<PAGE> 1
<TABLE>
<S> <C> <C>
$50,000,000 As filed pursuant to Rule 424(b)(1)
(LOGO) FIRSTFED FINANCIAL CORP. under the Securities Act of 1933
11 3/4% NOTES DUE 2004 Registration No. 33-54627
------------------------
</TABLE>
Interest on the 11 3/4% Notes due 2004 to be issued by FFC is payable
semiannually on April 1 and October 1 of each year, beginning April 1, 1995. The
Notes are redeemable at any time after October 1, 1999, at the option of FFC as
a whole or from time to time in part, at the redemption prices set forth herein
plus accrued interest to the date of redemption. The Notes will constitute
unsecured and unsubordinated indebtedness of FFC and will rank equally and
ratably with other unsecured and unsubordinated indebtedness of FFC. See "Risk
Factors -- Holding Company Structure."
The Notes will be represented by one or more global Notes registered in the
name of the nominee of The Depositary Trust Company. Beneficial interests in the
global Notes will be shown on, and transfers thereof will be effected only
through, records maintained by DTC and its participants. Except as described
herein, Notes in definitive form will not be issued. The Notes will be issued
only in denominations of $1,000 and integral multiples thereof. The Notes will
trade in DTC's Same-Day Funds Settlement System until maturity, and secondary
market trading activity for the Notes will therefore settle in immediately
available funds. All payments of principal and interest will be made by FFC in
immediately available funds. See "Description of Notes -- Same-Day Settlement
and Payment."
The Notes are a new issue of securities with no established trading market.
FFC does not intend to list the Notes on any securities exchange. The
Underwriters have advised FFC that the Underwriters intend to make a market in
the Notes but are not obligated to do so and may discontinue market making at
any time without notice.
THE NOTES ARE NOT SAVINGS ACCOUNTS DEPOSITS OR OTHER OBLIGATIONS OF ANY
BANK OR NONBANK SUBSIDIARY OF FFC AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION
INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY.
PROSPECTIVE INVESTORS SHOULD REVIEW AND CONSIDER THE DISCUSSIONS UNDER "RISK
FACTORS."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<S> <C> <C> <C>
UNDERWRITING
INITIAL PUBLIC DISCOUNTS AND PROCEEDS
OFFERING PRICE(1) COMMISSIONS(2) TO FFC(2)(3)
------------------ ------------------------- ------------------
Per Note............................ 100% 3.00% 97.00%
Total............................... $50,000,000 $1,500,000 $48,500,000
</TABLE>
- ---------------
(1) Plus accrued interest, if any, from September 28, 1994.
(2) FFC has agreed to indemnify the Underwriters against and contribute toward
certain liabilities, including liabilities under applicable securities laws.
See "Underwriting."
(3) Before deducting expenses payable by FFC, estimated at $725,000.
------------------------
The Notes offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Notes
will be ready for delivery in book-entry form only through the facilities of DTC
in New York, New York, on or about September 28, 1994, against payment therefore
in immediately available funds.
GOLDMAN, SACHS & CO. MONTGOMERY SECURITIES
------------------------
The date of this Prospectus is September 21, 1994.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT LEVELS
ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
FirstFed Financial Corp. ("FFC") is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and the Commission's Regional Offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained upon written request from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, FFC's common stock is listed on the New
York Stock Exchange, Inc. (the "NYSE"), and reports, proxy statements and other
information concerning FFC may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
This Prospectus does not contain all of the information set forth or
incorporated by reference in the registration statement filed with the
Commission (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
and reference is hereby made to the Registration Statement, including the
exhibits thereto and the documents incorporated by reference therein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
FFC hereby incorporates by reference in this Prospectus its Annual Report
on Form 10-K for the year ended December 31, 1993, as amended and restated in a
Form 10-K/A filed on September 7, 1994, its Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994, as amended and restated in a Form 10-Q/A filed
on September 7, 1994, and its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994, as amended and restated in a Form 10-Q/A filed on September
7, 1994 filed pursuant to Section 13 under the Exchange Act.
All documents filed by FFC pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date such documents are filed.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document that is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
FFC will provide without charge to each person (including any beneficial
owner of the Notes) to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any document incorporated herein by reference
other than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Written or oral requests should
be directed to FirstFed Financial Corp., Attention: Ann E. Lederer, Vice
President, General Counsel and Secretary, at FFC's principal executive offices
located at 401 Wilshire Boulevard, Santa Monica, California 90401, telephone
(310) 319-6000.
2
<PAGE> 3
PROSPECTUS SUMMARY
The following material is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the documents
incorporated in this Prospectus by reference.
THE COMPANY
FirstFed Financial Corp. ("FFC"), a Delaware corporation, is the holding
company for First Federal Bank of California, fsb (the "Bank" and, together with
FFC, the "Company"), a federally chartered savings bank with 25 retail branches
and eight loan origination offices located in Los Angeles, Orange and Ventura
counties. The Bank, headquartered in Santa Monica, California, is primarily in
the business of attracting deposits and utilizing those funds, together with
borrowings from other sources, to originate mortgage loans secured by single
family and multi-family residential real estate located in Southern California.
FFC has no material assets other than its equity interest in the Bank. At June
30, 1994, the Company had total assets of $3.7 billion, total deposits of $2.3
billion and stockholders' equity of $176.7 million.
The Bank originated $745.8 million of loans in 1993, of which 67.0% were
secured by single family properties and 31.7% were secured by multi-family
properties. In order to minimize its interest rate risk, the Bank originates
primarily adjustable rate mortgage loans ("ARMs") with interest rates that reset
monthly based upon the Federal Home Loan Bank ("FHLB") Eleventh District cost of
funds index ("COFI" or the "Index"). In 1993, 88.2% of the loans originated by
the Bank were ARMs, with fixed rate loans accounting for the remaining 11.8%.
The Bank sells into the secondary market substantially all of the fixed rate
mortgage loans that it originates as well as a portion of its ARMs. The Bank
converts into mortgage-backed securities ("MBS") a portion of loans originated
by it that meet the guidelines established by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA").
The Bank generally retains the right to service loans that it sells or
securitizes.
At June 30, 1994, the Bank had $2.8 billion of loans held for investment
("loans receivable"), $13.1 million of loans held for sale and $710.8 million of
MBS (collectively referred to as the "loan portfolio"). The Bank's loan
portfolio comprised 93.8% of the Company's total assets. Substantially all of
the loans securing the Bank's MBS were single family loans originated by the
Bank. At June 30, 1994, the Bank's loan portfolio was secured 54.6% by single
family properties and 37.4% by multi-family properties. ARMs represented 98.9%
of the Bank's loan portfolio at June 30, 1994.
To fund its residential lending activities, the Bank relies primarily on
deposits, advances from the Federal Home Loan Bank of San Francisco ("FHLBSF")
and sales of securities under agreements to repurchase ("reverse repurchase
agreements"). At June 30, 1994, the Bank had deposits of $2.3 billion, advances
from the FHLBSF of $627.2 million and reverse repurchase agreements of $600.3
million, collectively representing 98.7% of total liabilities. Approximately
65.7% of deposits at June 30, 1994 were generated by the Bank's 25 retail
branches ("retail deposits"), with the remainder obtained from national
brokerage firms ("brokered deposits") and a telemarketing solicitation effort
("telemarketing deposits"). On any given date, the Bank seeks to utilize the
source of funds with the lowest overall cost. The Bank's solicitation and use of
brokered deposits and telemarketing deposits has expanded the geographical scope
of its deposit activities. Other sources of funds for use in lending and for
other general business purposes are loan payments and loan sales. See
"Business -- Sources of Funds."
The Bank strives to minimize its non-interest expenses as a means of
enhancing operating results. The Bank's ratio of non-interest expense to average
assets in 1993 was 1.26%, down from 1.36% in 1992. During the six months ended
June 30, 1994, this ratio was 1.29%.
The Bank has historically experienced a modest level of loan losses;
however, beginning in 1990, the Bank's level of non-performing assets increased
primarily as a result of the economic recession in Southern California, the 1992
civil unrest in Los Angeles and the Los Angeles earthquake in January 1994.
Because the Bank's lending activities are concentrated in the Los Angeles area,
these events
3
<PAGE> 4
have had a negative impact on the Bank's loan loss exposure. The Bank's
provisions for loan losses increased from $824,000 in 1989 to $67.7 million in
1993, and its ratio of non-performing assets to total assets rose from 0.33% at
year-end 1989 to 3.03% at June 30, 1994, having peaked at 4.25% at July 31,
1993.
The Bank recorded a $55.0 million provision for loan losses during the
quarter ended June 30, 1994, which is in addition to the $24.7 million provision
for loan losses recorded during the quarter ended March 31, 1994. Management of
the Bank believes that these provisions for loan losses fully reflect the extent
to which collateral supporting the Bank's loans receivable, loans held for sale,
and loans sold with recourse (collectively, "loans with loss exposure") and real
estate acquired in settlement of loans ("REO") was damaged by the earthquake and
affected by continuing weakness in the Southern California real estate market,
and provide adequate protection for anticipated loan charge-offs. While
management believes that its second quarter provision for loan losses is
adequate given currently available information, there can be no assurance that
additional provisions for loan losses will not be required as a result of
adverse changes in economic conditions or the discovery of additional
earthquake-related damage. The table below shows the loan loss allowances and
their relationship to non-performing loans and non-performing assets
(non-performing loans and REO) at June 30, 1994:
<TABLE>
<CAPTION>
AT JUNE 30, 1994
----------------
(IN THOUSANDS,
EXCEPT
PERCENTAGES)
<S> <C>
Loan Loss Allowances(1).............................................. $108,276
Non-Performing Loans(2).............................................. 124,238
Non-Performing Assets(2)............................................. 144,292
Loan Loss Allowances to Non-Performing Loans......................... 87.15%
Loan Loss Allowances to Non-Performing Assets........................ 75.04
</TABLE>
- ---------------
(1) Loan loss allowances include general valuation allowances on the Bank's loan
portfolio, and specific loan loss allowances on the Bank's non-performing
loans. See "Business -- Loan Portfolio."
(2) Before deducting specific loan loss allowances.
The Bank's principal regulators are the Office of Thrift Supervision (the
"OTS") and the Federal Deposit Insurance Corporation (the "FDIC"). See
"Regulation." The Bank is subject to OTS regulations that establish minimum
capital standards for savings institutions. At June 30, 1994, the Bank exceeded
its fully phased-in regulatory capital requirements and met the regulatory
standards necessary to be deemed "adequately capitalized" under the OTS' "prompt
corrective action" regulations. Before giving pro forma effect to the
contribution by FFC to the Bank of the net proceeds of the sale of the Notes
offered hereby (the "Offering"), at June 30, 1994, the Bank met the standards
necessary to be deemed "adequately capitalized." The table below sets forth the
Bank's regulatory capital ratios at June 30, 1994, on an actual and pro forma
basis:
<TABLE>
<CAPTION>
ACTUAL AT PRO FORMA
JUNE 30, AFTER CAPITAL
CAPITAL RATIOS 1994 CONTRIBUTION(1) REQUIREMENTS(2)
----------------------------------------- --------- --------------- ---------------
<S> <C> <C> <C>
Tangible Capital......................... 4.57% 5.85% 1.50%
Core Capital............................. 4.57 5.85 3.00
Total Risk-Based Capital................. 8.71 10.85 8.00
</TABLE>
- ---------------
(1) Adjusted to reflect the contribution by FFC to the Bank of the net proceeds
of the Offering.
(2) Minimum capital requirements for a savings institution. See
"Regulation -- Regulatory Capital Requirements."
4
<PAGE> 5
Dividend payments from the Bank are the sole source of operating cash flow
to FFC, which owns 100% of the capital stock of the Bank. Payments of dividends
by the Bank to FFC are subject to limitations under applicable laws and
regulations. The ability of the Bank to pay dividends in the future will depend
in large part on the Bank's ability to continue to meet its fully phased-in
capital requirement and to continue to meet the regulatory standards necessary
to be deemed at least "adequately capitalized" under the OTS' "prompt corrective
action" regulations. See "Regulation -- Regulatory Capital Requirements."
THE OFFERING
Securities Offered......... $50,000,000 aggregate principal amount of 11 3/4%
Notes due 2004 (the "Notes").
Maturity Date.............. October 1, 2004.
Interest Payment Dates..... April 1 and October 1 commencing April 1, 1995.
Interest Rate.............. 11 3/4% per annum.
Optional Redemption........ The Notes are redeemable at any time after October
1, 1999, at the option of FFC, as a whole or from
time to time in part, at the redemption prices set
forth herein plus accrued interest to the date of
redemption.
Ranking.................... The Notes will be general unsecured obligations of
FFC and will rank on a parity in right of payment
to all existing and future unsubordinated
indebtedness of FFC.
Certain Covenants.......... The Indenture will contain certain covenants which,
among other things, (i) limit the incurrence of
debt by FFC, (ii) limit the payment of dividends
and the making of certain other distributions by
FFC and its subsidiaries, (iii) limit the
disposition of, and the existence of liens on, the
stock of certain of FFC's subsidiaries, (iv) limit
the existence of certain liens on other property or
assets of FFC and (v) limit the ability of FFC to
enter into certain transactions with affiliates.
See "Description of Notes -- Certain Covenants."
Use of Proceeds............ Substantially all of the net proceeds from the sale
of the Notes will be used to make a capital
contribution to the Bank. The Bank intends to use
such contribution to facilitate its growth. See
"Use of Proceeds."
Risk Factors............... The purchase of Notes involves investment risks
particular to FFC and to the financial institution
industry in general, and risks particular to the
Offering. Investors are urged to read and consider
carefully the information set forth under the
heading "Risk Factors."
5
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL DATA
The following sets forth selected consolidated financial data of the
Company which should be read in conjunction with, and is qualified in its
entirety by reference to, the more detailed information and consolidated
financial statements and notes thereto included and incorporated herein by
reference. The year-end data are derived from consolidated financial statements
of the Company, which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. The interim data are unaudited but reflect all
adjustments (all of which are of a normal recurring nature) which, in the
opinion of management, are necessary for a fair statement of results for the
interim periods. The results for interim periods presented herein are not
necessarily indicative of results to be expected for any other period or for the
entire fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest Income..................... $ 110,105 $ 114,773 $ 229,445 $ 255,612 $ 296,530 $ 291,436 $ 245,101
Interest Expense.................... 66,668 66,116 131,616 151,510 195,756 207,817 185,059
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income................. 43,437 48,657 97,829 104,102 100,774 83,619 60,042
Provision for Loan Losses........... 79,700 45,972 67,679 41,384 11,833 4,126 824
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income (Expense) After
Provision for Loan Losses......... (36,263) 2,685 30,150 62,718 88,941 79,493 59,218
Other Income........................ 5,565 6,741 12,054 12,634 7,059 7,025 7,963
Non-Interest Expense................ 23,844 22,897 45,298 46,125 40,482 39,355 32,817
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (Loss) Before Income
Taxes............................. (54,542) (13,471) (3,094) 29,227 55,518 47,163 34,364
Income Taxes (Benefit).............. (22,874) (5,397) (1,046) 11,198 27,091 20,112 13,862
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings (Loss) Before Cumulative
Effect of Change in Accounting
Principle......................... (31,668) (8,074) (2,048) 18,029 28,427 27,051 20,502
Cumulative Effect of Change in
Accounting Principle.............. -- -- -- 4,075 -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Earnings (Loss)................. $ (31,668) $ (8,074) $ (2,048) $ 22,104 $ 28,427 $ 27,051 $ 20,502
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT PERIOD END):
Total Assets........................ $3,736,171 $3,610,600 $3,661,117 $3,446,573 $3,287,059 $3,051,808 $2,583,705
Loans Receivable.................... 2,780,636 2,635,152 2,692,036 2,481,225 2,339,446 2,126,341 1,953,835
Mortgage-Backed Securities
("MBS")........................... 710,767 641,412 708,283 693,072 519,499 521,384 267,659
Loans and MBS Held for Sale......... 13,125 15,578 23,627 91,558 154,115 98,498 110,575
Investment Securities, Certificates
of Deposit, Federal Funds Sold and
FHLB Stock, at Cost............... 131,441 122,495 142,803 79,278 139,392 102,537 164,284
REO................................. 20,054 51,451 26,878 23,858 8,172 422 --
Deposits............................ 2,284,874 2,068,671 2,305,480 1,982,745 1,740,103 1,739,653 1,552,789
FHLB Advances and Other
Borrowings........................ 630,700 752,000 544,500 705,150 656,800 541,825 487,688
Securities Sold Under Agreements to
Repurchase........................ 600,324 539,821 548,649 491,091 623,572 520,979 327,413
Stockholders' Equity................ 176,704 199,536 208,292 207,511 190,176 161,438 134,971
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
AT OR FOR THE
SIX MONTHS
ENDED JUNE 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
REGULATORY CAPITAL RATIOS:
Tangible.......................... 4.57% 5.39% 5.64% 5.97% 5.70% 5.26% 5.13%
Core.............................. 4.57 5.39 5.64 5.97 5.70 5.26 5.13
Risk-Based........................ 8.71 9.47 10.25 10.20 9.36 8.61 6.85
ASSET QUALITY DATA(1):
Non-Performing Loans.............. $ 124,238 $ 106,830 $ 106,076 $ 71,009 $ 57,518 $ 25,388 $ 8,986
REO............................... 20,054 51,451 26,878 23,858 8,172 422 --
Non-Performing Assets............. 144,292 158,281 132,954 94,867 65,690 25,810 8,986
Loan Loss Allowances(2)........... 108,276 52,978 55,401 26,656 18,010 10,217 8,774
Charge-Offs....................... 43,324 21,297 48,633 27,467 9,077 1,339 122
Non-Performing Assets to Total
Assets(3)....................... 3.03% 4.14% 3.23% 2.62% 1.83% 0.82% 0.33%
Charge-Offs to Average Loans(4)... 1.51 0.80 1.82 1.11 0.40 0.06 0.01
Loan Loss Allowances to
Non-Performing Loans............ 87.15 49.59 52.23 37.54 31.31 40.24 97.64
Loan Loss Allowances to
Non-Performing Assets........... 75.04 33.47 41.67 28.10 27.42 39.59 97.64
OTHER DATA:
Interest Rate Spread During the
Period.......................... 2.25% 2.62% 2.67% 2.95% 2.97% 2.62% 2.22%
Non-Interest Expenses to Average
Assets.......................... 1.29 1.29 1.26 1.36 1.28 1.40 1.39
Return on Average Assets
("ROAA")........................ (1.72) (0.45) (0.06) 0.65 0.90 0.96 0.87
Return on Average Stockholders'
Equity ("ROAE")................. (32.90) (7.93) (0.99) 11.12 16.17 18.25 16.48
Stockholders' Equity to Total
Assets.......................... 4.73 5.53 5.69 6.02 5.79 5.29 5.22
Number of Branch Offices.......... 25 24 25 24 18 18 16
Number of Loan Origination
Offices......................... 8 8 8 8 6 7 7
Number of Employees............... 509 487 499 468 395 398 374
Earnings (Loss) Per Share Before
Cumulative Effect of Change in
Accounting Principle............ $ (3.01) $ (0.77) $ (0.19) $ 1.66 $ 2.61 $ 2.49 $ 1.88
Earnings (Loss) Per Share......... (3.01) (0.77) (0.19) 2.04 2.61 2.49 1.88
Book Value Per Share.............. 16.71 19.11 19.78 19.98 18.28 15.81 13.14
RATIO OF EARNINGS TO FIXED
CHARGES(5):
Including Interest on Deposits.... -- -- -- 1.19x 1.28x 1.23x 1.18x
Excluding Interest on Deposits.... -- -- -- 1.45 1.68 1.60 1.52
</TABLE>
- ---------------
(1) All loan amounts are before deducting specific loan loss allowances
attributable to such loans.
(2) These loan loss allowances include specific loan loss allowances on the
Bank's non-performing loans, but exclude general valuation allowances
attributable to loans sold with recourse, which allowances were classified
as part of loans receivable prior to 1994 and were removed in this
presentation for prior periods. General valuation allowances attributable to
loans sold with recourse are recorded as a liability on the Company's
statement of financial condition at June 30, 1994. These allowances were
$6.2 million, $8.2 million, $6.2 million, $5.8 million, $1.3 million, $1.9
million and zero at June 30, 1994 and 1993, and at December 31, 1993, 1992,
1991, 1990 and 1989, respectively. See "Risk Factors -- Asset Quality;
Southern California Real Estate."
(3) Non-performing assets after deducting specific loan loss allowances.
(4) Average loan amounts represent the Bank's loan portfolio, excluding MBS, and
before deducting loan loss allowances and unrealized loan fees.
(5) Earnings represent earnings before income taxes and accounting changes and
fixed charges. Fixed charges, including interest on deposit accounts,
represent all interest expense (including the portion of rental expense
deemed to be representative of the interest factor). Fixed charges,
excluding interest on deposit accounts, represent other interest expense.
Earnings were inadequate to cover fixed charges for the six months ended
June 30, 1994 and 1993 and for the year ended December 31, 1993, by $54.5
million, $13.5 million and $3.1 million, respectively.
7
<PAGE> 8
RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS SHOULD
CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS.
HOLDING COMPANY STRUCTURE
The Notes are obligations exclusively of FFC, which has no material assets
other than its ownership of 100% of the common stock of the Bank. Because the
operations of FFC currently are conducted through the Bank, the ability of FFC
to meet its obligations with respect to the Notes is dependent upon the payment
of dividends by the Bank to FFC. As discussed below, the ability of the Bank to
pay dividends to FFC is dependent upon the Bank's earnings and subject to a
number of regulatory restrictions. See "-- Source of Funds" and
"Regulation -- Regulatory Capital Requirements." The Bank is a separate and
distinct legal entity and has no obligation, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends or other payments. Accordingly, in a bankruptcy or
liquidation proceeding resulting from a default under the Notes, claims of
holders of the Notes would be satisfied solely from FFC's equity interest in the
Bank remaining after the satisfaction of all claims of creditors of the Bank
(including depositors), and thus would be subordinated to those of depositors
and other creditors of the Bank.
SOURCE OF FUNDS
The Bank' s ability to pay dividends to FFC is dependent upon the economic
factors that permit it to generate net income, as well as current and future
statutory and regulatory limitations. The Bank generally may not pay a dividend
at any time if, after the payment of the dividend, it would be deemed
"undercapitalized" under the "prompt corrective action" standards of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). See
"Regulation -- Regulatory Capital Requirements." A savings institution that has
a total risk-based capital ratio (total capital to risk-weighted assets) of less
than 8.0%, a Tier 1 risk-based capital ratio (core capital to risk-weighted
assets) of less than 4.0% or a core (or leverage) capital ratio (core capital to
total assets) of less than 4.0%, is considered to be "undercapitalized." At June
30, 1994, the Bank had a total risk-based capital ratio of 8.7%, a Tier 1
risk-based capital ratio of 7.6%, and a core (or leverage) capital ratio of
4.6%. At those percentages, the Bank is considered to be "adequately
capitalized" for purposes of the "prompt corrective action" standards of FDICIA.
At June 30, 1994, after giving pro forma effect to the contribution by FFC to
the Bank of the net proceeds from the Offering, the Bank would have had a total
risk-based capital ratio of 10.9%, a Tier 1 risk-based capital ratio of 9.8%,
and a core (or leverage) capital ratio of 5.9%. At those percentages, the Bank
would meet the capital standards necessary to be deemed "well capitalized" for
purposes of the "prompt corrective action" standards of FDICIA. See
"Regulation -- Regulatory Capital Requirements."
The Bank's ability to pay dividends to FFC may also be limited by the OTS'
capital distribution regulations. Under those regulations, savings institutions
generally are required to provide not less than thirty days' advance notice to
their OTS District Director of any proposed declaration of a dividend. The
regulations establish "safe harbor" amounts of capital distributions that
institutions can make after providing notice to the OTS, but without needing
prior approval. The safe harbor amounts vary depending on the level of
capitalization of the institution. For an institution that meets its fully
phased-in capital requirement under the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and the implementing regulations of the
OTS, immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution (a "Tier 1" institution), the safe harbor amount
of capital distributions during any calendar year is the greater of (i) 100% of
its net income to date during the calendar year, plus the amount that would
reduce by not more than one-half its surplus capital ratio at the beginning of
the calendar year (the percentage by which the institution's capital to assets
ratio exceeds the ratio of its fully phased-in capital requirement to its assets
at the determination date) or (ii) 75% of its net income over the most recent
four-quarter period. An institution's fully phased-in capital requirement means
its capital requirement under standards to be applicable on January 1, 1995,
after all
8
<PAGE> 9
scheduled increases in capital requirements are given effect and all scheduled
exclusions from capital requirements are implemented.
An institution that meets its current minimum capital requirement but not
its fully phased-in capital requirement immediately prior to, and on a pro forma
basis after giving effect to, a proposed capital distribution (a "Tier 2"
institution), may make capital distributions of up to 75% of its net income over
the most recent four-quarter period, as reduced by the amounts of any capital
distributions previously made during such period. An institution that does not
meet its minimum regulatory capital requirement immediately prior to, or on a
pro forma basis after giving effect to, a proposed capital distribution (a "Tier
3" institution) is not authorized to make any capital distributions unless it
receives prior written approval from the OTS, or the distributions are in
accordance with the express terms of an OTS approved capital plan. See
"Regulation -- Restrictions on Dividends and Other Capital Distributions." Under
these regulations, the OTS has discretion to treat any Tier 1 institution that
has been notified that it is in need of more than normal supervision as a Tier 2
or Tier 3 institution for purposes of these dividend restrictions. The OTS also
has the authority to prohibit any capital distribution otherwise permitted under
these regulations, if the OTS determines that the capital distribution would
constitute an unsafe or unsound practice. Among the circumstances posing such
risk would be capital distributions by a Tier 1 or Tier 2 institution with
decreasing capital because of substantial losses.
At June 30, 1994, the Bank met its fully phased-in capital requirement and,
accordingly, qualifies as a Tier 1 institution for purposes of the capital
distribution regulations. At June 30, 1994, after giving pro forma effect to the
contribution by FFC to the Bank of the net proceeds from the Offering, the Bank
would also have met the capital requirements necessary to qualify as a Tier 1
institution, and, accordingly, would have had available up to $33.8 million for
distribution to FFC without prior OTS approval under such regulations.
The ability of the Bank to pay dividends to FFC in the future will depend
in large part on the Bank's ability to continue to meet its capital requirements
and its continuing to qualify as a Tier 1 institution under the capital
distribution regulations. If the Bank continues to experience losses, the OTS
could object to any dividend payments by the Bank based on safety and soundness
concerns. Moreover, if such losses resulted in the Bank being deemed
"undercapitalized" for purposes of the "prompt corrective action" rules of
FDICIA, the Bank would not be permitted to pay cash dividends.
ASSET QUALITY; SOUTHERN CALIFORNIA REAL ESTATE
At June 30, 1994, approximately 99.5% of the Bank's loans were secured by
properties located in Southern California. The market for real estate in
Southern California has been negatively affected over the past several years by
the economic recession experienced by the region. The recession has been marked
by increased unemployment, declines in real estate values and reduced occupancy
rates for multi-family properties. In addition, during 1993, the economy of
Southern California was affected by fires that burned over one thousand homes.
The civil unrest in Los Angeles in 1992 has had continuing effects in 1993 and
1994. Furthermore, in January 1994, Los Angeles and Ventura counties experienced
a severe earthquake and related aftershocks. As a result, the Bank has
experienced an increase in total non-performing assets (non-performing loans and
REO) in recent years. The Bank's non-performing assets reached a high of $153.3
million, or 4.25%, of total assets at July 31, 1993. At June 30, 1994, the
Bank's non-performing assets were $113.1 million, or 3.03% of total assets.
There can be no assurance that the Bank's prior experience in reducing
non-performing assets can be repeated or maintained. See "Business -- Loan
Portfolio."
Approximately $1.1 billion of the Bank's loans receivable, loans held for
sale and loans sold with recourse (collectively, "loans with loss exposure"), or
35.0% of such loans at June 30, 1994, were collateralized by properties in areas
directly affected by the earthquake. For the quarter ended June 30, 1994, the
Bank recorded a $55.0 million provision for loan losses, approximately $31.9
million of which was attributable to continuing weakness in the Southern
California real estate market and approximately $23.1 million of which was
attributable to earthquake-related losses. Provisions for loan losses recorded
9
<PAGE> 10
during the six months ended June 30, 1994 were $79.7 million, $30.6 million of
which were directly attributable to effects of the earthquake. The Bank
anticipates that provisions for loan losses associated with the current economic
conditions and the January 1994 earthquake will result in the Bank experiencing
a net loss for 1994. See "Business -- Provisions for Loan Losses."
Based on currently available information, management believes that such
provisions for loan losses fully reflect the extent to which losses are
anticipated due to earthquake damage to collateral supporting the Bank's loan
portfolio; however, management believes that increases in non-performing assets
indirectly associated with the earthquake are likely to continue for some time.
There can be no assurance that additional earthquake related damages will not be
identified or that current estimates of damage and potential losses to the Bank
will not increase as additional information about affected properties becomes
available. The Bank intends to closely monitor the situation and to continue to
reflect the longer-term effects in its operating results and financial
condition. In accordance with customary industry practices among thrifts
operating in Southern California, the Bank does not, except in limited
circumstances, require that borrowers obtain earthquake insurance in connection
with the Bank's origination of new loans.
The Bank maintains loan loss allowances to absorb future losses that may be
realized on its loan-related assets, other investments and off-balance sheet
items. The Bank's loan loss allowances consist of three components: (i) specific
loan loss allowances; (ii) general valuation allowances for the Bank's loan
portfolio; and (iii) general valuation allowances for loans sold by the Bank
with full or limited recourse, which allowances are recorded as a liability on
the Company's statement of financial condition. (Items (ii) and (iii) are
referred to herein collectively as the "combined general valuation allowances.")
The general valuation allowances for the Bank's loan portfolio were $77.0
million at June 30, 1994 and $40.7 million at December 31, 1993, and represented
approximately 68.1% and 34.4%, respectively, of the value of the Bank's total
non-performing assets at such dates. A specific loan loss allowance is
established (and charged off from the combined general valuation allowance) for
any loan which is 90 days or more delinquent or in foreclosure, or when the
Bank's management has determined that it is unlikely that the loan will be fully
collectible. Specific loan loss allowances for the Bank's non-performing loans
were $31.2 million and $14.7 million and represented 25.1% and 13.9% of the
Bank's non-performing loans (before deducting specific loan loss allowances
established with respect to these non-performing loans) at June 30, 1994 and
December 31, 1993, respectively. As a result of weaknesses in the Southern
California real estate market, increases in provisions for loan losses, which
result in increases in combined general valuation allowances and are charges
against earnings, may be required in future periods. See "Business -- Asset
Quality." In addition, the OTS and the FDIC, as an integral part of their
examination processes, periodically review the Bank's loan loss allowances.
These agencies may require the Bank to establish additional loan loss
allowances, based on their respective judgments of the information available at
the time of the examinations. Any such requirement that the Bank increase its
loan loss allowances generally would require the Bank to record additional
provisions for loan losses, and would thus reduce the Bank's net income, which
may affect the Bank's ability to pay dividends to FFC.
MULTI-FAMILY LENDING
The Bank's lending activities include the origination of multi-family
loans, which are generally considered to involve more risk than single family
loans. Multi-family loans typically involve higher principal amounts and
repayment of the loan generally is dependent, in large part, on sufficient cash
flow being generated by the project to cover operating expenses and loan
repayments. Market values may vary as a result of economic events or
governmental regulations which are outside the control of the borrower or lender
and which can affect the future cash flow of the properties.
Over the past four years, the Bank's multi-family portfolio has had
increasing delinquency rates. At June 30, 1994, multi-family loans accounted for
37.4% of the Bank's total loan portfolio, and 61.3% of the Bank's non-performing
assets (before deducting specific loan loss allowances attributable to such
assets). Contributing factors to this increase have been (i) increasing vacancy
rates, (ii) the substantial decreases in the value of multi-family properties
experienced in recent periods (resulting, in some cases,
10
<PAGE> 11
in appraised values which are lower than the outstanding loan balances) and
(iii) the potentially greater willingness of investors to abandon such
properties or seek bankruptcy protection, particularly when such properties are
experiencing negative cash flow and the loans are not cross-collateralized by
other performing properties.
The Bank intends to continue to originate new multi-family loans, but
currently seeks to maintain the level of such originations at no more than 40%
of its total loan originations. Since 1992, the Bank has strengthened the
underwriting criteria that it applies to new multi-family loan applications in
an effort to reduce future levels of losses on its multi-family loan portfolio;
however, there can be no assurance that the Bank will be successful in reducing
these losses or that multi-family loans will not continue to represent a
disproportionate amount of the Bank's non-performing assets.
EFFECTS OF INTEREST RATES
Like most financial institutions, the Bank's operating results are affected
by changes in interest rates. In order to mitigate these effects, the Bank
emphasizes the origination of ARMs and sells substantially all of the fixed rate
loans it originates. At June 30, 1994, ARMs comprised approximately 98.9% of the
Bank's loan portfolio; of such loans, approximately 96.5% were indexed to the
COFI. Historically, the Bank's cost of funds has closely matched the COFI so
that increases in the Bank's cost of funds are accompanied by increases in
interest rates on its COFI loans. However, due to the timing of both the
calculation of and the publication of the COFI by the FHLBSF, changes in the
published Index generally lag behind changes in market interest rates. This
market lag, together with required borrower notice provisions and other
repricing procedures, results in a delay of up to 90 days between the beginning
of a month in which there is a change in the COFI and the date on which the
interest rate on an ARM in the Bank's loan portfolio is reset. Accordingly,
during periods of increases or decreases in interest rates, the Bank's cost of
funds may change more quickly than the interest rates on its ARMs. Because of
these timing disparities, the Bank's interest rate spreads generally can be
expected initially to increase as market rates fall and initially to decrease as
market rates rise. See "Business -- Net Interest Income." ARMs allow the Bank to
increase the sensitivity of its asset base to changes in interest rates;
however, the extent of this interest sensitivity is limited by the lifetime
interest rate adjustment limitation. In addition, in an increasing rate
environment, payment increases associated with rising rates can increase the
risk of default on ARMs. Accordingly, there can be no assurance that yields on
the Bank's ARMs will adjust sufficiently to compensate for increases in the
Bank's costs of funds and the increased risk of default during periods of
interest rate increases.
The Bank's net interest income is dependent to a large extent on its net
interest spread (the difference between the yield earned on average
interest-earning assets and the rate paid on average interest-bearing
liabilities). During the years ended December 31, 1992 and 1991, the decline in
market interest rates generally resulted in increased net interest spreads for
lending institutions. The Bank's net interest spread has declined since January
1993, primarily as a result of increases in non-performing assets. The excess of
average interest-earning assets over average interest-bearing liabilities
decreased slightly to $87.9 million for the six months ended June 30, 1994,
after decreasing to $90.8 million for the year ended December 31, 1993, from
$142.6 million for the year ended December 31, 1992, and $147.3 million for the
year ended December 31, 1991. A reduction in the excess of average
interest-earning assets over interest-bearing liabilities has a negative impact
on the net interest income earned by the Bank. See "-- Asset Quality; Southern
California Real Estate." Commencing in February 1994, market interest rates have
been increasing. If interest rates continue to rise, the Bank's net interest
spread is likely to decline, which may result in a decrease in the Bank's net
interest income.
Changes in interest rates also can affect the amount of loans originated by
the Bank and thus, the amount of the Bank's interest income and loan and
commitment fees, as well as the value of the Bank's loans, MBS, investment
securities and other earning assets. Moreover, changes in interest rates can
result in disintermediation, which is the flow of funds away from savings
institutions into direct investments, such as U.S. Government and corporate
securities and other investment vehicles which, because of the absence of
federal deposit insurance premiums and reserve requirements or due to a
11
<PAGE> 12
higher degree of risk associated with certain of these other investments,
generally pay higher rates of interest than savings institutions.
COMPETITION FOR ASSETS
The Bank competes with commercial banks, other savings banks and
associations, mortgage companies, finance companies, money market funds, credit
unions and other financial institutions, some of which have substantially
greater financial resources than the Bank. The Bank faces strong competition in
originating and purchasing residential mortgage loans, the Bank's primary source
of interest income. That competition may be increased if legislation currently
pending in Congress is enacted into law permitting, among other things, some
form of national interstate branching by commercial banks which, today, are
generally permitted to establish branches on a statewide basis and to make
acquisitions on a regional rather than a nationwide basis. The Bank's future
performance will be dependent on its ability to originate a sufficient volume of
mortgage loans in its local market areas.
REGULATION
The thrift industry is subject to extensive regulation that has materially
affected the business of the Bank and other thrift institutions in the past, and
is likely to do so in the future. Regulations now affecting the Bank may be
changed at any time, and the interpretation of these regulations is also subject
to change. There can be no assurance that future changes in such regulations or
in their interpretation will not adversely affect the business of the Company.
FIRREA, among other regulatory changes, imposed higher regulatory capital
requirements on savings institutions, limited the amount of goodwill that could
be included in capital, provided additional limitations on investments and
raised insurance and examination assessments. More recently, FDICIA added new
requirements and penalties for failure to comply therewith, and gave regulators
additional powers to enforce these requirements. FDICIA specified five capital
categories and imposed a system pursuant to which federal banking regulators are
authorized or required to take certain "prompt corrective action" under some
circumstances. The five categories are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." The OTS has by regulation established the levels
of capital that relate to each category. See "Regulation -- Prompt Corrective
Action." FDICIA, however, permits the OTS at any time to reclassify an
institution into the next lower category if the institution has received a less
than satisfactory rating (on the OTS "CAMEL" rating system) in its most recent
examination for capital adequacy levels, asset quality, management, earnings or
liquidity.
The severity of the prompt corrective actions authorized or required to be
taken by the OTS increases as an institution's capital position deteriorates
within the three undercapitalized categories. The OTS is required to monitor
closely and to restrict asset growth, acquisitions, branching and new lines of
business with respect to an undercapitalized institution. FDICIA prohibits
dividends and other capital distributions if, following such distribution, the
institution would be undercapitalized. It also requires an undercapitalized
savings institution to submit to the OTS a capital restoration plan. At June 30,
1994, the Bank's regulatory capital was in excess of the amount necessary to be
deemed "adequately capitalized." If, however, the Bank incurs losses that result
in it becoming undercapitalized or is otherwise reclassified as an
undercapitalized institution, it would become subject to the foregoing
limitations which would have an adverse effect on its operations and future
prospects.
TAX MATTERS
The Bank's federal income tax returns for tax years 1984, 1985 and 1986
have been under examination by the IRS since 1989. See "Regulation -- Taxation."
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 for both federal and state purposes, a change in the period of
income recognition could result in additional interest due to the government.
Although the outcome of the audit is
12
<PAGE> 13
not known at this time, and it may take several years to resolve any disputed
matters, the Bank recorded charges of $1.8 million, $3.4 million and $2.3
million in 1993, 1992 and 1991, respectively, as accrued interest on possible
tax adjustments (based on probability-weighted estimates) which may be required
in connection with federal and state tax returns for all periods affected by
such income recognition issue. 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 1993, the
IRS began examining the Company's federal income tax returns for tax years 1987
and 1988. There can be no assurance that the amounts accrued for interest on
such tax liabilities will be adequate to satisfy amounts which may become due
when such issues are resolved. See "Business -- Regulation" and Note 9 to FFC's
Notes to Consolidated Financial Statements.
BROKERED DEPOSITS; TELEMARKETING DEPOSITS
Brokered deposits and telemarketing deposits together constituted 22.3%,
24.0%, 21.1%, and 24.6% of the Bank's funds during the six months ended June 30,
1994 and the years ended December 31, 1993, 1992 and 1991, respectively.
During any period in which the Bank meets the regulatory capital standards
necessary to be deemed adequately capitalized but does not meet the regulatory
capital standards necessary to be deemed well-capitalized, it can only accept
brokered deposits pursuant to permission from the FDIC in the form of a waiver.
During any period in which the Bank does not meet the regulatory capital
standards necessary to be deemed adequately capitalized, the Bank would not be
permitted to accept brokered deposits.
Under FDIC insurance rules, employee benefit plan deposits (which
constitute the largest segment of telemarketing deposits) are provided
"pass-through" insurance (providing insurance up to $100,000 per participant
rather than $100,000 per plan) only if the depository institution is able to
accept brokered deposits, either by meeting the standards necessary to be deemed
well-capitalized, or by meeting the standards necessary to be deemed adequately
capitalized and having obtained a waiver from the FDIC.
The Bank currently accepts brokered deposits pursuant to a waiver obtained
from the FDIC that expires May 27, 1995. As a result of such waiver, employee
benefit plan deposits placed with the Bank, principally as telemarketing
deposits, are entitled to pass-through insurance. Upon consummation of the
Offering and the contribution to the Bank of the net proceeds therefrom, on a
pro forma basis the Bank would have met the standards necessary to be deemed
well-capitalized at June 30, 1994, and would not have required a waiver.
There can be no assurance that the Bank will, after consummation of the
Offering, continue to meet the standards necessary to be deemed
well-capitalized, or that the law may not again change and further limit or
eliminate the Bank's ability to accept new brokered deposits, or the ability of
employee benefit plan deposits placed with the Bank to obtain pass-through
insurance. If the ability of the Bank to accept new brokered deposits were
further limited or eliminated, it is likely that the Bank would be required to
cease accepting new brokered deposits and renewing current brokered deposits,
and that employee benefit plans would withdraw their deposits from the Bank. In
such event, the Bank would either seek alternative sources of funds, which may
only be available at a cost higher than that paid in connection with its
brokered deposits and telemarketing deposits, or it would be limited in the
volume of new loans which it would have funds to originate.
LIQUIDITY OF INVESTMENT; NO ESTABLISHED TRADING MARKET
The Notes are a new issue of securities with no established trading market.
The Company does not intend to list the Notes on any securities exchange. The
Underwriters have advised the Company that the Underwriters intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. There can be no assurance as to the liquidity
of the trading market for the Notes if the Underwriters make a market in the
Notes. If the Underwriters elect not to make a market in the Notes or
discontinue such market-making activities at any time, it is likely that the
liquidity of the Notes would be seriously impaired.
13
<PAGE> 14
USE OF PROCEEDS
FFC intends to contribute to the capital of the Bank the net proceeds from
the Offering, estimated to be approximately $48.0 million after deducting
underwriting discounts and commissions and other expenses payable by the
Company. The Bank will use the contributed capital to facilitate its growth,
consistent with its intent to maintain sufficient regulatory capital to meet the
standards necessary to be deemed "well-capitalized," thereby enabling the Bank
to qualify, subject to discretionary authority of the OTS, for lower deposit
insurance assessments, to accept brokered deposits without a waiver from the
FDIC and to pay higher dividends to FFC without prior OTS approval.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1994 on an actual basis and as adjusted to give effect to the Offering. In
addition to the indebtedness of the Company reflected below, at June 30, 1994,
the Company had other debt consisting of deposits ($2.3 billion) and FHLB
borrowing and other funding liabilities ($1.2 billion) incurred in the ordinary
course of business. See "Business -- Sources of Funds." The table should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1994
------------------------------
ACTUAL AS ADJUSTED(1)
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Long-Term Debt:
Notes.......................................................... -- $ 50,000
Stockholders' Equity:
Common Stock, Par Value $.01 Per Share, 25,000,000 Shares
Authorized; 11,371,066 Shares Issued; 10,574,546 Shares
Outstanding................................................. $ 114 114
Preferred Stock, Par Value $.01 Per Share, 5,000,000 Shares
Authorized; No Shares Issued or Outstanding................. -- --
Additional Paid-In Capital..................................... 27,414 27,414
Retained Earnings.............................................. 161,982 161,982
Loan to Employee Stock Ownership Plan.......................... (2,974) (2,974)
Treasury Stock, at Cost, 796,520 Shares........................ (9,832) (9,832)
-------- --------
Total Stockholders' Equity.................................. 176,704 176,704
-------- --------
Total Capitalization........................................ $176,704 $226,704
======== ========
</TABLE>
- ---------------
(1) Does not reflect results of operations for periods after June 30, 1994.
14
<PAGE> 15
BUSINESS
GENERAL
The Bank, organized in 1929, is engaged primarily in the business of
attracting savings and checking deposits from the general public and investing
those deposits, together with borrowings and other funds, in real estate secured
adjustable rate and fixed rate mortgage loans for the purchase and refinancing
of single family and multi-family residential property in Southern California.
Headquartered in Santa Monica, California, the Bank operates 25 retail branches
and eight loan origination offices located in Los Angeles, Orange and Ventura
counties.
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. According to The UCLA
Business Forecast for California, June 1994 Report (the "UCLA Report"), recovery
in California from the current recession is expected to begin during 1994, but
will be weak, with continuing loss of high paying defense and aerospace jobs
barely offset by rising service jobs. The UCLA Report forecasts that the
construction, trade and services (including financial) sectors may increase to
replace some of the loss of jobs caused by cutbacks in the defense industry.
However, the UCLA Report notes that the loss of jobs in the manufacturing sector
(particularly in defense-related aerospace) is expected to continue.
The unemployment rate for California during the first five months of 1994,
according to the UCLA Report, has varied from a high of 10.1% in January to a
low of 8.3% in May, with substantial swings from month to month. Even at the May
five-month low, California's jobless rate was reported to be more than 2% above
the national rate.
According to the UCLA Report, new residential building remained depressed
in California. Single family building permits issued in the first quarter of
1994 were comparable to the fourth quarter of 1993, while multi-family permits
increased slightly. While the UCLA Report states that a preliminary tabulation
of Los Angeles area home prices for April 1994 shows a month-to-month increase,
it also states that there is not sufficient evidence to establish any trend in
home prices for 1994.
LOAN ORIGINATION
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 or
refinance residential real property. The Bank's loan portfolio primarily
consists of loans made to home buyers and homeowners on the security of single
family properties (one to four units) and multi-family properties (five or more
units) as well as MBS, which are comprised solely of Bank-originated residential
mortgage loans. The Bank's loan portfolio also includes loans secured by
commercial properties.
15
<PAGE> 16
The tables below set forth information about the average sizes of loans
originated by the Bank and the uses made by borrowers of the proceeds of such
loans, in each case during the periods indicated.
AVERAGE LOAN SIZE
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Single Family................. $193,139 $169,468 $171,966 $169,292 $179,222 $178,727 $177,573
Multi-Family.................. 408,668 493,610 511,279 545,229 520,370 490,551 513,193
Commercial.................... 551,333 487,500 566,971 650,286 657,364 714,723 462,582
</TABLE>
LOAN ORIGINATIONS BY USE OF PROCEEDS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Purchase.................... $179,711 $156,870 $340,261 $370,583 $322,255 $567,753 $ 688,458
Refinance................... 158,308 214,964 404,622 466,204 320,243 325,916 288,261
Other....................... 60 497 945 3,968 4,756 13,361 28,547
-------- -------- -------- -------- -------- -------- ----------
Total..................... $338,079 $372,331 $745,828 $840,755 $647,254 $907,030 $1,005,266
======== ======== ======== ======== ======== ======== ==========
</TABLE>
The Bank has a long-standing policy of originating primarily monthly ARMs
for its loan portfolio. The Bank has maintained the level of ARMs in its
portfolio at over 90% for the last seven years. Management believes that the
high level of ARMs helps to insulate the Bank from fluctuations in interest
rates, notwithstanding the delay between changes in its monthly cost of funds
and corresponding changes in its loan rates. See "-- Asset-Liability Management"
and "Risk Factors -- Interest Rate Risk."
The Bank's residential loans are originated principally through
commissioned loan consultants and non-exclusive mortgage brokers. The
commissioned loan consultants market exclusively the Bank's loan products to
potential applicants for loans, with incentive compensation paid to these
consultants based upon funded loans made to such applicants. All loan
applications received by the Bank, including applications submitted through
non-exclusive mortgage brokers, are reviewed by the Bank's credit and appraisal
personnel in accordance with the Bank's loan approval and underwriting criteria.
Normally, upon approval of a residential loan application, the Bank gives a
commitment to the applicant that it will fund the approved loan at any time
during a given period. The loan is typically funded within 15 days after all
documents are executed, at a rate of interest and on other terms based on market
conditions at the date of the loan application (for ARMs) and loan commitment
(for fixed rate loans). The Bank does not engage in transactions to hedge
interest rate exposure between commitment and funding.
The table below sets forth certain information concerning the types of
loans originated by the Bank.
LOAN ORIGINATIONS BY PROPERTY TYPE
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Single Family............... $239,492 $270,979 $499,560 $590,152 $357,906 $535,822 $ 575,158
Multi-Family................ 95,219 98,722 236,211 237,720 273,194 345,348 391,053
Commercial.................. 3,308 2,438 9,638 9,104 14,462 18,583 27,755
Other....................... 60 192 419 3,779 1,692 7,277 11,300
-------- -------- -------- -------- -------- -------- ----------
Total..................... $338,079 $372,331 $745,828 $840,755 $647,254 $907,030 $1,005,266
======== ======== ======== ======== ======== ======== ==========
</TABLE>
16
<PAGE> 17
SINGLE FAMILY RESIDENTIAL LENDING
The Bank emphasizes the origination of single family loans. Such loans
represented 70.8%, 67.0%, 70.2% and 55.3% of total loans originated in the six
months ended June 30, 1994 and the years ended December 31, 1993, 1992 and 1991,
respectively, and are all secured by properties located in Southern California.
To attract applicants for such loans, the Bank offers what it believes to be
competitive rates for a variety of loan programs. As part of its single family
lending strategy, the Bank markets loan programs established specifically for
qualified first-time home buyers. In addition, the Bank markets its loans in low
income and minority communities due to (i) the lower historical delinquency
rates of loans made by the Bank to residents of these communities, on average,
than other loans in the Bank's loan portfolio and (ii) the Bank's view that this
is an underserved segment of the market.
MULTI-FAMILY RESIDENTIAL LENDING
The Bank has historically relied on multi-family residential lending for a
portion of its loan origination activity. Such loans represented 28.2%, 31.7%,
28.3% and 42.2% of total loans originated in the six months ended June 30, 1994
and the years ended December 31, 1993, 1992 and 1991, respectively. Multi-family
loans are considered more susceptible to market risk (the risk of changes in the
value of the collateral underlying the loans) than single family loans; as a
result, the Bank charges higher interest rates and fees. At June 30, 1994,
multi-family loans represented 61.3% of the Bank's non-performing assets (before
deducting specific loan loss allowances attributable to such assets). The Bank
has strengthened its underwriting criteria for multi-family loans to require
lower loan-to-value ratios and increased cash flow coverage for new multi-family
loans originated by the Bank. The Bank's management believes that with its
strengthened underwriting criteria, the higher interest rates and fees charged
in connection with multi-family loans generally compensate for the higher risk
associated with such loans.
At June 30, 1994, the Bank's management was aware of only four savings
banks (including the Bank) with significant operations in Southern California
that continue to offer new multi-family loans. Management believes, therefore,
that applications for multi-family loans will continue at historic levels or
increase as the availability of such loans decreases. In an effort to ensure
that the higher risk generally considered to be associated with multi-family
loans does not have an undue impact on the overall risk of its loan portfolio,
management currently intends to seek to maintain at its current level the
percentage of its portfolio representing multi-family loans, principally by
accepting applications for such loans during any period only when the volume of
the Bank's single family loan originations in such period is sufficient to
maintain the respective percentages. See "Risk Factors -- Multi-Family Lending."
COMMERCIAL LENDING
OTS regulations generally limit the amount that any federal savings
institution may invest in nonresidential real estate loans to 400% of its total
regulatory capital. Originations of real estate secured commercial loans as a
percentage of total loan originations totaled 2.3% or less during the six months
ended June 30, 1994 and each of the years ended December 31, 1993, 1992 and
1991. The Bank anticipates that it will continue to originate real estate
secured commercial loans from time to time in the future.
REO
Loans originated upon the sale of the Bank's REO were $25.2 million and
$69.6 million, or 7.5% and 9.3%, of total loan originations during the six
months ended June 30, 1994 and the year ended December 31, 1993, respectively.
Of these loans, $3.9 million and $8.2 million, respectively, were secured by
single family properties and $20.9 million and $61.4 million, respectively, were
secured by multi-family properties, and $408,000 and none, respectively, was
secured by commercial real estate. Of the Bank's total REO sold during the six
months ended June 30, 1994 and the year ended December 31, 1993, the Bank
provided financing for 49.4% and 70.5%, respectively.
17
<PAGE> 18
LOANS PURCHASED FROM OTHERS
Due to the rising interest rate environment resulting in recent consumer
preferences for ARMs over fixed rate loans, the Bank recently has been offered
opportunities to purchase whole ARMs from mortgage bankers and other
institutions that originate loans for sale. The Bank reviews these opportunities
on an individual basis, and may purchase such loans for its own portfolio or for
resale in the secondary market. In each case, the Bank reviews such loans in
accordance with its loan evaluation and underwriting criteria, and accepts only
those loans meeting the criteria the Bank would apply to loans originated by it.
While the Bank does not currently anticipate that such purchases will constitute
a significant source of loans over the long-term, the Bank is considering
actively soliciting such opportunities from selected originators for the purpose
of supplementing its loan origination activities. At June 30, 1994, the Bank had
entered into one agreement to purchase $43.0 million of whole ARMs from a third
party, and had consummated the purchase of $13.6 million pursuant to that
agreement. These loans are COFI-based monthly ARMs, secured by single family
residences, with an average loan amount of $219,218.
LOANS ORIGINATED FOR SALE
During the fourth quarter of 1993, the Bank started a new mortgage banking
program to take advantage of borrower demand for fixed rate and other loan
products the Bank typically does not retain for its portfolio. Under this
program, competitively priced loans are originated for immediate sale in the
secondary market. Although the Bank generally retains ARMs in its portfolio, it
originates for sale ARMs which (i) have interest rates subject to adjustment on
bases other than monthly or other than in accordance with the COFI or (ii) are
monthly adjustable COFI loans originated in any period in which the amount of
loans originated for the Bank's portfolio has exceeded the amount deemed prudent
by the Bank for strategic or regulatory purposes. See "-- Interest Rates and
Terms." The terms of loans originated by the Bank for sale conform to the
guidelines established by FHLMC, FNMA and other purchasers of loans in the
secondary market. As consumer preferences have shifted from fixed rate loans to
ARMs in response to recent increases in interest rates, and as the Bank
continues to emphasize the origination of loans indexed to COFI, the Bank does
not anticipate that this program will generate a material amount of revenue
until such time as interest rates begin to decline.
LOAN UNDERWRITING
The underwriting process is intended to assess the prospective borrower's
credit standing and ability to repay the loan on a fully-indexed basis (based
upon the contractual interest rate without regard to any initial discount), as
well as the value and adequacy of the real property which serves as collateral
for the mortgage loan. Each prospective borrower completes an application that
includes information with respect to the applicant's bank accounts, assets,
liabilities, income, credit history, employment history, personal information
and, for multi-family properties, the cash flow generated by the property. The
application also includes the amount of, and reason for, the loan being
requested. In addition, the Bank typically obtains verification of an
applicant's employment and income. Appraisals, which are part of the application
process, are performed by qualified staff appraisers or Bank-approved
independent appraisers. All independent appraisals are reviewed by a staff
appraiser. The Bank's salaried loan underwriters analyze the loan application,
the credit information and the appraisal and, depending on the size of the loan,
either approve or deny the loan or make a recommendation concerning approval of
a requested loan. The Bank requires approval at various levels of management
depending on the amount of the loan; residential loans of over $750,000 require
approval of a loan committee composed of senior officers of the Bank, and a loan
of any type in an amount over $3 million requires approval of the Board of
Directors of the Bank.
For all real estate loans, the Bank requires title insurance insuring the
priority of its lien, fire and extended coverage casualty insurance, and may
also require flood insurance in order to protect the Bank's interest in the
secured property. In accordance with industry practice, the Bank does not
require earthquake insurance except in limited instances. Mortgage insurance is
required on loans in excess of
18
<PAGE> 19
80% of the appraised value or increased 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 $198.3 million and
$155.3 million at June 30, 1994 and December 31, 1993, respectively, or less
than 6% of the Bank's loan portfolio at such dates. The Bank's delinquency
experience on these loans is comparable to that of the entire portfolio.
Because ARM loan-to-value ratios may increase above those established at
the time of loan origination due to negative amortization, the Bank's policy is
generally not to lend in excess of 90% of the appraised value on ARMs. See
"-- Interest Rates and Terms." On fixed rate loans originated for sale, the
Bank's policy is generally not to lend in excess of 95% of the appraised value,
in accordance with the criteria for loans acceptable for purchase by FHLMC and
FNMA. The Bank most often lends less than or equal to 80% of a single family
property's appraised value, although it has a loan program in which a higher
loan-to-value ratio is available to first time home buyers who occupy the
premises. The Bank most often lends less than or equal to 75% of a multi-family
property's appraised value at the time of loan origination. The average
loan-to-value ratio, calculated at the time of origination, for the Bank's loans
with loss exposure was 70.2% at June 30, 1994.
LOAN PORTFOLIO
GENERAL
The Bank's loan portfolio consists of loans receivable, MBS and loans held
for sale. Loans based on the security of single-family properties (one to four
units) comprise the largest category of the Bank's loan portfolio. The Bank's
loan portfolio also includes loans secured by multi-family and commercial
properties. At June 30, 1994, 54.6%, 37.4% and 6.7% of the Bank's loan portfolio
(before deducting combined general valuation allowances and unrealized loan
fees) consisted of loans secured by single family properties, multi-family
properties and commercial properties, respectively. At June 30, 1994, $3.4
billion, or 93.3%, of the Bank's loan portfolio consisted of COFI-based, monthly
ARMs.
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 its
savings products. Less than one half of 1% of new loans originated during the
six month period ended June 30, 1994 and during each of the years ended December
31, 1993, 1992 and 1991 were consumer loans. Such loans, in the aggregate,
represented less than 1% of the Bank's loan portfolio at June 30, 1994.
19
<PAGE> 20
The following table sets forth information regarding the composition of the
Bank's loan portfolio. Amounts shown represent loan amounts outstanding, net of
specific loan loss allowances.
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, --------------------------------------------------------------
1994 1993 1992 1991 1990 1989
------------ ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans
First Trust Deed
Residential Loans:
One Unit................. $ 939,733 $ 864,874 $ 771,870 $ 763,233 $ 761,429 $ 855,132
Two to Four Units........ 348,967 340,035 296,550 258,825 227,535 239,446
Five or More Units....... 1,320,743 1,296,260 1,178,595 1,075,829 853,173 621,833
---------- ---------- ---------- ---------- ---------- ----------
Residential Loans...... 2,609,443 2,501,169 2,247,015 2,097,887 1,842,137 1,716,411
Other Real Estate Loans:
Commercial................. 240,614 245,387 256,474 263,183 266,258 260,809
Second Trust Deeds......... 22,072 24,606 29,441 35,245 41,957 57,336
Other...................... 20,321 5,861 10,733 4,193 5,298 4,289
---------- ---------- ---------- ---------- ---------- ----------
Real Estate Loans...... 2,892,450 2,777,023 2,543,663 2,400,508 2,155,650 2,038,845
Non-Real Estate Loans:
Manufactured Housing....... 2,622 2,880 3,481 4,031 4,873 5,778
Deposit Accounts........... 1,278 1,086 1,184 1,615 1,884 1,297
Consumer................... 711 847 1,494 2,705 4,324 6,450
---------- ---------- ---------- ---------- ---------- ----------
Loans Receivable....... 2,897,061 2,781,836 2,549,822 2,408,859 2,166,731 2,052,370
Less:
General Valuation
Allowances --
Loan Portfolio........... 77,038 40,669 22,074 12,588 9,305 8,394
General Valuation
Allowances --
Loans Sold with
Recourse............... -- (1) 6,231 5,780 1,349 1,876 --
Unrealized Loan Fees....... 26,262 19,273 25,268 26,126 23,633 19,640
---------- ---------- ---------- ---------- ---------- ----------
Net Loans Receivable... 2,793,761 2,715,663 2,496,700 2,368,796 2,131,917 2,024,336
---------- ---------- ---------- ---------- ---------- ----------
FHLMC and FNMA MBS:
Secured by Single-Family
Properties............... 682,712 678,884 660,673 524,969 487,842 213,514
Secured by Multi-Family
Properties............... 28,055 29,399 108,482 119,295 126,464 94,219
---------- ---------- ---------- ---------- ---------- ----------
MBS.................... 710,767 708,283 769,155 644,264 614,306 307,733
---------- ---------- ---------- ---------- ---------- ----------
Total Loans......... $3,504,528 $3,423,946 $3,265,855 $3,013,060 $2,746,223 $2,332,069
========== ========== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Effective June 30, 1994, this amount ($6.2 million) was reclassified to a
liability account.
MORTGAGE-BACKED SECURITIES
All of the MBS included in the Bank's loan portfolio are collateralized by
loans originated by the Bank. Therefore, the MBS generally have the same
experience with respect to prepayment, repayment, delinquencies and other
factors as the remainder of the Bank's portfolio. MBS generally yield less than
the loans that underlie such securities due to the cost of guarantee fees or
other forms of credit enhancement. However, MBS are more liquid than individual
mortgage loans and are used by the Bank to collateralize borrowings such as
reverse repurchase agreements and FHLB advances. Also, MBS issued or guaranteed
by FHLMC and FNMA and most double "A"-rated, privately-issued pass-through MBS
are "weighted" at not more than 20% for risk-based capital purposes. This
compares to an assigned risk
20
<PAGE> 21
weighting of 50% to 100% for residential mortgage loans. Thus, holding its
portfolio loans in the form of these securities allows the Bank to optimize the
use of its capital for regulatory purposes. See "Regulation -- Regulatory
Capital Requirements." The Bank converted $49.3 million, $111.7 million, $187.5
million and $157.3 million of loans into MBS during the six months ended June
30, 1994 and the years ended December 31, 1993, 1992 and 1991, respectively.
LOANS SERVICED FOR OTHERS
The Bank is involved in the secondary mortgage market as a seller of whole
loans, loan participations and MBS to financial institutions, other
institutional investors and governmental entities including FHLMC and FNMA.
Under its various servicing agreements, the Bank usually continues to collect
payments as they become due, inspect the security properties, and otherwise
service the loans. The purchaser of the loan or participation is paid an agreed
upon yield, which is usually less than the interest rate paid by the borrower.
The difference is retained by the Bank as a servicing fee.
The Bank serviced $731.1 million in loans for other investors (excluding
loans underlying the Bank-owned MBS serviced for FHLMC and FNMA) at June 30,
1994. Of the total amount of loans serviced by the Bank for other investors at
such date, $292.4 million of these loans had been sold by the Bank under
recourse arrangements. Loans sold under recourse arrangements are primarily
multi-family loans. Due to applicable regulatory requirements which became
effective in 1989, 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 prior to 1989, but has not entered into any new recourse
arrangements since those regulations took effect. Loans sold with recourse are
considered along with the Bank's own loans in determining the adequacy of the
combined general valuation allowances. The principal balance of loans sold with
recourse decreased to $292.4 million at June 30, 1994 from $317.6 million at
December 31, 1993, $405.4 million at December 31, 1992 and $448.1 million at
December 31, 1991, due to loan payoffs and foreclosures.
INTEREST RATES AND TERMS
The table below sets forth certain additional information concerning the
types of loans originated by the Bank.
LOAN ORIGINATIONS BY TYPE OF LOAN
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ARMs....................... $308,440 $330,146 $657,675 $684,668 $585,530 $853,991 $ 927,175
ARMs Originated for Sale... 9,410 -- -- -- -- -- --
Fixed Rate Mortgages
Originated for Sale...... 20,169 41,688 87,208 154,052 60,032 46,392 66,791
Other...................... 60 497 945 2,035 1,692 6,647 11,300
-------- -------- -------- -------- -------- -------- ----------
Total.................. $338,079 $372,331 $745,828 $840,755 $647,254 $907,030 $1,005,266
======== ======== ======== ======== ======== ======== ==========
</TABLE>
The Bank has emphasized the origination of ARMs for its portfolio, in an
effort to minimize its interest rate risk. At June 30, 1994, approximately 98.9%
of the Bank's loan portfolio was ARMs. At such date, approximately 93.3% of such
ARMs were monthly ARMs indexed to the COFI. ARMs have features that can cause
interest rate and corresponding payment increases. Subject to market conditions,
however, the Bank's ARMs generally provide for a limit or "cap" on increases
from their initial interest rates, thereby protecting borrowers from unlimited
interest rate increases. Also, some of the Bank's ARM programs offer loans,
subject to competitive conditions, at fixed rates of interest during the initial
one-month to three-year period, which may be below the rate equal to the
contractual margin over the applicable index at the time of origination. The
Bank's COFI loans also provide for an annual change in
21
<PAGE> 22
payment limit, except that at the end of each five-year interval payments may be
adjusted by more than such annual payment limit to provide for amortization of
the ARMs by their maturity. It is possible that during periods of rising
interest rates, the risk of default on ARMs may increase due to the upward
adjustment of interest costs, and the resulting payment increases, to the
borrower. Further, although ARMs allow the Bank to increase the sensitivity of
its asset base to changes in interest rates, the extent of this interest
sensitivity is limited by the lifetime interest rate adjustment limitation. See
"Risk Factors -- Effects of Interest Rates."
The Bank primarily markets ARMs with interest rates which adjust each month
based upon the COFI. Generally, the monthly payment is changed annually, but the
maximum annual change in the payment amount is limited to 7.5% of the amount of
the prior year's payment. Any additional interest due is added to the principal
balance of the loan. The Bank's ARMs typically provide for first-year monthly
payments that are lower than the fully-indexed interest and principal due. Any
interest not fully paid by such lower first-year payments also is added to the
principal balance of the loan, causing negative amortization. Although interest
rates are adjusted monthly, these loans have a lifetime cap ranging from 400 to
850 basis points above their initial interest rate. Payments are adjusted
without regard to the 7.5% limitation every five years or at any time the loan
balance exceeds 110% of the original principal balance to provide for full
amortization during the balance of the loan term.
The Bank offers three variations of the ARM based on the COFI: the "AML
IIC," the "AML IID" and the "AML IIH." Most of the Bank's new ARM volume is
composed of 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
interest at the fully indexed rate immediately. The difference in negative
amortization on these two products is minor. The interest rate and payment on
the AML IIH is fixed for three years. Thereafter, the loan becomes a typical,
monthly ARM except that the first payment adjustment is limited to the amount
that would result in annual payments of no higher than 15% over the annual
payments required during the prior period.
The Bank also offers the "AML IIIP," a six month ARM based on the six month
London Interbank Offering Rate ("LIBOR"). 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 less than 3% of new loan originations for the Bank.
Because of the change in payment limit provided on the Bank's COFI-based
ARMs and the different times at which interest rate adjustments and payment
adjustments are made, monthly payments may not be sufficient to pay the interest
accruing on an ARM, causing negative amortization. The amount of any negative
amortization is added to the principal balance of the loan to be repaid through
future monthly payments, which could cause increases in the amount of principal
owed to the Bank over that which was originally lent. Significant negative
amortization, if it should occur, can increase the credit risk accrued on these
loans originated. The amount of negative amortization on all loans serviced by
the Bank decreased to $425,000 at June 30, 1994, from $602,000, $3.1 million and
$21.2 million, at December 31, 1993, 1992 and 1991, respectively. The decrease
in negative amortization during those periods was primarily due to the
significant decline in the COFI during the period, with such decline resulting
in continuing increases in the relative proportion of each scheduled monthly
payment being allocated to principal repayment (or to reduce negative
amortization). The COFI declined from 7.963%, published at December 31, 1990, to
a low of 3.629%, published at March 31, 1994. Since March 1994, however, the
COFI has begun to rise and, accordingly, an increase in negative amortization on
the Bank's COFI ARMs could occur, depending upon the extent of future interest
rate increases. To date, the Bank's delinquency experience on loans with
negative amortization has not been materially different than that on the fully-
amortizing loans in the Bank's loan portfolio.
Substantially all of the Bank's real estate loans provide for a maximum
amortization term of 30 years or less. Generally, the Bank's ARMs may be assumed
at any time during their term provided that the Bank
22
<PAGE> 23
enters into a separate written agreement with the current borrower and the
qualified borrower to whom the property is transferred. In such cases, the Bank
charges an assumption fee.
The following table shows the contractual maturities of the Bank's loan
portfolio, excluding MBS, at June 30, 1994.
LOAN MATURITY ANALYSIS
<TABLE>
<CAPTION>
MATURITY PERIOD
---------------------------------------------------------------------
TOTAL 1 YEAR >1 YEAR >5-10 >10-20 OVER
BALANCE OR LESS TO 5 YEARS YEARS YEARS 20 YEARS
---------- -------- ----------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Rate Sensitive
Loans..................... $2,755,567 $ 15,965 $ 7,227 $43,102 $ 91,464 $2,597,809
Fixed Rate Loans:
1st Mortgages............. 36,255 38 2,940 8,826 16,935 7,516
2nd Mortgages............. 384 -- 37 254 93 --
Consumer and Other Loans.. 1,555 1,555 -- -- -- --
---------- -------- ----------- ------- -------- ----------
Total Fixed Rate
Loans................ 38,194 1,593 2,977 9,080 17,028 7,516
---------- -------- ----------- ------- -------- ----------
Total Loans....... $2,793,761 $ 17,558 $10,204 $52,182 $108,492 $2,605,325
========== ======== ========= ======== ========= ==========
</TABLE>
ASSET QUALITY
ASSET QUALITY RATIOS
The following table sets forth certain asset quality ratios of the Bank at
the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, -----------------------------------------
1994 1993 1992 1991 1990 1989
-------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Non-Performing Loans to Total Loans
Receivable............................... 3.21% 3.28% 2.61% 2.16% 1.13% 0.42%
Non-Performing Assets to Total Assets...... 3.03 3.23 2.62 1.83 0.82 0.33
General Valuation and Specific Loan Loss
Allowances(1) to Non-Performing
Loans(2)................................. 87.15 52.23 37.54 31.31 40.24 97.64
Combined General Valuation Allowances to
Loans with Loss Exposure................. 2.57 1.48 0.93 0.49 0.42 0.41
</TABLE>
- ---------------
(1) These loan loss allowances exclude general valuation allowances attributable
to loans sold with recourse, which allowances were classified as part of
loans receivable prior to 1994 and were removed in this presentation for
prior periods. General valuation allowances attributable to loans sold with
recourse are recorded as a liability on the Company's statement of financial
condition as of June 30, 1994.
(2) Non-performing loans before deducting specific loan loss allowances
attributable to such loans.
NON-PERFORMING ASSETS
Beginning in 1991, the Bank experienced substantial increases in
non-performing assets as a result of the negative impact on the Southern
California real estate market of the economic recession that began in 1989, the
1992 civil unrest in Los Angeles and, most recently, the January 1994
earthquake. The Bank's total non-performing assets (before deducting specific
loan loss allowances) increased 8.5% during the six months ended June 30, 1994.
The increase in non-performing assets for the years ended December 31, 1993 and
1992 was 40.1% and 44.4%, respectively.
The Bank's total loan loss allowances increased 95.1% from December 31,
1993 to June 30, 1994. The increase in loan loss allowances for the years ended
December 31, 1993 and 1992 was 93.3% and
23
<PAGE> 24
70.3%, respectively. 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.
In 1993, the Bank experienced its first annual net loss in over eleven
years. The Bank anticipates that provisions for loan losses associated with the
current economic conditions and the January 1994 earthquake will result in the
Bank experiencing a net loss for 1994. See "-- Provisions for Loan Losses."
Management believes that, as of June 30, 1994, the level of loan loss allowances
recorded by the Bank is sufficient to cover losses inherent in the loan
portfolio. Management expects that as loan loss allowances are utilized for
charge-offs, the overall level of loan loss allowances will decrease. However,
the future level of loan loss allowances will depend upon several factors
including the general nature of the economy in Southern California and the real
estate market specifically, the level of non-performing assets and loan
charge-off activity.
During the past three years, multi-family loans have experienced a rate of
delinquency and foreclosure significantly higher than single family loans. At
June 30, 1994, multi-family loans comprised 61.3% of the Bank's total
non-performing assets (before deducting specific loan loss allowances
attributable to such assets). Prior to 1991, the Bank had never foreclosed on a
multi-family loan in its portfolio; during the six months ended June 30, 1994
and the years ended December 31, 1993, 1992 and 1991, the Bank foreclosed on
multi-family loans with principal amounts of $36.3 million, $100.8 million,
$69.6 million and $25.6 million, respectively. Based on its assessment of
delinquency rates during the first six months of 1994, management does not
believe that the foreclosure activity during the first six months of 1994 is
necessarily indicative of the full year.
Recently, the Bank has instituted programs and procedures designed to
increase significantly its scrutiny of and reduce its response time to loans
evidencing any type of non-compliance, and has improved and expanded its
procedures in an effort to speed the disposition of and maximize the proceeds
from the Bank's REO.
The Bank's asset classification committee meets at least monthly to review
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.
24
<PAGE> 25
The table below sets forth certain information concerning the Bank's
non-performing assets and loan loss allowances at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ---------------------------------------------------
1994(1) 1993 1992 1991 1990 1989
---------- -------- ------- ------- ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
REO:
Single Family.............. $ 9,277 $ 10,052 $ 8,268 $ 3,015 $ 422 --
Multi-Family............... 10,085 16,015 15,590 4,881 -- --
Commercial................. 137 327 -- 276 -- --
Other...................... 555 484 -- -- -- --
---------- -------- ------- ------- ------- ------
Total REO............... 20,054 26,878 23,858 8,172 422 --
---------- -------- ------- ------- ------- ------
Non-Performing Loans:
Single Family.............. 26,210 25,317 24,634 21,441 6,063 $3,849
Multi-Family............... 78,296 70,207 42,481 34,347 18,937 432
Commercial................. 19,543 10,307 3,623 1,536 -- 4,476
Other...................... 189 245 271 194 388 229
---------- -------- ------- ------- ------- ------
Total Non-Performing Loans... 124,238 106,076 71,009 57,518 25,388 8,986
Less Specific Loan Loss
Allowances................. 31,238 14,732 4,582 5,422 912 380
---------- -------- ------- ------- ------- ------
Net Non-Performing Loans(2).. 93,000 91,344 66,427 52,096 24,476 8,606
---------- -------- ------- ------- ------- ------
Total Non-Performing
Assets(2).................. $113,054 $118,222 $90,285 $60,268 $24,898 $8,606
======== ======== ======= ======== ======= ======
Ratio of Non-Performing
Assets to Total
Assets(2).................. 3.03% 3.23% 2.62% 1.83% 0.82% 0.33%
</TABLE>
- ---------------
(1) The adoption of Statement of Financial Accounting Standards No. 114 ("SFAS
No. 114") has had an effect on the comparability of the foregoing
information, since certain loans for which specific loan loss allowances
were not previously required under accounting standards in effect prior to
January 1, 1994 are now subject to the establishment of specific loan loss
allowances. See "-- Loan Modifications and Impaired Loans."
(2) Non-performing loans and non-performing assets after deducting specific
loan loss allowances attributable to such assets.
LOAN LOSS ALLOWANCES
The Bank maintains loan loss allowances to absorb possible future losses
that may be realized on its loan portfolio and REO. The Bank's loan loss
allowances consist of three components: (i) specific loan loss allowances; (ii)
general valuation allowances for the Bank's loan portfolio; and (iii) general
valuation allowances for loans sold by the Bank with full or limited recourse,
which allowances are recorded as a liability on the Company's statement of
financial condition. Items (ii) and (iii) are referred to herein collectively as
"combined general valuation allowances." A specific loan loss allowance is
established (and charged off from the combined general valuation allowances) for
any loan which is 90 days or more delinquent, in foreclosure, or when the Bank's
management has determined that it is unlikely to be fully collectible. Specific
loan loss allowances for the Bank's non-performing loans were $31.2 million and
$14.7 million and represented 25.1% and 13.9% of the Bank's non-performing loans
(before deducting specific loan loss allowances established with respect to
these non-performing loans) at June 30, 1994 and December 31, 1993,
respectively. The combined general valuation allowances included in the loan
loss allowances are reviewed and adjusted quarterly based upon a number of
factors, including asset classifications, economic trends, geographic
concentrations, asset-type 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 these
factors, the Bank has increased its combined general valuation allowances over
the last three years to $83.3 million, or 2.6% of loans with loss
25
<PAGE> 26
exposure at June 30, 1994. (Loans with loss exposure consist of the Bank's loan
portfolio, excluding MBS, and including loans sold with recourse, net of
specific loan loss allowances.) This compares to combined general valuation
allowances of $46.9 million, or 1.5% of loans with loss exposure at December 31,
1993, $27.9 million, or 0.9%, of loans with loss exposure at December 31, 1992
and $13.9 million, or 0.5% of loans with loss exposure at December 31, 1991.
LOAN LOSS ALLOWANCES BY TYPE OF PROPERTY
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ----------------------------------------------
1994 1993 1992 1991 1990 1989
----------- ------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Single Family.................... $ 12,842 $ 7,308 $ 4,166 $ 4,814 $ 3,017 $1,664
Multi-Family..................... 99,295 52,435 25,597 11,729 6,893 4,974
Commercial....................... 11,913 3,938 3,154 2,544 2,066 1,940
Non-Real Estate Loans.............. 318 51 57 272 117 196
-------- ------- ------- ------- ------- ------
Total.................... $124,368 $63,732 $32,974 $19,359 $12,093 $8,774
======== ======= ======= ======= ======= ======
</TABLE>
The Bank regularly assesses the adequacy of the loan loss allowances. In
assessing the adequacy of the Bank's loan loss allowances, management makes
certain assumptions about interest rate trends, general and local economic
conditions and other factors that may ultimately affect whether the Bank will
suffer a loss on either a class of loans or any particular loan. Management
believes that the Bank's loan loss allowances are adequate to provide for
potential losses on the Bank's loans with loss exposure, including its
non-performing loans. However, there can be no assurance that the Bank's
existing loan loss allowances will be adequate to absorb such losses if and when
they occur.
PROVISIONS FOR LOAN LOSSES
Provisions for loan losses may be necessary in any period to the extent
that the combined general valuation allowances are not adequate to cover
anticipated loan charge-offs. Provisions for loan losses were $79.7 million for
the six months ended June 30, 1994 and $67.7 million in 1993 compared with $41.4
million in 1992 and $11.8 million in 1991. Net loan charge-offs were $43.3
million for the six months ended June 30, 1994 and $48.6 million for the year
ended December 31, 1993. The increased charge-offs were due to losses recorded
on certain problem assets based on declines in the estimated value of the
underlying collateral.
For the quarter ended March 31, 1994, the Bank recorded a $24.7 million
provision for loan losses. At such date, the Bank had not been able to fully
assess the impact of the January 1994 earthquake on the collateral securing the
Bank's loans. Of the $24.7 million, only $7.5 million was directly attributable
to the earthquake. These provisions were attributable to loans secured by
properties which had been rendered uninhabitable and for which the borrower had
no earthquake insurance or other known means of rebuilding the property.
Provisions for loan losses attributable to the January 1994 earthquake
resulted from either physical damage to the collateral securing the Bank's loans
("direct effects"), or from the financial impairment of borrowers who, prior to
the earthquake, had been willing to contribute cash to cover the cost of
operations of their multi-family residential properties ("indirect effects").
At March 31, 1994, the available information was insufficient for
management of the Bank to quantify the anticipated impact of both of these
factors on the Bank's loan portfolio. For the quarter ended June 30, 1994, the
Bank recorded a $55.0 million provision for loan losses. Of this amount, $23.1
million was directly attributable to the earthquake and $31.9 million was
attributable to the continuing weakness in the Southern California real estate
market, including the indirect effects of the earthquake. Of the $31.9 million,
it is not possible to determine the portion which would have been necessary
regardless of the earthquake and which portion was attributable to increased
economic weakness caused by indirect
26
<PAGE> 27
effects of the earthquake. At June 30, 1994, approximately 99.5% of the Bank's
loans were secured by properties located in Southern California. As a result,
the Bank's loan portfolio has been affected more severely by the various
problems experienced over the past several years in Los Angeles County than
other lending institutions whose portfolios consist of loans secured by
properties throughout a wider geographic area.
Without regard to the earthquake, the Bank saw an overall increase in the
delinquency statistics of the loan portfolio during the second quarter of 1994,
particularly with respect to the Bank's multi-family loans. In 1993, the rate of
delinquencies in the Bank's loan portfolio had improved in the second quarter
compared to the first quarter. Based on a comparison between the Bank's
experience in 1993 and 1994, management determined that its previous
expectations for the Bank's loan portfolio's performance during the remainder of
1994 required further review, especially in light of the potential for
continuing indirect effects of the earthquake which could not be precisely
ascertained. Management concluded that the provision for loan losses to be
recorded for the second quarter of 1994 needed to take into account the
anticipated effects of the earthquake, both direct and indirect. Additionally,
the recent historical experience for loan losses had to be adjusted to take into
account the previously unanticipated increase in loan delinquencies during the
second quarter.
The following is an analysis of the activity in the Bank's combined general
valuation allowances for the periods indicated.
COMBINED GENERAL VALUATION ALLOWANCES AND LOAN CHARGE-OFF ACTIVITY
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
-------- -------- -------- -------- ------- ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning Combined General Valuation
Allowances................................ $ 46,900 $ 27,854 $ 27,854 $ 13,937 $11,181 $ 8,394 $7,692
Provisions for Loan Losses.................. 79,700 45,972 67,679 41,384 11,833 4,126 824
Charge-Offs:
Single Family............................. (4,757) (4,175) (8,605) (4,863) (1,690) (260) (7)
Multi-Family.............................. (35,806) (16,594) (38,178) (22,470) (7,696) (800) --
Commercial................................ (2,685) (442) (1,574) -- 440 (200) --
Non-Real Estate........................... (75) (86) (276) (134) (131) (79) (115)
-------- -------- -------- -------- ------- ------- ------
Charge-Offs................................. (43,324) (21,297) (48,633) (27,467) (9,077) (1,339) (122)
-------- -------- -------- -------- ------- ------- ------
Ending Combined General Valuation
Allowances................................ $ 83,276 $ 52,529 $ 46,900 $ 27,854 $13,937 $11,181 $8,394
======== ======== ======== ======== ======= ======= ======
Charge-Offs as Percentage of Average Loans
Receivable (Excluding MBS)................ 1.51% 0.80% 1.82% 1.11% 0.40% 0.06% 0.01%
</TABLE>
The $55.0 million provision for loan losses recorded for the quarter ended
June 30, 1994 is allocated among the Bank's total loan loss allowances based on
available information concerning the loans in the Bank's loan portfolio. At June
30, 1994, $18.7 million of such provision for loan losses was allocated to
specific loan loss allowances and $36.3 million was allocated to the general
valuation allowances for the Bank's loan portfolio; however, additional amounts
will be charged off from the combined general valuation allowances as additional
loans or properties requiring specific loan loss allowances are identified. The
Bank historically has not experienced significant recoveries on loans for which
charge-offs were taken.
NON-ACCRUAL AND PAST DUE 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 and loan loss allowance purposes.
27
<PAGE> 28
The additional amount of interest income that would have been reported had
there been no loans 90 days or more contractually delinquent would have been
$5.7 million, $4.3 million, $2.9 million, $1.5 million and $437,000 at December
31, 1993, 1992, 1991, 1990 and 1989, respectively.
LOAN MODIFICATIONS AND IMPAIRED LOANS
The Bank, from time to time, makes temporary modifications or offers
temporary payment forbearance with respect to its mortgage loans. Under these
arrangements, monthly payments required to be made on a loan are reduced during
a fixed period (generally three to six months) to an amount not less than the
interest payments required under the original terms of the loan. At June 30,
1994, the Bank had modified loans with an aggregate principal amount of $84.0
million. At that date, specific loan loss allowances of $6.1 million were
attributable to such loans. Less than 5% of these modified loans were 90 days or
more delinquent at June 30, 1994. In addition, the Bank offered temporary loan
modifications to borrowers with properties damaged in the January 1994
earthquake. Generally, the modifications involved deferral of both principal and
interest payments for a period of three months. At June 30, 1994, the Bank had
modified loans with an aggregate principal amount of $26.4 million for
earthquake-related reasons.
At January 1, 1994, the Bank implemented Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No.
114"). Pursuant to SFAS No. 114, the Bank considers a loan to be impaired when
management believes that it is probable that the Bank will be unable to collect
all amounts due under the contractual terms of the loan. Estimated impairment
losses are included in the Bank's specific loan loss allowances. Subsequent
adjustments to estimated impairment losses are included in the Bank's provisions
for loan losses. At June 30, 1994, the total recorded amount of loans for which
impairment has been recognized in accordance with SFAS No. 114 was $153.5
million (after deducting $31.9 million of specific loan loss allowances
attributable to such loans). The Bank's impaired loans at June 30, 1994 were
composed of non-accrual major loans (single family loans with an outstanding
principal amount greater than or equal to $500,000 and multi-family loans with
an outstanding principal amount greater than or equal to $750,000) of $53.1
million, modified loans of $58.6 million and major loans less than 90 days
delinquent in which full payment of principal and interest is not expected of
$41.8 million.
The Bank evaluates loans for impairment whenever the collectability of
contractual principal and interest payments is questionable. A loan is impaired
when the collateral property's undiscounted net operating income (over a holding
period not to exceed 5 years) plus the property's anticipated value at the end
of the period, are less than the estimated debt service payments over the same
period plus the estimated remaining unpaid balance. Large groups of smaller
balance homogenous loans that are collectively evaluated, including residential
mortgage loans, are not subject to the application of SFAS No. 114.
When a loan is considered impaired the Bank measures impairment based on
the present value of expected future cash flows (over a period not to exceed 5
years) discounted at the loan's effective interest rate. However, if the loan is
probable of foreclosure, impairment is measured based on the fair value of the
collateral. As of June 30, 1994, out of total impaired loans of $153.5 million,
approximately $71.3 million were measured using the fair value method and $82.2
million were measured based on the present value of expected future cash flows
discounted at the effective interest rate of the loan. When the measure of an
impaired loan is less than the recorded investment in the loan, the Bank has
recorded a specific loan loss allowance amounting to the excess of the Bank's
recorded investment in the loan over its measured value.
The present value of an impaired loan's expected future cash flows will
change from one reporting period to the next because of the passage of time and
also may change because of revised estimates in the amount or timing of those
cash flows. The Bank records the entire change in the present value of the
expected future cash flows as an adjustment to the provision for loan losses.
Similarly, the fair value of the collateral of an impaired collateral-dependent
loan may change from one reporting period to the next. The
28
<PAGE> 29
Bank records a change in the measure of these impaired loans as an adjustment to
the provision for loan losses.
Cash payments received from impaired loans are recorded in accordance with
the contractual terms of the loan. The principal portion of the payment is used
to reduce the principal balance of the loan, whereas the interest portion is
recognized as interest income.
Because the Bank had established specific loan loss allowances for all
loans deemed probable of foreclosure based on the fair value of the collateral,
the adoption of SFAS No. 114 had only a minor impact on the Bank's allowance for
loan losses.
Debt restructurings completed prior to the adoption of SFAS No. 114 were
accounted for in accordance with SFAS No. 15. Bank policy required that when the
estimated cash receipts projected in accordance with the modified terms were
less than the recorded investment in the loan, the recorded investment would be
reduced to an amount equal to these future cash receipts. The amount of this
reduction was required to be recognized as a specific loan loss allowance. Bank
policy also required that if future cash receipts specified by the new terms
exceeded the recorded investment in the loan, interest income would have been
recognized over the restructuring period using the interest method. Debt
restructurings that are probable of foreclosure require loss recognition based
on the fair value of the collateral.
The table below identifies the Bank's investment in nonperforming loans
determined to be impaired loans by property type at June 30, 1994:
<TABLE>
<CAPTION>
AT
JUNE 30, 1994
--------------
(IN THOUSANDS)
<S> <C>
Single Family......................................... $ 1,535
Multi-Family.......................................... 36,849
Commercial............................................ 14,715
----------
Total..................................... $ 53,099
==========
</TABLE>
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
The Bank's REO consists of property acquired through foreclosure
proceedings or, infrequently, by deed in lieu of foreclosure. At June 30, 1994,
the Bank's REO was $20.1 million, representing 0.5% of the Bank's total assets.
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 and commercial loans after they have been delinquent
for 10 days after the grace period. Generally, all loans greater than 90 days
delinquent are placed into foreclosure and, if necessary, a specific loan loss
allowance is established. 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 as REO at the lower of the unpaid
loan balance or fair market value in accordance with appraisals, OTS guidelines
and generally accepted accounting principles.
29
<PAGE> 30
The following table sets forth the Bank's REO by asset type, and as a
percentage of total REO, at June 30, 1994.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
<TABLE>
<CAPTION>
AT JUNE 30, 1994
------------------------------
AMOUNT % OF TOTAL REO
------- --------------
(IN THOUSANDS, EXCEPT
PERCENTAGES)
<S> <C> <C>
Single Family.................................. $ 9,277 46.3%
Multi-Family................................... 10,085 50.3
Commercial..................................... 137 .7
Other.......................................... 555 2.7
------- -----
Total........................................ $20,054 100.0%
======= =====
</TABLE>
Following the acquisition of 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.
The average percentages of appraised value (based on appraisals performed
at the time the REO was acquired by the Bank) recovered by the Bank in its sales
of REO were 97.2% and 92.4%, for the six months ended June 30, 1994 and the year
ended December 31, 1993, respectively. Of the Bank's total REO sold during the
six months ended June 30, 1994 and the year ended December 31, 1993, the Bank
provided financing for 49.4% and 70.5%, respectively.
While management intends to maintain its emphasis on REO disposition
activities at the current level for as long as necessary, there can be no
assurance that the Bank's experience can be repeated or maintained either with
respect to the efficient disposition of REO or the percentages of appraised
value recovered.
The following table provides information regarding the Bank's REO activity
for the periods indicated.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS ACTIVITY
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED ----------------------------------
JUNE 30, 1994 1993 1992 1991
------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning Balance......... $ 26,878 $ 23,858 $ 8,172 $ 422
Additions................. 30,479 93,010 76,121 28,647
Sales..................... (37,303) (89,990) (60,435) (20,897)
--------- -------- -------- --------
Ending Balance............ $ 20,054 $ 26,878 $ 23,858 $ 8,172
========= ======== ======== ========
</TABLE>
Based on its assessment of delinquency rates during the first six months of
1994, management does not believe the REO acquisition activity during the first
six months of 1994 is necessarily indicative of the full year.
OTHER INTEREST-EARNING ASSETS
At June 30, 1994, the Bank owned no other contractually delinquent
interest-earning assets other than loans.
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 by the OTS from time to time
in response to prevailing economic conditions and as a means of controlling the
30
<PAGE> 31
amount of available mortgage credit. See "Regulation -- Liquidity." At June 30,
1994, the liquidity requirement applicable to the Bank under OTS regulations was
5.00% and the Bank's regulatory liquidity percentage was 5.23%.
It is the Bank's policy to maintain liquid investment securities at the
regulatory minimum and to use available cash to originate mortgages which
normally command higher yields. Therefore, interest income on liquid investment
securities generally represents less than 3% of total revenues.
The Bank implemented Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, effective
January 1, 1994. All investment securities are carried at amortized cost (with
any premium or discount amortized over the term of the security using the
interest method) because such investments are classified by the Bank as
"held-to-maturity" securities. Gross unrealized gains and gross unrealized
losses totaled $100,000 and $3.2 million, respectively, at June 30, 1994. At
June 30, 1994, the Bank had no investments in the available-for-sale or trading
categories.
The following table sets forth information concerning the types of
securities comprising the Bank's total investment portfolio at the end of the
periods indicated.
COMPOSITION OF INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, --------------------------------------------------
1994 1993 1992 1991 1990 1989
----------- -------- ------- -------- ------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities....... $ 4,108 $ 5,111 $ 7,113 $ 7,115 $ 9,020 $ 5,009
U.S. Agency Securities......... 37,569 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
Obligations.................. 40,133 47,352 22,235 -- -- --
MBS............................ 9,909 8,773 3,354 -- -- --
-------- -------- ------- -------- ------- --------
$91,719 $103,836 $43,736 $111,172 $76,253 $141,268
======= ======== ======= ======== ======= ========
Weighted Average Yield on
Interest-Earning Investments
at End of Period............. 5.10% 5.16% 6.18% 4.90% 7.74% 8.42%
</TABLE>
Despite the decreasing interest rate trend in the financial marketplace
during 1993, the yield on the investment security portfolio increased during the
year ended December 31, 1993 to 4.70% from 4.24% during the year ended December
31, 1992 because management selected securities for the Bank's investment
portfolio with longer maturities. See "-- Net Interest Income -- Yields Earned
and Rates Paid."
31
<PAGE> 32
The following is a summary of the maturities and market values of
investment securities at June 30, 1994.
TERMS OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
MATURITY
-----------------------------------
TOTAL CARRYING
WITHIN 1 YEAR 1-5 YEARS VALUE
---------------- ----------------- ----------------- GROSS
WEIGHTED WEIGHTED WEIGHTED TOTAL UNREALIZED AVERAGE
AVERAGE AVERAGE AVERAGE MARKET -------------- MATURITY
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE GAINS LOSSES YRS/MOS
------ -------- ------- -------- ------- -------- ------- ----- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Securities........... $1,001 7.34% $ 3,107 8.17% $ 4,108 7.97% $ 4,201 $ 97 $ (4) 1 yr/10 mos
U.S. Agency
Securities........... -- -- 37,569 5.15 37,569 5.15 35,918 3 (1,654) 2 yr/11 mos
Collateral Mortgage
Obligations.......... -- -- 40,133 4.68 40,133 4.68 39,103 -- (1,030) 3 yr/4 mos
MBS.................... -- -- 9,909 5.42 9,909 5.42 9,422 -- (487) 3 yr/9 mos
------ ------- ------- ------- ----- -------
Total................ $1,001 7.34% $90,718 5.08% $91,719 5.10% $88,644 $100 $(3,175) 3 yr/1 mo
====== ======= ======= ======== ==== =======
</TABLE>
SOURCES OF FUNDS
GENERAL
The Bank's principal sources of funds for use in lending are savings
deposits, advances from the FHLBSF and other borrowings. Other sources of funds
for use in lending and for other general business purposes are loan payments and
loan sales. The determination of funding sources is established by the Bank's
management based on an analysis of the respective financial and other costs and
burdens associated with the various funding sources. On any given date, the Bank
seeks to utilize the source of funds with the lowest overall cost.
DEPOSITS
The Bank obtains deposits through three different sources: (i) its retail
branch system; (ii) its telemarketing department (phone solicitations by
employees); and (iii) national brokerage houses. 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.
The table below sets forth the Bank's level of deposits, by source, at the
dates indicated.
DEPOSITS BY SOURCE
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, --------------------------------------------------------------
1994 1993 1992 1991 1990 1989
----------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Retail Branches.............. $1,502,076 $1,490,541 $1,310,973 $ 997,606 $ 856,388 $ 784,418
Telemarketing................ 258,157 296,051 398,137 450,923 398,508 224,408
Brokered Deposits............ 524,641 518,888 273,635 291,574 484,757 543,963
----------- ---------- ---------- ---------- ---------- ----------
Total...................... $2,284,874 $2,305,480 $1,982,745 $1,740,103 $1,739,653 $1,552,789
========== ========== ========== ========== ========== ==========
</TABLE>
32
<PAGE> 33
The interest rates paid on deposits are a major determinant of the average
cost of funds available for lending. The following table sets forth information
regarding the average balances and rates for the various types of savings
programs offered by the Bank during the periods indicated.
DEPOSITS BY TYPE OF ACCOUNT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30, 1994 1993 1992 1991
--------------------- --------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
---------- -------- ---------- -------- ---------- -------- ---------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable Rate Non-
Term Accounts:
Money Market
Deposit
Accounts......... $ 193,030 2.30% $ 196,467 2.40% $ 186,721 2.75% $ 144,440 4.08%
Interest Bearing
Checking
Accounts......... 166,263 2.06 148,460 2.18 127,985 2.39 72,846 3.85
Passbook Accounts.. 123,893 2.19 118,455 2.29 106,247 2.64 61,700 4.25
Non-interest
Bearing Checking
Accounts......... 30,349 -- 44,868 -- 33,177 -- 16,070 --
---------- ---------- ---------- ----------
513,535 508,250 454,130 295,056
Fixed-Term Rate
Certificate
Accounts:
Under Six Month
Term............. 58,546 2.82 69,132 2.77 117,954 3.20 120,841 5.23
Six Month Term..... 198,432 3.35 299,368 3.13 230,489 3.50 123,040 5.68
Nine Month Term.... 123,068 4.28 200,269 3.36 45,852 3.77 118,249 6.45
One Year to 18
Months Term...... 644,428 4.28 474,853 3.67 333,798 4.14 308,945 6.39
Two Year to 30
Months Term...... 243,644 4.62 148,993 4.67 186,473 6.16 107,866 7.13
Over 30 Month
Term............. 236,960 5.96 307,513 5.80 141,713 6.56 68,152 7.77
Discounted
Accounts......... -- -- -- -- -- -- 34 7.50
Negotiable
Certificates of
$100,000 and
Greater, 30 Day
to One Year...... 266,261 3.71 297,102 3.43 472,336 3.82 597,920 5.84
---------- ---------- ---------- ----------
1,771,339 1,797,230 1,528,615 1,445,047
---------- ---------- ---------- ----------
Total Deposits....... $2,284,874 3.81% $2,305,480 3.60% $1,982,745 3.97% $1,740,103 5.74%
========== ========== ========== ==========
</TABLE>
The following table shows the maturity distribution of jumbo certificates
of deposit ($100,000 and greater) at June 30, 1994 (in thousands).
<TABLE>
<S> <C>
Maturing in:
1 month or less................................................ $ 73,622
Over 1 month to 3 months....................................... 81,238
Over 3 months to 6 months...................................... 49,131
Over 6 months to 12 months..................................... 61,476
Over 12 months................................................. 794
--------
Total.................................................. $266,261
========
</TABLE>
Based on historical renewal percentages at maturity, management believes
that jumbo certificates of deposit are a stable source of funds; however, jumbo
deposits are more likely to be shifted to other financial institutions than
smaller retail deposits in response to relative variations in interest rates
paid by the Bank and its competitors.
33
<PAGE> 34
RETAIL BRANCHES
The Company currently maintains 25 retail branch offices, the highest
concentration of which is located in Santa Monica and the surrounding westside
area of Los Angeles.
Deposits at retail branches were 65.7%, 64.7%, 66.1% and 57.3% of total
deposits, at June 30, 1994, December 31, 1993, 1992 and 1991, respectively.
Increased deposits during 1993 and 1992 resulted primarily from branch
acquisitions and, to a lesser extent, from additional deposits brought in by the
overall branch system.
The Bank acquired two retail branches from the Resolution Trust Corporation
("RTC") in December 1993 with deposits totaling $113.3 million, and acquired
seven retail branches during 1992 with deposits totaling $290.6 million. One of
the two branches acquired in 1993 was closed and the deposits were merged into
the other acquired branch. One previously existing branch which was located near
a branch acquired in 1992 was merged with that acquired branch. At June 30,
1994, deposits at these branches totaled $285.2 million, including new deposits
obtained at these branches since the acquisition dates, and excluding deposits
attributable to the Bank's branch prior to the merger. The Bank may seek to
acquire additional retail branches from the RTC from time to time if available
on an individual basis. The Company does not currently intend to acquire any
institutions offered by the RTC on a "whole-bank" basis.
TELEMARKETING
Deposits acquired through the Bank's telemarketing department are obtained
from depositors throughout the United States, and are typically placed by
managers of pension funds. Telemarketing deposits were $258.2 million, $285.6
million, $389.2 million and $439.6 million, representing 11.3%, 12.4%, 19.6% and
25.3% of total deposits, at June 30, 1994, December 31, 1993, 1992 and 1991,
respectively. The percentage of deposits in telemarketing funds varies based
upon competition from other investment products available to depositors. These
deposits are not subject to brokered deposit restrictions discussed below as
long as the rates offered for such deposits are not significantly higher than
the prevailing rates on deposits by other federally insured savings banks in the
Bank's normal market area. Based on weekly rate surveys conducted by the Bank,
the Bank has determined that the rates it offers on these deposits are not
significantly higher than such prevailing rates.
Under FDIC insurance rules, employee benefit plan deposits (which
constitute the largest segment of telemarketing deposits) are provided "pass
through" insurance (providing insurance up to $100,000 per participant rather
than $100,000 per plan) only if the depository institution is able to accept
brokered deposits, either by meeting the standards necessary to be deemed well
capitalized, or by meeting the standards necessary to be deemed adequately
capitalized and having obtained permission from the FDIC to accept brokered
deposits in the form of a waiver. See "-- Brokered Deposits." If the Bank were
unable to satisfy the criteria necessary to accept brokered deposits and, as a
result, employee benefit plan telemarketing deposits were not entitled to such
pass-through insurance, it is likely that employee benefit plan telemarketing
deposits would not be renewed at their maturity. Such deposits would be
difficult to replace until the Bank again satisfied the criteria necessary to
accept brokered deposits so that employee benefit plan telemarketing deposits
would be entitled to such pass-through insurance. See "Risk Factors -- Brokered
Deposits; Telemarketing Deposits."
BROKERED DEPOSITS
Deposits acquired through national brokerage houses were $524.6 million,
$518.9 million, $273.6 million and $291.6 million, representing 23.0%, 22.5%,
13.8% and 16.8% of total deposits at June 30, 1994, 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; however, brokered deposits are
more likely than smaller retail deposits to be shifted to other financial
institutions in response to relative variations in interest rates paid by the
Bank and its competitors.
34
<PAGE> 35
The Bank currently accepts brokered deposits pursuant to a waiver obtained
from the FDIC that expires on May 27, 1995. Well-capitalized institutions are
not required to obtain a waiver from the FDIC. Adequately capitalized
institutions, such as the Bank, can only accept brokered deposits under a waiver
from the FDIC. See "Regulation -- Prompt Corrective Action." Furthermore, an
institution granted a waiver is prohibited from paying an effective yield on any
brokered deposits which exceeds by more than 75 basis points (i) the effective
yield paid on deposits of comparable size and maturity in such institution's
normal market area for deposits accepted from within its normal market area or
(ii) the national rate paid on deposits of comparable size and maturity for
deposits accepted outside the institution's normal market area. For purposes of
this prohibition, "national rate" means 120 percent for retail deposits and 130
percent for wholesale deposits, respectively, of the current yield on comparable
maturity U.S. Treasury obligations.
There can be no assurance that the law may not again change and further
limit the Bank's ability to accept these funds. If the Bank is not permitted to
accept brokered deposits in the future for any reason, it will seek alternative
sources of funds, principally by offering rates sufficient to attract additional
retail deposits and by borrowing additional amounts from the FHLBSF. Giving
effect, on a pro forma basis, to the contribution by FFC to the Bank of the net
proceeds from the Offering, the Bank would have met the regulatory standards to
be deemed well capitalized at June 30, 1994. As long as the Bank meets the
capital standards necessary to be deemed well-capitalized, a waiver will not be
required for the Bank to continue accepting brokered deposits. See "Risk
Factors -- Brokered Deposits; Telemarketing Deposits."
BORROWINGS
The FHLB system functions as a source of credit to financial institutions
that are members of a regional FHLB. 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, any institution not meeting the
qualified thrift lender test will be subject to restrictions on its ability to
obtain advances from the FHLBSF. See "Regulation -- Qualified Thrift Lender
Test." In granting advances, the FHLBSF also considers a member's
creditworthiness and other relevant factors and takes a security interest in
qualified collateral.
Total advances from the FHLBSF were $627.2 million at June 30, 1994 at a
weighted average rate of 4.96%. This compares with advances of $514.7 million at
December 31, 1993, $654.5 million at December 31, 1992 and $524.0 million at
December 31, 1991, at weighted average rates of 4.70%, 5.20% and 5.86%,
respectively. The decrease in 1993 was due to advances repaid with funds from
the branches acquired in December 1993. At June 30, 1994, the Bank had available
$377.0 million for borrowing from the FHLBSF without providing any additional
collateral.
The Bank enters into reverse repurchase agreements, which are short-term
borrowings secured by MBS and require the repurchase of the same securities.
Reverse repurchase agreements are treated as borrowings in the Bank's statement
of financial condition. In order to minimize the risks associated with these
types of transactions, the Bank's policy is to enter into reverse repurchase
agreements only with primary dealers. Borrowings under reverse repurchase
agreements totaled $600.3 million, $548.6 million, $491.1 million and $623.6
million at June 30, 1994 and December 31, 1993, 1992 and 1991, respectively, and
were secured by MBS with principal balances totaling $634.8 million, $559.0
million, $506.6 million and $638.8 million, respectively.
Borrowings from all sources totaled $1.2 billion, $1.1 billion, $1.2
billion and $1.3 billion at weighted average rates of 4.62%, 3.99%, 4.48% and
5.47% at June 30, 1994, December 31, 1993, 1992 and 1991, respectively.
35
<PAGE> 36
The following schedule summarizes short term borrowings for the last three
years.
SHORT TERM BORROWINGS
<TABLE>
<CAPTION>
MAXIMUM MONTH-END OUTSTANDING BALANCE
----------------------------------------------------------
END OF PERIOD AVERAGE FOR PERIOD
-------------------- DURING THE --------------------
OUTSTANDING RATE PERIOD OUTSTANDING RATE
----------- ---- ---------- ----------- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
1993:
Short Term FHLBSF 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 FHLBSF 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 FHLBSF 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 OF FUNDS
Other sources of funds include sales of loans and MBS and principal
payments on loans in the Bank's loan portfolio. Sales of loans and MBS were
$42.4 million, $153.0 million, $154.4 million and $55.0 million for the six
months ended June 30, 1994 and for the years ended December 31, 1993, 1992 and
1991, respectively. The volume of loans and MBS sold varies based on a number of
factors, including the dollar amount of saleable loans originated.
Principal payments on loans in the Bank's loan portfolio were $141.7
million, $354.7 million, $321.7 million and $278.4 million for the six months
ended June 30, 1994 and for the years ended December 31, 1993, 1992 and 1991,
respectively. 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 several years due to growth in
average loans outstanding and increased mortgage refinancing due to low interest
rates. As interest rates have increased over the last several months, the Bank
has experienced a decline in refinancing activity.
NET INTEREST INCOME
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 Bank's 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 assets and interest-bearing liabilities.
36
<PAGE> 37
YIELDS EARNED AND RATES PAID
The following tables set forth information concerning the yields earned and
rates paid by the Bank for and at the end of the periods indicated.
WEIGHTED AVERAGE RATES FOR PERIOD
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------- ------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted Average Yield on Loan
Portfolio......................... 6.14% 6.67% 6.64% 7.92% 9.96% 10.87% 10.84%
Weighted Average Yield on Investment
Portfolio(1)...................... 4.83 4.55 4.70 4.24 6.03 8.16 9.46
Weighted Average Yield on All
Interest-Earning Assets........... 6.09 6.59 6.56 7.78 9.82 10.78 10.80
Weighted Average Rate Paid on
Deposits.......................... 3.65 3.87 3.76 4.66 6.70 7.93 8.19
Weighted Average Rate Paid on
Borrowings and FHLB Advances...... 4.21 4.13 4.09 5.10 7.08 8.59 9.39
Weighted Average Rate Paid on All
Interest-Bearing Liabilities...... 3.84 3.97 3.89 4.83 6.85 8.16 8.58
Net Yield on Average
Interest-Earning Assets(2)........ 2.34 2.73 2.77 3.16 3.29 3.02 2.54
Interest Rate Spread(3)............. 2.25 2.62 2.67 2.95 2.97 2.62 2.22
</TABLE>
WEIGHTED AVERAGE RATES AT END OF PERIOD
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, ------------------------------------------
1994 1993 1992 1991 1990 1989
-------- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Yield on Loan
Portfolio.............................. 5.98% 6.20% 7.25% 9.20% 10.45% 10.94%
Weighted Average Yield on Investment
Portfolio(1)........................... 5.10 5.16 6.18 4.90 7.74 8.42
Weighted Average Yield on All Interest-
Earning Assets......................... 5.96 6.17 7.24 9.05 10.37 10.80
Weighted Average Rate Paid on Deposits... 3.81 3.60 3.97 5.74 7.67 8.21
Weighted Average Rate Paid on Borrowings
and FHLB Advances...................... 4.62 3.99 4.48 5.47 8.07 8.82
Weighted Average Rate Paid on All
Interest-Bearing Liabilities........... 4.09 3.73 4.16 5.63 7.82 8.42
Interest Rate Spread(3).................. 1.87 2.44 3.08 3.42 2.55 2.38
</TABLE>
- ---------------
(1) Includes earnings on certificates of deposit and overnight investments. Does
not include earnings on FHLB stock.
(2) Net interest income (the difference between the dollar amounts of interest
earned and paid) divided by average interest earning assets.
(3) Weighted average yield on all interest-earning assets less weighted average
rate paid on all interest-bearing liabilities.
The tables above reflect the decreasing trend in interest rates over the
past three years. The Bank's ARM portfolio is based primarily on changes in the
COFI. Changes in the COFI closely parallel changes in the Bank's cost of funds.
Therefore, the yield on the Bank's loan portfolio has decreased along with the
cost of deposits and borrowings. 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-
37
<PAGE> 38
performing assets had a negative impact on the Bank's loan portfolio yield over
the last three years. The effect was more pronounced in 1993 when the interest
rate spread fell to 2.67% from the prior year's 2.95% due to a 40.1% increase in
non-performing assets (before deducting specific loan loss allowances
attributable to such assets). For the six months ended June 30, 1994, the Bank's
interest rate margin was 2.25%. This decrease was attributable to increases in
market interest rates during 1994 as well as the continuing higher level of
non-performing assets.
An increase in non-performing assets caused the excess of average
interest-earning assets over average interest-bearing liabilities to decrease to
$90.8 million for the year ended December 31, 1993 from $142.6 million for the
year ended December 31, 1992 and $147.3 million for the year ended December 31,
1991. At June 30, 1994, the excess of average interest-earning assets over
average interest-bearing liabilities decreased slightly, to $87.9 million. 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.
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 assets and interest-bearing liabilities,
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). 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 FHLB stock and
miscellaneous interest income are excluded.
INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
VERSUS 1992 CHANGES VERSUS 1991 CHANGES VERSUS 1990 CHANGES
DUE TO DUE TO DUE TO
----------------------------- ----------------------------- -----------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------- -------- -------- ------- -------- -------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans................. $14,144 $(41,930) $(27,786) $23,675 $(62,620) $(38,945) $31,417 $(24,797) $ 6,620
Investments........... 513 592 1,105 977 (2,088) (1,111) 1,240 (2,083) (843)
------- -------- -------- ------- -------- -------- ------- -------- --------
Total Interest
Income............ 14,657 (41,338) (26,681) 24,652 (64,708) (40,056) 32,657 (26,880) 5,777
Interest Expense:
Deposits.............. 7,914 (17,988) (10,074) 9,864 (37,682) (27,818) 6,116 (21,070) (14,954)
Borrowings............ 3,346 (13,018) (9,672) 7,697 (23,944) (16,247) 17,956 (14,863) 3,093
------- -------- -------- ------- -------- -------- ------- -------- --------
Total Interest
Expense............. 11,260 (31,006) (19,746) 17,561 (61,626) (44,065) 24,072 (35,933) (11,861)
------- -------- -------- ------- -------- -------- ------- -------- --------
Change in Net
Interest Income... $ 3,397 $(10,332) $ (6,935) $ 7,091 $ (3,082) $ 4,009 $ 8,585 $ 9,053 $ 17,638
======= ======== ======== ======= ======== ======== ======= ======== ========
</TABLE>
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
NON-INTEREST INCOME
Loan and other fees were $3.4 million and $3.3 million for the six months
ended June 30, 1994 and 1993, respectively, and $6.5 million, $5.9 million and
$6.0 million for the years ended December 31, 1993, 1992 and 1991, respectively.
Such fees are primarily earned on loans originated by the Bank.
Gain on sale of loans and MBS available for sale was $524,000 and $2.9
million for the six months ended June 30, 1994 and 1993, respectively, and $4.3
million, $2.1 million and $1.1 million for the years ended December 31, 1993,
1992 and 1991, respectively. Of the gain recognized during 1993, $2.0 million
resulted from the sale of a single issue of MBS from the Bank's portfolio of
loans and securities held for sale.
Real estate operations recorded a net gain of $961,000 in the six months
ended June 30, 1994, and a net loss of $316,000 for the six months ended June
30, 1993. Real estate operations recorded a net
38
<PAGE> 39
loss of $437,000 in 1993, 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. See "Risk Factors -- Asset Quality;
Southern California Real Estate."
The Bank assumes liability for various charges on these foreclosed
properties, including delinquent property taxes, unpaid utility charges and
rehabilitation costs. Many of the properties are 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 the first six months of 1994 and 1993, and the year ended
December 31, 1993 were due to recoveries of loss allowances which had been
established prior to the sale of foreclosed properties. Gains from real estate
operations increased due to an increase in the percentage of appraised value
recovered on the sale of foreclosed properties and a decrease in net operating
expenses on foreclosed properties.
Other operating income consists primarily of fees earned for services
provided by the retail savings branches. Other operating income was $721,000 and
$814,000 for the six months ended June 30, 1994 and 1993, respectively, and $1.7
million, $2.1 million and $1.3 million for the years ended December 31, 1993,
1992 and 1991, respectively. The decrease in other operating income in 1993
compared to 1992 was due to a lawsuit settlement and a refund of business
license taxes from the City of Los Angeles received in 1992.
NON-INTEREST EXPENSE
The table below sets forth certain information concerning the Bank's
non-interest expense.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries.............. $ 8,362 $ 7,979 $16,636 $15,399 $12,776 $11,697 $10,720
Employee Benefits..... 2,377 3,185 6,244 8,054 8,769 9,072 7,100
Occupancy Expense..... 2,695 2,581 5,531 5,119 4,424 3,992 3,847
Equipment............. 610 671 1,285 1,523 1,290 1,294 1,111
Advertising........... 1,319 1,292 2,486 2,235 1,731 1,579 1,168
Federal Deposit
Insurance........... 2,852 2,005 4,622 4,156 3,890 3,205 2,742
Outside Data
Processing.......... 509 419 1,036 2,213 1,147 938 768
Insurance............. 355 289 570 556 537 499 383
Contributions......... 326 359 591 751 761 784 520
Stockholders'
Relations........... 186 161 143 251 576 257 213
Professional
Services............ 345 328 755 709 580 331 566
Lawsuits.............. -- -- -- -- -- 1,400 --
Other Operating
Expense............. 3,908 3,628 5,399 5,159 4,001 4,307 3,679
------- ------- ------- ------- ------- ------- -------
Total................. $23,844 $22,897 $45,298 $46,125 $40,482 $39,355 $32,817
======= ======= ======= ======= ======= ======= =======
Non-Interest Expense
to Average Assets... 1.29%(1) 1.29%(1) 1.26% 1.36% 1.28% 1.40% 1.39%
</TABLE>
- ---------------
(1) Annualized basis.
Non-interest expense increased by 4.1% during the first six months of 1994
compared to the first six months of 1993 due to higher deposit insurance, normal
salary adjustments and costs associated with
39
<PAGE> 40
the integration of one savings branch acquired on December 3, 1993. The increase
during the first half of 1994 was offset by lower expenses recorded for
discretionary compensation expenses due to reduced earnings. The ratio of
non-interest expense to average assets was 1.29% for both the first six months
of 1994 and the first six months of 1993. 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 expenses in 1992 resulted from
data processing conversion costs and expenses associated with the acquisition of
seven branches from the RTC in that year. Two new branches were 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 Bank's bonus and profit sharing
plans in 1993 based on decreased earnings. Salary and benefit costs increased
8.9% in 1992 compared to 1991 due to employment costs associated with the
branches acquired from the RTC during 1992.
Occupancy expense increased slightly in 1993 compared to 1992 due to higher
lease costs resulting from the effect of lease escalation clauses. Occupancy
expense increased by 15.7% in 1992 compared to 1991 due to the costs of the
additional branches plus the effect of lease escalation clauses.
Advertising expense increased by 11.2% in 1993 compared to 1992 due to
advertising campaigns promoting various savings and loan products, particularly
the Bank's new mortgage banking products. The 29.1% increase in advertising
expense in 1992 compared to 1991 was primarily due to savings promotions for the
seven branches acquired in that year.
The cost of federal deposit insurance increased by 42.2% in the six months
ended June 30, 1994 compared to the six months ended June 30, 1993, and by 11.2%
in 1993 compared to 1992, due to growth in average total deposits. The increase
for the year ended December 31, 1993 was offset by a lower insurance rate
applicable to 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 6.8%
during 1992 compared to 1991 due to growth in average total deposits.
Other operating expenses increased 7.7% in the six months ended June 30,
1994 compared to the prior period, primarily due to costs associated with the
acquisition of a new branch in December 1993. Third party data processing costs
decreased 53.2% in 1993 compared to 1992 due to costs incurred in 1992 in
connection with the Bank's conversion to a new data processing system during
1992.
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. Generally, the maturities of
fixed rate assets are matched with fixed cost liabilities. The Bank currently
does not use any futures, options or swaps in its asset-liability management
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 June 30, 1994, the
Bank's one year gap was 15.9% of total assets, or a positive $591.9 million. At
December 31, 1993, the Bank's one year gap was 14.8% of total assets, or a
positive $541.9 million. This compares with positive gap ratios of 11.6% of
total assets at both December 31, 1992 and December 31, 1991.
40
<PAGE> 41
The following table shows the interest sensitivity gap of the Bank
(unconsolidated) at June 30, 1994 for the periods indicated and the interest
sensitivity gap as a percentage of total assets for the periods indicated. The
table reflects the repricing of deposits and other liabilities based on their
contractual terms.
INTEREST SENSITIVITY GAP
<TABLE>
<CAPTION>
AT JUNE 30, 1994
-----------------------------------------------------------------
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, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Investment Securities......... $ 91,719 $ 3,004 $ 10,014 $ 78,701 --
MBS........................... 710,767 702,050 -- -- $ 8,717
Loans Receivable:
Interest Rate Sensitive
Loans.................... 2,755,567 2,755,567 -- -- --
Fixed Rate Loans........... 38,194 3,781 6,705 10,695 17,013
---------- ---------- -------- --------- --------
Total Interest-Earning
Assets................ $3,596,247 $3,464,402 $ 16,719 $ 89,396 $ 25,730
========== ========== ========= ========= ========
Interest-Bearing Liabilities....
Demand Accounts............... $ 514,649 $ 514,649 -- -- --
Fixed Rate Term Certificate... 1,771,339 540,465 $ 676,811 $ 486,505 $ 67,558
Borrowings:
FHLB Advances.............. 627,200 410,000 143,500 73,700 --
Reverse Repurchase
Agreements............... 600,324 599,061 1,263 -- --
Other Borrowings........... 3,500 3,459 41 -- --
---------- ---------- --------- --------- --------
Total Interest-Bearing
Liabilities........... $3,517,012 $2,067,634 $ 821,615 $ 560,205 $ 67,558
========== ========== ========= ========= ========
Interest-Sensitivity Gap........ $1,396,768 $(804,896) $(470,809) $(41,828)
========== ========= ========== ========
Interest-Sensitivity Gap as a
Percentage of Total Assets.... 37.49% (21.60)% (12.64)% (1.12)%
Cumulative Interest-Sensitivity
Gap as a Percentage
of Total Assets............... 37.49 15.89 3.25 2.13
</TABLE>
COMPETITION
DEPOSITS AND OTHER FUNDS
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 believes that it is able to compete effectively for retail
deposits principally on the basis of its customer service. It has established
programs designed to offer specific incentives, financial and otherwise, to its
employees to encourage a high level of customer service, including monetary
awards, recognition within the Bank and an emphasis on customer service in
performance reviews. In addition, the Bank offers its long-term and high-balance
customers special services, principally fee discounts and waivers.
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<PAGE> 42
LOANS
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, real estate brokers and mortgage brokers.
The Bank's management believes that its loan terms currently are sufficiently
competitive with other lenders to originate its desired volume of loans while
maintaining its loan approval and underwriting criteria.
In order to compete more effectively for new loans, the Bank began a
mortgage banking program in October 1993 in which competitively-priced fixed and
adjustable rate mortgages are originated for sale in the secondary loan markets.
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.
SUBSIDIARIES
FFC owns 100% of the capital stock of the Bank, and has no other
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.
At December 31, 1993, the Bank had invested $457,000 (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.
REAL ESTATE DEVELOPMENT ACTIVITIES
Seaside has not been involved in any real estate development activity for
the last three years and therefore, no gains or losses on real estate activities
were recorded during 1993, 1992 or 1991. There are no plans for future real
estate development projects.
Seaside continues to hold three condominium units which are rented to the
Bank for use by its employees. At June 30, 1994, Seaside's investment in the
units totaled $363,000. There were no loans outstanding against the properties
at June 30, 1994. All three units are located in Southern California.
TRUSTEE ACTIVITIES
Seaside acts as trustee on the Bank's loans. Trustee fees for this activity
amounted to $174,000, $612,000, $599,000 and $218,000 for six months ended June
30, 1994, and the years ended December 31, 1993, 1992 and 1991, respectively.
Increases are due to additional foreclosure activity by the Bank.
EMPLOYEES
At June 30, 1994, the Bank had a total of 509 full time equivalent
employees, including 84 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 "ESOP"). At June 30, 1994,
the ESOP owned 8.5% of the outstanding common stock of FFC. The Bank considers
its employee relations to be excellent.
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<PAGE> 43
REGULATION
GENERAL
FFC, as a savings and loan holding company, is registered with, and subject
to regulation and examination by, the OTS. The Bank, which is a federally
chartered savings bank and a member of the FHLBSF, is subject to regulation and
examination by the OTS with respect to most of its business activities,
including, among others, lending activities, capital standards, general
investment authority, deposit taking and borrowing authority, mergers and other
business combinations, establishment of branch offices, and permitted subsidiary
investments and activities. The Bank's deposits are insured by the FDIC through
the Savings Association Insurance Fund ("SAIF"). As insurer, the FDIC is
authorized to conduct examinations of the Bank. The Bank is also subject to
Federal Reserve Board regulations concerning reserves required to be maintained
against deposits. Financial institutions, including the Bank, may also be
subject, under certain circumstances, to liability under various statutes and
regulations applicable to property owners generally, including statutes and
regulations relating to the environmental condition of real property and the
remediation thereof.
The OTS's enforcement authority over savings institutions and their holding
companies includes, among other things, the ability to assess civil money
penalties, to issue cease and desist orders and to initiate removal and
prohibition orders against officers, directors and certain other persons. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound conditions or practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or
untimely reports filed with the OTS. FIRREA significantly increased the amount
of, and grounds for, civil money penalties. FIRREA requires, except under
certain circumstances, public disclosure of final enforcement actions by the
OTS.
The FDIC has authority to recommend that the OTS take any authorized
enforcement action with respect to any federally insured savings institution. If
the OTS does not take the recommended action or provide an acceptable plan for
addressing the FDIC's concerns within 60 days after receipt of a recommendation
from the FDIC, the FDIC may take such action if the FDIC board of directors
determines that the institution is in an unsafe or unsound condition or that
failure to take such action will result in the continuation of unsafe or unsound
practices in conducting the business of the institution. The FDIC may also take
action prior to the expiration of the 60-day time period in exigent
circumstances after notifying the OTS.
The FDIC may terminate the deposit insurance of any insured depository if
the FDIC determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation or order or
any condition imposed in writing by the FDIC. The FDIC may also suspend deposit
insurance temporarily during the hearing process if the institution has no
tangible capital (which may be calculated under certain conditions by including
goodwill). In addition, FDIC regulations provide that any insured institution
that falls below a 2% minimum leverage ratio will be subject to FDIC deposit
insurance termination proceedings unless it has submitted, and is in compliance
with, a capital plan with its primary federal regulator and the FDIC.
As member of the FHLB System, the Bank is required to own capital stock in
its regional FHLB, the FHLBSF, in an amount at least equal to the greater of 1%
of the aggregate principal amount of its unpaid residential mortgage loans, home
purchase contracts and similar obligations at the end of each year, or 5% of its
outstanding borrowings from the FHLBSF. The Bank was in compliance with this
requirement, with an investment of $39.7 million in FHLBSF stock at June 30,
1994.
The FHLBSF serves as a source of liquidity for the member institutions
within its assigned region, the FHLB Eleventh District. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes advances to members in accordance with policies and procedures
established by the Federal Housing Finance Board and the Board of Directors of
the FHLBSF.
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<PAGE> 44
At June 30, 1994, the Bank's advances from the FHLBSF amounted to $627.2
million, or 17.8% of the Bank's total funding sources (deposits and borrowings).
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low and moderate income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future. For the six months ended June
30, 1994, dividends paid by the FHLBSF to the Bank totaled approximately
$953,000.
SAVINGS AND LOAN HOLDING COMPANY REGULATIONS
The activities of savings and loan holding companies are governed by the
Home Owners' Loan Act, as amended. Pursuant to that statute, FFC is subject to
certain restrictions with respect to its activities and investments. Among other
things, FFC is generally prohibited, either directly or indirectly, from
acquiring more than 5% of the voting shares of any savings association or
savings and loan holding company which is not a subsidiary, without prior
approval from OTS.
Similarly, OTS approval must be obtained prior to any person acquiring
control of FFC or the Bank. Control exists if, among other things, a person
acquires more than 25% of any class of voting stock of the institution or
holding company or controls in any manner the election of a majority of the
directors of the institution or holding company. Control is also presumed to
exist if, among other things, a person acquires more than 10% of any class of
voting stock of the institution or holding company and is subject to any
"control factor," as defined by the OTS.
A savings and loan holding company, like FFC, which controls only one
savings association is exempt from restrictions on the conduct of unrelated
business activities that are applicable to savings and loan holding companies
that control more than one savings association. The restrictions on multiple
savings and loan holding companies are similar to the restrictions on the
conduct of unrelated business activities applicable to bank holding companies
under the Bank Holding Company Act. FFC would become subject to these
restrictions if it were to acquire control of another savings association or if
the Bank were to fail to meet its QTL test. See "-- Qualified Thrift Lender
Test."
REGULATORY CAPITAL REQUIREMENTS
FIRREA and the capital regulations of the OTS promulgated thereunder (the
"Capital Regulations") established three capital requirements for savings
associations. These requirements require the Bank 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 relevant provisions of FIRREA and the Capital
Regulations, however, also contain various transitional provisions, including
phase-in provisions pursuant to which institutions have been required to meet
the higher FIRREA capital standards in stages, and phase-out provisions pursuant
to which various exclusions of types of assets formerly includable in regulatory
capital calculations have been implemented in stages. Moreover, the OTS may
establish, on a case by case basis, individual minimum capital requirements for
a savings institution which vary from the requirements that would otherwise
apply under the Capital Regulations.
"Core capital" generally includes common stockholders' equity,
noncumulative perpetual preferred stock, including any related surplus, and
minority interests in the equity accounts of fully consolidated subsidiaries.
"Tangible capital" means core capital less any intangible assets (including
supervisory goodwill), plus purchased mortgage servicing rights and purchased
credit card relationships, subject to certain limitations. "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
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<PAGE> 45
valuation allowances, subject to certain limitations. General loan valuation
allowances may generally be included in supplementary capital up to 1.25% of
risk-weighted assets. At June 30, 1994, $28.6 million of the Bank's $83.3
million in combined general valuation allowances was included in supplementary
capital. Supplementary capital may be used to satisfy an institution's
risk-based capital requirement only to the extent of its core capital.
The Bank exceeded all three capital requirements at June 30, 1994 and
December 31, 1993, as indicated by the chart below.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1994 1993
----------------- ------------------
AMOUNT % AMOUNT %
-------- ---- -------- -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Tangible Capital Requirement........................ $ 56,003 1.50% $ 54,921 1.50%
Bank's Tangible Capital............................. 170,554 4.57 206,616 5.64
Excess Tangible Capital................... 114,551 3.07 151,695 4.14
Core Capital Requirement............................ 112,005 3.00 109,843 3.00
Bank's Core Capital................................. 170,554 4.57 206,616 5.64
Excess Core Capital....................... 58,549 1.57 96,773 2.64
Risk-Based Capital Requirement...................... 179,281 8.00 180,406 8.00
Bank's Risk-Based Capital........................... 195,217 8.71 231,081 10.25
Excess Risk-Based Capital................. 15,936 0.71 50,675 2.25
</TABLE>
In April 1991, the OTS issued a notice proposing amendments to the minimum
core capital requirements to reflect recent changes in the core capital
requirements applicable to national banks. Under the proposed amendments, only
savings associations receiving the highest rating under the OTS supervisory
rating system would be permitted to operate at or near the minimum core capital
requirements of 3% of adjusted total assets. All other savings associations
would be required to meet a minimum core capital requirement at least 1% to 2%
greater than the minimum requirement. In determining the amount of additional
capital required, the OTS stated that it would asses both the quality of risk
management systems and the level of overall risk in each individual savings
institution on a case by case basis. The Company cannot predict whether or in
what form this amendment will be adopted or whether it will be withdrawn in
light of the "prompt corrective action" provisions of FDICIA, described below.
The Capital Regulations substantially changed the capital requirements for
asset sales with recourse or the retention of the subordinated portion of a
senior/subordinated loan participation or interest in a package of loans sold.
Essentially, the Capital Regulations treat asset sales with recourse as if they
had not occurred, and generally require a savings institution to maintain
capital against the entire amount of assets sold with recourse, even if the
recourse is for less than the full amount of assets sold, with one limited
exception. The exception is that assets sold with recourse with respect to which
the recourse percentage is less than the applicable risk-based capital
requirement are not included in risk-weighted assets; however, capital is
required to be maintained in an amount equal to such recourse amount. A savings
institution's retention of the subordinated portion of a senior/subordinated
loan participation or interest in a package of loans sold is treated in the same
manner as an asset sale with recourse. Since the change in regulation, the Bank
has not been active in such loan sales. At June 30, 1994, the outstanding
principal balances of loans the Bank had sold with recourse or subordination
totaled $292.4 million, and the amount of capital required to be maintained
against such off-balance sheet items was $15.1 million. On May 25, 1994, the OTS
and the other federal bank regulatory agencies proposed revisions to their
risk-based capital standards with respect to the regulatory capital treatment of
recourse arrangements and direct credit substitutes. The proposal would
generally allow banks and thrifts to maintain lower amounts of capital against
recourse arrangements. The Bank has not quantified the impact, if any, of this
proposal; however, the Bank does not expect that this proposal, if adopted,
would have a material effect on its operations or financial condition.
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<PAGE> 46
In August 1993, the OTS adopted a final rule incorporating an interest-rate
risk component into the risk-based capital regulation. Under the rule, an
institution with a greater than "normal" level of interest rate risk will be
subject to a deduction of its interest rate risk component from total capital
for purposes of calculating its risk-based capital requirement. As a result,
such an institution will be required to maintain additional capital in order to
comply with such requirement. An institution with a greater than "normal"
interest rate risk is defined as an institution that would suffer a loss of net
portfolio value exceeding 2.0% of the estimated market value of its assets in
the event of a 200 basis point increase or decrease (with certain minor
exceptions) in interest rates. The interest rate risk component will be
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the market
value of its assets. The rule also authorizes the OTS to waive or defer an
institution's interest rate risk component on a case-by-case basis. The final
rule is effective at January 1, 1994, subject, however, to a "lag" time between
the reporting date of the data used to calculate an institution's interest rate
risk and the effective date of each quarter's interest rate risk component.
Thus, an institution with greater than "normal" risk will not be subject to any
deduction from total capital until September 30, 1994 (based on the calculation
of the interest rate risk component using data at December 31, 1993). Management
of the Bank does not believe that the OTS' adoption of an interest-rate risk
component to the risk-based capital requirement will adversely affect the Bank.
FIRREA requires a savings institution which fails to meet its capital
standards to submit a capital restoration plan to the OTS District Director
which describes the manner in which the institution proposes to increase its
capital and the activities in which it will engage, and requires that any
increase in its assets be met with a commensurate increase in tangible capital
and risk-based capital. As part of the submission of a capital plan, a savings
institution is required to certify that, during the pendency of its application
for approval of its capital plan, it will adhere to certain growth restrictions,
and will not make any capital distributions or engage in certain other
prohibited or restricted activities. The OTS must, with certain limited
exceptions, limit the asset growth of any such institution.
Upon approval of a capital plan by the OTS, the submitting savings
institution is not generally subject to enforcement sanctions for failure to
meet its statutory capital standards as long as it is in compliance with the
approved capital plan. However, there is no limit on the authority of the OTS to
take any appropriate action with respect to any unsafe or unsound practice or
condition of a savings institution, other than the failure to comply with the
capital standards. As a result, approval of a capital plan by the OTS does not
limit any authority of the Director of the OTS under any other provisions of
law.
The OTS has the authority to issue a capital directive to a savings
institution that does not satisfy its minimum capital requirements. The capital
directive may also specify corrective actions to be taken. A capital directive,
including any plan submitted pursuant to a capital directive, is directly
enforceable in a court of law. The Capital Regulations provide that material
failure of a savings institution to comply with any plan, regulation, written
agreement, undertaking, order or directive issued pursuant to the Capital
Regulations, including a material noncompliance with the capital requirements,
shall be treated by the Director as an unsafe and unsound practice. The
existence of an unsafe and unsound practice authorizes the OTS to take
enforcement or supervisory action against a savings institution, including the
appointment of a conservator or receiver. Moreover, other regulations restrict
growth and prohibit savings institutions not meeting minimum capital
requirements from paying dividends and from making certain types of investments
without the prior approval of the OTS. The FDIC may also terminate a savings
institution's deposit insurance upon failure to meet applicable capital
requirements and may temporarily suspend a savings institution's deposit
insurance if the FDIC finds that the institution has no tangible capital (which
may be calculated under certain conditions by including goodwill). If such
termination were to occur, accounts outstanding at the time of such termination
would continue to be insured for a period of at least six months.
CAPITAL MAINTENANCE OBLIGATIONS OF FFC
In connection with its organization in September 1987, as was customary at
the time, FFC entered into a regulatory capital maintenance agreement with the
Federal Savings and Loan Insurance Corpora-
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<PAGE> 47
tion ("FSLIC"), the former insurer of the Bank's deposits, pursuant to which FFC
agreed that it would maintain the Bank's regulatory capital at the levels
required by present and future FSLIC regulations (including regulations of
successor agencies) and would infuse any additional capital required to comply
with such regulations. Under the terms of the regulatory capital maintenance
agreement, FFC's capital injection obligation is unlimited in amount, and is not
terminated unless or until it no longer controls the Bank. In the event the
Bank's capital levels fall below those required under OTS capital regulations,
the agreement requires FFC to inject additional capital into the Bank regardless
of the amount. The failure to inject such capital could lead to enforcement
proceedings, including cease and desist proceedings, against FFC. In addition,
in the event FFC were to seek bankruptcy law protection, the obligation to
maintain the Bank's capital at required regulatory levels would be required to
be assumed by a bankruptcy trustee and would be entitled to priority over the
claims of unsecured creditors, including holders of the Notes.
INSURANCE OF ACCOUNTS
The FDIC administers two separate deposit insurance funds. The Bank
Insurance Fund (the "BIF") insures the deposits of commercial banks and other
institutions which were insured by the FDIC prior to the enactment of FIRREA.
The SAIF insures the deposits of savings institutions which were insured by the
FSLIC prior to the enactment of FIRREA. The FDIC is authorized to increase
deposit insurance premiums if it determines such increases are appropriate to
maintain the reserves of either the SAIF or the BIF or to fund the
administration of the FDIC. In addition, the FDIC is authorized to levy
emergency special assessments on BIF and SAIF members.
FDICIA required the FDIC to implement a risk-based assessment system, under
which an institution's insurance 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 final risk-based assessment system effective January 1,
1994.
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 categorized
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,
demonstrated 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 assessment rates as a percentage of
deposits follows:
<TABLE>
<CAPTION>
GROUP A GROUP B GROUP C
------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................... 0.23% 0.26% 0.29%
Adequately Capitalized......................... 0.26 0.29 0.30
Undercapitalized............................... 0.29 0.30 0.31
</TABLE>
In addition to the above deposit insurance assessments, the OTS has imposed
assessments and examination fees on savings institutions. OTS assessments for
the Bank increased to $531,000 in 1993, from $482,000 in 1992 and $433,000 in
1991.
In December 1993, President Clinton signed legislation which provides
funding for the RTC and the SAIF. Among other things, the legislation authorizes
$8 billion to provide the SAIF with funds for the resolution of troubled savings
associations upon the expiration of the RTC's new case resolution authority.
Appropriation of the $8 billion would only occur after the Chairperson of the
FDIC certifies to the Congress that funds from that source are necessary under
certain conditions set forth in the legislation. In the absence of such
certification, an increase in SAIF premiums is likely since both the SAIF and
the BIF are required to be recapitalized to a reserve ratio of 1.25% of insured
deposits. Such an increase would cause a disparity in deposit insurance premiums
between members of SAIF and members of BIF administered by the FDIC. A
significant increase in SAIF insurance premiums and a long-term reduction in
47
<PAGE> 48
BIF insurance premiums would have an adverse effect on the Bank's operating
expenses and results of operations and could place the Bank and other
SAIF-insured institutions at a competitive disadvantage relative to BIF-insured
institutions.
LIQUIDITY
Federal regulations currently require a savings institution to maintain a
monthly average daily balance of liquid assets (including cash, certain time
deposits, bankers' acceptances and specified United States government, state or
federal agency obligations) equal to at least 5% of the average daily balance of
its net withdrawable accounts and short-term borrowings during the preceding
calendar month. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10% of such accounts and
borrowings depending upon economic conditions and the deposit flows of member
institutions. Federal regulations also require each member institution to
maintain a monthly average daily balance of short-term liquid assets (generally
those having maturities of 12 months or less) equal to at least 1% of the
average daily balance of its net withdrawable accounts and short-term borrowings
during the preceding calendar month. Monetary penalties may be imposed for
failure to meet these liquidity ratio requirements. The Bank's liquidity and
short-term liquidity ratios for the calculation period ended June 30, 1994, were
5.2% and 2.2%, respectively, which exceeded the applicable requirements.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires each savings institution,
as well as commercial banks and certain other lenders, to identify the
communities served by the institution and to identify the types of credit the
institution is prepared to extend within those communities. The CRA also
requires the OTS to assess an institution's performance in meeting the credit
needs of its identified communities as part of its examination of the
institution, and to take such assessments into consideration in reviewing
applications with respect to branches, mergers and other business combinations,
including savings and loan holding company acquisitions. An unsatisfactory CRA
rating may be the basis for denying such an application and community groups
have successfully protested applications on CRA grounds. The OTS assigns CRA
ratings of "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The Bank was rated "satisfactory" in its last CRA examination,
which was conducted in 1994. A new CRA regulation has been proposed by the OTS
which would significantly change the manner in which the OTS assesses CRA
compliance. Under the proposed regulations, institutions would be evaluated
based on: (i) performance in lending in their delineated service areas; (ii) the
provision of deposit services in their delineated service areas; and (iii) the
impact their investments have on their delineated service areas. The current
regulations focus on an institution's adherence to procedures designed to serve
its community's credit needs rather than an institution's actual performance in
meeting its community's credit needs. Under the proposed regulations an
institution which is found to be deficient in its performance in meeting its
community's credit needs may be subject to enforcement actions, including cease
and desist orders and civil money penalties. The Company is unable to predict
whether the proposed regulations will be adopted and, if so, what form they will
take.
CLASSIFICATION OF ASSETS
Federal regulations require savings institutions to review their assets on
a regular basis and to classify them as "substandard," "doubtful" or "loss" if
warranted. Adequate valuation allowances for loan losses, consistent with
generally accepted accounting principles, are required to be established for
assets classified as substandard or doubtful. If an asset is classified as loss,
the institution must either charge it off, or establish a specific allowance for
loss in an amount equal to the amount classified as loss. An asset which
currently does not warrant classification as substandard but which possesses
weaknesses or deficiencies deserving close attention is required to be
designated as "special mention." The institution's OTS District Director has the
authority to approve, disapprove or modify any asset classification and any
amounts established as allowances for loan losses.
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<PAGE> 49
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
Savings association subsidiaries of holding companies generally are
required to provide not less than thirty days' advance notice to their OTS
District Director of any proposed declaration of a dividend on the association's
stock.
Under OTS regulations limitations are imposed on "capital distributions" by
savings institution, including cash dividends, payments to repurchase or
otherwise acquire its shares, payments to stockholders of another institution in
a cash-out merger and other distributions charged against capital. The
regulations, which establish a three-tiered system of regulation, establish
"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. Under the OTS regulation, a Tier 1 association, which is a savings
association that before and after the proposed distribution meets or exceeds its
fully phased-in capital requirements, may make capital distributions during any
calendar year up to the higher of 100% of net income for the calendar
year-to-date plus 50% of its "surplus capital ratio" at the beginning of the
calendar year, or 75% of its net income over the most recent four-quarter
period. The "surplus capital ratio" is defined as the percentage by which the
association's ratio of total capital to assets exceeds the ratio of its fully
phased-in capital requirement to assets and "fully phased-in capital
requirement" is defined to mean an association's capital requirement under the
statutory and regulatory standards to be applicable on January 1, 1995, as
modified to reflect any applicable individual minimum capital requirements
imposed upon an association. At June 30, 1994, the Bank qualified as a Tier 1
institution for purposes of this regulation.
Tier 2 associations, which are associations that before and after the
proposed distribution meet or exceed their minimum capital requirements, but not
their fully phased-in capital requirements, may make capital distributions up to
75% of their net income over the most recent four quarter period.
Tier 3 associations, which are associations that do not meet current
minimum capital requirements, or are in need of more than normal supervision,
cannot make any capital distribution without obtaining prior OTS approval.
Although the OTS has not prohibited the Bank from making an otherwise
authorized capital distribution, the OTS nevertheless retains the authority to
prohibit any capital distribution otherwise authorized under the regulation if
the OTS determines that the capital distribution would constitute an unsafe or
unsound practice. The regulation also states that the capital distribution
limitations apply to direct and indirect distributions to affiliates, including
those occurring in connection with corporate reorganizations. Moreover, the Bank
would not be permitted to pay cash dividends if it were deemed to be an
"undercapitalized" institution for purposes of the "prompt corrective action"
rules of FDICIA. At June 30, 1994, the Bank met the standards necessary to be
deemed to be "adequately capitalized" for purposes of the "prompt corrective
action" rules and, at the same date, would have met the standards necessary to
be deemed "well capitalized," after giving pro forma effect to the contribution
by FFC to the Bank of the net proceeds of the Offering.
LIMITS ON TYPES OF LOANS AND INVESTMENTS
Federal savings associations are authorized, without quantitative limits,
to make loans on the security of liens upon residential real property and to
invest in a variety of instruments such as obligations of, or fully guaranteed
as to principal and interest by, the United States; stock or bonds of FHLB or
stock of FNMA; certain mortgages, obligations, or other securities which have
been sold by FHLMC; and certain securities issued by, or fully guaranteed as to
principal and interest by, FNMA, the Student Loan Marketing Association, and the
Government National Mortgage Association. Certain other types of loans or
investments may be acquired subject to quantitative limits; secured or unsecured
loans for commercial, corporate, business, or agricultural purposes, limited to
10% of assets; loans on the security of liens upon nonresidential real property,
limited to 400% of capital except when the Director of the OTS permits an
association to exceed such limits; investments in personal property, limited to
10% of assets; consumer loans and certain securities such as commercial paper
and corporate debt, limited to 35% of
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assets; and construction loans without security, which may not exceed the
greater of an association's capital or 5% of its assets.
SAFETY AND SOUNDNESS STANDARDS
The OTS has proposed various "safety and soundness" standards covering
various aspects of the operations of savings institutions pursuant to a
requirement of FDICIA that such standards be adopted by the federal banking
agencies. The proposed regulations include standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, maximum
ratios of classified assets to capital (a maximum ratio of classified assets to
risk-based total capital plus ineligible general valuation allowances of 1.0 has
been proposed, but lower ratios are also being considered), and minimum earnings
sufficient to absorb losses without impairing capital. A savings institution not
meeting one or more of such standards would be required to submit to the OTS,
and thereafter comply with, a compliance plan acceptable to the OTS describing
the steps the institution will take to attain compliance with the applicable
standard and the time within which those steps will be taken. FFC is unable to
predict the form in which such regulations will be adopted or the impact, if
any, that such adoption would have on the Bank or FFC.
PROMPT CORRECTIVE ACTION
FDICIA contains "prompt corrective action" provisions pursuant to which
insured depository institutions are to be classified into one of five categories
based primarily upon capital adequacy, ranging from "well capitalized" to
"critically undercapitalized" and which require, subject to certain exceptions,
the appropriate federal banking agency to take "prompt corrective action" with
respect to an institution which becomes "undercapitalized" and to take
additional actions if the institution becomes "significantly undercapitalized"
or "critically undercapitalized." These provisions expand the powers and duties
of the OTS and the FDIC and expressly authorize, or in many cases direct,
regulatory intervention at an earlier state than was previously the case.
The OTS regulations implementing the "prompt corrective action" provisions
of FDICIA define the five capital categories as follows: (i) a savings
institution is "well capitalized" if it has a total risk-based capital ratio
(total capital to risk-weighted assets) of 10% or greater, has a Tier 1
risk-based capital ratio (Tier 1 capital to risk-weighted assets) of 6% or
greater, has a core capital ratio (core capital to total assets) of 5% or
greater and is not subject to any written capital order or directive to meet and
maintain a specific capital level or any capital measure; (ii) a savings
institution is "adequately capitalized" if it has a total risk-based capital
ratio of 8% or greater, has a Tier 1 risk-based capital ratio of 4% or greater
and has a core capital ratio of 4% or greater (3% for certain highly rated
institutions); (iii) a savings institution is "undercapitalized" if it has a
total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital
ratio of less than 4% or a core capital ratio of less than 4% (3% for certain
highly rated institutions); (iv) a savings institution is "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, or
has either a Tier 1 risk-based or a core capital ratio of less than 3%; and (v)
a savings institution is "critically undercapitalized" if its "tangible equity"
(defined in the "prompt corrective action" regulations to mean core capital plus
cumulative perpetual preferred stock) is equal to or less than 2% of its total
assets. The OTS also has authority, after an opportunity for a hearing, to
downgrade a savings institution from "well capitalized" to "adequately
capitalized", or to subject an "adequately capitalized" or "undercapitalized"
savings institution to the supervisory actions applicable to the next lower
category, for supervisory concerns. At June 30, 1994, the Bank's regulatory
capital was in excess of the amount necessary to be deemed "adequately
capitalized." At June 30, 1994, after giving pro forma effect to the
contribution by FFC to the Bank of the net proceeds of the Offering, the Bank's
regulatory capital would have been in excess of the amount necessary to be
deemed "well capitalized."
Generally, FDICIA requires that an "undercapitalized" institution submit an
acceptable capital restoration plan to the appropriate federal banking agency
within 45 days after the institution becomes undercapitalized and that the
agency take action on the plan within 60 days. The appropriate federal
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banking agency may not accept a capital restoration plan unless, among other
requirements, each company having control of the institution has guaranteed that
the institution will comply with the plan until the institution has been
adequately capitalized on average during each of four consecutive calendar
quarters and has provided adequate assurance of performance. The aggregate
liability under this provision of all companies having control of an institution
is limited to the lesser of (i) 5% of the institution's total assets at the time
the institution became "undercapitalized" or (ii) the amount which is necessary,
or would have been necessary, to bring the institution into compliance with all
capital standards applicable to the institution at the time the institution
fails to comply with a plan filed pursuant to FDICIA.
Pursuant to FDICIA and implementing regulations adopted by the FDIC, only
"well capitalized" institutions may obtain brokered deposits without a waiver.
An "adequately capitalized" institution can obtain brokered deposits only if it
receives a waiver from the FDIC. An "undercapitalized" institution may not
accept brokered deposits under any circumstances. The Bank currently obtains
brokered deposits pursuant to a waiver obtained from the FDIC, which expires on
May 27, 1995. The Bank will be able to continue to obtain new brokered deposits
after this date only if it is either "well capitalized" or receives another
waiver. See "Business -- Sources of Funds."
An "undercapitalized" institution may not acquire an interest in any
company or any other insured depository institution, establish or acquire
additional branch offices or engage in any new business unless the appropriate
federal banking agency has accepted its capital restoration plan, the
institution is implementing the plan and the agency determines that the proposed
action is consistent with and will further the achievement of the plan, or the
FDIC determines that the proposed action will further the purpose of the "prompt
corrective action" sections of FDICIA.
Under FDICIA, the OTS must place a "critically undercapitalized"
institution in conservatorship or receivership within 90 days after it becomes
"critically undercapitalized" or take such other actions as the OTS, with the
concurrence of the FDIC, deems appropriate. In addition, the institution must
comply with the restrictions described above and must discontinue, beginning 60
days after becoming critically undercapitalized, any payment of principal and
interest on its subordinated debt unless the FDIC determines that an exception
to this provision would further the purposes of FDICIA. The FDIC is authorized
to restrict the activities of any critically undercapitalized institution and to
prohibit such an institution, with the FDIC's prior written approval, from: (i)
entering into any material transaction other than in the usual course of
business; (ii) engaging in any covered transaction (as defined in Section 23A(b)
of the Federal Reserve Act) with affiliates; (iii) paying excessive compensation
or bonuses; and (iv) paying interest on new or renewed liabilities at a rate
that would increase the institution's weighted average cost of funds to a level
significantly exceeding the prevailing rates of interest on insured deposits in
the institution's normal market areas.
QUALIFIED THRIFT LENDER TEST
In general, the Qualified Thrift Lender ("QTL") test requires that 65% of
an institution's portfolio assets be invested in "qualified thrift investments"
(primarily loans, securities and other investments related to housing), measured
on a monthly average basis for nine out of every 12 months on a rolling basis.
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 FHLB advances. The Bank met the QTL test at June 30, 1994,
with 94.1% of its portfolio assets comprised of "qualified thrift investments."
TRANSACTIONS WITH AFFILIATES
Federal savings associations are subject to the provisions of Section 23A
of the Federal Reserve Act, which place limits as to the amount of loans or
extensions of credit to, or investments in, or certain other transactions with,
affiliates and as to the amount of advances to third parties collateralized by
the securities or obligations of affiliates. In addition, most of these loans
and certain other transactions must
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be secured in prescribed amounts. Federal savings associations may not make any
extension of credit to an affiliate which is engaged in activities not permitted
to bank holding companies, and may not invest in securities issued by an
affiliate (except with respect to a subsidiary). FFC is an "affiliate" of the
Bank for the purposes of these provisions.
Federal savings associations are also subject to the provisions of Section
23B of the Federal Reserve Act which, among other things, prohibit an
institution from engaging in certain transactions (including, for example,
loans) with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
or involving non-affiliated companies. In the absence of such comparable
transactions, any transaction between a savings association and its affiliates
must be on terms and under circumstances, including credit standards, that in
good faith would be offered to, or would apply to, nonaffiliated companies.
TRANSACTIONS WITH INSIDERS
Federal savings associations are subject to the restrictions of Sections
22(g) and (h) of the Federal Reserve Act which, among other things, restrict the
amount of extensions of credit which may be made to executive officers,
directors, certain principal shareholders (collectively "insiders"), and to
their related interests. When lending to insiders, a savings association must
follow credit underwriting procedures that are not less stringent that those
applicable to comparable transactions with persons outside the association. The
amount that a savings association can lend in the aggregate to insiders (and to
their related interests) is limited to an amount equal to the association's
unimpaired capital and surplus. Insiders are also prohibited from knowingly
receiving (or knowingly permitting their related interests to receive) any
extensions of credit not authorized under these statutes.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings institutions to maintain
non-interest bearing reserves against their transaction 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
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.
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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 in a particular taxable year only if at least 60% of the Bank's total
assets are qualifying assets at the close of such year. Qualifying assets
include, 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 at December 31, 1987. In
accordance with the Tax Reform Act of 1986, the Bank generally may maintain the
balance of its tax reserve at the December 31, 1987 level, even if the result
would be less using the experience method; however, if the amount of the Bank's
loans outstanding at the end of a particular year is less than the Bank's loans
outstanding on December 31, 1987, then for such year the Bank may maintain the
balance of its tax reserve at a level equal to the amount which bears the same
ratio to loans outstanding at the close of such year as the balance of the
reserve on December 31, 1987 bears to the amount of loans outstanding on
December 31, 1987. If the Bank were to fail the 60% qualifying asset test, it
would no longer be permitted to calculate its bad debt deductions under the
reserve method. In that case, the Bank would be required generally to change to
the specific charge-off method of accounting for bad debts and would be required
to include the amount of its reserve in income over a six-year period.
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.
To the extent that distributions by the Bank to FFC that are permitted
under federal regulations exceed the Bank's earnings and profits (as computed
for federal income tax purposes), such distributions would be treated for tax
purposes as being made out of the Bank's excess bad debt reserve and would
thereby constitute taxable income to the Bank in an amount equal to the lesser
of the Bank's excess bad debt reserve or the amount which, when reduced by the
amount of income tax attributable to the inclusion of such amount in gross
income, is equal to the amount of such distribution. At December 31, 1993, the
Bank's excess debt reserve was zero. At December 31, 1993, the Bank's earnings
and profits (as computed for federal income tax purposes) were approximately
$141.5 million.
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
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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 at 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.
At December 31, 1993, the Bank had $20.4 million in deferred tax assets. No
valuation allowance was established because management believes that it is more
likely than not that the deferred tax assets will be realized. Deferred tax
liabilities totaled $36.8 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.) The excess of the addition to the bad debt reserve computed
under the percentage of taxable income method over the increase in the reserve
calculated on the basis of actual experience is an item of tax preference. 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 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
11.470%.
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 $365,000 refund 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.
The Internal Revenue Service (the "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 $1.8 million, $3.4 million and $2.3 million 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 $7.5 million 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.
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In December 1993, the IRS began examining the Company's federal income tax
returns for tax years 1987 and 1988. There can be no assurance that the amounts
accrued for interest on such tax liabilities will be adequate to satisfy amounts
which may become due when such issues are resolved.
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, to be dated as of September
28, 1994 (the "Indenture"), between FFC and Harris Trust Company of California,
as Trustee (the "Trustee").
The Indenture is by its terms subject to and governed by the Trust
Indenture Act of 1939, as amended. The statements under this caption relating to
the Notes and the Indenture are summaries and do not purport to be complete, and
where reference is made to particular provisions of the Indenture, such
provisions, including the definition of certain terms, are incorporated by
reference as a part of such summaries or terms, which are qualified in their
entirety by such reference. Unless otherwise indicated, references under this
caption to sections, "sec." or articles are references to the Indenture. A copy
of the Indenture substantially in the form in which it is to be executed has
been filed with the Commission as an exhibit to the Registration Statement of
which this Prospectus is a part.
GENERAL
The Notes will be general unsecured obligations of FFC, will be limited to
$50 million aggregate principal amount and will mature on October 1, 2004. The
Notes are not savings accounts or deposits of the Bank and are not insured by
the FDIC or any other governmental agency.
The Notes will bear interest at the rate per annum shown on the front cover
of this Prospectus from September 28, 1994 or from the most recent Interest
Payment Date to which interest has been paid or provided for, payable
semi-annually on April 1 and October 1 of each year, commencing April 1, 1995,
to the Person in whose name the Note (or any predecessor Note) is registered at
the close of business on the preceding March 15 or September 15, as the case may
be. Interest on the Notes will be computed on the basis of a 360-day year of
twelve 30-day months. (sec.sec. 301, 307 and 310) Principal of and premium, if
any, and interest on the Notes will be payable at the Corporate Trust Office of
the paying agent, Bank of Montreal Trust Company in New York, New York. At the
option of FFC, payment of interest may be made by check mailed to the address of
the Person entitled thereto as it appears in the Security Register. (sec.sec.
301, 305 and 1002)
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of FFC, in whole or
in part, at any time on or after October 1, 1999 and prior to maturity, upon not
less than 30 nor more than 60 days' notice mailed to each Holder of Notes to be
redeemed at his address appearing in the Security Register, in amounts of $1,000
or an integral multiple of $1,000, at the following Redemption Prices (expressed
as percentages of principal amount) plus accrued interest to but excluding the
Redemption Date (subject to the right of Holders of Record on the relevant
Regular Record Date to receive interest due on an Interest Payment Date that is
on or prior to the Redemption Date), if redeemed during the 12-month period
beginning October 1 of the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---------------------------------------- ----------
<S> <C>
1999.................................... 105.8750%
2000.................................... 102.9375%
2001 and thereafter..................... 100.0000%
</TABLE>
(sec.sec. 203, 1101, 1105 and 1107)
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If less than all the Notes are to be redeemed, the Trustee shall select, in
such manner as it shall deem fair and appropriate, the particular Notes to be
redeemed or any portion thereof that is an integral multiple of $1,000. (sec.
1104)
The Notes will not have the benefit of any sinking fund obligation.
Initially, the Trustee will act as Paying Agent and Registrar. The Notes
may be presented for registration of transfer and exchange at the offices of the
Registrar. (sec. 305)
FORM, DENOMINATION AND BOOK-ENTRY PROCEDURES
The Notes initially will be represented by a global Note or Notes
(collectively, the "Book-Entry Notes") in definitive fully registered form
without coupons, which will be deposited with, or on behalf of, The Depository
Trust Company ("DTC") as depositary and registered in the name of DTC's nominee.
Accordingly, beneficial interests in the Notes will be shown on, and transfers
thereof will be effected only through, records maintained by DTC and its
participants. Except as set forth below, owners of beneficial interests in the
Book-Entry Notes will not be entitled to receive Notes in definitive form and
will not be considered Holders of Notes under the Indenture.
The Depositary has advised FFC and the Underwriters as follows: The
Depositary is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered under the Exchange Act. The Depositary was created
to hold securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own the Depositary.
Access to the Depositary's book-entry system is also available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly. The
Depositary agrees with and represents to its participants that it will
administer its book-entry system in accordance with its rules and by-laws and
requirements of law.
In connection with the issuance of the Book-Entry Notes, DTC will credit on
its book-entry registration and transfer system the respective principal amounts
of Book-Entry Notes represented by the global Note or Notes deposited with it to
the accounts of institutions that have accounts with DTC or its nominee
("participants") and that beneficially own (or hold for persons who beneficially
own) such Book-Entry Notes. Ownership of beneficial interests in Book-Entry
Notes will be limited to participants or persons that may hold beneficial
interests through participants. Ownership of beneficial interests in Book-Entry
Notes will be shown on, and the transfer of those ownership interests will be
effected only through, records maintained by DTC (with respect to participants'
interests) or such participants (with respect to persons that may hold
beneficial interests in the Book-Entry Notes through such participants).
So long as DTC or its nominee is the registered holder and owner of a
global Note representing Book-Entry Notes, DTC or such nominee, as the case may
be, will be considered the sole owner and Holder of the related Book-Entry Notes
for all purposes of such Book-Entry Notes and for all purposes under the
Indenture. Therefore, neither FFC, the Trustee nor any paying agent has any
direct responsibility or liability for the payment of principal or interest or
premium, if any, on the Notes to owners of beneficial interests in the
Book-Entry Notes. DTC has advised FFC and the Trustee that its current practice
is, upon receipt of any payment of principal or interest or premium, if any, to
immediately credit the accounts of the participants with such payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the Book-Entry Notes as shown in the records of DTC. Payments by
participants and indirect participants to owners of beneficial interests in the
Book-Entry Notes will be governed by standing instructions and customary
practices, as is now the case with securities held for
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<PAGE> 57
the accounts of customers registered in "street name," and will be the
responsibility of the participants or indirect participants.
Owners of beneficial interests in the Book-Entry Notes will not be entitled
to have Notes registered in their names, will not receive or be entitled to
receive physical delivery of certificated Notes in definitive form and will not
be considered to be the owners or holders of any Notes under the Indenture or of
such Book-Entry Notes, unless (a) DTC notifies FFC that it is unwilling or
unable to continue as depositary for such Book-Entry Notes, (b) DTC ceases to be
a clearing agency registered under the Securities Exchange Act of 1934, (c) FFC
delivers to the Trustee a written notice that all Book-Entry Notes shall be
exchangeable for definitive Notes or (d) an Event of Default or event that after
notice or lapse of time, or both, would become an Event of Default has occurred
and is continuing with respect to the Notes.
Payment of principal of and premium and interest, if any, on Book-Entry
Notes will be made to the depositary or its nominee, as the case may be, as the
registered owner and holder thereof.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that FFC believes to be reliable, but FFC takes
no responsibility for the accuracy thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON FFC FUNDED DEBT
FFC may not Incur any Funded Debt unless, after giving effect to the
Incurrence of such Debt and the receipt and application of the proceeds thereof,
FFC's Funded Debt would be less than 90% of FFC's Tangible Net Worth at the date
of the most recent financial statements filed with the Commission and, of this
amount, Funded Debt of FFC that would rank by its terms, in bankruptcy or
otherwise, pari passu with the Notes would be less than 50% of FFC's Tangible
Net Worth as of the date of the most recent financial statements filed with the
Commission.
Notwithstanding the foregoing limitation, FFC may Incur Funded Debt to
renew, extend, refinance or refund (each, a "refinancing") any outstanding
Funded Debt (or Debt which at the time of original Incurrence was Funded Debt)
Incurred in compliance with the Indenture in an aggregate principal amount not
to exceed the principal amount of the Debt so refinanced plus the amount of any
premium required to be paid in connection with such refinancing pursuant to the
terms of the Debt so refinanced or the amount of any premium reasonably
determined by FFC as necessary to accomplish such refinancing by means of a
tender offer or privately negotiated repurchase, plus the expenses of FFC
incurred in connection with such refinancing; provided, however, that Funded
Debt the proceeds of which are used to refinance Debt which is pari passu to the
Notes or subordinate in right of payment to the Notes shall only be permitted if
(A) in the case of any refinancing of Debt which is pari passu to the Notes, the
refinancing Debt is made pari passu to the Notes or subordinated to the Notes,
and, in the case of any refinancing of Debt which is subordinated to the Notes,
the refinancing Debt constitutes Subordinated Debt and (B) in either case, the
refinancing Funded Debt by its terms, or by the terms of any agreement or
instrument pursuant to which such Funded Debt is issued, (x) does not provide
for payments of principal of such Funded Debt at the stated maturity thereof or
by way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by FFC (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of acceleration
of such Funded Debt upon any event of default thereunder), in each case prior to
the stated maturity of the Debt being refinanced and (y) does not permit
redemption or other retirement (including pursuant to an Offer to Purchase made
by FFC) of such Funded Debt at the option of the holder thereof prior to the
final stated maturity of the Debt being refinanced, other than a redemption or
other retirement at the option of the holder of such Funded Debt (including
pursuant to an Offer to Purchase made by FFC) which is conditioned upon a change
substantially similar to those described under "Change of Control". (sec. 1008)
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LIMITATION ON RESTRICTED PAYMENTS
FFC may not, and may not permit any Subsidiary of FFC to, directly or
indirectly, (i) declare or pay any dividend, or make any distribution, in
respect of its Capital Stock or to the holders thereof (including pursuant to a
merger or consolidation of FFC or such Subsidiary, but excluding (a) any pro
rata dividend or distribution payable solely in shares of its Capital Stock or
in options, warrants or rights to acquire shares of its Capital Stock, (b) any
dividends or distributions payable by any Subsidiary of FFC to FFC or another
Subsidiary and (c) any dividends or distributions payable by any Subsidiary of
FFC pro rata to the holders of such Subsidiary's Capital Stock), (ii) purchase,
redeem, or otherwise retire or acquire for value (a) any Capital Stock of FFC,
any Subsidiary of FFC (other than a Wholly Owned Subsidiary) or any Related
Person of FFC or (b) any options, warrants or rights to purchase or acquire
shares of Capital Stock of FFC, any Subsidiary of FFC or any Related Person of
FFC or any securities convertible or exchangeable into shares of Capital Stock
of FFC, any Subsidiary of FFC or any Related Person of FFC, (iii) make any
Investment in any Person, other than a Permitted Investment, (iv) redeem,
defease, repurchase, retire or otherwise acquire or retire for value prior to
any scheduled maturity, repayment or sinking fund payment, Debt of FFC (other
than the Notes and other than in exchange for, or in an amount not in excess of
the net proceeds of, a substantially concurrent issue and sale (other than to a
Subsidiary of FFC) of shares of any class of Capital Stock (other than
Redeemable Stock) of FFC), and (v) make any Investment in any Unrestricted
Subsidiary (each of clauses (i) through (v) being a "Restricted Payment") if:
(1) an Event of Default, or an event that with the lapse of time or the giving
of notice, or both, would constitute an Event of Default, shall have occurred
and be continuing, (2) upon giving effect to such Restricted Payment, FFC would
not be able to Incur $1 of additional Debt in accordance with the limitations
described under the first paragraph of "Limitation on FFC Funded Debt", or (3)
upon giving effect to such Restricted Payment, the aggregate of all Restricted
Payments from the date of the Indenture exceeds the sum of: (a) $7.5 million
plus (b) 50% of cumulative Consolidated Adjusted Net Income after June 30, 1994
through the last day of the last full fiscal quarter immediately preceding such
Restricted Payment for which quarterly or annual financial statements of FFC are
available (or if such cumulative Consolidated Adjusted Net Income shall be a
deficit, minus 100% of such deficit) plus (c) 100% of the aggregate net
proceeds, including the fair value of property other than cash (determined in
good faith by the Board of Directors of FFC as evidenced by a resolution of the
Board of Directors filed with the Trustee), (without duplication, including the
issuance of Capital Stock in (iv) above) from (x) the issuance of Capital Stock
(other than Redeemable Stock) of FFC; (y) the issuance or exercise of options,
warrants or other rights on Capital Stock (other than Redeemable Stock) of FFC
(other than to a Subsidiary of FFC); and (z) the amount by which Debt or
Redeemable Stock of FFC is reduced on FFC's balance sheet upon the conversion of
such Debt or Redeemable Stock into Capital Stock (other than Redeemable Stock)
of FFC (other than by a Subsidiary of FFC) after the date of the Indenture plus
(d) any dividends or distributions or other similar payments paid to FFC or any
Subsidiary of FFC by any Unrestricted Subsidiary after the date of the Indenture
plus (e) the amount of any repayment (other than a dividend, distribution or
other similar payment) to FFC or a Subsidiary of FFC of any Investment in, an
Unrestricted Subsidiary, Affiliate of FFC or Related Person of FFC to the extent
such Investment resulted in the making of a Restricted Payment; provided that,
in the case of clauses (d) and (e), Consolidated Adjusted Net Income for the
purposes of clause (b) above only, shall not include the amount of any such
payments.
The foregoing provision will not be violated by reason of (i) the payment
of any dividend within 60 days after the declaration thereof if at the
declaration date such payment would have complied with the foregoing provision,
(ii) the repurchase, redemption or other acquisition or retirement of any shares
of any class of Capital Stock of FFC or any Related Person of FFC, in exchange
for (including any such exchange pursuant to the exercise of a conversion right
or privilege in connection with which cash is paid in lieu of the issuance of
fractional shares or scrip) or out of the net cash proceeds of a substantially
concurrent issue and sale of shares of Capital Stock (other than Redeemable
Stock) of FFC, (iii) the purchase, redemption, acquisition, cancellation or
other retirement for value of shares of Capital Stock of FFC, options on any
such shares or related stock appreciation rights or similar securities held by
officers or employees or former officers or employees (or their estates or
beneficiaries under their estates) or by
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any employee benefit plan, upon death, disability, retirement or termination of
employment or pursuant to the terms of any employee benefit plan or any other
agreement under which such shares of stock or related rights were issued,
provided that the aggregate cash consideration paid for such purchase,
redemption, acquisition, cancellation or other retirement of such shares of
Capital Stock after the date of the Indenture does not exceed $1 million in any
fiscal year; (iv) the repurchase, redemption, defeasance, retirement,
refinancing, acquisition for value or payment of principal of any Subordinated
Debt (other than Redeemable Stock) (a "refinancing") through the issuance of new
Subordinated Debt, provided that any such new Debt (1) shall be in a principal
amount that does not exceed the principal amount so refinanced (or, if such
Subordinated Debt provides for an amount less than the principal amount thereof
to be due and payable upon a declaration or acceleration thereof, then such
lesser amount calculated as of the date of determination), plus the amount of
any premium required to be paid in connection with such refinancing pursuant to
the terms of the Debt so refinanced or the amount of any premium reasonably
determined by FFC as necessary to accomplish such refinancing by means of a
tender offer or privately negotiated repurchase, plus the expenses of FFC
incurred in connection with such refinancing; (2) has an average life to stated
maturity greater than or equal to the remaining average life to stated maturity
of the Debt so refinanced (or, if shorter, the Notes); and (3) is expressly
subordinated in right of payment to the Notes at least to the same extent as the
Subordinated Debt to be refinanced, (v) unsecured loans to directors or
executive officers of FFC or any of its Subsidiaries made after the date of the
Indenture not in the ordinary course of business in an amount not to exceed $1.5
million in the aggregate at any one time outstanding, (vi) mortgage and consumer
loans to officers, directors or employees of FFC or its Subsidiaries made by the
Bank after the date of the Indenture in the ordinary course of business, or
(vii) payments made pursuant to tax sharing or tax allocation agreements from
Subsidiaries of FFC to FFC or another Subsidiary of FFC. (sec. 1009)
LIMITATIONS CONCERNING DISTRIBUTIONS BY SUBSIDIARIES
FFC may not, and may not permit any Subsidiary of FFC to, suffer to exist
any consensual encumbrance or restriction (other than pursuant to a Regulatory
Requirement) on the ability of such Subsidiary (i) to pay directly or indirectly
dividends or make any other distributions in respect of its Capital Stock or pay
any Debt or other obligation owed to FFC or any other Subsidiary of FFC; (ii) to
make loans or advances to FFC or any Subsidiary of FFC; or (iii) to transfer any
of its property or assets to FFC. Notwithstanding the foregoing, FFC may permit
a Subsidiary to suffer to exist any such encumbrance or restriction (a) pursuant
to an agreement relating to any Debt Incurred by such Subsidiary prior to the
date on which such Subsidiary was acquired, directly or indirectly, by FFC and
outstanding on such date and not Incurred in anticipation of becoming a
Subsidiary of FFC; (b) pursuant to any agreement existing on the date of the
Indenture, and any extension or renewal thereof; (c) pursuant to agreements
governing Bank Subordinated Debt that (1) prohibit distributions when (A) an
event of default under such agreement has occurred, or (B) after giving effect
to such distribution, the Bank would fail to meet the regulatory capital
standards necessary to be deemed a "Tier 1 Institution" under OTS regulations,
or (2) provide for restrictions on distributions that are no more restrictive
than the provisions set forth in the "Limitations on Restricted Payments"
covenant described above, or (d) pursuant to an agreement effecting a renewal,
refunding, refinancing or extension of Debt or Preferred Stock Incurred pursuant
to an agreement referred to in clause (a) above; provided, however, that the
provisions contained in such renewal, refunding, refinancing or extension
agreement relating to such encumbrance or restriction are no more restrictive in
any material respect than the provisions contained in the agreement the subject
thereof in the reasonable judgment of the Board of Directors of FFC as evidenced
by a resolution of the Board of Directors. (sec. 1010)
LIMITATION ON DISPOSITIONS OF CERTAIN CAPITAL STOCK AND ASSETS OF SUBSIDIARIES
THAT ARE INSURED DEPOSITORY INSTITUTIONS
FFC may not, and may not permit any Subsidiary of FFC to, directly or
indirectly, (i) transfer, convey, sell, lease or otherwise dispose of any
outstanding Common Stock or Voting Stock of any Subsidiary of FFC that is an
Insured Depository Institution (a "Bank Subsidiary") to any Person other
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than FFC or a Wholly Owned Subsidiary of FFC or such Subsidiary, unless (a) such
transfer, conveyance, sale, lease or other disposition shall consist of a sale
of all of the Common Stock and Voting Stock of such Bank Subsidiary owned by FFC
and any Subsidiary of FFC, (b) FFC receives consideration at the time of such
sale at least equal to the fair market value of the Common Stock or Voting Stock
sold (as determined in good faith by the Board of Directors of FFC), of which
the lesser of 75% of such consideration or the then outstanding principal
balance of and accrued interest on the Notes shall be in the form of cash or
readily marketable cash equivalents, and (c) the Net Available Proceeds from
such sale are applied in accordance with the next sentence, (ii) permit any Bank
Subsidiary to merge or consolidate with any other Person either unless (a) the
surviving entity is FFC, a Wholly Owned Subsidiary of FFC or, in the case of a
Bank Subsidiary that is a Subsidiary of another Subsidiary of FFC, such other
Subsidiary or a Wholly Owned Subsidiary thereof, or (b) FFC receives
consideration at the time of the merger or consolidation at least equal to the
fair market value of the properties and assets of the Bank Subsidiary that is
merged or consolidated (as determined in good faith by the Board of Directors of
FFC), of which the lesser of 75% of such consideration or the then outstanding
principal balance of and accrued interest on the Notes shall be in the form of
cash or readily marketable cash equivalents and the Net Available Proceeds from
such sale are applied in accordance with the next sentence, (iii) permit any
Bank Subsidiary to convey or transfer its properties and assets substantially as
an entirety to any Person except FFC, a Wholly Owned Subsidiary of FFC or, in
the case of a Bank Subsidiary that is a Subsidiary of another Subsidiary of FFC,
such other Subsidiary or a Wholly Owned Subsidiary thereof unless FFC receives
consideration at the time of the conveyance or transfer at least equal to the
fair market value of the properties and assets sold (as determined in good faith
by the Board of Directors of FFC), of which the lesser of 75% of such
consideration or the then outstanding principal balance of and accrued interest
on the Notes shall be in the form of cash or readily marketable cash equivalents
and the Net Available Proceeds from such sale are applied in accordance with the
next sentence, and (iv) permit any Bank Subsidiary to issue shares of its Common
Stock or Voting Stock (other than directors' qualifying shares), or securities
convertible into, or warrants, rights or options to subscribe for or purchase
shares of, its Common Stock or Voting Stock, to any Person other than FFC or a
Wholly Owned Subsidiary of FFC or, in the case of a Bank Subsidiary that is a
Subsidiary of another Subsidiary of FFC, such other Subsidiary or a Wholly Owned
Subsidiary thereof. Net Available Proceeds from transactions described in the
preceding sentence shall be applied, within 270 days from the later of (x) the
closing of any such transaction or (y) the receipt of such Net Available
Proceeds, (i) first, to the extent FFC elects, to make an Investment in an
Insured Depository Institution, (ii) second, to the extent FFC elects, to
prepay, repay or repurchase Debt of a Wholly Owned Subsidiary (other than Debt
owed to FFC or an Affiliate of FFC), (iii) third, to the extent Net Available
Proceeds exceed the amount applied in accordance with clauses (i) and (ii)
("Excess Proceeds"), to make an offer to apply the Excess Proceeds, once such
Excess Proceeds exceed $5 million, to make an Offer to Purchase the Notes at a
purchase price in cash equal to 100% of their principal amount plus accrued and
unpaid interest to the date of purchase. To the extent Excess Proceeds exist
after application in accordance with clauses (i), (ii) and (iii), FFC may apply
such Excess Proceeds for any general business purposes not otherwise prohibited
by the Indenture. (sec. 1011)
LIMITATION ON LIENS
FFC will not incur or suffer to exist any Lien other than a Permitted Lien
on (i) the Voting Stock of the Bank (other than directors' qualifying shares) as
security for Debt or (ii) any of its assets (other than the Voting Stock of the
Bank) as security for Funded Debt, without, in the cases of either (i) or (ii),
effectively providing that the Notes will be equally and ratably secured with
(or, in the case of Subordinated Debt, prior to) such Debt. (sec. 1012)
LIMITATION ON TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
FFC may not, and may not permit any Subsidiary of FFC to, enter into any
transaction or series of related transactions with an Affiliate or Related
Person of FFC (other than between FFC and Wholly Owned Subsidiaries of FFC or
between Wholly Owned Subsidiaries of FFC) unless (i) such transaction
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is on terms no less favorable to FFC or such Subsidiary (as conclusively
evidenced by a resolution of the Board of Directors of FFC) than those that
could be obtained in a comparable arm's length transaction with an entity that
is not an Affiliate or a Related Person of the Company, (ii) with respect to a
transaction or series of transactions involving aggregate value in excess of
$2.5 million, the transaction or series of transactions is approved by a
majority of the Board of Directors of FFC and (iii) with respect to a
transaction or series of transactions not reported to the OTS involving
aggregate value in excess of $10 million, FFC delivers to the Trustee an opinion
of a nationally recognized investment banking firm stating that the transaction
or series of transactions is fair (from a financial point of view) to FFC.
Notwithstanding the foregoing, the following shall not be deemed to be a
transaction for purposes of the foregoing: (i) the issuance by FFC or any
Subsidiary of FFC of Debt otherwise permitted under the Indenture, (ii) any
issuance of securities, or other payments, awards, or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, benefit
plans, stock options and stock ownership plans approved by the Board of
Directors of FFC or any Subsidiary of FFC, (iii) loans or advances to officers,
directors and employees of FFC or any Subsidiary of FFC made in the ordinary
course of business or approved by the Board of Directors, (iv) any transaction
with an officer or director of FFC or any Subsidiary of FFC entered into in the
ordinary course of business, (v) the payment of reasonable fees to directors of
FFC and of any Subsidiary of FFC who are not employees of FFC or any Subsidiary
of FFC, (vi) reasonable and customary indemnification arrangements between FFC
or any Subsidiary of FFC and their respective directors and officers, (vii)
transactions between FFC or its Subsidiaries, on the one hand, and the
Underwriters, their respective Affiliates, or any other investment banking firm
and its Affiliates on the other hand, involving the provision of financial,
consulting or underwriting services, (viii) any Permitted Investment (ix) any
payments, distributions or dividends permitted under the provisions of the
"Limitation on Restricted Payments" covenant, (x) payments made by FFC or any
Subsidiary of FFC pursuant to any tax sharing or tax allocation agreement
between FFC and any Subsidiary of FFC, or (xi) allocation of corporate overhead
expenses by FFC to any Subsidiary of FFC. (sec. 1013)
MAINTENANCE OF STATUS
FFC will cause the Bank to do all things necessary to maintain the Bank's
status as an "insured depository institution" within the meaning of the Federal
Deposit Insurance Act. (sec. 1014)
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, FFC will be required to make an
Offer to Purchase all Outstanding Notes at a purchase price equal to 101% of
their principal amount plus accrued interest to the date of purchase. A "Change
of Control" will be deemed to have occurred in the event that, after the date of
the Indenture, either (a) any Person or any Persons acting together that would
constitute a group (for purposes of Section 13(d) of the Exchange Act, or any
successor provision thereto) (a "Group"), together with any Affiliates or
Related Persons thereof, shall beneficially own (as defined in Rule 13d-3 under
the Exchange Act, or any successor provision thereto) at least 50% of the
aggregate voting power of all classes of Capital Stock of FFC entitled to vote
generally in the election of directors; or (b) any Person or Group, together
with any Affiliates or Related Persons thereof, shall succeed in having a
sufficient number of its nominees elected to the Board of Directors of FFC such
that such nominees, when added to any existing director remaining on the Board
of Directors of FFC after such election who is an Affiliate or Related Person of
such Group, will constitute a majority of the Board of Directors of FFC.
(sec. 1015)
In the event that FFC makes an Offer to Purchase the Notes, FFC intends to
comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act.
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NOTICE REQUIREMENT
FFC will deliver a notice to the Trustee within 30 days after the Bank
receives notice from the OTS that it has ceased to be a "Tier 1 association" as
defined in the OTS regulation regarding capital distributions. (sec. 1016)
PROVISION OF FINANCIAL INFORMATION
Whether or not FFC is subject to Section 13(a) or 15(d) of the Exchange
Act, or any successor provision thereto, FFC shall prepare the annual reports,
quarterly reports and other documents which FFC would have been required to file
with the Commission pursuant to such Section 13(a) or 15(d) or any successor
provision thereto if FFC were so required, and, unless such filing is not
permitted under the Exchange Act, file such reports and other documents with the
Commission on or prior to the respective dates (the "Required Filing Dates") by
which FFC would have been required so to file such documents if FFC were so
required. FFC shall also in any event (a) within 15 days of each Required Filing
Date (i) transmit by mail to all Holders, as their names and addresses appear in
the Security Register, without cost to such Holders, and (ii) file with the
Trustee copies of such annual reports, quarterly reports and other documents and
(b) if filing such documents by FFC with the Commission is not permitted under
the Exchange Act, promptly upon written request supply copies of such documents
to any prospective Holder or prospective purchaser of Notes. (sec. 1017)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
FFC (i) may not consolidate with or merge into any other Person, or permit
any other Person to consolidate with or merge into FFC, and (ii) may not,
directly or indirectly, transfer, convey, sell, lease or otherwise dispose of
all or substantially all of its consolidated properties and assets; unless: (1)
in a transaction in which FFC does not survive or in which FFC directly or
indirectly transfers, conveys, sells, leases or otherwise disposes of all or
substantially all of its consolidated assets, the successor entity is organized
under the laws of the United States of America, any State thereof or the
District of Columbia and shall expressly assume, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee, all
of FFC's obligations under the Indenture; (2) immediately after giving effect to
such transaction and treating any Debt which becomes an obligation of FFC or a
Subsidiary as a result of such transaction as having been incurred by FFC or
such Subsidiary at the time of the transaction, no Event of Default or event
that with the passing of time or the giving of notice, or both, would constitute
an Event of Default shall have happened and be continuing; and (3) immediately
after giving effect to such transaction, the Consolidated Adjusted Net Worth of
FFC or the successor entity is equal to or greater than that of FFC immediately
prior to the transaction. (sec. 801)
The foregoing covenant shall not apply to the consolidation or merger of
any Wholly Owned Subsidiary of FFC with or into FFC, provided that FFC is the
surviving entity.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (sec. 101)
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person.
"Bank Subordinated Debt" means Debt of any Bank Subsidiary which is
permitted under Regulatory Requirements to be included in the capital of the
Bank for regulatory purposes.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
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principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Adjusted Net Income" of any Person means for any period the
net income (or loss) of such Person and its Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by such Person or a Subsidiary of
such Person in a pooling-of-interests transaction for any period prior to the
date of such transaction, (b) the net income (but not net loss) of any
Subsidiary of such Person which is subject to restrictions which prevent the
payment of dividends or the making of distributions to such Person to the extent
of such restrictions, (c) the net income (or loss) of any Person that is not a
Subsidiary of such Person except to the extent of the amount of dividends or
other distributions actually paid to such Person by such other Person during
such period, (d) all extraordinary gains (other than tax credits to the extent
they result in cash benefits to the owner thereof) and extraordinary losses;
provided, further, that there shall be added thereto the aggregate amount of
dividends paid with respect to preferred stock of Subsidiaries of FFC to the
extent such amount was otherwise deducted in the foregoing calculation of
Consolidated Adjusted Net Income.
"Consolidated Adjusted Net Worth" of any Person means the consolidated
stockholders' equity of such Person and its Subsidiaries, determined on a
consolidated basis in accordance with generally accepted accounting principles,
less amounts attributable to Redeemable Stock of such Person; provided that,
with respect to FFC, adjustments following the date of the Indenture to the
accounting books and records of FFC in accordance with Accounting Principles
Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise for
goodwill resulting from the application of pushdown accounting from the
acquisition of control of FFC by another Person shall not be given effect to.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) all Capital Lease
Obligations, (v) every obligation of such Person issued or assumed as the
deferred purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business), (vi)
the maximum fixed redemption or repurchase price of Redeemable Stock of such
Person at the time of determination, (vii) every payment obligation of such
Person other than the Bank or any other Insured Depository Institution under
interest rate swap or similar agreements or foreign currency hedge, exchange or
similar agreements at the time of determination and (viii) every obligation of
the type referred to in clauses (i) through (vii) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has Guaranteed or is responsible or liable for, directly or indirectly, as
obligor, Guarantor or otherwise. Notwithstanding the foregoing, Debt shall not
include any obligations of FFC with respect to any Wholly Owned Bank Subsidiary
pursuant to any Regulatory Requirement.
"Funded Debt" means all Debt of any Person (including the Notes), whether
secured or unsecured, which by its terms has a final maturity, duration or
payment date more than one year from the date on which Funded Debt is to be
determined (including any Debt of any Person having a final maturity, duration
or payment date within one year from such date which, pursuant to the terms of
any agreement under which it is issued or otherwise, may be renewed or extended
at the option of such Person for more than one year from such date).
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"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing any Debt of any other Person (the "primary obligor") in
any manner, whether directly or indirectly, and including, without limitation,
any obligation of such Person (i) to purchase or pay (or advance or supply funds
for the purchase of payment of) such Debt or to purchase (or to advance or
supply funds for the purchase of) any security for the payment of such Debt,
(ii) to purchase property, securities or services for the purpose of assuring
the holder of such Debt of the payment of such Debt, or (iii) to maintain
working capital, equity capital or other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to pay such
Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings
correlative to the foregoing); provided, however, that the "Guarantee" by any
Person shall not include (a) endorsements by such Person for collection or
deposit, in either case, in the ordinary course of business or (b) any
obligations of FFC with respect to any Wholly Owned Bank Subsidiary pursuant to
any Regulatory Requirement.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person; provided, however, that a change in generally accepted
accounting principles that results in an obligation of such Person that exists
at such time becoming Debt shall not be deemed an Incurrence of such Debt.
"Investment" in any Person means (without duplication) the acquisition or
ownership of Capital Stock, bonds, notes, debentures or other securities or
evidence of Debt of such Person, any capital contribution to such Person, any
deposit with, or advance, loan or other extension of credit to, such Person, any
Guarantee of, or other contingent obligation with respect to, Debt or other
liability of such Person or any amount committed to be advanced, lent or
extended to such Person.
"Insured Depository Institution" means an insured depository institution
within the meaning of 12 U.S.C. sec. 1813(c)(2) or any successor law, rule or
regulation.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"Net Available Proceeds" from any disposition by any Person means cash or
readily marketable cash equivalents received (including by way of sale or
discounting of a note, instalment receivable or other receivable) therefrom by
such Person, net of (i) all legal, title and recording tax expenses, commissions
and other fees and expenses Incurred and all federal, state, provincial, foreign
and local taxes required to be accrued as a liability as a consequence of such
disposition, (ii) all payments made by such Person or its Subsidiaries on any
Debt which is secured by such assets in accordance with the terms of any Lien
upon or with respect to such assets or which must by the terms of such Lien, or
in order to obtain a necessary consent to such disposition or by applicable law,
be repaid out of the proceeds from such disposition, (iii) all distributions and
other payments made to minority interest holders in Subsidiaries of such Person
or joint ventures as a result of such disposition, and (iv) appropriate amounts
to be provided by such Person or any Subsidiary thereof, as the case may be, as
a reserve in accordance with generally accepted accounting principles against
any liabilities associated with such assets and retained by such Person or such
Subsidiary thereof, as the case may be, after such disposition, including,
without limitation, liabilities under any indemnification obligations and
severance and other employee-termination costs associated with such disposition.
"Offer to Purchase" means a written offer (the "Offer") sent by FFC by
first class mail, postage prepaid, to each Holder at his address appearing in
the Security Register on the date of the Offer offering to purchase up to the
principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to this Indenture). Unless
otherwise required by applicable law, the
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Offer shall specify an expiration date (the "Expiration Date") of the Offer to
Purchase which shall be, subject to any contrary requirements of applicable law,
not less than 30 days or more than 60 days after the date of such Offer and a
settlement date (the "Purchase Date") for purchase of Notes within five Business
Days after the Expiration Date. FFC shall notify the Trustee at least 15
Business Days (or such shorter period as is acceptable to the Trustee) prior to
the mailing of the Offer of FFC's obligation to make an Offer to Purchase, and
the Offer shall be mailed by FFC or, at FFC's request, by the Trustee in the
name and at the expense of FFC. The Offer shall contain information concerning
the business of FFC and its Subsidiaries which FFC in good faith believes will
enable such Holders to make an informed decision with respect to the Offer to
Purchase (which at a minimum will include (i) the most recent annual and
quarterly financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the documents
required to be filed with the Trustee (which requirements may be satisfied by
delivery of such documents together with the Offer), (ii) a description of
material developments in FFC's business subsequent to the date of the latest of
such financial statements referred to in Clause (i) (including a description of
the events requiring FFC to make the Offer to Purchase), (iii) if applicable,
appropriate pro forma financial information concerning the Offer to Purchase and
the events requiring FFC to make the Offer to Purchase and (iv) any other
information required by applicable law to be included therein. The Offer shall
contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding Notes offered to
be purchased by FFC pursuant to the Offer to Purchase (including, if less
than 100%, the manner by which such has been determined) (the "Purchase
Amount");
(4) the purchase price to be paid by FFC for each $1,000 aggregate
principal amount of Notes accepted for payment (as specified pursuant to
the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by FFC pursuant to the Offer to Purchase will continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender a Note pursuant to the Offer
to Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if FFC or the Trustee so requires, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to
FFC and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if FFC (or its Paying Agent) receives, not later than the
close of business on the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the principal
amount of the Note the Holder tendered, the certificate number of the Note
the Holder tendered and a statement that such Holder is withdrawing all or
a portion of his tender;
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(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, FFC shall purchase all such Notes and (b) if
Notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, FFC shall
purchase Notes having an aggregate principal amount equal to the Purchase
Amount on a pro rata basis (with such adjustments as may be deemed
appropriate so that only Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
(12) that in case of any Holder whose Note is purchased only in part,
FFC shall execute, and the Trustee shall authenticate and deliver to the
Holder of such Note without service charge, a new Note or Notes, of any
authorized denomination as requested by such Holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
"Permitted Investments" means (i) any Investment in an Affiliate or Related
Person of FFC which is a Wholly Owned Subsidiary prior to the Investment, (ii)
any Investment of Net Available Proceeds in an Insured Depository Institution
resulting in such institution becoming a Wholly Owned Bank Subsidiary, (iii) any
Investment of Excess Proceeds in accordance with the provisions of the covenant
"Limitation on Dispositions of Certain Capital Stock and Assets of Subsidiaries
that are Insured Depository Institutions", (iv) any extension, renewal or
replacement of Investments of any Person in effect as of the date of the
Indenture, (v) any Investment by an Insured Depository Institution (other than
an Investment in an Unrestricted Subsidiary) permitted in accordance with all
applicable Regulatory Requirements, (vi) any Investment (other than an
Investment in an Unrestricted Subsidiary) that would be permitted to FFC or any
Subsidiary of FFC on the date such Investment is made if FFC on that date were a
multiple savings and loan holding company (as defined in 12 CFR Section 583.12)
in accordance with all applicable Regulatory Requirements, (vii) any investment
in a Person as a result of which such Person becomes a Wholly Owned Subsidiary,
(viii) any payments or contributions of any kind by FFC to a Bank Subsidiary
required pursuant to Regulatory Requirements, or (ix) Investments in the
following types of instruments:
(a) direct obligations of the United States of America or any agency
or instrumentality thereof, or obligations guaranteed by the United States
of America or any agency or instrumentality thereof, provided that such
obligations mature within one year from the date of acquisition thereof;
(b) demand deposit accounts, or certificates of deposit or other
obligations, maturing within one year after acquisition thereof, either
fully insured by the FDIC (or any successor Federal agency) or issued by a
national or state bank, trust or thrift institution having capital, surplus
and undivided profits of at least $250,000,000, and having (or being the
Wholly Owned Subsidiary of a holding company having) a short-term credit
rating, at the time of purchase, within one of the two then-highest rating
categories of Moody's Investors Service or Standard & Poor's Corporation;
or
(c) commercial paper rated at the time of purchase in one of the two
then-highest rating categories by Moody's Investors Service or by Standard
& Poor's Corporation and maturing not more than 270 days from the date of
creation thereof; or
(d) guaranteed investment contracts of insurance companies whose
claims-paying ability at the time of purchase is rated AA/Aa or higher by
Moody's Investors Service or by Standard & Poor's Corporation, provided
that the total amount of investments in such contracts which may constitute
Permitted Investments at any one time pursuant to this section (d) shall
not at any time exceed 20% of FFC's total Permitted Investments; or
(e) repurchase agreements with respect to direct obligations of the
United States of America or any agency or instrumentality thereof, or
obligations guaranteed by the United States of America or any agency or
instrumentality thereof, provided that such repurchase agreements mature
within one year from the date of creation thereof; or
(f) cash.
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"Permitted Lien" means the following:
(i) any Lien existing, or provided for under arrangements existing, at
the date of the Indenture;
(ii) any Lien on Capital Stock of FFC sold or contributed to the
Banks' employee stock ownership plan;
(iii) any Lien arising by reason of (1) any judgment, decree or order
of any court or other governmental authority, if appropriate legal
proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes, assessments or similar charges not yet delinquent or
which are being contested in good faith; (3) security for the payment of
insurance-related obligations (including but not limited to in respect of
deductibles, self-insured retention amounts and premiums and adjustments
thereto); (4) deposits or pledges in connection with bids, tenders, leases
and contracts (other than contracts for the payment of money); (5) zoning
restrictions, easements, licenses, reservations, provisions, covenants,
conditions, waivers, restrictions on the use of property or minor
irregularities of title (and with respect to leasehold interests,
mortgages, obligations, liens and other encumbrances incurred, created,
assumed or permitted to exist and arising by, through or under a landlord
or owner of the leased property, with or without consent of the lessee),
none of which materially impairs the use of any parcel of property material
to the operation of the business of FFC and its Subsidiaries taken as a
whole or the value of such property for the purpose of such business; (6)
deposits or pledges to secure public or statutory obligations, progress
payments, surety and appeal bonds or other obligations of like nature
incurred in the ordinary course of business; (7) title defects,
encumbrances, easements, reservations of, or rights of others for, rights
of way, sewers, electric lines, telegraph or telephone lines and other
similar purposes or zoning or other restrictions as to the use of real
property not materially interfering with the ordinary conduct of the
business of FFC and its Subsidiaries taken as a whole; or (8) operation of
law, in favor of landlords, mechanics, carriers, warehousemen, materialmen,
laborers, employees, suppliers, banks or others, incurred in the ordinary
course of business for sums which are not yet delinquent or are being
contested in good faith by negotiations or by appropriate proceedings which
suspend the collection thereof;
(iv) any Lien on any computer or management information systems
equipment acquired after the date of the Indenture; and
(v) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clause (i) (in addition to any
such extension, renewal, refinancing or replacement permitted pursuant to
such clause) so long as the amount of security is not increased thereby.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms or otherwise is required to be redeemed prior to the final
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to the final Stated Maturity of the Notes.
"Regulatory Requirement", as to any Person, means any law, ordinance,
administrative or governmental rule, regulation, official interpretation
applicable to it or any of its properties, any formal or informal written
demand, directive or notice to such Person by any administrative or governmental
agency requiring or prohibiting action by such Person, any written agreement
between any administrative or governmental agency and such Person, or any order
or decree of any court or governmental agency or body having jurisdiction over
such Person or any of its properties including any such order or directive by
the OTS applicable to OTS regulated institutions generally, including such
Person.
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"Related Person" of any Person means any other Person directly or
indirectly owning (a) 10% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 10% or more of the
equity interest in such Person) or (b) 10% or more of combined voting power of
the Voting Stock of such Person.
"Subordinated Debt" means Debt of FFC as to which the payment of principal
of (and premium, if any) and interest and other payment obligations in respect
of such Debt shall be subordinate to the prior payment in full of the Notes to
at least the following extent: (i) no payments of principal of (or premium, if
any) or interest on or otherwise due in respect of such Debt may be permitted
for so long as any default in the payment of principal (or premium, if any) or
interest on the Notes exists; (ii) in the event that any other default that with
the passing of time or the giving of notice, or both, would constitute an event
of default exists with respect to the Notes, upon notice by 25% or more in
principal amount of the Notes to the Trustee, the Trustee shall have the right
to give notice to FFC and the holders of such Debt (or trustees or agents
therefor) of a payment blockage, and thereafter no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
made for a period of 179 days from the date of such notice; and (iii) such Debt
may not (x) provide for payments of principal of such Debt at the stated
maturity thereof or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by FFC
(including any redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each case
prior to the final Stated Maturity of the Notes or (y) permit redemption or
other retirement (including pursuant to an offer to purchase made by FFC) of
such other Debt at the option of the holder thereof prior to the final Stated
Maturity of the Notes (unless the Notes shall no longer then be Outstanding),
other than a redemption or other retirement at the option of the holder of such
Debt (including pursuant to an offer to purchase made by FFC) which is
conditioned upon the change of control of FFC pursuant to provisions
substantially similar to those contained in the Indenture.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person and
one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and power to direct the policies,
management and affairs thereof. For purposes of the Indenture, no Unrestricted
Subsidiary created in accordance with the definition of Unrestricted Subsidiary
shall be deemed to be a Subsidiary of FFC.
"Tangible Net Worth" of any Person means its net worth calculated in
accordance with generally accepted accounting principles, less goodwill.
"Unrestricted Subsidiary" means (1) any entity which, but for its
designation as an Unrestricted Subsidiary by the Board of Directors, would be a
Subsidiary of FFC, but only if (a) neither FFC nor any of its other Subsidiaries
(i) provides credit support for, or a Guarantee of, any Debt of such entity or
any Subsidiary of such entity (including any undertaking, agreement or
instrument evidencing such Debt) or (ii) is directly or indirectly liable for
any Debt of such entity or any Subsidiary of such entity, and (b) no default
with respect to any Debt of such entity or any Subsidiary of such entity
(including any right which the holders thereof may have to take enforcement
action against such entity or Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Debt of FFC and its Subsidiaries to
declare a default on such other Debt or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity and (2) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary (other than the Bank or its successor) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, any other Subsidiary of FFC which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary, provided that either (x) the Subsidiary to be so designated has
total assets of $1,000 or less or (y) immediately after giving pro forma effect
to such designation, FFC would then be permitted to make a Restricted Payment
pursuant to the "Limitation on Restricted Payments" covenant
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in an amount equal to the greater of (A) the aggregate amount of all Investments
made by FFC and all Subsidiaries of FFC in such proposed Unrestricted Subsidiary
and its Subsidiaries prior to such designation and (B) the Consolidated Adjusted
Net Worth of such proposed Unrestricted Subsidiary, and upon such designation
such amount shall be deemed to be a Restricted Payment. The Board of Directors
may designate any Unrestricted Subsidiary to be a Subsidiary, provided that (i)
had such Unrestricted Subsidiary been a Subsidiary of FFC immediately prior
thereto there would not have occurred and be continuing any Event of Default or
event that with the lapse of time or the giving of notice, or both, would
constitute an Event of Default, and (ii) for purposes of the definition of
"Consolidated Adjusted Net Income," only the net income of such entity for the
period beginning on the date of such designation shall be included therein. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing a certified copy of a resolution with the Trustee and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture: (a) failure to pay
principal of (or premium, if any, on) any Note when due; (b) failure to pay any
interest on any Note when due and payable, continued for 30 days; (c) default in
the payment of principal and interest on Notes required to be repurchased
pursuant to an Offer to Purchase as described under "Limitation on Dispositions
of Certain Capital Stock and Assets of Subsidiaries that are Insured Depository
Institutions" and "Change of Control" when due and payable; (d) failure to
perform or comply with the provisions described under "Mergers, Consolidations
and Certain Sales and Purchases of Assets"; (e) failure to perform any other
covenant or agreement of FFC under the Indenture continued for 60 days after
written notice to FFC, specifying such default, by the Trustee or Holders of at
least 25% in aggregate principal amount of Outstanding Notes; (f) the occurrence
of any event under the terms of any instrument evidencing or securing Debt for
money borrowed by FFC or any Subsidiary of FFC in a principal amount in excess
of $10 million, individually or in the aggregate, (i) which shall consist of the
failure to pay any portion of principal of such Debt when due and payable beyond
any applicable grace period therefor or (ii) which results in such Debt becoming
or being declared due and payable prior to the date on which it would otherwise
have become due and payable; (g) the rendering of a final judgment or judgments
(not subject to appeal and not covered by insurance) against FFC or any
Subsidiary of FFC in an amount in excess of $10 million by a court or courts of
competent jurisdiction which remains undischarged or unbonded or unstayed for a
period of 60 days after the date on which the right to appeal has expired; and
(h) certain events of bankruptcy, insolvency or reorganization affecting FFC or
any Subsidiary of FFC. (sec. 501) Subject to the provisions of the Indenture
relating to the duties of the Trustee in case an Event of Default shall occur
and be continuing, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request or direction of any of
the Holders, unless such Holders shall have offered to the Trustee reasonable
security or indemnity. (sec. 603) Subject to such provisions for the
indemnification of the Trustee, the Holders of a majority in aggregate principal
amount of the Outstanding Notes will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee. (sec. 512)
If an Event of Default (other than an Event of Default described in clause
(h) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in
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aggregate principal amount of Outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the non-payment of accelerated principal, have been cured or waived
as provided in the Indenture. If an Event of Default specified in clause (h)
above occurs, the Outstanding Notes will ipso facto become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder. (sec. 502) For information as to waiver of defaults, see "Modification
and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless also (i) the Holders of at least 25% in aggregate principal
amount of the Outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such proceeding as Trustee,
(ii) the Trustee shall have failed to institute such proceeding within 60 days
and (iii) the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request. (sec. 507) However, such limitations do not apply to a suit
instituted by a Holder of a Note for enforcement of payment of the principal of
and premium, if any, or interest on such Note on or after the respective due
dates expressed in such Note. (sec. 508)
FFC will be required to furnish to the Trustee annually a statement as to
the performance by FFC of certain of its obligations under the Indenture and as
to any default in such performance. (sec. 1018)
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York. (sec. 112)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by FFC and the
Trustee with the consent of the Holders of a majority in aggregate principal
amount of the Outstanding Notes; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Note
affected thereby, (a) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (b) reduce the principal amount of, or the
premium or interest on, any Note, (c) change the place or currency of payment of
principal of, or premium or interest on, any Note, (d) impair the right to
institute suit for the enforcement of any such payment on or with respect to any
Note, (e) reduce the above-stated percentage of Outstanding Notes necessary to
modify or amend the Indenture, (f) reduce the percentage of aggregate principal
amount of Outstanding Notes necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, (g) modify any
provisions of the Indenture relating to the modification and amendment of the
Indenture or the waiver of past defaults or covenants, except as otherwise
specified, or (h) following the mailing of any Offer to Purchase, modify any
Offer to Purchase for the Notes required under the "Limitation on Dispositions
of Certain Capital Stock and Assets of Subsidiaries that are Insured Depository
Institutions" and "Change of Control" covenants contained in the Indenture in a
manner materially adverse to such Holders. (sec. 902)
The Holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by FFC with
certain restrictive provisions of the Indenture. (sec. 1019) Subject to certain
rights of the Trustee, as provided in the Indenture, the Holders of a majority
in aggregate principal amount of the Outstanding Notes, on behalf of all Holders
of Notes, may waive any past default under the Indenture, except a default in
the payment of principal, premium or interest or a default arising from a Change
of Control or in respect of a covenant or provision which according to the
Indenture cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected. (sec. 513)
DEFEASANCE
The Indenture provides that (A) if applicable, FFC will be discharged from
any and all obligations in respect of then Outstanding Notes, other than the
obligation to duly and punctually pay the principal of, and premium and interest
on, the Notes in accordance with the terms of the Notes and the Indenture, or
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(B) if applicable, FFC may omit to comply with certain restrictive covenants,
and that such omission shall not be deemed to be an Event of Default under the
Indenture or the Notes, in either case (A) or (B) upon irrevocable deposit with
the Trustee, in trust, of money and/or U.S. government obligations which will
provide money in an amount sufficient in the opinion of a nationally recognized
accounting firm to pay the principal of and premium, if any, and each
installment of interest, if any, on the Outstanding Notes. With respect to
clause (B), the obligations under the Indenture other than with respect to such
specified covenants and Events of Default shall remain in full force and effect.
Such trust may only be established if, among other things, (i) with respect to
clause (A), if FFC has delivered to the Trustee an opinion of counsel stating
that FFC has received from, or there has been published by, the Internal Revenue
Service a ruling or there has been a change in law, which in the opinion of
counsel provides that Holders of the Notes will not recognize gain or loss for
Federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to Federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or with respect to clause (B), FFC
has delivered to the Trustee an opinion of counsel to the effect that the
Holders of the Notes will not recognize gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit and defeasance had not occurred;
(ii) no Event of Default or event that with the passing of time or the giving of
notice, or both, shall constitute an Event of Default shall have occurred or be
continuing; and (iii) certain other customary conditions precedent are
satisfied. (Article Twelve)
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
or use under the circumstances in the conduct of such person's own affairs.
(sec. 601)
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of FFC, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with FFC or any Affiliate of FFC; provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign. (sec. 608)
The Trustee also serves as the transfer and paying agent for FFC's common
stock and the rights agent for FFC's associated preferred stock purchase rights.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below, and each of the Underwriters has severally agreed to purchase, the
respective principal amount of the Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
------------------------------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co.......................................... $ 35,000,000
Montgomery Securities........................................ 15,000,000
----------------
Total................................................... $ 50,000,000
=============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to pay for all of the Notes, if any are taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering prices set forth on the cover page of this
Prospectus and in part to certain securities dealers at such price less a
concession of 1.50% of the principal amount of the Notes. The Underwriters may
allow, and such dealers may reallow, a concession not to exceed 0.25% of the
principal amount of the Notes to certain brokers and dealers. After the Notes
are released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Underwriters.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that the Underwriters intend to
make a market in the Notes but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Notes.
FFC has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
At June 30, 1994, Goldman, Sachs & Co. and its affiliate, The Goldman Sachs
Group, L.P., beneficially owned 870,468 shares, or 8.23%, of FFC's common stock
on behalf of third parties for which Goldman, Sachs & Co., and The Goldman Sachs
Group, L.P. have voting and/or dispositive power.
VALIDITY OF THE NOTES
The validity of the Notes to which this Prospectus relates will be passed
upon for the Company by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), Los Angeles, California, and for the
Underwriters by Sullivan & Cromwell, Los Angeles, California.
EXPERTS
The financial statements of FFC, at December 31, 1993 and 1992, and for
each of the years in the three-year period ended December 31, 1993, have been
included herein and in the Registration Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, included
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP refers to a change in the method
of accounting for income taxes upon the adoption of Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes.
72
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Statements of Financial Condition -- December 31, 1993 and 1992.......... F-3
Consolidated Statements of Operations -- Years Ended December 31, 1993, 1992 and
1991................................................................................ F-4
Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1993, 1992
and 1991............................................................................ F-5
Consolidated Statements of Cash Flows -- Years Ended December 31, 1993, 1992 and
1991................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
Consolidated Statements of Financial Condition -- June 30, 1994 (unaudited) and
December 31, 1993................................................................... F-24
Consolidated Statements of Operations (unaudited) -- Three-Months and Six-Months Ended
June 30, 1994 and 1993.............................................................. F-25
Consolidated Statements of Cash Flows (unaudited) -- Six-Months Ended June 30, 1994
and 1993............................................................................ F-26
Notes to Consolidated Financial Statements............................................ F-27
</TABLE>
F-1
<PAGE> 74
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 LLP
January 27, 1994
Los Angeles, California
F-2
<PAGE> 75
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1993 AND 1992
ASSETS
<TABLE>
<CAPTION>
1993 1992
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
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 (market 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.
F-3
<PAGE> 76
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Interest income:
Interest on loans and mortgage-backed
securities..................................... $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
losses............................................ 30,150 62,718 88,941
-------- -------- --------
Other income (expense):
Loan and other fees............................... 6,530 5,863 5,972
Gain on sale of loans and mortgage-backed
securities..................................... 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 principle
(Note 9).......................................... -- 4,075 --
-------- -------- --------
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
principle......................................... -- 0.38 --
-------- -------- --------
Earnings (loss) per share........................... $ (0.19) $ 2.04 $ 2.61
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 77
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
RETAINED
EARNINGS LOAN TO
ADDITIONAL (SUBSTANTIALLY ESOP
COMMON PAID-IN RESTRICTED) (NOTES 10 TREASURY
STOCK CAPITAL (NOTE 10) AND 11) STOCK TOTAL
------ ---------- -------------- --------- -------- --------
(IN THOUSANDS)
<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
dividend (Note 10)........... 21 (35) -- -- -- (14)
Exercise of employee stock
options...................... 2 359 -- -- -- 361
Net increase in loan to
employee stock ownership
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 ownership
plan......................... -- -- -- (1,026) -- (1,026)
Treasury stock purchases....... -- -- -- -- (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 ownership
plan......................... -- -- -- 73 -- 73
Benefit from stock option 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.
F-5
<PAGE> 78
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
(IN THOUSANDS)
<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) by operating activities:
Net change in loans and mortgage-backed
securities 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
other liabilities............................. (521) 422 5,543
--------- --------- ---------
Net cash provided (used) by operating
activities.................................... 129,207 138,037 (12,586)
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
securities...................................... 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.
F-6
<PAGE> 79
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
F-7
<PAGE> 80
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
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
F-8
<PAGE> 81
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-9
<PAGE> 82
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES
Loans receivable and mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
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 1992. The
Bank had an
F-10
<PAGE> 83
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) LOANS RECEIVABLE AND MORTGAGE-BACKED SECURITIES (CONTINUED)
allowance for losses related to loans sold with recourse of $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.
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.
The following is a summary of the activity in general loan valuation
allowances for the periods indicated (in thousands):
<TABLE>
<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
Real estate consists of the following:
<TABLE>
<CAPTION>
1993 1992
------- -------
(IN THOUSANDS)
<S> <C> <C>
Real estate held for investment................................ $ 371 $ 385
Real estate acquired by (or deed in lieu of) foreclosure....... 26,878 23,858
------- -------
$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.
F-11
<PAGE> 84
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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>
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.
F-12
<PAGE> 85
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
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 months 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 deposit (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.
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>
F-13
<PAGE> 86
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) DEPOSITS (CONTINUED)
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
Federal Home Loan Bank (FHLB) Advances and other borrowings consist of the
following:
<TABLE>
<CAPTION>
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>
The following is a summary of maturities at December 31, 1993 (in
thousands):
<TABLE>
<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
F-14
<PAGE> 87
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (CONTINUED)
maximum amounts outstanding at any month end during 1993 and 1992 were
$650,033,000 and $594,680,000, respectively.
(9) INCOME TAXES
Income taxes (benefit) consist of the following:
<TABLE>
<CAPTION>
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>
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 income, 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.
F-15
<PAGE> 88
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
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>
<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.
Listed below are the significant components of the net deferred
liability(in thousands):
<TABLE>
<CAPTION>
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.
F-16
<PAGE> 89
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
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.
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 $6,000,000 to the ESOP under a line of
credit loan. At December 31, 1993 and 1992 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.
F-17
<PAGE> 90
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
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 obligations:
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 rendered to
date.................................................. 4,156 3,611 3,414 2,945
------- ------ ------- -------
Shortage of plan assets over the projected benefit
obligation............................................ (1,888) (1,271) (3,414) (2,945)
Unrecognized net loss (gain) from past experience
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 transition....... (230) (321) 510 574
------- ------ ------- -------
Accrued pension liability............................... $(1,142) $ (895) $(2,781) $(2,474)
======= ====== ======= =======
Net pension cost for the year ended December 31, 1993
and December 31, 1992 included the following
components:
Service cost-benefits earned during the period..... $ 396 $ 392 $ 57 $ 54
Interest cost on projected benefit obligation...... 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
F-18
<PAGE> 91
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
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.
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:
<TABLE>
<S> <C>
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
</TABLE>
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>
F-19
<PAGE> 92
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) PARENT COMPANY FINANCIAL INFORMATION
This parent company only financial information should be read in
conjunction with the other notes to consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
(IN THOUSANDS)
<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>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Other income (expense), net......................... $ (78) $ (28) $ (48)
Equity in undistributed net earnings (loss) of
subsidiary........................................ (1,970) 22,132 28,475
------- ------- -------
Net earnings (loss)................................. $(2,048) $22,104 $28,427
======= ======= =======
</TABLE>
F-20
<PAGE> 93
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<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
activities:
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
activities........................................ 73 (1,051) (14)
------- -------- --------
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>
F-21
<PAGE> 94
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>
PROVISION NON NET 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>
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
F-22
<PAGE> 95
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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,
F-23
<PAGE> 96
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
F-24
<PAGE> 97
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents........................................ $ 16,738 $ 17,491
U.S. Government and other securities, at cost (market of $88,645
and $104,282).................................................. 91,719 103,836
Loans receivable................................................. 2,780,636 2,692,036
Mortgage-backed securities (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
Income taxes payable............................................. -- 16,366
Accrued expenses and other liabilities........................... 43,569 37,830
---------- ----------
3,559,467 3,452,825
COMMITMENTS AND CONTINGENT LIABILITIES
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 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>
See accompanying notes to consolidated financial statements.
F-25
<PAGE> 98
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<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
---------- ---------- ---------- ----------
Loss before income taxes............. (44,168) 14,339 (54,542) (13,471)
Income tax benefit................... (18,615) 6,011 (22,874) (5,397)
---------- ---------- ---------- ----------
Net loss............................. $ (25,553) $ 8,328 $ (31,668) $ (8,074)
========== ========== ========== ==========
Loss per share....................... $ (2.42) $ 0.78 $ (3.01) $ (0.77)
========== ========== ========== ==========
Weighted average shares for earnings
per share calculation.............. 10,541,367 10,649,177 10,536,561 10,427,554
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE> 99
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1994 1993
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $ (31,668) $ (8,074)
Adjustments to reconcile net 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 of 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
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE> 100
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 earnings 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 the fair
value of its collateral. SFAS No. 114 does not apply to large groups of smaller
balance homogeneous loans that are collectively evaluated 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.
F-28
<PAGE> 101
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO ITS
DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Selected Consolidated Financial
Data................................ 6
Risk Factors.......................... 8
Use of Proceeds....................... 14
Capitalization........................ 14
Business.............................. 15
Regulation............................ 43
Description of the Notes.............. 55
Underwriting.......................... 72
Validity of the Notes................. 72
Experts............................... 72
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$50,000,000
FIRSTFED FINANCIAL CORP.
11 3/4% NOTES DUE 2004
---------------------
(LOGO)
---------------------
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
- ------------------------------------------------------
- ------------------------------------------------------
