<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from N/A to
------- --------
Commission File No. l-9566
FIRSTFED FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 95-4087449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40l Wilshire Boulevard, Santa Monica, California 9040l-l490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 319-6000
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange
Act of l934 during the preceding l2 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 number of shares of Registrant's $0.01 par value common stock
outstanding as of August 1, 1994 was 10,585,620.
==========================================================================
<PAGE>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
INDEX TO FORM 10-Q
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Statements of Financial Condition-
June 30, 1994 and December 31, 1993 3
Consolidated Statements of Operations Three-Months
and Six-Months Ended June 30, 1994 and 1993 4
Consolidated Statements of Cash Flows Six-Months
Ended June 30, 1994 and 1993 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL STATEMENTS
Item 1. Financial statements
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
June 30, December 31,
ASSETS 1994 1993
---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 16,738 $ 17,491
Investment securities, held to maturity
(market of $88,645 and $104,282) 91,719 103,836
Loans receivable 2,780,636 2,692,036
Mortgage-backed securities, held to maturity
(market of $699,624 and $715,726) 710,767 708,283
Loans held for sale, market value approximates
carrying value 13,125 23,627
Accrued interest and dividends receivable 20,871 21,018
Real estate 20,417 27,249
Office properties and equipment, net 9,700 8,923
Investment in Federal Home Loan Bank
Stock, at cost 39,722 38,967
Other assets 32,476 19,687
---------- ----------
$3,736,171 $3,661,117
========== ==========
LIABILITIES
Deposits $2,284,874 $2,305,480
Federal Home Loan Bank advances
and other borrowings 1,231,024 1,093,149
Deferred income taxes - 16,366
Accrued expenses and other liabilities 43,569 37,830
---------- ----------
3,559,467 3,452,825
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued
11,371,066 and 11,326,191 shares,
outstanding 10,574,546 and 10,529,671
shares 114 113
Additional paid-in capital 27,414 27,279
Retained earnings - substantially
restricted 161,982 193,650
Loan to employee stock ownership plan (2,974) (2,918)
Treasury stock, at cost, 796,520 shares (9,832) (9,832)
---------- ----------
176,704 208,292
---------- ----------
$3,736,171 $3,661,117
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans and mortgage-backed
securities $ 52,060 $ 54,435 $105,622 $110,796
Interest and dividends on investments 2,320 2,091 4,483 3,977
-------- -------- -------- --------
Total interest income 54,380 56,526 110,105 114,773
-------- -------- -------- --------
Interest expense:
Interest on deposits 21,265 18,929 41,539 38,097
Interest on borrowings 13,297 13,989 25,129 28,019
-------- -------- -------- --------
Total interest expense 34,562 32,918 66,668 66,116
-------- -------- -------- --------
Net interest income 19,818 23,608 43,437 48,657
Provision for loan losses 55,030 1,849 79,700 45,972
-------- -------- -------- --------
Net interest income (loss)
after provision for losses (35,212) 21,759 (36,263) 2,685
-------- -------- -------- --------
Other income:
Loan and other fees 1,725 1,550 3,359 3,341
Gain on sale of loans and mortgage-
backed securities 84 2,502 524 2,902
Real estate operations, net 579 (459) 961 (316)
Other operating income 367 430 721 814
-------- -------- -------- --------
Total other income 2,755 4,023 5,565 6,741
-------- -------- -------- --------
Non-interest expense 11,711 11,443 23,844 22,897
-------- -------- -------- --------
Earnings (loss) before income taxes (44,168) 14,339 (54,542) (13,471)
Income tax provision (benefit) (18,615) 6,011 (22,874) (5,397)
-------- -------- -------- ---------
Net earnings (loss) $(25,553) $ 8,328 $(31,668) $ (8,074)
======== ======== ======== ========
Earnings (loss) per share $ (2.42) $ 0.78 $ (3.01) $ (0.77)
======== ======== ======== ========
Weighted averages shares for earnings
per share calculation 10,541,367 10,649,177 10,536,561 10,427,554
========== ========== ========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
( In Thousands)
Six Months Ended
June 30,
-----------------
1994 1993
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) $ (31,668) $ (8,074)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Provision for loan losses 79,700 45,972
Amortization of fees and discounts (876) (1,835)
Net change to loans held for sale 12,785 66,948
Valuation adjustments on real estate sold (2,782) (3,323)
(Increase) decrease in interest and
dividends receivable (608) 839
Decrease in negative amortization 147 1,630
Decrease in interest payable (1,854) (4,908)
Change in income taxes (26,881) (7,281)
Other 3,269 3,338
--------- ---------
Net cash provided by operating activities 31,232 93,306
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal
collections of loans (180,284) (158,275)
Loans repurchased (13,905) (36,093)
Proceeds from sales of real estate 38,972 28,988
Purchase of investment securities (2,247) (42,397)
Proceeds from maturities and principal payments
on investment securities 14,256 2,000
Other (5,291) (1,824)
--------- ---------
Net cash used by investing activities (148,499) (207,601)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits (20,606) 85,926
Net increase in short term borrowings 195,375 100,380
Proceeds from long term borrowings 50,000 112,700
Repayment of long term borrowings (107,500) (117,500)
Other (755) 1,936
--------- ---------
Net cash provided by financing activities 116,514 183,442
Net increase (decrease) in cash and cash --------- ---------
equivalents (753) 69,147
Cash and cash equivalents at beginning of period 17,491 23,985
--------- ---------
Cash and cash equivalents at end of period $ 16,738 $ 93,132
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial statements included herein have been prepared
by the Registrant pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of the Registrant,
all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for the periods
covered have been made. Certain information and note disclosures
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Registrant believes
that the disclosures are adequate to make the information presented not
misleading.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included
in the Registrant's latest annual report on Form 10-K. The results for
the periods covered hereby are not necessarily indicative of the operating
results for a full year.
2. Earnings or loss per share were computed by dividing net income or loss
by the weighted average number of shares of common stock outstanding for
the period, plus the effect of stock options, if dilutive.
3. For purposes of reporting cash flows on the "Consolidated Statement of
Cash Flows", cash and cash equivalents include cash, overnight investments
and securities purchased under agreements to resell.
4. The Bank adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," (SFAS No. 114")
effective January 1, 1994. SFAS No. 114 requires the measurement of
impaired loans 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 at the fair value of its collateral. SFAS
No. 114 does not apply to large groups of homogeneous loans that are
collectively reviewed for impairment. For the Bank, loans collectively
reviewed for impairment include all single family loans less than $500
thousand and multi-family loans less than $750 thousand. The adoption
of SFAS No.114 did not result in material additions to the Bank's
provision for loan losses.
6
<PAGE>
Item 2. Management's Discussion and Analysis of
-------------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
Financial Condition
-------------------
At June 30, 1994, FirstFed Financial Corp., (the "Company"), holding
company for First Federal Bank of California and its subsidiaries
(the "Bank"), had consolidated assets totaling $3.7 billion, comparable to
the level at December 31, 1993 and 3% more than at June 30, 1993. The
slight increase over the prior year period is due to new loan originations
which caused the overall loan portfolio to increase by 6%. The increase in
asset size was offset by lower amounts in short term securities and real
estate acquired by foreclosure at June 30, 1994 compared to June 30, 1993.
During the first six months of 1994, the Bank recorded $79.7 million in
loan loss provisions, consisting of $30.6 million for estimated losses
relating to the January 17, 1994 earthquake and $49.1 million to provide
for estimated losses due to the weak Southern California economy and real
estate market. Of the $79.7 million mentioned above, $11.8 million was
charged-off as earthquake losses during the first six months and $31.5
million was charged-off as economic losses during the first six months.
Charge-offs were due primarily to losses on multi-family loans. Multi-
family loans have been disproportionately affected in the current recession.
The Bank originates primarily single family and multi-family loans in
Southern California. Loan originations increased by 6% in the second quarter
of 1994 over the second quarter of 1993 and 27% over the first quarter of
1994. Loan originations for the second quarter of 1994 include $13.6
million in single family loans purchased from another financial institution.
Due to rising interest rates, market demand for adjustable rate mortgages,
which the Bank originates for its own portfolio, improved during the
second quarter. 94% of new loans originated or purchased during the first
six months of 1994 were adjustable rate mortgages. At June 30, 1994, 98.9%
of the loan portfolio had adjustable interest rate provisions. It is
management's belief that adjustable rate mortgages help to maintain net
interest income in fluctuating interest rate environments.
The ratio of non-performing assets to total assets was 3.03% as of June 30,
1994, compared to 3.23% at December 31, 1993 and 4.14% at June 30, 1993.
Real estate acquired by foreclosure decreased 61% at June 30, 1994 compared
to June 30,1993. Also, greater specific allowances were allocated for
problem loans in 1994 compared to 1993. (See "Non-performing Assets" for
further discussion.)
7
<PAGE>
The following table shows the components of the Bank's loan portfolio by
type of loan for the periods indicated:
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
June 30, December 31, June 30,
1994 1993 1993
-------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $ 939,733 $ 864,874 $ 873,933
Two to four units 348,967 340,035 341,429
Five or more units 1,320,743 1,296,260 1,214,155
---------- ---------- ----------
Residential loans 2,609,443 2,501,169 2,429,517
OTHER REAL ESTATE LOANS:
Commercial and industrial 240,614 245,387 250,362
Second trust deeds 22,072 24,606 29,214
Other 20,321 5,861 14,052
---------- ---------- ----------
Real estate loans 2,892,450 2,777,023 2,723,145
NON-REAL ESTATE LOANS:
Manufactured housing 2,622 2,880 3,204
Deposit accounts 1,278 1,086 1,173
Consumer 711 847 1,187
---------- ---------- ----------
Loans receivable 2,897,061 2,781,836 2,728,709
LESS:
General valuation allowances-
loan portfolio 77,038 40,669 44,282
General valuation allowances-
loans sold with recourse (1) - 6,231 8,247
Unrealized loan fees 26,262 19,273 25,450
---------- ---------- ----------
Net loans receivable 2,793,761 2,715,663 2,650,730
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single family dwellings 682,712 678,884 610,876
Secured by multi-family dwellings 28,055 29,399 30,536
---------- ---------- ----------
Mortgage-backed securities 710,767 708,283 641,412
---------- ---------- ----------
TOTAL $3,504,528 $3,423,946 $3,292,142
========== ========== ==========
</TABLE>
(1) Effective June 30, 1994, this amount was reclassified to a
liability account.
8
<PAGE>
The one year GAP ratio (the difference between rate-sensitive assets and
liabilities repricing within one year or less as a percentage of total
assets) was a positive 15.9% at the end of the second quarter.
Management's goal is to keep the one year GAP ratio less than 20% of total
assets to further minimize the Bank's exposure to interest rate risk.
Deposits grew by 10% at June 30, 1994 compared to the level one year ago due
to the acquisition of $113 million in deposits from the Resolution Trust
Corporation in December of 1993. Deposits at June 30, 1994 decreased
slightly from the December 31,1993 level due to deposits withdrawn when
interest rates on the acquired deposits were modified to market rates.
Also, deposits in the telemarketing area decreased due primarily to
competition from other investments available to telemarketing customers.
Consolidated stockholders' equity decreased to $176.7 million at June 30,
1994 due to the $31.7 million loss booked for the first six months of 1994.
However, the Bank's capital remains above the minimum amounts required by
its primary regulatory agency, the Office of Thrift Supervision. At June
30, 1994, the Bank was required 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. The Bank's core and tangible capital ratios were both 4.6% and
the risk-based capital ratio was 8.7% as of June 30, 1994.
Effective January 1, 1994, a financial institution must hold additional
capital to the extent that its net portfolio value deteriorates greater
than 2%, based on a 200 basis point increase or decrease in interest rates.
The amount of additional capital required to be held is equal to one-half
the difference between an institution's measured exposure to interest rate
risk and a "normal" level of exposure to interest rate risk. A normal
level of interest rate risk is defined as two percent of the estimated
economic value of an institution's assets. The initial calculation, which
is to be done as of September 1, 1994, will be based on data as of
December 31, 1993. Based on data as of December 31, 1993, management does
not expect that the Bank will be required to hold any additional capital as
a result of this regulation.
Results of Operations
---------------------
The Company reported a consolidated net loss of $25.6 million for the
second quarter of 1994 compared to net earnings of $8.3 million for the
second quarter of 1993. For the first six months of 1994, the Company
reported a net loss of $31.7 million compared to a net loss of $8.1 million
for the first six months of 1993. 1994 results to date were caused by loan
loss provisions totaling $55.0 million and $79.7 million, respectively, for
the second quarter and first six months of the year. The provisions were
necessary due to anticipated losses stemming from the earthquake and general
weakness in the Southern California economy. 1993 results were also
9
<PAGE>
impacted by weakness in the Southern California economy, A $44.1 million
provision recorded in the first quarter of 1993 brought total provisions
for the first six months of 1993 to $46.0 million.
Management is unable to predict future levels of loan loss provisions.
Among other things, future loan loss provisions are based on the level of
loan charge-offs and the severity and duration of the economic recession
in Southern California. Although management believes that it has provided
for all known losses resulting from the January 1994 earthquake, further
provisions for losses may be necessary in the future due to unforeseen
events.
Loan charge-offs increased to $18.6 million and $43.3 million for the second
quarter and first six months of 1994, compared to $8.8 million and $21.3
million for the second quarter and first six months of 1993. The increase
in charge-offs compared to the prior year resulted primarily from
adjustments to record loans and foreclosed properties at fair value less
estimated costs to sell. Multi-family loans have been particularly
affected in the current economy. The current recession has caused declines
in multi-family property values due to lower rental income, higher vacancy
rates, real estate depreciation, and lower levels of real estate sales.
Upon foreclosure, or when a loan becomes seriously delinquent,the properties
securitizing the loans are recorded at fair value less the estimated costs
to sell. As a result of the decrease in multi-family property values,
larger write-downs on non-performing multi-family loans and multi-family
properties acquired by foreclosure were required.
The Bank maintains two different general valuation allowance accounts: one
for inherent risks in the Bank's own loan portfolio and the other for risks
associated with loans the Bank has sold with recourse (and recorded as a
liability.) These two allowances, when added together, are referred to as
the "combined GVA" by the Bank.
Listed below is a summary of the activity in the combined GVA and the
associated loan portfolio during the periods indicated (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1994 1993
----------- ----------
<S> <C> <C>
Beginning balance $ 46,900 $ 27,854
Provision for loan losses 79,700 45,972
Charge-offs, net of recoveries (43,324) (21,297)
---------- ----------
Ending Balance $ 83,276 $ 52,529
========== ==========
Loans with loss exposure $3,238,323 $3,131,339
========== ==========
</TABLE>
Due to the high level of provisions recorded during the first six months of
1994, the ratio of general valuation allowances to the Bank's portfolio of
loans with loss exposure and real estate owned increased to 2.62% at
June 30, 1994
10
<PAGE>
compared to 1.43% at March 31, 1994 and 1.60% at June 30, 1993. The
liability for loans sold with recourse amounted to 2.13% of the principal
balance of loans sold with recourse at June 30, 1994 compared to 1.89% at
March 31, 1994 and 2.23% at June 30, 1993. Management believes that, as of
June 30, 1994, the level of general valuation allowances recorded by the
Bank is sufficient to cover losses inherent in the loan portfolio at that
time.
Due to the increasing trend in interest rates, the Bank's net interest
income decreased 16% in the second quarter of 1994 compared to the
second quarter of 1993 and 11% in the first six months of 1994
compared to the first six months of 1993. The Bank's interest rate
margin declined in 1994 compared to 1993 due to the lagging nature of the
index upon which the majority of the Bank's loans are adjusted. Although
the loan portfolio will eventually adjust to any changes in interest rates,
net interest income initially decreases due to the three month time lag
before changes in the index upon which the Bank's loans adjust can be
passed on to its loan customers.
The following table sets forth: (i) the average dollar amounts of and
average yields earned on loans, mortgage-backed securities and investment
securities, (ii) the average dollar amounts of and average rates paid on
savings and borrowing, (iii) the average dollar differences, (iv) the
interest rate spreads, and (v) the effective net spreads for the periods
indicated.
<TABLE>
<CAPTION>
During The Six Months Ended June 30, (1)
----------------------------------------
1994 1993
----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average dollar amount of and
average yield earned on:
Loans and mortgage-backed
securities $3,443,353 6.14% $3,322,992 6.67%
Investment securities (2) 138,726 4.83 132,709 4.55
---------- ---- ---------- ----
Interest-earning assets 3,582,079 6.09 3,455,701 6.59
Average dollar amount of and
average rate paid on:
Deposits 2,293,683 3.65 1,988,053 3.87
Borrowings 1,200,506 4.21 1,366,033 4.13
---------- ---- ---------- ----
Interest-bearing liabilities 3,494,189 3.84 3,354,086 3.97
Average dollar difference between
interest-earning assets and
--------- ----------
interest-bearing liabilities $ 87,890 $ 101,615
========= ==========
----- -----
Interest rate spread 2.25% 2.62%
===== =====
Interest net spread (3) 2.34% 2.73%
===== =====
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
During The Three Months Ended June 30,(1)
------------------------------------------
1994 1993
----------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average dollar amount of and
average yield earned on:
Loans and mortgage-backed
securities $3,453,952 6.03% $3,324,984 6.55%
Investment securities (2) 140,020 4.88 135,440 4.64
---------- ---- ---------- ----
Interest-earning assets 3,593,972 5.99 3,460,424 6.47
Average dollar amount of and
average rate paid on:
Deposits 2,294,226 3.72 1,996,188 3.80
Borrowings 1,225,354 4.35 1,395,932 4.02
---------- ---- ---------- ----
Interest-bearing liabilities 3,519,580 3.94 3,392,120 3.89
Average dollar difference between
interest-earning assets and
---------- ----------
interest-bearing liabilities $ 74,392 $ 68,304
========== ==========
----- -----
Interest rate spread 2.05% 2.58%
===== =====
Interest net spread (3) 2.13% 2.66%
===== =====
- ------------------------
(1) Average balances and weighted average rates for the period are computed
based on daily balances.
(2) Does not include Federal Home Loan Bank Stock.
(3) The effective net spread is a fraction, the denominator of which is the
average dollar amount of interest-earning assets, and the numerator of
which is net interest income (excluding stock dividends and
miscellaneous interest income)
Real estate operations resulted in net gains of $579 thousand and $961
thousand for the second quarter and first six months of 1994, respectively.
Gains are mostly the result of recoveries of excess valuation allowances
realized upon the sale of foreclosed properties. In comparison, the Bank
recorded net losses of $459 thousand and $316 thousand for the second
quarter and first six months of 1993, respectively. The losses recorded
during 1993 were mostly attributable to maintenance costs and property tax
payments on foreclosed multi-family properties which exceeded rents
collected during the holding period before the properties were sold.
Gain on sale of loans and mortgage-backed securities was $84 thousand and
$524 thousand, respectively, for the second quarter and first six months
of 1994 compared to $2.5 million and $2.9 million, respectively, for the
second quarter and first six months of 1993. Gain on sale of loans for the
second quarter of 1993 included a gain of $2.0 million on the sale of a
mortgage-backed security which had previously been identified as held for
sale.
12
<PAGE>
Total non-interest expenses increased by 2% during the second quarter of
1994 compared to the same period of the prior year and 4% during the first
six months of 1993 compared to the same period of the prior year. The
increases were in line with with the Bank's asset growth. Non-interest
expenses increased slightly in 1994 compared to 1993 due to costs associated
with one branch added since June of 1993. The expense-to-assets ratio was
1.26% of average assets for the second quarter of 1994 compared to 1.27%
for the second quarter of 1993. On a six-month comparative basis, the
expense-to-assets ratio remained at 1.29% of average assets for both
periods.
Non-accrual, Past Due, Modified and Restructured Loans
-------------------------------------------------------
The Bank accrues interest earned but uncollected for every loan without
regard to its contractual delinquency status but establishes a specific
interest allowance for each loan which becomes 90 days or more past due
or in foreclosure. Loans on which delinquent interest allowances had
been established totaled $124 million at June 30, 1994 compared to $106
million at December 31, 1993 and $107 million at June 30, 1993.
The additional interest that would have been earned had there been no
loans 90 days or more delinquent or in foreclosure was $6.7 million as of
June 30, 1994 compared to $5.8 million at December 31, 1993 and $5.0
million at June 30, 1993.
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 June 30, 1994, the Bank had
modified loans totaling $84.0 million. As of that date, loan loss
allowances totaling $6.1 million had been established for these loans.
Less than 5% of modified loans were 90 days or more delinquent as of
June 30, 1994.
The Bank also restructured certain loans to borrowers who experienced
damage to their properties as a result of the January 1994 earthquake.
These modifications were granted in the months immediately following the
earthquake and were usually for the deferral of three to six months of
loan payments. As of June 30, 1994, the modification period for most of
these loans had ended. The outstanding balance of loans which remain
modified for earthquake reasons as of June 30, 1994 totaled $26.4 million.
The Bank implemented Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for the Impairment of a Loan," (SFAS No. 114") as
of January 1, 1994. The Bank considers a loan impaired when, based on
current information and events, it believes it probable that the Bank will
be unable to collect all amounts due according to the contractual terms of
13
<PAGE>
the loan agreement. Estimated impairment losses are included in the
allowance for loan losses. Adjustments to impairment losses are included
in the provision for loan losses.
At June 30, 1994, the recorded investment in loans for which impairment
had been recognized in accordance with SFAS No. 114 totaled $149.0 million,
net of $31.1 million in loan loss allowances related to such loans.
Impaired loans as of June 30, 1994 included the following components:
non-accrual major loans of $48.6 million (major loans being defined as
single family loans greater than or equal to $500 thousand and multi-family
loans greater than or equal to $750 thousand), restructured debt of $58.6
million, and major loans less than 90 days delinquent in which full payments
of principal and interest are not expected totaling $41.8 million. Of the
$149.0 million in impaired loans as of June 30, 1994, $55.9 million are
included in the modified loans noted above.
Non-performing Assets
---------------------
The Bank defines non-performing assets as loans delinquent over 90 days
(non-accrual loans), loans in foreclosure and real estate acquired in
settlement of loans.
An analysis of non-performing assets as of June 30, 1994 and 1993 and
December 31, 1993 follows:
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1994 1993 1993
--------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C>
Foreclosed real estate owned:
Single family $ 9,277 $ 10,052 $ 14,424
Multi-family 10,085 16,015 36,378
Commercial real estate 137 327 -
Other 555 484 649
-------- -------- --------
Total foreclosed real estate owned 20,054 26,878 51,451
Delinquent loans over 90 days past due:
Single family 26,210 25,317 31,762
Multi-family 78,296 70,207 67,891
Commercial real estate 19,543 10,307 6,893
Other 189 245 284
Specific valuation allowances (31,238) (14,732) (8,696)
-------- -------- --------
Total delinquent loans 93,000 91,344 98,134
-------- -------- --------
Total non-performing assets $113,054 $118,222 $149,585
-------- -------- --------
General Valuation Allowances (GVA) $ 77,038 $ 40,669 $ 44,282
======== ======== ========
Ratio of general valuation allowances
to total non-performing assets 68.1% 34.4% 29.6%
======= ======== ========
</TABLE>
14
<PAGE>
The ratio of non-performing assets to total assets was 3.03% at June 30,
1994, compared to 3.23% at December 31, 1993 and 4.14% at June 30, 1993.
The decrease from June 30, 1993 to June 30, 1994 was caused by a 61% drop
in foreclosed properties owned by the Bank and higher specific allowances
established for non-performing loans. Management continues to dedicate
significant attention to resolving problem loan situations and disposing of
foreclosed properties. Foreclosed real estate sold totaled $23.6 million
and $37.3 million for the second quarter and first six months of 1994,
respectively, compared to $20.0 million and $28.4 million, respectively
for the second quarter and first six months of 1993.
Sources of Funds
----------------
External sources of funds include savings deposits, advances from the
Federal Home Loan Bank of San Francisco ("FHLBSF") and securitized
borrowings. For purposes of funding asset growth, the source or
sources of funds with the lowest cost for the desired term are typically
selected.
Savings deposits are obtained from several sources: retail savings
branches, the telemarketing department, and national deposit brokers.
Not including $15.8 million and $30.9 million in interest credits during
the second quarter and first six months of 1994, respectively, total
savings deposits decreased by $12.9 million during the second quarter and
$52.0 million during the first six months of 1994.
Retail deposits decreased by $4.0 million during the second quarter and
$24.7 million during the first six months of 1994. The Bank experienced
outflows of deposits acquired from the Resolution Trust Corporation in
December of 1993, particularly during the first quarter of 1994. This
outflow typically occurs with acquired deposits when the interest rates,
which are typically above market on the date of acquisition, are adjusted
to market rates after the acquisition. The Bank had several promotional
campaigns during the second quarter which helped to stem the outflow of
deposits. Retail deposits comprised 66% of total deposits at June 30, 1994.
Telemarketing deposits decreased by $59.1 million during the second quarter
of 1994 and $33.1 million for the first six months of the year. These
deposits, normally large deposits from pension plans and other managed
trusts, decreased due primarily to higher yields available to investors
on alternate investments. Telemarketing deposits comprised 11% of total
deposits at June 30, 1994.
Deposits acquired from national brokerage firms increased by $50.2 million
during the second quarter of 1994 and $5.8 million for the first six months
of the year. The Bank has used brokered deposits for nearly 10 years and
considers these deposits a stable source of funds. The Bank solicits
brokered funds based on a waiver obtained from the Federal Deposit
Insurance Corporation ("FDIC"), the insurer of the Bank's deposits.
15
<PAGE>
The Bank's waiver expires on August 27, 1994 and it has applied for a new
waiver. At June 30, 1994, brokered deposits comprised 23% of total deposits.
Securitized borrowings under reverse repurchase agreements increased by
$51.7 million during the first six months of the year and $1.1 million
during the second quarter. These securitized borrowings are normally the
most cost effective for the Bank but the amount outstanding varies
depending on the level of available collateral. The Bank converted $35.4
million and $49.3 million of loans into mortgage-backed securities during
the second quarter and first six months of 1994, respectively.
FHLB advances increased by $112.5 million for both the second quarter and
the first six months of 1994. The Bank utilized its borrowing capacity with
the FHLB during the second quarter when it exhausted the collateral
available for securitized borrowings.
Internal sources of funds include both principal payments and payoffs on
loans, loan sales, and positive cash flows from operations.
Principal payments include amortization and prepayments which are a
function of real estate activity and the general level of interest rates.
Total principal payments were $76.6 million and $141.7 million,
respectively, for the second quarter and first six months of 1994. This
compares with $90.8 million and $172.3 million, respectively, for the
second quarter and first six months of 1993. Principal payments decreased
due to higher interest rates in 1994 compared to 1993 which had the effect
of decreasing loan refinance activity.
Loan sales decreased to $5.9 million for the second quarter and $42.4 million
for the first six months of 1994. This compares with loan sales of $91.2
million and $108.6 million, respectively for the second quarter and first
six months of 1993. Activity for the second quarter of 1993 included the
sale of a $70.2 million mortgage-backed security from the Bank's portfolio
of loans and mortgage-backed securities held for sale. Due to increased
interest rates in 1994, the level of loans originated for sale by the Bank
decreased in 1994 compared to 1993.
16
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On April 20, 1994, the Company held its Annual Meeting of Stockholders for
the purpose of voting on two proposals. The following are the matters
voted on at the meeting and the votes cast for, against or withheld,
and abstentions as to each such matter. There were no broker non-votes as
to these matters.
1. Election of Directors
<TABLE>
For Withheld Abstain
--------- -------- -------
<S> <C> <C> <C>
Christopher Harding 9,059,689 41,825 0
James L. Hesburgh 9,060,438 41,076 0
Steven L. Soboroff 9,060,439 41,075 0
</TABLE>
2. Ratification of KPMG Peat Marwick as independent public auditors for
the Company for 1994.
<TABLE>
<S> <C>
For: 9,045,331
Against 37,089
Abstain: 19,094
</TABLE>
Item 6. Exhibits and Reports on Form 8-K (Unaudited)
<TABLE>
a) Exhibits
<C> <S>
1.) Computation of earnings per share. Part I hereof is hereby
incorporated by reference.
2.) Reports furnished to security holders. The second quarter
report to shareholders for the period ended June 30, 1994.
Page 19 to 24.
b) Reports on Form 8-K
1.) No reports on Form 8-K were filed during the period ended
June 30, 1994.
</TABLE>
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
------------------------
Registrant
Date: August 15, 1994
By /s/ WILLIAM S. MORTENSEN
-------------------------
William S. Mortensen
Chairman of the Board
and Chief Executive Officer
/s/ JAMES. P. GIRALDIN
---------------------------
James P. Giraldin
Chief Financial Officer and
Executive Vice President
18
<PAGE>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
SECOND QUARTER REPORT TO STOCKHOLDERS
FOR THE PERIOD ENDED JUNE 30, 1994
19
<PAGE>
FirstFed Financial Corp. and Subsidiary
MESSAGE TO STOCKHOLDERS
Dear Stockholder:
The Bank recorded a loss in the second quarter due to our provision
for loan losses resulting from the earthquake and continued economic
problems in Southern California. During the second quarter of the year,
the Bank added $55 million in provisions for loan losses, bringing the
year-to-date total to nearly $80 million. The result was a reported loss
of $25.6 million for the second quarter and $31.7 million for the six-month
period.
Although no one can accurately predict when the economy will recover,
recent reports by UCLA and other economic forecasters have indicated that we
may have seen the worst of the current recession and that there is some
possibility that the economy is improving. Real estate sales in Southern
California for the month of June increased 12% over May and 27% over the
level in June of last year.
To aid in the recovery, the California state legislature is taking a
more aggressive role in creating jobs and developing housing opportunities.
A recent article in the Los Angeles Times indicates that the number of
businesses leaving the state has declined and that some businesses are
actually returning to the state. Recent reforms in the workers
compensation laws have created a more business-friendly environment in the
state. Furthermore, with the decrease in real estate values in the current
recession, the "affordability" of housing has improved significantly in
many areas of the state, making it easier for businesses to attract high
quality employees.
20
<PAGE>
Despite the encouraging news, we don't know when the economy will fully
recover. However, one reason for our optimism is that the volume of new
loans originated by the Bank has increased 27% over the first quarter level
and 6% over the second quarter of last year. Because of rising interest
rates, market conditions for adjustable rate mortgages have improved.
Adjustable rate mortgages have traditionally provided the Bank with strong
core earnings. 99% of the loan portfolio has adjustable interest rate
provisions.
We are pleased that, due to strong allowances built in the past, the
Bank's capital remains above the minimum levels required by Federal
regulations. Also, as announced in a recent news release, the Company has
filed a preliminary registration statement with the Securities and Exchange
Commission for the future issuance of $50 million in 10-year notes.
The Company's low expense-to-assets ratio remains well below that of
our major thrift competitors. In the long run, the Bank's ability to
provide services at a low cost will allow us to compete favorably in the
financial environment of the future.
21
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------
June 30, June 30,
1994 1993
---------- ---------
(Dollars in Thousands,
Except Per Share)
<S> <C> <C>
At, Or For The Three Months Ended
Net Earnings (Loss) $ (25,553) $ 8,328
Net Earnings (Loss) Per Share $ (2.42) $ 0.78
Common Shares Outstanding 10,574,546 10,439,882
Weighted Average Shares for
Earnings Per Share calculation 10,541,367 10,649,177
Book Value Per
Common Share $ 16.71 $ 19.11
Total Loan Volume $ 196,962 $ 185,876
Total Assets $ 3,736,171 $ 3,610,600
Total Loans $ 3,504,528 $ 3,292,142
Total Deposits $ 2,284,874 $ 2,068,671
Total Borrowings $ 1,231,024 $ 1,291,821
Net Worth $ 176,704 $ 199,536
Net Interest Income $ 19,818 $ 23,608
Interest Rate Spread During
the Period 2.05% 2.58%
Net Worth to Assets Ratio 4.73% 5.53%
Tangible Capital Ratio 4.57% 5.39%
Core Capital Ratio 4.57% 5.39%
Risk-Based Capital Ratio 8.71% 9.47%
Return on Average Assets (2.76%) 0.93%
Return on Average Equity (53.95%) 17.05%
Expense Ratio as a % of
Average Assets 1.26% 1.27%
Non-performing Assets to
Total Assets Ratio 3.03% 4.14%
Adjustable Loans as a % of
Total Loans 98.87% 97.99%
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
June 30, December 31,
ASSETS 1994 1993
--------- -----------
<S> <C> <C>
Cash and cash equivalents $ 16,738 $ 17,491
Investment securities, held to maturity
(market of $ 88,645 and $104,282) 91,719 103,836
Loans receivable 2,780,636 2,692,036
Mortgage-backed securities, held to maturity
(market of $699,624 and $715,726) 710,767 708,283
Loans held for sale, market value approximates
carrying value 13,125 23,627
Accrued interest and dividends receivable 20,871 21,018
Real estate 20,417 27,249
Office properties and equipment, net 9,700 8,923
Investment in Federal Home Loan Bank
Stock, at cost 39,722 38,967
Other assets 32,476 19,687
----------- -----------
$ 3,736,171 $ 3,661,117
=========== ===========
LIABILITIES
Deposits $ 2,284,874 $ 2,305,480
Federal Home Loan Bank advances
and other borrowings 1,231,024 1,093,149
Deferred income taxes - 16,366
Accrued expenses and other liabilities 43,569 37,830
----------- -----------
3,559,467 3,452,825
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued
11,371,066 and 11,326,191 shares,
outstanding 10,574,546 and 10,529,671
shares 114 113
Additional paid-in capital 27,414 27,279
Retained earnings - substantially
restricted 161,982 193,650
Loan to employee stock ownership plan (2,974) (2,918)
Treasury stock, at cost, 796,520 shares (9,832) (9,832)
----------- -----------
176,704 208,292
----------- -----------
$ 3,736,171 $ 3,661,117
=========== ===========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans and mortgage-backed
securities $ 52,060 $ 54,435 $105,622 $110,796
Interest and dividends on investments 2,320 2,091 4,483 3,977
-------- -------- -------- --------
Total interest income 54,380 56,526 110,105 114,773
-------- -------- -------- --------
Interest expense:
Interest on deposits 21,265 18,929 41,539 38,097
Interest on borrowings 13,297 13,989 25,129 28,019
-------- -------- -------- --------
Total interest expense 34,562 32,918 66,668 66,116
-------- -------- -------- --------
Net interest income 19,818 23,608 43,437 48,657
Provision for loan losses 55,030 1,849 79,700 45,972
-------- -------- -------- --------
Net interest income (loss)
after provision for losses (35,212) 21,759 (36,263) 2,685
-------- -------- -------- --------
Other income:
Loan and other fees 1,725 1,550 3,359 3,341
Gain on sale of loans and mortgage-
backed securities 84 2,502 524 2,902
Real estate operations, net 579 (459) 961 (316)
Other operating income 367 430 721 814
-------- -------- -------- --------
Total other income 2,755 4,023 5,565 6,741
-------- -------- -------- --------
Non-interest expense 11,711 11,443 23,844 22,897
-------- -------- -------- --------
Earnings (loss) before income taxes (44,168) 14,339 (54,542) (13,471)
Income tax provision (benefit) (18,615) 6,011 (22,874) (5,397)
-------- -------- -------- ---------
Net earnings (loss) $(25,553) $ 8,328 $(31,668) $ (8,074)
======== ======== ======== ========
Earnings (loss) per share $ (2.42) $ 0.78 $ (3.01) $ (0.77)
======== ======== ======== ========
Weighted averages shares for earnings
per share calculation 10,541,367 10,649,177 10,536,561 10,427,554
========== ========== ========== ===========
</TABLE>
24
