<PAGE>
======================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from N/A to
---- --------
Commission File No. l-9566
FIRSTFED FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 95-4087449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40l Wilshire Boulevard, Santa Monica, California 9040l-l490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 319-6000
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange
Act of l934 during the preceding l2 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No _
The number of shares of Registrant's $0.01 par value common stock
outstanding as of August 1, 1994 was 10,585,620.
======================================================================
<PAGE>
PART I - FINANCIAL STATEMENTS
Item 1. Financial statements
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
June 30, December 31,
ASSETS 1994 1993
--------- -----------
<S> <C>
Cash and cash equivalents $ 16,738 $ 17,491
Investment securities, held to maturity
(market of $88,645 and $104,282) 91,719 103,836
Loans receivable 2,780,636 2,692,036
Mortgage-backed securities, held to maturity
(market of $699,624 and $715,726) 710,767 708,283
Loans held for sale, market value approximates
carrying value 13,125 23,627
Accrued interest and dividends receivable 20,871 21,018
Real estate 20,417 27,249
Office properties and equipment, net 9,700 8,923
Investment in Federal Home Loan Bank
Stock, at cost 39,722 38,967
Other assets 32,476 19,687
---------- ----------
$3,736,171 $3,661,117
========== ==========
LIABILITIES
Deposits $2,284,874 $2,305,480
Federal Home Loan Bank advances
and other borrowings 1,231,024 1,093,149
Deferred income taxes - 16,366
Accrued expenses and other liabilities 43,569 37,830
---------- ----------
3,559,467 3,452,825
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 paid-in capital 27,414 27,279
Retained earnings - substantially
restricted 161,982 193,650
Loan to employee stock ownership plan (2,974) (2,918)
Treasury stock, at cost, 796,520 shares (9,832) (9,832)
176,704 208,292
---------- ----------
$3,736,171 $3,661,117
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest on loans and mortgage-backed
securities $ 52,060 $ 54,435 $105,622 $110,796
Interest and dividends on investments 2,320 2,091 4,483 3,977
-------- -------- -------- --------
Total interest income 54,380 56,526 110,105 114,773
-------- -------- -------- --------
Interest expense:
Interest on deposits 21,265 18,929 41,539 38,097
Interest on borrowings 13,297 13,989 25,129 28,019
-------- -------- -------- --------
Total interest expense 34,562 32,918 66,668 66,116
-------- -------- --------
Net interest income 19,818 23,608 43,437 48,657
Provision for loan losses 55,030 1,849 79,700 45,972
-------- -------- -------- --------
Net interest income (loss)
after provision for losses (35,212) 21,759 (36,263) 2,685
-------- -------- --------
Other income:
Loan and other fees 1,725 1,550 3,359 3,341
Gain on sale of loans and mortgage-
backed securities 84 2,502 524 2,902
Real estate operations, net 579 (459) 961 (316)
Other operating income 367 430 721 814
-------- -------- -------- ----------------
Total other income 2,755 4,023 5,565 6,741
-------- -------- -------- --------
Non-interest expense 11,711 11,443 23,844 22,897
-------- -------- -------- --------
Earnings (loss) before income taxes (44,168) 14,339 (54,542) (13,471)
Income tax provision (benefit) (18,615) 6,011 (22,874) (5,397)
-------- -------- -------- --------
Net earnings (loss) $(25,553) $ 8,328 $(31,668) $ (8,074)
======== ======== ======== ========
Earnings (loss) per share $ (2.42) $ 0.78 $ (3.01) $ (0.77)
======== ======== ======== ========
Weighted averages shares for
earnings per share calculation 10,541,367 10,649,177 10,536,561 10,427,554
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
( In thousands)
Six Months Ended
June 30,
-----------------------
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (31,668) $ (8,074)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Provision for loan losses 79,700 45,972
Amortization of fees and discounts (876) (1,835)
Net change to loans held for sale 12,785 66,948
Valuation adjustments on real estate sold (2,782) (3,323)
(Increase) decrease in interest and
dividends receivable (608) 839
Decrease in negative amortization 147 1,630
Decrease in interest payable (1,854) (4,908)
Change in income taxes (26,881) (7,281)
Other 3,269 3,338
---------- ----------
Net cash provided by operating activities 31,232 93,306
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal
collections of loans (180,284) (158,275)
Loans repurchased (13,905) (36,093)
Proceeds from sales of real estate 38,972 28,988
Purchase of investment securities (2,247) (42,397)
Proceeds from maturities and principal payments
on investment securities 14,256 2,000
Other (5,291) (1,824)
---------- ----------
Net cash used by investing activities (148,499) (207,601)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits (20,606) 85,926
Net increase in short term borrowings 195,375 100,380
Proceeds from long term borrowings 50,000 112,700
Repayment of long term borrowings (107,500) (117,500)
Other (755) 1,936
----------- ----------
Net cash provided by financing activities 116,514 183,442
----------- -----------
Net increase (decrease) in cash and cash
equivalents (753) 69,147
Cash and cash equivalents at beginning of period 17,491 23,985
----------- ----------
Cash and cash equivalents at end of period $ 16,738 $ 93,132
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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 at the fair value of its collateral.
SFAS No. 114 does not apply to large groups of homogeneous loans that
are collectively reviewed for impairment. For the Bank, loans
collectively reviewed for impairment include all single family loans
less than $500 thousand and multi-family loans less than $750 thousand.
The adoption of SFAS No. 114 did not result in material additions to
the Bank's provision for loan losses.<PAGE>
Item 2.
5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition
At June 30, 1994, FirstFed Financial Corp., (the "Company"), holding
company for First Federal Bank of California and its subsidiaries
(the "Bank"), had consolidated assets totaling $3.7 billion, comparable
to the level at December 31, 1993 and 3% more than at June 30, 1993.
The slight increase over the prior year period is due to new loan
originations which caused the overall loan portfolio to increase by 6%.
The increase in asset size was offset by lower amounts in short term
securities and real estate acquired by foreclosure at June 30, 1994
compared to June 30, 1993.
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.
6
<PAGE>
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.
During the first six months of 1994, the Bank recorded $79.7 million in
loan loss provisions, consisting of $30.6 million for estimated losses
relating to the January 17, 1994 earthquake and $49.1 million to provide
for estimated losses due to the weak Southern California economy and real
estate market. Of the $79.7 million mentioned above, $11.8 million was
charged-off as earthquake losses during the first six months and $31.5
million was charged-off as economic losses during the first six months.
Charge-offs were due primarily to losses on multi-family loans.
Multi-family loans have been disproportionately affected in the current
recession.
The Bank's portfolio of loans, including mortgage-backed securities, as
of June 30, 1994 was 2% greater than the December 31, 1993 level and 6%
greater than the June 30, 1993 level. All of the mortgage-backed
securities included in the Bank's loan portfolio are collateralized by
loans originated by the Bank. Therefore, the mortgage-backed securities
generally have the same experience with respect to prepayment, repayment,
delinquencies and other factors as the remainder of the Bank's portfolio.
The Bank originates primarily single family and multi-family loans in
Southern California. Loan originations increased by 6% in the second
quarter of 1994 over the second quarter of 1993 and 27% over the first
quarter of 1994. Loan originations for the second quarter of 1994 include
$13.6 million in single family loans purchased from another financial
institution. Due to rising interest rates, market demand for adjustable
rate mortgages, which the Bank originates for its own portfolio, improved
during the second quarter. 94% of new loans originated or purchased during
the first six months of 1994 were adjustable rate mortgages. At June 30,
1994, 98.9% of the loan portfolio had adjustable interest rate provisions.
It is management's belief that adjustable rate mortgages help to maintain
net interest income in fluctuating interest rate environments.
The ratio of non-performing assets to total assets was 3.03% as of June 30,
1994, compared to 3.23% at December 31, 1993 and 4.14% at June 30, 1993.
Real estate acquired by foreclosure decreased 61% at June 30, 1994 compared
to June 30,1993. Also, greater specific allowances were allocated for
problem loans in 1994 compared to 1993. (See "Non-performing Assets" for
further discussion.)
7
<PAGE>
The following table shows the components of the Bank's loan portfolio
by type of loan for the periods indicated:
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1994 1993 1993
-------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $ 939,733 $ 864,874 $ 873,933
Two to four units 348,967 340,035 341,429
Five or more units 1,320,743 1,296,260 1,214,155
---------- ---------- ----------
Residential loans 2,609,443 2,501,169 2,429,517
OTHER REAL ESTATE LOANS:
Commercial and industrial 240,614 245,387 250,362
Second trust deeds 22,072 24,606 29,214
Other 20,321 5,861 14,052
---------- ---------- ----------
Real estate loans 2,892,450 2,777,023 2,723,145
NON-REAL ESTATE LOANS:
Manufactured housing 2,622 2,880 3,204
Deposit accounts 1,278 1,086 1,173
Consumer 711 847 1,187
---------- ---------- ----------
Loans receivable 2,897,061 2,781,836 2,728,709
LESS:
General valuation allowances-
loan portfolio 77,038 40,669 44,282
General valuation allowances-
loans sold with recourse (1) - 6,231 8,247
Unrealized loan fees 26,262 19,273 25,450
---------- ---------- ----------
Net loans receivable 2,793,761 2,715,663 2,650,730
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single family dwellings 682,712 678,884 610,876
Secured by multi-family dwellings 28,055 29,399 30,536
Mortgage-backed securities 710,767 708,283 641,412
---------- ---------- ----------
TOTAL $3,504,528 $3,423,946 $3,292,142
========== ========== ==========
</TABLE>
(1) Effective June 30, 1994, this amount ($6,238,000) was reclassified
to a liability account.
8
<PAGE>
The one year GAP ratio (the difference between rate-sensitive assets and
liabilities repricing within one year or less as a percentage of total
assets) was a positive 15.9% at the end of the second quarter.
Management's goal is to keep the one year GAP ratio less than 20% of
total assets to further minimize the Bank's exposure to interest rate
risk.
Deposits grew by 10% at June 30, 1994 compared to the level one year ago
due to the acquisition of $113 million in deposits from the Resolution
Trust Corporation in December of 1993. Deposits at June 30, 1994 decreased
slightly from the December 31,1993 level due to deposits withdrawn when
interest rates on the acquired deposits were modified to market rates.
Also, deposits in the telemarketing area decreased due primarily to
competition from other investments available to telemarketing customers.
Consolidated stockholders' equity decreased to $176.7 million at June 30,
1994 due to the $31.7 million loss booked for the first six months of 1994.
However, the Bank's capital remains above the minimum amounts required by
its primary regulatory agency, the Office of Thrift Supervision. At June
30, 1994, the Bank was required to maintain tangible capital of at least
1.5% of adjusted total assets; core capital of at least 3% of adjusted
total assets; and risk-based capital of at least 8% of risk-weighted
assets. The Bank's core and tangible capital ratios were both 4.6% and
the risk-based capital ratio was 8.7% as of June 30, 1994.
Effective January 1, 1994, a financial institution must hold additional
capital to the extent that its net portfolio value deteriorates greater
than 2%, based on a 200 basis point increase or decrease in interest rates.
The amount of additional capital required to be held is equal to one-half
the difference between an institution's measured exposure to interest rate
risk and a "normal" level of exposure to interest rate risk. A normal
level of interest rate risk is defined as two percent of the estimated
economic value of an institution's assets. The initial calculation, which
is to be done as of September 1, 1994, will be based on data as of
December 31, 1993. Based on data as of December 31, 1993, management does
not expect that the Bank will be required to hold any additional capital
as a result of this regulation.
Results of Operations
The Company reported a consolidated net loss of $25.6 million for the
second quarter of 1994 compared to net earnings of $8.3 million for the
second quarter of 1993. For the first six months of 1994, the Company
reported a net loss of $31.7 million compared to a net loss of $8.1
million for the first six months of 1993. 1994 results to date were
caused by loan loss provisions totaling $55.0 million and $79.7 million,
respectively, for the second quarter and first six months of the year.
The provisions were necessary due to anticipated losses stemming from
the earthquake and general weakness in the Southern California economy.
1993 results were also impacted by weakness in the Southern California
economy, A $44.1 million provision recorded in the first quarter of
1993 brought total provisions for the first six months of 1993 to
$46.0 million.
9
<PAGE>
Management is unable to predict future levels of loan loss provisions.
Among other things, future loan loss provisions are based on the level
of loan charge-offs and the severity and duration of the economic
recession in Southern California. Although management believes that
it has provided for all known losses resulting from the January 1994
earthquake, further provisions for losses may be necessary due to
unforeseen events.
Loan charge-offs increased to $18.6 million and $43.3 million for the
second quarter and first six months of 1994, compared to $8.8 million
and $21.3 million for the second quarter and first six months of 1993.
The increase in charge-offs compared to the prior year resulted
primarily from adjustments to record loans and foreclosed properties at
fair value less estimated costs to sell. Multi-family loans have been
particularly affected in the current economy. The current recession
has caused declines in multi-family property values due to lower rental
income, higher vacancy rates, real estate depreciation, and lower levels
of real estate sales. Upon foreclosure, or when a loan becomes seriously
delinquent, the properties securitizing the loans are recorded at fair
value less the estimated costs to sell. As a result of the decrease in
multi-family property values, larger write-downs on non-performing
multi-family loans and multi-family properties acquired by foreclosure
were required.
The Bank maintains two different general valuation allowance accounts:
one for inherent risks in the Bank's own loan portfolio and the other
for risks associated with loans the Bank has sold with recourse (and
recorded as a liability.) These two allowances, when added together,
are referred to as the "combined GVA" by the Bank.
Listed below is a summary of the activity in the combined GVA and the
associated loan portfolio during the periods indicated (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1994 1993
-------- ------
<S> <C> <C>
Beginning Balance $ 46,900 $ 27,854
Provision for Loan Losses 79,700 45,972
Charge-Offs:
Single Family (4,757) (4,175)
Multi-Family (35,807) (16,594)
Commercial (2,685) (442)
Non-Real Estate (75) (86)
--------- ---------
Total Charge-Offs (43,324) (21,297)
--------- ---------
Ending General Valuation Allowances $ 83,276 $ 52,529
========= =========
</TABLE>
10
<PAGE>
Due to the high level of provisions recorded during the first six months
of 1994, the ratio of general valuation allowances to the Bank's
portfolio of loans with loss exposure and real estate owned increased
to 2.62% at June 30, 1994 compared to 1.43% at March 31, 1994 and 1.60%
at June 30, 1993. The liability for loans sold with recourse amounted
to 2.13% of the principal balance of loans sold with recourse at June 30,
1994 compared to 1.89% at March 31, 1994 and 2.23% at June 30, 1993.
Management believes that, as of June 30, 1994, the level of general
valuation allowances recorded by the Bank is sufficient to cover losses
inherent in the loan portfolio at that time.
Due to the increasing trend in interest rates, the Bank's net interest
income decreased 16% in the second quarter of 1994 compared to the
second quarter of 1993 and 11% in the first six months of 1994 compared
to the first six months of 1993. The Bank's interest rate margin declined
in 1994 compared to 1993 due to the lagging nature of the index upon
which the majority of the Bank's loans are adjusted. Although the loan
portfolio will eventually adjust to any changes in interest rates, net
interest income initially decreases due to the three month time lag
before changes in the index upon which the Bank's loans adjust can be
passed on to its loan customers.
The following table sets forth: (i) the average dollar amounts of and
average yields earned on loans, mortgage-backed securities and
investment securities, (ii) the average dollar amounts of and average
rates paid on savings and borrowing, (iii) the average dollar differences,
(iv) the interest rate spreads, and (v) the effective net spreads for the
periods indicated.
<TABLE>
<CAPTION>
During The Six Months Ended June 30, (1)
----------------------------------------
1994 1993
---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average dollar amount of and
average yield earned on:
Loans and mortgage-backed
securities $3,443,353 6.14% $3,322,992 6.67%
Investment securities (2) 138,726 4.83 132,709 4.55
---------- ---- ---------- ----
Interest-earning assets 3,582,079 6.09 3,455,701 6.59
Average dollar amount of and
average rate paid on:
Deposits 2,293,683 3.65 1,988,053 3.87
Borrowings 1,200,506 4.21 1,366,033 4.13
---------- ---- ---------- ----
Interest-bearing liabilities 3,494,189 3.84 3,354,086 3.97
Average dollar difference between
interest-earning assets and
---------- ----------
interest-bearing liabilities $ 87,890 $ 101,615
========== ==========
----- -----
Interest rate spread 2.25% 2.62%
===== =====
Effective net spread (3) 2.34% 2.73%
===== =====
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
During The Three Months Ended June 30,(1)
------------------------------------------
1994 1993
---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average dollar amount of and
average yield earned on:
Loans and mortgage-backed
securities $3,453,952 6.03% $3,324,984 6.55%
Investment securities (2) 140,020 4.88 135,440 4.64
---------- ---- ---------- ----
Interest-earning assets 3,593,972 5.99 3,460,424 6.47
Average dollar amount of and
average rate paid on:
Deposits 2,294,226 3.72 1,996,188 3.80
Borrowings 1,225,354 4.35 1,395,932 4.02
---------- ---- ---------- ----
Interest-bearing liabilities 3,519,580 3.94 3,392,120 3.89
Average dollar difference between
interest-earning assets and
---------- ----------
interest-bearing liabilities $ 74,392 $ 68,304
========== ==========
----- -----
Interest rate spread 2.05% 2.58%
===== =====
Effective net spread (3) 2.13% 2.66%
===== =====
- - - ---------------
(1) Average balances and weighted average rates for the period are computed
based on daily balances.
(2) Does not include Federal Home Loan Bank Stock.
(3) The effective net spread is a fraction, the denominator of which is the
average dollar amount of interest-earning assets, and the numerator of
which is net interest income (excluding stock dividends and miscellaneous
interest income)
Real estate operations resulted in net gains of $579 thousand and $961
thousand for the second quarter and first six months of 1994, respectively.
Gains are mostly the result of recoveries of excess valuation allowances
realized upon the sale of foreclosed properties. In comparison, the Bank
recorded net losses of $459 thousand and $316 thousand for the second
quarter and first six months of 1993, respectively. The losses recorded
during 1993 were mostly attributable to maintenance costs and property tax
payments on foreclosed multi-family properties which exceeded rents
collected during the holding period before the properties were sold.
Gain on sale of loans and mortgage-backed securities was $84 thousand and
$524 thousand, respectively, for the second quarter and first six months of
1994 compared to $2.5 million and $2.9 million, respectively, for the second
quarter and first six months of 1993. Gain on sale of loans for the second
quarter of 1993 included a gain of $2.0 million on the sale of a mortgage-
backed security which had previously been identified as held for sale.
Total non-interest expenses increased by 2% during the second quarter of
1994 compared to the same period of the prior year and 4% during the
first six months of 1994 compared to the same period of the prior year.
The increases were in line with with the Bank's asset growth.
Non-interest expenses increased slightly in 1994 compared to 1994 due
to costs associated with one branch added since June of 1993. The
12
<PAGE>
expense-to-assets ratio was 1.26% of average assets for the second
quarter of 1994 compared to 1.27% for the second quarter of 1993.
On a six-month comparative basis, the expense-to-assets ratio remained
at 1.29% of average assets for both periods.
Non-accrual, Past Due, Modified and Restructured Loans
The Bank accrues interest earned but uncollected for every loan without
regard to its contractual delinquency status but establishes a specific
interest allowance for each loan which becomes 90 days or more past due
or in foreclosure. Loans on which delinquent interest allowances had
been established totaled $124 million at June 30, 1994 compared to
$106 million at December 31, 1993 and $107 million at June 30, 1993.
The additional interest that would have been earned had there been no
loans 90 days or more delinquent or in foreclosure was $6.7 million
as of June 30, 1994 compared to $5.8 million at December 31, 1993
and $5.0 million at June 30, 1993. The Bank has debt restructurings
which result from temporary modifications of principal and interest
payments. Under these arrangements, loan terms are typically reduced
to no less than a monthly interest payment required under the note.
Any loss of revenues under the modified terms would be immaterial to
the Bank. If the borrower is unable to return to scheduled principal
and interest payments at the end of the modification period,
foreclosure procedures are initiated. As of June 30, 1994, the
Bank had modified loans totaling $84.0 million. As of that date,
loan loss allowances totaling $6.1 million had been established
for these loans. Less than 5% of modified loans were 90 days or
more delinquent as of June 30, 1994.
The Bank also restructured certain loans to borrowers who experienced
damage to their properties as a result of the January 1994 earthquake.
These modifications were granted in the months immediately following
the earthquake and were usually for the deferral of three to six months
of loan payments. As of June 30, 1994, the modification period for most
of these loans had ended. The outstanding balance of loans which remain
modified for earthquake reasons as of June 30, 1994 totaled $26.4 million.
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 and
commercial real estate loans with an outstanding principal amount greater
13
<PAGE>
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 payment 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 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
14
<PAGE>
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 non-performing loans
determined to be impaired loans by property type at June 30, 1994:
</TABLE>
<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>
Asset Quality
Asset Quality Ratios
- - - --------------------
The following table sets forth certain asset quality ratios of
the Bank at the periods indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1994 1993 1993
----------- ---------------- ----------
<S> <C> <C> <C>
Non-Performing Loans to
Loans Receivable (1) 3.21% 3.28% 3.60%
Non-Performing Assets to
Total Assets (2) 3.03% 3.23% 4.14%
Loan Loss Allowances to
Non-Performing Loans (3) 87.15% 52.23% 49.59%
General Loss Allowances to
Total Loans with Loss
Exposure (4) 2.57% 1.48% 1.68%
- - - -------------------
(1) Non-performing loans are net of specific loan loss allowances. Loans
receivable exclude mortgage-backed securities and are before deducting
unrealized loan fees and general valuation allowances.
(2) Non-performing assets are net of specific loan loss allowances.
(3) The Bank's loan loss allowances, including specific loan loss
allowances and general valuation allowances but excluding general
valuation allowances for loans sold by the Bank with full or
limited recourse. Non-performing loans are before deducting
specific loan loss allowances.
(4) The Bank's general valuation allowances, including general valuation
allowances for loans sold with full or limited recourse.
</TABLE>
15
Non-performing Assets
The Bank defines non-performing assets as loans delinquent over 90 days
(non-accrual loans), loans in foreclosure and real estate acquired in
settlement of loans.
An analysis of non-performing assets as of June 30, 1994 and 1993 and
December 31, 1993 follows:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1994 1993 1993
-------- ------------ --------
(Dollars in thousands)
<S> <C> <C> <C>
Foreclosed real estate owned:
Single family $ 9,277 $10,052 $ 14,424
Multi-family 10,085 16,015 36,378
Commercial 137 327 -
Other 555 484 649
-------- -------- --------
Total foreclosed real estate owned 20,054 26,878 51,451
Delinquent loans over 90 days past due:
Single family 26,210 25,317 31,762
Multi-family 78,296 70,207 67,891
Commercial 19,543 10,307 6,893
Other 189 245 284
Specific valuation allowances (31,238) (14,732) (8,696)
-------- -------- --------
Total delinquent loans 93,000 91,344 98,134
-------- -------- --------
Total non-performing assets $113,054 $118,222 $149,585
======== ======== ========
General Valuation Allowances (GVA) $ 77,038 $ 40,669 $ 44,282
======== ======== ========
Ratio of general valuation allowances
to total non-performing assets 68.1% 34.4% 29.6%
======== ======== ========
</TABLE>
The ratio of non-performing assets to total assets was 3.03% at June 30,
1994, compared to 3.23% at December 31, 1993 and 4.14% at June 30, 1993.
The decrease from June 30, 1993 to June 30, 1994 was caused by a 61%
drop in foreclosed properties owned by the Bank and higher specific
allowances established for non-performing loans. Management continues to
dedicate significant attention to resolving problem loan situations and
disposing of foreclosed properties. Foreclosed real estate sold totaled
$23.6 million and $37.3 million for the second quarter and first six
months of 1994, respectively, compared to $20.0 million and $28.4 million,
respectively for the second quarter and first six months of 1993.
The Bank's general and specific loan loss allowances (excluding general
valuation allowances for loans sold with full or limited recourse)
increased 105.4% from December 31, 1993 to June 30, 1994. 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.
The adoption of SFAS No. 114 has had an effect on the comparability of the
non-performing assets information and the specific loan loss and
general loan loss allowance information to the extent that certain loans
for which specific loan loss allowances were not previously required under
prior accounting standards are now considered impaired and thus subject to
the establishment of specific loan loss allowances.
Sources of Funds
External sources of funds include savings deposits, advances from the Federal
Home Loan Bank of San Francisco ("FHLB") and securitized borrowings.
Savings deposits are obtained from several sources: retail savings branches,
the telemarketing department, and national deposit brokers. Not including
$15.8 million and $30.9 million in interest credits during the second quarter
and first six months of 1994, respectively, total savings deposits decreased
by $12.9 million during the second quarter and $52.0 million during the first
six months of 1994.
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.
Retail deposits decreased by $4.0 million during the second quarter and
$24.7 million during the first six months of 1994. The Bank experienced
outflows of deposits acquired from the Resolution Trust Corporation in
December of 1993, particularly during the first quarter of 1994. This
outflow typically occurs with acquired deposits when the interest rates,
which are typically above market on the date of acquisition, are
adjusted to market rates after the acquisition. The Bank had several
promotional campaigns during the second quarter which helped to stem the
outflow of deposits. Retail deposits comprised 66% of total deposits
at June 30, 1994.
Telemarketing deposits decreased by $59.1 million during the second quarter
of 1994 and $33.1 million for the first six months of the year.
These deposits, normally large deposits from pension plans and other
managed trusts, decreased due primarily to higher yields available to
investors on alternate investments. Telemarketing deposits comprised
11% of total deposits at June 30, 1994.
Deposits acquired from national brokerage firms increased by $50.2 million
during the second quarter of 1994 and $5.8 million for the first six months
of the year. The Bank has used brokered deposits for nearly 10 years and
considers these deposits a stable source of funds. The Bank solicits
brokered funds based on a waiver obtained from the Federal Deposit
Insurance Corporation ("FDIC"), the insurer of the Bank's deposits.
The Bank's waiver expires on August 27, 1994 and it has applied for a
new waiver. At June 30, 1994, brokered deposits comprised
23% of total deposits.
Securitized borrowings under reverse repurchase agreements increased by
$51.7 million during the first six months of the year and $1.1 million
during the second quarter. These securitized borrowings are normally
17
<PAGE>
the most cost effective for the Bank but the amount outstanding varies
depending on the level of available collateral. The Bank converted
$35.4 million and $49.3 million of loans into mortgage-backed
securities during the second quarter and first six months of 1994,
respectively.
FHLB advances increased by $112.5 million for both the second quarter
and the first six months of 1994. The Bank utilized its borrowing
capacity with the FHLB during the second quarter when it exhausted
the collateral available for securitized borrowings.
Internal sources of funds include both principal payments and
payoffs on loans, loan sales, and positive cash flows from operations.
Principal payments include amortization and prepayments which are a function
of real estate activity and the general level of interest rates. Total
principal payments were $76.6 million and $141.7 million, respectively,
for the second quarter and first six months of 1994. This compares with
$90.8 million and $172.3 million, respectively, for the second quarter
and first six months of 1993. Principal payments decreased due to higher
interest rates in 1994 compared to 1993 which had the effect of decreasing
loan refinance activity.
Loan sales decreased to $5.9 million for the second quarter and $42.4 million
for the first six months of 1994. This compares with loan sales of $91.2
million and $108.6 million, respectively for the second quarter and first six
months of 1993. Activity for the second quarter of 1993 included the sale of
a $70.2 million mortgage-backed security from the Bank's portfolio of loans
and mortgage-backed securities held for sale. Due to increased interest
rates in 1994, the level of loans originated for sale by the Bank decreased
in 1994 compared to 1993.
18
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On April 20, 1994, the Company held its Annual Meeting of Stockholders for
the purpose of voting on two proposals. The following are the matters
voted on at the meeting and the votes cast for, against or withheld,
and abstentions as to each such matter. There were no broker non-votes
as to these matters.
1. Election of Directors
For Withheld Abstain
--------- -------- -------
Christopher Harding 9,059,689 41,825 0
James L. Hesburgh 9,060,438 41,076 0
Steven L. Soboroff 9,060,439 41,075 0
2. Ratification of KPMG Peat Marwick as independent public auditors for
the Company for 1994.
For: 9,045,331
Against 37,089
Abstain: 19,094
Item 6. Exhibits and Reports on Form 8-K (Unaudited)
a) Exhibits
1.) Computation of earnings per share. Part I hereof is hereby
incorporated by reference.
2.) Reports furnished to security holders. The second quarter report
to shareholders for the period ended June 30, 1994. Pages
21 to 25.
b) Reports on Form 8-K
1.) No reports on Form 8-K were filed during the period ended June
30, 1994.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
Registrant
Date: SEPTEMBER 7, 1994
By /s/ WILLIAM MORTENSEN
---------------------
William S. Mortensen
Chairman of the Board
and Chief Executive Officer
By /s/ JAMES GIRALDIN
------------------
James P. Giraldin
Chief Financial Officer and
Executive Vice President
20
<PAGE>
FirstFed Financial Corp. and Subsidiary
MESSAGE TO STOCKHOLDERS
Dear Stockholder:
The Bank recorded a loss in the second quarter due to our provision
for loan losses resulting from the earthquake and continued economic
problems in Southern California. During the second quarter of the
year, the Bank added $55 million in provisions for loan losses,
bringing the year-to-date total to nearly $80 million. The result
was a reported loss of $25.6 million for the second quarter and
$31.7 million for the six-month period.
Although no one can accurately predict when the economy will recover,
recent reports by UCLA and other economic forecasters have indicated
that we may have seen the worst of the current recession and that
there is some possibility that the economy is improving. Real
estate sales in Southern California for the month of June increased
12% over May and 27% over the level in June of last year. To aid
in the recovery, the California state legislature is taking a more
aggressive role in creating jobs and developing housing opportunities.
A recent article in the Los Angeles Times indicates that the number
of businesses leaving the state has declined and that some businesses
are actually returning to the state. Recent reforms in the workers
compensation laws have created a more business-friendly environment
in the state. Furthermore, with the decrease in real estate values
in the current recession, the "affordability" of housing has improved
significantly in many areas of the state, making it easier for
businesses to attract high quality employees.
Despite the encouraging news, we don't know when the economy will fully
recover. However, one reason for our optimism is that the volume of new
loans originated by the Bank has increased 27% over the first quarter
level and 6% over the second quarter of last year. Because of rising
interest rates, market conditions for adjustable rate mortgages have
improved. Adjustable rate mortgages have traditionally provided the
Bank with strong core earnings. 99% of the loan portfolio has adjustable
interest rate provisions.
We are pleased that, due to strong allowances built in the past, the
Bank's capital remains above the minimum levels required by Federal
21
<PAGE>
regulations. Also, as announced in a recent news release, the Company
has filed a preliminary registration statement with the Securities
and Exchange Commission for the future issuance of $50 million in
10-year notes.
The Company's low expense-to-assets ratio remains well
below that of our major thrift competitors. In the long run, the Bank's
ability to provide services at a low cost will allow us to compete
favorably in the financial environment of the future.
22
<PAGE>
FINANCIAL HIGHLIGHTS
Quarter Ended
<TABLE>
<CAPTION>
June 30, June 30,
1994 1993
------------- ------------
(Dollars in Thousands,
Except Per Share)
<S> <C> <C>
At, Or For The Three Months Ended
Net Earnings (Loss) $ (25,553) $ 8,328
Net Earnings (Loss) Per Share $ (2.42) $ 0.78
Common Shares Outstanding 10,574,546 10,439,882
Weighted Average Shares for
Earnings Per Share Calculation 10,541,367 10,649,177
Book Value Per Common Share $ 16.71 $ 19.11
Total Loan Volume $ 196,962 $ 185,876
Total Assets $ 3,736,171 $ 3,610,600
Total Loans $ 3,504,528 $ 3,292,142
Total Deposits $ 2,284,874 $ 2,068,671
Total Borrowings $ 1,231,024 $ 1,291,821
Net Worth $ 176,704 $ 199,536
Net Interest Income $ 19,818 $ 23,608
Interest Rate Spread During
the Period 2.05% 2.58%
Net Worth to Assets Ratio 4.73% 5.53%
Tangible Capital Ratio 4.57% 5.39%
Core Capital Ratio 4.57% 5.39%
Risk-Based Capital Ratio 8.71% 9.47%
Return on Average Assets (2.76%) 0.93%
Return on Average Equity (53.95%) 17.05%
Expense Ratio as a % of
Average Assets 1.26% 1.27%
Non-performing Assets to
Total Assets Ratio 3.03% 4.14%
Adjustable Loans as a % of
Total Loans 98.87% 97.99%
</TABLE>
23
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)
June 30, December 31,
ASSETS 1994 1993
--------- ------------
<S> <C> <C>
Cash and cash equivalents $ 16,738 $ 17,491
Investment securities, held to maturity
(market of $88,645 and $104,282) 91,719 103,836
Loans receivable 2,780,636 2,692,036
Mortgage-backed securities, held to maturity
(market of $699,624 and $715,726) 710,767 708,283
Loans held for sale, market value approximates
carrying value 13,125 23,627
Accrued interest and dividends receivable 20,871 21,018
Real estate 20,417 27,249
Office properties and equipment, net 9,700 8,923
Investment in Federal Home Loan Bank
Stock, at cost 39,722 38,967
Other assets 32,476 19,687
---------- ----------
$3,736,171 $3,661,117
========== ==========
LIABILITIES
Deposits $2,284,874 $2,305,480
Federal Home Loan Bank advances
and other borrowings 1,231,024 1,093,149
Deferred income taxes - 16,366
Accrued expenses and other liabilities 43,569 37,830
---------- ----------
3,559,467 3,452,825
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 paid-in capital 27,414 27,279
Retained earnings - substantially
restricted 161,982 193,650
Loan to employee stock ownership plan (2,974) (2,918)
Treasury stock, at cost, 796,520 shares (9,832) (9,832)
176,704 208,292
---------- ----------
$3,736,171 $3,661,117
========== ==========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
FIRSTFED FINANCIAL CORP.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest on loans and mortgage-backed
securities $ 52,060 $ 54,435 $105,622 $110,796
Interest and dividends on investments 2,320 2,091 4,483 3,977
-------- -------- -------- --------
Total interest income 54,380 56,526 110,105 114,773
-------- -------- -------- --------
Interest expense:
Interest on deposits 21,265 18,929 41,539 38,097
Interest on borrowings 13,297 13,989 25,129 28,019
-------- -------- -------- --------
Total interest expense 34,562 32,918 66,668 66,116
-------- -------- --------
Net interest income 19,818 23,608 43,437 48,657
Provision for loan losses 55,030 1,849 79,700 45,972
-------- -------- -------- --------
Net interest income (loss)
after provision for losses (35,212) 21,759 (36,263) 2,685
-------- -------- -------- --------
Other income:
Loan and other fees 1,725 1,550 3,359 3,341
Gain on sale of loans and mortgage-
backed securities 84 2,502 524 2,902
Real estate operations, net 579 (459) 961 (316)
Other operating income 367 430 721 814
-------- -------- -------- --------
Total other income 2,755 4,023 5,565 6,741
-------- -------- -------- --------
Non-interest expense 11,711 11,443 23,844 22,897
-------- -------- -------- --------
Earnings (loss) before income taxes (44,168) 14,339 (54,542) (13,471)
Income tax provision (benefit) (18,615) 6,011 (22,874) (5,397)
-------- -------- -------- --------
Net earnings (loss) $(25,553) $ 8,328 $(31,668) $ (8,074)
======== ======== ======== ========
Earnings (loss) per share $ (2.42) $ 0.78 $ (3.01) $ (0.77)
======== ======== ======== ========
</TABLE>
25
