family properties comprised approximately 38% of the portfolio, and
first liens on commercial properties represented approximately 7% of the
portfolio.
Multi-family and commercial real estate loans are considered more
susceptible to market risk than single family loans and higher interest
rates and fees are charged to borrowers for these loans. As noted earlier,
approximately 32% of new loans originated were multi-family loans. Only 1%
of loan originations in 1993 were commercial real estate loans. The Bank
has not emphasized the origination of commercial real estate loans for
several years.
34
<PAGE>
The Bank also has loss exposure on certain loans sold with recourse.
These loans are substantially all multi-family loans. Loans sold with
recourse were $318 million as of December 31, 1993, $405 million as of
December 31, 1992 and $448 million at December 31, 1991. Although no longer
owned by the Bank, these loans are combined with the Bank's loan portfolio
for purposes of computing general valuation allowances and measuring risk
exposure.
The Bank maintains a small portfolio of consumer loans but no longer markets
this type of loan product other than as a service ancillary to other savings
products. Less than one half of 1% of new loans were consumer loans, and this
loan type represents less than 1% of the total loan portfolio.
The following table sets forth the composition of the Bank's portfolio of
loans and mortgage-backed securities for each of the last five years.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
------------------------------------------------------
1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed resi-
dential loans:
One unit.............. $ 855,132 $ 761,429 $ 763,233 $ 771,870 $ 864,874
Two to four units..... 239,446 227,535 258,825 296,550 340,035
Five or more units.... 621,833 853,173 1,075,829 1,178,595 1,296,260
---------- ---------- ---------- ---------- ----------
Residential loans... 1,716,411 1,842,137 2,097,887 2,247,015 2,501,169
OTHER REAL ESTATE LOANS:
Commercial and indus-
trial................ 260,809 266,258 263,183 256,474 245,387
Second trust deeds.... 57,336 41,957 35,245 29,441 24,606
Other................. 4,289 5,298 4,193 10,733 5,861
---------- ---------- ---------- ---------- ----------
Real estate loans... 2,038,845 2,155,650 2,400,508 2,543,663 2,777,023
NON-REAL ESTATE LOANS:
Manufactured housing.. 5,778 4,873 4,031 3,481 2,880
Deposit accounts...... 1,297 1,884 1,615 1,184 1,086
Consumer.............. 6,450 4,324 2,705 1,494 847
---------- ---------- ---------- ---------- ----------
Loans receivable.... 2,052,370 2,166,731 2,408,859 2,549,822 2,781,836
LESS:
Allowance for loan
losses............... 8,394 11,181 13,937 27,854 46,900
Unrealized loan fees.. 19,640 23,633 26,126 25,268 19,273
---------- ---------- ---------- ---------- ----------
Net loans receiv-
able............... 2,024,336 2,131,917 2,368,796 2,496,700 2,715,663
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single fam-
ily dwellings........ 213,514 487,842 524,969 660,673 678,884
Secured by multi-fam-
ily dwellings........ 94,219 126,464 119,295 108,482 29,399
---------- ---------- ---------- ---------- ----------
Mortgage-backed se-
curities........... 307,733 614,306 644,264 769,155 708,283
---------- ---------- ---------- ---------- ----------
TOTAL............. $2,332,069 $2,746,223 $3,013,060 $3,265,855 $3,423,946
========== ========== ========== ========== ==========
</TABLE>
35
<PAGE>
ASSET QUALITY
Assets Quality Ratios
---------------------
The following table sets forth certain asset quality ratios of the Bank
for the periods indicated
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1989 1990 1991 1992 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-Performing Loans to
Loans Receivable (1)........... 0.42% 1.13% 2.16% 2.61% 3.28%
Non-Performing Assets to
Total Assets (2)............... 0.33% 0.82% 1.83% 2.62% 3.23%
Loan Loss Allowances to
Non-Performing Loans (3)....... 97.64% 40.24% 31.31% 37.54% 52.23%
General Loss Allowances to
Total Loans with Loss
Exposure.(4)................. 0.41% 0.42% 0.49% 0.93% 1.48%
-------------
(1) Non-performing loans are net of specific loan loss allowances. Loans
receivable exclude mortgage-backed securities and are before deducting
unrealized loan fees and general valuation allowances.
(2) Non-performing assets are net of specific loan loss allowances.
(3) Bank's loan loss allowances, including specific loan loss allowances
for non-performing loans and general valuation allowances but
excluding general valuation allowances for loans sold by the Bank
with full or limited recourse. Non-performing loans are before
deducting specific loan loss allowances.
(4) Bank's general valuation allowances, including general valuation
allowances for loans sold with full or limited recourse.
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets, as defined by the Bank, include loans delinquent over
90 days or in foreclosure, real estate acquired in settlement of loans,
and other loans less than 90 days delinquent but for which collectibility
is questionable.
The table below details the amounts of non-performing assets by type
of collateral and the percentage to total non-performing assets. Also shown
is the ratio of non-performing assets to total assets.
<TABLE>
<CAPTION>
RECAP OF NON-PERFORMING ASSETS
1989 1990 1991 1992 1993
------------------ ------------------- ------------------- ------------------- --------------------
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
ASSETS ASSETS ASSETS ASSETS ASSETS
NON- NON- NON- NON- NON-
$ PERFORMING $ PERFORMING $ PERFORMING $ PERFORMING $ PERFORMING
------ ---------- ------- ---------- ------- ---------- ------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Owned:
Single Family.......... $ -- -- % $ 422 1.69% $ 3,015 5.00% $ 8,268 9.16% $ 10,052 8.50%
Multi-Family........... -- -- -- -- 4,881 8.10 15,590 17.27 16,015 13.55
Commercial............. -- -- -- -- 276 0.46 -- -- 327 0.28
Other.................. -- -- -- -- -- -- -- -- 484 0.41
------ ------ ------- ------ ------- ------ ------- ------ -------- ------
Total Real Estate
Owned................. -- -- 422 1.69 8,172 13.56 23,858 26.43 26,878 22.74
------ ------ ------- ------ ------- ------ ------- ------ -------- ------
Non-Performing Loans:
Single Family.......... 3,849 44.70 6,063 24.35 21,441 35.57 24,634 27.28 25,317 21.41
Multi-Family........... 432 5.00 18,937 76.06 34,347 56.99 42,481 47.05 70,207 59.39
Commercial............. 4,476 52.00 -- -- 1,536 2.55 3,623 4.01 10,307 8.72
Other.................. 229 2.70 388 1.56 194 0.33 271 0.30 245 0.20
Less Valuation
Allowances............ (380) (4.40) (912) (3.66) (5,422) (9.00) (4,582) (5.07) (14,732) (12.46)
------ ------ ------- ------ ------- ------ ------- ------ -------- ------
Total Non-Performing
Loans................. 8,606 100.00 24,476 98.31 52,096 86.44 66,427 73.57 91,344 77.26
------ ------ ------- ------ ------- ------ ------- ------ -------- ------
Total.................. $8,606 100.00% $24,898 100.00% $60,268 100.00% $90,285 100.00% $118,222 100.00%
====== ====== ======= ====== ======= ====== ======= ====== ======== ======
Ratio of Non-Performing
Assets To Total As-
sets:................. .33% .82% 1.83% 2.62% 3.23%
====== ====== ====== ====== ======
</TABLE>
36
<PAGE>
The increase in single family non-performing loans and delinquencies is
primarily due to recession-related factors such as layoffs, decreased
incomes and decreased real estate values. The increase in multi-family
delinquencies is attributable primarily to economic factors, declines
in occupancy rates, and decreased real estate values. The Bank actively
monitors the status of all delinquent loans.
The Bank has debt restructurings which result from temporary
modifications of principal and interest payments. Under these
arrangements, loan terms are typically reduced to no less than a
required monthly interest payment. Any loss of revenues under
the modified terms would be immaterial to the Bank. If the borrower
is unable to return to scheduled principal and interest payments
at the end of the modification period, foreclosure procedures are
initiated. As of December 31, 1993, the Bank had modified loans
totaling $66.2 million. The Bank had established loan loss allowances
of $4.1 million for these loans. No modified loans were 90 days or more
delinquent as of December 31, 1993.
Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses is presented
in note 3 of the Notes to Consolidated Financial Statements. At December
31, 1993, the allowance for loan losses was comprised of $46.9 million
in general valuation allowances. Total general valuation allowances,
including allowances on loans sold with recourse amounted to 1.48%
of the loans with loss exposure at the end of 1993. This compares to 0.93
% at the end of 1992 and 0.41% at the end of 1991. The increase reflects
management's concerns regarding the Southern California economy. The
current level of loss allowances is considered adequate to cover the Bank's
loss exposure at this time.
The Bank's total loan loss allowances increased 93.3 from December 31,
1992 to December 31,1993. The increase in loan loss allowances is attributable
to the increase in non-performing loans. The overall increase in the loan
portfolio and the continuing decline in the Southern California real
estate market.
SOURCES OF FUNDS
External Sources of Funds
External sources of funds include savings deposits, loans sales, advances
from the Federal Home Loan Bank of San Francisco ("FHLB") and other
borrowings. For purposes of funding asset growth, the source or sources
of funds with the lowest all-in cost for the desired term are generally
selected. The funding sources used most often during 1993 were deposits
from national brokerage firms and reverse repurchase agreements (securitized
borrowings).
Deposits obtained from national brokerage firms ("brokered deposits") are
considered a source of funds similar to a borrowing. The Bank is permitted
to obtain brokered deposits pursuant to a waiver of certain regulatory
requirements from the Federal Deposit Insurance Corporation. Often during
1993, these deposits, including commission costs, were the least costly
source of funds to the Bank. Brokered deposits were $519 million at
December 31, 1993. This compares to $274 million at the end of 1992
and $292 million at the end of 1991.
Deposits at retail savings branches increased to $1.5 billion at the
end of 1993 from $1.3 billion at the end of 1992 and $1.0. billion at
the end of 1991. The Bank acquired two branches with deposits totaling
$113 million from the RTC in December of 1993. Thirty days after the
acquisition, the deposits of the two branches were combined and one of the
branches was closed. The Bank also acquired seven branches with deposits
totaling $290 million from the RTC during 1992.
The Bank also solicits deposits through telemarketing efforts.
Telemarketing deposits are solicited by the Bank's employees by telephone,
principally from pension funds. Telemarketing deposits decreased by 27%
during 1993 to $286 million at the end of the year. Telemarketing deposits
decreased during 1993 due to lower interest rates on other funding sources
available to the Bank. Telemarketing deposits were $389 million at the
end of 1992 and $440 million at the end of 1991.
37
<PAGE>
Reverse repurchase agreements ("reverse repos") are short term
borrowings secured by mortgage-backed securities. These borrowings
increased to $549 million at the end of 1993 from $491 million at the
end of 1992. Reverse repos at the end of 1991 were $624 million. $112
million in loans were securitized during 1993 to increase the
availability of this type of borrowing.
FHLB advances decreased 21% to $ 515 million at the end of 1993 from
$655 million at the end of 1992. Advances at the end of 1991 totaled
$524 million. Advances dropped at the end of 1993 because short term
borrowings were paid off with funds from the branches acquired in December.
Sales of loans and mortgage-backed securities were $153 million during
1993, comparable to $154 million sold during 1992. $55 million in loans
were sold during 1991. The volume of loans sold varies with the amount
of saleable loans originated.
Internal Sources of Funds
Internal sources of funds include scheduled loan principal payments,
loan payoffs, and positive cash flows from operations. Principal payments
were $355 million in 1993 compared with $322 million in 1992 and $278
million in 1991. Principal payments include both amortization and
prepayments and are a function of real estate activity and the general
level of interest rates.
CAPITAL REQUIREMENTS
Current regulatory capital standards require that the Bank maintain
tangible capital of at least 1.5% of total assets, core capital of 3.0%
of total assets, and risk-based capital of 8.0% of total assets,
risk-weighted. Among other things, failure to comply with these capital
standards will result in restrictions on asset growth and the preparation
of a capital plan, subject to regulatory approval. Any institution with
a risk-based capital ratio in excess of 10% and a core capital ratio
greater than 5% is considered well-capitalized for regulatory purposes.
Institutions who maintain this capital level can take in brokered
deposits at their discretion, and if they achieve a sufficient
ranking on their regulatory examination, may be assessed a lower
deposit insurance rate. Management presently intends to maintain its
capital position at levels above those required by regulators to ensure
operating flexibility and growth capacity for the Bank. The Bank's
capital position is actively monitored. The Bank met all three capital
requirements at the end of 1993 as indicated by the chart below:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
REQUIREMENT RATIO
----------- -------
<S> <C> <C>
Tangible Capital....................... 1.50% 5.64%
Core Capital........................... 3.00% 5.64%
Risk-based Capital..................... 8.00% 10.25%
The Bank declared and paid a dividend to FirstFed Financial Corp. in
February of 1994 as a return of a capital infusion. After the payment,
the Bank's tangible and core capital ratios became 5.51% and the risk-
based capital ratio became 10.03%.
ASSET-LIABILITY MANAGEMENT
The Bank's asset-liability management policy is designed to improve the
balance between the maturities and repricings of interest-earning assets
and interest-bearing liabilities in order to better insulate earnings from
interest rate fluctuations. Under this program, the Bank emphasizes the
funding of monthly adjustable mortgages with short term savings and
borrowings and matching the maturities of these assets and liabilities.
The maturities of fixed rate assets are matched with fixed cost liabilities.
The majority of the Bank's assets are monthly adjustable rate mortgages
with interest rates that fluctuate based on changes in the Federal Home
Loan Bank of San Francisco Eleventh District Cost of Funds Index ("Index").
38
<PAGE>
These mortgages constitute over 95% of the loan portfolio at the end of 1993.
Comparisons over the last several years show that changes in the Bank's
cost of funds generally correlate with changes in the Index. The Bank does
not use any futures, options or swaps in its asset-liability strategy.
Assets and liabilities which are subject to repricing are considered
rate sensitive. The mismatch in the repricing of rate sensitive assets
and liabilities is referred to as a company's "GAP". The GAP is positive
if rate-sensitive assets exceed rate-sensitive liabilities. A positive
GAP benefits a company during periods of increasing interest rates.
The reverse is true during periods of decreasing interest rates. In order
to minimize the impact of rate fluctuations on earnings, management's
goal is to keep the one year GAP at less than 20% of total assets
(positive or negative). At December 31, 1993, the Bank's one-year GAP
was a positive $542 million or 14.8% of total assets. This compares
with positive GAP ratios of 11.6% of total assets at December 31,
1992 and December 31, 1991.
The following chart shows the composition of the Bank's
(unconsolidated) GAP position at the end of 1993 and the GAP position
as a percentage of total assets at that time.
</TABLE>
<TABLE>
<CAPTION>
INTEREST-SENSITIVITY GAP
BALANCES BALANCES BALANCES BALANCES
-------- -------- -------- --------
REPRICING REPRICING REPRICING REPRICING
--------- --------- --------- ---------
TOTAL WITHIN WITHIN WITHIN AFTER
----- ------ ------ ------ -----
BALANCE 0-3 MONTHS 4-12 MONTHS 1-5 YEARS 5 YEARS
--------- --------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Investment Securities $ 103,836 $ 1,100 $ 3,011 $ 99,725 $ -
MBS 708,283 697,705 - - 10,578
Loans Receivable:
Interest Rate Sensitive Loans 2,658,594 2,658,594 - - -
Fixed Rate Loans 56,880 6,530 7,717 16,778 25,855
----------- ----------- -------- -------- ---------
Total Interest-Earning
Assets $3,527,593 $3,363,929 $10,728 $ 116,503 $ 36,433
=========== =========== ======== ========= =========
Interest-Bearing Liabilities
Demand Accounts................... $ 504,405 $ 504,405 $ - $ - $ -
Fixed Rate Term Certificate...... 1,802,050 593,114 811,807 311,525 85,604
Borrowings:
FHLB Advances................... 514,700 317,500 33,000 164,200 -
Reverse Repurchase .............
Agreements.................... 548,649 457,199 91,450 - -
Other Borrowings................ 24,800 22,800 2,000 - -
----------- ---------- --------- --------- ---------
Total Interest-Bearing
Liabilities................. $3,394,604 $1,895,018 $ 938,257 $ 475,725 $ 85,604
=========== =========== ========== ========= ========
Interest-Sensitivity Gap........... $ 132,989 $1,468,911 $ (927,529) $(359,222) $(49,171)
=========== =========== ========== ========= ========
Interest-Sensitivity Gap as a
Percentage of Total Assets....... 40.11% (25.33)% (9.81)% (1.34)%
======= ======== ======== =======
Cumulative Interest-Sensitivity Gap $1,468,911 $ 541,382 $182,160 $ 132,989
=========== ========== ========== =========
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets......................... 40.11% 14.78% 4.97% 3.63%
====== ====== ===== =====
</TABLE>
39
<PAGE>
STOCK PRICES
The common stock of FirstFed Financial Corp. is traded on the New York
Stock Exchange under the trading symbol "FED". The quarterly high and low
and period-end price information presented below is based on information
supplied by the New York Stock Exchange. All prices have been adjusted
for stock splits.
The Company has never declared or paid a cash dividend. In 1987 the
Company's Board of Directors authorized the repurchase of 10% of the
Company's outstanding shares of stock. No shares were repurchased during
1993. 279,900 shares were repurchased during 1992 at an average purchase
price of $16.42 per share. As of December 31, 1993, a total of 796,520
shares had been repurchased at an average cost of $12.34 per share.
Based on the number of shares outstanding at December 31, 1987, 264,000
shares remain eligible for repurchase under this program.
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
(ADJUSTED FOR STOCK SPLITS)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- --------------- ------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
------ ------ ------- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993............... 26 1/2 19 1/4 20 7/8 15 1/4 20 3/8 16 1/4 19 3/4 14 7/8
1992............... 26 22 24 1/2 19 1/2 21 3/4 13 7/8 19 1/2 13 1/2
1991............... 19 7/8 12 1/4 24 1/4 19 7/8 26 5/8 21 1/8 24 18 1/4
1990............... 18 14 3/4 20 5/8 15 3/8 18 1/2 11 1/2 13 7/8 11 1/4
1989............... 12 5/8 10 5/8 16 5/8 12 1/4 21 5/8 15 1/2 21 5/8 14 7/8
</TABLE>
40
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1993 1992
---------- ----------
<S> <C> <C>
ASSETS
Cash..................................................... $ 17,491 $ 23,985
Investment securities, at cost ( market of $104,282 and
$44,059)................................................ 103,836 43,736
Loans receivable (Notes 3, 7 and 8)...................... 2,692,036 2,481,225
Mortgage-backed securities (market of $715,726 and
$706,827) (Notes 3 and 8)............................... 708,283 693,072
Loans and mortgage-backed securities held for sale (mar-
ket of $24,030 and$92,899) (Note 3)..................... 23,627 91,558
Accrued interest and dividends receivable................ 21,018 23,016
Real estate (Note 4)..................................... 27,249 24,243
Office properties and equipment, at cost less accumulated
depreciation (Note 5)................................... 8,923 9,520
Investment in Federal Home Loan Bank (FHLB) stock , at
cost (Note 7)........................................... 38,967 35,542
Other assets (Note 1).................................... 19,687 20,676
---------- ----------
$3,661,117 $3,446,573
========== ==========
LIABILITIES
Deposits (Note 6)........................................ $2,305,480 $1,982,745
FHLB advances and other borrowings (Note 7).............. 544,500 705,150
Securities sold under agreements to repurchase (Note 8).. 548,649 491,091
Deferred income taxes (Note 9)........................... 16,366 21,849
Accrued expenses and other liabilities................... 37,830 38,227
---------- ----------
3,452,825 3,239,062
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 3, 5, AND 11)
STOCKHOLDERS' EQUITY (NOTES 10 AND 11)
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued 11,326,191 and 11,180,221
shares, outstanding 10,529,671 and 10,383,701
shares................................................ 113 112
Additional paid-in capital............................. 27,279 24,524
Retained earnings--substantially restricted............ 193,650 195,698
Loan to employee stock ownership plan.................. (2,918) (2,991)
Treasury stock, at cost, 796,520 shares................ (9,832) (9,832)
---------- ----------
208,292 207,511
---------- ----------
$3,661,117 $3,446,573
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest on loans and mortgage-backed securi-
ties........................................... $221,177 $249,104 $287,909
Interest and dividends on investments........... 8,268 6,508 8,621
-------- -------- --------
Total interest income......................... 229,445 255,612 296,530
-------- -------- --------
Interest expense:
Interest on deposits (Note 6)................... 77,741 87,802 115,627
Interest on borrowings.......................... 53,875 63,708 80,129
-------- -------- --------
Total interest expense........................ 131,616 151,510 195,756
-------- -------- --------
Net interest income............................... 97,829 104,102 100,774
Provision for loan losses (Note 3)............... 67,679 41,384 11,833
-------- -------- --------
Net interest income after provision for loan loss- 30,150 62,718 88,941
es............................................... -------- -------- --------
Other income (expense):
Loan and other fees............................. 6,530 5,863 5,972
Gain on sale of loans and mortgage-backed secu-
rities......................................... 4,257 2,098 1,133
Real estate operations, net..................... (437) 2,604 (1,319)
Other operating income.......................... 1,704 2,069 1,273
-------- -------- --------
Total other income............................ 12,054 12,634 7,059
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (Note 11)........ 22,880 23,453 21,545
Occupancy (Note 5).............................. 6,816 6,642 5,714
Advertising..................................... 2,486 2,235 1,731
Federal deposit insurance....................... 4,622 4,156 3,890
Other operating expense......................... 8,494 9,639 7,602
-------- -------- --------
Total non-interest expense.................... 45,298 46,125 40,482
-------- -------- --------
Earnings (loss) before income taxes (benefit) and
cumulative effect of change in accounting
principle....................................... (3,094) 29,227 55,518
Income taxes (benefit) (Note 9)................... (1,046) 11,198 27,091
-------- -------- --------
Earnings (loss) before cumulative effect of change
in accounting principle.......................... (2,048) 18,029 28,427
Cumulative effect of change in accounting princi- -- 4,075 --
ple (Note 9)..................................... -------- -------- --------
Net earnings (loss)............................. $ (2,048) $ 22,104 $ 28,427
======== ======== ========
Earnings (loss) per share (Note 10):
Earnings (loss) before cumulative effect of
change in accounting principle................. $ (0.19) $ 1.66 $ 2.61
Cumulative effect of change in accounting prin- -- 0.38 --
ciple.......................................... -------- -------- --------
Earnings (loss) per share ........................ $ (0.19) $ 2.04 $ 2.61
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
RETAINED
EARNINGS LOAN TO
ADDITIONAL (SUBSTANTIALLY ESOP
COMMON PAID-IN RESTRICTED) (NOTES 10 TREASURY
STOCK CAPITAL (NOTE 10) AND 11) STOCK TOTAL
------ ---------- -------------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1990................... $ 86 $23,350 $145,167 $(1,929) $(5,236) $161,438
Stock split in form of
stock dividends
(Note 10).............. 21 (35) -- -- -- (14)
Exercise of employee
stock options.......... 2 359 -- -- -- 361
Net increase in loan to
employee stock owner-
ship plan.............. -- -- -- (36) -- (36)
Net earnings 1991....... -- -- 28,427 -- -- 28,427
---- ------- -------- ------- ------- --------
Balance, December 31,
1991................... 109 23,674 173,594 (1,965) (5,236) 190,176
Exercise of employee
stock options.......... 3 850 -- -- -- 853
Net increase in loan to
employee stock owner-
ship plan.............. -- -- -- (1,026) -- (1,026)
Treasury stock pur-
chases................. -- -- -- -- (4,596) (4,596)
Net earnings 1992....... -- -- 22,104 -- -- 22,104
---- ------- -------- ------- ------- --------
Balance, December 31,
1992................... 112 24,524 195,698 (2,991) (9,832) 207,511
Exercise of employee
stock options.......... 1 400 -- -- -- 401
Net decrease in loan to
employee stock owner-
ship plan.............. -- -- -- 73 -- 73
Benefit from stock op-
tion tax adjustment.... -- 2,355 -- -- -- 2,355
Net loss 1993........... -- -- (2,048) -- -- (2,048)
---- ------- -------- ------- ------- --------
Balance, December 31,
1993................... $113 $27,279 $193,650 $(2,918) $(9,832) $208,292
==== ======= ======== ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).............................. $ (2,048) $ 22,104 $ 28,427
Adjustments to reconcile net earnings (loss) to
net cash
provided (used) operating activities:
Net change in loans and mortgage-backed securi-
ties held for sale............................ 67,931 62,557 (55,617)
Depreciation and amortization.................. 1,710 1,712 711
Provision for losses on loans.................. 67,679 41,384 11,833
Valuation adjustments on real estate........... (1,151) (2,890) --
Amortization of fees and discounts............. (763) (1,111) (976)
Write off of discount on bonds................. -- -- 2,411
Decrease in deferred premium on sale of loans.. 3,079 3,998 4,862
(Increase) decrease in negative amortization... (2,008) 15,005 7,047
Decrease in deferred taxes..................... (5,483) (5,080) (2,665)
(Increase) decrease in interest and dividends
receivable.................................... 1,998 5,782 (388)
Increase (decrease) in interest payable........ 2,242 (3,513) (12,869)
Increase in other assets....................... (3,458) (2,333) ( 905)
Increase (decrease) in accrued expenses and (521) 422 5,543
other liabilities............................. -------- -------- --------
Net cash provided (used) by operating activi- 129,207 138,037 (12,586)
ties........................................ -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
of loans........................................ (335,534) (428,790) (274,993)
Loans purchased.................................. (55,188) (17,277) --
Proceeds from sales of real estate............... 96,120 69,405 34,694
Proceeds from maturities of investment securi-
ties............................................ 11,710 3,510 6,338
Purchases of investment securities............... (71,682) (31,124) (6,200)
Purchases of FHLB stock.......................... (2,415) (6,559) ( 330)
Other............................................ 1,007 (6,399) (2,661)
-------- -------- --------
Net cash used by investing activities........ (355,982) (417,234) (243,152)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits......................... 209,488 52,246 450
Acquisitions of branches, net.................... 113,247 190,396 --
Net increase (decrease) in short term borrowings. (73,292) (198,631) 251,996
Proceeds from long term borrowings............... -- 214,500 --
Repayment of long term borrowings................ (29,800) (100,000) (36,839)
Payments to acquire treasury stock............... -- (4,596) --
Other............................................ 638 (7,308) (1,167)
-------- -------- --------
Net cash provided by financing activities.... 220,281 146,607 214,440
-------- -------- --------
Net decrease in cash and cash equivalents........ (6,494) (132,590) (41,298)
Cash and cash equivalents at beginning of year... 23,985 156,575 197,873
-------- -------- --------
Cash and cash equivalents at end of year......... $ 17,491 $ 23,985 $156,575
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies of
FirstFed Financial Corp. (the "Company"), and its wholly-owned subsidiary
First Federal Bank of California (the "Bank").
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Certain items in the 1992 and 1991 consolidated financial
statements have been reclassified to conform to the 1993 presentation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash, overnight investments and securities purchased under agreements to
resell.
Allowance for Loan Losses
The Bank maintains a general valuation allowance for loan losses,
unallocated to any specific loan. The allowance is maintained at an
amount that management believes adequate to cover estimable and
probable loan losses based on a risk analysis of the current portfolio.
Additionally, management performs periodic reviews of the loan portfolio
to identify potential problems and establish specific loan loss allowances
if losses are expected to be incurred. Additions to the allowance are
charged to earnings. The regulatory agencies periodically review the
allowance for loan losses and may require the Bank to adjust the allowance
based on information available to them at the time their examination.
Allowance for Delinquent Interest
The Bank provides an allowance for accrued interest receivable on
delinquent loans when such interest is deemed uncollectible, generally
at the time the loan is 90 days past due. This allowance reduces
interest receivable for financial statement purposes.
Loans and Mortgage-Backed Securities Held for Sale
The Bank identifies loans and mortgage-backed securities that foreseeably
may be sold prior to maturity and classifies them as held for sale.
They are carried at the lower of amortized cost or market value on an
aggregate basis by type of asset. For loans, market value is calculated
on an aggregate basis as determined by the current market investor
yield requirement. Market values for mortgage-backed securities are
determined by financial market quotes.
Gain or Loss on Sale of Loans
The Bank sells mortgage loans and loan participations with yield rates
to the buyer based upon the current market rates which may differ from
the contractual rate on the loans sold. Gain or loss is recognized and
a premium or discount is recorded at the time of sale based upon the
net present value of amounts expected to be received or paid resulting from
the difference between the contractual interest rates and the yield to the
buyer, excluding a normal servicing fee to be earned for continuing to
service the loans. Amortization of discount or premium represents an
adjustment of yield and is reflected as an addition to or reduction of
interest income using the interest method over the life of such loans
adjusted for estimated prepayments. Excess service fees are written
down for impairment if the present value of the estimated remaining future
excess service fee revenue, using the same discount factor used to calculate
the original excess service fee receivable, exceeds the recorded amount.
45
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) Summary of Significant Accounting Policies (continued)
Deferred premiums arising from the sale of loans are included in other
assets and were $7,738,000 and $10,817,000 at December 31, 1993 and 1992,
respectively.
Investment Securities
Investment securities held for investment are carried at cost. Any
premium or discount is amortized over the term of the security using
the interest method. The securities are not carried at the lower of
cost or market because management has the ability to and intends to hold
such securities until maturity.
Real Estate
Real estate acquired through foreclosure is recorded at fair value (net
of estimated selling costs) at the date of foreclosure, and is adjusted
for any subsequent declines in fair value.
In years previous to 1993, some loans were classified as real estate
("in-substance foreclosure") under certain circumstances when the collateral
for the loan or the financial condition of the borrower had been impaired.
Consistent with recent accounting guidance issued in 1993, certain impaired
loans are no longer accounted for as real estate. These in-substance
foreclosures were reclassified, for financial reporting purposes, to
loans receivable as of December 31, 1993 and 1992. Additionally, any related
loss allowances were reclassified to specific loan valuation allowances.
These impaired loans continue to be recorded at the fair value of the
underlying collateral. There was no change in reported net earnings (loss)
as a result of these reclassifications.
The recognition of gain on the sale of real estate is dependent on a
number of factors relating to the nature of the property sold, terms of
sale, and any future involvement of the Bank or its subsidiaries in the
property sold. If a real estate transaction does not meet certain down
payment, cash flow and loan amortization requirements, income is deferred
and recognized under an alternative method.
Depreciation and Amortization
Depreciation of properties and equipment is provided by use of the
straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is provided by use of
the straight-line method over the lesser of the life of the improvement
or the term of the lease.
Income Taxes
The Company accounts for income taxes using the asset and liability
method in accordance with Statement of Financial Accounting Standards No.
109. In the asset and liability method, deferred tax assets and liabilities
are established as of the reporting date for the realizable cumulative
temporary differences between the financial reporting and tax return bases
of the Bank's assets and liabilities. The tax rates applied are the statutory
rates expected to be in effect when the temporary differences are realized or
settled.
46
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(1) Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In May of 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires
that impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or at
the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. SFAS No. 114 applies to financial
statements for fiscal years beginning after December 15, 1994. In the
opinion of management, implementation of this standard will not have a
material impact on the Company.
In May of 1993, the FASB also issued SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Statement
addresses the accounting and reporting for investments in debt securities.
The Statement requires that all securities be classified, at acquisition,
into one of three categories: held-to maturity securities, trading
securities, and available-for-sale securities. Held-to-maturity securities
are those securities the Company has the positive intent and ability to
hold to maturity and are carried at amortized cost. Trading securities are
those securities that are bought and held principally for the purpose of
selling them in the near term and are reported at fair value, with
unrealized gains and losses included in earnings. Available-for-sale
securities are those securities that do not fall into the other two
categories and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported in a separate component of
shareholders' equity. This Statement is effective for fiscal years
beginning after December 15, 1993. In the opinion of management,
implementation of this standard will not have a material impact on
the Company.
(2) Securities Purchased Under Agreements to Resell
The amounts advanced under agreements to resell securities (repurchase
agreements) represent short-term investments. During the agreement period
the securities are maintained by the dealer under a written custodial
agreement that explicitly recognizes the Bank's interest in the securities.
The Bank had no agreements to resell securities at December 31, 1993 or
December 31, 1992. Securities purchased under agreements to resell averaged
$48,761,000 and $94,918,000 during 1993 and 1992, and the maximum amounts
outstanding at any month end during 1993 and 1992 were $95,000,000 and
$120,000,000, respectively.
47
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) Loans Receivable and Mortgage-backed Securities
<TABLE>
<CAPTION>
Loans receivable and mortgage-backed securities are summarized as follows:
1993 1992
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real Estate Loans:
First trust deed residential loans:
One unit.............................................. $1,543,758 $1,432,543
Two to four units..................................... 340,035 296,550
Five or more units.................................... 1,325,659 1,287,077
---------- ----------
Residential loans..................................... 3,209,452 3,016,170
Other real estate loans:
Commercial and industrial............................. 245,387 256,474
Second trust deeds.................................... 24,606 29,441
Other................................................. 5,861 10,733
---------- ----------
Real estate loans................................... 3,485,306 3,312,818
Non-real estate loans:
Manufactured housing.................................... 2,880 3,481
Deposit accounts........................................ 1,086 1,184
Consumer................................................ 847 1,494
---------- ----------
Loans receivable.................................... 3,490,119 3,318,977
Less:
General loan valuation allowances....................... 46,900 27,854
Unearned loan fees...................................... 19,273 25,268
---------- ----------
Subtotal............................................ 3,423,946 3,265,855
---------- ----------
Less:
Mortgage-backed securities.............................. 708,283 693,072
Loans and mortgage-backed securities held for sale...... 23,627 91,558
---------- ----------
Loans receivable, net............................... $2,692,036 $2,481,225
========== ==========
</TABLE>
Mortgage-backed securities created with loans originated by the Bank
totaled $111,701,000, $187,479,000 and $157,266,000, during 1993, 1992,
and 1991, respectively. At December 31, 1993, the Bank owned $674,372,000
in FHLMC mortgage-backed securities and $33,911,000 in FNMA mortgage-backed
securities with combined market values of $715,726,000. At December 31,
1992, $731,127,000 in FHLMC mortgage-backed securities and $38,028,000
in FNMA mortgage-backed securities were owned with combined market values of
$783,677,000. All mortgage-backed securities mature in periods greater than
ten years. There were no mortgage-backed securities held for sale at
December 31, 1993. Mortgage-backed securities held for sale totaled
$76,083,000 at December 31, 1992.
Loans serviced for others totaled $786,809,000, $891,484,000 and
$1,052,980,000 at December 31, 1993, 1992 and 1991, respectively.
The Bank has loss exposure on certain loans sold with recourse. These
loans are combined with the Bank's loan portfolio for purposes of computing
general valuation allowances and measuring credit risk exposure.
The dollar amount of loans sold with recourse totaled $316,136,000 and
$396,653,000, respectively, as of December 31, 1993 and 1992. The maximum
potential recourse liability totaled $69,808,000 and $82,056,000,
respectively, as of December 31, 1993 and December 31, 1992. The Bank's
allowance for losses related to loans sold with recourse totaled $6,231,000
and $5,780,000 at December 31, 1993 and 1992, respectively.
At December 31, 1993 the Bank had outstanding commitments to fund
$62,015,000 in real estate loans.
48
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) Loans Receivable and Mortgage-backed Securities (continued)
Accrued interest receivable related to loans and mortgage-backed securities
outstanding at December 31, 1993 and 1992 totaled $25,450,000 and $26,931,000,
respectively.
Loans delinquent greater than 90 days or in foreclosure were $106,076,000
and $47,814,000 as of December 31, 1993 and 1992, respectively, and the
related allowances for delinquent interest were $5,723,000 and $4,325,000,
respectively.
Loans originated upon sale of real estate totaled $69,808,000, $48,132,000,
and $11,963,000 during 1993, 1992 and 1991, respectively.
<TABLE>
<CAPTION>
The following is a summary of the activity in general loan valuation
allowances for the periods indicated (in thousands):
<S> <C>
Balance at December 31, 1990................................... $11,181
Charge-offs.................................................... (9,077)
Provisions for loan losses..................................... 11,833
-------
Balance at December 31, 1991................................... 13,937
Charge-offs.................................................... (27,467)
Provisions for loan losses..................................... 41,384
-------
Balance at December 31, 1992................................... 27,854
Charge-offs.................................................... (48,633)
Provisions for loan losses..................................... 67,679
-------
Balance at December 31, 1993................................... $46,900
=======
</TABLE>
(4) Real Estate
<TABLE>
<CAPTION>
Real estate consists of the following:
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate held for investment........................ $ 371 $ 385
Real estate acquired by (or deed in lieu of) 26,878 23,858
foreclosure........................................... ------- -------
$27,249 $24,243
======= =======
</TABLE>
The Bank acquired $135,577,000, $93,807,000 and $27,804,000 of real
estate in settlement of loans during 1993, 1992, and 1991, respectively.
(5) Office Properties, Equipment and Lease Commitments
Office properties and equipment, at cost, less accumulated depreciation
and amortization, are summarized as follows:
<TABLE>
<CAPTION>
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 2,907 $ 2,907
Office buildings........................................ 3,759 3,742
Furniture, fixtures and equipment....................... 9,511 9,115
Leasehold improvements.................................. 8,541 8,527
Other................................................... 93 84
------- -------
24,811 24,375
Less accumulated depreciation and amortization.......... 15,888 14,855
------- -------
$ 8,923 $ 9,520
======= =======
</TABLE>
49
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) Office Properties, Equipment and Lease Commitments (continued)
The Bank is obligated under noncancelable operating leases for periods
ranging from five to thirty years. The leases are for certain of the
office facilities. Approximately half of the leases for office facilities
contain five and ten year renewal options. Minimum rental commitments at
December 31, 1993 under all noncancelable leases are as follows:
<TABLE>
<CAPTION>
REAL PROPERTY
--------------
(IN THOUSANDS)
<S> <C>
1994............................... $ 4,302
1995............................... 4,253
1996............................... 4,223
1997............................... 4,004
1998............................... 3,069
Thereafter......................... 6,273
-------
$26,124
=======
</TABLE>
Rent payments under these leases were $3,898,000, $3,390,000, and
$2,942,000 for 1993, 1992 and 1991, respectively. Certain leases
require the Bank to pay property taxes and insurance. Additionally,
certain leases have rent escalation clauses based on specified
indices.
50
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
(6)Deposits
Deposit account balances are summarized as follows:
1993 1992
-------------- --------------
AMOUNT % AMOUNT %
---------- --- ---------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 2.40% and 2.75%)............ $ 196,467 9% $ 186,721 9%
Interest-bearing checking accounts (weighted
average rate of 2.18% and 2.39%)............ 148,460 6 127,985 7
Passbook accounts (weighted average rate of
2.29% and 2.64%)............................ 118,455 5 106,247 5
Non-interest bearing checking accounts....... 44,868 2 33,177 2
---------- --- ---------- ---
508,250 22 454,130 23
---------- --- ---------- ---
Fixed rate term certificate accounts:
Under six month term (weighted average rate
of 2.77% and 3.20%)......................... 69,132 3 117,954 6
Six month term (weighted average rate of
3.13% and 3.50%)............................ 299,368 13 230,489 12
Nine month term (weighted average rate of
3.36% and 3.77%)............................ 200,269 9 45,852 2
One year to 18 month term (weighted average
rate of 3.67% and 4.14%).................... 474,853 20 333,798 17
Two year or 30 month term (weighted average
rate of 4.67% and 6.16%).................... 148,993 7 186,473 9
Over 30 month term (weighted average rate of
5.80% and 6.56%)............................ 307,513 13 141,713 7
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 3.43% and 3.82%)............ 297,102 13 472,336 24
---------- --- ---------- ---
1,797,230 78 1,528,615 77
---------- --- ---------- ---
Total Deposits (weighted average rate of
3.60% and 3.97%).......................... $2,305,480 100% $1,982,745 100%
========== === ========== ===
</TABLE>
Certificates of deposit, placed through five major national brokerage
firms, totaled $518,888,000 in 1993 and $273,635,000 in 1992.
Cash payments for interest on deposits (including interest credited)
totaled $95,544,000, $82,973,000, and $126,266,000 during 1993, 1992
and 1991, respectively. Accrued interest on deposits at December 31,
1993 and 1992 totaled $8,201,000 and $6,270,000, respectively.
51
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) Deposits (continued)
The following table indicates the maturities and weighted average
interest rates of the Bank's deposits at December 31, 1993:
<TABLE>
<CAPTION>
NON-TERM
ACCOUNTS 1994 1995 1996 1997 THEREAFTER TOTAL
-------- ---------- -------- ------- ------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits at December 31,
1993................... $508,250 $1,414,006 $171,317 $89,872 $16,361 $105,674 $2,305,480
======== ========== ======== ======= ======= ======== ==========
Weighted average
interest rates......... 2.10% 3.68% 4.78% 5.47% 5.87% 5.93% 3.60%
======== ========== ======== ======= ======= ======== ==========
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Passbook accounts............................... $ 2,580 $ 2,806 $ 3,319
Money market deposits and interest-bearing
checking accounts.............................. 7,918 8,328 7,524
------- ------- --------
Certificate accounts............................ 67,243 76,668 104,784
------- ------- --------
$77,741 $87,802 $115,627
======= ======= ========
</TABLE>
(7) Federal Home Loan Bank Advances and Other Borrowings
<TABLE>
<CAPTION>
Federal Home Loan Bank (FHLB) Advances and other borrowings consist of
the following:
1993 1992
------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances from the FHLB of San Francisco with a
weighted average interest rate of 4.70% and 5.20%,
secured by FHLB stock and certain real estate loans
with unpaid principal balances of approximately
$1,262,008,000 at December 31, 1993, payable through
1996................................................ $514,700 $654,500
Unsecured term funds with a weighted average interest
rate of 3.33% and 3.52%, maturing within one year... 24,800 47,650
Unsecured promissory note with an interest rate of
prime plus 1% (7% and 7%), maturing within one year. 5,000 3,000
-------- --------
$544,500 $705,150
======== ========
</TABLE>
52
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) Federal Home Loan Bank Advances and Other Borrowings (continued)
<TABLE>
<CAPTION>
The following is a summary of maturities at December 31, 1993
(in thousands):
<S> <C>
1994..................................... $270,300
1995..................................... 265,200
1996..................................... 9,000
--------
$544,500
========
</TABLE>
Cash payments for interest on borrowings (including reverse
repurchase agreements) totaled $31,011,000, $54,472,000, and $80,403,000
during 1993, 1992, and 1991, respectively.
(8) Securities Sold Under Agreements to Repurchase
The Bank enters into sales of securities and whole loans under agreements
to repurchase (reverse repurchase agreements) which require the repurchase
of the same securities or loans. Reverse repurchase agreements are treated
as financing arrangements, and the obligation to repurchase securities or
loans sold is reflected as a borrowing in the statement of financial
condition. The mortgage-backed securities underlying the agreements
were delivered to the dealer who arranged the transactions or its trustee.
At December 31, 1993, $548,649,000 in reverse repurchase agreements were
collateralized by mortgage-backed securities with principal balances
totaling $559,004,000 and market values totaling $564,768,000. All
borrowings under reverse repurchase agreements mature within 96 days after
December 31, 1993, with a weighted average interest rate of 3.32%.
Securities sold under agreements to repurchase averaged $594,314,000 and
$527,528,000 during 1993 and 1992, respectively, and the maximum amounts
outstanding at any month end during 1993 and 1992 were $650,033,000 and
$594,680,000, respectively.
(9) Income Taxes
<TABLE>
<CAPTION>
Income taxes (benefit) consist of the following:
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal...................................... $ 4,317 $12,590 $21,065
State........................................ 120 3,688 8,179
------- ------- -------
4,437 16,278 29,244
------- ------- -------
Deferred:
Federal...................................... (5,114) (3,764) (1,751)
State........................................ (369) (1,316) (402)
------- ------- -------
(5,483) (5,080) (2,153)
------- ------- -------
Total:
Federal...................................... (797) 8,826 19,314
State........................................ (249) 2,372 7,777
------- ------- -------
$(1,046) $11,198 $27,091
======= ======= =======
</TABLE>
53
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) Income Taxes (continued)
A reconciliation of the statutory federal corporate income tax rate to
the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1993 1992 1991
------ ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate................... (35.0)% 34.0% 34.0%
Increase (reductions) in taxes resulting from:
Bad debt deduction based upon a percentage of in-
come, net of preference tax...................... -- -- (3.0)
State franchise tax, net of federal income tax
benefit.......................................... (6.4) 4.2 9.2
Provisions for losses on loans and real estate
held for sale.................................... -- -- 8.0
Goodwill.......................................... 7.4 .6 .2
Other, net........................................ .2 (.5) .4
------ ---- ----
Effective rate.................................. (33.8)% 38.3% 48.8%
====== ==== ====
</TABLE>
Cash payments for income taxes totaled $2,158,000, $20,645,000 and
$27,005,000 during 1993, 1992, and 1991, respectively.
Deferred income taxes in 1993 and 1992 represent the realizable
cumulative temporary differences between the financial reporting and
tax bases of the Company's assets and liabilities. Prior to 1992, deferred
taxes resulted from timing differences in the recognition of income
and expense for tax and financial statement purposes. The source of
these differences and the effect of each are shown as follows for
1991 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Loan fees....................................................... $ (14)
Provision for loan losses, net of federal bad debt deduction,
net of preference tax.......................................... 137
Accrued franchise taxes, net of federal benefit................. (731)
Gain on sale of loans........................................... (1,914)
Divided on FHLB stock........................................... 722
Other, net...................................................... (353)
-------
$(2,153)
=======
</TABLE>
The Company implemented Statement of Financial Accounting Standards No.
109 ("SFAS No. 109") on a prospective basis during 1992. SFAS No.109
established new accounting principles for calculating income taxes using
the asset and liability method instead of the deferred method. In applying
the asset and liability method using SFAS No. 109, deferred tax assets
and liabilities are established as of the reporting date for the
realizable cumulative difference between the financial reporting and
tax return bases of the Company's assets and liabilities. The tax rates
applied are the statutory rates expected to be in effect when the
temporary differences are realized or settled.
54
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) Income Taxes (continued)
<TABLE>
<CAPTION>
Listed below are the significant components of the net deferred
liability (in thousands):
1993 1992
-------- --------
<S> <C> <C>
Components of the deferred tax asset:
Bad debts................................................. $(16,850) $(10,789)
State taxes............................................... (1,822) (2,833)
Pension expense........................................... (1,773) (1,353)
-------- --------
Total deferred tax asset................................ (20,445) (14,975)
Valuation allowance......................................... -- --
-------- --------
Total deferred tax asset, net of valuation allowance.... (20,445) (14,975)
-------- --------
Components of the deferred tax liability:
Loan fees................................................. 25,197 23,588
Loan sales................................................ 4,146 4,879
FHLB stock dividends 5,705 4,892
Other..................................................... 1,763 3,465
-------- --------
Total deferred tax liability............................ 36,811 36,824
-------- --------
Net deferred tax liability.................................. $ 16,366 $ 21,849
======== ========
Net state deferred tax liability.......................... $ 6,049 $ 6,418
Net federal deferred tax liability........................ 10,317 15,431
-------- --------
Net deferred tax liability.................................. $ 16,366 $ 21,849
======== ========
</TABLE>
SFAS No. 109 allows for recognition and measurement of deductible temporary
differences (including general valuation allowances) to the extent that it
is more likely than not that the deferred tax asset will be realized. As a
result of implementing SFAS No. 109, the Bank recognized $4,075,000 in tax
benefits during 1992 due primarily to additions to its general valuation
allowances.
The Internal Revenue Service (IRS) is currently examining tax years 1984 to
1988 and has proposed adjustments primarily related to timing differences
as to the recognition of certain taxable income and expense items. While
the Bank has provided for deferred taxes for federal and state purposes,
a change in the period of income recognition could result in interest due to
the government. Although the outcome of the audits is not known at this
time, and it may take several years to resolve any disputed matters, the
Bank has recorded charges of $1,776,000, $3,409,000 and $2,262,000 in 1993,
1992 and 1991, respectively, as accrued interest on possible tax adjustments
which may be required in connection with the tax returns for all periods
affected by such income recognition issues. At December 31, 1993, the
Bank had $7,447,000 of accrued interest payable recorded as a liability
on the consolidated statement of financial condition. The amount of
interest accrued was based upon the tax issues known to date and is
management's best estimate of liability as of this date.
(10) Stockholders' Equity and Earnings (Loss) Per Share
The Company's stock charter authorizes 5,000,000 shares of serial
preferred stock. As of December 31, 1993 no preferred shares have
been issued.
The Company declared a five-for four stock split on September 26, 1991.
Fractional shares were paid in cash. All per share amounts in the
accompanying consolidated financial statements have been adjusted for the
split.
55
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) Stockholders' Equity and Earnings (Loss) Per Share (continued)
The computation of net earnings (loss) per share is based on the weighted
average shares of common stock and dilutive common stock equivalents
(employee stock options) outstanding during the year which were 10,659,214,
10,856,815 and 10,907,635 for 1993, 1992 and 1991, respectively.
On August 9, 1989, the Financial Institutions Reform, Recovery and
Enforcement Act ("FIRREA") was signed into law. FIRREA abolished the
Federal Home Loan Bank Board and the Federal Savings and Loan Insurance
Corporation and transferred many of their previous regulatory functions to
the Office of Thrift Supervision ("OTS"). Additionally, FIRREA changed
the regulatory capital requirements for savings institutions. As of
December 31, 1993 the Bank met all current capital requirements.
For federal income tax purposes, savings institutions meeting certain
definitional and other tests are allowed a special bad debt reserve
deduction for qualifying loans computed as percentage of taxable
income before such deduction. If amounts appropriated to these tax bad
debt reserves in excess of the amount allowable under the experience method
("excess tax bad debt reserves") are used for the payment of return of
capital dividends or other distributions to stockholders (including
distributions in dissolution, liquidation or redemption of stock), an
amount will generally be includable in taxable income. The amount
includable in taxable income is equal to the distribution plus the
federal income tax attributable thereto, up to the aggregate amount of
excess tax bad debt reserves. At December 31, 1993 the Company had no
excess bad debt reserves and at December 31, 1992 the Company had
approximately $5,775,000 of excess bad debt reserves.
FirstFed Financial Corp. may loan up to $6,000,000 to the ESOP under a
line of credit loan. At December 31, 1993 and 1992 the loans to the ESOP
totaled $2,918,000 and $2,991,000, respectively. Interest on the outstanding
loan balance is due each December 31. Interest varies based on the Bank's
monthly cost of funds. The average rates paid during 1993 and 1992 were 3.90%
and 4.75%, respectively.
(11) Employee Benefit Plans
The Bank maintains a pension plan ("Plan") covering substantially all
employees who are employed on either a full time or a part time basis. The
benefits are based on the employee's years of credited service, average
annual salary and primary social security benefit, as defined in the Plan.
Pension expense including administration costs was $468,000, $475,000
and $350,000 for 1993, 1992 and 1991, respectively. The Bank uses the
projected unit credit actuarial method and bases its funding policy on
the entry age normal method.
The discount rate and rate of increase in future compensation levels
used in determining the actuarial value of benefit obligations and
pension cost at December 31, 1993 and December 31, 1992 were 7.0% and 7.5%,
respectively. The expected long-term rates of return on assets were 7.0%
at December 31, 1993 and 7.5% at December 31, 1992.
The Bank has a Supplementary Executive Retirement Plan ("SERP") which
covers any individual employed by the Bank as its President or Chairman
of the Board. The pension expense for the SERP was $434,000, $418,000
and $439,000 in 1993, 1992 and 1991, respectively. The SERP uses the same
actuarial assumptions as the pension plan. The plan is unfunded.
56
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) Employee Benefit Plans (continued)
The following table sets forth the funded status and amounts recognized
in the Bank's statement of the financial condition for the pension plan
and the SERP for the years indicated (in thousands):
<TABLE>
<CAPTION>
PENSION PLAN SERP
--------------- ----------------
1993 1992 1993 1992
------- ------ ------- -------
<S> <C> <C> <C> <C>
Actuarial present value of benefits obliga-
tions:
Accumulated benefits obligation.......... $ 2,703 $2,186 $ 2,781 $ 2,474
======= ====== ======= =======
Vested benefit obligation................ $ 2,567 $2,092 $ 2,423 $ 2,215
======= ====== ======= =======
Plan assets at fair value.................. $ 2,268 $2,340 $ -- $ --
Projected benefit obligation for service 4,156 3,611 3,414 2,945
rendered to date.......................... ------- ------ ------- -------
Shortage of plan assets over the projected
benefit obligation........................ (1,888) (1,271) (3,414) (2,945)
Unrecognized net loss (gain) from past ex-
perience different from that assumed...... 729 414 131 (149)
Prior service cost not yet recognized in
net periodic pension cost................. 247 283 838 934
Additional minimum liability............... -- -- (846) (888)
Unrecognized net (asset) obligation at (230) (321) 510 574
transition................................ ------- ------ ------- -------
Accrued pension liability.................. $(1,142) $ (895) $(2,781) $(2,474)
======= ====== ======= =======
Net pension cost for the year ended Decem-
ber 31, 1993 and December 31, 1992 in-
cluded the following components:
Service cost-benefits earned during the
period.................................. $ 396 $ 392 $ 57 $ 54
Interest cost on projected benefit obli-
gation.................................. 264 255 217 204
Actual return on plan assets............. (106) (179) -- --
Net amortization......................... (50) (45) 160 160
Deferral of asset gains.................. (73) 17 -- --
------- ------ ------- -------
Net period pension cost.................. $ 431 $ 440 $ 434 $ 418
======= ====== ======= =======
</TABLE>
The Bank has a profit sharing plan for all salaried employees and
officers who have completed one year of continuous service. The plan
is a leveraged employee stock ownership plan ("ESOP"). At December 31,
1993 the ESOP held 8.94% of outstanding stock of the Company. Profit
sharing expense for the years ended December 31, 1993, 1992 and 1991 was
$200,000, $1,007,000 and $1,510,000, respectively. The amount of the
contribution made by the Bank is determined each year by the Board of
Directors, but is not to exceed 15% of the participants' aggregated
compensation. The Bank does not offer post retirement benefits.
57
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) Employee Benefit Plans (continued)
The Company has a Stock Option and Stock Appreciation Rights Plan which
allows the issuance of 342,375 shares (as adjusted for stock splits) at
December 31, 1993. Options prices are based upon the market value of the
common stock on the date of grant. Granted options are exercisable as
follows:
50,853 shares --100% exercisable
21,202 shares --25% exercisable on the date of grant and 25% at the
third, Fifth and seventh anniversary dates of the grant
184,382 shares --25% exercisable on the second, fourth, sixth and eighth
anniversary dates of the grant
85,938 shares --33% immediately exercisable and 33% on the first and
second anniversary dates
Options expire ten years after the date of grant, or sixty days after
termination of employment other than retirement, death or disability.
Stock appreciation rights have also been authorized under the plan, but
none have as yet been granted.
Information with respect to stock options follows:
<TABLE>
<CAPTION>
1993 1992
-------- --------
(In Shares)
<S> <C> <C>
Options Outstanding
(Average option prices for 1993)
Beginning of year ($9.45)............................ 516,616 720,729
Granted ($19.58)..................................... 15,322 56,968
Excised ($4.10)...................................... (33,026) (261,077)
Canceled ($16.11).................................... (156,537) (4)
-------- --------
End of Year ($11.70)................................. 342,375 516,616
======== ========
Shares exercisable at December 31 ($9.07)............ 215,795 348,585
======== ========
</TABLE>
58
<PAGE>
(12) Parent Company Financial Information
This parent company only financial information should be read in
conjunction with the other notes to consolidated financial statements.
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
DECEMBER 31,
------------------
1993 1992
-------- --------
<S> <C> <C>
Assets:
Cash............................................ $ 923 $ 586
Other assets.................................... 25 25
Investment in subsidiary........................ 212,226 209,841
-------- --------
$213,174 $210,452
======== ========
Liabilities and Stockholders' Equity:
Note payable.................................... $ 5,000 $ 3,000
Other liabilities............................... (118) (59)
Stockholders' equity............................ 208,292 207,511
-------- --------
$213,174 $210,452
======== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------
1993 1992 1991
-------- -------- -------
<S> <C> <C> <C>
Other income (expense), net....................... $ (78) $ (28) $ (48)
Equity in undistributed net earnings (loss) of (1,970) 22,132 28,475
subsidiary....................................... -------- -------- -------
Net earnings (loss)............................... $ (2,048) $ 22,104 $28,427
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net earnings (loss)............................. $ (2,048) $ 22,104 $28,427
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activi-
ties:
Equity in net (earnings) loss of subsidiary..... 1,970 (22,132) (28,475)
Other........................................... (10) (2) (1)
-------- -------- -------
Net cash used by operating activities........... (88) (30) (49)
-------- -------- -------
Cash Flows from Investing Activities:
(Increase) decrease in ESOP loan................ 73 (1,026) (36)
(Increase) decrease in other assets............. -- (25) 22
-------- -------- -------
Net cash (used) by provided for investing activ- 73 (1,051) (14)
ities.......................................... -------- -------- -------
Cash Flows from Financing Activities:
Dividend from subsidiary........................ 3,000 4,250 1,000
Capital contribution to subsidiary.............. (7,355) (4,000) --
Increase in notes payable....................... 2,000 3,000 --
Purchase of treasury stock...................... -- (4,596) --
Benefit from stock option tax adjustment........ 2,355 -- --
Other........................................... 352 815 347
-------- -------- -------
Net cash provided (used) by financing activities.. 352 (531) 1,347
-------- -------- -------
Net increase (decrease) in cash................... 337 (1,612) 1,284
Cash at beginning of period....................... 586 2,198 914
-------- -------- -------
Cash at end of period............................. $ 923 $ 586 $ 2,198
======== ======== =======
</TABLE>
59
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) Quarterly Results of Operations: (unaudited)
Summarized below are the Company's results of operations on a quarterly
basis for 1993, 1992 and 1991:
<TABLE>
<CAPTION>
NET
PROVISION NON- NET EARNINGS
INTEREST INTEREST FOR LOAN OTHER INTEREST EARNINGS (LOSS)
INCOME EXPENSE LOSSES INCOME EXPENSE (LOSS) PER SHARE
-------- -------- --------- ------ -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
First quarter
1993........ $ 58,247 $ 33,198 $44,123 $ 2,718 $11,454 $(16,402) $(1.53)
1992........ 67,984 41,787 10,716 2,873 11,052 6,774 .62
1991........ 75,641 52,618 1,203 2,131 10,454 7,762 .71
Second quarter
1993........ $ 56,526 $ 32,918 $ 1,849 $ 4,023 $11,443 $ 8,328 $ .78
1992........ 65,800 37,889 5,847 3,370 11,818 7,972 .73
1991........ 76,420 51,532 1,004 1,389 10,823 8,200 .75
Third quarter
1993........ $ 58,875 32,586 $11,590 $ 2,964 $11,453 $ 3,629 $ .34
1992 . 61,647 36,765 18,098 4,077 11,993 703 .06
1991........ 73,657 47,177 3,363 1,474 8,658 8,246 .75
Fourth quarter
1993........ $ 55,797 $ 32,914 $10,117 $ 2,349 $10,948 $ 2,397 $ .22
1992........ 60,181 35,069 6,723 2,314 11,262 6,655 .62
1991........ 70,812 44,429 6,263 2,065 10,547 4,219 .39
Total year
1993........ $229,445 $131,616 $67,679 $12,054 $45,298 $ (2,048) $ (.19)
1992........ 255,612 151,510 41,384 12,634 46,125 22,104 2.04
1991........ 296,530 195,756 11,833 7,059 40,482 28,427 2.61
</TABLE>
(14) Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments ("SFAS No. 107"), requires that the Bank
disclose estimated fair value for its financial instruments as of December
31, 1993 and 1992. Set forth below are tables showing the financial
instruments shown in the Bank's statements of financial condition for
which fair value are estimated to be different from their carrying value.
Financial instruments whose carrying value is estimated to be equal to fair
value are not included below.
The following table presents fair value information for financial
instruments for which a market exists. The fair values for these
financial instruments were estimated based upon prices published in
financial newspapers or quotations received from national securities dealers.
<TABLE>
<CAPTION>
1993 1992
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage-backed Securities.............. $708,283 $715,726 $769,155 $783,677
Investment Securities................... 47,711 48,054 21,501 21,984
Collateralized Mortgage Obligations..... 56,125 56,228 22,235 22,075
</TABLE>
60
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) Fair Values of Financial Instruments (continued)
The following table presents fair value information for financial
instruments shown in the Bank's statements of financial condition for
which there is no readily available market. The fair values for these
financial instruments were calculated by discounting expected cash flows.
Because the particulars of these financial instruments have not been
evaluated for possible sale and because management does not intend to
sell these financial instruments, the Bank does not know whether the
fair values shown below represent values at which the respective
financial instruments could be sold.
<TABLE>
<CAPTION>
1993 1992
--------------------- --------------------
CALCULATED CALCULATED
CARRYING FAIR VALUE CARRYING FAIR VALUE
VALUE AMOUNT VALUE AMOUNT
---------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Adjustable Loans:
Single Family...................... $1,112,144 $1,154,316 $ 998,502 $1,010,208
Multi-Family....................... 1,206,197 1,215,606 1,112,523 1,121,786
Commercial......................... 227,712 213,268 244,511 224,270
Fixed Rate Loans:
Single Family...................... 24,520 25,393 30,935 31,236
Multi-Family....................... 13,624 14,288 26,569 27,082
Commercial......................... 4,409 4,483 4,429 4,539
Other Real Estate Loans............. 8,654 8,800 10,500 10,638
Non Real Estate Loans.............. 4,453 5,334 5,563 6,029
Fixed Term Certificate Accounts...... 1,797,230 1,803,457 1,528,615 1,540,170
Borrowings........................... 514,700 517,953 654,500 666,493
</TABLE>
SFAS No. 107 specifies that fair values should be calculated based on the
value of one unit. The estimates do not necessary reflect the price the
Company might receive if it were to sell the entire holding of a particular
financial instrument at one time.
Fair value estimates were based on the following methods and assumptions,
some of which are subjective in nature. Changes in assumptions could
significantly affect the estimates.
Cash
The carrying amounts reported in the statements of financial conditions
for this item approximate fair value.
Investment securities and Mortgage-Backed securities
Fair values were based on bid prices published in financial newspapers
or bid quotations received from national securities dealers.
Loans Receivable
The portfolio was segregated into those loans with adjustable rates of
interest and those with fixed rates of interest. Fair values were based
on discounting future cash flows by the current rate offered for such
loans with similar remaining maturities and credit risk. The amounts so
determined for each loan category are reduced by the Bank's allowance
for loans losses which thereby takes into consideration changes in
credit risk.
61
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14)Fair Values of Financial Instruments (continued)
Deposits
The fair value of deposits with no stated term such as regular passbook
accounts, money market accounts and NOW accounts, is defined by SFAS No.
107 as the carrying accounts reported in the statement of financial
condition. The Company had $508,250,000 in non-term accounts at December 31,
1993. These non-term accounts provide a source of funds to the Bank at a
cost significantly below the cost of borrowing funds in the financial
markets. Management believes that the Bank's non-term accounts, as a
continuing source of less costly funds, provide significant additional
value to the Bank that is not reflected above. The fair value of deposits
with a stated maturity such as certificates of deposit is based on
discounting future cash flows by the current rate offered for such deposits
with similar remaining maturities.
Borrowings
For short term borrowings, fair value approximates carrying value. The
fair value of long term borrowings is based on their interest
characteristics. For variable rate borrowings, fair value is based on
carrying values. For fixed rate borrowings, fair value is based on
discounting future contractual cash flows by the current interest rate
paid on such borrowings with similar remaining maturities.
Deferred Premiums Arising from the Sale of Loans
The carrying amount reported in the Statement of Financial Condition for
this item approximates fair value.
(15) Subsequent Event
On January 17, 1994, a significant earthquake struck the Southern
California area. This earthquake and the related aftershocks caused
damage to certain areas of Los Angeles and Ventura Counties. The Bank
is still in the early stages of assessing the damage to its assets. It
is estimated that less than 30% of the Bank's loans are in areas severely
affected by the earthquake. At this time, the extent of damage to the
collateral securing the Bank's loans or the impact on the Company's
financial condition is not known.
62
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstFed Financial Corp.
Santa Monica, California:
We have audited the accompanying consolidated statements of financial
condition of FirstFed Financial Corp. and subsidiary ("Company") as of
December 31, 1993 and 1992, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1993. 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 Financial Corp. and subsidiary at December 31, 1993 and
1992, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1993 in
conformity with generally accepted accounting principles.
As discussed in note 9 to the consolidated financial statements,
FirstFed Financial Corp. and subsidiary adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in 1992.
KPMG Peat Marwick
January 27, 1994
Los Angeles, California
63
<PAGE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers appearing on pages 3
through 8 and on pages 11 and 12 of the Proxy Statement for the Annual
Meeting of Stockholders dated April 20, 1994, and filed March 21, 1994 is
incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing on pages 7 through
8 of the Proxy Statement for the Annual Meeting of Stockholders dated
April 20, 1994, and filed March 21, 1994 is incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management appears on pages 2 and 3 of the Proxy Statement for the Annual
Meeting of Stockholders dated April 20, 1994, and filed March 21, 1994
is incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
a. Certain Relationships: None.
b. Information regarding certain related transactions appears on page
12 of the Proxy Statement for the Annual Meeting of Stockholders dated
April 21, 1994, and filed March 21, 1994 is incorporated herein by
reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) 1. Financial Statements
The financial statements included in this Report are listed under Item 8.
2. Financial Statement Schedules
Schedules have been omitted because they are not applicable or the required
information is presented in the financial statements or notes thereto.
64
<PAGE>
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
(3.1) Certificate of Incorporation filed as Exhibit (1) (a) to Form 8-A
dated June 4,1987 and incorporated by reference.
(4.1) Instruments defining rights of security holders. Registrant agrees
to file copies of its mortgage-backed bond indenture and collateral
loan agreements upon request.
(4.2) Shareholders' Rights Agreement filed as Exhibit 1 to Form 8A, dated
November 2, 1988 and incorporated by reference.
(10.2) 1983 Stock Option and Stock Appreciation Rights Plan included as
Exhibit A to the Company's Proxy Statement for the Annual Meeting
of Shareholders, April 20, 1984 as amended on April 22, 1987 and
incorporated by reference.
(10.3) Deferred compensation plan, filed as Exhibit 10.3 to Form 10-K for
the fiscal year ended December 31, 1983 dated March 17, 1984 and
incorporated by reference.
(10.4) Bonus Plan filed as Exhibit 10 (iii) (A) (2) to Form 10 dated
November 2, 1983, and incorporated by reference.
(10.5) Supplemental Executive Retirement Plan dated January 16, 1986 and
filed as Exhibit 10.5 to Form 10-K for the fiscal year ended
December 31, 1992.
(22.) Registrant's sole subsidiary is First Federal Bank of California,
fsb, a federal savings bank.
(23.1) Proxy Statement for Annual Meeting of Stockholders, April 20, 1994.
The 1993 Annual Report to stockholders and exhibit 23.1 have already been
furnished to each stockholder of record who is entitled to receive copies
thereof. Copies of these items will be furnished without charge upon
request in writing by any stockholder of record on March 3, 1994 and any
beneficial owner of Company stock on such date who has not previously
received such material and who so represents in good faith and in
writing to:
Corporate Secretary
FirstFed Financial Corp.
401 Wilshire Boulevard
Santa Monica, California 90401
Other exhibits will be supplied to any such stockholder at a charge equal
to the Company's cost of copying, postage, and handling.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRSTFED FINANCIAL CORP., a Delaware
corporation
By: /s/ William S. Mortensen
_______________________________
William S. Mortensen, Chairman and
Chief Executive Officer
Date: September 7, 1994
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes William S.
Mortensen and James P. Giraldin, and each of them or either of them, as
attorney-in-fact to sign on his or her behalf as an individual and in
every capacity stated below, and to file all amendments to the Registrant's
Form 10-K, and the Registrant hereby confers like authority to sign and
file in its behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on the 24th day of
September 7, 1994.
SIGNATURE TITLE
/s/ William S. Mortensen Chairman of the Board (Principal
- - - - ------------------------------------- Executive Officer)
William S. Mortensen
/s/ James P. Giraldin Executive Vice President (Principal
- - - - ------------------------------------- Financial Officer)
James P. Giraldin
/s/ Michael R. Hilton Senior Vice President and Controller
- - - - ------------------------------------- (Principal Accounting Officer)
Michael R. Hilton
/s/ Samuel J. Crawford, Jr. Director
- - - - -------------------------------------
Samuel J. Crawford
/s/ Christopher M. Harding Director
- - - - -------------------------------------
Christopher M. Harding
/s/ Babette E. Heimbuch Director
- - - - -------------------------------------
Babette E. Heimbuch
/s/ James L. Hesburgh Director
- - - - -------------------------------------
James L. Hesburgh
/s/ June Lockhart Director
- - - - -------------------------------------
June Lockhart
/s/ Charles F. Smith Director
- - - - -------------------------------------
Charles F. Smith
/s/ Steven L. Soboroff Director
- - - - -------------------------------------
Steven L. Soboroff
/s/ John R. Woodhull Director
- - - - -------------------------------------
John R. Woodhull
66
</TABLE>
