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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1995
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9566
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.)
401 Wilshire Boulevard
Santa Monica, California 90401-1490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 319-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
----- -----
As of November 1, 1995, 10,610,402 shares of the Registrant's
$.01 par value common stock were outstanding.
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<PAGE>
<TABLE>
<CAPTION>
FirstFed Financial Corp.
Index
Page
Part I. Financial Information ----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Financial Condition 3
as of September 30, 1995, December 31, 1994
and September 30, 1994
Consolidated Statement of Operations for the three 4
month and nine month periods ended September 30,
1995 and 1994
Consolidated Statement of Cash Flows for the nine 5
month periods ended September 30, 1995 and 1994
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Part II. Other Information (omitted items are inapplicable) 17
Item 6. Exhibits and Reports on Form 8-K
Signatures 18
</TABLE>
2
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PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
--------------------
<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(Dollars in thousands except share and per share amounts)
September 30, December 31, September 30,
1995 1994 1994
Assets -------------- ------------ -------------
<S> <C> <C> <C>
Cash $ 34,300 $ 35,853 $ 20,457
Investment securities, held to maturity
(market of $85,267, $79,316, and $83,898) 86,384 84,052 87,344
Loans receivable 3,052,652 3,041,910 3,013,965
Mortgage-backed securities, held to maturity
(market of $846,359, $791,930, and $727,322) 844,893 821,317 746,656
Loans receivable, held for sale (market of
$36,270, $30,399, and $24,162) 35,860 30,399 24,162
Accrued interest and dividends receivable 29,566 24,420 22,629
Real estate 21,172 17,081 18,886
Office properties and equipment, net 8,668 9,211 9,441
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 58,161 56,061 55,361
Other assets 18,520 37,110 32,167
------------ ------------ ------------
$ 4,190,176 $ 4,157,414 $ 4,031,068
============ ============ ============
Liabilities
Deposits $ 2,182,918 $ 2,298,914 $ 2,206,294
FHLB advances and other borrowings 1,010,000 913,700 968,700
Securities sold under agreements to repurchase 739,268 691,121 627,800
Deferred income taxes - 6,324 -
Accrued expenses and other liabilities 67,635 62,668 47,352
------------ ------------ ------------
3,999,821 3,972,727 3,850,146
------------ ------------ ------------
Commitments and Contingencies
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued 11,405,522
11,395,492, and 11,385,897 shares, outstanding
10,609,002, 10,598,972, and 10,589,377 shares 114 114 114
Additional paid-in capital 28,160 28,061 27,506
Retained earnings - substantially restricted 174,873 169,186 166,140
Loan to employee stock ownership plan (2,960) (2,842) (3,006)
Treasury stock, at cost, 796,520 shares (9,832) (9,832) (9,832)
------------ ------------ -----------
190,355 184,687 180,922
------------ ------------ -----------
$ 4,190,176 $ 4,157,414 $ 4,031,068
============ ============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 59,508 $ 47,881 $172,814 $135,894
Interest on mortgage-backed securities 15,487 8,811 41,608 26,420
Interest and dividends on investments 3,553 2,850 10,194 7,333
-------- -------- -------- --------
Total interest income 78,548 59,542 224,616 169,647
Interest expense:
Interest on deposits 27,599 22,636 81,948 64,175
Interest on borrowings 29,584 18,282 86,479 43,411
-------- -------- -------- --------
Total interest expense 57,183 40,918 168,427 107,586
-------- -------- -------- --------
Net interest income 21,365 18,624 56,189 62,061
Provision for loan losses 6,173 3,000 17,376 82,700
-------- -------- -------- --------
Net interest income (loss)
after provision for losses 15,192 15,624 38,813 (20,639)
-------- -------- -------- --------
Other income (expense):
Loan and other fees 1,252 1,820 4,562 5,179
Gain (loss) on sale of loans and
mortgage-backed securities (2,125) (20) (1,864) 504
Real estate operations, net 72 1,240 1,399 2,201
Other operating income 546 434 1,661 1,155
-------- -------- -------- --------
Total other income (expense) (255) 3,474 5,758 9,039
-------- -------- -------- --------
Non-interest expense 11,342 11,653 34,224 35,497
-------- -------- -------- --------
Earnings (loss) before income taxes 3,595 7,445 10,347 (47,097)
Income tax provision (benefit) 1,611 3,287 4,660 (19,587)
-------- -------- -------- --------
Net earnings (loss) $ 1,984 $ 4,158 $ 5,687 $(27,510)
======== ======== ======== ========
Earnings (loss) per share $ 0.19 $ 0.39 $ 0.53 $ (2.61)
======== ======== ======== ========
Weighted average shares outstanding
for earnings per share calculation 10,662,633 10,643,738 10,653,978 10,532,732
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statement of Cash Flows
(Dollars in thousands)
Nine Months Ended
September 30,
------------------------
1995 1994
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 5,687 $ (27,510)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Provision for loan losses 17,376 82,700
Amortization of fees and discounts (576) (1,284)
Net change in loans held for sale (5,696) (3,918)
Valuation adjustments on real estate sold (889) (7,342)
Increase in interest and
dividends receivable (5,146) (2,920)
(Increase) decrease in negative amortization (3,630) 129
Increase (decrease) in interest payable 3,215 (550)
Change in income taxes 4,667 (16,366)
Other 4,362 710
--------- ----------
Net cash provided by operating activities 19,370 23,649
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal
reduction on loans (115,681) (471,746)
Loans repurchased (18,699) (17,915)
Loans purchased - (59,166)
Proceeds from sales of real estate
46,098 66,181
Purchase of investment securities (13,095) (2,348)
Principal reductions on mortgage-backed securities 36,144 67,937
Proceeds from maturities and principal payments
on investment securities 10,675 18,693
Purchase of FHLB stock - (15,085)
Other 4,460 (5,838)
--------- ----------
Net cash used by investing activities (50,098) (419,287)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in savings deposits (115,996) (99,186)
Net increase in short term borrowings 407,647 610,851
Proceeds from long term borrowings - 100,000
Repayment of long term borrowings (263,200) (207,500)
Other 724 (5,561)
--------- ----------
Net cash provided by financing activities 29,175 398,604
--------- ----------
Net increase (decrease) in cash and cash equivalents (1,553) 2,966
Cash and cash equivalents at beginning of period 35,853 17,491
--------- ----------
Cash and cash equivalents at end of period $ 34,300 $ 20,457
========= ==========
See accompanying notes to consolidated financial statements.
</TABLE>
5
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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. 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 (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. Weighted average shares outstanding
for the earnings per share calculation were 10,662,633 for the
three months ended September 30, 1995 and 10,643,738 for the
three months ended September 30, 1994. Weighted average shares
outstanding for the earnings (loss) per share calculation were
10,653,978 for the nine-month period ended September 30, 1995 and
10,532,732 for the nine-month period ended September 30, 1994.
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 which mature within 90 days or less.
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.
Prior to the adoption of SFAS No. 114, the Bank considered the
transfer of specific allowances from general valuation allowances
to be "charge-offs." Pursuant to SFAS No. 114, the Bank now
considers these transfers as valuation allowances for impairment.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition
At September 30, 1995, FirstFed Financial Corp., (the
"Company"), holding company for First Federal Bank of California
and its subsidiaries (the "Bank"), had consolidated assets
totaling $4.2 billion, comparable to the asset level as of
December 31, 1994 and 4% greater than the asset level as of
September 30, 1994. Due to the continued weakness in the
Southern California real estate markets, loan originations have
decreased in 1995. Asset growth from the September 30, 1994
level resulted from loan originations, primarily in the fourth
quarter of 1994.
The economic recession, which has persisted in Southern
California since mid-1990, is beginning to show some signs of
improvement during 1995. According to the UCLA Business Forecast
for California, September, 1995 Report (the "UCLA Report"),
California is outpacing the nation in the areas of payroll
employment and merchandise exports. There has also been
improvement in statewide taxable sales and bank loans to
businesses and consumers.
Despite the improvement in some areas of the California economy,
Southern California real estate continues to be depressed by the
recession. The UCLA Report states that multi-family housing
permits, new construction and new single family homes sales have
declined further in 1995 compared to the already deflated levels
of 1994. Some signs of stabilization have occurred in recent
months. According to sources quoted in the UCLA Report, sales of
existing single family homes were nearly the same in July as they
were in June of 1995 (though nearly 10% below July, 1994 sales).
Also, sales prices for existing homes have increased in recent
months.
The recession, combined with riots, earthquakes and other natural
disasters, has negatively impacted the Company's results over the
last three years. The weakness in the Southern California real
estate market has impacted the credit quality of the Bank's loan
portfolio, creating a need for larger provisions for loan losses.
Provisions for loan losses were $17 million for the first nine
months of 1995 compared to $83 million for the first nine months
of 1994. The Bank recorded provisions for loan losses totaling
$6 million for the third quarter of 1995, down from $8 million
for the second quarter of 1995. The Bank also recorded $2 million
in additional loss provisions in the third quarter of 1995
(recorded as a loss on the sale of loans) for loans previously
sold with recourse. Due to the large provisions recorded in the
first and second quarters of 1994, a provision of only $3 million
was necessary for the third quarter of 1994.
For the first nine months of 1995, loan charge-offs were $18
million compared to $24 million for the first nine months of
1994. Loan charge-offs were $7 million for the third quarter of
1995 compared to $5 million for the third quarter of 1994.
Charge-offs during 1995 and 1994 were due primarily to losses on
multi-family loans which have been particularly affected in the
on-going recession. The ratio of non-performing assets to total
assets was 2.19% as of September 30, 1995, compared to 2.23% at
December 31, 1994 and 3.03% at September 30, 1994. Real estate
acquired by foreclosure at September 30, 1995 increased 14% from
September 30, 1994 and 26% from December 31, 1994. Loans
delinquent greater than 90 days decreased 32% at September 30,
1995 compared to the level one year ago and 7% compared to the
level at December 31, 1994. (See "Non-performing Assets" for
further discussion.)
The Bank's general valuation allowances were $38 million at
September 30, 1995 compared to $55 million at December 31, 1994
and $70 million at September 30, 1994. The decrease in general
valuation allowances is consistent with the decline in loan
charge-offs and non-performing assets compared to last year.
7
<PAGE>
The Bank also maintains valuation allowances for impaired loans
which totaled $26 million at September 31, 1995 compared to $24
million at December 31, 1994 and $26 million at September 31,
1994. Transfers to the allowance for impaired loans totaled $2
million and $17 million, respectively, for the third quarter and
first nine months of 1995 compared to $6 million and $31 million,
respectively, for the third quarter and first nine months of
1994. Prior to 1994, transfers to loan allowances for impaired
loans were considered as charge-offs by the Bank.
The Bank's portfolio of loans, including mortgage-backed
securities, as of September 30, 1995 totaled $3.9 billion,
comparable to the December 31, 1994 level. Mortgage-backed
securities generally have the same experience with respect to
prepayment, repayment, delinquencies and other factors of the
Bank's loan portfolio.
The following table shows the components of the Bank's portfolio
of loans and mortgage-backed securities by collateral type for
the periods indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $ 1,229,844 $ 1,192,251 $ 1,165,578
Two to four units 354,548 350,718 356,931
Five or more units 1,341,541 1,357,251 1,361,724
----------- ----------- -----------
Residential loans 2,925,933 2,900,220 2,884,233
OTHER REAL ESTATE LOANS:
Commercial and industrial 222,308 246,340 244,564
Second trust deeds 18,558 20,401 21,587
Other 3,471 4,793 4,768
----------- ----------- -----------
Real estate loans 3,170,270 3,171,754 3,155,152
NON-REAL ESTATE LOANS:
Manufactured housing 2,118 2,439 2,533
Deposit accounts 1,618 1,301 1,150
Consumer 469 506 548
----------- ----------- -----------
Loans receivable 3,174,475 3,176,000 3,159,383
LESS:
General valuation allowances-
loan portfolio 37,938 55,353 69,625
Valuation allowances - impaired loans 25,695 23,887 26,432
Unrealized loan fees 22,330 24,451 25,199
----------- ----------- -----------
Net loans receivable 3,088,512 3,072,309 3,038,127
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single family dwellings 820,047 794,126 719,018
Secured by multi-family dwellings 24,846 27,191 27,638
----------- ----------- -----------
Mortgage-backed securities 844,893 821,317 746,656
----------- ----------- -----------
TOTAL $ 3,933,405 $ 3,893,626 $ 3,784,783
=========== =========== ===========
</TABLE>
The Bank originates primarily single family loans in Southern
California. Recently, loan originations have been impacted by
the decrease in real estate sales activity due to the recession.
Loan originations decreased by 67% in the first nine months of
1995 compared to the first nine months of 1994. Management
decided to de-emphasize the origination of multi-family loans
starting in the fourth quarter of 1994 because market pricing
did not fully compensate the Bank for the risks associated with
this type of lending. This decision contributed to the decrease
in loan originations in 1995.
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 $383 million or
9.13% at the end of the third quarter. In comparison, the one
year GAP ratio was a positive $636 million or 15.79% as of
September 30, 1994 and $574 million or 13.81% of total assets as
of December 31, 1994. The positive one year GAP decreased during
the first nine months of 1995 due to an increase in certificates
of deposit maturing in less than one year.
Over 94% of the Bank's loans adjust based upon monthly changes in
the Eleventh District Cost of Funds Index ("COFI Index"). Since
the majority of the Bank's loans are monthly adjustables, the
Bank's one year GAP position varies primarily based upon the
remaining terms of its savings and borrowings. The longer the
term of the Bank's liabilities, the more positive the one year
GAP. A positive GAP normally benefits a financial institution in
times of increasing interest rates. However, the Bank's net
interest income typically declines during periods of increasing
interest rates because of the three month time lag before changes
in the COFI Index can be implemented with respect to the Bank's
loans. In order to diversify its loan portfolio, starting in
1995, the Bank began emphasizing the origination of adjustable
rate loans based upon the one month London Interbank Overseas
Rate ("LIBOR").
Deposits, including interest credited, were $2.2 billion, as of
September 30, 1995 and September 30, 1994. As of December 31,
1994, deposits were slightly higher at $2.3 billion. The
decrease in savings resulted from increased competition from
institutions offering promotional accounts in the Bank's market
areas and decreased customer demand for deposits from national
brokerage houses. Borrowings increased to $1.7 billion as of
September 30, 1995, from $1.6 billion as of September 30, 1994
and as of December 31, 1994.
The Bank's capital as of September 30, 1995 exceeded the minimum
amounts required by its primary regulatory agency, the Office of
Thrift Supervision ("OTS"). 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 5.5% and the risk-based
capital ratio was 10.6% at September 30, 1995. These ratios meet
the OTS' requirements necessary to be deemed well capitalized.
Results of Operations
The Company reported consolidated net earnings of $2.0 million
for the third quarter of 1995 compared to net earnings of $4.2
million for the third quarter of 1994. The decrease in quarterly
net earnings resulted from a $3.2 million increase in the
provision for loan losses in the third quarter of 1995 compared
to the same quarter of the prior year. The increased provisions
were partially offset by a 15% increase in net interest income
and a 3% decline in non-interest expense compared to the third
quarter of the prior year.
For the first nine months of 1995, the Company reported
consolidated net earnings of $5.7 million compared to a net loss
of $27.5 million for the first nine months of 1994. Results for
the first nine months of 1994 were adversely impacted by a $82.7
million provision for loan losses due to weakness in the Southern
California real estate market and estimated losses from the
January 17, 1994 earthquake. Although the Company has reported
positive results throughout 1995, its level of earnings has
continued to be impacted by weakness in the Southern California
real estate market, primarily in the area of multi-family
housing.
Multi-family loans comprised 34% of loans and mortgage-backed
securities as of September 30, 1995. The value of multi-family
properties has declined due to a weak rental market resulting in
increased vacancies and lower rents. Upon foreclosure, or when a
loan becomes a non-accrual loan, the properties securing the
loans are recorded at fair value less the estimated costs to
sell.
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, transfers to allowances
for impaired loans, foreclosure activity, and the severity and
duration of the economic recession in Southern California.
For the first nine months of 1995, loan charge-offs were $18
million compared to $24 million for the first nine months of
1994. The lower charge-off levels in 1995 resulted primarily
from improvement in non-performing loans. (See "Non-performing
Assets" for further discussion.) Transfers to valuation
allowances for impaired loans were considered as charge-offs
prior to 1994. These transfers totaled $2 million and $17
million for the third quarter and first nine months of 1995
compared to $6 million and $31 million for the third quarter and
first nine months of 1994.
Listed below is a summary of the activity in general valuation
allowances applicable to the Bank's loan portfolio during the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1995 1994
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Beginning general valuation allowances $ 55,353 $ 40,669
Provision for loan losses 17,376 82,700
Charge-offs, net of recoveries:
Single family (5,474) (7,709)
Multi-family (14,092) (21,452)
Commercial 2,066 5,210
Non-real estate - (100)
---------- -----------
Total charge-offs (17,500) (24,051)
Transfers to liability account for
loans sold with recourse (503) 942
Transfers (to) from valuation allowances for
impaired loans:
Single family (187) (187)
Multi-family (14,093) (22,403)
Commercial (2,508) (8,045)
---------- -----------
Total transfers to valuation allowances for
impaired loans (16,788) (30,635)
---------- -----------
Ending general valuation allowances $ 37,938 $ 69,625
========== ===========
</TABLE>
The ratio of general valuation allowances to the Bank's assets
with loss exposure (primarily loans and real estate owned) was
1.18% at the end of the third quarter of 1995, compared to 1.73%
as of December 31, 1994 and 2.19% as of September 30, 1994. The
Bank also maintains an allowance for loans sold with recourse,
recorded as a liability. This allowance was 4.13% of loans sold
with recourse as of September 30, 1995, compared to 2.86% as of
December 31, 1994 and 1.87% as of September 30, 1994. The
balance of loans sold with recourse totaled $281 million, $305
million and $310 million as of September 30, 1995, December 31,
1994 and September 30, 1994, respectively. The Bank has not
entered into any new recourse arrangements since 1989.
The Company's net interest income increased 15% in the third
quarter of 1995 compared to the third quarter of 1994 and
decreased 9% in the first nine months of 1995 compared to the
first nine months of 1994. The Company's interest rate margin
increased in the third quarter, yet decreased for the first nine
months compared to the same periods of last year. The Federal
Reserve increased interest rates seven times throughout 1994 and
the first quarter of 1995. Interest rates began to moderate in
the second quarter of 1995 and the Federal Reserve decreased
interest rates early in the third quarter. The Company's
10
<PAGE>
interest rate margin improved to 1.92% in the third quarter of
1995 from 1.85% in the third quarter of 1994.
Interest expense for the third quarter and first nine months of
1995 includes $1.5 million and $4.4 million of interest expense,
respectively, on the $50 million in 10-year notes issued by the
Company in September of 1994.
The following table sets forth: (i) the average daily dollar
amounts of and average yields earned on loans, mortgage-backed
securities and investment securities, (ii) the average daily
dollar amounts of and average rates paid on savings and
borrowings, (iii) the average daily dollar differences, (iv) the
interest rate spreads, and (v) the effective net spreads for the
periods indicated.
<TABLE>
<CAPTION>
During the Nine Months Ended September 30, During the Three Months Ended September 30,
------------------------------------------ -------------------------------------------
1995 1994 1995 1994
-------------------- ----------------- --------------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average dollar amount of and
average yield earned on:
Loans and mortgage-backed
securities $ 3,946,865 7.24% $ 3,506,748 6.17% $ 3,955,711 7.58% $ 3,633,745 6.24%
Investment securities (1) 177,437 5.58 143,525 4.89 180,826 5.60 153,123 4.98
----------- ----------- ----------- -----------
Interest-earning assets 4,124,302 7.17 3,650,273 6.12 4,136,537 7.49 3,786,868 6.19
Average dollar amount of and
average rate paid on:
Deposits 2,256,933 4.86 2,284,289 3.76 2,213,907 4.95 2,265,502 3.97
Borrowings 1,809,352 6.36 1,288,785 4.47 1,852,989 6.30 1,465,343 4.91
----------- ----------- ----------- -----------
Interest-bearing liabilities 4,066,285 5.52 3,573,074 4.01 4,066,896 5.57 3,730,845 4.34
Average dollar difference between
interest-earning assets and ----------- ----------- ----------- -----------
interest-bearing liabilities $ 58,017 $ 77,199 $ 69,641 $ 56,023
=========== =========== =========== ===========
----- ----- ----- -----
Interest rate spread 1.65% 2.11% 1.92% 1.85%
===== ===== ===== =====
Effective net spread (2) 1.73% 2.19% 2.02% 1.91%
===== ===== ===== =====
</TABLE>
- ----------------------------------
(1) Does not include Federal Home Loan Bank Stock.
(2) 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 produced net gains of $72 thousand and
$1.4 million for the third quarter and first nine months of
1995, respectively. In comparison, the Bank recorded net gains
of $1.2 million and $2.2 million for the third quarter and first
nine months of 1994, respectively. Gains are the result of
having conservatively estimated the fair value of the
foreclosed properties sold.
A net loss on sale of loans of $1 thousand and a net gain of
$260 thousand were recognized for the first quarter and nine
months of 1995, respectively, compared to a net loss of $20
thousand and a net gain of $504 thousand, respectively, for the
third quarter and first nine months of 1994. During the third
quarter of 1995, the Bank also recorded, as a loss on sale of
loans, $2.1 million in additional allowances for loans
previously sold with recourse. There were no such additional
allowances during 1994.
The volume of loans sold during the third quarter and the first
nine months of 1995 was $8 million and $10 million,
respectively. For the third quarter and nine months ended 1994,
the volume of loans sold was $1 million and $43 million,
respectively. Loans sold have been impacted by the reduced
levels of real estate sales activity in the current recession.
11
<PAGE>
Total non-interest expense decreased by 3% and 4% during the
third quarter and first nine months of 1995, respectively,
compared to the prior year periods. The expense-to-assets ratio
was 1.07% of average assets for the third quarter of 1995, down
from 1.20% for the same quarter of last year. On a nine-month
comparative basis, the expense-to-assets ratio was 1.09% for
1995 compared to 1.25% for 1994. Management maintains ongoing
programs to monitor the level of non-interest expense incurred
by the Bank.
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 is in foreclosure. Loans on
which delinquent interest allowances had been established (non-
accrual loans) totaled $93 million at September 30, 1995
compared to $94 million at December 31, 1994 and $131 million at
September 30, 1994.
The additional amount of interest that would have been earned had
there been no loans 90 days or more delinquent or in foreclosure
was $5 million at September 30, 1995 and December 31, 1994
compared to $7 million at September 30, 1994.
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. Generally, if the borrower is unable to return to
scheduled principal and interest payments at the end of the
modification period, foreclosure proceedings are initiated. As
of September 30, 1995, the Bank had modified loans totaling $30
million, net of loan loss allowances totaling $5 million. No
modified loans were 90 days or more delinquent as of September
30, 1995.
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
recorded as separate valuation allowances and may be subsequently
adjusted based upon changes in the measurement of impairment.
Impaired loans, which are disclosed net of valuation allowances,
include 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 than or equal to $750,000),
modified loans, and major loans less than 90 days delinquent in
which full payment of principal and interest is not expected to
be received.
Valuation allowances for impairment totaled $26 million as of
September 30, 1995, $24 million as of December 31, 1994 and $26
million as of September 30, 1994. The following is a summary of
impaired loans, net of valuation allowances for impairment, for
the periods indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 27,635 $ 38,004 $ 44,437
Modified loans 22,249 41,635 50,059
Other impaired loans 34,738 28,637 22,600
------------ ------------ ------------
$ 84,622 $ 108,276 $ 117,096
============ ============ ============
</TABLE>
The Bank evaluates loans for impairment whenever the
collectibility of contractual principal and interest payments is
questionable. Large groups of smaller balance homogenous loans
that are collectively evaluated for impairment, including
residential mortgage loans, are not subject to the application of
SFAS No. 114.
12
<PAGE>
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 "collateral-dependent" or
probable of foreclosure, impairment is measured based on the fair
value of the collateral. When the measure of an impaired loan is
less than the recorded investment in the loan, the Bank records
an impairment allowance equal to the excess of the Bank's
recorded investment in the loan over its measured value. The
following summary details loans measured using the fair value
method and loans measured based on the present value of expected
future cash flows discounted at the effective interest rate of
the loan for the periods indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Fair value method $ 68,011 $ 77,245 $ 62,665
Present value method 16,611 31,031 54,431
------------ ------------ ------------
Total impaired loans $ 84,622 $ 108,276 $ 117,096
============ ============ ============
</TABLE>
Impaired loans for which there were no valuation allowances
established totaled $14 million, $22 million and $32 million as
of September 30, 1995, December 31, 1994, and September 30, 1994,
respectively.
Listed below is a summary of the activity in the valuation
allowance for losses applicable to impaired loans during the
period indicated (dollars in thousands):
<TABLE>
<CAPTION>
September 30,
1995
-------------
<S> <C>
Beginning valuation allowances for impaired loans $ 23,887
Allocation from general valuation allowances 16,788
Charges to the allowances (1) (14,980)
-----------
Ending valuation allowances for impaired loans $ 25,695
===========
</TABLE>
- ------------------------------------
(1) Prior to 1994, these amounts were considered charge-offs at the
time an impairment allowance was established.
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. On certain modified loans where the Bank does not believe
that it will receive all amounts due under the original
contractual loan terms, the Bank records an allowance for
interest received.
The average recorded investment in impaired loans during the
quarter ended September 30, 1995 was $84 million. The amount of
interest income recognized for impaired loans during the quarter
ended September 30, 1995 was $1 million under both the accrual
method of accounting and the cash basis method of accounting.
Prior to SFAS No. 114, the Bank had a policy of establishing
valuation allowances for all loans deemed probable of foreclosure
based on the fair value of the collateral. As a result, SFAS No.
114 had only a minor impact on the Bank's allowance for loan
losses.
13
<PAGE>
The table below shows the Bank's net investment in non-performing
loans determined to be impaired, by property type, as of the
periods indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Single family $ 2,170 $ 2,140 $ 3,318
Multi-family 25,465 22,696 28,383
Commercial - 13,168 12,736
----------- ----------- ----------
$ 27,635 $ 38,004 $ 44,437
=========== =========== ==========
</TABLE>
Asset Quality
The following table sets forth certain asset quality ratios of
the Bank at the periods indicated:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
<S> <C> <C> <C>
Non-Performing Loans to
Loans Receivable (1) 2.22% 2.39% 3.28%
Non-Performing Assets to
Total Assets (2) 2.19% 2.23% 3.03%
Loan Loss Allowances to
Non-Performing Loans (3) 64.92% 78.27% 73.95%
General Loss Allowances to
Assets with Loss Exposure (4) 1.18% 1.73% 2.19%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 1.40% 1.82% 2.17%
</TABLE>
------------------------------------
(1) Non-performing loans are net of valuation allowances related to
those loans. Loans receivable exclude mortgage-backed
securities and are before deducting unrealized loan fees, general
valuation allowances and valuation allowances for impaired loans.
(2) Non-performing assets are net of valuation allowances related to
those assets.
(3) The Bank's loan loss allowances, including valuation allowances for
non-performing loans and general valuation allowances but excluding
general valuation allowances for loans sold by the Bank with full or
limited recourse. Non-performing loans are before deducting
valuation allowances related to those loans.
(4) The Bank's general valuation allowances, excluding general
valuation allowances for loans sold with full or limited
recourse. The Bank's assets with loss exposure include primarily
loans and real estate owned, but exclude mortgage-backed
securities.
(5) The Bank's general valuation allowances, including general
valuation allowances for loans sold with full or limited recourse.
Assets with loss exposure include the Bank's loan portfolio and
real estate owned plus loans sold with recourse, but exclude
mortgage-backed securities.
14
<PAGE>
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 by foreclosure (real estate owned). An analysis of
non-performing assets as of the periods indicated follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1995 1994 1994
------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate owned:
Single family $ 7,599 $ 5,711 $ 8,851
Multi-family 8,642 10,647 9,579
Commercial 4,718 366 41
Other 92 - 55
-------- -------- --------
Total real estate owned 21,051 16,724 18,526
Non-performing loans:
Single family 23,116 13,041 29,981
Multi-family 65,943 60,213 77,555
Commercial 3,677 20,986 23,240
Other 124 245 271
Valuation allowances (1) (22,347) (18,596) (27,289)
-------- -------- --------
Total non-performing loans 70,513 75,889 103,758
-------- -------- --------
Total non-performing assets $ 91,564 $ 92,613 $122,284
======== ======== ========
</TABLE>
- ------------------------------------
(1) Includes valuation allowances for impaired loans and loss
allowances on other non-performing loans requiring fair value
adjustments.
Real estate acquired by foreclosure at September 30, 1995
increased 14% compared to September 30, 1994 and 26% compared to
December 31, 1994. Increases during 1995 were due to greater
foreclosures on commercial and single-family properties offset
by sales of multi-family real estate. Non-performing loans
decreased 32% at September 30, 1995 compared to the level one
year ago and 7% compared to the level at December 31, 1994. The
decrease in non-performing loans during 1995 was primarily due
to an increase in valuation allowances to record non-performing
loans at fair value. Also, several large commercial loans were
foreclosed upon and sold during the first nine months of 1995.
Management continues to dedicate significant attention to
resolving problem loans and disposing of foreclosed properties.
Sales of foreclosed real estate totaled $14 million and $45
million for the third quarter and first nine months of 1995,
respectively, compared to $23 million and $61 million,
respectively for the third quarter and first nine months of
1994.
15
<PAGE>
Sources of Funds
External sources of funds include savings deposits, advances
from the Federal Home Loan Bank of San Francisco ("FHLB"),
securitized borrowings and unsecured term funds.
Savings deposits are accepted from several sources: retail
savings branches, the telemarketing department, and national
deposit brokers. Not including $18 million and $54 million in
interest credits during the third quarter and first nine months
of 1995, respectively, total savings deposits decreased by
$170 million during the first nine months of 1995 and $118
million during the third quarter.
Retail deposits decreased by $86 million during the first nine
months of 1995 and $3 million during the third quarter.
Decreases were due to increased competition from other financial
institutions offering promotional accounts in the Bank's market
areas. The Bank instituted its own promotional accounts during
the third quarter which helped stem the outflow of funds.
Retail deposits comprised 67% of total savings deposits as of
September 30, 1995.
Telemarketing deposits increased by $3 million during the first
nine months of 1995 and $25 million during the third quarter.
These deposits are normally large deposits from pension plans
and other managed trusts. Deposit levels fluctuate based on the
attractiveness of the Bank's rates compared to rates available
to investors on alternative investments. Telemarketing deposits
comprised 10% of total deposits at September 30, 1995.
Deposits acquired from national brokerage firms ("brokered
deposits") decreased by $87 million during the first nine months
of 1995 and $140 million for the third quarter of the year.
Brokered deposits decreased during 1995 due to decreased
customer demand and were replaced by borrowings, primarily from
the FHLB. The Bank has used brokered deposits for over 10 years
and considers these deposits a stable source of funds. Because
the Bank has sufficient capital to be deemed "well-capitalized"
by the Office of Thrift Supervision, it may solicit brokered
funds without special regulatory approval. At September 30,
1995, brokered deposits comprised 23% of total deposits.
Total borrowings increased by $144 million during the first nine
months of 1995 due to additional borrowings of $48 million
under reverse repurchase agreements, $88 million in advances
from the FHLB, and $8 million in unsecured term funds. Total
borrowings increased by $10 million during the third quarter of
1995, due to $3 million in additional borrowings of unsecured
term funds and $12 million in advances from the FHLB. Reverse
repurchase agreements decreased by $5 million during the third
quarter of 1995.
The cost of funds, operating margins and net earnings of the Bank
associated with brokered and telemarketing deposits are generally
comparable to the cost of funds, operating margins and net
earnings 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, the Bank seeks funds from the lowest cost source
until the relative costs change. As the cost of funds, operating
margins and net earnings 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.
Internal sources of funds include both principal payments and
payoffs on loans, loan sales, and positive cash flows from
operations. Principal payments include amortized principal and
prepayments which are a function of real estate activity and the
general level of interest rates. Total principal payments were
$58 million and $152 million, respectively, for the third
quarter and first nine months of 1995. This compares with
principal payments of $70 million and $211 million,
respectively, for the third quarter and first nine months of
1994.
Loan sales decreased to $8 million and $10 million for the
third quarter and the first nine months of 1995. This compares
with loan sales of $869 thousand and $43 million, respectively
for the third quarter and first nine months of 1994.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(4.1) Shareholders' Rights Agreement filed as Exhibit 1
to Form 8-A, dated November 2, 1988 and incorporated by
reference.
(4.2) Indenture filed as Exhibit 4 to Amendment No. 3
to Form S-3 dated September 20, 1994 and incorporated by
reference.
(10.1) Deferred Compensation Plan filed as Exhibit 10.3
to Form 10-K for the fiscal year ended December 31, 1983
and incorporated by reference.
(10.2) Bonus Plan filed as Exhibit 10(iii)(A)(2) to Form
10 dated November 2, 1993 and incorporated by reference.
(10.3) Supplemental Executive Retirement Plan dated
January 16, 1986 and filed as Exhibit 10.5 to Form 10-K
for the fiscal year ended December 21, 1992 and incorporated
by reference.
(11.1) Computation of earnings per share. Part I hereof is
incorporated by reference.
b) Reports on Form 8-K
No reports on Form 8-K were filed during the period ended
September 30, 1995.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
------------------------
Registrant
Date: November 14, 1995
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
18
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Consolidated Statements of Operations and Consolidated Statements of
Financial Condition and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 34,300
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 86,384
<INVESTMENTS-MARKET> 85,267
<LOANS> 3,933,405
<ALLOWANCE> 37,938
<TOTAL-ASSETS> 4,190,176
<DEPOSITS> 2,182,918
<SHORT-TERM> 1,638,268
<LIABILITIES-OTHER> 67,635
<LONG-TERM> 111,000
<COMMON> 114
0
0
<OTHER-SE> 190,241
<TOTAL-LIABILITIES-AND-EQUITY> 4,190,176
<INTEREST-LOAN> 214,422
<INTEREST-INVEST> 10,194
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 224,616
<INTEREST-DEPOSIT> 81,948
<INTEREST-EXPENSE> 168,427
<INTEREST-INCOME-NET> 56,189
<LOAN-LOSSES> 17,376
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 34,224
<INCOME-PRETAX> 10,347
<INCOME-PRE-EXTRAORDINARY> 10,347
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,687
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<YIELD-ACTUAL> 1.73
<LOANS-NON> 70,513
<LOANS-PAST> 0
<LOANS-TROUBLED> 34,898
<LOANS-PROBLEM> 42,270
<ALLOWANCE-OPEN> 55,353
<CHARGE-OFFS> 17,500
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 37,938
<ALLOWANCE-DOMESTIC> 37,938
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
