<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 June 30, 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 August 1, 1996, 10,508,897 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 June 30, 1996, December 31, 1995
and June 30, 1995
Consolidated Statements of Operations for the three 4
months and six months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows for the six 5
months ended June 30, 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) 18
Item 4. Submission of Matters to a Vote of Securities Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures 19
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
FirstFed Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
June 30, December 31, June 30,
1996 1995 1995
---------- ----------- -----------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 79,650 $ 36,878 $ 70,669
Investment securities, available-for-sale
(at fair value) 120,776 76,184 -
Investment securities, held-to-maturity
(fair value of $88,470) - - 89,882
Mortgage-backed securities, available-for-sale
(at fair value) 765,555 835,448 -
Mortgage-backed securities, held-to-maturity
(fair value of $863,035) - - 858,716
Loans receivable, held-for-sale (fair value of
$2,929, $7,464, and $33,909) 2,926 7,377 33,790
Loans receivable, net 3,000,483 3,052,403 3,079,538
Accrued interest and dividends receivable 28,196 28,620 28,473
Real estate 20,548 19,821 15,377
Office properties and equipment, net 8,940 8,686 8,863
Investment in Federal Home Loan Bank
(FHLB) stock, at cost 60,518 58,935 57,484
Other assets 17,262 15,385 20,419
---------- ---------- ----------
$4,104,854 $4,139,737 $4,263,211
========== ========== ==========
Liabilities
Deposits $2,158,268 $2,205,036 $2,282,287
FHLB advances and other borrowings 1,020,875 942,300 994,600
Securities sold under agreements to repurchase 679,006 724,643 744,797
Accrued expenses and other liabilities 57,939 71,467 53,134
---------- ---------- ----------
3,916,088 3,943,446 4,074,818
---------- ---------- ----------
Commitments and Contingent Liabilities
Stockholders' Equity
Common stock, par value $.01 per share;
authorized 25,000,000 shares; issued 11,432,417
11,410,922, and 11,403,765 shares, outstanding
10,508,897, 10,614,402, and 10,607,245 shares 114 114 114
Additional paid-in capital 28,430 28,212 28,141
Retained earnings - substantially restricted 182,489 175,721 172,889
Loan to employee stock ownership plan (2,566) (2,500) (2,919)
Treasury stock, at cost,
923,520, 796,520, and 796,520 shares (11,885) (9,832) (9,832)
Unrealized gain (loss) on securities
available-for-sale, net of taxes (7,816) 4,576 -
---------- ---------- ----------
188,766 196,291 188,393
---------- ---------- ----------
$4,104,854 $4,139,737 $4,263,211
========== ========== ==========
</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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 56,564 $ 57,971 $ 114,450 $ 113,306
Interest on mortgage-backed securities 13,850 14,991 28,565 26,121
Interest and dividends on investments 3,339 3,380 6,835 6,641
---------- ---------- ---------- ----------
Total interest income 73,753 76,342 149,850 146,068
Interest expense:
Interest on deposits 26,245 28,362 53,413 54,349
Interest on borrowings 24,033 29,377 49,817 56,895
---------- ---------- ---------- ----------
Total interest expense 50,278 57,739 103,230 111,244
---------- ---------- ---------- ----------
Net interest income 23,475 18,603 46,620 34,824
Provision for loan losses 9,000 8,203 18,000 11,203
---------- ---------- ---------- ----------
Net interest income
after provision for loan losses 14,475 10,400 28,620 23,621
---------- ---------- ---------- ----------
Other income:
Loan and other fees 1,641 1,719 3,270 3,310
Gain on sale of loans and
mortgage-backed securities 73 426 197 261
Real estate operations, net 452 621 1,248 1,327
Other operating income 657 485 1,381 1,115
---------- ---------- ---------- ----------
Total other income 2,823 3,251 6,096 6,013
---------- ---------- ---------- ----------
Non-interest expense 11,287 11,205 22,753 22,882
---------- ---------- ---------- ----------
Earnings before income taxes 6,011 2,446 11,963 6,752
Income tax provision 2,611 1,100 5,195 3,049
---------- ---------- ---------- ----------
Net earnings $ 3,400 $ 1,346 $ 6,768 $ 3,703
========== ========== ========== ==========
Earnings per share $ 0.32 $ 0.13 $ 0.64 $ 0.35
========== ========== ========== ==========
Weighted average shares outstanding
for earnings per share calculation 10,618,472 10,679,934 10,636,757 10,663,524
========== ========== ========== ==========
</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)
Six Months Ended
June 30,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,768 $ 3,703
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Net change in loans-held-for-sale 4,451 (3,391)
Provision for loan losses 18,000 11,203
Valuation adjustments on real estate sold (768) (837)
Amortization of fees and discounts (662) (411)
Increase in negative amortization (2,257) (4,959)
Increase in taxes payable 5,195 3,049
(Increase) decrease in interest and
dividends receivable 424 (1,226)
Decrease in interest payable (6,289) (5,827)
Other (2,479) (917)
--------- ---------
Total adjustments 15,615 (3,316)
--------- ---------
Net cash provided by operating activities 22,383 387
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers net of principal
collection on loans 1,142 (122,531)
Loans repurchased (9,479) (13,662)
Proceeds from sales of real estate 41,181 31,729
Proceeds from maturities and principal payments
on investment securities 34,123 7,237
Principal reductions on mortgage-backed securities 49,085 22,321
Purchase of investment securities (79,405) (13,095)
Treasury stock purchases (2,053) -
Other 2,578 2,291
--------- ---------
Net cash provided by (used in) investing activities 37,172 (85,710)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in savings deposits (46,768) (16,627)
Net increase in short term borrowings 41,938 375,076
Repayment of long term borrowings (9,000) (240,500)
Other (2,953) 2,190
--------- ---------
Net cash provided by (used in) financing activities (16,783) 120,139
--------- ---------
Net increase in cash and cash equivalents 42,772 34,816
Cash and cash equivalents at beginning of period 36,878 35,853
--------- ---------
Cash and cash equivalents at end of period $ 79,650 $ 70,669
========= =========
</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 per share were computed by dividing net earnings
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 10,618,472 for the three months ended
June 30, 1996 and 10,679,934 for the three months ended June 30,
1995. Weighted average shares outstanding for the earnings per
share calculation were 10,636,757 for the six months ended June
30, 1996 and 10,663,524 for the six months ended June 30, 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 of the date of purchase.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
At June 30, 1996, FirstFed Financial Corp. (the "Company"),
holding company for First Federal Bank of California and its
subsidiaries (the "Bank"), had consolidated assets totaling $4.1
billion, compared to $4.1 billion at December 31, 1995 and $4.3
billion at June 30, 1995.
The Bank's primary market area is Southern California. For the
last two years Southern California has been in the process of
recovering from an economic recession which began in the early
1990s. Despite the fact that the region has shown strong gains in
retail spending, consumer confidence and employment since 1993,
the real estate market remains weakened by lower sales prices.
According to the UCLA Business Forecast for California, June,
1996 Report (the "UCLA Report"), a greater than expected outflow
of people from California during the period from 1993 to 1995 may
have affected demand and may explain why the housing market has
taken so long to recover. According to the UCLA Report, first
quarter home prices in Los Angeles County were 3% lower than one
year ago and 1.6% below the fourth quarter of 1995. The UCLA
Report also expresses concern that further reductions in home
prices could trigger a new wave of mortgage loan defaults due to
negative or very low equity in homes bought in the early 1990s.
The Bank's asset quality continues to be impacted by the
uncertainty and weakness in the Southern California real estate
market. The ratio of non-performing assets to total assets was
2.52% as of June 30, 1996, compared to 2.33% at December 31, 1995
and 1.99% at June 30, 1995. Real estate acquired through
foreclosure at June 30, 1996 increased 7% from the December 31,
1995 level and 39% from the June 30, 1995 level. Non-performing
loans, net of valuation allowances, increased 7% from the
December 31, 1995 level and 18% from the June 30, 1995 level.
(See "Non-performing Assets" for further discussion.)
For the second quarter of 1996, loan charge-offs, net of
recoveries, were $9.7 million compared to $10.1 for the second
quarter of 1995. For the first six months of 1996, loan charge-
offs, net of recoveries, were $17.9 million compared to $20.7
million for the first six months of 1995. Charge-offs during
1996 and 1995 were due primarily to losses on multi-family loans.
The Bank's general valuation allowances were $49 million at June
30, 1996 compared to $43 million at December 31, 1995 and $41
million at June 30, 1995. The Bank also maintains valuation
allowances for impaired loans which totaled $21 million at June
30, 1996, $26 million at December 31, 1995 and $28 million at
June 30, 1995.
The Bank's portfolio of loans, including mortgage-backed
securities, at June 30, 1996 totaled $3.8 billion, compared to
$3.9 billion at December 31, 1995 and $4.0 billion at June 30,
1995. The declines in the loan portfolio are due to principal
reductions on loans and mortgage-backed securities in excess of
loan originations. Loan originations were $73 million in the
second quarter of 1996 compared to $75 million in the second
quarter of 1995. Total principal payments were $80 million and
$41 million for the second quarter of 1996 and 1995,
respectively. For the first six months of 1996, loan
originations were $123 million compared to $191 million for the
first six months of 1995. Total principal payments were $149
million and $95 million for the first six months of 1996 and
1995, respectively. The Bank primarily focuses on the
origination of adjustable rate mortgages which were less in
demand by borrowers due to the availability of low-rate fixed
rate loans during 1996. 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.
7
<PAGE>
The following table shows the components of the Bank's portfolio
of loans and mortgage-backed securities by collateral type as of
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit $1,205,993 $1,217,848 $1,240,590
Two to four units 341,550 350,553 356,510
Five or more units 1,304,150 1,334,570 1,349,876
---------- ---------- ----------
Residential loans 2,851,693 2,902,971 2,946,976
OTHER REAL ESTATE LOANS:
Commercial and industrial 215,301 220,494 231,689
Second trust deeds 18,070 19,416 19,217
Other 2,761 3,206 3,738
---------- ---------- ----------
Real estate loans 3,087,825 3,146,087 3,201,620
NON-REAL ESTATE LOANS:
Manufactured housing 1,710 1,938 2,211
Deposit accounts 1,199 1,104 1,076
Consumer 320 359 426
---------- ---------- ----------
Loans receivable 3,091,054 3,149,488 3,205,333
LESS:
General valuation allowances-
loan portfolio 48,630 42,876 40,852
Valuation allowances - impaired loans 21,083 26,101 28,398
Unrealized loan fees 17,932 20,731 22,755
---------- ---------- ----------
Net loans receivable 3,003,409 3,059,780 3,113,328
FHLMC AND FNMA MORTGAGE-
BACKED SECURITIES (at fair value):
Secured by single family dwellings 745,016 810,980 832,899
Secured by multi-family dwellings 20,539 24,468 25,817
---------- ---------- ----------
Mortgage-backed securities 765,555 835,448 858,716
---------- ---------- ----------
TOTAL $3,768,964 $3,895,228 $3,972,044
========== ========== ==========
</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.
As permitted by 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 June 30,
1996. A negative fair value adjustment of $7.2 million, net of
taxes, was reflected in stockholders' equity as of June 30, 1996.
This compares with a positive fair value adjustment of $4.9
million as of December 31, 1995.
8
<PAGE>
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 $653 thousand, net of taxes,
was reflected in stockholders' equity as of June 30, 1996. This
compares with a $322 thousand negative adjustment as of December
31, 1995.
Deposits totaled $2.2 billion at June 30, 1996, comparable to the
level at December 31, 1995. Borrowings were $1.7 billion as of
June 30, 1996, comparable to the level at December 31, 1995.
Asset/Liability Management
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 $294 million or
7.16% at the end of the second 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 $390 million
or 9.14% as of June 30, 1995.
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. The positive one year GAP decreased during the
first six months of 1996 due to an increase in short term
borrowings.
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.
Capital
The Bank's capital as of June 30, 1996 exceeded the minimum
amounts required by its primary regulatory agency, the Office of
Thrift Supervision ("OTS"). The Bank is required to maintain
tangible capital of at least 1.5% of adjusted total assets, core
capital of at least 3.0% of adjusted total assets, and
risk-based capital of at least 8.0% of risk-weighted assets. The
Bank's core and tangible capital ratios were both 5.8% and the
risk-based capital ratio was 11.3% at June 30, 1996. These
ratios meet the OTS' requirements necessary to be deemed well
capitalized.
Pursuant to the authorization by the Company's Board of Directors
in 1987 to repurchase 10% of the Company's outstanding shares of
stock, 127,000 shares were repurchased in the second quarter of
1996 at an average price of $16.17. Based on the number of
shares outstanding at December 31, 1987, 137,000 shares remain
eligible for repurchase under the program.
Results of Operations
The Company reported consolidated net earnings of $3.4 million
for the second quarter of 1996 compared to net earnings of $1.3
million for the second quarter of 1995. The improved earnings
resulted primarily from a 26% increase in net interest income,
partially offset by a $1 million increase in the loan loss
provision.
The Company reported consolidated net earnings of $7 million for
the first six months of 1996 compared to $4 million for the same
period last year. For the first six months of 1996, the Bank
provided $18 million in loan loss provisions compared to $11
million for the first six months of 1995.
Loan Loss Provisions
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 the
economic recession in Southern California.
9
<PAGE>
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>
Six Months Ended June 30, 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 9,515 8,485 18,000
Charge-offs:
Single family (4,822) (165) (4,987)
Multi-family - (12,849) (12,849)
Commercial - (489) (489)
Non-real estate (157) - (157)
------- -------- --------
Total charge-offs (4,979) (13,503) (18,482)
Recoveries 2,827 - 2,827
-------- -------- --------
Net charge-offs (2,152) (13,503) (15,655)
-------- -------- --------
Transfers to general valuation
allowance for real estate (1,609) - (1,609)
-------- -------- --------
Ending general valuation allowances $ 48,630 $ 21,083 $ 69,713
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 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 (3,581) 14,784 11,203
Charge-offs:
Single family (3,126) 84 (3,042)
Multi-family (9,797) (7,391) (17,188)
Commercial - (2,966) (2,966)
Non-real estate (4) - (4)
-------- -------- --------
Total charge-offs (12,927) (10,273) (23,200)
Recoveries 2,510 - 2,510
-------- -------- --------
Net charge-offs (10,417) (10,273) (20,690)
-------- -------- --------
Transfers to liability account for
loans sold with recourse (503) - (503)
-------- -------- --------
Ending general valuation allowances $ 40,852 $ 28,398 $ 69,250
======== ======== ========
</TABLE>
The Bank also maintains a valuation allowance for loans sold with
recourse, recorded as a liability. This allowance was 3.54% of
loans sold with recourse as of June 30, 1996, compared to 3.65%
as of December 31, 1995 and 3.23% as of June 30, 1995. The
balance of loans sold with recourse totaled $239 million, $248
million and $261 million as of June 30, 1996, December 31, 1995
and June 30, 1995, respectively. The Bank has not entered into
any new recourse arrangements since 1989. Listed below is a
10
<PAGE>
summary of the activity in the valuation allowance for loans sold
with recourse during the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Beginning recourse valuation allowances $ 9,050 $ 7,948
Charge-offs (600) -
Transfers from valuation allowance - 503
-------- --------
Ending recourse valuation allowances $ 8,450 $ 8,451
======== ========
</TABLE>
The Bank established a general valuation allowance for real
estate owned ("REO") during the second quarter of 1996. Listed
below is a summary of the activity in the general valuation
allowance and the valuation allowance for real estate owned for
the six months ended June 30,1996:
<TABLE>
<CAPTION>
REO
General REO
Valuation Valuation
Allowances Allowances Total
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning general valuation allowances $ - $ 1,631 $ 1,631
Net transfers from loan
general valuation allowance 700 909 1,609
Charge-offs - (1,892) (1,892)
-------- -------- --------
Ending general valuation allowances $ 700 $ 648 $ 1,348
======== ======== ========
</TABLE>
Net Interest Income
The Company's interest rate margin increased to 2.11% during the
first six months of 1996 from 1.51% for the same period of last
year. The COFI Index (on a lagged basis) determines the yield on
over 95% of the loan portfolio. The Index in effect during the
three months and six months ended June 30, 1996 increased .07%
and .39% compared to the same periods of the prior year. In
addition, the Bank's cost of funds during the three months and
six months ended June 30, 1996 dropped by .44% and .22%,
respectively, compared to the same periods of the prior year.
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
11
<PAGE>
interest rate spreads, and (v) the effective net spreads for the
periods indicated:
<TABLE>
<CAPTION>
During the Six Months Ended June 30,
------------------------------------
1996 1995
-------------- ---------------
(Dollars In Thousands)
<S> <C> <C>
Average loans and mortgage-backed
securities $ 3,822,478 $ 3,942,472
Average investment securities 169,790 175,742
----------- -----------
Average interest-earning assets 3,992,268 4,118,214
----------- -----------
Average savings deposits 2,230,165 2,278,447
Average borrowings 1,684,870 1,787,679
----------- -----------
Average interest-bearing liabilities 3,915,035 4,066,126
----------- -----------
Excess of interest-earning assets over
interest-bearing liabilities $ 77,233 $ 52,088
=========== ===========
Yields earned on average interest
earning assets 7.40% 7.01%
Rates paid on average interest-
bearing liabilities 5.29 5.50
Net interest rate spread 2.11 1.51
Effective net spread1 2.21 1.58
Total interest income $ 147,683 $ 144,340
Total interest expense 103,230 111,244
----------- -----------
44,453 33,096
Total other items2 2,167 1,728
----------- -----------
Net interest income $ 46,620 $ 34,824
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
During the Three Months Ended June30,
-------------------------------------
1996 1995
--------------- ---------------
(Dollars In Thousands)
<S> <C> <C>
Average loans and mortgage-backed
securities $ 3,799,176 $ 3,966,341
Average investment securities 157,927 177,587
----------- -----------
Average interest-earning assets 3,957,103 4,143,928
----------- -----------
Average savings deposits 2,214,194 2,287,592
Average borrowings 1,654,879 1,815,025
----------- -----------
Average interest-bearing liabilities 3,869,073 4,102,617
----------- -----------
Excess of interest-earning assets over
interest-bearing liabilities $ 88,030 $ 41,311
=========== ===========
Yields earned on average interest
earning assets 7.34% 7.29%
Rates paid on average interest-
bearing liabilities 5.21 5.63
Net interest rate spread 2.13 1.66
Effective net spread1 2.24 1.71
Total interest income $ 72,581 $ 75,497
Total interest expense 50,278 57,739
----------- -----------
22,303 17,758
Total other items2 1,172 845
----------- -----------
Net interest income $ 23,475 $ 18,603
=========== ===========
</TABLE>
- ------------------------
(1) 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).
(2) Includes Federal Home Loan Bank Stock and other miscellaneous
items.
12
<PAGE>
Non-Interest Income
Real estate operations produced net gains of $452 thousand and
$621 thousand for the second quarter of 1996 and 1995,
respectively. For the first six months of 1996 and 1995, real
estate operations produced net gains of $1.2 million and $1.3
million, respectively. Gains result primarily from the recovery
of excess valuation allowances associated with foreclosed
properties sold.
A net gain on sale of loans and mortgage-backed securities of $73
thousand and $426 thousand were recognized for the second quarter
of 1996 and 1995, respectively. The gain on sale of loans during
the second quarter of 1996 was primarily the result of deferred
fees recognized on loans sold. For the first six months of 1996,
sales of loans and mortgage-backed securities produced a net gain
of $197 thousand compared to $261 thousand for the first six
months of 1995. The volume of loans sold during the second
quarter of 1996 and 1995 was $11 million and $2 million,
respectively. During the first six months of 1996 and 1995, the
volume of loans sold was $30 million and $2 million,
respectively.
Non-Interest Expense
Non-interest expenses were comparable to prior year amounts
during both the three months ended and six months ended June 30.
The expense-to-assets ratios increased to 1.09% and 1.10% for the
second quarter and first six months of 1996, respectively, from
1.06% and 1.09%, respectively, for the same periods one year ago
due to decreases in average assets. 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 $102 million at June 30, 1996 compared to
$99 million at December 31, 1995 and $92 million at June 30,
1995.
The amount of interest that has been reserved for loans 90 days
or more delinquent or in foreclosure was $5 million at June 30,
1996, $6 million at December 31, 1995 and $5 million at June 30,
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 June 30, 1996, the Bank had modified loans totaling $14
million, net of loan loss allowances totaling $5 million. No
modified loans were 90 days or more delinquent as of June 30,
1996.
Pursuant to Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan", ("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.
13
<PAGE>
The following is a summary of impaired loans, net of valuation
allowances for impairment, as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 33,025 $ 34,503 $ 28,674
Modified loans 7,819 16,573 34,632
Other impaired loans 14,660 35,333 34,136
-------- -------- --------
$ 55,504 $ 86,409 $ 97,442
======== ======== ========
</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.
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 as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Fair value method $ 48,389 $ 70,414 $ 80,260
Present value method 7,115 15,995 17,182
-------- -------- --------
Total impaired loans $ 55,504 $ 86,409 $ 97,442
======== ======== ========
</TABLE>
Impaired loans for which there were no valuation allowances
established totaled $1 million, $9 million and $16 million as of
June 30, 1996, December 31, 1995, and June 30, 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
dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
--------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Single family $ 847 $ 1,677 $ 4,593
Multi-family 27,372 32,826 19,491
Commercial 4,806 - 4,590
-------- -------- --------
$ 33,025 $ 34,503 $ 28,674
======== ======== ========
</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
14
<PAGE>
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>
June 30, December 31, June 30,
1996 1995 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Average recorded investment $ 52,815 $ 83,307 $ 94,009
Interest income recognized:
Accrual method of accounting $ 34 $ - $ (481)
Cash basis method of accounting $ 509 $ 1,311 $ 2,058
</TABLE>
Asset Quality
The following table sets forth certain asset quality ratios of
the Bank at the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
------ ------ ------
<S> <C> <C> <C>
Non-Performing Loans to
Loans Receivable (1) 2.66% 2.44% 2.18%
Non-Performing Assets to
Total Assets (2) 2.52% 2.33% 1.99%
Loan Loss Allowances to
Non-Performing Loans (3) 66.96% 65.62% 68.52%
General Loss Allowances to
Assets with Loss Exposure (4) 1.56% 1.35% 1.27%
General Loss Allowances to
Total Assets with Loss
Exposure (5) 1.70% 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.
15
<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 follows as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate owned:
Single family $ 10,339 $ 7,252 $ 5,839
Multi-family 9,712 9,827 8,641
Commercial 1,080 2,544 773
Other - 78 -
--------- --------- ---------
Total real estate owned 21,131 19,701 15,253
--------- --------- ---------
Non-accrual loans:
Single family 24,187 25,991 20,410
Multi-family 70,064 69,579 60,242
Commercial 7,201 3,313 10,846
Other 192 220 409
Less:
Valuation allowances (1) (19,427) (22,159) (22,124)
--------- --------- ---------
Total non-accrual loans 82,217 76,944 69,783
--------- --------- ---------
Total non-performing assets $ 103,348 $ 96,645 $ 85,036
========= ========= =========
Non-Performing Assets to
Total Assets 2.52% 2.33% 1.99%
==== ==== ====
</TABLE>
- ------------------------------------
(1) Includes valuation allowances for impaired loans and loss allowances on
other non-performing loans requiring fair value adjustments.
Real estate owned at June 30, 1996 increased 7% compared to
December 31, 1995 and 39% compared to June 30, 1995. Real
estate owned increased compared to December 31, 1995 and June
30, 1995 primarily due to higher foreclosures on single family
loans. Management continues to dedicate significant attention to
the quick resolution and disposition of foreclosed properties.
Sales of foreclosed real estate totaled $21 million and $20
million during the second quarter of 1996 and 1995,
respectively. For the first six months of 1996 and 1995, sales
of foreclosed real estate totaled $41 million and $32 million,
respectively.
Non-accrual loans, net of valuation allowances, increased 7%
compared to the level at December 31, 1995. The increase was due
to increased delinquencies on commercial properties. The 18%
increase since the second quarter of 1995 was due to an increase
in single family and multi-family non-accrual loans. However,
non-accrual commercial real estate loans decreased during this
period.
The Bank had potential problem loans totalling $32 million at
June 30, 1996 which are not included in the above numbers.
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.
16
<PAGE>
Savings deposits are accepted from retail savings branches, the
telemarketing department, and national deposit brokers.
Excluding $18 million and $37 million in interest credits during
the second quarter and first six months of 1996, respectively,
total savings deposits decreased by $117 million and $84 million
during the second quarter and first six months of 1996,
respectively.
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 decreased by $21
million and $10 million during the second quarter and first six
months of 1996, respectively. 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 69% of total savings
deposits as of June 30, 1996.
Telemarketing deposits decreased by $44 million and $69 million
during the second quarter and first six months of 1996,
respectively. 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 8% of
total deposits at June 30, 1996.
Deposits acquired from national brokerage firms ("brokered
deposits") decreased by $52 million and $5 million during the
second quarter and first six months of 1996, respectively. 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 June 30, 1996, brokered deposits comprised 23% of total
deposits.
Total borrowings increased by $57 million during the second
quarter of 1996 due to net payoffs of $28 million in borrowings
under reverse repurchase agreements and $1 million in unsecured
term funds offset by $86 million in additional advances from the
FHLB. Total borrowings increased by $33 million during the
first six months of 1996 due to net payoffs of $46 million in
borrowings under reverse repurchase agreements offset by $19
million in additional unsecured term funds and $60 million in
additional advances from the FHLB.
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 $80 million and $149 million for
the second quarter and first six months of 1996, respectively.
This compares with principal payments of $41 million and $95
million for the second quarter and first six months of 1995,
respectively.
Loan sales increased to $11 million and $30 million for the
second quarter and the first six months of 1996, respectively,
compared with loan sales of $2 million for both the second
quarter and first six months of 1995 due to an increase in the
amount of saleable product originated.
17
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On April 24, 1996 the Company held its Annual Meeting of
Stockholders for the purpose of voting on two proposals.
The following are the matters voted on at the meeting and
the votes cast for, against or withheld, and abstentions
as to each such matter. There were no broker non-votes as
to these matters.
1) Election of Directors
<TABLE>
<CAPTION>
For Against Abstain
--------- ----------- ---------
<S> <C> <C> <C>
William A. Ouchi 8,544,852 92,962 0
William P. Rutledge 8,544,852 92,962 0
Charles F. Smith 8,565,217 92,577 0
</TABLE>
2) Ratification of KPMG Peat Marwick LLP as independent
public auditors for the Company for 1995.
For: 8,582,194
Against: 35,801
Abstain: 19,799
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(3.) 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
June 30, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FIRSTFED FINANCIAL CORP.
------------------------
Registrant
Date: August 14, 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
19
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 79,650
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 886,331
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,003,409
<ALLOWANCE> 48,630
<TOTAL-ASSETS> 4,104,854
<DEPOSITS> 2,158,268
<SHORT-TERM> 1,599,881
<LIABILITIES-OTHER> 57,939
<LONG-TERM> 100,000
0
0
<COMMON> 114
<OTHER-SE> 188,652
<TOTAL-LIABILITIES-AND-EQUITY> 4,104,584
<INTEREST-LOAN> 143,015
<INTEREST-INVEST> 6,835
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 149,850
<INTEREST-DEPOSIT> 53,413
<INTEREST-EXPENSE> 103,230
<INTEREST-INCOME-NET> 46,620
<LOAN-LOSSES> 18,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,753
<INCOME-PRETAX> 11,963
<INCOME-PRE-EXTRAORDINARY> 11,963
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,768
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 2.21
<LOANS-NON> 82,217
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 31,709
<ALLOWANCE-OPEN> 42,876
<CHARGE-OFFS> 22,187
<RECOVERIES> 4,323
<ALLOWANCE-CLOSE> 48,630
<ALLOWANCE-DOMESTIC> 48,630
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
