<PAGE>
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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 March 31, 1996
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 May 1, 1996, 10,623,097 shares of the Registrant's $.01 par
value common stock were outstanding.
=====================================================================
<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 March 31, 1996, December 31, 1995
and March 31, 1995
Consolidated Statements of Operations for the three 4
months ended March 31, 1996 and 1995
Consolidated Statements of Cash Flows for the three 5
months ended March 31, 1996 and 1995
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
<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)
March 31, December 31, March 31,
1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 148,526 $ 36,878 $ 24,072
Investment securities, available-for-sale
(at fair value) 56,071 76,184 -
Investment securities, held-to-maturity
(fair value of $82,046) - - 85,099
Mortgage-backed securities, available-for-sale
(at fair value) 806,441 835,448 -
Mortgage-backed securities, held-to-maturity
(fair value of $835,906) - - 842,566
Loans receivable, held-for-sale (fair value of
$5,307, $7,464, and $32,107) 5,294 7,377 32,107
Loans receivable 3,006,048 3,052,403 3,084,159
Accrued interest and dividends receivable 28,031 28,620 26,227
Real estate 26,010 19,821 15,692
Office properties and equipment, net 8,939 8,686 9,070
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 59,699 58,935 56,866
Other assets 20,766 15,385 23,075
---------- ---------- ----------
$4,165,825 $4,139,737 $4,198,933
========== ========== ==========
Liabilities
Deposits $2,256,643 $2,205,036 $2,297,485
FHLB advances and other borrowings 936,900 942,300 944,200
Securities sold under agreements to repurchase 706,282 724,643 715,654
Accrued expenses and other liabilities 70,689 71,467 54,587
---------- ---------- ----------
3,970,514 3,943,446 4,011,926
---------- ---------- ----------
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued 11,420,816
11,410,922, and 11,395,492 shares, outstanding
10,624,296, 10,614,402, and 10,598,972 shares 114 114 114
Additional paid-in capital 28,306 28,212 28,061
Retained earnings - substantially restricted 179,089 175,721 171,543
Loan to employee stock ownership plan (2,533) (2,500) (2,879)
Treasury stock, at cost, 796,520 shares (9,832) (9,832) (9,832)
Unrealized gain on securities
available-for-sale, net of taxes 167 4,576 -
---------- ---------- ----------
195,311 196,291 187,007
---------- ---------- ----------
$4,165,825 $4,139,737 $4,198,933
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Interest income:
Interest on loans $ 57,886 $ 55,335
Interest on mortgage-backed securities 14,715 11,130
Interest and dividends on investments 3,496 3,261
---------- ----------
Total interest income 76,097 69,726
---------- ----------
Interest expense:
Interest on deposits 27,168 25,987
Interest on borrowings 25,784 27,518
---------- ----------
Total interest expense 52,952 53,505
---------- ----------
Net interest income 23,145 16,221
Provision for loan losses 9,000 3,000
---------- ----------
Net interest income (loss)
after provision for losses 14,145 13,221
---------- ----------
Other income:
Loan and other fees 1,629 1,591
Gain (loss) on sale of loans and
mortgage-backed securities 124 (165)
Real estate operations, net 796 706
Other operating income 724 630
---------- ----------
Total other income 3,273 2,762
---------- ----------
Non-interest expense 11,466 11,677
---------- ----------
Earnings before income taxes 5,952 4,306
Income tax provision 2,584 1,949
---------- ----------
Net earnings $ 3,368 $ 2,357
========== ==========
Earnings per share $ 0.32 $ 0.22
========== ==========
Weighted average shares outstanding
for earnings per share calculation 10,674,779 10,632,586
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
March 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,368 $ 2,357
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net change in loans-held-for-sale 2,083 (2,124)
Provision for loan losses 9,000 3,000
Valuation adjustments on real estate sold
(152) (1,144)
Amortization of fees and discounts (765) (74)
Increase in negative amortization (1,255) (785)
Decrease (increase) in taxes payable 2,583 1,948
(Increase) decrease in interest and
dividends receivable 589 (1,807)
Increase (decrease) in interest payable 1,723 (3,314)
Other (5,423) (25)
--------- ---------
Total adjustments 8,383 (4,325)
--------- ---------
Net cash provided by (used in) operating activities
11,751 (1,968)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans 20,356 (85,394)
Loans purchased - (30)
Loans repurchased (7,297) (6,342)
Proceeds from sales of real estate 20,000 12,401
Proceeds from maturities and principal payments
on investment securities 19,980 4,015
Principal reduction of mortgage-backed securities 25,930 13,458
Purchase of investment securities - (5,100)
Net change in mark to market adjustment
for investment securities (4,409) -
Other (1,652) 3,597
--------- ---------
Net cash provided by (used in) investing activities 72,908 (63,395)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits
51,607 (1,429)
Net increase (decrease) in short term borrowings
(18,761) 95,533
Repayment of long term borrowings (5,000) (40,500)
Other (857) (22)
--------- ---------
Net cash provided by financing activities 26,989 53,582
--------- ---------
Net increase (decrease) in cash and cash equivalents 111,648 (11,781)
Cash and cash equivalents at beginning of period 36,878 35,853
--------- ---------
Cash and cash equivalents at end of period $ 148,526 $ 24,072
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FirstFed Financial Corp. and Subsidiary
Notes to Consolidated Financial Statements
1-. The unaudited financial statements included herein have
been prepared by the Registrant pursuant to the rules and
regulations of the Securities and Exchange Commission. In the
opinion of the Registrant, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the
results of operations for the periods covered have been made.
Certain information and note disclosures normally included in
financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. 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 10,674,779 for the
three months ended March 31, 1996 and 10,632,586 for the three
months ended March 31, 1995.
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.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
At March 31, 1996, 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, compared to $4.1 billion at December 31, 1995 and $4.2
billion at March 31, 1995. The increase in assets from December
31, 1995 to March 31, 1996 was due to growth in cash and liquid
investments which resulted from deposit inflows and principal
reductions on loans and mortgage-backed securities.
The economic recession which has affected Southern California
since 1990 began to improve in 1995 and has continued into 1996.
According to the UCLA Business Forecast for California, March,
1996 Report (the "UCLA Report"), the California economy is
showing signs of recovery due primarily to growth in jobs,
personal income and taxable sales. However, the Southern
California real estate market remains weak. Although statewide
sales of existing single family homes have improved in recent
months, sales prices have continued to decline. The California
Association of Realtors recently reported that statewide existing
home sales in January were up 17% from the same month in 1995 but
that statewide sales prices dropped 1.6% during the same period.
The authors of the UCLA Report believe that California real
estate values are getting close to the bottom and that sales
prices will soon join in the state's recovery.
For the first three months of 1996, loan charge-offs were $8
million compared to $11 million for the first three months of
1995. Charge-offs during 1996 and 1995 were due primarily to
continued foreclosures and losses on multi-family loans. The
ratio of non-performing assets to total assets was 2.56% as of
March 31, 1996, compared to 2.33% at December 31, 1995 and 2.49%
at March 31, 1995. Real estate acquired by foreclosure at March
31, 1996 increased 31% from the December 31, 1995 level and 69%
from the March 31, 1995 level. (See "Non-performing Assets" for
further discussion.)
The Bank's general valuation allowances were $46 million at March
31, 1996 compared to $43 million at December 31, 1995 and $41
million at March 31, 1995. The Bank also maintains valuation
allowances for impaired loans which totaled $24 million at March
31, 1996 compared to $26 million at December 31, 1995 and $30
million at March 31, 1995.
The Bank's portfolio of loans, including mortgage-backed
securities, at March 31, 1996 totaled $3.8 billion, compared to
$3.9 billion at December 31, 1995 and $4.0 billion at March 31,
1995. The decline in the loan portfolio over the last year is due
to principal reductions on loans and mortgage-backed securities
exceeding loan originations. Loan originations decreased by 57%
in the first three months of 1996 compared to the first three
months of 1995. Due to lower interest rates available during the
first quarter of 1996, borrowers preferred fixed rate loans to
adjustable rate mortgages. The Bank primarily focuses on the
origination of adjustable rate mortgages. The level of loan
originations has also been impacted by the Bank's decision to
limit multi-family lending. Due to inadequate market pricing for
the risks and costs associated with multi-family lending, since
1994, the Bank has originated multi-family loans primarily to
finance the sale of its real estate owned.
In mid-1995, the Bank formed FirstFed Mortgage Services ("FFMS"),
a division through which it engages in mortgage origination and
mortgage brokering activities. Through FFMS, loans which the
Bank cannot originate either for its portfolio or for sale in the
secondary market are marketed to a variety of other lenders. If
a loan brokered by FFMS is funded by another lender, FFMS
receives fee income for its mortgage brokerage activities. To
date, income from brokered loan originations by FFMS has not been
significant.
7
<PAGE>
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>
March 31, December 31, March 31,
1996 1995 1995
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $ 1,196,701 $ 1,217,848 $ 1,234,351
Two to four units 344,867 350,553 356,450
Five or more units 1,320,392 1,334,570 1,352,747
----------- ----------- -----------
Residential loans 2,861,960 2,902,971 2,943,548
OTHER REAL ESTATE LOANS:
Commercial and industrial 216,415 220,494 239,899
Second trust deeds 18,712 19,416 19,840
Other 3,038 3,206 4,891
----------- ----------- -----------
Real estate loans 3,100,125 3,146,087 3,208,178
NON-REAL ESTATE LOANS:
Manufactured housing 1,853 1,938 2,284
Deposit accounts 1,140 1,104 1,384
Consumer 292 359 130
----------- ----------- -----------
Loans receivable 3,103,410 3,149,488 3,211,976
LESS:
General valuation allowances-
loan portfolio 46,152 42,876 41,193
Valuation allowances - impaired loans 23,936 26,101 29,956
Unrealized loan fees 21,980 20,731 24,561
----------- ----------- -----------
Net loans receivable 3,011,342 3,059,780 3,116,266
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES:
Secured by single family dwellings 783,212 810,980 815,864
Secured by multi-family dwellings 23,229 24,468 26,702
----------- ----------- -----------
Mortgage-backed securities 806,441 835,448 842,566
----------- ----------- -----------
TOTAL $ 3,817,783 $ 3,895,228 $ 3,958,832
=========== =========== ===========
</TABLE>
Because the Bank structures mortgage-backed securities with loans
from its own portfolio, mortgage-backed securities generally have
the same experience with respect to prepayment, repayment,
delinquencies and other factors as the remainder of the Bank's
loan portfolio.
In accordance with a Special Report issued by the Financial
Accounting Standards Board in November of 1995 to assist in the
implementation and understanding of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS No. 115"), the Bank
reclassified its entire portfolio of mortgage-backed securities
to the available-for-sale category from the held-to-maturity
category. In accordance with SFAS No. 115, the mortgage-backed
securities portfolio was recorded at fair value as of March 31,
1996. A positive fair value adjustment of $556 thousand, net of
taxes, was reflected in stockholders' equity as of March 31,
1996. This represents a $4.3 million decrease from $4.9 million
as of December 31, 1995.
The Bank also reclassified its investment securities portfolio to
the available-for-sale category from the held for sale category.
A negative fair value adjustment of $389 thousand, net of taxes,
was reflected in stockholders' equity as of March 31, 1996. This
represents a $67 thousand decrease from $322 thousand as of
December 31, 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 $308 million or
7.39% at the end of the first quarter of 1996. In comparison,
the one year GAP ratio was a positive $348 million or 8.40% of
total assets as of December 31, 1995 and a positive $481 million
or 11.45% as of March 31, 1995. The positive one year GAP
decreased during the first three months of 1996 due to the growth
in short term certificates of deposit.
Since over 95% of the Bank's loans adjust based upon monthly
changes in the Eleventh District Cost of Funds Index ("COFI
Index"), 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, beginning in 1995, the
Bank started originating adjustable rate loans based upon the one
month London Interbank Overseas Rate ("LIBOR"). To date, LIBOR-
based adjustable rate loans have not represented a significant
percentage of loan originations.
The increase in deposits to $2.3 billion at March 31, 1996 from
$2.2 billion at December 31, 1995 resulted from increased
promotional efforts at the Bank's retail branches and the
acquisition of deposits from national brokerage firms.
Borrowings decreased to $1.6 billion as of March 31, 1996, from
$1.7 billion as of December 31, 1995 due to decreased cash flow
requirements resulting from deposit inflows and loan payoffs.
The Bank's capital as of March 31, 1996 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 5.6% and the risk-based
capital ratio was 11.0% at March 31, 1996. These ratios meet the
OTS' requirements necessary to be deemed well capitalized.
Results of Operations
The Company reported consolidated net earnings of $3.4 million
for the first quarter of 1996 compared to net earnings of $2.4
million for the first quarter of 1995. The improved earnings
resulted primarily from a 43% increase in net interest income,
offset by a $6 million increase in the loan loss provision. Due
to continued concerns about the credit quality of multi-family
real estate in Southern California and to increase the level of
the Bank's valuation allowances, $9 million was provided for loan
losses in the first quarter of 1996 compared to $3 million in the
first quarter of 1995.
Multi-family property values have continued to decline due to
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. Multi-family loans comprised 34% of loans and mortgage-
backed securities as of March 31, 1996.
For the first three months of 1996, loan charge-offs, net of
recoveries, were $8 million compared to $11 million for the first
three months of 1995. The lower charge-off levels in 1996
resulted primarily from fewer valuation allowances established on
multi-family loans compared to the first quarter of 1995. (See
"Non-performing Assets" for further discussion.)
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, foreclosure activity,
and management's perceptions of the severity and duration of
9
<PAGE>
the economic recession in Southern California.
Listed below is a summary of the activity in the general
valuation allowance and the valuation allowance for impaired
loans for the Bank's loan portfolio during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
------------------------------------
General Impaired
Valuation Valuation
Allowances Allowances Total
---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning general valuation allowances $ 42,876 $ 26,101 $ 68,977
Provision for loan losses 4,552 4,448 9,000
Charge-offs, net of recoveries:
Single family (2,201) (165) (2,366)
Multi-family 729 (6,448) (5,719)
Commercial 226 - 226
Non-real estate (30) - (30)
--------- --------- ---------
Total charge-offs (1,276) (6,613) (7,889)
--------- --------- ---------
Ending general valuation allowances $ 46,152 $ 23,936 $ 70,088
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1995
-----------------------------------
General Impaired
Valuation Valuation
Allowances Allowances Total
---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning general valuation allowances $ 55,353 $ 23,887 $ 79,240
Provision for loan losses (8,018) 11,018 3,000
Charge-offs, net of recoveries:
Single family (2,260) (1) (2,261)
Multi-family (3,540) (3,622) (7,162)
Commercial 161 (1,326) (1,165)
--------- --------- ---------
Total charge-offs (5,639) (4,949) (10,588)
Transfers to liability account for
loans sold with recourse (503) - (503)
--------- --------- ---------
Ending general valuation allowances $ 41,193 $ 29,956 $ 71,149
========= ========= =========
</TABLE>
The Bank also maintains a valuation allowance for loans sold with
recourse, recorded as a liability. This allowance was 3.64% of
loans sold with recourse as of March 31, 1996, compared to 3.65%
as of December 31, 1995 and 3.13% as of March 31, 1995. The
balance of loans sold with recourse totaled $242 million, $248
million and $270 million as of March 31, 1996, December 31, 1995
and March 31, 1995, respectively. The Bank has not entered into
any new recourse arrangements since 1989. Listed below is a
summary of the activity in the valuation allowance for loans sold
with recourse during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Beginning recourse valuation allowances $ 9,050 $ 7,948
Charge-offs (259) -
Transfers from valuation allowance - 503
-------- --------
Ending recourse valuation allowances $ 8,791 $ 8,451
======== ========
</TABLE>
10
<PAGE>
The Company's interest rate margin increased to 2.09% in the
first quarter of 1996 from 1.36% for the same period of last
year. The Eleventh District Cost of Funds Index (on a lagged
basis) determines the yield on over 95% of the Bank's loan
portfolio and was 0.72% higher during the first three months of
1996 compared to the same period of 1995. However, the Bank's
cost of funds was relatively unchanged between the two periods.
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 Three Months Ended March 31,
------------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------ ---------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans and mortgage-backed
securities $3,852,566 $ 72,601 7.54% $3,918,794 $ 66,465 6.78%
Investment securities 181,653 2,501 5.47 173,897 2,378 5.47
---------- -------- ---------- --------
Interest-earning assets 4,034,219 75,102 7.45 4,092,691 68,843 6.73
Other items (1) 995 883
-------- --------
Total interest income 76,097 69,726
Average dollar amount of and
average rate paid on:
Deposits 2,246,137 27,168 4.87 2,269,302 25,987 4.65
Borrowings 1,714,861 25,784 6.01 1,760,333 27,518 6.30
---------- -------- ---------- --------
Interest-bearing liabilities 3,960,998 52,952 5.36 4,029,635 53,505 5.37
Average dollar difference between
interest-earning assets and ---------- ----------
interest-bearing liabilities $ 73,221 $ 63,056
Net interest income/ ========== ==========
-------- ---- -------- ----
Interest rate spread $ 23,145 2.09% $ 16,221 1.36%
======== ==== ======== ====
Effective net spread (2) 2.18% 1.44%
==== ====
</TABLE>
- -----------------------------------
(1) Includes Federal Home Loan Bank Stock and other miscellaneous items.
(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 $796 thousand and
$706 thousand for the first quarter of 1996 and 1995,
11
<PAGE>
respectively. Gains result primarily from the recovery of
excess valuation allowances associated with foreclosed
properties sold.
A net gain on sale of loans of $124 thousand and a net loss of
$165 thousand were recognized for the first quarter of 1996 and
1995, respectively. The gain on sale of loans during the first
quarter of 1996 was primarily the result of deferred fees
recognized on loans sold. The volume of loans sold during the
first quarter of 1996 and 1995 was $19 million and $50 thousand,
respectively.
Total non-interest expense decreased by 2% during the first
quarter of 1996 compared to the prior year period. The expense-
to-assets ratio was 1.10% of average assets for the first
quarter of 1996, down from 1.12% for the same quarter of last
year. Management maintains ongoing programs to monitor the
level of non-interest expense incurred by the Company.
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 $98 million at March 31, 1996 compared to
$99 million at December 31, 1995 and $114 million at March 31,
1995.
The amount of interest that has been reserved for loans 90 days
or more delinquent or in foreclosure was $5 million at March 31,
1996, $6 million at December 31, 1995 and $6 million at March 31,
1995.
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 March 31, 1996, the Bank had modified loans totaling $12
million, net of loan loss allowances totaling $5 million. No
modified loans were 90 days or more delinquent as of March 31,
1996.
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.
The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1996 1995 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 29,895 $ 34,503 $ 39,730
Modified loans 11,274 16,573 39,034
Other impaired loans 37,076 35,333 26,091
-------- -------- --------
$ 78,245 $ 86,409 $104,855
======== ======== ========
</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>
March 31, December 31, March 31,
1996 1995 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Fair value method $ 59,753 $ 70,414 $ 94,150
Present value method 18,492 15,995 10,705
-------- -------- --------
Total impaired loans $ 78,245 $ 86,409 $104,855
======== ======== ========
</TABLE>
Impaired loans for which there were no valuation allowances
established totaled $4 million, $9 million and $9 million as of
March 31, 1996, December 31, 1995, and March 31, 1995,
respectively. See "Results of Operations" for an analysis of
activity in the valuation allowance for impaired loans.
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>
March 31, December 31, March 31,
1996 1995 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Single family $ 825 $ 1,677 $ 5,453
Multi-family 25,540 32,826 24,971
Commercial 3,530 - 9,306
-------- -------- --------
$ 29,895 $ 34,503 $ 39,730
======== ======== ========
</TABLE>
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.
Listed below is additional information concerning the Bank's
impaired loans for the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1996 1995 1995
--------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Average recorded investment $ 77,435 $ 83,307 $ 105,204
Interest income recognized:
Accrual method of accounting $ (8) $ - $ 13
Cash basis method of accounting $ 1,172 $ 1,311 $ 1,426
</TABLE>
13
<PAGE>
Asset Quality
The following table sets forth certain asset quality ratios of
the Bank at the periods indicated:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1996 1995 1995
-------- -------- --------
<S> <C> <C> <C>
Non-Performing Loans to
Loans Receivable (1) 2.61% 2.44% 2.78%
Non-Performing Assets to
Total Assets (2) 2.56% 2.33% 2.49%
Loan Loss Allowances to
Non-Performing Loans (3) 64.66% 65.62% 57.55%
General Loss Allowances to
Assets with Loss Exposure (4) 1.48% 1.35% 1.27%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 1.63% 1.52% 1.41%
</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
portfolio 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>
March 31, December 31, March 31,
1996 1995 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate owned:
Single family $ 9,112 $ 7,252 $ 5,421
Multi-family 13,797 9,827 9,598
Commercial 2,806 2,544 319
Other 177 78 -
-------- -------- --------
Total real estate owned 25,892 19,701 15,338
-------- -------- --------
Non-accrual loans:
Single family 26,248 25,991 22,410
Multi-family 65,661 69,579 73,916
Commercial 6,278 3,313 16,976
Other 223 220 246
Less:
Valuation allowances (1) (17,482) (22,159) (24,154)
-------- -------- --------
Total non-performing loans 80,928 76,944 89,394
-------- -------- --------
Total non-performing assets $106,820 $ 96,645 $104,732
======== ======== ========
</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 March 31, 1996 increased
31% compared to December 31, 1995 and 69% compared to March 31,
1995. Real estate owned increased compared to the previous
quarter and the same period of last year due to higher
foreclosures on both single family and multi-family loans.
Management continues to dedicate significant attention to the
quick resolution and disposition of foreclosed properties. Sales
of foreclosed real estate totaled $20 million and $12 million
during the first quarter of 1996 and 1995, respectively.
Non-accrual loans, net of valuation allowances, increased 5%
compared to the level at December 31, 1995 and decreased 9%
compared to the March 31, 1995 level. The increase since December
31, 1995 is due to lower valuation allowances on multi-family
loans. The decrease since the first quarter of 1995 was due
to a decline in multi-family and commercial non-accrual loans.
15
<PAGE>
Sources of Funds
External sources of funds include savings deposits from several
sources, advances from the Federal Home Loan Bank of San
Francisco ("FHLB"), securitized borrowings and unsecured term
funds.
Savings deposits are accepted from retail savings branches, the
telemarketing department, and national deposit brokers.
Excluding $19 million in interest credits during the first
quarter of 1996, total savings deposits increased by $33
million during the first three months of 1996.
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 will seek 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.
Deposits accepted by retail savings branches increased by $11
million during the first three months of 1996. The Bank has
increased its promotional efforts at retail branches in order to
counter increased competition for customer deposits in Southern
California. Retail deposits comprised 66% of total savings
deposits as of March 31, 1996.
Telemarketing deposits decreased by $25 million during the first
three months of 1996. These deposits are normally large
deposits from pension plans, managed trusts and other financial
institutions. These 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 March 31, 1996.
Deposits acquired from national brokerage firms ("brokered
deposits") increased by $47 million during the first three
months of 1996. 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" under the standards established by the Office of
Thrift Supervision, it may solicit brokered funds without
special regulatory approval. At March 31, 1996, brokered
deposits comprised 24% of total deposits.
Total borrowings decreased by $24 million during the first three
months of 1996 due to net payoffs of $18 million in borrowings
under reverse repurchase agreements and $26 million in advances
from the FHLB, offset by $20 million in additional unsecured
term funds.
Internal sources of funds include both principal payments and
payoffs on loans and mortgage-backed securities, 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 $48 million for the first quarter
of 1996. This compares with principal payments of $39 million
for the first quarter of 1995.
Loan sales increased to $19 million for the first quarter of
1996 compared with loan sales of $50 thousand for the first
quarter of 1995 due to an increase in the amount of saleable
product originated.
16
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3.1) Certificate of Incorporation and By-Laws filed
as Exhibit (1)(a) to Form 8-A dated June 4, 1987 and
incorporated by reference.
(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 March 31, 1996.
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: May 15, 1996
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 148,526
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 862,512
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,011,342
<ALLOWANCE> 46,152
<TOTAL-ASSETS> 4,165,825
<DEPOSITS> 2,256,643
<SHORT-TERM> 1,539,182
<LIABILITIES-OTHER> 70,689
<LONG-TERM> 104,000
0
0
<COMMON> 114
<OTHER-SE> 195,197
<TOTAL-LIABILITIES-AND-EQUITY> 4,165,825
<INTEREST-LOAN> 72,601
<INTEREST-INVEST> 3,496
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 76,097
<INTEREST-DEPOSIT> 27,168
<INTEREST-EXPENSE> 52,952
<INTEREST-INCOME-NET> 23,145
<LOAN-LOSSES> 9,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,466
<INCOME-PRETAX> 5,952
<INCOME-PRE-EXTRAORDINARY> 5,952
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,368
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 2.18
<LOANS-NON> 80,928
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 48,350
<ALLOWANCE-OPEN> 42,876
<CHARGE-OFFS> 8,148
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 46,152
<ALLOWANCE-DOMESTIC> 46,152
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
