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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from N/A to __________
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
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $0.01 PAR VALUE
(TITLE OF CLASS)
Securities registered pursuant to Section 12(g) of the Act: NONE
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
_____ _____
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of February 14, 1997: $229,658,227. The
number of shares of Registrant's $0.01 par value common stock outstanding as of
February 14, 1997: 10,539,379.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Stockholders, April 23,
1997 (Parts III & IV).
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K (SUB-SECTION 229.405 OF THIS CHAPTER) IS NOT CONTAINED
HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN
DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART
III OF THE FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
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PART I
ITEM 1--BUSINESS
General Description
FirstFed Financial Corp., a Delaware corporation ["FFC," and
collectively with its sole and wholly-owned subsidiary, First Federal Bank of
California (the "Bank"), the "Company"], was incorporated on February 3, 1987.
Since September 22, 1987, FFC has operated as a savings and loan holding
company engaged primarily in the business of owning the Bank. Because the
Company does not presently engage in any independent business operations,
substantially all earnings and performance figures herein reflect the
operations of the Bank.
The Bank was organized in 1929 as a state-chartered savings and loan
association, and, in 1935, converted to a federal mutual charter. In February
1983 the Bank obtained a federal savings bank charter, and, in December 1983,
converted from mutual to stock ownership.
The principal business of the Bank is attracting savings and checking
deposits from the general public, and using such deposits, together with
borrowings and other funds, to make real estate secured loans.
At December 31, 1996, the Company had assets totaling $4.1 billion,
comparable to the level at December 31, 1995. The Company recorded net earnings
of $8.2 million for the year ended December 31, 1996. It recorded net earnings
of $6.5 million and a net loss of $24.5 million for the years ended December
31, 1995 and 1994, respectively.
The Bank derives its revenues principally from interest on loans and
investments, loan origination fees and servicing fees on loans sold. Its major
items of expense are interest on deposits and borrowings, and general and
administrative expense.
As of February 14, 1997, the Bank operated 25 retail savings branches
and 2 loan origination offices, all located in Southern California. In addition
to the retail branches, the Bank has telemarketing programs which expand the
geographic scope of its deposit activities. Permission to operate all
full-service branches must be granted by the Office of Thrift Supervision
("OTS").
The Bank's principal market for loan originations continues to be
Southern California.
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation, Oceanside Insurance Agency, Inc. and Santa Monica Capital Group,
all of which are California corporations. See "Subsidiaries." The Bank conducts
its loan origination business under the name "FirstFed Mortgage Services." See
"Competition."
Current Operating Environment
The Company's operating results are significantly influenced by
national and regional economic conditions, monetary and fiscal policies of the
federal government, housing demand and affordability and general levels of
interest rates.
The Bank's primary market area is Los Angeles County. This area of
Southern California has been especially affected by the economic recession
which began in 1990. Many economists agree that California is now in the third
year of its recovery from a recession. Propelling the California recovery is
job growth, particularly in the entertainment and service industries, and
wholesale and
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retail trades, coupled with expanding foreign trade and an improved business
climate in the state. Consumer confidence continues to improve.
Real estate prices in Southern California are believed to have
bottomed out and may even have begun to improve in certain areas. According to
"Los Angeles Real Estate Magazine" January, 1997 edition, "At last the worst
appears to be over. Economists are now saying that L.A. home prices hit bottom
in early 1996 and that the median price has started inching upward..." The
"UCLA Business Forecast for California", December 1996 Report ("UCLA Report")
further states that certain demographic changes in the state, such as record
levels of out-migration and slower growth in the population of young adults,
which had contributed to the decline in real estate prices earlier in the
decade, may soon reverse.
Because the Bank typically lends less than 90% of the appraised value
of the underlying collateral of loans originated, borrowers originally have
equity in their properties. However, when the value of the underlying
collateral declines, borrowers may have little or no remaining equity and
consequently foreclosure by the Bank becomes more likely. Additionally,
multi-family property values have been impacted by decreased rental income
resulting from increased vacancies and a general lowering of market rents. Upon
foreclosure, or when foreclosure becomes likely, the Bank's assets are recorded
at fair value less estimated cost to sell. Consistent with the improved real
estate climate in the greater Los Angeles area, non-performing assets declined
to 1.78% of total assets at the end of 1996 from 2.33% at the end of 1995 and
2.23% at the end of 1994.
The Bank continually monitors the sufficiency of the collateral
supporting its loan portfolio. The portfolio is evaluated on a number of
factors including property location, date of origination and the original
loan-to-value ratio. The Bank has added substantial amounts to its general
allowance for anticipated loan losses as a result of these evaluations,
particularly during 1994 at the height of the real estate recession. The
provision for loan losses was $35.2 million in 1996 compared to $28.4 million
in 1995 and $85.7 million in 1994.
The ratio of general valuation allowance to the Bank's assets with
loss exposure (the Bank's loan portfolio plus real estate owned) was 1.73% at
the end of 1996 compared to 1.35% at the end of 1995 and 1.73% at the end of
1994. The increase in the general valuation allowance at December 31,1996 from
December 31,1995 is the result of the increased provision for loan losses and a
decrease in charge-offs. The decrease in the general valuation account at
December 31, 1995 compared to December 31, 1994 is the result of a decreased
provision for loan losses in 1995 compared with 1994, partially offset by
decreased loan charge-offs. See "Business - Loan Loss Experience Summary".
The Bank also maintains separate valuation allowances for impaired
loans and loans sold with recourse. See "Business -- Loan Loss Experience
Summary" for additional information regarding valuation allowances for these
loans.
Current Interest Rate Environment. Due to the relative strength of
the national economy, the Federal Reserve Board ("FRB") decreased interest
rates once during 1996 causing key interest rates to remain flat or slightly
below year-ago levels. However, during 1995, interest rates were more
volatile. The FRB increased interest rates once early in 1995 due to concerns
about inflation on the national level but later reduced interest rates twice
due to concerns that the national economy was slowing down. In a declining
interest rate environment, the Bank's interest rate spread increases due to a
time lag inherent in the adjustable loan portfolio. The reverse is true during
periods of increasing interest rates. The time lag inherent in the loan
portfolio results from operational and regulatory constraints which do not
allow the Bank to pass through monthly changes in the primary index utilized
for the majority of its adjustable rate loan customers for a period of ninety
days. However, interest costs on the Bank's short term deposits and borrowings
respond immediately to a change in interest rates.
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Because of the stability in interest rates during 1996, this time lag had an
insignificant effect on the Bank's operations. See "Asset-Liability Management"
and "Components of Earnings - Net Interest Income" in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for additional
information.
Competition. The Bank experiences strong competition in attracting and
retaining deposits and originating real estate loans. It competes for deposits
with many of the nation's largest savings institutions and commercial banks
which have significant operations in Southern California. Federal legislation
has been passed which imposed a special assessment on institutions with
deposits insured by the Savings Association Insurance Fund ("SAIF"). This
action recapitalized the SAIF and therefore caused a reduction in the disparity
between the insurance assessment rates of the Bank Insurance Fund ("BIF") and
the SAIF. See "Summary of Material Legislation and Regulations - Insurance of
Accounts."
The Bank also competes for deposits with credit unions, thrift and
loan associations, money market mutual funds, issuers of corporate debt
securities and the government. In addition to the rates of interest offered to
depositors, the Bank's ability to attract and retain deposits depends upon the
quality and variety of services offered, the convenience of its branch
locations and its financial strength as perceived by depositors.
The Bank competes for real estate loans primarily with savings
institutions, commercial banks, mortgage banking companies and insurance
companies. The primary factors in competing for loans are interest rates, loan
fees, interest rate caps, interest rate adjustment provisions and the quality
and extent of service to borrowers and mortgage brokers.
Environmental Concerns. Under certain circumstances, such as when it
actively participates in the management or operation of a property securing its
loans, the Bank could have liability for any properties found to have pollutant
or toxic features. Environmental protection laws are strict and impose joint
and several liability on numerous parties. It is possible for the cost of
cleanup of environmental problems to exceed the value of the security property.
The Bank has adopted stringent environmental underwriting requirements when
considering loans secured by properties which appear to have environmentally
high risk characteristics (e.g. commercial, industrial, new construction of all
types, and older properties of all types which may contain friable asbestos or
lead paint hazards). These requirements are intended to minimize the risk of
environmental hazard liability. The Bank's policies are also designed to avoid
the potential for liability imposed on lenders who assume the management of a
property.
Business Concentration. The Bank has no single customer or group of
customers, either as depositors or borrowers, the loss of any one or more of
which would have a material adverse effect on the Bank's operations or earnings
prospects.
Yields Earned and Rates Paid. Net interest income, the major
component of core earnings for the Bank, depends primarily upon the difference
between the combined average yield earned on the loan and investment security
portfolios and the combined average interest rate paid on deposits and
borrowings, as well as the relative balances of interest-earning assets and
interest-bearing liabilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview and Components of
Earnings - Net Interest Income" for further analysis and discussion.
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Lending Activities
General. The Bank's primary lending activity has been and continues to
be the origination of loans for the purpose of enabling borrowers to purchase,
refinance or construct improvements on residential real property. The loan
portfolio primarily consists of loans made to home buyers and homeowners on the
security of single family dwellings and multi-family dwellings. The loan
portfolio also includes loans secured by commercial and industrial properties.
For an analysis of loan portfolio composition and an analysis of the
types of loans originated, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Balance Sheet Analysis - Loan
Portfolio and Loan Composition."
Origination and Sale of Loans. The Bank employs loan officers on an
incentive compensation basis to obtain qualified applicants for loans. The Bank
also derives business from other sources such as mortgage brokers, borrower
referrals and clients from its retail banking branches.
Loan originations were $302.8 million in 1996, $299.3 million in 1995
and $909.3 million in 1994. Loan originations during 1994 included $59.2
million in loans purchased from other financial institutions. Loan origination
volume remained substantially the same in 1996 compared to 1995.
Management decided to de-emphasize the origination of multi-family
loans in 1994 due to real estate market conditions and governmental regulations
relating to risk-based capital requirements for such loans. As a result,
multi-family loans were 19% of originations in 1996 and 1995 and 18% of loan
originations in 1994. Multi-family loans originated during 1996, 1995 and 1994
resulted primarily from the sale of the Bank's foreclosed properties.
Loans sold totaled $24.1 million in 1996, $36.5 million in 1995 and
$43.7 million in 1994. For the year ended December 31, 1996, $22.9 million in
loans were originated for sale compared to $34.6 million in 1995 and $49.0
million during 1994. Loans originated for resale totaled 8%, 12% and 5% of loan
originations during 1996, 1995 and 1994, respectively.
Loans held-for-sale at December 31, 1996, 1995 and 1994 were $6.2
million, $7.4 million and $30.4 million, respectively, constituting 0.20%,
0.24% and 0.99%, respectively, of the Bank's total loans at such dates. In
December of 1995, the Bank transferred $19.2 million of loans previously
"held-for-sale" to its "held-for-investment" portfolio.
Loans originated for resale are recorded at the lower of cost or
market. The time from origination to sale may take up to three months due to
packaging requirements. During this time period the Bank may be exposed to
price adjustments as a result of fluctuations in market interest rates.
The Bank structures mortgage-backed securities with loans from its own
loan portfolio for use in collateralized borrowing arrangements. In exchange
for the improvement in credit risk when the mortgage-backed securities are
formed, guarantee fees are paid to the Federal Home Loan Mortgage Corporation
("FHLMC") or the Federal National Mortgage Association ("FNMA"). No loans were
converted into mortgage-backed securities in 1996. However, $59.7 million and
$198.1 million in loans were converted into mortgage-backed securities during
1995 and 1994, respectively. All of the loans underlying the mortgage-backed
securities were originated by the Bank. Therefore, mortgage-backed securities
generally have the same experience with respect to prepayment, repayment,
delinquencies and other factors as the remainder of the Bank's portfolio.
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In accordance with a Special Report issued by the Financial Accounting
Standards Board ("FASB") in November of 1995 to assist in the implementation
and understanding of the 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 portfolio of mortgage-backed securities was
recorded at fair value as of December 31, 1996 and 1995. A negative fair
value adjustment of $4.1 million, net of taxes, was recorded in stockholders'
equity at December 31, 1996. A positive fair value adjustment of $4.9 million,
net of taxes was recorded in stockholders' equity at December 31, 1995.
The Bank serviced $572.3 million in loans for other investors as of
December 31, 1996. $230.8 million of these loans were sold under recourse
arrangements. The Bank has an additional $20.1 million in loans that were
formed into mortgage-backed securities with recourse features, but were still
owned by the Bank as of December 31, 1996. Due to regulatory requirements, the
Bank maintains capital for loans sold with recourse as if those loans had not
been sold. The Bank had been active in these types of transactions in the past,
but has not entered into any new recourse arrangements since 1989 when the new
capital regulations took effect. Loans sold with recourse are considered along
with the Bank's own loans in determining the adequacy of general loan valuation
allowances. The decrease in the principal balance of loans sold with recourse
to $230.8 million at the end of 1996 from $247.6 million at the end of 1995 and
$278.3 million at the end of 1994 was due to loan amortization, payoffs and
foreclosures.
Interest Rates, Terms and Fees. The Bank makes adjustable mortgage
loans ("AMLs") with 30 and 40 year terms and interest rates which adjust each
month based upon the Federal Home Loan Bank's Eleventh District Cost of Funds
Index ("Index"). (See "Asset-Liability Management" in "Management's Discussion
and Analysis of Financial Condition and Results of Operations.") While the
monthly payment can change annually, the maximum annual change in the payment
is limited to 7.5%. Any additional interest due as a result of a rising Index
is added to the principal balance of the loan ("negative amortization").
Payments are adjusted every five years without regard to the 7.5% limitation to
provide for full amortization during the balance of the loan term. Although the
interest rates are adjusted monthly, these loans have maximum interest rates
which can be charged ranging from 400 to 750 basis points above their initial
interest rate. Generally, these loans may be assumed at any time during their
term provided that the Bank enters into a separate written agreement with the
current borrower and the qualified borrower to whom the property is
transferred. Additionally, the new borrower is required to pay assumption fees
customarily charged for similar transactions.
The Bank offers two primary AML products based on the Index, the "AML
IIC" and the "AML IID." The initial interest rate on the AML IIC is below
market for the first three months of the loan term. The AML IID has no below
market initial interest rate but starts with a pay rate similar to the AML IIC.
This results in immediate negative amortization but allows the loan to earn at
the fully indexed interest rate immediately. The difference in negative
amortization on these two products is minor. 81% of the Bank's AML loan
origination volume in 1996 was comprised of these two products.
Under current portfolio loan programs, the Bank normally lends less
than or equal to 90% of a single family property's appraised value at the time
of loan origination.
The Bank generally requires that borrowers obtain private mortgage
insurance on loans in excess of 80% of the appraised property value. On
certain portfolio loans, the Bank charges premium rates and/or fees in exchange
for waiving the insurance requirement. Management believes that the additional
rates and fees charged on these loans compensate the Bank for the additional
risks associated with this type of loan. Subsequent to the origination of a
portfolio loan, the Bank may
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purchase private mortgage insurance with its own funds. Under certain of these
mortgage insurance programs, the Bank acts as co-insurer and participates with
the insurer in absorbing any future loss. As of December 31, 1996 and December
31, 1995, loans which had co-insurance totaled $258.9 million and $258.2
million, respectively. Loans over 80% loan-to-value, for which there was no
private mortgage insurance, totaled $122.5 million at December 31, 1996
compared to $132.5 million at December 31, 1995 and $128.6 million at December
31, 1994.
Because AML loan-to-value ratios may increase above those established
at the time of loan origination due to negative amortization, the Bank rarely
lends in excess of 90% of the appraised value on AMLs. When the Bank does lend
in excess of 90% of the appraised value, additional fees and higher rates are
charged, and there is no below market initial interest rate. The amount of
negative amortization recorded by the Bank increases during periods of rising
interest rates. As of December 31, 1996, negative amortization on all loans
serviced by the Bank totaled $11.0 million, compared to $6.7 million at
December 31, 1995.
Although regulations permit a maximum amortization period of 40 years
for real estate secured home loans and 30 years for other real estate loans,
the majority of the Bank's real estate loans provide for a maximum amortization
term of 30 years or less. In 1994, the Bank began offering several of its loan
products based on an amortization period of 40 years. Loans with 40-year terms
constituted 14% and 20% of loan originations during 1996 and 1995,
respectively.
The following table shows the contractual remaining maturities of the
Bank's loans at December 31, 1996:
<TABLE>
<CAPTION>
LOAN MATURITY ANALYSIS
MATURITY PERIOD
-----------------------------------------------------------------------------------------
>1 YEAR
TOTAL 1 YEAR TO 5 >5-10 >10-20 >20-30 >30
BALANCE OR LESS YEARS YEARS YEARS YEARS YEARS
----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive loans:
AMLs........................... $3,021,246 $8,554 $ 8,656 $51,903 $178,388 $2,551,981 $ 221,764
----------- ----------- ----------- ----------- ----------- ----------- -----------
Fixed-rate loans:
1st mortgages................. 25,906 147 3,566 6,905 8,314 6,776 198
2nd mortgages................. 260 - 94 166 - - -
Consumer and other loans...... 1,057 1,057 - - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total.......................... $3,048,469 $9,758 $12,316 $58,974 $186,702 $2,558,757 $221,962
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
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Non-accrual, Past Due, Impaired and Restructured Loans
The Bank establishes allowances for delinquent interest equal to the
amount of accrued interest on all loans 90 days or more past due or in
foreclosure. This practice effectively places such loans on non-accrual status
for financial reporting purposes.
The following is a summary of non-accrual loans for which delinquent
interest allowances had been established as of the end of each of the periods
indicated:
<TABLE>
<CAPTION>
% OF % OF % OF % OF %OF
1996 TOTAL 1995 TOTAL 1994 TOTAL 1993 TOTAL 1992 TOTAL
------- ------ ------- -------- ------- ------- -------- ------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual Loans:
Single family.......... $25,602 35% $25,991 26% $13,041 14% $ 25,317 24% $24,634 35%
------- ------ ------- -------- ------- ------- -------- ------- ------- -------
Multi-family........... 44,754 62 69,579 70 60,213 64 70,207 66 42,481 60
Commercial............. 2,223 3 3,313 4 20,986 22 10,307 10 3,623 5
Other.................. - - 220 - 245 - 245 - 271 -
------- ------ ------- -------- ------- ------- -------- ------- ------- -------
Total Non-accrual
Loans.............. $72,579 100% $99,103 100% $94,485 100% $106,076 100% $71,009 100%
======= ====== ======= ======== ======= ======= ======== ======= ======= =======
</TABLE>
The allowance for delinquent interest, based on loans past due more
than 90 days or in foreclosure, totaled $4.2 million, $5.6 million, $5.2
million, $5.7 million and $4.3 million at December 31, 1996, 1995, 1994, 1993
and 1992, respectively.
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. If the borrower is unable to return to scheduled
principal and interest payments at the end of the modification period,
foreclosure procedures are initiated or the modification period may be
extended. As of December 31, 1996, the Bank had modified loans totaling $15.3
million, net of loan loss allowances of $4.0 million. This compares with $19.4
million, net of loan loss allowances of $5.3 million as of December 31, 1995.
Modified loans 90 days or more delinquent as of December 31, 1996 were $472
thousand. No modified loans were 90 days or more delinquent as of December 31,
1995.
The Bank adopted the FASB's 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.
The Bank adopted the FASB's Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" ("SFAS No. 118"), effective January 1, 1995. SFAS
No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan. SFAS No. 118 requires, among
other things, additional disclosure, either in the body of the financial
statements or in the accompanying notes, about the recorded investment in
certain impaired loans and about how a creditor recognizes interest income
related to those impaired loans.
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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 allowances on
impaired loans to be charge-offs when the loan is foreclosed upon or the
borrower is permitted to satisfy the debt with less than a full repayment of
the amount owed.
Pursuant to SFAS No. 114, a loan is considered 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 thousand and multi-family and commercial real estate loans with
an outstanding principal amount greater than or equal to $750 thousand),
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 $12.4 million as of
December 31, 1996 and $26.1 million as of December 31, 1995. The following is
a summary of impaired loans, net of valuation allowances for impairment, for
the periods indicated:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
(Dollars In Thousands)
<S> <C> <C>
Non-accrual loans . . . . . $ 20,052 $ 34,503
Modified loans . . . . . 5,996 16,573
------------ ------------
Other impaired loans . . . . 11,586 35,333
------------ ------------
$ 37,634 $ 86,409
============ ============
</TABLE>
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 a probable 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. Impaired loans for which there
were no valuation allowances established totaled $4.1 million and $9.3 million
as of December 31, 1996 and December 31, 1995, respectively. The following
summary details impaired loans measured using the present value of expected
future cash flows discounted at the effective interest rate of the loan and
impaired loans measured using the fair value method for the periods indicated:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ ------------
(Dollars In Thousands)
<S> <C> <C>
Present value method . . . $ 2,992 $ 15,995
Fair value method . . . . 34,642 70,414
------------ ------------
Total impaired loans . . . $ 37,634 $ 86,409
============ ============
</TABLE>
The present value of an impaired loan's expected future cash flows
will change from one reporting period to the next because of the passage of
time and also may change because of revised estimates in the amount or timing
of those cash flows. The Bank records the entire change in the present value
of the expected future cash flows as an impairment valuation allowance which
may
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<PAGE> 10
necessitate an increase in the provision for loan losses. Similarly, the fair
value of the collateral of an impaired collateral-dependent loan may change
from one reporting period to the next. The Bank also records a change in the
measure of these impaired loans as an impairment valuation allowance which may
necessitate an adjustment to the provision for loan losses.
The following is an analysis of the activity in the Bank's valuation
allowance for impaired loans during the periods indicated (dollars in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1993 . . . . . . . . . . . . . -
Provision for loan losses . . . . . . . . . . . . . $ 32,528
Charge-offs . . . . . . . . . . . . . . . . . . . . (8,641)
-----------
Balance at December 31, 1994 . . . . . . . . . . . . . 23,887
Provision for loan losses . . . . . . . . . . . . . 21,418
Charge-offs . . . . . . . . . . . . . . . . . . . . (19,204)
-----------
Balance at December 31, 1995 . . . . . . . . . . . . . 26,101
Provision for loan losses . . . . . . . . . . . . . 11,387
Charge-offs . . . . . . . . . . . . . . . . . . . . (25,138)
-----------
Balance at December 31, 1996 . . . . . . . . . . . . . $ 12,350
===========
</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.
The average recorded investment in impaired loans for December 31,
1996 and 1995 was $52.7 million and $91.8 million, respectively. The amount of
interest income recognized from impaired loans during the years ended December
31, 1996 and 1995 was $2.7 million and $6.1 million, respectively, under the
cash basis method of accounting. Interest income recognized under the accrual
basis method of accounting for the years ended December 31, 1996 and 1995
totaled $2.5 million and $5.7 million, respectively.
Prior to SFAS No. 114, the Bank had a policy of establishing valuation
allowances for all loans deemed to be probable foreclosures based on the fair
value of the collateral. As a result, SFAS No. 114 did not have a material
impact on the Bank's allowance for loan losses.
The table below shows the Bank's net investment in non-accrual loans
determined to be impaired, by property type, as of the periods indicated:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Single family . . . . . . . . . $ 2,002 $ 1,677
---------- ----------
Multi-family . . . . . . . . . . 17,417 32,826
Commercial . . . . . . . . . . . 633 -
---------- ----------
$ 20,052 $ 34,503
========== ==========
</TABLE>
Loan Loss Experience Summary. The Bank maintains a general valuation
allowance to absorb possible future losses that may be realized on its loan
portfolio. The allowance is reviewed and adjusted at least quarterly based upon
a number of factors, including asset classifications, economic trends, industry
experience, industry and geographic concentrations, estimated collateral
values, management's assessment of credit risk inherent in the portfolio,
historical loss experience and the Bank's underwriting practices.
10
<PAGE> 11
Based on the factors above, the Bank's general valuation allowance
(including general valuation allowances for loans sold with recourse) was 1.86%
of total assets with loss exposure (including loans sold with recourse) at
December 31, 1996, 1.52% at December 31, 1995 and 1.82% at December 31, 1994.
Depending on the economy and real estate markets in which the Bank operates,
increases in the general valuation allowance may be required in future periods.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's general valuation
allowance. These agencies may require the Bank to establish additional general
valuation allowances based on their judgment of the information available at
the time of their examination.
The following table details general valuation allowances by loan type
for the periods indicated, including the general valuation allowance for loans
sold with recourse:
<TABLE>
<CAPTION>
% OF % OF % OF % OF % OF
1996 TOTAL 1995 TOTAL 1994 TOTAL 1993 TOTAL 1992 TOTAL
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Single Family ....... $ 15,355 24% $ 8,887 17% $ 6,938 11% $ 6,607 14% $ 3,935 14%
-------- ---- -------- ---- -------- ---- -------- ----- -------- ----
Multi-Family ....... 44,078 70 35,278 68 50,018 79 37,691 81 20,708 75
Commercial ......... 3,587 6 7,529 15 6,170 10 2,551 5 3,154 11
Non-Real Estate Loans. 278 - 232 - 175 - 51 - 57 -
-------- ---- -------- ---- -------- ---- -------- ----- -------- ----
Total ............. $ 63,298 100% $ 51,926 100% $ 63,301 100% $ 46,900 100% $ 27,854 100%
======== ==== ======== ==== ======== ==== ======== ===== ======== ====
</TABLE>
The following is an analysis of the activity in the Bank's general
valuation allowance for the periods indicated:
GENERAL VALUATION ALLOWANCES AND LOAN CHARGE-OFF ACTIVITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning General Valuation
Allowance.......................... $ 42,876 $ 55,353 $ 46,900 $ 27,854 $ 13,937
--------- --------- --------- --------- ---------
Provisions for Loan Losses........... 23,768 6,958 53,172 67,679 41,384
Charge-Offs, Net of Recoveries:
Single Family...................... (8,845) (6,040) (16,127) (8,605) (4,863)
Multi-Family....................... (2,448) (13,676) (19,800) (38,178) (22,470)
Commercial......................... 240 851 (664) (1,574) -
Non-Real Estate.................... 9 (67) (180) (276) (134)
--------- --------- --------- --------- ---------
Total Charge-Offs.................. (11,044) (18,932) (36,771) (48,633) (27,467)
Transfer to Liability Account for
Loans Sold with Recourse..... - (503) (7,948) - -
--------- --------- --------- --------- ---------
Transfer to Real Estate General
Valuation Allowance................ (700) - - - -
--------- --------- --------- --------- ---------
Ending General Valuation
Allowances................... $ 54,900 $ 42,876 $ 55,353 $ 46,900 $ 27,854
========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 12
The Bank also has a general valuation allowance for loans sold with
recourse. This allowance was included in the general valuation allowance
balance in years prior to 1994. The amount of this recourse general valuation
allowance totaled $6.2 million and $5.3 million at December 31, 1993 and 1992,
respectively. The activity in the general valuation allowance for loans sold
with recourse for 1994, 1995 and 1996 is presented below (dollars in
thousands):
<TABLE>
<S> <C>
Balance at December 31, 1993 . . . . . . . . . . . . . . $ -
Transfer from general valuation allowance . . . . . . . . 7,948
---------
Balance at December 31, 1994 . . . . . . . . . . . . . . 7,948
Provisions for loan losses
(recorded as loss on sale of loans) . . . . . . . . . . 2,123
Transfer from general valuation allowance . . . . . . . . 503
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . (1,524)
---------
Balance at December 31, 1995 . . . . . . . . . . . . . . 9,050
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . (652)
---------
Balance at December 31, 1996 . . . . . . . . . . . . . . $ 8,398
=========
</TABLE>
Net loan charge-offs, including net charge-offs from the general
valuation allowance, impaired allowance and the general valuation allowance for
loans sold with recourse totaled $37.5 million, $39.7 million, $45.4 million,
$48.6 million and $27.5 million for 1996, 1995, 1994, 1993 and 1992,
respectively, representing 1.21%, 1.28%, 1.58%, 1.82% and 1.11% of the average
loan portfolio for such periods.
The high level of loan charge-offs since 1989 is due to recessionary
factors such as increased vacancies on multi-family properties, decreased real
estate values, layoffs and slower rates of real estate sales. These
recessionary factors have negatively impacted the ability of some borrowers to
make loan payments on a timely basis or sell their properties prior to
foreclosure. Any increase in charge-offs would adversely impact the Company's
future loan loss provisions and earnings. Charge-offs during 1996, 1995 and
1994 included $692 thousand, $2.4 million and $13.8 million, respectively, in
losses attributable to the January 17, 1994 earthquake.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset Quality Ratios" for an analysis of the Bank's
general valuation allowances as a percentage of non-accrual loans, the total
loan portfolio and total loans with loss exposure.
Potential Problem Loans. The Bank also has $44.0 million in potential
problem loans as of December 31, 1996. These are loans which do not meet the
criterial of impaired or non-performing loans but have displayed some past or
present weakness. If the weakness is not corrected, the loan could eventually
result in a loss to the Bank.
Non-performing Assets. For a further discussion of non-performing
assets, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Non-Performing Assets."
Generally, loans greater than 60 days delinquent are placed into
foreclosure and a valuation allowance is established, if necessary. The Bank
acquires title to the property in most foreclosure actions in which the loan is
not reinstated by the borrower. Once real estate is acquired in settlement of a
loan, the property is recorded at fair value less estimated costs to sell.
Following the acquisition of foreclosed real estate ("REO"), the Bank
evaluates the property and establishes a plan for marketing and disposition.
The Bank inspects the property, using the Bank's appraisal staff. After
inspecting the property, the Bank determines whether the property may be
disposed of in its present condition or if repairs, rehabilitation or
improvements are necessary.
12
<PAGE> 13
The following table provides information regarding the Bank's REO
activity for the periods indicated:
<TABLE>
<CAPTION>
REAL ESTATE OWNED ACTIVITY
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
Beginning Balance............... $ 19,701 $ 16,724 $ 26,878
--------- --------- ---------
Additions....................... 74,886 64,053 67,466
Sales........................... (80,256) (61,076) (77,620)
--------- --------- ---------
Ending Balance.................. $ 14,331 $ 19,701 $ 16,724
========= ========= =========
</TABLE>
The Bank's Asset Classification Committee meets at least monthly to
review and monitor the condition of the loan portfolio on an ongoing basis.
Additionally, a special workout group of the Bank's officers meets at least
weekly to resolve delinquent loan situations and to initiate actions enforcing
the Bank's rights in security properties pending foreclosure and liquidation.
Other Interest-Earning Assets. The Bank owned no contractually
delinquent interest-earning assets other than loans as of December 31, 1996.
Investment Activities
Savings institutions are required by federal regulations to maintain a
minimum ratio of liquid assets which may be invested in certain government and
other specified securities. This level is adjusted from time to time in
response to prevailing economic conditions and as a means of controlling the
amount of available mortgage credit. At December 31, 1996, the regulatory
liquidity requirement was 5.00% and the Bank's liquidity percentage was 5.11%.
It is the Bank's policy to maintain liquidity investments at a modest
level and to use available cash to originate mortgages which normally command
higher yields. Therefore, interest income on investments generally represents
less than 5% of total revenues.
In November 1995, the Financial Accounting Standards Board issued a
Special Report as an aid in understanding and implementing Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
and Debt Securities" ("SFAS 115"). In accordance with the report, the Bank
reclassified its entire portfolio of liquidity-qualifying investments to the
available-for-sale portfolio from the held- to-maturity portfolio. The Bank
recorded negative fair value adjustments of $128 thousand and $322 thousand,
net of taxes, to stockholders' equity as of December 31, 1996 and 1995,
respectively. Management believes that the reclassification will provide
greater flexibility to the Bank in the future.
13
<PAGE> 14
The following table summarizes the total investment portfolio at
historical cost (including liquid investments) by type at the end of the
periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities . $ 301 $ 301 $ 4,205 $ 5,111 $ 7,113
--------- --------- --------- --------- ---------
U.S. Agency Securities . . 49,989 46,561 36,565 42,600 11,034
Collateralized Mortgage
Obligations . . . . . . . 19,372 29,874 43,282 56,125 25,589
--------- --------- --------- --------- ---------
69,662 $76,736 84,052 103,836 43,736
Unrealized loss on
securities available-for-sale (222) (552) - - -
--------- --------- --------- --------- ---------
$ 69,440 $ 76,184 $ 84,052 $ 103,836 $ 43,736
--------- --------- --------- --------- ---------
Weighted average yield on
interest-earnings invest-
ments end of period . . . 5.98% 5.15% 5.08% 5.16% 6.18%
--------- --------- --------- --------- ---------
</TABLE>
The following is a summary of the maturities of investment securities at
historical value as of December 31, 1996:
<TABLE>
<CAPTION>
MATURITY
------------------------------------------------------
TOTAL HISTORICAL
WITHIN 1 YEAR 1-5 YEARS VALUE
------------------------ ------------------------ ---------------------------------
WEIGHTED WEIGHTED WEIGHTED AVERAGE
AVERAGE AVERAGE AVERAGE MATURITY
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD YRS/MOS
--------- --------- --------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Securities . . . . . . $ 200 5.50% $ 101 6.61% $ 301 5.87% 0/8
U.S. Agency Securities. 29,991 6.88 19,998 5.34 49,989 6.26 0/8
Collateralized Mortgage
Obligations . . . . . 14,746 5.15 4,626 5.65 19,372 5.27 1/6
--------- --------- --------- ---------
$ 44,937 6.30 $ 24,725 5.41 $ 69,662 5.98 0/11
========= ========= ========= ========= ========= ========= =========
</TABLE>
Sources of Funds
General. The Bank's principal sources of funds are savings deposits,
advances from the Federal Home Loan Bank of San Francisco ("FHLBSF") and
securities sold under agreements to repurchase.
Deposits. The Bank obtains deposits through three different sources:
1) its retail branch system; 2) its telemarketing department (phone
solicitations by designated employees); and 3) national brokerage firms.
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, Federal Home Loan Bank ("FHLB") borrowings and securities
sold under agreements to repurchase. As the cost of each source of funds
fluctuates
14
<PAGE> 15
from time to time, the Bank seeks funds from the lowest cost source until the
relative costs change. As the costs of funds, operating margins and net income
of the Bank associated with each source of funds are generally comparable, the
Bank does not deem the impact of a change in incremental use of any one of the
specific sources of funds at a given time to be material.
Deposits acquired through the telemarketing department are typically
placed by managers of pension funds and represented 6%, 11% and 9% of total
deposits at December 31, 1996, 1995 and 1994, respectively. The level of
telemarketing deposits varies based on yields available to depositors on other
investment instruments and the depositors' perception of the Bank's credit
worthiness.
Deposits acquired through national brokerage firms represented 20%,
23% and 26% of total deposits at December 31, 1996, 1995 and 1994,
respectively. Any fees paid to deposit brokers are amortized over the term of
the deposit. Based on historical renewal percentages, management believes that
these deposits are a stable source of funds. The Bank accepted brokered
deposits during the first nine months of 1994, as an adequately-capitalized
institution, pursuant to a waiver obtained from the Federal Deposit Insurance
Corporation ("FDIC"). Institutions meeting the regulatory capital standards
necessary to be deemed well-capitalized are not required to obtain a waiver
from the FDIC in order to accept brokered deposits. See "Management's
Discussion and Analysis - Capital Resources and Liquidity."
Retail deposits were $1.5 billion at December 31, 1996, 1995 and 1994.
Retail deposits comprised 74% of total deposits at December 31, 1996, 66% of
total deposits at December 31, 1995 and 65% at December 31, 1994. The level of
deposits has decreased slightly over the last three years due to increased
competition for retail savings deposits in Southern California. The Bank
operated 25 retail branches at the end of 1996.
15
<PAGE> 16
The interest rates paid on deposits are a major determinant of the
Bank's average cost of lendable funds. The following tables set forth
information regarding the amount of deposits in the various types of savings
programs offered by the Bank at the end of the years indicated and the average
balances and rates for those years:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
------------ ------- ------------ ------- ------------ ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Variable rate non-term accounts:
Money market deposit accounts
(weighted average rate of 2.82%,
2.52% and 2.55%)....................... $ 130,173 7% $ 125,352 6% $ 161,147 7%
Interest-bearing checking accounts
(weighted average rate of 1.01%
1.20% and 2.14%)....................... 165,616 8 145,801 7 169,416 7
Passbook accounts (2.04%, 2.04%
and 2.29%)............................. 94,718 5 96,948 4 114,075 5
Non-interest bearing checking
accounts............................... 40,404 2 54,876 2 36,773 2
------------ ------- ------------ ------- ------------ ------
430,911 22 422,977 19 481,411 21
------------ ------- ------------ ------- ------------ ------
Fixed term rate certificate accounts:
Under six month term (weighted
average rate of 5.11%, 5.21%
and 4.64%)........................... 160,430 8 126,599 6 89,763 4
Six month term (weighted average
rate of 5.69%, 5.42% and 4.99%)........ 204,048 10 417,855 19 282,130 12
Nine month term (weighted average of
5.45%, 5.98% and 4.90%)................ 246,777 13 144,308 6 104,962 5
One year to 18 month term (weighted
average rate of 5.32%, 5.57% and
4.76%)................................. 304,532 16 235,164 11 512,846 22
Two year or 30 month term (weighted
average rate of 5.32%, 5.55% and
5.22%)................................ 40,498 2 239,411 11 315,223 14
Over 30 month term (weighted
average rate of 6.27%, 6.31%
and 6.20%)............................ 202,724 10 238,742 11 285,438 12
Negotiable certificates of $100,000
and greater, 30 day to one year terms
(weighted average rate of 5.39%,
5.66% and 4.79%)...................... 367,528 19 379,980 17 227,141 10
------------ ------- ------------ ------- ------------ ------
1,526,537 78 1,782,059 81 1,817,503 79
------------ ------- ------------ ------- ------------ ------
Total deposits (weighted average
rate of 4.67%, 4.89% and 4.49%)..... $ 1,957,448 100% $ 2,205,036 100% $ 2,298,914 100%
============ ======= ============ ======= ============ ======
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
DURING THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
---------- ------- ---------- ------- ------------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook Accounts...................... $ 94,858 2.02% $ 103,737 2.20% $ 118,776 2.26%
Money Market Deposit Accounts.......... 125,722 2.61 137,099 2.59 188,663 2.35
Interest-bearing Checking Accounts..... 142,487 0.96 195,920 1.39 204,882 1.66
Fixed term Certificate Accounts........ 1,615,926 5.42 1,808,422 5.56 1,760,744 4.37
---------- ---------- ----------
$1,978,993 4.76% $2,245,178 4.86% $2,273,065 3.85%
========== ========== ==========
</TABLE>
The following table shows the maturity distribution of jumbo
certificates of deposit ($100,000 and greater) as of December 31, 1996 (dollars
in thousands):
<TABLE>
<S> <C>
Maturing in:
1 month or less................... $ 101,202
Over 1 month to 3 months.......... 93,720
Over 3 months to 6 months......... 79,915
Over 6 months to 12 months........ 92,691
---------
Total....................... $ 367,528
=========
</TABLE>
Based on historical renewal percentages at maturity, management
believes that jumbo certificates of deposit are a stable source of funds. For
additional information with respect to deposits, see Note 8 of the Notes to
Consolidated Financial Statements.
Borrowings. The FHLB System functions as a source of credit to
financial institutions which are members of a regional Federal Home Loan Bank.
The Bank may apply for advances from the FHLBSF secured by the FHLBSF capital
stock owned by the Bank, certain of the Bank's mortgages and other assets
(principally obligations issued or guaranteed by the United States government
or agencies thereof). Advances can be requested for any sound business purpose
which an institution is authorized to pursue. Any institution not meeting the
qualified thrift lender test will be subject to restrictions on its ability to
obtain advances from the FHLBSF. See "Summary of Material Legislation and
Regulation - Qualified Thrift Lender Test." In granting advances, the FHLBSF
also considers a member's creditworthiness and other relevant factors.
Total advances from the FHLBSF were $1.2 billion at December 31, 1996
at a weighted average rate of 5.71%. This compares with advances of $890.0
million at December 31, 1995 and $863.2 million at December 31, 1994 at
weighted average rates of 6.12% and 5.96%, respectively. These advances were
often the most available source of funds to the Bank during 1996 and 1995. The
Bank has credit availability with the FHLBSF which allows it to borrow up to
40% of the Bank's assets or approximately $1.7 billion at December 31, 1996.
The Bank enters into sales of securities under agreements to
repurchase (reverse repurchase agreements) which require the repurchase of the
same securities. The agreements are treated as borrowings in the Company's
Consolidated Statements of Financial Condition. There are certain risks
involved with doing these types of transactions. In order to minimize these
risks, the Bank's policy is to enter into agreements only with well-known
national brokerage firms which meet their regulatory capital requirements.
Borrowings under reverse repurchase agreements totaled $646.5 million at
December 31, 1996 at a weighted average rate of 5.42% and were secured by
mortgage-backed securities with principal balances totaling $689.1 million.
Borrowings under reverse repurchase agreements totaled $724.6 million at
December 31, 1995 and $691.1 million at December 31, 1994 at weighted average
rates of 5.68% and 5.81%, respectively.
17
<PAGE> 18
The Company issued $50 million in 10-year senior unsecured notes
("Notes") in September of 1994. The Notes are interest only, with an interest
rate of 11.75% and are due October 2004. The $47.8 million in net proceeds
were contributed to the Bank as capital. The Notes are governed by the terms
of an indenture dated September 28, 1994 (the "Indenture"). The Indenture
contains financial and operating covenants which, among other things, (i) limit
the incurrence of debt by the Company, (ii) limit the payment of dividends and
the making of certain other distributions by the Company and its subsidiaries,
including the Bank, (iii) limit the disposition of, and the existence of liens
on, the stock of the Company's subsidiaries, (iv) limit the existence of
certain liens on other property or assets of the Company and (v) limit the
ability of the Company to enter into certain transactions with affiliates.
Management does not believe that these covenants impair the Bank's activities
in the ordinary course of business. The amount of annual interest due on the
Notes is $5.9 million. The Company is solely dependent upon the Bank's ability
to pay dividends to provide funds for meeting the interest due on these Notes.
See "Summary of Material Legislation and Regulations" for a discussion of
regulatory restrictions on dividends and other capital distributions.
Borrowings from all sources totaled $1.9 billion, $1.7 billion and
$1.6 billion at weighted average rates of 5.77%, 6.11% and 6.04% at December
31, 1996, 1995 and 1994, respectively. Due to increased competition for
deposits, the Bank increased its use of borrowings in 1996 and 1995 to meet its
cash flow requirements.
The Bank's portfolio of short term borrowings includes short-term
variable rate credit advances and FHLB advances due in less than one year from
the FHLBSF, securities sold under agreements to repurchase and other short term
borrowings. The following schedule summarizes short term borrowings for the
last three years:
<TABLE>
<CAPTION>
MAXIMUM
MONTH-END
END OF PERIOD OUTSTANDING AVERAGE FOR PERIOD
------------------ BALANCE ----------------------
DURING THE
OUTSTANDING RATE PERIOD OUTSTANDING RATE
----------- ---- ---------- ------------ -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
1996
- ----
Short term variable rate credit advances.............. $ 32,000 7.33% $ 32,000 $ 87 7.33%
Short term FHLB Advances.............................. 980,000 5.69 1,140,000 896,250 5.74
Securities sold under agreements to repurchase........ 646,482 5.42 715,465 678,420 5.40
Other short term borrowings........................... 2,000 5.53 22,900 15,802 5.55
1995
- ----
Short term variable rate credit advances.............. $ 21,000 6.90% $ 59,000 $ 9,154 6.09%
Short term FHLB Advances.............................. 810,000 6.11 990,000 728,077 6.32
Securities sold under agreements to repurchase.... 724,643 5.68 749,546 718,057 5.93
Other short term borrowings........................... 2,300 5.82 15,000 8,565 5.99
1994
- ----
Short term variable rate credit advances.............. $ 39,000 7.33% $ 215,000 $ 78,231 5.13%
Short term FHLB Advances.............................. 500,000 6.22 525,000 179,231 5.58
Securities sold under agreements to repurchase.... 691,121 5.81 691,121 602,681 4.55
Other short term borrowings........................... 500 5.60 39,800 16,835 3.72
</TABLE>
Other Sources
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Sources of Funds" for a discussion of other funding
sources.
18
<PAGE> 19
Subsidiaries
The Bank has three wholly-owned subsidiaries: Seaside Financial
Corporation ("Seaside"), Oceanside Insurance Agency, Inc. ("Oceanside"), and
Santa Monica Capital Group ("SMCG"), all of which are California corporations.
As of December 31, 1996, the Bank had invested an aggregate of $999
thousand (primarily equity) in Seaside, Oceanside and SMCG. Revenues and
operating results of these subsidiaries accounted for less than 1% of
consolidated revenues in 1996 and no material change is presently foreseen. For
the past several years, only Seaside and Oceanside have been active.
Real Estate Development Activities. Seaside has not been involved in
any real estate development activity for the last four years and there are no
plans for future real estate projects. Therefore, no gains or losses on real
estate development activities were recorded during 1996, 1995 or 1994.
Seaside continues to hold two condominium units which are rented to
the Bank for use by its employees. In 1995, a house, previously rented to the
Bank, was sold. At December 31, 1996, Seaside's investment in the units totaled
$114 thousand. There were no loans outstanding against the properties at
December 31, 1996. Both units are located in Southern California.
Trustee Activities. Seaside acts as trustee on the Bank's loans.
Trustee fees for this activity amounted to $695 thousand, $462 thousand and
$403 thousand in 1996, 1995 and 1994, respectively.
Insurance Brokerage Activities. Oceanside engages in limited
insurance brokerage activities. Income to date from this source has been
insignificant. In 1996, Oceanside began operating as a licensed life insurance
agent solely for the purpose of receiving commissions on the sale of fixed and
variable rate annuities and mutual funds conducted in the Bank's offices by a
licensed third party vendor. During 1996, Oceanside received commission income
of approximately $428 thousand from the sale of non-insured investment products
by the Bank's strategic partner, Independent Financial Securities, Inc.
("IFS"). IFS, a registered broker-dealer, conducts its sales activities in the
Bank's branch offices and the Bank receives a percentage of the commissions on
such sales through its licensed insurance agency, Oceanside.
Employees
As of December 31, 1996, the Bank had a total of 442 full time
equivalent employees, including 78 part-time employees. No employees were
represented by a collective bargaining group. At present, the Company has no
employees who are not also employees of the Bank. The Bank provides its regular
full-time employees with a comprehensive benefits program that includes basic
and major medical insurance, long-term disability coverage, sick leave, a
401(k) plan and a profit sharing employee stock ownership plan. The Bank
considers its employee relations to be excellent.
Summary of Material Legislation and Regulations
General. FFC, as a savings and loan holding company, is registered
with, and subject to regulation and examination by, the OTS. The Bank, which
is a federally chartered savings bank and a member of the FHLBSF, is subject to
regulation and examination by the OTS with respect to most of its business
activities, including, among others, lending activities, capital standards,
general investment authority, deposit taking and borrowing authority, mergers
and other business combinations, establishment of branch offices, and permitted
subsidiary investments and activities.
19
<PAGE> 20
The Bank's deposits are insured by the FDIC through the SAIF. As insurer, the
FDIC is authorized to conduct examinations of the Bank. The Bank is also
subject to Federal Reserve Board regulations concerning reserves required to be
maintained against deposits.
As a member of the FHLB System, the Bank is required to own capital
stock in its regional FHLB, the FHLBSF, in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the end of
each year, or 5% of its outstanding borrowings from the FHLBSF. The Bank was
in compliance with this requirement, with an investment of $62.4 million in
FHLBSF stock at December 31, 1996.
The FHLBSF serves as a source of liquidity for the member institutions
within its assigned region, the FHLB Eleventh District. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes advances to members in accordance with policies and
procedures established by the Federal Housing Finance Board and the Board of
Directors of the FHLBSF. At December 31, 1996, the Bank's advances from the
FHLBSF amounted to $1.2 billion, or 32% of the Bank's total funding sources
(deposits and borrowings).
As a result of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), the FHLBs are required to provide funds for
the resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances
targeted for community investment and low and moderate income housing projects.
These contributions have adversely affected the level of FHLB dividends paid
and could continue to do so in the future. These contributions also could have
an adverse effect on the value of FHLB stock in the future. For the year ended
December 31, 1996, dividends paid by the FHLBSF to the Bank totaled
approximately $3.5 million.
Savings and Loan Holding Company Regulations. The activities of
savings and loan holding companies are governed by the Home Owners' Loan Act,
as amended. Pursuant to that statute, the Company is subject to certain
restrictions with respect to its activities and investments.
A savings and loan holding company, like FFC, which controls only one
savings association is exempt from restrictions on the conduct of unrelated
business activities that are applicable to savings and loan holding companies
that control more than one savings association. The restrictions on multiple
savings and loan holding companies are similar to the restrictions on the
conduct of unrelated business activities applicable to bank holding companies
under the Bank Holding Company Act. The Company would become subject to these
restrictions if it were to acquire control of another savings association or if
the Bank were to fail to meet its qualified thrift lender ("QTL") test. See
"Qualified Thrift Lender Test."
The OTS may impose restrictions when it has reasonable cause to
believe that the continuation of any particular activity by a savings and loan
holding company constitutes a serious risk to the financial safety, soundness
or stability of such holding company's savings institution. Specifically, the
OTS may, as necessary, (i) limit the payment of dividends by the savings
institution; (ii) limit transactions between the savings institution and its
holding company or its affiliates; and (iii) limit any activities of the
savings institution that create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings institution.
Any such limits will be issued in the form of a directive having the effect of
a cease-and-desist order.
Regulatory Capital Requirements. FIRREA and the capital regulations
of the OTS promulgated thereunder (the "Capital Regulations") established three
capital requirements for savings institutions. These regulations require the
Bank to maintain "tangible capital" of at least 1.5% of adjusted total assets,
"core capital" of at least 3% of adjusted total assets, and a "risk-based
capital" ratio of at least 8%. The OTS may establish, on a case-by-case basis,
individual minimum capital requirements
20
<PAGE> 21
for a savings institution which vary from the requirements that would otherwise
apply under the Capital Regulations.
"Tangible capital" means stockholders' equity computed in accordance
with generally accepted accounting principles less any intangible assets, less
unrealized gains and losses on certain "available-for-sale" securities, plus
purchased mortgage servicing rights and purchased credit card relationships,
subject to certain limitations. "Core capital" is generally defined the same
as tangible capital except that certain qualifying intangible assets may be
included. The Bank has no such qualifying intangible assets as of December 31,
1996. The "risk- based capital" ratio is defined as the ratio of total capital
to total assets after the assets have been risk-weighted in accordance with
certain percentages developed by the OTS and the other bank regulatory
agencies. Total capital for purposes of the risk-based capital requirements
consists of core capital and supplementary capital, less cash pledged for
credit support in certain loan sales. Supplementary capital includes, among
other things, a portion of the general loan valuation allowance. The general
loan valuation allowance may generally be included in supplementary capital up
to 1.25% of risk-weighted assets. At December 31, 1996, $29.6 million of the
Bank's $54.9 million in general valuation allowances were included in
supplementary capital. Supplementary capital may be used to satisfy an
institution's risk-based capital requirement in an amount not greater than its
core capital. The Bank is considered to be "well capitalized" for purposes of
these capital measures. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Resources and Liquidity - Capital
Requirements."
The Capital Regulations substantially changed the capital requirements
for asset sales with recourse or the retention of the subordinated portion of a
senior/subordinated loan participation or interest in a package of loans sold.
Essentially, the Capital Regulations treat asset sales with recourse as if they
had not occurred, and generally require a savings institution to maintain
capital against the entire amount of assets sold with recourse, even if the
recourse is for less than the full amount of assets sold, with one limited
exception. The exception is that assets sold with recourse with respect to
which the recourse percentage is less than the applicable risk-based capital
requirement are not included in risk-weighted assets; however, capital is
required to be maintained in an amount equal to such recourse amount. A
savings institution's retention of the subordinated portion of a
senior/subordinated loan participation or interest in a package of loans sold
is treated in the same manner as an asset sale with recourse. Since the change
in regulation, the Bank has not been active in such loan sales. At December
31, 1996 the Bank had loans sold with recourse or subordination totaling $230.9
million on which it was required to hold additional capital. The amount of
capital required to be maintained against such off-balance sheet loans was
$11.8 million.
FIRREA requires a savings institution which fails to meet its capital
standards to submit a capital restoration plan to the OTS District Director
which describes the manner in which the institution proposes to increase its
capital and the activities in which it will engage, and requires that any
increase in its assets be met with a commensurate increase in tangible capital
and risk-based capital. The OTS also has the authority to issue a capital
directive to a savings institution that does not satisfy its minimum capital
requirements. The capital directive may also specify corrective actions to be
taken.
Insurance of Accounts. The FDIC administers two separate deposit
insurance funds. The BIF insures the deposits of commercial banks and other
institutions which were insured by the FDIC prior to the enactment of FIRREA.
The SAIF insures the deposits of savings institutions which were insured by the
Federal Savings and Loan Insurance Corporation ("FSLIC") prior to the enactment
of FIRREA. The FDIC is authorized to increase deposit insurance premiums if it
determines such increases are appropriate to maintain the reserves of either
the SAIF or the BIF or to fund the administration of the FDIC. In addition, the
FDIC is authorized to levy emergency special assessments on BIF and SAIF
members.
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<PAGE> 22
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") required the FDIC to implement a risk-based assessment system, under
which an institution's insurance assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. The FDIC adopted a final risk-based assessment system
effective January 1, 1994.
Under the risk-based assessment system, a savings institution is
categorized into one of three capital categories: well capitalized, adequately
capitalized, and undercapitalized. A savings institution is also categorized
into one of three supervisory subgroup categories based on evaluations by the
OTS. In addition to deposit insurance assessments, the OTS has imposed
assessments and examination fees on savings institutions. OTS assessments for
the Bank increased to $611 thousand in 1996, from $603 thousand in 1995 and
$547 thousand in 1994.
The FDIC may terminate the deposit insurance of any insured depository
if the FDIC determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation or order
or any condition imposed in writing by the FDIC. The FDIC may also suspend
deposit insurance temporarily during the hearing process if the institution has
no tangible capital (which may be calculated under certain conditions by
including goodwill). In addition, FDIC regulations provide that any insured
institution that falls below a 2% minimum leverage ratio will be subject to
FDIC deposit insurance termination proceedings unless it has submitted, and is
in compliance with, a capital plan with its primary federal regulator and the
FDIC.
Recent Legislation. In a significant and long-awaited development,
the Savings Association Insurance Fund ("SAIF") was recapitalized as part of
the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the
"Economic Growth Act"), which was enacted September 30, 1996. This legislation
included the Deposit Insurance Funds Act of 1996 (the "DIFA)" which provided
for the recapitalization of the SAIF through a special assessment levied on all
institutions that have SAIF-insured deposits. The Economic Growth Act provides
that if the thrift charter has been eliminated by January 1, 1999 through
additional legislation, then the Bank Insurance Fund ("BIF"), which insures the
accounts of most commercial banks, and the SAIF will be merged into the
"Deposit Insurance Fund" ("DIF") of the FDIC. There is no assurance that such
additional legislation will be enacted.
The Economic Growth Act also provides for funding for payments due on
a bond issued by the Federal Insurance Corporation ("FICO"), the prohibition on
the shifting of deposits from the SAIF to the BIF, the imposition of certain
restrictions on the deposit insurance assessments that may be charged by the
FDIC, and the refund of excess assessments.
The SAIF special assessment imposed a tax deductible special
assessment on SAIF-assessable deposits held as of March 31, 1995, at a rate
sufficient to capitalize the SAIF (i.e., to cause the SAIF to achieve its
designated reserve ratio of 1.25% of SAIF deposits) as of October 1, 1996. The
assessment was accrued in the third quarter and paid in the fourth quarter of
1996. As a result of the recapitalization of the SAIF, the disparity between
the deposit premiums paid by SAIF-insured institutions, such as the Bank, and
BIF-insured institutions has significantly narrowed. The impact of the special
SAIF assessment on the Bank and the positive effects of the reduced insurance
premium are discussed in "Management's Discussion and Analysis - Overview."
The Economic Growth Act contained a number of other provisions
concerning financial institutions, none of which have a significant effect on
the Bank or its operations at this time. These include changing the
availability of a tax bad debt reserve deduction (see "Business - Taxation"),
regulatory burden relief measures reducing government regulation of financial
institutions and streamlining consumer statutes, revised quantitative limits on
certain types of lending, an expansion of the "qualified thrift investments"
definition for purposes of determining what constitutes a QTL, and statutory
limitations on lender liability under environmental laws.
22
<PAGE> 23
Liquidity. Federal regulations currently require a savings
institution to maintain a monthly average daily balance of liquid assets
(including cash, certain time deposits, bankers' acceptances and specified
United States government, state or federal agency obligations) equal to at
least 5% of the average daily balance of its net withdrawable accounts and
short-term borrowings during the preceding calendar month. This liquidity
requirement may be changed from time-to-time by the OTS to any amount within
the range of 4% to 10% of such accounts and borrowings depending upon economic
conditions and the deposit flows of member institutions. Federal regulations
also require each member institution to maintain a monthly average daily
balance of short-term liquid assets (generally those having maturities of 12
months or less) equal to at least 1% of the average daily balance of its net
withdrawable accounts and short-term borrowings during the preceding calendar
month. Monetary penalties may be imposed for failure to meet these liquidity
ratio requirements. The Bank's liquidity and short-term liquidity ratios for
the calculation period ended December 31, 1996 were 5.11% and 3.64%,
respectively, which exceeded the applicable requirements.
Community Reinvestment Act. The Community Reinvestment Act ("CRA")
requires each savings institution, as well as commercial banks and certain
other lenders, to identify the communities served by the institution's offices
and to identify the types of credit the institution is prepared to extend
within those communities. The CRA also requires the OTS to assess an
institution's performance in meeting the credit needs of its identified
communities as part of its examination of the institution, and to take such
assessments into consideration in reviewing applications with respect to
branches, mergers and other business combinations, including acquisitions by
savings and loan holding companies. An unsatisfactory CRA rating may be the
basis for denying such an application and community groups have successfully
protested applications on CRA grounds. In connection with its assessment of
CRA performance, the OTS assigns CRA ratings of "outstanding," "satisfactory,"
"needs to improve" or "substantial noncompliance." The Bank was rated
"satisfactory" in its last CRA examination, which was conducted in 1996. New
CRA regulations which were enacted in late 1995 took effect starting in 1996,
for examinations in 1997 and thereafter. Under the new regulations,
institutions will evaluated based on: (i) performance in lending in their
assessment areas; (ii) the provision of deposit and other community services in
their assessment areas; and (iii) the investment in housing-related and other
qualified community investments. Under the new regulations, an institution
which is found to be deficient in its performance in meeting its community's
credit needs may be subject to enforcement actions, including cease and desist
orders and civil money penalties.
Restrictions on Dividends and Other Capital Distributions. Savings
association subsidiaries of holding companies generally are required to provide
not less than thirty days' advance notice to their OTS District Director of any
proposed declaration of a dividend on the association's stock.
Under OTS regulations, limitations are imposed on "capital
distributions" by savings institutions, including cash dividends, payments to
repurchase or otherwise acquire its shares, payments to stockholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulations, which establish a three-tiered system of regulation,
establish "safe-harbor" amounts of capital distributions that institutions can
make after providing notice to the OTS, but without needing prior approval.
Institutions can distribute amounts in excess of the safe-harbor only with the
prior approval of the OTS.
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<PAGE> 24
Although the OTS has never prohibited the Bank from making a capital
distribution, the OTS nevertheless retains the authority to prohibit any
capital distribution otherwise authorized under the regulations if the OTS
determines that the capital distribution would constitute an unsafe or unsound
practice. The regulations also state that the capital distribution limitations
apply to direct and indirect distributions to affiliates, including those
occurring in connection with corporate reorganizations. Moreover, the Bank
would not be permitted to pay cash dividends if it were deemed to be an
"undercapitalized" institution for purposes of the "prompt corrective action"
rules of FDICIA. At December 31, 1996, the Bank met the standards necessary to
be deemed to be "well capitalized" for purposes of the "prompt corrective
action" rules.
Limits on Types of Loans and Investments. Federal savings
institutions are authorized, without quantitative limits, to make loans on the
security of liens upon residential real property and to invest in a variety of
instruments such as obligations of, or fully guaranteed as to principal and
interest by, the United States; stock or bonds of the FHLB; certain mortgages,
obligations, or other securities which have been sold by FHLMC or FNMA; and
certain securities issued by, or fully guaranteed as to principal and interest
by, the Student Loan Marketing Association and the Government National Mortgage
Association. Certain other types of loans or investments may be acquired
subject to quantitative limits: secured or unsecured loans for commercial,
corporate, business, or agricultural purposes, loans on the security of liens
upon nonresidential real property, investments in personal property, consumer
loans and certain securities such as commercial paper and corporate debt, and
construction loans without security.
Savings institutions are subject to the same loans-to-one borrower
("LTOB") restrictions that are applicable to national banks, with limited
provisions for exceptions. In general, the national bank standard restricts
loans to a single borrower to no more than 15% of a bank's capital and surplus,
plus an additional 10% if the loan is collateralized by certain readily
marketable collateral. The Bank's loans were within the LTOB limitations at
December 31, 1996.
Savings institutions and their subsidiaries are prohibited from
acquiring or retaining any corporate debt security that, at the time of
acquisition, is not rated in one of the four highest rating categories by at
least one nationally recognized statistical rating organization. The Bank has
no impermissible equity investments in its investment portfolio.
Safety and Soundness Standards. In 1995, the OTS enacted regulations
containing "safety and soundness" standards covering various aspects of the
operations of savings institutions pursuant to a requirement of FDICIA that
such standards be adopted by the federal banking agencies. The guidelines
relate to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
executive compensation, maximum ratios of classified assets to capital, and
minimum earnings sufficient to absorb losses without impairing capital. If the
OTS determines that a savings institution has failed to meet the safety and
soundness standards, it may require the institution to submit to the OTS, and
thereafter comply with, a compliance plan acceptable to the OTS describing the
steps the institution will take to attain compliance with the applicable
standard and the time within which those steps will be taken.
FDICIA contains a number of measures intended to promote early
identification of management problems at depository institutions and to ensure
that regulators intervene promptly to require corrective action by
institutions. The Bank's annual management report on the effectiveness of
compliance with internal control standards and certain designated laws will be
made available in March of 1997.
Prompt Corrective Action. FDICIA contains "prompt corrective action"
provisions pursuant to which insured depository institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
24
<PAGE> 25
require, subject to certain exceptions, the appropriate federal banking agency
to take "prompt corrective action" with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized." These
provisions expand the powers and duties of the OTS and the FDIC and expressly
authorize, or in many cases direct, regulatory intervention at an earlier state
than was previously the case.
Pursuant to FDICIA and implementing regulations adopted by the FDIC,
only "well capitalized" institutions may obtain brokered deposits without a
waiver. An "adequately capitalized" institution can obtain brokered deposits
only if it receives a waiver from the FDIC. An "undercapitalized" institution
may not accept brokered deposits under any circumstances. The Bank met the
"well-capitalized" standards throughout 1996 and was eligible to accept
brokered deposits without a waiver.
Qualified Thrift Lender Test. In general, the QTL test requires that
65% of an institution's portfolio assets be invested in "qualified thrift
investments" (primarily loans, securities and other investments related to
housing), measured on a monthly average basis for nine out of every 12 months
on a rolling basis. Any savings institution that fails to meet the QTL test
must either convert to a bank charter or become subject to national bank-type
restrictions on branching, business activities, and dividends, and its ability
to obtain FHLB advances is affected. The Bank met the QTL test at December 31,
1996, with 95% of its portfolio assets comprised of "qualified thrift
investments."
Transactions with Affiliates. Federal savings institutions are
subject to the provisions of Sections 23A and 23B of the Federal Reserve Act.
Section 23A restricts loans or extensions of credit to, or investments in, or
certain other transactions with, affiliates and as to the amount of advances to
third parties collateralized by the securities or obligations of affiliates.
Section 23B generally requires that transactions with affiliates must be on a
non-preferential basis. Federal savings institutions may not make any
extension of credit to an affiliate which is engaged in activities not
permitted by bank holding companies, and may not invest in securities issued by
an affiliate (except with respect to a subsidiary). The Company is an
"affiliate" of the Bank for the purposes of these provisions.
Transactions with Insiders. Federal savings institutions are subject
to the restrictions of Sections 22(g) and (h) of the Federal Reserve Act which,
among other things, restrict the amount of extensions of credit which may be
made to executive officers, directors, certain principal shareholders
(collectively "insiders"), and to their related interests. When lending to
insiders, a savings association must follow credit underwriting procedures that
are not less stringent than those applicable to comparable transactions with
persons outside the association. The amount that a savings association can
lend in the aggregate to insiders (and to their related interests) is limited
to an amount equal to the association's core capital and surplus. Insiders are
also prohibited from knowingly receiving (or knowingly permitting their related
interests to receive) any extensions of credit not authorized under these
statutes.
Federal Reserve System. Federal Reserve Board regulations require
savings institutions to maintain non-interest bearing reserves against their
transaction accounts. The reserve for transaction accounts as of December 31,
1996 was 3% of the first $47.7 million (decreasing to $44.9 million as of
January 1, 1997) of such accounts and 10% (subject to adjustment by the Federal
Reserve Board between 8% and 14%) of the balance of such accounts. The Bank is
in compliance with these requirements.
Taxation. The Company, the Bank and its subsidiaries file a
consolidated federal income tax return on a calendar year basis using the
accrual method. The maximum marginal federal tax rate is currently 35%.
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In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. One provision of the Act repeals the reserve method of
accounting for bad debts for savings institutions effective for taxable years
beginning after 1995. The Bank, therefore, will be required to use the
specific charge-off method on its 1996 and subsequent federal tax returns. The
Bank will be required to recapture its "applicable excess reserves", which are
its federal tax bad debt reserves in excess of the base year reserve amount
described above. As of December 31, 1996, the Bank had no applicable excess
reserves. The base year reserves will be subject to recapture and the Bank
could be required to recognize a tax liability if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes; (2) certain distributions
are made with respect to the stock of the Bank; (3) the bad debt reserves are
used for any purpose other than to absorb bad debt losses; or (4) there is a
change in federal tax law. The enactment of this legislation is not expected
to have a material impact on the Bank's operations or financial position.
In 1996, 1995 and 1994, the Bank was allowed an addition to its tax
bad debt reserves under the experience method equal to the amount necessary to
bring the tax reserve balance to the level that was established at December 31,
1987. In accordance with the Tax Reform Act of 1986, the Bank generally may
maintain the balance of its tax reserve at the December 31, 1987 level, even if
the result would be less using the experience method; however, if the amount of
the Bank's loans outstanding at the end of a particular year is less than the
Bank's loans outstanding on December 31, 1987, then for such year the Bank may
maintain the balance of its tax reserve at a level equal to the amount which
bears the same ratio to loans outstanding at the close of such year as the
balance of the reserve on December 31, 1987 bears to the amount of loans
outstanding on December 31, 1987. If the Bank were to fail the 60% qualifying
asset test, it would no longer be permitted to calculate its bad debt
deductions under the reserve method. In that case, the Bank would be required
generally to change to the specific charge-off method of accounting for bad
debts and would be required to include the amount of its reserve in income over
a six-year period.
For state tax purposes, the Bank is allowed an addition to its tax bad
debt reserves in an amount necessary to fill up to its tax reserve balance
calculated using the experience method.
To the extent that distributions by the Bank to the Company that are
permitted under federal regulations exceed the Bank's earnings and profits (as
computed for federal income tax purposes), such distributions would be treated
for tax purposes as being made out of the Bank's excess bad debt reserve and
would thereby constitute taxable income to the Bank in an amount equal to the
lesser of the Bank's excess bad debt reserve or the amount which, when reduced
by the amount of income tax attributable to the inclusion of such amount in
gross income, is equal to the amount of such distribution. At December 31,
1996, the Bank's excess bad debt reserve was zero. At December 31, 1996, the
Bank's earnings and profits (as computed for federal income tax purposes) were
approximately $143.6 million.
At December 31, 1996, the Bank had $38.6 million in deferred tax
assets. No valuation allowance was established because management believes that
it is more likely than not that the deferred tax assets will be realized.
Deferred tax liabilities totaled $35.1 million at December 31, 1996.
The Bank is subject to an alternative minimum tax if such tax is
larger than the tax otherwise payable. Generally, alternative minimum taxable
income is a taxpayer's regular taxable income, increased by the taxpayer's tax
preference items for the year and adjusted by computing certain deductions in a
special manner which negates the acceleration of such deductions under the
regular tax. The adjusted income is then reduced by an exemption amount and is
subject to tax at a 20% rate. The excess of the addition to the bad debt
reserve computed under the percentage of taxable income method over the
increase in the reserve calculated on the basis of actual experience is an item
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<PAGE> 27
of tax preference. No alternative minimum taxes were applicable to the Bank
for tax years 1996, 1995 or 1994.
California tax laws have generally conformed to federal tax laws since
several provisions of the Tax Reform Act of 1986 were adopted in September
1987.
For California franchise tax purposes, federal savings banks are taxed
as "financial corporations" at a higher rate than that applicable to
non-financial corporations because of exemptions from certain state and local
taxes. The tax rates for 1996, 1995 and 1994 were 11.30%, 11.30% and 11.469%,
respectively. The Franchise Tax Board ("FTB") has announced a rate of 10.84%
for 1997.
The Internal Revenue Service ("IRS") is currently examining tax years
1991 and 1992. During 1994, the IRS completed its examination of the Company's
consolidated federal income tax returns for tax years 1984 through 1986 and, in
1995, completed its examination of tax returns for 1987 and 1988. In 1996, the
IRS completed its examination of tax returns for 1989 and 1990. The
adjustments proposed by the IRS related to temporary differences as to the
recognition of certain taxable income and expense items. While the Company has
provided for deferred taxes for federal and state purposes, a change in the
period of recognition of certain income and expense items could result in
interest due to the IRS and FTB. The Company filed formal protests with the
IRS to take exception to most of the proposed adjustments for all examinations
and in early 1997, resolved all outstanding audit issues for the years 1984
through 1990, inclusively. As a result, the Company recorded a $5.1 million
reversal of accrued interest due to the IRS and FTB during 1996. The total
amount of accrued interest payable to the IRS, recorded as a liability in the
Consolidated Statements of Financial Condition, was $8.6 million as of December
31, 1996. Charges of $3.5 million and $3.2 million had been recorded in the
Consolidated Statements of Operations for 1995 and 1994, respectively, as
interest on possible IRS adjustments.
ITEM 2--PROPERTIES
At December 31, 1996, the Bank owned the building and land for seven
of its branch offices, owned the building but leased the land for three
additional offices, and leased its remaining offices. Properties leased by the
Bank include its home and executive offices located in a 12-story office tower
in downtown Santa Monica and a general services and corporate operations office
building in Santa Monica. FFC does not lease or own properties. For information
concerning rental obligations, see Note 6 of the Notes to Consolidated
Financial Statements.
ITEM 3--LEGAL PROCEEDINGS
The Company is involved as a plaintiff or defendant in various legal
actions incident to its business, none of which are believed by management to
be material to the Company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) Market Information. The Company's common stock is traded on the
New York Stock Exchange ("NYSE") under the symbol "FED." Included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is a chart representing the range of high and low stock prices for
the Company's common stock for each quarterly period for the last five years.
(b) Holders. As of February 14, 1997, the Company had 10,539,379
shares of its common stock outstanding, representing approximately 1,078 record
stockholders, which total does not include the number of stockholders whose
shares are held in street name.
(c) Dividends. As a publicly traded company, the Company has no
history of dividend payments on its common stock. However, the Company may in
the future adopt a policy of paying dividends, depending on its net earnings,
financial position and capital requirements, as well as regulatory
restrictions, tax consequences and the ability of the Company to obtain a
dividend from the Bank for payment to stockholders. OTS regulations limit
amounts that the Bank can pay as a dividend to the Company. No dividend may be
paid if the Bank's net worth falls below regulatory requirements. (See
"Business - Summary of Material Legislation and Regulations" for other
regulatory restrictions on dividends.) Within these regulations, the Board of
Directors of the Bank declared and paid dividends to the Company totaling $5.9
million, $5.9 million and $5.0 million in 1996, 1995 and 1994, respectively.
These dividends enabled the Company to service the $50 million in Notes due
October 2004.
The ability of the Company to pay dividends is also restricted by the
covenants contained in its Indenture pertaining to $50 million in Notes due
October 2004. See "Business - Borrowings."
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ITEM 6--SELECTED FINANCIAL DATA
Selected financial data for the Company is presented below:
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
FIVE YEAR CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ----- ----- ---- ----
(Dollars In Thousands, Except per Share Data)
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31:
Interest income................ $ 297,178 $ 301,735 $ 235,424 $ 229,445 $ 255,612
Interest expense............... 198,031 224,077 157,655 131,616 151,510
Net interest income............ 99,147 77,658 77,769 97,829 104,102
Provision for loan losses...... 35,155 28,376 85,700 67,679 41,384
Other income................... 10,915 8,725 11,264 12,054 12,634
Non-interest expense........... 59,175 45,903 45,496 45,298 46,125
Earnings (loss) before income
taxes (benefit) and cumulative
effect of change in accounting
principle..................... 15,732 12,104 (42,163) (3,094) 29,227
Income taxes (benefit)......... 7,488 5,569 (17,699) (1,046) 11,198
Earnings (loss) before
cumulative effect of change
in accounting principle....... 8,244 6,535 (24,464) (2,048) 18,029
Net earnings (loss)............ 8,244 6,535 (24,464) (2,048) 22,104
Earnings (loss) per share
before cumulative effect of
change in accounting
principle..................... 0.78 0.61 (2.32) (0.20) 1.66
Earnings (loss) per share...... 0.78 0.61 (2.32) (0.20) 2.04
End of Year:
Loans receivable............... 3,048,469 3,059,780 3,072,309 2,715,663 2,496,700
Mortgage-backed securities..... 735,475 835,448 821,317 708,283 769,155
Investment securities.......... 69,440 76,184 84,052 103,836 43,736
Total assets................... 4,143,852 4,139,737 4,157,414 3,661,117 3,446,573
Deposits....................... 1,957,448 2,205,036 2,298,914 2,305,480 1,982,745
Borrowings..................... 1,940,482 1,666,943 1,604,821 1,093,149 1,196,241
Liabilities.................... 3,949,302 3,943,446 3,972,727 3,452,825 3,239,062
Stockholders' equity........... 194,550 196,291 184,687 208,292 207,511
Book value per share........... 18.48 18.49 17.42 19.78 19.98
Selected Ratios:
Return on average assets....... 0.20% 0.16% (0.64)% (0.06)% 0.65%
Return on average equity....... 4.22% 3.47% (12.78)% (1.01)% 11.09%
Ratio of non-performing
assets to total assets....... 1.78% 2.33% 2.23% 3.23% 2.62%
Other Data:
Number of Bank full service
branches..................... 25 25 25 25 24
</TABLE>
Also see summarized results of operations on a quarterly basis for
1996, 1995 and 1994 in Note 15 of the Notes to Consolidated Financial
Statements.
29
<PAGE> 30
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's results of operations are primarily affected by its
levels of net interest income, provisions for loan losses, non-interest income,
non-interest expense and income taxes. The Company's results are strongly
influenced by the Southern California economy in which it operates.
Net earnings of $8.2 million or $0.78 per share were recorded in 1996,
and net earnings of $6.5 million or $0.61 per share were recorded in 1995. A
net loss of $24.5 million or $2.32 per share was reported in 1994. The
Company's results over the last two years have continued to improve from the
economic recession which hit Southern California in the early 1990's. Loan
charge-offs declined to $37.5 million in 1996 from $39.7 million and $45.4
million during 1995 and 1994, respectively. In addition, transfers to
valuation allowances for impaired loans declined to $11.4 million in 1996, from
$21.4 million and $32.5 million in 1995 and 1994, respectively.
Certain key financial ratios for the Company are presented below:
<TABLE>
<CAPTION>
AVERAGE
RETURN ON RETURN ON EQUITY TO
AVERAGE AVERAGE AVERAGE
ASSETS EQUITY ASSETS
------------- ------------ ---------
<S> <C> <C> <C>
1996......................... .20% 4.22% 4.61%
1995......................... .16 3.47 4.49
1994......................... (.64) (12.78) 4.97
1993......................... (.06) (1.01) 5.61
1992......................... .65 11.09 5.86
</TABLE>
Core earnings reflect the Company's results from basic operations and
were $60.5 million in 1996, $45.6 million in 1995 and $46.5 million in 1994.
Core earnings are defined as net interest income before provision for loan
losses plus other income (excluding gain on sale of loans and securities) less
non-interest expense. Non-recurring items are excluded from core earnings.
Core earnings increased in 1996 compared to 1995 due to an increased level of
average earning assets resulting from a reduction in non-performing assets. In
addition, there was a decline in the average cost of deposits and borrowings
while the yields on loans and investments improved. Core earnings decreased in
1995 compared to 1994 primarily as a result of decreased loan servicing fees
due to payoffs of loans serviced for others.
Non-performing assets (primarily loans 90 days past due or in
foreclosure plus foreclosed real estate) were $73.9 million or 1.78% of total
assets at December 31, 1996 This figure compares to $96.6 million or 2.33% of
total assets at December 31, 1995 and $92.6 million or 2.23% of total assets at
December 31, 1994. The decrease in non-performing assets during 1996 was due
primarily to a reduction in the balance of non-performing multi-family loans.
The increase during 1995 compared to 1994 was due primarily to small increases
in foreclosed real estate and non-performing loans.
The Company issued $50 million in 10-year Notes during 1994. The net
proceeds were contributed to the Bank as capital. At December 31, 1996, the
Bank's regulatory risk-based capital ratio was 11.40% and the tangible and core
capital ratios were 5.76%. The Bank met the regulatory capital standards to be
deemed "well-capitalized" at December 31, 1996.
30
<PAGE> 31
The Bank's deposits are insured by the SAIF up to a maximum of
$100,000 for each insured depositor. The FDIC administers a separate fund, the
BIF, applicable to commercial banks and certain other non-SAIF insured
institutions. In the third quarter of 1996, legislation was enacted by
Congress which included a one-time assessment for SAIF members such as the
Bank. The Bank's one-time assessment, net of tax, was $8.7 million based on
the Bank's insured deposits at March 31, 1995.
Risks and Uncertainties
In the normal course of business, the Company encounters two
significant types of risk: economic risk and regulatory risk.
There are three main components of economic risk: interest rate risk,
credit risk and market risk. The Company is subject to interest rate risk when
its interest-earning assets reprice in different time frames, or on a different
basis than its interest-bearing liabilities. See "Asset-Liability Management."
Credit risk is the risk of default in the Company's loan portfolio that results
from a borrowers' inability to make contractually required payments. See "Loan
Loss Provisions" and "Non-performing Assets." Market risk reflects changes in
the value of the collateral underlying loans receivable and the valuation of
real estate held by the Company.
The determination of the allowance for loan losses and the valuation
of real estate collateral is based on estimates that are susceptible to changes
in the economic environment and market conditions. Management believes that
the allowance for loan losses as of December 31, 1996 was adequate based on
information available at that time. A downward turn in the current economic
climate could increase the likelihood of losses due to credit and market risks.
This could create the need for additional loan loss provisions.
Regulatory risk is the risk that the regulators will reach different
conclusions than management regarding the financial position of the Company.
The OTS examines the Bank's financial results annually. The OTS reviews the
allowance for loan losses and may require the Bank to adjust the allowance
based on information available at the time of their examination.
Other Risks
The Bank has been named as a defendant in various lawsuits, none of
which is expected to have a materially adverse effect on the Company.
Inflation substantially impacts the financial position and operations
of financial intermediaries, such as banks and savings institutions. These
entities primarily hold monetary assets and liabilities and, as such, can
experience significant purchasing power gains and losses over relatively short
periods of time. In addition, interest rate changes during inflationary periods
change the amounts and composition of assets and liabilities held by financial
intermediaries and could result in regulatory pressure for additional equity
investment.
31
<PAGE> 32
COMPONENTS OF EARNINGS
Net Interest Income
Net interest income is the primary component of the Company's
earnings. The chief determinants of net interest income are the dollar amounts
of interest-earning assets and interest-bearing liabilities and the interest
rates earned or paid thereon. The greater the excess of average
interest-earning assets over average interest-bearing liabilities, the more
beneficial the impact on net interest income. The excess of average
interest-earning assets over average interest-bearing liabilities was $92.9
million in 1996, $63.1 million in 1995 and $53.9 million in 1994. The increase
over the last two years was due to improved net earnings and a continued
decline in average non-performing assets.
The Company's net interest income is also impacted by a three month
time lag before changes in the cost of funds can be passed along to monthly
adjustable rate loan customers. Savings and borrowing costs adjust to market
rates immediately while it takes several months for the loan yield to adjust.
This time lag decreases the Company's net interest income during periods of
rising interest rates. The reverse is true during periods of declining interest
rates. See "Asset-Liability Management" for further discussion.
The following table sets forth the components of interest-earning
assets and liabilities, the excess of interest-earning assets over
interest-bearing liabilities, the yields earned and rates paid and net interest
income for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C>
Average loans and mortgage-backed
securities(1)............................. $3,806,979 $3,940,247 $3,598,561
Average investment securities.............. 165,710 176,131 149,907
---------- ---------- ----------
Average interest-earning assets............ 3,972,689 4,116,378 3,748,468
--------- --------- ---------
Average savings deposits................... 2,135,688 2,245,178 2,273,065
Average borrowings......................... 1,744,091 1,808,072 1,421,522
--------- ---------- ----------
Average interest-bearing liabilities....... 3,879,779 4,053,250 3,694,587
--------- --------- ---------
Excess of interest-earning assets over
interest-bearing liabilities.............. $ 92,910 $ 63,128 $ 53,881
========== ========== ==========
Yields earned on average interest
earning assets............................ 7.37% 7.23% 6.20%
Rates paid on average interest-
bearing liabilities....................... 5.25(3) 5.51 4.27
Net interest rate spread................... 2.12 1.72 1.93
Effective net spread....................... 2.24 1.80 1.99
Total interest income(2)................... $ 292,627 $ 297,683 $ 232,368
Total interest expense(2).................. 203,633(3) 223,501 157,625
---------- ---------- ----------
Net interest income........................ $ 88,994(3) $ 74,182 $ 74,743
========== ========== ==========
</TABLE>
- -------------
(1) Non-accrual loans were included in the average dollar amount of
loans outstanding, but no income was recognized during the period
that each such loan was on non-accrual status.
(2) Dividends on FHLB stock and miscellaneous interest income and expense
were not considered in this analysis.
(3) Excludes the effect of the IRS accrued interest reversal.
The yield on earning assets increased in 1996 compared to 1995 due to
a decline in non-performing assets. Also during 1996, the cost of funds
decreased due to lower rates paid on deposits and borrowings. As a result, the
net interest spread increased by 0.40% in 1996 compared to 1995.
32
<PAGE> 33
The table below sets forth certain information regarding changes in
the interest income and interest expense of the Bank for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average balance multiplied by old rate) and (ii) changes in rates
(changes in rate multiplied by prior year average balance):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
VERSUS VERSUS
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------------- --------------------------------------
CHANGE DUE TO CHANGE DUE TO
------------------------------------- --------------------------------------
RATE VOLUME TOTAL RATE VOLUME TOTAL
----------- -------- --------- --------- --------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and mortgage-backed
securities . . . . . . . . . $ (9,851) $ 5,054 $(4,797) $40,373 $22,651 $ 63,024
Investments . . . . . . . . . (592) 333 (259) 891 1,400 2,291
--------- ------- --------- --------- -------- ----------
Total interest income . . . (10,443) 5,387 (5,056) 41,264 24,051 65,315
--------- ------- -------- --------- -------- ----------
Interest Expense:
Deposits . . . . . . . . . . (5,245) (2,308) (7,553) 22,698 (1,087) 21,611
Borrowings (1) . . . . . . . (8,116) (4,199) (12,315) 22,572 21,693 44,265
--------- -------- ---------- -------- --------- ----------
Total interest expense . . (13,361) (6,507) (19,868) 45,270 20,606 65,876
-------- -------- --------- -------- --------- ----------
Net change in
interest income (expense) $ 2,918 $ 11,894 $ 14,812 $(4,006) $ 3,445 $ (561)
======== ======== ======== ======== ======= ==========
</TABLE>
1 Excludes the IRS interest reversal.
Note: Changes in rate/volume (change in rate multiplied by the change in
average volume) have been allocated to the change in rate or the
change in volume based upon the respective percentages of the combined
totals. Dividends on Federal Home Loan Bank stock and miscellaneous
interest income and expense were not considered in this analysis.
33
<PAGE> 34
INTEREST RATE SPREADS AND YIELD ON AVERAGE INTEREST-EARNING ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ---------------- ----------------
DURING END OF DURING END OF DURING END OF DURING END OF DURING END OF
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
------ ------ ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted average yield
on loans and mortgage-
backed securities.............. 7.44% 7.47% 7.31% 7.63% 6.25% 6.50% 6.64% 6.20% 7.92% 7.25%
Weighted average yield
on investment portfolio(1) 5.71 5.98 5.56 5.15 5.00 5.08 4.70 5.16 4.24 6.18
Weighted average yield
on all interest-earning
assets......................... 7.37 7.45 7.23 7.59 6.20 6.47 6.56 6.17 7.78 7.24
Weighted average rate
paid on deposits............... 4.76 4.67 4.86 4.89 3.85 4.49 3.76 3.60 4.66 3.97
Weighted average rate
paid on borrowings and
FHLB advances.................. 5.85(4) 5.77 6.32 6.11 4.93 6.04 4.09 3.99 5.10 4.48
Weighted average rate
paid on all interest-
bearing liabilities............ 5.25 5.22 5.51 5.41 4.27 5.12 3.89 3.73 4.83 4.16
Effective net spread(2)......... 2.24 1.80 1.99 2.77 3.16
Interest rate spread(3)......... 2.12% 2.23% 1.72% 2.18% 1.93% 1.35% 2.67% 2.44% 2.95 3.08%
</TABLE>
- ----------
(1) Dividends on FHLB stock and miscellaneous interest income were not
considered in this analysis.
(2) Net interest income (the difference in the dollar amounts of interest earned
and paid) divided by average interest-earning assets.
(3) Weighted average yield on all interest-earning assets less weighted average
rate paid on all interest-bearing liabilities.
(4) Excludes effect of IRS accrued interest reversal.
Loss Provisions
The Company recorded $35.2 million in loan loss provisions during 1996
due to lingering weakness in the Southern California real estate markets. This
compares with $28.4 million recorded in 1995 and $85.7 million in 1994. The
Company recorded its largest provisions for loan losses during 1994 when it was
hardest hit by the economic recession in Southern California. The 1994
provision also includes $13.8 million provided for losses resulting from the
earthquake which occurred in Southern California on January 17, 1994.
The Bank has a policy of providing for general valuation allowances,
unallocated to any specific loan, but available to offset any future loan
losses. The allowance is maintained at an amount that management believes
adequate to cover estimable and probable loan losses. The general valuation
allowance, excluding the general valuation allowance for loans sold with
recourse, totaled $54.9 million and $42.9 million at December 31, 1996 and
December 31, 1995, respectively. The increase in general valuation allowances
from 1995 to 1996 is a result of larger provisions in 1996 consistent with
management's analysis of the loan portfolio. In addition, charge-offs
decreased from 1.28% of average loans outstanding in 1995 to 1.21% of average
loans outstanding in 1996. The Company also maintains valuation allowances for
impaired loans and loans sold with recourse. See "Allowances for Loan Losses."
Management performs regular risk assessments of the Bank's loan portfolio to
maintain appropriate general valuation allowances.
Additional loan loss provisions may also be required to the extent
that charge-offs are recorded against the valuation allowance for impaired
loans or the general valuation allowance. Loan charge-offs decreased to $37.5
million in 1996 from $39.7 million in 1995 and $45.4 million in 1994.
Charge-offs for 1996 include $692 thousand related to the 1994 earthquake.
Charge-offs for 1995 and 1994 include $2.4 million and $13.8 million,
respectively, related to the earthquake. Charge-offs
34
<PAGE> 35
are due primarily to declines in the estimated value of the underlying
collateral of the Bank's loans. The Southern California area has experienced
declines in real estate values and other economic problems for the past several
years resulting from increased unemployment, reductions in defense spending and
natural disasters. Multi-family properties have been particularly affected
during the recession. The Bank's loan portfolio (excluding mortgage-backed
securities) 41% of which is secured by multi-family properties, has required
additional loss provisions primarily due to these recessionary factors.
Non-interest Income
Loan servicing and other fees increased to $6.4 million in 1996
compared to $6.1 million in 1995 primarily as a result of broker fees earned
from other lenders and an increase in other loan income in 1996 compared to
1995. The decrease in loan and other fees from $7.0 million in 1994 is due to
decreased fees on loans serviced for others.
Gain (loss) on sale of loans increased to a gain of $253 thousand in
1996 from a loss of $1.6 million in 1995 and a gain of $319 thousand in 1994.
The 1995 loss includes a $2.1 million provision for loans that had been sold
with recourse in prior years. Loans originated for sale declined during 1996
and 1995 due to increased competition in the current economic environment.
Real estate operations resulted in a net gain of $1.2 million in 1996
compared to net gains of $2.0 million and $2.3 million in 1995 and 1994,
respectively. The 1996 amount includes $745 thousand recorded as a provision
for losses on real estate. Gains from real estate operations generally result
from the recovery of excess valuation allowances upon the sale of foreclosed
properties. The Bank normally sells foreclosed properties within a few months
after acquisition.
Other operating income, which increased to $3.0 million in 1996 from
$2.2 million in 1995 and $1.6 million in 1994, consists primarily of fees
earned for services provided in the retail savings branches. Fees earned by
retail savings branches increased 36% in 1996 compared to 1995 primarily as a
result of third party annuity and mutual fund sales in the Bank's branch
offices. Fees earned by retail savings branches increased 44% during 1995 due
to management's efforts to improve fee income earned by retail savings
branches.
Non-interest Expense
Non-interest expense decreased to 1.06% of average total assets in
1996, excluding the SAIF special assessment, from 1.10% of average total assets
in 1995 and 1.18% of average total assets in 1994. The decreasing trend in
recurring non-interest expense over the last three years resulted from the
Bank's ongoing cost control programs. Including the SAIF assessment, the
Company's ratio of non-interest expense to average total assets was 1.43% in
1996.
Salary and benefit costs decreased 5% in 1996 compared to 1995.
Decreased salary and related payroll and benefit insurance costs were primarily
caused by attrition. The 1% increase in 1995 compared to 1994 was due to an
increase in the contribution to the Employee Stock Ownership Plan and higher
year-end performance bonuses, offset by a decrease in salary and related
payroll and benefit insurance costs resulting from staffing attrition.
Occupancy expense was substantially unchanged in 1996 compared to
1995. Occupancy expense decreased 6% in 1995 from 1994 due to reduced
maintenance and equipment costs and the consolidation of loan offices.
Other operating expenses decreased 2% in 1996 compared to 1995 due
primarily to lower insurance and data processing charges. The 7% decrease in
1995 compared to 1994 was primarily due to lower insurance, legal and
contribution expenses.
35
<PAGE> 36
Advertising expense increased by 29% in 1996 due to the cost of new
marketing initiatives related to retail deposit acquisition. Advertising
expense decreased by 7% in 1995 from the prior year due to cost containment
efforts and the realignment of costs to reflect business activity in 1995.
Federal deposit insurance, excluding the special SAIF assessment,
decreased in 1996 compared to 1995 due to a decline in deposits and a $268
thousand refund received in the fourth quarter of 1996 as a result of an
assessment rate reduction. The increase of 24% in 1995 compared to 1994 was due
to a higher average assessment rate.
The following table details the components of non-interest expense for
the periods indicated:
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits:
Salaries......................... $15,749 $16,436 $16,887 $16,557 $15,387
Incentive compensation........... 556 899 1,363 1,425 1,635
Payroll taxes.................... 1,389 1,400 1,498 1,388 1,225
Employee benefit insurance....... 1,137 1,180 1,225 1,332 1,244
Bonus compensation............... 1,000 1,001 300 633 1,751
Profit sharing................... 500 500 200 200 1,007
Pension.......................... 241 436 481 468 475
Other salaries and benefits...... 1,356 1,193 780 877 729
------- -------- -------- -------- --------
21,928 23,045 22,734 22,880 23,453
------- -------- -------- -------- --------
Occupancy:
Rent............................. 4,270 4,250 4,246 3,898 3,390
Equipment........................ 959 885 1,246 1,285 1,522
Maintenance costs................ 477 460 594 741 690
Other occupancy.................. 583 663 600 892 1,040
------- -------- -------- -------- --------
6,289 6,258 6,686 6,816 6,642
------- -------- -------- -------- --------
Other Operating Expense:
Insurance........................ 381 528 748 570 556
Goodwill......................... 915 996 996 650 531
Data processing.................. 732 1,012 1,094 895 2,213
Contributions.................... 401 341 412 591 751
Professional services............ 832 777 732 799 709
Supervisory exam................. 611 603 547 531 482
Other operating costs............ 4,299 4,110 4,424 4,458 4,397
------- -------- -------- -------- --------
8,171 8,367 8,953 8,494 9,639
------- -------- -------- -------- --------
Federal Deposit Insurance:
Deposit insurance premiums.... 5,418 6,400 5,151 4,622 4,156
SAIF special assessment......... 15,007 - - - -
------- -------- -------- -------- --------
20,425 6,400 5,151 4,622 4,156
------- -------- -------- -------- --------
Advertising ..................... 2,362 1,833 1,972 2,486 2,235
------- -------- -------- -------- --------
Total.......................... $59,175 $45,903 $45,496 $45,298 $46,125
======= ======= ======= ======= =======
Non-interest expense as
% of average assets............. 1.43%(1) 1.10% 1.18% 1.26% 1.36%
==== ==== ==== ==== ====
</TABLE>
(1) The ratio for 1996 includes the special SAIF assessment. Excluding the SAIF
assessment, the ratio would have been 1.06%.
36
<PAGE> 37
BALANCE SHEET ANALYSIS
Consolidated assets at the end of 1996 were $4.1 billion,
substantially the same as at the end of 1995. Increased loan originations
during 1996 were largely offset by loan payoffs and sales during the year.
Assets decreased $17.7 million in 1995 compared to 1994 due to sales of loans
and a reduction in investment securities.
Loan Portfolio
At the end of 1996, 95% of the Bank's loan portfolio was adjustable
based on monthly changes in the Eleventh District Federal Home Loan Bank Cost
of Funds Index. The Bank has maintained the level of adjustable loans in its
portfolio at over 90% for the last ten years. Management believes that the high
level of adjustable rate mortgages will help insulate the Bank from
fluctuations in interest rates, notwithstanding the several month lag between a
change in its monthly cost of funds and a corresponding change in its loan
yields. See "Asset - Liability Management."
The Board of Directors has authorized the origination of fixed-rate
loans, which feature fixed interest rates for 3, 5 or 7 years and thereafter
become adjustable, up to an aggregate limit of $120 million. Management
believes that the limited origination of fixed-rate loans will enhance the
Company's overall return on assets and improve loan originations in this
economy.
Loans originated and purchased totaled $302.8 million in 1996, $299.3
million in 1995 and $909.3 million in 1994. Included in the 1994 amount is
$59.2 million in single family adjustable rate mortgages purchased from other
financial institutions. In addition, in 1996 the Bank through its lending
division, FirstFed Mortgage Services, placed $19.1 million of mortgages with
other lenders under fee arrangements, which amount is not included in loan
originations. In 1996, loans made on the security of single family properties
(one to four units) comprised 79% of the dollar amount of new loan
originations; loans made on the security of multi-family properties comprised
19% of new originations; and loans made on the security of commercial real
estate properties comprised less than 2% of new originations. No construction
loans and an insignificant amount of consumer loans were originated in 1996.
Adjustable rate mortgages comprised 94% of new loan activity during 1996
compared to 90% in 1995.
The following table details loan originations by loan type for the
periods indicated:
<TABLE>
<CAPTION>
LOAN ORIGINATIONS BY TYPE
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Single Family (one to four units)..... $239,866 $237,508 $734,438 $499,560 $590,152
Multi-Family.......................... 57,414 55,832 164,788 236,211 237,720
Commercial............................ 5,568 4,881 9,858 9,638 9,104
Other................................. - 1,031 230 419 3,779
-------- ---------- ---------- ---------- ----------
Total............................... $302,848 $299,252 $909,314 $745,828 $840,755
======== ======== ======== ======== ========
</TABLE>
Loans originated upon the sale of the Bank's real estate owned were
$54.2 million or 18% of total originations in 1996. $3.7 million of these loans
were originated based on the security of single family properties, $47.0
million were originated based on the security of multi-family properties and
$3.5 million were based on the security of commercial properties.
The Bank converted $59.7 million of its loans into mortgage-backed
securities in 1995 for use in securitized borrowings (reverse repurchase
agreements) compared to $198.1 million in 1994. No loans were securitized in
1996. Securitized loans have a lower risk weighting for regulatory risk-based
37
<PAGE> 38
capital purposes. In exchange for the enhanced credit risk associated with
mortgage-backed securities, the Bank pays guarantee fees to FHLMC and/or FNMA.
The Bank's adjustable rate loan products often provide for first year
monthly payments that are lower than the fully-indexed interest and principal
due. Any interest not fully paid by such lower first year payments is added to
the principal balance of the loan. This causes negative amortization until
payments increase to cover interest and principal shortfalls. Due to negative
amortization, loan-to-value ratios may increase above those calculated at the
inception of the loan.
To date, the Bank's foreclosure experience on loans with negative
amortization has been no different from that on the fully-amortizing portfolio.
The amount of negative amortization recorded by the Bank decreases in periods
of declining interest rates and increases during periods of increasing interest
rates. The balance of negative amortization on all loans serviced by the Bank
was $11.0 million at December 31, 1996 compared to $6.7 million at December 31,
1995 and $889 thousand at December 31, 1994.
The Bank does not normally lend in excess of 90% of the appraised
collateral value on adjustable mortgage loans ("AMLs"). Where the Bank does
lend in excess of 90% of the appraised value, additional fees and rates are
charged and there is no initial below-market interest rate. Mortgage insurance
is required on loans in excess of 80% or premium rates and/or fees are charged
if the mortgage insurance requirement is waived. Subsequent to the origination
of a loan, the Bank may purchase private mortgage insurance with its own funds.
Loans originated under this program for which there is no private mortgage
insurance totaled $122.5 million at December 31, 1996 compared to $132.5
million at December 31, 1995 and $128.6 million at December 31, 1994. See
"Business - Interest Rates, Terms and Fees."
Loan Composition
Loans based on the security of single family properties (one to four
units) comprise the largest category of the Bank's loan portfolio (including
mortgage-backed securities). The loan portfolio also includes loans secured by
multi-family and commercial properties. At December 31, 1996, approximately 60%
of the loan and mortgage-backed securities portfolio consisted of first liens
on single family properties. First liens on multi-family properties comprised
approximately 34% of the portfolio, and first liens on commercial properties
represented approximately 6% of the portfolio.
Multi-family and commercial real estate loans are considered more
susceptible to market risk than single family loans and higher interest rates
and fees are charged to borrowers for these loans. Due to inadequate market
pricing, management elected to de-emphasize the origination of multi-family
loans starting in 1994 and continuing into 1995 and 1996. Approximately 19% of
loan originations in 1996 were multi-family loans compared to 19% and 18%
during 1995 and 1994, respectively. Multi-family loans originated upon the
sale of real estate were approximately 16% and 14% of total loan originations
during 1996 and 1995, respectively. The Bank has not emphasized the
origination of commercial real estate loans for several years.
38
<PAGE> 39
The Bank also has loss exposure on certain loans sold with recourse.
These loans are substantially all secured by multi-family properties. Loans
sold with recourse totaled $230.8 million as of December 31, 1996, $247.6
million as of December 31, 1995 and $278.3 million as of December 31, 1994.
Although no longer owned by the Bank, these loans are combined with the Bank's
loan portfolio for purposes of computing general valuation allowances and
measuring risk exposure for regulatory capital purposes. Under the Bank's
current policy, it no longer enters into loans sold with recourse agreements.
The following table sets forth the composition of the Bank's portfolio
of loans and mortgage-backed securities for each of the last five years:
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
DECEMBER 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
First trust deed residential loans:
One unit............................ $1,279,267 $1,221,927 $1,192,251 $ 862,340 $ 769,367
Two to four units................... 342,230 351,942 350,718 340,035 296,550
Five or more units.................. 1,277,634 1,344,866 1,357,251 1,298,794 1,181,098
---------- ---------- ---------- ---------- ----------
Residential loans................. 2,899,131 2,918,735 2,900,220 2,501,169 2,247,015
OTHER REAL ESTATE LOANS:
Commercial and industrial........... 210,953 221,982 246,340 245,387 256,474
Second trust deeds.................. 17,497 2,213 20,401 24,606 29,441
Other................................ 2,137 3,157 4,793 5,861 10,733
---------- ---------- ---------- ---------- ----------
Real estate loans................. 3,129,718 3,146,087 3,171,754 2,777,023 2,543,663
NON-REAL ESTATE LOANS:
Manufactured housing................ 1,480 1,938 2,439 2,763 3,481
Deposit accounts.................... 1,042 1,104 1,301 1,086 1,184
Consumer............................ 236 359 506 964 1,494
---------- ---------- ---------- ---------- ----------
Loans receivable.................. 3,132,476 3,149,488 3,176,000 2,781,836 2,549,822
LESS:
General valuation allowance......... 54,900 42,876 55,353 46,900 27,854
Valuation allowances -
impaired loans...................... 12,350 26,101 23,887 - -
Unrealized loan fees................ 16,757 20,731 24,451 19,273 25,268
---------- ---------- ---------- ---------- ----------
Net loans receivable.............. 3,048,469 3,059,780 3,072,309 2,715,663 2,496,700
FHLMC AND FNMA MORT-
GAGE-BACKED SECURITIES:
Secured by single family
dwellings.......................... 715,286 810,980 794,126 678,884 660,673
Secured by multi-family
dwellings.......................... 20,189 24,468 27,191 29,399 108,482
---------- ---------- ---------- ---------- ----------
Mortgage-backed securities.. 735,475 835,448 821,317 708,283 769,155
---------- ---------- ---------- ---------- ----------
TOTAL............................ $3,783,944 $3,895,228 $3,893,626 $3,423,946 $3,265,855
========== ========== ========== ========== ==========
</TABLE>
39
<PAGE> 40
ASSET QUALITY
Asset Quality Ratios
The following table sets forth certain asset quality ratios of the
Bank for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-performing Loans to Loans Receivable(1)....... 1.89% 2.44% 2.39% 3.28% 2.61%
Non-performing Assets to Total Assets(2).......... 1.78% 2.33% 2.23% 3.23% 2.62%
Loan Loss Allowances to Non-performing
Loans(3)........................................ 94.27% 65.62% 78.27% 52.23% 37.54%
General Loss Allowances to Assets
with Loss Exposure(4)........................... 1.73% 1.35% 1.73% 1.46% 0.88%
General Loss Allowances to Total Assets with
Loss Exposure(5)................................ 1.86% 1.52% 1.82% 1.48% 0.93%
</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 plus loans sold
with recourse, but exclude mortgage-backed securities.
40
<PAGE> 41
NON-PERFORMING ASSETS
Non-performing assets, as defined by the Bank, include loans
delinquent over 90 days or in foreclosure, real estate acquired in settlement
of loans, and other loans less than 90 days delinquent but for which
collectibility is questionable.
The table below details the amounts of non-performing assets by type
of collateral and the percentage of total non-performing assets. Also shown is
the ratio of non-performing assets to total assets.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
$ % $ % $ % $ % $ %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Owned:
Single Family......... $ 6,840 9.25% $ 7,252 7.50% $ 5,711 6.17% $ 10,052 8.50% $ 8,268 9.16%
Multi-Family.......... 7,339 9.93 9,827 10.17 10,647 11.50 16,015 13.55 15,590 17.27
Commercial............ 673 .91 2,544 2.63 366 0.39 327 0.28 - -
Other.................. - - 78 0.08 - - 484 0.41 - -
------- ------ -------- ------ -------- ----- -------- ----- ------- ------
Total Real Estate
Owned................ 14,852 20.09 19,701 20.38 16,724 18.06 26,878 22.74 23,858 26.43
------- ------ -------- ------ -------- ------ -------- ----- ------- ------
Non-Performing Loans:
Single Family......... 25,602 34.64 25,991 26.89 13,041 14.08 25,317 21.41 24,634 27.28
Multi-Family.......... 44,754 60.55 69,579 72.00 60,213 65.02 70,207 59.39 42,481 47.05
Commercial............ 2,223 3.01 3,313 3.43 20,986 22.66 10,307 8.72 3,623 4.01
Other................... - - 220 0.23 245 0.26 245 0.20 271 0.30
Less Valuation
Allowances........... (13,522) (18.29) (22,159) (22.93) (18,596) (20.08) (14,732) (12.46) (4,582) (5.07)
------- ------ -------- ------ -------- ------- -------- ------ ------- ------
Total Non-Performing
Loans................ 59,057 79.91 76,944 79.62 75,889 81.94 91,344 77.26 66,427 73.57
------- ------ -------- ------ -------- ------- -------- ------ ------- -------
Total.................$ 73,909 100.00% $ 96,645 100.00% $ 92,613 100.00% $118,222 100.00% $90,285 100.00%
======== ====== ======== ====== ======= ======= ======== ====== ======= ======
Ratio of Non-Performing
Assets To Total Assets: 1.78% 2.33% 2.23% 3.23% 2.62%
==== ==== ==== ==== ====
</TABLE>
The decrease in non-performing loans in 1996 compared to 1995 was due
primarily to a decrease in delinquent and non-performing multi- family loans.
The increase in non-performing loans in 1995 compared to 1994 was due primarily
to growth in multi-family and single family delinquent loans offset by a
decrease in delinquent commercial real estate loans.
The decrease in real estate owned in 1996 compared to 1995 was due to
increased sales in the improving Southern California real estate market. The
increase in real estate owned in 1995 compared to 1994 was due to additional
foreclosures on single family and commercial real estate loans.
Single family non-performing loans are primarily due to
recession-related factors such as layoffs, decreased incomes and decreased real
estate values. Multi-family and commercial non-performing loans are
attributable primarily to economic factors, declines in occupancy rates, and
decreased real estate values. The Bank actively monitors the status of all
non-performing loans.
The Bank implemented SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" as of January 1, 1994 and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures" as of
January 1, 1995. Impaired loans totaled $37.6 million and $86.4 million, net
of related allowances of $12.4 million and $26.1 million as of December 31,
1996 and 1995, respectively. See "Business - Risk Elements" for a further
discussion of impaired loans.
41
<PAGE> 42
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 required monthly interest
payment. Any loss of revenues under the modified terms would be immaterial to
the Bank. If the borrower is unable to return to scheduled principal and
interest payments at the end of the modification period, foreclosure procedures
are initiated, or, in certain circumstances, the modification period is
extended. As of December 31, 1996, the Bank had modified loans totaling $15.3
million, net of loan loss allowances. This compares with $19.3 million, net,
as of December 31, 1995. Modified loans included in the impaired loan totals
above totaled $6.0 million, net, and $16.6 million, net, as of December 31,
1996 and 1995, respectively. Modified loans 90 days or more delinquent as of
December 31, 1996 were $472 thousand. No modified loans were 90 days or more
delinquent as of December 31, 1995.
Allowances for Loan Losses
For an analysis of the changes in the loan loss allowances, see
"Business - Risk Elements." At December 31, 1996, the general valuation
allowance was $54.9 million or 1.73% of the Bank's assets with loss exposure.
This compares to 1.35% at the end of 1995 and 1.73% at the end of 1994. In
addition to the general valuation allowance and the allowance for impaired
loans mentioned above, the Bank also maintains an allowance for loans sold with
recourse. These allowances amounted to 3.64%, 3.65% and 2.86% of loans sold
with recourse at December 31, 1996, 1995 and 1994, respectively. Management
considers the current level of loss allowances adequate to cover the Bank's
loss exposure at this time. However, there can be no assurance that future
additions to loan loss allowances will not be required.
CAPITAL RESOURCES AND LIQUIDITY
Liquidity Requirements
Federal regulations currently require a savings institution to
maintain a monthly average daily balance of liquid assets (including cash,
certain time deposits, bankers' acceptances and specified United States
government, state or federal agency obligations) equal to at least 5% of the
average daily balance of its net withdrawable accounts and short-term
borrowings during the preceding calendar month. This liquidity requirement may
be changed from time-to-time by the OTS to any amount within the range of 4% to
10% of such accounts and borrowings depending upon economic conditions and the
deposit flows of member institutions. Federal regulations also require each
member institution to maintain a monthly average daily balance of short-term
liquid assets (generally those having maturities of 12 months or less) equal to
at least 1% of the average daily balance of its net withdrawable accounts and
short-term borrowings during the preceding calendar month. Monetary penalties
may be imposed for failure to meet these liquidity ratio requirements. The
Bank's liquidity and short-term liquidity ratios for the calculation period
ended December 31, 1996 were 5.11% and 3.64%, respectively, which exceeded the
applicable requirements.
External Sources of Funds
External sources of funds include savings deposits, loan sales,
advances from the FHLBSF and reverse repurchase agreements ("reverse repos").
For purposes of funding asset growth, the source or sources of funds with the
lowest total cost for the desired term are generally selected. The funding
sources used most often during 1996 were FHLB advances and reverse repos.
Deposits obtained from national brokerage firms ("brokered deposits")
are considered a source of funds similar to a borrowing. In evaluating
brokered deposits as a source of funds, the cost of
42
<PAGE> 43
these deposits, including commission costs, is compared to other funding
sources. Brokered deposits were $389.4 million at December 31, 1996. This
compares to $502.0 million at December 31, 1995 and $597.2 million at December
31, 1994.
Deposits at retail savings offices have remained steady at
approximately $1.5 billion for the last three years. Not considering interest
credited, the Bank experienced $62.0 million in deposit outflows from savings
offices during 1996 due to the availability of alternate investments paying
higher returns to customers and intense competition for deposits by other
financial institutions.
The Bank also solicits deposits through telemarketing efforts.
Telemarketing deposits are obtained by the Bank's employees via telephone,
principally from pension funds. Telemarketing deposits decreased by 53% to
$112.6 million at the end of 1996 from $239.1 million at the end of 1995. The
level of telemarketing deposits varies based on the availability of higher
yielding investments to investors, who are usually managers of pension funds.
The availability of telemarketing deposits also varies based on the investors'
perception of the Bank's creditworthiness. Telemarketing deposits were $200.6
million at the end of 1994.
Reverse repurchase agreements are short term borrowings secured by
mortgage-backed securities. These borrowings decreased 11% to $646.5 million at
the end of 1996 from $724.6 million at the end of 1995. Reverse repos at the
end of 1994 were $691.1 million. The Bank did not securitize any mortgage
loans in 1996 for this purpose.
FHLB advances increased to $1.2 billion at the end of 1996 from $890.0
million at the end of 1995. Advances at the end of 1994 totaled $863.2 million.
Advances increased during 1996 because these were often the most available
source of funds to the Bank.
Sales of loans were $24.1 million during 1996. This compares to $36.5
million during 1995 and $43.7 million sold during 1994. The volume of loans
sold varies with the amount of saleable loans originated. The Bank sold $29.6
million in non-performing loans under a bulk sale arrangement during 1994.
Internal Sources of Funds
Internal sources of funds include scheduled loan principal payments,
loan payoffs, and positive cash flows from operations. Principal payments were
$199.3 million in 1996 compared to $161.6 million in 1995 and $183.4 million in
1994. Principal payments include both amortization and prepayments and are a
function of real estate activity and the general level of interest rates.
Capital Requirements
Current regulatory capital standards require that the Bank maintain
tangible capital of at least 1.5% of total assets, core capital of 3.0% of
total assets, and risk-based capital of 8.0% of total assets, risk-weighted.
Among other things, failure to comply with these capital standards will result
in restrictions on asset growth and necessitate the preparation of a capital
plan, subject to regulatory approval. Generally, any institution with a
risk-based capital ratio in excess of 10% and a core capital ratio greater than
5% is considered well-capitalized for regulatory purposes. Institutions who
maintain this capital level can take in brokered deposits at their discretion,
and if they achieve a sufficient ranking on their regulatory examination, may
be assessed a lower deposit insurance rate.
43
<PAGE> 44
Management presently intends to maintain its capital position at
levels above those required by regulators to ensure operating flexibility and
growth capacity for the Bank. The Bank's capital position is actively
monitored. In September of 1994, the Company issued $50 million in 10-year
Notes. The proceeds from these Notes were contributed to the Bank as capital.
See "Business - Borrowings." The Bank met the regulatory capital standards to
be deemed "well-capitalized" for purposes of the various regulatory measures of
capital including the prompt corrective action regulations.
To be considered "well capitalized" for purposes of the prompt
corrective action requirements the Bank must maintain the capital ratios as set
forth in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------------------
AMOUNT %
-------- -----
(Dollars In Thousands)
<S> <C> <C>
Core capital requirement . . . . . . . . . . . $207,746 5.00%
Bank's core capital . . . . . . . . . . . . . 239,273 5.76
-------- -----
Excess core capital . . . . . . . . . . . . $ 31,527 0.76%
======== =====
Tier 1 risk-based capital requirement . . . . $142,849 6.00%
Bank's tier 1 risk-based capital . . . . . . . 237,323 10.13
-------- -----
Excess tier 1 risk-based capital . . . . . . 94,474 4.13%
======== =====
Risk-based capital requirement . . . . . . . . $236,182 10.00%
Bank's risk-based capital . . . . . . . . . . 266,918 11.40
-------- -----
Excess risk-based capital . . . . . . . . . $ 30,736 1.40%
======== =====
</TABLE>
ASSET-LIABILITY MANAGEMENT
The Bank's asset-liability management policy is designed to improve
the balance between the maturities and repricings of interest-earning assets
and interest-bearing liabilities in order to better insulate net earnings from
interest rate fluctuations. Under this program, the Bank emphasizes the funding
of monthly adjustable mortgages with short term savings and borrowings and
matching the maturities of these assets and liabilities.
The majority of the Bank's assets are monthly adjustable rate
mortgages with interest rates that fluctuate based on changes in the FHLBSF
Eleventh District Cost of Funds Index ("Index"). These mortgages constitute
over 95% of the loan portfolio at the end of 1996. Comparisons over the last
several years show that changes in the Bank's cost of funds generally
correlates with changes in the Index. The Bank does not use any futures,
options or swaps in its asset-liability strategy.
Assets and liabilities which are subject to repricing are considered
rate sensitive. The mis-match in the repricing of rate sensitive assets and
liabilities is referred to as a company's "GAP." The GAP is positive if
rate-sensitive assets exceed rate-sensitive liabilities. Generally, a positive
GAP benefits a company during periods of increasing interest rates. The reverse
is true during periods of decreasing interest rates. However, because the Index
lags changes in market interest rates by three months while the Bank's
short-term savings and borrowing costs adjust immediately, the Bank's net
interest income initially decreases during periods of rising interest rates and
increases during periods of declining interest rates.
44
<PAGE> 45
In order to minimize the impact of rate fluctuations on earnings,
management's goal is to keep the one year GAP at less than 20% of total assets
(positive or negative). At December 31, 1996, the Company's one-year GAP was a
positive $240 million or 5.8% of total assets. This compares with positive GAP
ratios of 8.4% and 13.8% of total assets at December 31, 1995 and December 31,
1994, respectively.
The following chart shows the interest sensitivity of the Company's
assets and liabilities by repricing period at December 31, 1996 and the
consolidated GAP position as a percentage of total assets at that time:
INTEREST-SENSITIVITY GAP
<TABLE>
<CAPTION>
BALANCES BALANCES BALANCES BALANCES
REPRICING REPRICING REPRICING REPRICING
TOTAL WITHIN WITHIN WITHIN AFTER
BALANCE 0-3 MONTHS 4-12 MONTHS 1-5 YEARS 5 YEARS
------- ---------- ----------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Overnight Investments.............. $ 141,000 $ 141,000 $ - $ - $ -
Investment Securities.............. 69,440 12,725 33,512 23,203 -
MBS................................ 735,475 730,046 585 2,547 2,297
Loans Receivable:
Interest Rate Sensitive Loans...... 3,020,418 3,020,418 - - -
Fixed Rate Loans................... 28,051 2,051 3,023 13,924 9,053
--------- --------- ---------- -------- --------
Total Interest-Earning
Assets...................... $3,994,384 $3,906,240 $ 37,120 $ 39,674 $ 11,350
========== ========= ========== ======== ========
Interest-Bearing Liabilities:
Demand Accounts.................. $ 430,911 $ 430,911 $ - $ - $ -
Fixed Rate Term Certificate...... 1,526,537 651,724 729,885 134,561 10,367
Borrowings:
FHLB Advances.................. 1,242,000 627,000 615,000 - -
Reverse Repurchase
Agreements............... 646,482 427,203 219,279 - -
Other Borrowings............... 52,000 2,000 - - 50,000
--------- --------- ---------- -------- --------
Total Interest-Bearing
Liabilities.............. $3,897,930 $2,138,838 $ 1,564,164 $134,561 $ 60,367
========= ========= ========== ======== ========
Interest-Sensitivity Gap............. $ 96,454 $1,767,402 $(1,527,044) $(94,887) $(49,017)
========= ========= ========== ======== ========
Interest-Sensitivity Gap as a
Percentage of Total Assets......... 42.65% (36.85)% (2.29)% (1.18)%
===== ===== ==== ====
Cumulative Interest-Sensitivity Gap.. $1,767,402 $ 240,358 $145,471 $ 96,454
========= ========== ======== ========
Cumulative Interest-Sensitivity
Gap as a Percentage of Total
Assets........................... 42.65% 5.80% 3.52% 2.33%
===== ==== ==== ====
</TABLE>
45
<PAGE> 46
STOCK PRICES
The common stock of FirstFed Financial Corp. is traded on the New
York Stock Exchange under the trading symbol "FED." The quarterly high and low
information presented below is based on information supplied by the New York
Stock Exchange.
The Company has never declared or paid a cash dividend. The
Company repurchased 127,000 shares of its common stock in 1996 at an average
cost of $16.17 pursuant to a 1987 Board of Directors' authorization to
repurchase up to 10% of the Company's then outstanding shares. No shares were
repurchased during 1995 or 1994. As of December 31, 1996, a total of 923,520
shares had been repurchased at an average cost of $12.87 per share. Based on
the number of shares outstanding at December 31, 1987, 137,000 shares remain
eligible for repurchase under this program.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------------ --------------- --------------- ---------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996............... 15 7/8 12 3/8 17 1/2 15 1/2 19 3/4 16 3/4 24 1/4 19 1/2
1995............... 16 11 1/8 17 3/4 14 5/8 17 5/8 14 1/2 18 1/2 13 3/4
1994............... 17 13 3/8 17 1/4 13 3/8 16 1/2 13 3/4 15 1/4 10 1/4
1993............... 26 1/2 19 1/4 20 7/8 15 1/4 20 3/8 16 1/4 19 3/4 14 7/8
1992............... 26 22 24 1/2 19 1/2 21 3/4 13 7/8 19 1/2 13 1/2
</TABLE>
46
<PAGE> 47
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(Dollars In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . $ 162,402 $ 36,878
Investment securities, available-for-sale
(at fair value ) (Note 2) . . . . . . . . . . . . . 69,440 76,184
Mortgage-backed securities, available-for-sale
(at fair value) (Notes 3 and 10) . . . . . . . . . 735,475 835,448
Loans receivable, held-for-sale (fair value of $6,238
and $7,464) (Note 4) . . . . . . . . . . . . . . . 6,195 7,377
Loans receivable, net (Note 4) . . . . . . . . . . 3,042,274 3,052,403
Accrued interest and dividends receivable . . . . . 26,910 28,620
Real estate (Note 5) . . . . . . . . . . . . . . . . 14,445 19,821
Office properties and equipment, net (Note 6) . . 8,944 8,686
Investment in Federal Home Loan Bank (FHLB)
stock, at cost (Note 7) . . . . . . . . . . . . . . 62,400 58,935
Other assets (Note 1) . . . . . . . . . . . . . . . 15,367 15,385
---------- ----------
$4,143,852 $4,139,737
========== ==========
LIABILITIES
Deposits (Note 8) . . . . . . . . . . . . . . . . . $1,957,448 $2,205,036
FHLB advances and other borrowings (Note 9) . . . . 1,294,000 942,300
Securities sold under agreements to repurchase
(Note 10) . . . . . . . . . . . . . . . . . . . . . 646,482 724,643
Accrued expenses and other liabilities . . . . . . . 51,372 71,467
---------- ----------
3,949,302 3,943,446
---------- ----------
COMMITMENTS AND CONTINGENT
LIABILITIES (NOTES 4, 6 AND 13)
STOCKHOLDERS' EQUITY (NOTES 12 AND 13)
Common stock, par value $.01 per share; authorized
25,000,000 shares; issued 11,453,369 and
11,410,922 shares, outstanding 10,529,849 and
10,614,402 shares . . . . . . . . . . . . . . . . . 115 114
Additional paid-in capital . . . . . . . . . . . . 28,677 28,212
Retained earnings-substantially restricted . . . . . 183,965 175,721
Loan to employee stock ownership plan . . . . . . . (2,132) (2,500)
Treasury stock, at cost,
923,520 and 796,520 shares . . . . . . . . . . . . (11,885) (9,832)
Unrealized (loss) gain on investment securities
available-for-sale, net of taxes . . . . . . . . . (4,190) 4,576
---------- ----------
194,550 196,291
---------- ----------
$4,143,852 $4,139,737
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 48
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars In Thousands, Except per Share Data)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest on loans. . . . . . . . . . . . . . . . $229,000 $233,648 $188,665
Interest on mortgage-backed securities . . . . 54,825 54,389 36,207
Interest and dividends on investments . . . . . 13,353 13,698 10,552
-------- -------- --------
Total interest income . . . . . . . . . . . 297,178 301,735 235,424
-------- -------- ---------
Interest expense:
Interest on deposits (Note 8) . . . . . . . . 101,595 109,151 87,545
Interest on borrowings (Note 9) . . . . . . . . 96,436 114,926 70,110
-------- -------- --------
Total interest expense . . . . . . . . . . . 198,031 224,077 157,655
-------- -------- ---------
Net interest income . . . . . . . . . . . . . . 99,147 77,658 77,769
Provision for loan losses (Note 4) . . . . . . 35,155 28,376 85,700
-------- -------- --------
Net interest income (loss) after provision for
loan losses . . . . . . . . . . . . . . . . . . 63,992 49,282 (7,931)
-------- -------- ---------
Other income :
Loan servicing and other fees . . . . . . . . 6,402 6,126 7,044
Gain (loss) on sale of loans . . . . . . . . . 253 (1,581) 319
Real estate operations, net . . . . . . . . . 1,246 2,015 2,327
Other operating income . . . . . . . . . 3,014 2,165 1,574
-------- -------- ---------
Total other income . . . . . . . . . . . . 10,915 8,725 11,264
-------- -------- ---------
Non-interest expense:
Salaries and employee benefits (Note 13) . . . 21,928 23,045 22,734
Occupancy (Note 6) . . . . . . . . . . . . . . 6,289 6,258 6,686
Advertising . . . . . . . . . . . . . . . . . 2,362 1,833 1,972
Federal deposit insurance . . . . . . . . . . 5,418 6,400 5,151
SAIF special assessment . . . . . . . . . . . . 15,007 - -
Other operating expense . . . . . . . . . . . 8,171 8,367 8,953
-------- -------- ---------
Total non-interest expense . . . . . . . . 59,175 45,903 45,496
-------- -------- ---------
Earnings (loss) before income taxes (benefit) . 15,732 12,104 (42,163)
Income taxes (benefit) (Note 11) . . . . . . . . 7,488 5,569 (17,699)
-------- -------- ---------
Net earnings (loss) . . . . . . . . . . . . . . $ 8,244 $ 6,535 $ (24,464)
======== ======== =========
Earnings (loss) per share (Notes 12 and 15) . . $ 0.78 $ 0.61 $ (2.32)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 49
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars In Thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
SECURITIES
RETAINED AVAILABLE
EARNINGS FOR SALE,
(SUB- LOAN TO NET OF
ADDITIONAL STANTIALLY ESOP TAXES
COMMON PAID-IN RESTRICTED) (NOTES 12 TREASURY (NOTES 3
STOCK CAPITAL (NOTE 12) AND 13) STOCK AND 4) TOTAL
------ ---------- ----------- --------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.............. $113 $27,279 $193,650 $(2,918) $ (9,832) $ - $208,292
Exercise of employee stock options...... 1 273 - - - - 274
Net decrease in loan to employee stock
ownership plan......................... - - - 76 - - 76
Benefit from stock option tax
adjustment............................ - 509 - - - - 509
Net loss 1994........................... - - (24,464) - - - (24,464)
---- ------- -------- ------- -------- ------- --------
Balance, December 31, 1994.............. 114 28,061 169,186 (2,842) (9,832) - 184,687
Exercise of employee stock options..... - 151 - - - - 151
Net decrease in loan to employee stock
ownership plan......................... - - - 342 - - 342
Unrealized gain on securities
available-for-sale, net of taxes....... - - - - - 4,576 4,576
Net earnings 1995....................... - - 6,535 - - - 6,535
---- ------- -------- ------- -------- ------- --------
Balance, December 31, 1995.............. 114 28,212 175,721 (2,500) (9,832) 4,576 196,291
Exercise of employee stock options..... 1 465 - - - - 466
Net decrease in loan to employee stock
ownership plan......................... - - - 368 - - 368
Common stock repurchased
(127,000 shares) ..................... - - - - (2,053) - (2,053)
Unrealized loss on securities
available-for-sale, net of taxes....... - - - - - (8,766) (8,766)
Net earnings 1996....................... - - 8,244 - - - 8,244
---- ------- -------- ------- -------- ------- --------
Balance, December 31, 1996.............. $115 $28,677 $183,965 $(2,132) $(11,885) $(4,190) $194,550
==== ======= ======== ======= ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 50
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................... $ 8,244 $ 6,535 $ (24,464)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Net change in loans held-for-sale.................... 1,182 23,022 (10,155)
Depreciation and amortization........................ 1,722 1,735 1,977
Provision for losses on loans........................ 35,155 28,376 85,700
Valuation adjustments on real estate sold............ 1,036 221 2
Amortization of fees and discounts................... (2,210) (2,749) (2,690)
Decrease in deferred premium on sale of loans........ 588 865 1,154
Negative amortization on loans....................... (3,770) (5,044) (243)
Decrease (increase) in taxes payable................. 7,488 5,569 (17,699)
Increase (decrease) in tax interest accrual.......... (5,135) 3,524 3,239
(Increase) decrease in interest and dividends
receivable.......................................... 1,710 (4,200) (4,711)
Increase (decrease) in interest payable.............. (8,685) 2,714 6,050
(Increase) decrease in other assets.................. (4,049) 1,573 (3,868)
Increase in accrued expenses and
other liabilities................................... (177) (1,763) 1,018
-------- --------- ---------
Total adjustments ................................ 24,855 53,843 59,774
-------- --------- ---------
Net cash provided by operating activities.......... 33,099 60,378 35,310
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans made to customers and principal collections
on loans.............................................. (84,424) (129,393) (624,728)
Loans purchased........................................ - (115) (59,191)
Loans repurchased under recourse arrangements.......... (14,806) (27,212) (21,506)
Proceeds from sales of real estate owned............... 80,256 61,076 77,620
Proceeds from sales of non-performing loans............ - - 17,674
Proceeds from maturities and principal payments
of investment securities available-for-sale........... 86,329 20,267 -
Proceeds from maturities and principal payments
of investment securities.............................. - - 21,946
Principal reductions of mortgage-backed
securities available-for-sale......................... 84,544 53,973 -
Principal reductions of mortgage-backed securities..... - - 85,052
Purchases of investment securities
available-for-sale.................................... (79,405) (13,095) -
Purchases of investment securities..................... - - (2,347)
Purchases of FHLB stock................................ - - (15,785)
Purchases of treasury stock............................ (2,053) - -
Other.................................................. 2,525 6,324 (614)
--------- --------- --------
Net cash provided (used) by investing activities.. 72,966 (28,175) (521,879)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits............................... (247,588) (93,878) (6,566)
Net increase in short term borrowings.................. 282,539 327,322 622,172
Proceeds from long term borrowings..................... - - 100,000
Repayment of long term borrowings...................... (9,000) (265,200) (210,500)
Other.................................................. (6,492) 578 (175)
--------- --------- ----------
Net cash provided (used) by financing activities... 19,459 (31,178) 504,931
--------- --------- ----------
Net increase in cash and cash equivalents.............. 125,524 1,025 18,362
Cash and cash equivalents at beginning of year......... 36,878 35,853 17,491
--------- --------- ---------
Cash and cash equivalents at end of year............... $ 162,402 $ 36,878 $ 35,853
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 51
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies of
FirstFed Financial Corp. ("Company") and its wholly-owned subsidiary First
Federal Bank of California ("Bank").
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported operations of the Company for the
periods presented. Actual results may differ from those estimates calculated
by management.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary, the Bank. The Bank maintains 25 full- service
savings branches and 2 loan offices in Southern California. The Bank's primary
business consists of attracting retail deposits from the general public and
originating loans secured by mortgages on residential real estate. All
significant inter-company balances and transactions have been eliminated in
consolidation. Certain items in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the 1996 presentation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash, overnight investments and securities purchased under agreements
to resell with maturities within 90 days of the date of purchase.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS No. 107"), requires the
disclosure of the fair value of financial instruments, whether or not
recognized on the statement of financial condition, for which it is practicable
to estimate the value. A significant portion of the Bank's assets and
liabilities are financial instruments as defined under SFAS No. 107. SFAS No.
107 requires that the Bank disclose fair values for its financial instruments.
Fair values, estimates and assumptions are set forth in Note 16, Fair Value of
Financial Instruments.
Risks Associated with Financial Instruments
The credit risk of a financial instrument is the possibility that a
loss may result from the failure of another party to perform in accordance with
the terms of the contract. The most significant credit risk associated with
the Bank's financial instruments is concentrated in its loans receivable.
Additionally, the Bank is subject to credit risk on certain loans sold with
recourse. The Bank has established a system for monitoring the level of credit
risk in its loan portfolio and for loans sold with recourse.
The market risk of a financial instrument is the possibility that
future changes in market prices may reduce the value of a financial instrument
or increase the contractual obligations of the Bank. The Bank's market risk is
concentrated in its portfolios of loans receivable and real estate acquired by
foreclosure. When a borrower fails to meet the contractual requirements of
their loan agreement, the Bank is subject to the market risk of the collateral
securing the loan. Likewise, the Bank is subject to
51
<PAGE> 52
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the volatility of real estate prices with respect to real estate acquired by
foreclosure. The Bank's securities available-for-sale are traded in active
markets. The value of these securities is susceptible to the fluctuations of
the market.
Interest Rate Risk
Financial instruments are subject to interest rate risks to the extent
that they report on a frequency, degree or basis that varies from market
pricing. The Bank is subject to interest rate risk to the degree that its
interest-earning assets reprice on a different frequency or schedule than its
interest-bearing liabilities. A majority of the Bank's loans receivable and
mortgage-backed securities reprice based on the Eleventh District Cost of Funds
Index (the "Index"). The repricing of the Index tends to lag market interest
rates. The Bank closely monitors the pricing sensitivity of its financial
instruments.
Concentrations of Credit Risk
Concentrations of credit risk would exist for groups of borrowers when
they have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in economic or
other conditions. The ability of the Bank's borrowers to repay their
commitments is contingent on several factors, including the economic conditions
in the borrowers' geographic area and the individual financial condition of the
borrowers. The Bank's lending activities are primarily concentrated in Southern
California. The Bank currently focuses on the origination of single family
loans (one to four units) although, prior to October of 1994, the Bank's
lending strategy also emphasized the origination of multi-family loans. The
Bank does not have significant exposure to any individual customer.
Securities Purchased under Agreements to Resell
The Bank invests in securities purchased under agreements to resell
("repurchase agreements"). The Bank obtains collateral for these agreements,
which normally consists of U.S. treasury securities or mortgage-backed
securities guaranteed by agencies of the U.S. government. The collateral is
held in the custody of a trustee, who is not a party to the transaction. The
duration of these agreements is typically 1 to 30 days. The Bank deals only
with nationally recognized investment banking firms as the counterparties to
these agreements. The Bank's investment in repurchase agreements consisted
solely of securities purchased under agreements to resell identical securities.
Investments and Mortgage-Backed Securities
The Bank's investment in securities principally consists of U.S.
Treasury and agency securities and mortgage-backed securities. The Bank
creates mortgage-backed securities when it exchanges pools of its own loans for
mortgage-backed securities. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"
52
<PAGE> 53
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
("SFAS No. 115"), the Bank classifies its investment in securities as
"held-to-maturity" securities, "trading" securities and "available-for- sale"
securities as applicable.
In November of 1995, the Financial Accounting Standard Board issued a
Special Report as an aid in understanding and implementing SFAS No. 115. The
Special Report included guidance that allowed the Bank to review the
appropriateness of the classifications of all securities held. Any
reclassifications must be accounted for at fair value in accordance with SFAS
No. 115.
In accordance with the Special Report, the Bank reclassified its
entire portfolio of U.S. Treasury and agency securities and mortgage- backed
securities as "available-for-sale" from "held-to-maturity" during the fourth
quarter of 1995.
The Bank did not hold any trading securities at December 31, 1996 or
1995.
Available-for-Sale Securities
The Bank classified all of its securities as "available-for-sale" as
of December 31, 1996 and December 31, 1995. The Bank classifies securities as
available-for-sale based upon a determination that such securities may be sold
at a future date or if there are foreseeable circumstances under which the Bank
would sell such securities.
Securities designated as available-for-sale are recorded at fair
value. Changes in the fair value of debt securities available-for-sale are
included in stockholders' equity as unrealized gains (losses) on securities
available-for-sale, net of taxes. Unrealized losses on available-for-sale
securities, reflecting a decline in value judged to be other than temporary,
are charged to earnings in the Consolidated Statements of Operations.
Unrealized gains or losses on available-for-sale securities are computed on a
specific identification basis.
Loans Held-for-Investment
The Bank's loan portfolio is primarily comprised of single family
residential loans (one to four units), and multi-family loans (five or more
units). Since 1994, the Bank has not actively sought to originate multi-family
loans, except to finance the sale of the Bank's foreclosed real estate. Loans
are generally recorded at the contractual amounts owed by borrowers, less
unearned interest and allowances for loan losses.
Loans Held-for-Sale
The Bank identifies loans that foreseeably may be sold prior to
maturity and classifies them as held-for-sale. They are carried at the lower of
amortized cost or fair value on an aggregate basis by type of asset. For loans,
fair value is calculated on an aggregate basis as determined by current market
investor yield requirements.
53
<PAGE> 54
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impaired Loans
The Bank evaluates loans for impairment whenever the collectibility of
contractual principal and interest payments is questionable. A loan is
impaired when, based on current circumstances and events, a creditor will be
unable to collect all amounts contractually due under a loan agreement. Large
groups of smaller balance homogenous loans that are collectively evaluated for
impairment are not subject to the application of SFAS No. 114.
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.
Allowances for Loan Losses
The Bank maintains a general valuation allowance for loan losses for
the inherent risk in the loan portfolio which has yet to be specifically
identified. The allowance is unallocated to any specific loan. The allowance is
maintained at an amount that management believes adequate to cover estimable
and probable loan losses based on a risk analysis of the current portfolio.
Additionally, management performs periodic reviews of the loan portfolio to
identify potential problems and establish impairment allowances if losses are
expected to be incurred. Additions to the allowances are charged to earnings.
The regulatory agencies periodically review the allowances for loan losses and
may require the Bank to adjust the allowances based on information available to
them at the time of their examination.
General allowances are provided for all loans, regardless of any
specific allowances provided. The determination of the Bank's general allowance
for loan losses is based on estimates that are affected by changes in the
regional or national economy and market conditions. The Bank believes that as
of December 31, 1996 and 1995, the general allowance for loan losses is
adequate based on current economic and market conditions. Should there be an
economic or market downturn or if market interest rates increase significantly,
the Bank could experience a material increase in the level of loan defaults and
charge-offs.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an adjustment of
loan yields using the interest method. When a loan is repaid or sold, any
unamortized net deferred fee balance is credited to income.
54
<PAGE> 55
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gain or Loss on Sale of Loans
The Bank primarily sells its mortgage loans on a servicing released
basis and recognizes cash gains or losses immediately in its Statement of
Operations. The Bank has previously sold mortgage loans and loan participations
on a servicing retained basis with yield rates to the buyer based upon the
current market rates which may differ from the contractual rate of the loans
sold. A gain or loss was recognized and a premium or discount was recorded at
the time of sale based upon the net present value of amounts expected to be
received or paid resulting from the difference between the contractual interest
rates and the yield to the buyer, excluding a normal servicing fee to be earned
for continuing to service the loans. Amortization of discount or premium
represents an adjustment of yield and was reflected as an addition to or
reduction of interest income using the interest method over the life of such
loans adjusted for estimated prepayments. Excess service fees are written down
for impairment if the present value of the estimated remaining future excess
service fee revenue, using the same discount factor used to calculate the
original excess service fee receivable, exceeds the recorded amount.
Excess servicing gains arising from the sale of loans are included in
other assets and were $5,131,000 and $5,719,000 at December 31, 1996 and 1995,
respectively. No excess servicing gains have been recorded in 1996, 1995 and
1994.
Real Estate
The Bank's real estate acquired in settlement of loans ("REO")
consists of property acquired through foreclosure proceedings or by deed in
lieu of foreclosure. Generally, all loans greater than 60 days delinquent are
placed into foreclosure and, if necessary, a valuation allowance is
established. The Bank acquires title to the property in most foreclosure
actions that are not reinstated by the borrower. Once real estate is acquired
in settlement of a loan, the property is recorded as REO at fair market value,
less estimated selling costs. The REO's balance is adjusted for any subsequent
declines in fair value through a valuation allowance.
The recognition of gain on the sale of real estate is dependent on a
number of factors relating to the nature of the property, terms of sale, and
any future involvement of the Bank or its subsidiaries in the property sold. If
a real estate transaction does not meet certain down payment, cash flow and
loan amortization requirements, income is deferred and recognized under an
alternative method.
55
<PAGE> 56
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and Amortization
Depreciation of properties and equipment is provided by use of the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is provided by use of the straight-line
method over the lesser of the life of the improvement or the term of the lease.
Income Taxes
The Company files a consolidated federal income tax return and a
combined California franchise tax report with the Bank and its subsidiaries.
The Bank accounts for income taxes using the asset and liability method. In
the asset and liability method, deferred tax assets and liabilities are
established as of the reporting date for the realizable cumulative temporary
differences between the financial reporting and tax return bases of the Bank's
assets and liabilities. The tax rates applied are the statutory rates expected
to be in effect when the temporary differences are realized or settled.
Recent Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No.
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities based on control. Under
this approach, after a transfer of financial assets, the Company will recognize
the financial and servicing assets it controls and the liabilities incurred,
and derecognize financial assets when control has been surrendered and
liabilities have been extinguished. SFAS No. 125 provides standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. SFAS No. 125 must be adopted for financial statements
for fiscal years beginning after December 31, 1996. In December 1996, the FASB
issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB No. 125." SFAS No. 127 defers for one year the effective date of certain
provisions. The impact on the Company of adopting SFAS No. 125 are not
expected to be material as the Company does not presently engage in material
amount of transactions subject to the provisions of SFAS No. 125.
(2) INVESTMENT SECURITIES
The amounts advanced under agreements to resell securities (repurchase
agreements) represent short-term investments. During the agreement period the
securities are maintained by the dealer under a written custodial agreement
that explicitly recognizes the Bank's interest in the securities. The Bank had
no agreements to resell securities at December 31, 1996 or December 31, 1995.
Securities purchased under agreements to resell averaged $68,622,000 and
$88,859,000 during 1996 and 1995, and the maximum amounts outstanding at any
month end during 1996 and 1995 were $141,000,000 and $112,000,000,
respectively.
56
<PAGE> 57
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) INVESTMENT SECURITIES (CONTINUED)
Investment securities, available-for-sale, are recorded at fair value
and summarized below for the periods indicated:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
United States Government
and federal agency
obligations.......................... $50,290 $ 94 $ (129) $ 50,255
Collateralized
Mortgage Obligations................. 19,372 3 (190) 19,185
------- ------ -------- --------
$69,662 $ 97 $ (319) $ 69,440
======= ====== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
United States Government
and federal agency
obligations.......................... $46,862 $ 22 $ (193) $ 46,691
Collateralized
Mortgage Obligations................. 29,874 9 (390) 29,493
------- ------ ------- --------
$76,736 $ 31 $ (583) $ 76,184
======= ====== ======= ========
</TABLE>
Related maturity data for investment securities, available-for-sale,
is summarized below for the period indicated:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Maturing within 1 year................. $44,937 $ 96 $ (151) $ 44,882
Maturing after 1 year
but within 5 years .................. 24,725 1 (168) 24,558
------- ------ ------- --------
$69,662 $ 97 $ (319) $ 69,440
======= ====== ======= ========
</TABLE>
There were no sales of securities held-for-investment during 1996,
1995 or 1994.
Accrued interest on investments was $853,000 and $885,000 at December
31, 1996 and 1995, respectively.
57
<PAGE> 58
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(3) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities, available-for-sale, are due through the
year 2035 and are summarized below for the periods indicated:
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
FNMA.................... $ 22,795 $ 93 $ (57) $ 22,831
FHLMC................... 719,725 90 (7,171) 712,644
--------- ------ -------- ---------
Total................... $ 742,520 $ 183 $ (7,228) $ 735,475
========= ====== ======== =========
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
GROSS GROSS
HISTORICAL UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
------------ ------------ ----------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
FNMA.................... $ 27,221 $ 533 $ - $ 27,754
FHLMC................... 799,843 7,854 (3) 807,694
--------- ------- -------- ---------
Total................... $ 827,064 $ 8,387 $ (3) $ 835,448
========= ======= ======= =========
</TABLE>
There were no mortgage-backed securities created with loans originated
by the Bank in 1996. Mortgage-backed securities created with loans originated
by the Bank totaled $59,720,000 and $198,085,000 during 1995 and 1994,
respectively. There were no sales during 1996, 1995 or 1994.
Accrued interest receivable related to mortgage-backed securities
outstanding at December 31, 1996 and 1995 totaled $7,042,000 and $7,746,000,
respectively.
58
<PAGE> 59
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Real Estate Loans:
First trust deed residential loans:
One unit.......................................... $1,279,267 $1,221,927
Two to four units................................. 342,230 351,942
Five or more units................................ 1,277,634 1,344,866
--------- ----------
Residential loans................................. 2,899,131 2,918,735
Other real estate loans:
Commercial and industrial......................... 210,953 221,982
Second trust deeds................................ 17,497 2,213
Other............................................. 2,137 3,157
---------- ----------
Real estate loans............................... 3,129,718 3,146,087
Non-real estate loans:
Manufactured housing................................ 1,480 1,938
Deposit accounts.................................... 1,042 1,104
Consumer............................................ 236 359
---------- ----------
Loans receivable................................ 3,132,476 3,149,488
Less:
General loan valuation allowance.................... 54,900 42,876
Valuation allowances for impaired loans ............ 12,350 26,101
Unearned loan fees.................................. 16,757 20,731
---------- ----------
Subtotal........................................ 3,048,469 3,059,780
---------- ----------
Less:
Loans held-for-sale................................. 6,195 7,377
---------- ----------
Loans receivable, net........................... $3,042,274 $3,052,403
========== ==========
</TABLE>
During the fourth quarter of 1995, the Bank reclassified $19,154,000
from loans "held-for-sale" to loans receivable.
Loans serviced for others totaled $572,275,000, $622,969,000 and
$699,538,000 at December 31, 1996, 1995 and 1994, respectively.
The Bank has loss exposure on certain loans sold with recourse. These
loans are combined with the Bank's loan portfolio for purposes of computing
general valuation allowances and measuring credit risk exposure. The dollar
amount of loans sold with recourse totaled $230,836,000 and $247,646,000 at
December 31, 1996 and 1995, respectively. The maximum potential recourse
liability totaled $42,398,000 and $47,424,000 at December 31, 1996 and December
31, 1995, respectively. The Bank's allowance for losses related to loans sold
with recourse, which is recorded as a liability, totaled $8,398,000 and
$9,050,000 at December 31, 1996 and 1995, respectively.
The Bank had outstanding commitments to fund $28,589,000 in real
estate loans at December 31, 1996 which were primarily adjustable rate
mortgages. The Bank had outstanding commitments to sell real estate loans of
$205,000 at December 31, 1996.
59
<PAGE> 60
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS RECEIVABLE (CONTINUED)
Accrued interest receivable related to loans outstanding at December
31, 1996 and 1995 totaled $22,174,000 and $24,767,000, respectively.
Loans delinquent greater than 90 days or in foreclosure were
$72,579,000 and $99,103,000 at December 31, 1996 and 1995, respectively, and
the related allowances for delinquent interest were $4,167,000 and $5,557,000,
respectively.
Loans originated upon the sale of real estate totaled $54,227,000,
$49,303,000, and $54,561,000 during 1996, 1995 and 1994, respectively.
See Note 9 for loans which were pledged as security for borrowings.
The following is a summary of the activity in general loan valuation
allowances and impaired valuation allowances for the periods indicated:
<TABLE>
<CAPTION>
GENERAL IMPAIRED
VALUATION VALUATION
ALLOWANCE ALLOWANCE TOTAL
--------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Balance at December 31, 1993 . . . . . . . . . . . . . . $ 46,900 $ - $ 46,900
Provisions for loan losses . . . . . . . . . . . . . . 53,172 32,528 85,700
Charge-offs . . . . . . . . . . . . . . . . . . . . . . (36,854) (8,641) (45,495)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 83 - 83
Transfer of general valuation allowances for loans
sold with recourse to liability account (7,948) - (7,948)
-------- -------- --------
Balance at December 31, 1994 . . . . . . . . . . . . . . 55,353 23,887 79,240
Provisions for loan losses . . . . . . . . . . . . . . . 6,958 21,418 28,376
Charge-offs . . . . . . . . . . . . . . . . . . . . . . (24,473) (19,204) (43,677)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 5,541 - 5,541
Transfer of general valuation allowances for loans
sold with recourse to liability account (503) - (503)
-------- -------- --------
Balance at December 31, 1995 . . . . . . . . . . . . . 42,876 26,101 68,977
Provisions for loan losses . . . . . . . . . . . . . . . 23,768 11,387 35,155
Charge-offs . . . . . . . . . . . . . . . . . . . . . . (16,114) (25,138) (41,252)
Recoveries . . . . . . . . . . . . . . . . . . . . . . . 5,070 - 5,070
Transfer of general valuation allowance for loans
to real estate general valuation allowance (700) - (700)
-------- -------- --------
Balance at December 31, 1996 . . . . . . . . . . . . . $ 54,900 $ 12,350 $ 67,250
======== ======== ========
</TABLE>
60
<PAGE> 61
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS RECEIVABLE (CONTINUED)
Additionally the Bank maintains a general valuation allowance for
loans sold with recourse. This allowance is included in accrued expenses and
other liabilities in the Consolidated Statements of Financial Condition. The
following is a summary of the activity in the allowance for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993.................................. $ -
Transfer from general valuation allowance................... 7,948
-------
Balance at December 31, 1994.................................. 7,948
Provisions for loan losses
(recorded as loss on sale of loans)......................... 2,123
Transfer from general valuation allowance..................... 503
Charge-offs, net of recoveries................................ (1,524)
-------
Balance at December 31, 1995.................................. 9,050
Charge-offs, net of recoveries................................ (652)
-------
Balance at December 31, 1996.................................. $ 8,398
=======
</TABLE>
The following is a summary of impaired loans, net of valuation
allowances for impairment, for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
(Dollars In Thousands)
<S> <C> <C>
Non-accrual loans.......... $ 20,052 $ 34,503
Modified loans............. 5,996 16,573
Other impaired loans....... 11,586 35,333
--------- --------
$ 37,634 $ 86,409
========= ========
</TABLE>
The Bank implemented SFAS No. 114, as of January 1, 1994. Pursuant to
SFAS No. 114, the Bank considers a loan to be impaired when management believes
that it is probable that the Bank will be unable to collect all amounts due
under the contractual terms of the loan. Estimated impairment losses are
included in the Bank's impairment allowances. At December 31, 1996, the total
recorded amount of loans for which impairment has been recognized in accordance
with SFAS No. 114 was $37,634,000 (after deducting $12,350,000 of impairment
allowances attributable to such loans). The Bank's impaired, non-accrual loans
consist of single family loans with an outstanding principal amount greater
than or equal to $500,000 and multi-family loans with an outstanding principal
amount greater than or equal to $750,000.
Impaired loans for which there were no valuation allowances
established are included in the above summary and totaled $4,139,000 and
$9,261,000 as of December 31, 1996 and December 31, 1995, respectively.
61
<PAGE> 62
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS RECEIVABLE (CONTINUED)
The average recorded investment in impaired loans during the years
ended December 31, 1996 and 1995 was $52,725,000 and $91,818,000, respectively.
The amount of interest income recognized for impaired loans during the years
ended December 31, 1996 and 1995 was $2,656,000 and $6,075,000, respectively,
under the cash basis method of accounting. Interest income recognized under
the accrual basis method of accounting for the years ended December 31, 1996
and 1995 totaled $2,549,000 and $5,746,000, respectively. There were no
commitments to lend additional funds to borrowers whose loan terms have been
modified.
(5) REAL ESTATE
Real estate consists of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(Dollars In Thousands)
<S> <C> <C>
Real estate acquired by
(or deed in lieu of) foreclosure ("REO")..................... $14,852 $19,701
Real estate general valuation allowance....................... (521) -
------- -------
14,331 19,701
Real estate held-for-investment............................... 114 120
------- -------
Real estate, net............................................ $14,445 $19,821
======= =======
</TABLE>
The Bank established a general valuation allowance for real estate
owned during 1996. Listed below is a summary of the activity in the general
valuation allowance for real estate owned for the year ended December 31,1996
(dollars in thousands):
<TABLE>
<S> <C>
Beginning general valuation allowances....................... $ -
Provision for losses on REO.................................. 745
Net transfers from loan
general valuation allowance................................ 700
Charge-offs.................................................. (924)
-------
Ending general valuation allowances.......................... $ 521
=======
</TABLE>
The Bank acquired $74,886,000, $64,053,000 and $67,466,000 of real
estate in settlement of loans during 1996, 1995 and 1994, respectively.
62
<PAGE> 63
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) OFFICE PROPERTIES, EQUIPMENT AND LEASE COMMITMENTS
Office properties and equipment, at cost, less accumulated
depreciation and amortization, are summarized as follows:
<TABLE>
1996 1995
------- -------
(Dollars In Thousands)
<S> <C> <C>
Land.............................................. $ 3,061 $ 3,061
Office buildings.................................. 4,508 4,458
Furniture, fixtures and equipment................. 10,988 10,057
Leasehold improvements............................ 8,639 8,650
Other............................................. 44 44
------- -------
27,240 26,270
Less accumulated depreciation and amortization.... 18,296 17,584
------- -------
$ 8,944 $ 8,686
======= =======
</TABLE>
The Bank is obligated under noncancelable operating leases for periods
ranging from five to thirty years. The leases are for certain of the Bank's
office facilities. Approximately half of the leases for office facilities
contain five and ten year renewal options. Minimum rental commitments at
December 31, 1996 under all noncancelable leases are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1997............................ $ 4,279
1998............................ 3,445
1999............................ 1,338
2000............................ 1,214
2001............................ 961
Thereafter...................... 4,597
-------
$15,834
=======
</TABLE>
Rent payments under these leases were $4,270,000, $4,250,000 and
$4,246,000 for 1996, 1995 and 1994, respectively. Certain leases require the
Bank to pay property taxes and insurance. Additionally, certain leases have
rent escalation clauses based on specified indices.
(7) FEDERAL HOME LOAN BANK STOCK
The Bank's investment in FHLB stock at December 31, 1996 and 1995 was
$62,400,000 and $58,935,000, respectively. The FHLB provides a central credit
facility for member institutions. As a member of the FHLB system, the Bank is
required to own capital stock in the FHLBSF in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid home loans, home
purchase contracts and similar obligations at the end of each calendar year,
assuming for such purposes that at least 30% of its assets were home mortgage
loans, or 5% of its advances (borrowings) from the FHLBSF. The Bank was in
compliance with this requirement at December 31, 1996. The Bank's investment in
FHLB stock was pledged as collateral on advances from the FHLB at December 31,
1996 and 1995. The fair value of the Bank's FHLB stock approximates book value
due to the Bank's ability to redeem such stock with the FHLB at par value.
63
<PAGE> 64
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- --------------------
AMOUNT % AMOUNT %
----------- ----- ----------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Variable rate non-term accounts:
Money market deposit accounts (weighted
average rate of 2.82% and 2.52%)............. $ 130,173 7% $ 125,352 6%
Interest-bearing checking accounts
(weighted average rate of 1.01% and
1.20%)....................................... 165,616 8 145,801 7
Passbook accounts (weighted average
rate of 2.04% and 2.04%)..................... 94,718 5 96,948 4
Non-interest bearing checking accounts........ 40,404 2 54,876 2
---------- ---- ---------- ----
430,911 22 422,977 19
---------- ---- ---------- -----
Fixed-rate term certificate accounts:
Under six-month term (weighted average
rate of 5.11% and 5.21%)...................... 160,430 8 126,599 6
Six-month term (weighted average rate of
5.69% and 5.42%).............................. 204,048 10 417,855 19
Nine-month term (weighted average rate of
5.45% and 5.98%).............................. 246,777 13 144,308 6
One year to 18 month term (weighted
average rate of 5.32% and 5.57%).............. 304,532 16 235,164 11
Two year or 30 month term (weighted
average rate of 5.32% and 5.55%)............. 40,498 2 239,411 11
Over 30-month term (weighted average rate
of 6.27% and 6.31%).......................... 202,724 10 238,742 11
Negotiable certificates of $100,000 and
greater, 30 day to one year terms (weighted
average rate of 5.39% and 5.66%).............. 367,528 19 379,980 17
---------- ---- ---------- ----
1,526,537 78 1,782,059 81
---------- ---- ---------- ----
Total Deposits (weighted average rate of
4.67% and 4.89%)............................ $1,957,448 100% $2,205,036 100%
========== ==== ========== ====
</TABLE>
64
<PAGE> 65
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) DEPOSITS (CONTINUED)
Certificates of deposit, placed through five major national brokerage
firms totaled $389,436,000 and $502,013,000 at December 31, 1996 and 1995,
respectively.
Cash payments for interest on deposits (including interest credited)
totaled $104,269,000, $110,357,000 and $84,842,000 during 1996, 1995 and 1994,
respectively. Accrued interest on deposits at December 31, 1996 and 1995
totaled $7,024,000 and $9,698,000, respectively, and is included in accrued
expenses and other liabilities in the accompanying Consolidated Statements of
Financial Condition.
The following table indicates the maturities and weighted average
interest rates of the Bank's deposits at December 31, 1996:
<TABLE>
<CAPTION>
NON-TERM THERE-
ACCOUNTS 1997 1998 1999 2000 AFTER TOTAL
-------- ----------- -------- -------- ------- -------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits at
December 31, 1996..... $430,911 $1,381,609 $51,996 $73,013 $7,199 $12,720 $1,957,448
======== ========== ======= ======= ====== ======= ==========
Weighted average
interest rates........ 1.69% 5.35% 5.54% 5.94% 5.66% 5.81% 4.67%
==== ===== ==== ==== ==== ==== ====
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Passbook accounts...................... $ 1,933 $ 2,289 $ 2,726
Money market deposits and
interest-bearing checking accounts..... 4,869 6,272 7,960
Certificate accounts.................... 94,793 100,590 76,859
-------- -------- -------
$101,595 $109,151 $87,545
======== ======== =======
</TABLE>
65
<PAGE> 66
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank (FHLB) Advances and other borrowings consist of
the following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
(Dollars In Thousands)
<S> <C> <C>
Advances from the FHLB of San Francisco with a
weighted average interest rate of 5.71% and 6.12%,
respectively, secured by FHLB stock and certain
real estate loans with unpaid principal balances of
approximately $2,015,992,000 at December 31, 1996,
advances mature through 1997................................... $1,242,000 $890,000
Unsecured term funds with a weighted average interest
rate of 5.49% and 5.82%, maturing within one year.............. 2,000 2,300
10 Year Senior Unsecured Notes with an interest
rate of 11.75%, due 2004....................................... 50,000 50,000
---------- --------
$1,294,000 $942,300
========== ========
</TABLE>
At December 31, 1996 and 1995, accrued interest payable on FHLB
advances and other borrowings totaled $2,653,000 and $6,010,000, respectively,
which is included in accrued expenses and other liabilities in the accompanying
Consolidated Statements of Financial Condition.
The Bank has a credit facility with the FHLB in the form of FHLB
advances and letters of credit which allow borrowings up to 40% of the Bank's
assets, as computed for regulatory purposes, or approximately $1,661,000 at
December 31, 1996 with terms up to 30 years.
The Company's 10-year senior unsecured Notes are governed by the terms
of an indenture dated September 28, 1994 (the "Indenture"). The Indenture
contains financial and operating covenants which, among other things, (i) limit
the incurrence of debt by the Company, (ii) limit the payment of dividends and
the making of certain other distributions by the Company and its subsidiaries,
including the Bank, (iii) limit the disposition of, and the existence of liens
on, the stock of the Company's subsidiaries, (iv) limit the existence of
certain liens on other property or assets of the Company and (v) limit the
ability of the Company to enter into certain transactions with affiliates. The
amount of annual interest due on the Notes is $5,875,000.
66
<PAGE> 67
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (CONTINUED)
The following is a summary of borrowing maturities at December 31,
1996 (dollars in thousands):
<TABLE>
<S> <C>
1997 . . . . . . . . . $1,244,000
2004 . . . . . . . . . 50,000
----------
$1,294,000
==========
</TABLE>
Cash payments for interest on borrowings (including reverse repurchase
agreements) totaled $107,559,000, $102,611,000 and $61,945,000 during 1996,
1995 and 1994, respectively.
Interest expense on borrowings is comprised of the following for the
years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------- -------- -------
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB Advances . . . . . . . . . . . . . $57,427 $ 61,591 $38,162
Reverse Repurchase Agreements . . . 37,345 43,295 26,430
10 Year Senior Unsecured Notes . . 5,875 5,875 1,568
Other . . . . . . . . . . . . . . . (4,211) 4,165 3,950
------- -------- -------
$96,436 $114,926 $70,110
======= ======== =======
</TABLE>
Other interest expense in 1996 includes the reversal of accrued
interest due to the IRS. See Note 11.
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank enters into sales of securities under agreements to
repurchase (reverse repurchase agreements) which require the repurchase of the
same securities. Reverse repurchase agreements are treated as financing
arrangements, and the obligation to repurchase securities sold is reflected as
a borrowing in the Consolidated Statements of Financial Condition. The
mortgage-backed securities underlying the agreements were delivered to the
dealer who arranged the transactions or its trustee.
At December 31, 1996, $646,482,000 in reverse repurchase agreements
were collateralized by mortgage-backed securities with principal balances
totaling $689,064,000 and fair values totaling $682,216,000. At December 31,
1995, $724,643,000 in reverse repurchase agreements were collateralized by
mortgage-backed securities with principal balances totaling $765,792,000 and
fair values totaling $773,295,000.
The weighted average interest rates for borrowings under reverse
repurchase agreements were 5.42% and 5.68%, respectively, as of December 31,
1996 and December 31, 1995.
Securities sold under agreements to repurchase averaged $678,420,000
and $718,057,000 during 1996 and 1995, respectively, and the maximum amounts
outstanding at any month-end during 1996 and 1995 were $715,465,000 and
$749,546,000, respectively.
67
<PAGE> 68
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (CONTINUED)
The following is a summary of maturities at December 31, 1996 (dollars
in thousands):
<TABLE>
<S> <C>
Up to 30 days . . . . . $192,120
30 to 90 days . . . . . . 235,083
Over 90 to 182 days . . . 219,279
--------
$646,482
========
</TABLE>
Accrued interest on securities sold under agreements to repurchase
which is included in accrued expenses and other liabilities in the accompanying
Consolidated Statements of Financial Condition was $6,283,000 and $8,940,000
for the years ended December 31, 1996 and 1995, respectively.
(11) INCOME TAXES
Income taxes (benefit) consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C>
Current:
Federal............................................. $ 6,999 $ 42 $ (7,169)
State............................................... 591 555 (488)
------- ------ --------
7,590 597 (7,657)
------- ------ --------
Deferred:
Federal............................................. (1,560) 3,898 (4,464)
State............................................... 1,458 1,074 (5,578)
------- ------ --------
(102) 4,972 (10,042)
------- ------ --------
Total:
Federal............................................. 5,439 3,940 (11,633)
State............................................... 2,049 1,629 (6,066)
------- ------ --------
$ 7,488 $5,569 $(17,699)
======= ====== ========
</TABLE>
A reconciliation of the statutory federal corporate income tax rate to
the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory federal income tax rate . . . . . . 35.0% 35.0% (35.0)%
Increase (reductions) in taxes resulting from:
State franchise tax, net of federal income
tax benefit . . . . . . . . . . . . . . . . 8.5 8.8 (7.2)
Core deposit intangibles . . . . . . . . . . 0.5 0.8 0.1
Provision for additional taxes due to audits 3.3 - -
Other, net . . . . . . . . . . . . . . . . . 0.3 1.4 0.1
---- ---- ----
Effective rate . . . . . . . . . . . . . . 47.6% 46.0% (42.0)%
==== ==== =====
</TABLE>
68
<PAGE> 69
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) INCOME TAXES (CONTINUED)
Cash payments for income taxes totaled $6,754,000 $154,000 and
$254,000 during 1996, 1995 and 1994, respectively. In addition, the Company
received cash refunds totaling $1,000,000 and $8,267,000 during 1996 and 1995,
respectively.
Current income taxes receivable at December 31, 1996 and 1995 were
$1,113,000 and $2,276,000, respectively.
Listed below are the significant components of the net deferred tax
asset.
<TABLE>
<CAPTION>
1996 1995
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Components of the deferred tax asset:
Bad debts . . . . . . . . . . . . . . . . . . . . . . . $(28,146) $(24,483)
Pension expense. . . . . . . . . . . . . . . . . . . . (1,970) (1,941)
State taxes . . . . . . . . . . . . . . . . . . . . . . (99) -
IRS interest accrual . . . . . . . . . . . . . . . . . (3,965) (6,535)
Tax effect of unrealized loss on
securities available-for-sale. . . . . . . . . . . . . (3,077) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . (1,337) (1,887)
-------- --------
Total deferred tax asset . . . . . . . . . . . . . . (38,594) (34,846)
Valuation allowance . . . . . . . . . . . . . . . . . . . - -
-------- --------
Total deferred tax asset, net of valuation allowance (38,594) (34,846)
-------- --------
Components of the deferred tax liability:
Loan fees . . . . . . . . . . . . . . . . . . . . . . . 20,194 20,942
Tax effect of unrealized gain on
securities available-for-sale . . . . . . . . . . . . - 3,257
Loan sales . . . . . . . . . . . . . . . . . . . . . . 2,351 2,581
State taxes . . . . . . . . . . . . . . . . . . . . . . - 518
FHLB stock dividends . . . . . . . . . . . . . . . . . 10,654 8,947
Other . . . . . . . . . . . . . . . . . . . . . . . . . 1,905 1,547
-------- --------
Total deferred tax liability . . . . . . . . . . . . 35,104 37,792
-------- --------
Net deferred tax liability (asset) . . . . . . . . . . . $ (3,490) $ 2,946
======== ========
Net state deferred tax asset . . . . . . . . . . . . . $ (1,446) $ (1,160)
Net federal deferred tax liability (asset) . . . . . . (2,044) 4,106
-------- --------
Net deferred tax liability (asset) . . . . . . . . . . . $ (3,490) $ 2,946
======== ========
</TABLE>
SFAS No. 109 allows for recognition and measurement of deductible
temporary differences (including general valuation allowances) to the extent
that it is more likely than not that the deferred tax asset will be realized.
The Bank did not have a valuation allowance for the deferred tax asset at
December 31, 1996 and 1995, as it is more likely than not that the deferred tax
asset will be realized through loss carrybacks and the timing of future
reversals of existing temporary differences.
69
<PAGE> 70
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) INCOME TAXES (CONTINUED)
During 1994, the Internal Revenue Service ("IRS") completed its
examination of the Company's consolidated federal income tax returns for tax
years 1984 through 1986 and, in 1995, completed its examination of tax returns
for 1987 and 1988. In 1996, the IRS completed its examination of tax returns
for 1989 and 1990. The adjustments proposed by the IRS primarily related to
temporary differences as to the recognition of certain taxable income and
expense items. While the Company had provided for deferred taxes for federal
and state purposes, the change in the period of recognition of certain income
and expense items resulted in interest due to the IRS and FTB. The Company
filed formal protests with the IRS to take exception to most of the proposed
adjustments for all examinations and, in early 1997, resolved all outstanding
audit issues. As a result, the Company recorded a $5,135,000 net reversal of
accrued interest due to the IRS and FTB during 1996. The total amount of
accrued interest payable to the IRS, recorded as a liability in the
Consolidated Statements of Financial Condition, was $8,563,000 as of December
31, 1996. Charges of $3,524,000 and $3,239,000 had been recorded in the
Consolidated Statements of Operations for 1995 and 1994, respectively, as
interest on possible IRS adjustments.
The Bank computes its bad debt deduction based upon actual loan loss
experience (the "experience method"). Savings institutions may utilize the
experience method to "fill-up" to their adjusted base year bad debt reserve.
The adjusted base year bad debt reserve is the tax bad debt reserve amount at
the end of 1987. The base year reserve may be proportionately decreased by any
reduction in qualifying loans at the end of the current year relative to the
end of 1987. The Bank utilized the experience method for computing its bad debt
deduction for all years presented.
The Consolidated Statements of Financial Condition at December 31,
1996 and 1995 did not include a liability of $5,342,000 and $5,164,000,
respectively, related to the adjusted base year bad debt reserve.
In August 1996, the Small Business Job Protection Act (the "Act") was
signed into law. One provision of the Act repeals the reserve method of
accounting for bad debts for savings institutions effective for taxable years
beginning after 1995. The Bank, therefore, will be required to use the
specific charge-off method on its 1996 and subsequent federal tax returns. The
Bank will be required to recapture its "applicable excess reserves", which are
its federal tax bad debt reserves in excess of the base year reserve amount
described above. As of December 31, 1996, the Bank had no applicable excess
reserves. The base year reserves will be subject to recapture and the Bank
could be required to recognize a tax liability if: (1) the Bank fails to
qualify as a "bank" for federal income tax purposes; (2) certain distributions
are made with respect to the stock of the Bank; (3) the bad debt reserves are
used for any purpose other than to absorb bad debt losses; or (4) there is a
change in federal tax law. The enactment of this legislation is not expected
to have a material impact on the Bank's operations or financial position.
70
<PAGE> 71
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) STOCKHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE
The Company's stock charter authorizes 5,000,000 shares of serial
preferred stock. As of December 31, 1996 no preferred shares had been issued.
The computation of net earnings (loss) per share is based on the
weighted average shares of common stock and dilutive common stock equivalents
(employee stock options) outstanding during the year which were 10,636,166,
10,655,577 and 10,552,963 for 1996, 1995 and 1994 respectively.
Regulatory Capital
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations) to
risk weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS
indicated that the Bank was well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events since December 31,
1996 that management believes have changed the Bank's category.
The following table summarizes the Bank's actual capital and required
capital as of December 31, 1996:
<TABLE>
<CAPTION>
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Actual Capital:
Amount . . . . . . . . . . . . . . . . $239,273 $239,273 $237,323 $266,918
Ratio . . . . . . . . . . . . . . . . . 5.76% 5.76% 10.13% 11.40%
FIRREA minimum required capital:
Amount . . . . . . . . . . . . . . . . $ 62,324 $124,647 - $189,336
Ratio . . . . . . . . . . . . . . . . . 1.50% 3.00% - 8.00%
FIDICIA well capitalized required capital:
Amount . . . . . . . . . . . . . . . . - $207,746 $142,849 $236,182
Ratio . . . . . . . . . . . . . . . . . - 5.00% 6.00% 10.00%
</TABLE>
71
<PAGE> 72
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) STOCKHOLDERS' EQUITY AND EARNINGS (LOSS) PER SHARE (CONTINUED)
The payment of dividends is subject to certain federal income tax
consequences. Specifically, the Bank is capable of paying dividends to the
Company in any year without incurring tax liability only if such dividends do
not exceed both the tax basis current year earnings and profits and accumulated
tax earnings and profits as of the beginning of the year.
Thirty days' prior notice to the OTS of the intent to declare
dividends is required for the declaration of such dividends by the Bank. The
OTS issued a regulation in 1990 which generally allows a savings institution
which meets its fully phased-in capital requirements to distribute without OTS
approval dividends up to 100% of the institution's net income during a calendar
year plus the amount that would reduce the institution's "surplus capital
ratio" (the excess over its fully phased-in capital requirements) to one-half
of its surplus capital ratio at the beginning of the calendar year. However,
the OTS has the authority to preclude the declaration of any dividends or adopt
more stringent amendments to its capital regulations.
The Company may loan up to $6,000,000 to the Employee Stock Ownership
Plan ("ESOP") under a line of credit loan. At December 31, 1996 and 1995, the
loan to the ESOP totaled $2,132,000 and $2,500,000, respectively. Interest on
the outstanding loan balance is due each December 31. Interest varies based on
the Bank's monthly cost of funds. The average rates paid during 1996 and 1995
were 5.16% and 5.44%, respectively.
In 1988, the Company adopted a Shareholder Rights Plan ("Rights Plan")
which is designed to protect shareholders from attempts to acquire control of
the Company at an inadequate price. Under the Rights Plan, the owner of each
share of Company stock received a dividend of one right ("Right") to purchase
one one-hundredth share of a new series of preferred stock for its estimated
long term value of $54.80. In the event of certain acquisitions of 15% or more
of the voting stock or a tender offer for 15% or more of the voting stock of
the Company, each holder of a Right who exercises such Right will receive
shares of the Company with a market value equal to two times the exercise price
of the Right. Also, in the event of certain business combination transactions
following the acquisition by a person of 15% or more of the Company stock, each
Rights holder will have the right to receive upon exercise of the Right common
stock of the surviving company in such transaction having a market value of two
times the exercise price of the Right. The Company may redeem the Rights at
any time prior to such acquisition or tender offer should the Board of
Directors deem redemption to be in its stockholders' best interests.
72
<PAGE> 73
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLANS
Until August 31, 1996, the Bank maintained a pension plan ("Pension
Plan") covering substantially all employees who are employed on either a full
time or a part time basis. The benefits were based on an employee's years of
credited service, average annual salary and primary social security benefit, as
defined in the Pension Plan.
Effective August 31, 1996, the Pension Plan was discontinued and
benefits accrued to participants under the Pension Plan were distributed to
participants in accordance with their instructions. Effective January 1, 1997,
the Bank made available to its employees a qualified defined contribution plan
established under Section 401 (k) of the Internal Revenue Code, as amended (the
"401(k) Plan"). Participants are permitted to make contributions on a pre-tax
basis, a portion of which is matched by the Bank. Because the 401(k) Plan took
effect in 1997, no contributions were made by the Bank during 1996.
Pension expense including administration costs was $241,000, $436,000
and $481,000 for 1996, 1995 and 1994, respectively. The Bank uses the
projected unit credit actuarial method and based its funding policy on the
entry age normal method.
The discount rate and rate of increase in future compensation levels
used in determining the actuarial value of benefit obligations were 7.5% and
5.0%, respectively, as of December 31, 1996. The discount rate and rate of
increase in future compensation levels used in determining the pension cost
were 7.0% and 5.0%, respectively, as of December 31, 1995. The expected
long-term rate of return on assets was 8.5% at December 31, 1995. The plan had
no assets at December 31, 1996.
The Bank has a Supplementary Executive Retirement Plan ("SERP") which
covers any individual employed by the Bank as its President or Chairman of the
Board. The pension expense for the SERP was $505,000, $408,000 and $471,000 in
1996, 1995 and 1994, respectively. The SERP uses the same actuarial assumptions
as the Pension Plan. The SERP is unfunded.
73
<PAGE> 74
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status and amounts
recognized in the Company's Statements of Financial Condition for the Pension
Plan and the SERP for the years indicated:
<TABLE>
<CAPTION>
PENSION PLAN SERP
------------------- ---------------------
1996 1995 1996 1995
------ ------- ------ --------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Actuarial present value of benefits obligations:
Accumulated benefits obligation . . . . . . . . . . $3,046 $ 2,943 $ 3,318 $ 3,167
====== ======= ======= =======
Vested benefit obligation . . . . . . . . . . . . $3,046 $ 2,725 $ 2,858 $ 2,678
====== ======= ======= =======
Plan assets at fair value . . . . . . . . . . . . . . $3,228 $ 2,979 $ - $ -
Projected benefit obligation for service
rendered to date . . . . . . . . . . . . . . . . . . 3,046 4,491 4,157 3,738
------ ------- ------- -------
Shortage of plan assets over the projected
benefit obligation . . . . . . . . . . . . . . . . . 182 (1,512) (4,157) (3,738)
Unrecognized net loss (gain) from past ex-
perience different from that assumed . . . . . . . . 437 959 84 (75)
Prior service cost not yet recognized in
net periodic pension cost . . . . . . . . . . . . . - 149 558 655
Additional minimum liability . . . . . . . . . . . . - - (116) (384)
Unrecognized net (asset) obligation at
transition . . . . . . . . . . . . . . . . . . . . . - (41) 313 375
------ ------- ------- -------
Accrued pension liability . . . . . . . . . . . . . . $ 619 $ (445) $(3,318) $(3,167)
====== ======= ======= =======
Net pension cost for the year ended December
31, 1996 and December 31, 1995 in-
cluded the following components:
Service cost-benefits earned during the
period . . . . . . . . . . . . . . . . . . . . . . $ 328 $ 412 $ 87 $ 62
Interest cost on projected benefit obligation . . . 272 320 259 237
Actual return on plan assets . . . . . . . . . . . (99) (223) - -
Net amortization . . . . . . . . . . . . . . . . . 25 (58) 160 109
Deferral of asset gains . . . . . . . . . . . . . . (141) (46) - -
------ ------- ------- -------
Net period pension cost . . . . . . . . . . . . . . $ 385 $ 405 $ 506 $ 408
====== ======= ======= =======
Curtailment Gain . . . . . . . . . . . . . . . . . . $ (762)
======
</TABLE>
The Bank has a profit sharing plan (the ESOP) for all salaried
employees and officers who have completed one year of continuous service. At
December 31, 1996, the ESOP held 6.35% of outstanding stock of the Company.
Profit sharing expense for the years ended December 31, 1996, 1995 and 1994 was
$500,000, $500,000 and $200,000, respectively. The amount of the contribution
made by the Bank is determined each year by the Board of Directors, but is not
to exceed 15% of the participants' aggregated compensation. The Bank does not
offer post retirement benefits under this plan.
Stock Compensation Plans
At December 31, 1996, the Company had two stock-based compensation
programs, which are described below. The Company applies APB Opinion 25 and
related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock compensation plans.
74
<PAGE> 75
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLANS (CONTINUED)
Stock Option Program
The Company has a stock option program which is comprised of two
plans. One of these plans, the 1983 Stock Option and Stock Appreciation Rights
Plan (the "1983 Plan"), expired in 1993 but some grants issued under that plan
are still outstanding and exercisable. The 1983 Plan provided for the issuance
of up to 1,571,000 million shares of common stock to employees of the Bank.
Under the 1994 Stock Option and Stock Appreciation Rights Plan (the "1994
Plan"), the Company may grant options to employees of the Bank for up to
1,500,000 shares of common stock, subject to limitations set forth under the
1994 Plan. Under both the 1983 Plan and the 1994 Plan, the exercise price of
each option equals the market value of the Company's stock on the date of the
grant, and an option's maximum term is 10 years. Options typically vest in 25
percent increments every two years beginning on the second anniversary date of
the grant under both plans.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1996 and 1995, respectively: no
dividend yield in any year; expected volatility of 36 and 35 percent; risk free
interest rates of 5.8 and 6.3 percent; and expected average lives of 10 years.
The weighted-average grant date fair value of options granted during the year
are $8.50 and $9.61 for 1996 and 1995, respectively As provided for in FASB
No. 123 the Company has elected to recognize forfeitures in the year they
occur.
Had compensation cost for the Company's stock-option program been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement of Financial Standards No. 123,
"Accounting for Stock Based Compensation," the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
------ ------
(Dollars in thousands except per share amounts)
<S> <C> <C>
Net earnings:
As reported....... $8,244 $6,535
Pro forma......... $8,143 $6,491
Earnings per share:
As reported....... $.78 $.61
Pro forma......... $.77 $.61
</TABLE>
Pro forma net earnings and earnings per share reflect only options
granted in 1996 and 1995. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma net earnings per share amounts presented above because compensation
cost is reflected over the options' vesting period of 8 years and compensation
cost for options granted prior to January 1, 1995 is not considered.
75
<PAGE> 76
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) EMPLOYEE BENEFIT PLANS (CONTINUED)
Information with respect to stock options follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(In Shares)
<S> <C> <C> <C>
Options Outstanding
(Average option prices)
Beginning of year ($14.04, $13.74 and $11.70) . . 347,422 347,319 342,375
Granted ($14.28, $15.63 and $14.58) . . . . . . . 34,133 40,789 102,906
Exercised ($10.67, $9.79 and $3.95) . . . . . . . (42,447) (15,430) (69,301)
Canceled ($16.17 $14.99 and $16.11) . . . . . . . (16,230) (25,256) (28,661)
Re-issued grants ($12.88) . . . . . . . . . . . . 30,128 - -
Cancellation of grants re-issued ($20.16) . . . . (33,475) - -
------- ------- -------
End of Year ($13.66, $14.04 and $13.74) . . . . . 319,531 347,422 347,319
======= ======= =======
Shares exercisable at December 31 . . . . . . . .
($12.70, $12.18 and $11.76) . . . . . . . . . . 160,457 164,252 164,322
======= ======= =======
</TABLE>
Restricted Stock Plan
The Company also has a restricted stock plan. Under the 1991
Restricted Stock Plan (the "Restricted Stock Plan"), the Company may issue
shares of restricted stock to employees of the Company and its subsidiaries,
including officers and directors. A total of 500,000 shares have been reserved
for issuance under the Restricted Stock Plan. As of December 31, 1996, 436,491
shares are available for grant. The shares consist of previously issued shares
reacquired by the Company. The shares typically vest in increments of 25% per
year, beginning on the fourth anniversary of the grant date. As shares vest,
they are released to the recipient, at which time the recipient will recognize
ordinary income equal to the fair market value of the restricted stock at the
time the restrictions lapse. No shares were granted under this program in 1996
and 792 shares were issued under this program in 1995. Compensation costs
related to shares granted under the Restricted Stock Plan have been recorded in
previous periods.
(14) PARENT COMPANY FINANCIAL INFORMATION
The following condensed parent company financial information should be
read in conjunction with the other Notes to the Consolidated Financial
Statements.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
----------------------
1996 1995
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Assets:
Cash . . . . . . . . . . . . . . . . . $ 6,570 $ 2,737
Other assets . . . . . . . . . . . . . 1,834 2,036
Investment in subsidiary . . . . . . . 237,786 240,523
-------- --------
$246,190 $245,296
======== ========
Liabilities and Stockholders' Equity:
Notes payable . . . . . . . . . . . . . $ 50,000 $ 50,000
Other liabilities . . . . . . . . . . . 1,640 (995)
Stockholders' equity . . . . . . . . . 194,550 196,291
-------- --------
$246,190 $245,296
======== ========
</TABLE>
76
<PAGE> 77
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) PARENT COMPANY INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
-------- ------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Dividends received from Bank . . . . . . $ 5,875 $ 5,875 $ 5,000
Equity in undistributed net
earnings (loss) of subsidiary . . . . . 6,029 4,374 (28,403)
Other expense, net . . . . . . . . . . . (3,660) (3,714) (1,061)
------- ------ --------
Net earnings (loss) . . . . . . . . . . . $ 8,244 $ 6,535 $(24,464)
======= ======= ========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------- ------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net earnings (loss) . . . . . . . . . . . . . . . $ 8,244 $ 6,535 $(24,464)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating
activities:
Equity in undistributed net (earnings) loss
of subsidiary . . . . . . . . . . . . . . . . . (6,029) (4,374) 28,403
Other . . . . . . . . . . . . . . . . . . . . . . 2,838 (1,521) 39
------- ------ ---------
Net cash used by operating activities . . . . . . 5,053 (640) 3,978
------- ------ ---------
Cash Flows from Investing Activities:
Decrease in ESOP loan . . . . . . . . . . . . . . 368 342 76
Increase in treasury stock . . . . . . . . . . . (2,053) - -
Increase in other assets . . . . . . . . . . . . - - (2,225)
------- ------ ---------
Net cash (used) provided by investing
act . . . . . . . . . . . . . . . . . . . . . . 3,368 342 1,829
------- ------ ---------
Cash Flows from Financing Activities:
Capital contribution to subsidiary . . . . . . . . - - (47,750)
Increase (decrease) in short term notes payable . - - (5,000)
Proceeds from long term borrowings . . . . . . . - - 50,000
Benefit from stock option tax adjustment . . . . - - 510
Other . . . . . . . . . . . . . . . . . . . . . . 465 102 1,141
------- ------- ---------
Net cash provided by financing activities . . . . 465 102 (1,099)
------- ------- ---------
Net increase in cash . . . . . . . . . . . . . . . 3,833 1,084 730
Cash at beginning of period . . . . . . . . . . . . 2,737 1,653 923
------- ------- ---------
Cash at end of period . . . . . . . . . . . . . . . $ 6,570 $ 2,737 $ 1,653
======= ======= =========
</TABLE>
77
<PAGE> 78
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) QUARTERLY RESULTS OF OPERATIONS: (UNAUDITED)
Summarized below are the Company's results of operations on a
quarterly basis for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
NET
PROVISION OTHER NON- NET EARNINGS
INTEREST INTEREST FOR LOAN INCOME INTEREST EARNINGS (LOSS)
INCOME EXPENSE LOSSES (EXPENSE) EXPENSE (LOSS) PER SHARE
-------- -------- -------- --------- --------- -------- ---------
(Dollars In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C>
First quarter
1996........ $ 76,097 $ 52,952 $ 9,000 $ 3,273 $11,466 $ 3,368 $ .32
1995........ 69,726 53,505 3,000 2,762 11,677 2,357 .22
1994........ 55,725 32,106 24,670 2,810 12,133 (6,115) (.58)
Second quarter
1996........ $ 73,753 $ 50,278 $ 9,000 $ 2,823 $11,287 $ 3,400 $ .32
1995........ 76,342 57,739 8,203 3,251 11,205 1,346 .13
1994........ 54,380 34,562 55,030 2,755 11,711 (25,553) (2.42)
Third quarter
1996........ $ 73,540 $ 50,280 $ 8,700 $ 2,143 $25,561 $ (5,169) $ (.49)
1995........ 78,548 57,183 6,173 (255) 11,342 1,984 .19
1994........ 59,542 40,918 3,000 3,474 11,653 4,158 .39
Fourth quarter
1996........ $ 73,788 $ 44,521 $ 8,455 $ 2,676 $10,861 $ 6,645 $ .62
1995........ 77,119 55,650 11,000 2,967 11,679 848 .08
1994........ 65,777 50,069 3,000 2,225 9,999 3,046 .29
Total year
1996........ $297,178 $198,031 $35,155 $10,915 $59,175 $ 8,244 $ .78
1995........ 301,735 224,077 28,376 8,725 45,903 6,535 .61
1994........ 235,424 157,655 85,700 11,264 45,496 (24,464) (2.32)
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments" ("SFAS No. 107"), requires that the
Company disclose the estimated fair value for its financial instruments as of
December 31, 1996 and 1995. The following table presents fair value
information for financial instruments for which a market exists. The fair
values for these financial instruments were estimated based upon prices
published in financial newspapers or quotations received from national
securities dealers.
78
<PAGE> 79
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
HISTORICAL HISTORICAL
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ----------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed Securities . . . . . . . $742,520 $735,475 $827,064 $835,448
Investment Securities . . . . . . . . . 50,290 50,225 46,862 46,691
Collateralized Mortgage Obligations . . 19,372 19,185 29,874 29,493
Loans Held-for-Sale . . . . . . . . . . 6,195 6,238 7,377 7,464
</TABLE>
The following table presents fair value information for financial
instruments shown in the Company's Consolidated Statements of Financial
Condition for which there is no readily available market. The fair values for
these financial instruments were calculated by discounting expected cash flows.
Because these financial instruments have not been evaluated for possible sale
and because management does not intend to sell these financial instruments, the
Company does not know whether the fair values shown below represent values at
which the respective financial instruments could be sold.
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
CALCULATED CALCULATED
CARRYING FAIR VALUE CARRYING FAIR VALUE
VALUE AMOUNT VALUE AMOUNT
---------- ---------- ---------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Adjustable Loans:
Single Family . . . . . . . . . $1,603,723 $1,615,234 $1,556,368 $1,569,324
Multi-Family . . . . . . . . . . 1,165,069 1,175,415 1,191,852 1,188,435
Commercial . . . . . . . . . . 188,156 192,731 188,623 192,488
Fixed Rate Loans:
Single Family . . . . . . . . . 13,214 13,723 20,867 22,050
Multi-Family . . . . . . . . . . 10,529 10,568 11,714 12,360
Commercial . . . . . . . . . . . 1,830 2,021 2,147 2,443
Other Real Estate Loans . . . 696 971 3,888 4,057
Non-Performing Loans . . . . . . . 59,057 59,057 76,944 76,944
Fixed-Term Certificate Accounts . 1,526,537 1,529,246 1,782,059 1,788,581
Non-Term Deposit Accounts . . . 430,911 430,911 422,977 422,977
Borrowings . . . . . . . . . . . . 1,940,482 1,940,109 1,666,943 1,667,953
</TABLE>
SFAS No. 107 specifies that fair values should be calculated based on
the value of one unit. The estimates do not necessarily reflect the price the
Company might receive if it were to sell the entire holding of a particular
financial instrument at one time.
Fair value estimates are based on the following methods and
assumptions, some of which are subjective in nature. Changes in assumptions
could significantly affect the estimates.
79
<PAGE> 80
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Cash
The carrying amounts reported in the Consolidated Statements of
Financial Condition for this item approximate fair value.
Investment Securities and Mortgage-Backed Securities
Fair values are based on bid prices published in financial newspapers
or bid quotations received from national securities dealers.
Loans Receivable
The portfolio is segregated into those loans with adjustable rates of
interest and those with fixed rates of interest. Fair values are based on
discounting future cash flows by the current rate offered for such loans with
similar remaining maturities and credit risk. The amounts so determined for
each loan category are reduced by the Bank's allowance for loans losses which
thereby takes into consideration changes in credit risk. The Bank had
outstanding commitments to fund $28,589,000 in real estate loans which were
substantially at fair value.
Non-performing Assets
The carrying amounts reported in the Consolidated Statements of
Financial Condition for this item approximate fair value.
Deposits
The fair value of deposits with no stated term, such as regular
passbook accounts, money market accounts and checking accounts, is defined by
SFAS No. 107 as the carrying accounts reported in the Consolidated Statements
of Financial Condition. The fair value of deposits with a stated maturity,
such as certificates of deposit, is based on discounting future cash flows by
the current rate offered for such deposits with similar remaining maturities.
Borrowings
For short term borrowings, fair value approximates carrying value. The
fair value of long term borrowings is based on their interest rate
characteristics. For variable rate borrowings, fair value is based on carrying
values. For fixed rate borrowings, fair value is based on discounting future
contractual cash flows by the current interest rate paid on such borrowings
with similar remaining maturities.
Excess Servicing Arising from the Sale of Loans
The carrying amounts reported in the Consolidated Statements of
Financial Condition for this item approximate fair value.
80
<PAGE> 81
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FirstFed Financial Corp.
We have audited the accompanying consolidated statements of financial
condition of FirstFed Financial Corp. and subsidiary ("Company") as of December
31, 1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
FirstFed Financial Corp. and subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 28, 1997
81
<PAGE> 82
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers appearing on
pages 4 through 8 of the Proxy Statement for the Annual Meeting of Stockholders
dated April 23, 1997 is incorporated herein by reference.
ITEM 11--EXECUTIVE COMPENSATION
Information regarding executive compensation appearing on pages 8
through 15 of the Proxy Statement for the Annual Meeting of Stockholders dated
April 23, 1997 is incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management appearing on pages 2 and 3 of the Proxy Statement for the Annual
Meeting of Stockholders dated April 23, 1997 is incorporated herein by
reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
a. Certain Relationships: None.
b. Information regarding certain related transactions appearing on page 11 of
the Proxy Statement for the Annual Meeting of Stockholders dated
April 23, 1997 is incorporated herein by reference.
PART IV
ITEM 14--EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8K
(a) 1. Consolidated Financial Statements
The consolidated financial statements included in this Report are
listed under Item 8.
2. Consolidated Financial Statement Schedules
Schedules have been omitted because they are not applicable or the
required information is presented in the consolidated financial
statements or notes thereto.
82
<PAGE> 83
FIRSTFED FINANCIAL CORP. AND SUBSIDIARY
EXHIBIT
NUMBER
--------
(1) Underwriting Agreement filed as Exhibit 1 to Amendment No. 2
to Form S-3 dated September 7, 1994 and incorporated by
reference.
(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
filed as Exhibit 10.5 to Form 10-K for the fiscal year ended
December 31, 1992 and incorporated by reference.
(10.4) Change of Control Agreement effective September 26, 1996 filed
as Exhibit 10.4 to Form 10-Q for the Quarter ended September
30, 1996 and incorporated by reference.
(21) Registrant's sole subsidiary is First Federal Bank of
California, a federal savings bank.
(24) Power of Attorney (included at page 84).
This 1996 Annual Report on Form 10-K and the Proxy Statement for the
Annual Meeting of Stockholders dated April 23, 1997 have already been furnished
to each stockholder of record who is entitled to receive copies thereof. Copies
of these items will be furnished without charge upon request in writing by any
stockholder of record on March 4, 1997 and any beneficial owner of Company
stock on such date who has not previously received such material and who so
represents in good faith and in writing to:
Corporate Secretary
FirstFed Financial Corp.
401 Wilshire Boulevard
Santa Monica, California 90401
Other exhibits will be supplied to any such stockholder at a charge
equal to the Company's cost of copying, postage, and handling.
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated October 25, 1996
which announced the appointment of James P. Giraldin as Chief Operating Officer
effective January 1, 1997.
83
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.,
a Delaware corporation
By: /s/ Babette E. Heimbuch
------------------------------------
Babette E. Heimbuch
President and
Chief Executive Officer
Date: February 27, 1997
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Babette E.
Heimbuch and James P. Giraldin, and each of them or either of them, as
attorney-in-fact to sign on his or her behalf as an individual and in every
capacity stated below, and to file all amendments to the Registrant's Form
10-K, and the Registrant hereby confers like authority to sign and file in its
behalf.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of February, 1997.
SIGNATURE TITLE
/s/ Babette E. Heimbuch Chief Executive Officer (Principal
- ------------------------------ Executive Officer)
Babette E. Heimbuch
/s/ James P. Giraldin Senior Executive Vice President and
- ------------------------------ Chief Operating Officer (Principal
James P. Giraldin Financial Officer)
/s/ Brenda J. Battey Senior Vice President and Controller
- ------------------------------ (Principal Accounting Officer)
Brenda J. Battey
/s/ Christopher M. Harding Director
- ------------------------------
Christopher M. Harding
/s/ James L. Hesburgh Director
- ------------------------------
James L. Hesburgh
/s/ William S. Mortensen Chairman of the Board
- ------------------------------
William S. Mortensen
/s/ William G. Ouchi Director
- ------------------------------
William G. Ouchi
/s/ William P. Rutledge Director
- ------------------------------
William P. Rutledge
/s/ Charles F. Smith Director
- ------------------------------
Charles F. Smith
/s/ Steven L. Soboroff Director
- ------------------------------
Steven L. Soboroff
/s/ John R. Woodhull Director
- ------------------------------
John R. Woodhull
84
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 162,402
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 804,915
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,048,469
<ALLOWANCE> 67,250
<TOTAL-ASSETS> 4,143,852
<DEPOSITS> 1,957,448
<SHORT-TERM> 1,660,482
<LIABILITIES-OTHER> 51,372
<LONG-TERM> 280,000
0
0
<COMMON> 115
<OTHER-SE> 194,435
<TOTAL-LIABILITIES-AND-EQUITY> 4,143,852
<INTEREST-LOAN> 283,825
<INTEREST-INVEST> 13,353
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 297,178
<INTEREST-DEPOSIT> 101,595
<INTEREST-EXPENSE> 198,031
<INTEREST-INCOME-NET> 99,147
<LOAN-LOSSES> 35,155
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 59,175
<INCOME-PRETAX> 15,732
<INCOME-PRE-EXTRAORDINARY> 15,732
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,244
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
<YIELD-ACTUAL> 2.24
<LOANS-NON> 59,057
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,995
<LOANS-PROBLEM> 43,973
<ALLOWANCE-OPEN> 68,977
<CHARGE-OFFS> 41,952
<RECOVERIES> 5,070
<ALLOWANCE-CLOSE> 67,250
<ALLOWANCE-DOMESTIC> 67,250
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
